-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, EedqcnJ/NUBeDurqWOsd2KaK6YwaOOO6LCa1RuQM6OKn1dBWAAKZvF3TeQ2kObFb gENt6wNM47UUcOnBV23ldQ== 0000950117-97-001492.txt : 19970912 0000950117-97-001492.hdr.sgml : 19970912 ACCESSION NUMBER: 0000950117-97-001492 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970909 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: AIRSHIP INTERNATIONAL LTD CENTRAL INDEX KEY: 0000764587 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-ADVERTISING [7310] IRS NUMBER: 061113228 STATE OF INCORPORATION: NY FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 000-14646 FILM NUMBER: 97677622 BUSINESS ADDRESS: STREET 1: 7380 SAND LAKE RD STE 350 CITY: ORLANDO STATE: FL ZIP: 32819 BUSINESS PHONE: 4073510011 MAIL ADDRESS: STREET 1: 7380 SAND LAKE RD STREET 2: STE 200 CITY: ORLANDO STATE: FL ZIP: 32819 10-K405 1 AIRSHIP INTERNATIONAL LTD. 10-K SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C 20549 FORM 10-K [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED: DECEMBER 31, 1996 COMMISSION FILE NUMBER: 0-14646 AIRSHIP INTERNATIONAL LTD. -------------------------------------------------- (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) NEW YORK 06-1113228 (STATE OF INCORPORATION) (I.R.S. EMPLOYER IDENTIFICATION NUMBER) 7380 SAND LAKE ROAD, SUITE 350, ORLANDO, FL 32819 (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE) (407) 351-0011 (REGISTRANT'S TELEPHONE NUMBER) SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: COMMON STOCK, $.01 PAR VALUE PER SHARE. (TITLE OF CLASS) CLASS A 8% CUMULATIVE CONVERTIBLE VOTING PREFERRED STOCK, PAR VALUE $.01 PER SHARE (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 [ ] No [X] 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. [X] The aggregate market value of the voting stock held by non-affiliates of the Registrant including Preferred Stock as of September 5, 1997 was $3,649,537.50. The number of shares of Common Stock outstanding as of September 5, 1997 was 42,522,778. Documents Incorporated by Reference: None. A list of Exhibits to this Annual Report on Form 10-K begins on page 24. AIRSHIP INTERNATIONAL LTD. 1996 FORM 10-K REPORT TABLE OF CONTENTS PART I ITEM 1. BUSINESS......................................................... -1- ITEM 2. PROPERTIES....................................................... -6- ITEM 3. LEGAL PROCEEDINGS................................................ -6- ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.............. -8- ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.......................................... -9- ITEM 6. SELECTED FINANCIAL DATA.......................................... -11- ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.......................... -12- ITEM 8. FINANCIAL STATEMENTS AND SCHEDULES............................... -15- ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE....................... -15- ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT............... -16- ITEM 11. EXECUTIVE COMPENSATION........................................... -17- ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT............................................... -20- ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS................... -20- ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON FORM 8-K.......................................... -22- ii The Private Securities Litigation Reform Act of 1995 provides a "safe harbor" for forwardlooking statements. This Annual Report contains certain forwardlooking 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 forwardlooking 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. iii PART I ITEM 1. BUSINESS GENERAL Airship International Ltd. (the "Company") operated lighter-than-air airships, also commonly known as blimps, which were used to advertise and promote the products and services of the Company's clients. The Company's clients utilized its airships at major sporting and special events and over urban and beach locations as an informative advertising and promotional vehicle. The Company did not operate any airships during 1996. 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. AIRSHIPS For daytime advertising, each of the Airships and its ground support vehicles were generally painted with the name and logo of the respective client. In addition, the Company's operating personnel wore uniforms carrying the client's logo or name. The Company's clients utilized its Airships as an aerial ambassador and network-television camera platform for numerous major events. Each of the Company's airships was operated by a team employed by the Company which included U.S. Federal Aviation Administration ("FAA") certified airship pilots, mechanics, technicians and crew. The team supervised and executed the flight schedule and activities which the client specified. The team was supported by specially equipped ground support vehicles owned by the Company, which were used in the operation and maintenance of the Airships. The flight schedule of an airship could have included flights over a several hundred mile geographical area. The Company could accommodate such requirements because an airship's mooring support facilities are mobile and will travel with the ground crew to each of the landing sites. The Company believes that this mobility provides the flexibility for the use of the airships and implementation of a client's promotional campaign. No specialized facility is required for use as a landing site. Historically, substantially all of the Company's revenues were derived from the operation of the Airships pursuant to aerial advertising contracts with its clients. Fees were generally paid to the Company on a monthly basis and the respective Airships were flown according to a flight schedule provided by the client, subject to weather conditions, government regulations and maintenance requirements. In the absence of availability of suitable replacements and/or rights of the Company to terminate outstanding advertising contracts, Termination of or substantial reduction in fees provided by the Company's operating Airships has had a material adverse impact on the Company's revenues. The Company continues to seek new aerial advertising contracts and clients. AERIAL ADVERTISING AND OTHER CONTRACTS -1- Set forth below are descriptions of the Company's aerial advertising contracts which were in effect during the fiscal year ended December 31, 1996 (for further detail see "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Comparison of Revenue and Operating Costs - -- 1996 to 1995"). ARGENTINA AGREEMENTS. On December 15, 1994 the Company and AOI consummated the Argentina Lease Agreement and the Argentina Operations Agreement, respectively, with Mastellone, an Argentinean dairy company, for the promotion of the products of Mastellone. Subsequently, on May 24, 1995, prior to commencement of flight operations of the Argentina Airship and pursuant to the Purchase and Assignment Agreement, the Argentina Airship and related equipment were sold and the Argentina Lease Agreement was assigned to First Security. In consideration for such sale and assignment, First Security assumed the Company's obligations under the Argentina Lease Agreement. The initial terms of the Agreements were for a period of four months, and commenced in July 1995. Such initial terms were extended for a ten-month period by Mastellone pursuant to the provisions of the Agreements. In addition, the Company had the option to repurchase the Airship for 120% of the out-of-pocket expenses and the assumption of all liabilities incurred by First Security and Aviation in connection with the Argentina Airship. Such option expired unexercised on January 15, 1996. Concurrently with the execution and delivery of the Purchase and Assumption Agreement, the Company sold to Aviation all of the issued and outstanding shares of the capital stock of AOI. Mr. Julian Benscher, a shareholder of the Company, is an officer and stockholder of Aviation. See "Certain Relationships and Related Transactions". The Company's revenues were historically dependent on the Company's aerial advertising contracts. For the years ended December 31, 1995 and 1994, 100% and 50%, respectively, of the Company's revenues were derived from Anheuser-Busch. In addition, 19% of 1994 revenues were derived from Kingstreet Tours and 29% from Gulf Oil. The Company has been adversely affected during the period between the time that any particular aerial advertising agreement terminated and the time a new contract commenced. The Company had no aerial advertising contracts in effect in 1996. ACQUISITIONS, LEASES AND FINANCINGS Set forth below is a description of the Company's financing arrangements in effect during the year ended December 31, 1996 and for the period from December 31, 1996 through August 24, 1997. ORIX LEASE In 1989 the Company executed, as lessee, an airship lease (the "Orix Lease") with Orix USA, Inc. then known as Orix Commercial Credit Corporation ("Orix") for the 600.05 Airship, which provided for an initial three year term with two three-year renewal options. Pursuant to the Orix Lease, the Company was obligated to pay a monthly lease payment of $121,000 (through November 1995), and $35,000 per month from December 1995 to November 1998. As a result of the termination of the Met Life Contract in October 1993, the Company and Orix entered into amendments to the Orix Lease in January and May 1994 to restructure the monthly payments. As a result of the reduced fees under the Bud One Contract and the suspension of operations of the Gulf Oil Airship, several required payments were not made. The Company again renegotiated its arrangement with Orix and in October, 1995, entered into an Amended and Restated Lease Agreement in the form of a Conditional Sales Contract effective as of June 2, 1995 (the "Amended Lease"). Pursuant to the Amended Lease, -2- the payments to Orix are $20,000 per month for the first year, $40,000 plus interest per month for the next 6 months, $60,000 plus interest per month for the next 6 months and thereafter the greater of $80,000 per month or 50% of annual cash flow for the proceeding 12 month period. The Amended Lease expires June 2, 2002 at which time the Company can purchase the Airship for $1.00. The Airship which is the subject of the Amended Lease is not currently operational, as it requires a new envelope. To date, the envelope has not been replaced. As security for the Company's obligations under the Orix Lease and the Amended Lease, Louis J. Pearlman, Chairman of the Board, President and Chief Executive and Operating Officer of the Company ("Mr. Pearlman"), has personally guaranteed the payment and performance of the obligations of the Company. In addition, the Company's obligations to Orix are guaranteed by TransContinental Airlines, Inc., an affiliate of the Company, which received common stock of the Company in exchange for such guaranty. See "Certain Relationships and Related Transactions." WDL LEASE Pursuant to an agreement effective May 16, 1993 (the "WDL Lease"), the Company leased from Westdeutsche Luftwerbung Theodor Wullenkemper GMBH ("Westdeutsche") a used type WDL IB airship equipped with a NightSign`tm' system. The Company entered into the WDL Lease to procure an airship to fulfill its obligations under the Gulf Oil Contract when it became apparent that the proposed acquisition of the assets of Slingsby could not be completed in time to provide an additional airship to fulfill the Company's obligations under the Gulf Oil Contract. The Company began operating this airship as the Gulf Oil Airship on June 25, 1993. On September 11, 1994, the Gulf Oil Airship was damaged in an accident and its operations ended. As a result of the damage to the Gulf Oil Airship, the Company sustained a loss of $1,978,000, representing the cost of the airship less insurance proceeds and credits allowed, including salvage value, when the airship was returned to WDL in September 1994. At December 31, 1994, the Company owed WDL a total of $2,866,000 under the WDL Lease including the $1,978,000 described above plus lease and other operating costs through September 11, 1994. Pursuant to the WDL Lease, the Company maintained a security deposit in a cash account (the "Cash Escrow Account") with Trans Continental Airlines Inc., an affiliate of the Company ("Trans Continental"). As of December 31, 1994, the Company had on deposit in the Cash Escrow Account $1,800,000. During March 1995, the Company paid the full balance of the Cash Escrow Account to WDL to reduce its liability to WAL to $1,000,000. Pursuant to the WDL Lease, Trans Continental collateralized the advances with a certificate of deposit in the amount of $2,500,000 (see Note C to the Financial Statements included elsewhere herein). The Company is currently indebted to WDL in the approximate amount of $1,000,000. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources." ALLSTATE LOAN On November 16, 1994, the Company entered into an Aircraft Collateral Funding Repayment Agreement (the "Allstate Agreement") with Allstate Financial Corporation ("Allstate"). Pursuant to the Allstate Agreement, on December 6, 1994, the Company borrowed $1,500,000, (the "Allstate Loan") and as of December 31, 1994, the Company owed Allstate $1,250,000 plus approximately $47,000 of accrued interest. The Allstate Loan bore interest at the rate of 37.5% annually and required a minimum payment of $75,000 each month, the first payment of $75,000 having been made on January 5, 1995. The Allstate Loan was guaranteed by both Mr. Pearlman and Trans Continental. See "Certain Relationships and Related Transactions." The guarantors agreed to subordinate -3- any payments due to them from the Company while the Allstate Loan is outstanding, and any payments that would otherwise be paid to the guarantors is to be paid to Allstate and applied against the Allstate Loan. Subsequently on June 22, 1995 the Allstate Loan was repaid when Trans Continental Leasing, Inc. ("TLI"), a wholly-owned subsidiary of Trans Continental Airlines, Inc., ("Trans Continental"), an affiliate of the Company, entered into a Sale-Leaseback Agreement the ("S/L Agreement") with the Company pursuant to which the Company's last remaining airship was sold to TLI for the purchase price of $2,060,000, which in turn leased such airship back to the Company. TLI borrowed the purchase price for the airship (the "Phoenixcor Loan") from Phoenixcor, Inc. ("Phoenixcor"), which was granted a pledge of the lease and a lien on the Bud One Airship. In addition, the Phoenixcor Loan was guaranteed by the Company and Trans Continental. The lease payments to be made under the S/L Agreement are equal to the payments to be made under the Phoenixcor Loan. The Phoenixcor Loan was structured as a sale-leaseback for financing purposes only. The Company entered into an arrangement with Senstar Capital Corporation, ("Senstar") pursuant to which the sale leaseback arrangement with TLI was reversed such that the Company reacquired such airship and the Company has borrowed a total of $3,500,000 from Senstar (the "Senstar Loan"), part of which has been used to repay the Phoenixcor Loan. The loan from Senstar is repayable over 5 years in sixty monthly payments of approximately $63,000 each, with a balance due at the end of the five year term of approximately $700,000, and is secured by a lien on the Airship and a guaranty by Trans Continental. The Senstar Loan provided approximately $1,337,000 to the Company after payment of the Phoenixcor Loan. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources". On January 15, 1997 the Company entered into a sale agreement with Trans Continental Leasing (TCL), an affiliated company, with respect to the Company's 500.04 airship (formerly the "Bud One" airship) whereby the Company sold to TCL the airship and related equipment. In consideration for said assets, TCL retired the Company's debt to Senstar Capital Corp. in the amount of $3,014,000. Additionally, TCL procured a new envelope from a third party and agreed to lease back the entire assembled and operational airship to the Company. Pursuant to the agreement, the Company further agreed that it would sell certain idle airship components to TCL provided that TCL would undertake to pay the operational costs of the 500.04 airship for a minimum of eight months. 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. ADDITIONAL AIRSHIPS; AIRSHIP ASSEMBLY In addition to providing clients with aerial advertising and promotion with its airships, the Company also had acquired assets enabling it to partially construct additional airships either to service existing or potential clients of the Company or for lease or purchase by other parties. The Company owns substantial airship replacement components and its experience in airship assembly includes the assembly of four airships. The airship components that the Company currently has in inventory, plus approximately $1,000,000 of additional capital per airship, would enable the Company to construct up to five additional airships. The Company believes that its inventory of spare airship components will significantly reduce its cost for initial airship assembly and future maintenance expenditures, should future clients be obtained. There can be no assurance, however, that the Company would be able to obtain the financing necessary to complete construction of any additional airships, or that it would be able to consummate aerial advertising agreements with respect to any such airships. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources." -4- Operation of the Company's airships is subject to suitable weather conditions and an absence of mechanical failures, either of which could damage or destroy an airship. During 1994, the 600.05 Airship was damaged in a storm while attached to its mast and the Gulf Oil Airship was damaged in an accident. Airships can be operated only in warm climates. Accordingly, during the winter months airships can only operate in the southern states and west coast states. Furthermore, maintenance of an airship requires that it cease operations for an aggregate of approximately one month each year, including approximately two weeks of in-hangar maintenance. MARKETING The Company marketed its airship services directly to potential clients through a sales effort conducted by its management, including a Director of Marketing. During 1996, the Company continued pursuing potential new clients, both for aerial advertising contracts and for the purchase of new airships; none of such contracts or purchases was consummated. SUPPLIERS Airships are manufactured by a limited number of suppliers worldwide. The Company's Airships were manufactured by Airship UK, a United Kingdom supplier no longer doing business, and by Slingsby. Due to asset purchases and expertise described above in "Additional Airships; Airship Assembly," the Company could be in a position to manufacture or assemble up to five additional airships, subject to financing requirements. COMPETITION Historically, the Company's direct competition was limited to those companies which had airships legally permitted to operate in the United States. The Company competed with Airship Management Service (AMS), the operator of the Fuji airship, and Icarus Aircraft, Inc. ("IAI"), a privately-held firm which operates lightships, which are small airships approximately 1/3 the size of the Company's airships. Currently, IAI is operating for MetLife. The Lightship Group, Inc. (formerly Virgin Lightships Inc. and American Blimp Company) owns and operates the smaller airships on behalf of numerous advertising clients in the United States. MetLife and Anheuser-Busch are former clients of the Company which did not renew its agreement with the Company, at least in part due to these alternative airship providers. GOVERNMENTAL REGULATION Operation of airships in the United States is regulated by the Federal aviation laws of the United States. The Company currently holds all necessary Federal Aviation Administration ("FAA") and U.S. Department of Transportation authorizations to operate all of its existing airships, including a Standard airworthiness Certificate issued by the FAA with respect to each of the airships. In addition, the Company holds an FAA "Type Certificate" which certifies that the design for the Company's airships meets air-worthiness requirements of Federal aviation regulations, and an FAA facilities license which permits the Company to assemble, repair and maintain airships. However, there can be no assurance that the federal government will not impose additional requirements on the operation of airships in the future, which might require the Company to incur additional expense, or which might otherwise have a material adverse effect on the Company's operations. In addition, the Argentina Airship is subject to regulation by the Argentinean equivalent of the FAA. The Company is currently in compliance with the requirements of such governmental authority, and anticipates that it will be able to maintain such compliance in the foreseeable future. -5- EMPLOYEES As of December 31, 1996, the Company had approximately 11 full-time employees, 2 of whom are officers, 8 of whom are administrative and one of whom is warehouse personnel. The number of employees fluctuates based in part on the number of Airships conducting flight operations. The Company's employees are not represented by any union. The Company considers its employee relations to be good. The Company believes it can serve additional pilots and flight personnel as required if new contracts are served. INSURANCE There are risks inherent in the ownership and operation of airships. The Company has maintained insurance in such amounts and for such coverage as management has determined to be appropriate and as has been required from time to time under its contracts with Orix and various financing companies and airship aerial advertisers. Currently, the Company maintains insurance for its spare parts, as well as property coverage and general liability insurance. The Company has also maintained Aircraft Hull All Risk Insurance for the periods when its Airships are operational. ITEM 2. PROPERTIES The Company had leased its principal executive offices pursuant to the terms of a five-year lease, which commenced May 7, 1991 and ended May 6, 1996, for approximately 7,000 square feet in Orlando, Florida, the home base of the Company. The annual rent under such lease was approximately $132,000. Since May 7, 1996, the Company has subleased approximately 2,000 square feet of such facility from Trans Continental Airlines, Inc. on a month-to-month basis for monthly rental payments of approximately $1,800. The Company also maintains a small office in New York City for which it pays minimal rent. In December 1994, the Company renewed for one year a lease for a warehouse of approximately 5,000 square feet in Kissimmee, Florida for approximately $15,000 per year. The Company stores various spare parts for its existing airships at this warehouse and intends to do so for the foreseeable future. ITEM 3. LEGAL PROCEEDINGS Tenerten and Drake, Inc. On September 15, 1994, Tenerten and Drake, Inc. ("TDI") filed a complaint against the Company. The complaint alleges that the Company failed to pay certain sums of money due and owing to TDI under an agreement to perform advertising and related services for the Company. The Company filed its answer and raised its affirmative defenses to said complaint alleging that the services allegedly performed by TDI were defective in numerous respects. On June 13, 1995, the parties entered into a Settlement Stipulation whereby the Company agreed to make certain payments to Tenerten and Drake, Inc. On July 20, 1995, Tenerten and -6- Drake, Inc. filed its Motion for Final Judgment alleging that the Company failed to make a payment under the Settlement Stipulation. A Final Judgment was entered against the Company on July 20, 1995. The Company filed its Notice of Appeal on September 19, 1995 and posted a cash bond in the amount of $24,190.76. The Company filed Appellant's Initial Brief on January 8, 1996, contending that the Company's payment was made in a timely manner as required by the Settlement Stipulation. The Circuit Court of the Eighteenth Judicial Circuit in and for Seminole County, Florida is reviewing the Briefs filed by the parties and no opinion has been received as of this date. Watermark. In January, 1993, a second amended complaint to a lawsuit, which was initially commenced in March 1991 and subsequently dismissed twice without prejudice, was filed in the Circuit Court of the State of Florida against the Company and its President by Watermark Group PLC and Von Tech Corporation, as general partners of Company Communications (collectively, the "WNT Plaintiffs") alleging breach of an alleged joint venture agreement involving Company Communications and Airship Enterprises Ltd. (a company that was owned by Mr. Pearlman and that was not in any way owned or controlled by the Company), breach of an alleged agreement by the Company regarding the lease and operation of a particular airship; and breach of an alleged oral commission agreement by the Company relating to the Company's acquisition of two airships it presently owns. The WNT Plaintiffs seek various legal and equitable remedies, including monetary damages against the Company and Mr. Pearlman in excess of $800,000 together with a claim for some portion of the advertising revenue the Company has received, and will continue to receive, from the operation of some of its airships. On October 3, 1995, the parties entered into a Mutual Release and Joint Stipulation for Settlement whereby the Company agreed to make payments to Watermark in the total amount of $40,000. Such payments were made during 1995 and 1996. In March 1993, the second amended complaint was dismissed without prejudice. Since the Company denies any involvement with any of the transactions set forth in the second amended complaint, the Company believes that its liability, if any, on the claims made by the WNT Plaintiffs will not be material. Capital Funding Group Ltd. In February 1992, Capital Funding Group Ltd. ("CFG") commenced an action against the Company and others in excess of $1,000,000 in damages based on the alleged failure by the Company to provide adequate collateral and security in connection with certain alleged financial agreements with CFG. The Company retained CFG in July 1991, paid a commitment fee (which was written off in 1991) and received a commitment from CFG which then failed to provide the funding. The Company and the other defendants answered the complaint in February 1992 by denying all of the substantive allegations and asserting several affirmative defenses. In addition, the Company asserted certain counterclaims against CFG and its two principals for breach of a commitment letter pursuant to which CFG was to arrange for a $9 million loan to the Company, breach of a compromise agreement accepted by CFG in January 1992, pursuant to which CFG was to provide funding to the Company in the amount of $7 million, breach of an escrow agreement, pursuant to -7- which CFG was to return $200,000 of the commitment fee paid by the Company and various other counterclaims. In March 1993, the Company was awarded a default judgment of $8,000,000 against CFG and the complaint against the Company was dismissed. No balances have been returned to the Company as of December 31, 1995. Due to the weakening financial position of the Company at the time, the Company was unable to complete its audit for the year ended December 31, 1994 or to conduct audits for the years ended December 31, 1995 and 1996. Accordingly, the Company had not filed any periodic reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, for the quarterly and annual periods ended December 31, 1994 through March 31, 1997 or any Current Reports on Form 8-K during such periods until July 11, 1997, on which date the Company filed its Current Report on Form 8-K reporting a change of accountants. On July 18, 1997, the Company entered into a Consent and Undertaking with the Securities and Exchange Commission pursuant to which the Company agreed, among other things, to file this Annual Report on Form 10-K, Annual Reports on Form 10-K for the years ended December 31, 1994 and 1995 and all reports due under Sections 13 and 15 of the Securities Exchange Act of 1934, as amended, for all subsequent periods. Judgement was entered on August 21, 1997. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS The Company has not held any meetings of, nor has it submitted any matters to a vote by, shareholders since April 11, 1995. -8- PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The Company's Common Stock, Preferred Stock, and Class B Warrants had been listed on the Nasdaq SmallCap Market under the symbols BLMP, BLMPP and BLMPL, respectively, until Nasdaq's delisting of the Company's securities on July 5, 1995 (the "Delisting") as a result of the Company's failure to timely file this Annual Report on Form 10-K. Since the Delisting, the Company's Common Stock and Preferred Stock have traded on the over-the-counter market under the symbols "BLMPE" and "BLMPPE," respectively. The price ranges presented below represent the highest and lowest quoted bid prices during each quarter reported by Bureau, Inc for the third quarter of 1995. The Nasdaq quotes represent prices between dealers and do not reflect mark-ups, markdowns or commissions and therefore may not necessarily represent actual transactions. COMMON STOCK: 1995 High Bid Low Bid 1st Quarter $.125 $.0625 2nd Quarter $.0625 $.03125 3rd Quarter* 4th Quarter $.25 $.125 1996 High Bid Low Bid 1st Quarter $.3125 $.03125 2nd Quarter $.3125 $.04 3rd Quarter* $.1 $.04 4th Quarter $.085 $.05 - ------------------------ * Prior to the Delisting. Price ranges during the third quarter of 1995 include quotations on NASDAQ SmallCap Market up to such date. The Common Stock and the Preferred Stock are currently traded on the Nasdaq OTC Electronic Bulletin Board. -9- 1997 High Bid Low Bid 1st Quarter $.175 $.08 2nd Quarter $.175 $.09 Preferred Stock: 1995 High Bid Low Bid 1st Quarter $.59375 $.40625 2nd Quarter $.46875 $.375 3rd Quarter* $.325 $.325 4th Quarter $.25 $.125 1996 High Bid Low Bid 1st Quarter $.1875 $.1875 2nd Quarter $1.625 $.375 3rd Quarter* $.71875 $.385 4th Quarter $.59375 $.28125 1997 High Bid Low Bid 1st Quarter $1.125 $.51 2nd Quarter $1.09375 $.53125 As reported by the Nasdaq OTC Bulletin Board, on September 5, 1997 the closing bid price of the Common Stock was $0.0825 per share and the closing bid price of the Preferred Stock was $0.4375. As of September 5, 1997, there were 1,498 holders of record of the Company's Common Stock and 83 holders of record of the Preferred Stock, respectively. 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. Dividends on the Preferred Stock are payable quarterly on February 15, May 15, August 15 and November 15 of each year (each such date a "Dividend Payment Date") and accrue at the annual rate of $.48 per share, to the extent payable in cash and $.60 per share, to the extent payable in shares of Common Stock. The first four dividend payments were paid 50% in cash and 50% in registered shares of Common Stock computed on an annual basis, the last such dividend payment being made on February 15, 1994. The cash portion of such dividend payments was paid with a portion of the proceeds of the 1993 Offering, which had been reserved for -10- such purposes. Beginning May 15, 1994, dividends were payable in cash from the available cash derived from the adjusted earnings of the Company for the fiscal quarter immediately preceding the Dividend Payment Date to the extent available, according to a formula based on adjusted earnings. Such formula provides that the available cash will be determined as one half of the difference between airship operating revenues and the sum of operating costs, interest and principal payments on debt, selling, general and administrative expenses (limited to a ceiling based on historical numbers with stated annual percentage increases thereafter) and airship related capital expenditures (limited to $2,000,000 in any given year). The components of the above formula are to be determined in accordance with generally accepted accounting principles as applied in the Company's financial statements as filed with the Securities and Exchange Commission (the "Commission"). At its option, the Company may pay cash dividends in excess of the available cash determined by the above formula. The May 15, 1994 dividend was paid in registered shares of Common Stock. The Company has deferred and accrued the cash dividend on the Preferred Stock due on August 15, 1994 and subsequent quarterly dividends until a later payment date. The Company does not anticipate paying such dividends in the near future, and intends to continue to defer and accrue such dividends. Concern has been expressed by management and various shareholders of the Company over the dilutive effects of issuances of shares of Common Stock in payment of dividends accrued on the Preferred Stock. The Company is currently exploring possible alternatives to such issuances, including submitting to the Company's shareholders a proposal to amend the terms of the Preferred Stock. 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 Discussion and Analysis of Financial Condition and Results of Operation appearing elsewhere herein.
OPERATING STATEMENT DATA: YEAR ENDED DECEMBER 31, ----------------------------------------------------------------------- 1996 1995 1994 1993 1992 ----------- ----------- ----------- ----------- ----------- Gross revenues........................ $ -- $ 2,620,000 $ 3,980,000 $ 9,748,000 $ 7,258,000 Net income (loss) before cumulative effect of a change in accounting principle............................. $(2,506,000) $(4,867,000) $(20,645,000) $(5,406,000) $ 1,165,000 Net income (loss)..................... $(2,506,000) $(4,867,000) $(20,645,000) $(5,406,000) $ 1,165,000 Net income (loss) per share........... $ (0.10) $ (0.18) $ (0.74) $ (0.24) $ 0.05 BALANCE SHEET DATA: AT DECEMBER 31, ----------------------------------------------------------------------- 1996 1995 1994 1993 1992 ----------- ----------- ----------- ----------- ----------- Total assets.......................... $ 4,496,000 $ 5,073,000 $ 9,819,000 $26,077,000 $21,690,000 Long-term obligations................. $ 3,016,000 $ 3,689,000 $ -- $ -- $ -- Obligations under capital lease....... $ 3,158,000 $ 3,348,000 $ 3,258,000 $ 2,380,000 $ 3,186,000 Total liabilities..................... $ 18,334,000 $ 14,680,000 $ 13,070,000 $ 7,842,000 $12,394,000 Stockholders' equity (deficit)........ $(13,838,000) $ (9,607,000) $ (3,251,00) $18,235,000 $ 9,296,000 Book value per common share........... $ (0.34) $ (0.27) $ (0.10) $ 0.65 $ 0.36
-11- ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS GOING CONCERN AND MANAGEMENT'S PLANS 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 $50,800,000, at December 31, 1996. During the year ended December 31, 1996, the Company did not generate any revenues from airship operations. It reported a net loss of $2,506,000 and has negative working capital of $12,598,000. These conditions raise substantial doubt about the Company's ability to continue as a going concern. Management's plans 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 Airlines, Inc. or other related parties common directorship and ownership, to provide funds on a monthly basis as a loan and acquiring assets and operations of one or more entities, with which the Company has been in negotiation. The expectation is that such business combination, if completed, would provide additional cash flow and net income to the Company. Though management believes the Company will secure additional capital and/or attain one or more of the above goals, there can be no assurance that any acquisition, financing or other plan will be effected. Any acquisition or securities offering is subject to the Company's due diligence, the state of the general securities markets and of the specific market for the Company's securities, and any necessary regulatory review. While the Company believes that its plans for additional funding or 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. -12- OVERALL FINANCIAL CONDITION AND RESULTS OF OPERATIONS. The Company's stockholders' deficit at December 31, 1996 was $13,838,000, an increase of $4,231,000 from stockholders' deficit of $9,607,000 at December 31, 1995. The increase was due primarily to the net loss of $20,506,000 in fiscal 1995. The accrual of dividends on Preferred Stock decreased equity by $1,725,000. As a result of these equity changes, during 1996 the Company's assets decreased $577,000 while liabilities increased $3,664,000. Compared to the year ended December 31, 1995, revenues, operating costs and selling, general and administrative costs decreased 100%, 71.4% and 63.6%, respectively. Interest expense less other income for 1996 was $724,000, an increase of $321,000 or 30.7%. These changes in revenues and costs, as explained in more detail below, resulted in a net loss for fiscal 1996 of $2,506,000 compared to a net loss of $4,867,000 in fiscal 1995. The Company continues to experience negative cash flows from operating activities and through the cessation of flights and fees under the Gulf Oil Contract. Cash flows for 1995 were also adversely affected by the termination of the Gulf Oil Contract as liabilities at December 31, 1996 related to its termination and the damage to the Gulf Oil Airship approximates $3,220,000. The Company has made changes in its management, office and airship crew operations (the "Restructuring"). The Restructuring includes the reduction of salaries of certain of its management, office, and operations personnel ("Personnel"); the reduction of Personnel; the reduction of insurance costs and the reduction of recurring costs throughout its operations; (collectively, the "Cost Savings"). Certain of the Restructuring considerations were the result of the cessation of operations under both the 600.05 Aerial Advertising Agreement and the Sea World Passenger Contract. Additional Personnel reductions were made, and operating costs ceased, when the Gulf Oil Airship was destroyed in an accident on September 11, 1994. 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. LIQUIDITY AND CAPITAL RESOURCES. -13- The Company continues to experience negative cash flows from operating activities. During 1996, the Company sustained a net change in cash and cash equivalents of $24,000, with a reduction of $2,135,000 from operating activities. At December 31, 1996, available cash balances were represented by the $2,000 in cash. The Company's negative cash flow for 1996 was $24,000. Operating activities utilized $2,135,000 principally as a result of the net loss for the period, which includes non-cash charges of approximately $14,122,000. In addition, the change in operating assets and liabilities offset the negative cash flow effect of the net loss by approximately $384,000 as liabilities at December 31, 1996 increased to approximately $18,334,000. Investing activities used $30,000 in the form of funds taken from the Cash Escrow Account. Financing activities contributed $3,004,000 principally from proceeds of the Trans Continental Loan, partially offset by the repayment of loans. The Company has not had existing bank lines of credit available to provide additional working capital due to the Company's negative cash flow and existing encumbrances on assets, and has previously received substantial financing from Mr. Pearlman in the form of loans and guarantees which supplement the funds available from the Company's operations. There can be no assurance that Mr. Pearlman will make additional cash -14- advances or loans or give personal guarantees if the Company requires additional capital. At December 31, 1996, the Company owed Mr. Pearlman $1,137,000 net of unamortized discount and after offsetting $785,000 with respect to a loan made by the Company and guaranteed by Mr. Pearlman. As of December 31, 1994, the Company owed Mr. Pearlman $1,137,000 net of unamortized discount. The entire unpaid principal balance of the loan from Mr. Pearlman, together with all accrued and unpaid interest, becomes due and payable on May 31, 1997. Mr. Pearlman has deferred repayment of such loan for an indefinite period of time. In addition, Trans Continental has guaranteed the Company's obligations under the Allstate Loan and the Phoenixcor Loan. In consideration for these and other guarantees of the Company's obligations, Trans Continental has been granted 10% of the issued and outstanding common stock of the Company. See "Certain Relationships and Related Transactions." There can be no assurance that Trans Continental will continue to guaranty the Company's obligations in connection with any future financings. During the year ended December 31, 1996, Trans Continental advanced the Company $3,004,000. The total outstanding balance at December 31, 1996 amounted to $3,470,000. 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. The financing did not close until January 1997. To date the Company has never paid a dividend on its Common Stock and does not anticipate paying one on its Common Stock in the foreseeable future. Dividends on the Company's Preferred Stock are payable in cash to the extent of available cash derived from the adjusted earnings of the Company for the fiscal quarter immediately preceding the Dividend Payment Date (according to a formula based on adjusted earnings). The Company has deferred and accrued the cash dividend on the Preferred Stock due on August 15, 1994, and all subsequent quarterly dividend payment dates, until a later payment date. ITEM 8. FINANCIAL STATEMENTS AND SCHEDULES The report of the Company's Independent Auditor, Financial Statements, Notes to Financial Statements and Financial Statement Schedules appear herein commencing on Page F-1. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE The Company became delinquent in its financial filings subsequent to filing its Form 10-Q for the period ending September 30, 1994. In June 1997 the Company retained Charlie M. Meeks, C.P.A., P.A. as its independent auditor due the added expense of continuing with a large audit firm such as Grant Thornton. -15- PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The following table sets forth information, as of September 4, 1997, relating to each director and executive officer of the Company.
Name Age Positions with the Company Position Held Since Louis J. Pearlman 43 Chairman of the Board of Directors, June 1982 President and Chief Executive, Finanical and Operating Officer Marvin Palmquist 81 Director November 1984 James J. Ryan 49 Director July 1986 Alan A. Siegel 33 Secretary and Director October 1989
- -------------------- 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 since June 1982. Since November 1976, Mr. Pearlman has been President and Chief Operating Officer, a director and a 21% shareholder of Trans Continental. See "Certain Relationships and Related Transactions." Mr. Pearlman currently devotes approximately 50% of his time to Trans Continental and the remainder of his time to the Company. Marvin Palmquist has been a director of the Company since November 1984. Since August 1967, Mr. Palmquist has been Chairman of the Board of Directors and President of Lloyd American Corporation ("LAC") and its subsidiaries, including Lloyd Communications Group, Inc. which develops, owns and operates local television stations and a satellite receiving center associated with the Independent Network System. LAC also owns and operates the Midway Theater, an historic theater located in Rockford, Illinois. James J. Ryan has been a director of the Company since July 1986. 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. Mr. Ryan is currently Executive Director of Sedgwick Aviation of North America, an international insurance brokerage firm. -16- Alan A. Siegel has been a director of the Company since December 1991 and Secretary of the Company since October 1989. From 1985 to 1989, Mr. Siegel was Senior Account Manager of the Company and since 1989 has served as the Company's General Manager. Mr. Siegel has also been Senior Account Manager for Trans Continental since 1986. The Company's directors are elected for a period of one year and until their successors are duly elected and qualified. 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. 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. There are currently four members of the Board of Directors. The Company and its principal shareholders have agreed to use their best efforts to elect two designees of the underwriters of the 1993 Offering to the Company's Board of Directors. Due to the Company's failure to pay a specified portion of dividends on the Preferred Stock in cash, the holders of the Preferred Stock, voting as a class, have the right to designate two additional members of the Company's Board of Directors. 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, 1996. No other executive officer's annual salary and bonus exceeded $100,000 during the Company's past three fiscal years. SUMMARY COMPENSATION TABLE
Name and Principal Fiscal Salary Bonus Other Annual Restricted Securities Other Position Year Compensation Stock Award Underlying Compensation Options ----- ----------- ------ ------------- ----------- ---------- ------------ Louis J. Pearlman, 1996 $118,921 $ 0 Chairman, 1995 $112,276.50 $ 0 President, Chief 1994 $252,101 $ 0 -- -- -- -- Executive and Operatng Officer Alan A. Siegel, 1996(1) $ 61,530 $ 0 Secretary, General 1995(1) $ 58,140 $70,000 Manager and Director 1994(1) $ 71,539 $ 0
- -------------- (1) Mr. Siegel deferred $25,000 of his salary in each of 1994, 1995 and 1996. 1994 EMPLOYEE SHARE PURCHASE PLAN The Company has an employee share option plan (the "Plan") for employees of the Company and any present or future "subsidiary corporations." The Company intends the Plan to be an "employee stock purchase -17- 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 less of (i) 85% of the fair value of the shares on the day of the offering, or (ii) 85% of the fair market value of the shares at the time the option is exercised. OPTIONS/SAR GRANTS IN LAST FISCAL YEAR There were no option grants in 1996. -18- AGGREGATED OPTION EXERCISES IN 1996 AND 1996 FISCAL YEAR-END OPTION VALUES There were no options exercises in 1996. - -------------------------- COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION The Board of Directors of the Company does not have a compensation committee. Messrs. Pearlman and Siegel determine executive compensation, based on corporate performance and market conditions. The compensation of Mr. Pearlman, the Chief Executive and Operating Officer of the Company, is based solely upon the terms of his employment agreement with the Company. See "Employment Agreements." EMPLOYMENT AGREEMENTS The Company entered into an employment agreement as of February 15, 1993 with Louis J. Pearlman, superseding his prior agreement which was to expire December 31, 1994. Both agreements contemplate an annual salary to Mr. Pearlman of $200,000 during 1989 and for annual increases thereafter in an amount equal to the greater of 5% of his previous year's salary or the increase, if any, in the Consumer Price Index for All Urban Consumers, Central Florida 1967 - 100. The agreement also provided for an annual profit bonus payable to Mr. Pearlman in an amount equal to 4% of the first $1 million of the Company's net after-tax profits for such fiscal year. Pursuant to the agreement, Mr. Pearlman's annual compensation, including salary and bonus was limited to $340,000 per year. In addition, Mr. Pearlman agreed in 1993 not to receive a bonus for the 1993 fiscal year. Mr. Pearlman received a bonus of $254,000 (including $100,000 applied to exercise of options) for the 1994 fiscal year. See "Option Grants in 1994." The Company is presently negotiating a new employment agreement with Mr. Pearlman. The Company entered into an employment agreement as of December 31, 1992 with Alan A. Siegel. Mr. Siegel's agreement expires on January 1, 1998. Mr. Siegel's agreement provides for an annual salary of $75,000 for the first year of the agreement and for annual increases thereafter in an amount equal to the greater of 5% of his previous year's salary or the increase, if any, in the Consumer Price Index for All Urban Consumers, Central Florida 1967 -- 100. The agreement also provides for an annual bonus payable to Mr. Siegel in an amount equal to 1 1/2% of the Company's net after-tax profits for such fiscal year plus an amount determined in the discretion of the Board. -19- 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 the Record Date, by (i) all persons known by the Company to be the beneficial owner of more than 5% of the outstanding Common Stock or Preferred Stock, (ii) each of the Company's directors, (iii) the Company's Chief Executive Officer and (iv) all executive officers and directors of the Company as a group (5 persons).
SHARES OWNED OF RECORD PERCENTAGE OF OUTSTANDING PERCENTAGE OF OUTSTANDING NAME AND ADDRESS OR BENEFICIALLY SHARES OF COMMON STOCK SHARES OF PREFERRED STOCK - ---------------- ----------------- ------------------------ ------------------------- Louis J. Pearlman(1) 9,302,291 23.9% * Alan A. Siegel(2) 51,130 * * Roy T. Belotti 1,250 * * Marvin Palmquist -0- * * James J. Ryan 97,000 * * Trans Continental(3) 3,666,862 10% * All officers and 13,118,533 24.3% * directors as a group (5 persons)(2)
- ---------- * Denotes less than 1%. (1) Mr. Pearlman has an address at: c/o Airship International Ltd., 7380 Sand Lake Road, Suite 350, Orlando, Florida 32819. (2) Includes 50,000 options granted under the Company's Incentive Stock Option Plan. (3) Such shares of Common Stock were granted to Trans Continental Airlines, Inc. in consideration for its guaranty of the Company's obligations under the Allstate Loan, the Phoenixcor Loan, the Senstar Loan, the Argentina Lease Agreement and the Argentina Operations Agreement, and a corporate credit card issued for the Company's benefit. See "Certain Relationships and Related Transactions". ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS As of January 1, 1993, the Company owed Mr. Pearlman an aggregate amount of approximately $1,900,000 which amount represented accrued and unpaid salary and bonus, and principal and accrued and unpaid interest on loans made to the Company by Mr. Pearlman for general operation purposes. On June 30,1993, the Company made a $789,000 loan (the "June 1993 Loan") to an individual who had previously facilitated financing for the Company. Mr. Pearlman has guaranteed repayment of the Loan and in addition, has agreed that -20- the Company's obligation to repay principal and interest on Mr. Pearlman's loan to the Company shall be reduced proportionately to reflect the amount of the then outstanding Loan for so long as the Loan shall remain outstanding. The loan from Mr. Pearlman bears interest at the rate of 8.5%. In consideration for Mr. Pearlman's guaranteeing repayment of the Loan and agreeing that the Loan can be offset against his loan, the Company has treated the $789,000 as a reduction of the amount due to Mr. Pearlman. As the result of further interest accruing on the amounts owing to Mr. Pearlman by the Company, at December 31, 1994, and after allowing for the offset described above with respect to the Loan, the Company owed Mr. Pearlman $950,000 net of unamortized discount. As of December 31, 1994 the Company owed Mr. Pearlman $950,000 net of unamortized discount. During the year ended December 31, 1994, the Company earned $164,000 of interest income on advances (the "Trans Continental Account") previously made to Trans Continental Airlines, Inc. ("Trans Continental"). Mr. Louis J. Pearlman owns 21% of Trans Continental and is the Company's Chairman of the Board, President and principal shareholder. The advances were made to obtain higher yields and, at December 31, 1994, totaled $1,809,000. Trans Continental has pledged a $2,500,000 money market account as collateral for this advance. This advance is returnable to the Company upon demand, and during the year ended December 31, 1994, an aggregate amount of $881,000 of the advances were returned to the Company including interest earned. The balance of the advances were returned to the Company during 1995 and were used by the Company to pay outstanding amounts owing to WDL. On October 9, 1995 the Company granted to Trans Continental 3,666,862 shares of Common Stock representing 10% of the issued and outstanding Common Stock of the Company. Such grant was made in consideration of Trans Continental's guaranty of the Company's obligations under the Allstate Loan, the Phoenixcor Loan and the Senstar Loan and the Argentina Lease and Operations Agreements. In addition, Trans Continental has procured, for the Company's benefit, a corporate credit card. 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. The Company advanced Airship Airways, Inc. ("AAI") $137,500 in August 1994. At such time, Mr. Pearlman was a principal stockholder of AAI, owning approximately 44% of its stock. Subsequent to such transaction Mr. Pearlman has reduced his ownership interest in AAI to approximately 4%. The advance was made in connection with a proposed merger (the "Merger") transaction between the Company and AAI. At the present time the Company believes that it is unlikely that the Merger will be consummated. In connection with the advance, AAI issued to the Company its promissory note (the "AAI Note") in the amount of $137,500 in October 1994. The AAI Note is secured by certain aircraft and equipment owned by AAI. The AAI Note bore interest at the rate of 8% per annum, and was due and payable on or before February 23,1995. On February 8, 1995 AAI repaid the AAI Note in full by paying the Company $82,100 and cancelling two promissory notes that had been issued by the Company to AAI in the respective principal amounts of $25,000 and $30,400. These notes had been issued in connection with expenses incurred in connection with the Merger, and reductions in rental payments on office space obtained with the cooperation of AAI, and which were due and payable on February 23, 1995 and May 1, 1996, respectively. Pursuant to an Agreement dated December 7, 1993, the Company made a $75,000 unsecured loan to Superbound Limited ("Superbound"), a United Kingdom corporation controlled by James Stuart Tucker, the former President of Slingsby. The loan bears interest at an annual rate of 10%. Principal is payable in two equal installments of $37,500 each on the first two anniversaries of the date the loan proceeds were paid to Superbound (within seven days of December 7, 1993). Mr. Tucker is a guarantor of this loan. During 1994 Mr. Tucker was able to procure, without cost to the Company, required maintenance service and parts which would otherwise have cost the Company over $100,000. In exchange for his services, $37,500 of the loan was cancelled as of December -21- 3, 1994 and interest of $7,500 was received in February 1995. The remaining balance of the loan was subsequently repaid. On December 31, 1991, Mr. Julian Benscher and the Company entered into a Line of Credit Agreement, pursuant to which Mr. Benscher loaned the Company $1,000,000 in 1992. As partial consideration for making these loans, the Company issued to Mr. Benscher warrants to purchase 775,000 shares of Common Stock and issued additional warrants to purchase 325,000 shares of Common Stock to certain parties designated by Mr. Benscher. The Company has granted Mr. Benscher registration rights with respect to all shares of Common Stock and warrants owned by him. These warrants were to expire on December 31, 1994; however, for continued assistance provided to the Company by Mr. Benscher, the Company extended the expiration date of these warrants to December 31, 1996, on which date the warrants expired unexercised. The Company sold the Argentina Airship to First Security for the benefit of Aviation, in June, 1995 in consideration for First Security's assumption of the Company's liabilities under the Argentina Lease Agreement and AOI's obligations under the Argentina Operations Agreement. In connection with such sale, the Company assigned the Argentina Lease Agreement to First Security, and Aviation purchased all of the issued and outstanding Capital Stock of AOI. See "Business-Aerial Advertising and Other Contracts-Argentina Airship." 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. -22- ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON FORM 8-K
Page ---- (a) (1) The following financial statements of the Company have been filed as part of this report: A. Report of Independent Certified Public Accountant F-1 B. Balance Sheets as of December 31, 1995 and 1994 F-2 C. Statements of Operations for the years ended December 31, 1995, 1994 and 1993 F-3 D. Statements of Changes in Stockholders' Equity for the years ended December 31, 1995, 1994 and 1993 F-4 to F-5 E. Statements of Cash Flows for the years ended December 31, 1995, 1994 and 1993 F-6 to F-7 F. Notes to Financial Statements F-8 to F-22 (a) (2) No Financial Statement Schedules are required to be filed by the Company other than the following which have been filed as part of this report: A. Report of Independent Certified Public Accountants on Schedules F-23 B. II - Amounts receivable from related parties F-24 C. IV - Indebtedness to related parties F-25 D. V - Airships and related equipment F-26 E. VI - Accumulated depreciation and amortization of F-27 airships and related equipment
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(12) 3.3 Amendment to Certificate of Incorporation filed April 8, 1985. Exhibit 4(12) 3.4 Amendment to Certificate of Incorporation filed August 1, 1986. Exhibit 5(12) 3.5 Amendment to Certificate of Incorporation filed January 27, 1989. Exhibit 6(12) 3.6 Amendment to Certificate of Incorporation filed August 5, 1992. Exhibit 7(12) 3.7 Certificate of Correction to Amendment of Certificate of Incorporation filed Exhibit 8(12) on February 26, 1993. 3.8 Amendment to Certificate of Incorporation filed February 26, 1993. Exhibit 9(12) 3.9 By-laws of the Company. * 4.1 Warrant Agreement dated February 14, 1991 between the Company and Exhibit 4.1(4) American Securities Transfer, Inc. including form of Class A Warrant and form of Class B. Warrant. 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 Exhibit 4.3(4) issued to Julian M. Benscher. 4.4 Two warrants dated respectively February 7, 1991 and March 23, 1991 Exhibit 4.4(4) issued to Kenneth S. Bernstein. 4.5 Two warrants dated respectively February 7, 1991, and May 23, 1991 Exhibit 4.5(4) issued to Chatfield Dean & Co., Inc. 4.6 Warrant dated September 26. 1991 issued to Dr. Joseph C. F. Chow and Exhibit 4.6(4) Cynthia B. Chow. 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 Exhibit 4.9(4) issued to Emanuel and Company. 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, Exhibit 4.11(4) December 17,1 990, and February 21, 1991 issued to Alfonso Figlioia. 4.12 Two warrants dated respectively, May 23, 1991 and February 7, 1992 Exhibit 4.12(4) issued to Sanford D. Greenberg. 4.13 Warrant dated December 7, 1991 issued to Edward C. Larkin. Exhibit 4.13(4)
-23-
Exhibit Index -------------- Exhibit Incorporated by Number Description Reference to - ------- ----------- --------------- 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 Exhibit 10.29(5) Corporation ("ORIX"). 4.18 Warrant date February, 1992 issued to Chahram Pahlavi. Exhibit 4.18(4) 4.19 Warrant dated April 7, 1992 issued to Jim Ryan. Exhibit 4.19(4) 4.20 Warrant dated May 1, 1992 issued to Sterling Capital Group, Inc. Exhibit 4.20(4) 4.21 Warrant dated May 1, 1991 issued to Jonathan Turk. Exhibit 4.21(4) 4.22 Warrant dated February 7, 1991 issued to Steven R. Hinkle. Exhibit 4.22(4) 4.23 Warrant dated April 1. 1992 issued to Simon Zamet. Exhibit 4.23(4) 4.24 Warrant dated May 8, 1992 issued to Louis J. Pearlman. Exhibit 4.24(6) 4.25 Two Warrants dated April 17, 1992 issued to Emanuel and Company. Exhibit 4.25(6) 4.26 Representatives' Preferred Stock Warrant issued to Emanuel and Company and Chatfield Dean & Co. Inc. 10.1 Amended and Restated Loan Agreement dated as May 8, 1992 between the Exhibit 10.1(6) Company and Louis J. Pearlman. 10.2 Form of Subscription Agreement between the Company and certain Exhibit 10.2(6) investors relating to the 1992 Private Placement. 10.3 Letter Agreement dated April 17, 1992, between the Company and Emanuel Exhibit 10.3(6) and Company in connection with the 1992 Private Placement. 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 Exhibit 10.29(7) Company and the Metropolitan Life Insurance Company ("MetLife"). 10.7 Amendment dated as of March 15, 1988 to the Advertising Agreement Exhibit B.1(3) between the Company and MetLife. 10.8 Amendment dated as of March 15, 1988 to the Aerial Advertising Exhibit 10.14(5) Agreement between the Company and MetLife. 10.9 Amendment dated as of March 15, 1988 to the Aerial Advertising Exhibit 10.15(5) Agreement between the Company and MetLife. 10.10 Amendment dated as of March 15, 1988 to the Aerial Advertising Exhibit 19.4(8) Agreement between the Company and MetLife. 10.11 Airship Advertising Agreement dated as to April 27, 1990 between the Exhibit 10.8(4) Company, Airship Industries (USA), Inc. ("AIUSA") and Anheuser Busch Companies, Inc. ("Anheuser").
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Exhibit Index -------------- Exhibit Incorporated by Number Description Reference to - ------- ----------- --------------- 10.12 Termination Agreement dated as of January 1, 1991 between the Company, Exhibit 19.2(8) Anheuser, and AIUSA. 10.13 Airship Advertising Agreement dated as of January 1, 1991 between the Exhibit 19.3(8) Company and Anheuser. 10.14 Amendment to Airship Advertising Agreement dated May 31, 1991 between Exhibit 10.11(4) the Company and Anheuser. 10.15 Passenger Airship Agreement dated May 31, 1991 between the Company Exhibit 19.12(4) and Anheuser. 10.16 Airship Advertising Agreement dated March 12, 1992 between the Exhibit 10.13(4) Company and Anheuser. 10.17 Term Loan Agreement dated as of February 27. 1990, between State Bank Exhibit 10.3(9) of South Australia and the Company in the principal amount of $250,000. 10.18 Airship Lease dated February 27, 1990 between the Company and the State Exhibit 10.23(5) Bank of South Australia together with Lease Supplement No. 1 thereto. 10.19 Subordination Agreement dated February 27, 1990, between the Company, Exhibit 10.16(4) State Bank of South Australia and Louis J. Pearlman. 10.20 Line of Credit Agreement dated December 31, 1991 between Julian Exhibit 10.17(4) 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. 10.21 Loan Agreement dated December 8, 1988 between the Company and Louis Exhibit C.1(3) J. Pearlman relating to a loan of $500,000. 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. Exhibit H.1(3) Pearlman, in the principal amount of $324,929.76. 10.24 Term Note for the principal amount of $850.000 dated January 31, 1990 Exhibit 10.21(4) from the Company to Louis J. Pearlman. 10.25 Stock Option Agreement dated January 1, 1989 between the Company and Exhibit E.1(3) Louis J. Pearlman to purchase 1,000,000 shares. 10.26 Amendment to Stock Option Agreement between the Company and Louis J. Exhibit 10.24(4) Pearlman dated as of February 7, 1991. 10.27 Exchange Agreement dated January 29, 1992 between Slingsby Aviation Exhibit 10.28(4) Limited and the Company. 10.28 Purchase Agreement Assignment dated November 2, 1989 between the Exhibit 10.26(5) Company and ORIX and Consent by Airship UK. 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 Exhibit 10.27(5) as of November 2, 1989 between the Company and Airship (UK).
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Exhibit Index -------------- Exhibit Incorporated by Number Description Reference to - ------- ----------- --------------- 10.31 Guaranty of Louis J. Pearlman in favor of ORIX dated as of November 2, Exhibit 10.28(5) 1989. 10.32 Note and Warrant Purchase Agreement dated as of November 2, 1989 Exhibit 109.33(5) between the Company and ORIX 10.33 Agreement dated November 12, 1990 among the Company the Receiver for Exhibit 10.30(10) Airship UK, AIUSA and others. 10.34 Corporate Financial Consulting Agreement dated February 14, 1991 Exhibit 10.38(4) between the Company and Cohig & Associates. 10.35 Engagement Letter dated September 22, 1988 between Emanuel and Exhibit K.1(3) Company and the Company. 10.36 Agreement dated August 28, 1992 between Seoul Olympic Sports Promotion Exhibit 10.45(11) Foundation and the Company. 10.37 Fifth Amendment to Aerial Advertising Agreement effective as of Exhibit 10.46(11) September 1, 1992 between Metropolitan Life and the Company. 10.38 Loan Agreement dated October 14, 1992 between Sequel Capital Corporation and Exhibit 10.47(11) the Company. 10.39 Agreement dated December 17, 1992 between J&B Enterprises Limited Exhibit 10.48(11) (UK) Corp. Julian Benscher and the Company. 10.40 Airship Mortgage dated December 17, 1992 between the Company and J&B Exhibit 10.49(11) Enterprises Limited (UK) Corp. 10.41 Employment Agreement dated as of December 31, 1992 between the Exhibit 10.50(11) Company and Seth Bobet. 10.42 Employment Agreement dated as of December 31, 1992 between the Exhibit 10.51(11) Company and Alan Siegel. 10.43 Employment Agreement dated as of December 31, 1992 between the Exhibit 10.52(11) Company and Frank Sicoli. 10.44 Amended Employment Agreement dated as of February 15,1993 between Exhibit 10.53(11) the Company and Louis J. Pearlman 10.45 Second Amendment to Stock Option Agreement between the Company and Exhibit 10.54(11) Louis J. Pearlman date as of February 15.l 1993. 10.46 Mast Sale Agreement dated December 30, 1992 between J&B Enterprises Exhibit 10.55(11) Limited (UK) Corp. Julian Benscher and the Company. 10.47 Mortgage dated December 30, 1992 between the Company and J&B Exhibit 10.56(11) Enterprises Limited (UK) Corp. 10.48 Subscription Agreements between the Company and certain investors Exhibit 10.57(11) relating to the 1992 Private Placement. 10.49 Sublease Agreement between Westinghouse Airships, Inc. and the Company Exhibit 10.58(13) dated November 9, 1992.
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Exhibit Index -------------- Exhibit Incorporated by Number Description Reference to - ------- ----------- --------------- 10.50 Amendment to Sublease Agreement between Westinghouse Airships, Inc. Exhibit 10.59(13) and the Company dated November 9, 1992. 10.51 Lease Agreement between Sand Lake IV-A Limited Partnership and the Exhibit 10.60(13) Company dated February 25, 1991. 10.52 Lease Agreement between T&L Leasing and the Company dated January Exhibit 10.61(13) 13. 1992. 10.53 Lease Agreement between Westdeutsche Luftwerbung Theodor Exhibit 10.52(15) Wullenkemper GMBH and the company dated May 16, 1993. 10.54 Manufacturers Agreement between WDL Luftschiffgesellschaft MBH and Exhibit 10.53(15) the Company dated may 16, 1993. 10.55 Escrow Agreement between and among Westdeutsche Lufterbung Theodor Exhibit 10.54(15) Wullenkemper GMBH & Co., WDL Luftschiffgesellschaft MBH, Trans Exhibit 10.55(15) Continental Airlines Inc., and the Company dated May 15, 1993. 10.56 Aerial Advertising Agreement between the Company and Catamount Exhibit 10.56(15) Petroleum Limited Partnership dated May 28, 1993. 10.57 Amendment to Aerial Advertising Agreement between the Company and Exhibit 10.57(15) Catamount Petroleum Limited Partnership dated July 27, 1993. 10.58 Second Amendment to Aerial Advertising Agreement between the Company Exhibit 10.58(15) and Catamount Petroleum Limited Partnership dated August 9, 1993. 10.59 Third Amendment to Aerial Advertising Agreement between the Company Exhibit 10.59(15) and Catamount Petroleum Limited Partnership dated October 13, 1993. 10.60 Fourth Amendment to Aerial Advertising Agreement between the Company Exhibit 10.60(15) and Catamount Petroleum Limited Partnership dated November 9, 1993. 10.61 Aerial Advertising Agreement between Kingstreet Tours Limited and the Exhibit 10.61(15) Company dated as of January 18, 1994. 10.62 Passenger Airship Agreement between Anheuser-Busch Companies, Inc. Exhibit 10.62(15) and the Company dated as of January 2, 1994. 10.63 Amendment to Airship Advertising Agreement dated March 12, 1992, Exhibit 10.63(15) between the Company and Anheuser-Busch Companies, Inc. dated March 4, 1994 and related letter agreement dated February 11, 1994. 10.64 Amendment to note agreement dated as of November 2, 1989 between the Exhibit 10.64(15) Company and ORIX dated January 11, 1994. 10.65 Loan Agreement between Don Golden and the Company dated June 30, Exhibit 10.65(15) 1993. 10.66 Guarantee of Louis J. Pearlman in favor of the Company dated as of June Exhibit 10.66(15) 30, 1993. 10.67 Loan Agreement between Superbound Limited and the Company dated Exhibit 10.67(15) December 7, 1993.
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Exhibit Index -------------- Exhibit Incorporated by Number Description Reference to - ------- ----------- --------------- 10.68 Guarantee of James Stuart Tucker in favor of the Company dated as of Exhibit 10.68(19) December 7, 1993. 10.69 Kingstreet Tours Limited Aerial Advertising Agreement dated January 18, Exhibit 10.69(19) 1994, by and between the Company and Kingstreet Tours Limited. 10.70 Amended and Restated Airship Advertising Agreement, dated July 8, 1994, Exhibit 10.70(19) by and between the Company and Anheuser-Busch Companies, Inc. 10.71 Aircraft Lease Agreement, dated December 15, 1994, by and between the Exhibit 10.71(19) Company and Mastellone Hnos., S.A. 10.72 Airship Operations Agreement, dated December 15, 1994, by and between Exhibit 10.72(19) Airship Operations (USA), Inc. and Mastellone Hnos, S.A. 10.73 Passenger Airship Agreement, dated as of January 2, 1994, by and between Exhibit 10.73(19) the Company and Anheuser-Busch Companies, Inc. 10.74 Letter Agreement Modification, dated January 11, 1994, by and between Exhibit 10.74(19) the Company and ORIX USA Corporation. 10.75 Amendment to Lease, dated May 12, 1994, by and between the Company Exhibit 10.75(19) and ORIX USA Corporation. 10.76 Collateral and Security Agreement, dated as of May 10, 1994, by and Exhibit 10.76(19) between the Company and ORIX USA Corporation. 10.77 Aircraft Collateral Funding Repayment Agreement, dated as of November Exhibit 10.77(19) 16, 1994, by and between the Company and Allstate Financial Corporation. 10.78 Guaranty, dated December 6, 1994, of Louis J. Pearlman. Exhibit 10.78(19) 10.79 Guaranty, dated December 6, 1994, of Trans-Continental Airlines, Inc. Exhibit 10.79(19) 10.80 Aircraft Lease Agreement, dated as of May 31, 1995, by and between Exhibit 10.80(19) Trans Continental Leasing, Inc., as Lessor and the Company, as Lessee. 10.81 Full Warranty Bill of Sale, dated as of May 31, 1994, by the Company to Exhibit 10.81(19) Trans Continental Leasing, Inc. 10.82 Credit Agreement, dated November 30, 1995, by and between the Company Exhibit 10.82(19) and Senstar Capital Corporation. 10.83 Term Note, dated November 30, 1995, of the Company to Senstar Capital Exhibit 10.83(19) Corporation. 10.84 Aircraft Mortgage and Security Agreement, dated November 30, 1995, by Exhibit 10.84(19) and between the Company and Senstar Capital Corporation. 10.85 Assignment of Contract Rights, dated November 30, 1995, by and between Exhibit 10.85(19) the Company and Senstar Capital Corporation. 10.86 Agreement of Guaranty and Suretyship, dated November 30, 1995, by and Exhibit 10.86(19) between Trans Continental Airlines and Senstar Capital Corporation.
-28-
Exhibit Index -------------- Exhibit Incorporated by Number Description Reference to - ------- ----------- --------------- 10.87 Release and Settlement Agreement, dated September 20, 1993, by and Exhibit 10.87(19) between the Company and Sequel Capital Corporation and Louis J. Pearlman. 10.88 Promissory Note, dated October __, 1994, of Louis J. Pearlman to Airship Exhibit 10.88(19) Airways, Inc. 10.89 Promissory Note, dated October 26, 1994, of Louis J. Pearlman to Airship Exhibit 10.89(19) Airways, Inc. 10.90 Form of Share Subscription Agreement, dated August 11, 1994, between Exhibit 10.90(19) the Company and _______________. 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 Exhibit 10.92(19) the Company. 10.93 Option Agreement, dated as of August 11, 1994, between the Company and Exhibit 10.93(19) Louis J. Pearlman. 10.94 Airship International Ltd. Employee Share Purchase Plan. Exhibit 1(18) 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 *
*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 14,1 992. (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. -29- (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 Annnual Report on Form 10-K for the year ended December 31, 1994. (c) The Company had not filed any reports on form 8-K during the last quarter of the period covered by this report. -30- SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. AIRSHIP INTERNATIONAL LTD. Dated: September 8, 1997 By: /s/ Louis J. Pearlman ----------------------- Louis J. Pearlman Chairman of the Board of Directors, President and Treasurer (Principal Executive and Financial Officer) Dated: September 8, 1997 By: /s/ Alan A. Siegel -------------------- Alan A. Siegel Secretary & Director Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. Dated: September 8, 1997 By: /s/ Marvin Palmquist ---------------------- Marvin Palmquist Director Dated: September 8, 1997 By: /s/ James J. Ryan ------------------- James J. Ryan Director -31- REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANT Board of Directors and Stockholders Airship International Ltd. I have audited the accompanying balance sheets of Airship International Ltd. as of December 31, 1996 and 1995 and the related statement of operations, stockholders' equity (deficit) and cash flows for the years then ended. These financial statements are the responsibility of the Company's management. My responsibility is to express an opinion on these financial statements based on my audit. I conducted my audits in accordance with generally accepted auditing standards. Those standards require that I 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. I believe my audits provide a reasonable basis for my opinion. In my opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Airship International Ltd. at December 31, 1996 and 1995, and the results of its operations and its cash flows for the years then ended, in conformity with generally accepted accounting principles. The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As described in Note B to the financial statements, the Company has experienced significant operating losses, an accumulated deficit and negative working capital at December 31, 1996 and 1995. These conditions raise substantial doubt about the Company's ability to continue as a going concern. Management's plans in regard to these matters are also described in Note B. The financial statements do not include any adjustments that might result from the outcome of this uncertainty, with the exception of the effects of applying Statement of Financial Accounting Standards No. 121, "Impairment of Long-Lived Assets to be Disposed Of," as described in Note A. CHARLIE M. MEEKS, C.P.A., P.A. Maitland, Florida September 5, 1997 F-1 AIRSHIP INTERNATIONAL LTD. BALANCE SHEETS DECEMBR 31,
1996 1995 ------------ ------------ ASSETS Airships and Related Equipment Airships.................................................................... $ 2,294,000 $ 2.294,000 Vehicles.................................................................... 1,384,000 1,566,000 Parts and equipment......................................................... 1,216,000 1,197,000 Airship components.......................................................... 1,605,000 1,605,000 ------------ ------------ 6,499,000 6,662,000 Less: Accumulated depreciation and amortization.................................. 2,292,000 1,958,000 ------------ ------------ 4,207,000 4,704,000 Cash and cash equivalents........................................................ 2,000 26,000 Prepaid insurance................................................................ -- 81,000 Due from related parties......................................................... 275,000 176,000 Other assets..................................................................... 12,000 86,000 ------------ ------------ $ 4,496,000 $ 5,073,000 ------------ ------------ ------------ ------------ LIABILITIES AND STOCKHOLDERS' DEFICIT LIABILITIES Accounts payable--trade..................................................... $ 1,615,000 $ 1,690,000 Customer payment on future services......................................... 553,000 553,000 Insurance financing......................................................... 38,000 104,000 Accrued expenses and other liabilities...................................... 4,536,000 2,838,000 Obligations under capital leases............................................ 3,158,000 3,348,000 Loan payable................................................................ 3,016,000 3,689,000 Deferred gain on sale of airship............................................ 810,000 854,000 Due to stockholders......................................................... 4,608,000 1,604,000 ------------ ------------ Total liabilities...................................................... 18,334,000 14,680,000 ------------ ------------ ------------ ------------ CONTINGENCIES AND COMMITMENTS.................................................... -- -- STOCKHOLDERS' DEFICIT Preferred stock, $.01 par value; Authorized--10,000,000 shares, issued and outstanding--2,712,000 shares in 1996 and 2,797,000 in 1995............... 27,000 28,000 Common stock, $.01 par value; Authorized--80,000,000 shares, issued and outstanding--41,002,000 shares in 1995 and 40,490,000 in 1995.............. 410,000 405,000 Capital in excess of par value -- Preferred Stock........................... 14,444,000 14,443,000 Capital in excess of par value -- Common Stock.............................. 22,081,000 22,086,000 Accumulated deficit......................................................... (50,800,000) (46,569,000) ------------ ------------ Total stockholders' deficit............................................ (13,838,000) (9,607,000) ------------ ------------ $ 4,496,000 $5,073,000 ------------ ------------ ------------ ------------ The accompanying notes are an integral part of these statements. F-2 AIRSHIP INTERNATIONAL LTD. STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, ------------------------------------------ 1996 1995 1994 ----------- ----------- ------------ Airship Revenue..................................................... $ -- $ 2,620,000 $ 3,980,000 Costs and Expenses: Operating costs................................................ 1,150,000 4,027,000 17,452,000 Selling, general and administrative expenses................... 689,000 1,893,000 2,408,000 ----------- ----------- ------------ 1,839,000 5,920,000 19,860,000 Loss from operations................................................ (1,839,000) (3,300,000) (15,880,000) ----------- ----------- ------------ Other income (expense) Gain (loss) on sale of airship components to a stockholder..... 13,000 (548,000) (659,000) Realized gain on sale leaseback................................ 44,000 26,000 -- Loss on insurance settlement................................... -- -- (3,433,000) Interest expense............................................... (768,000) (1,103,000) (805,000) Interest, royalties and other income........................... 44,000 58,000 206,000 Costs relating to settlement of litigation..................... -- -- (64,000) ----------- ----------- ------------ (667,000) (1,567,000) (4,765,000) ----------- ----------- ------------ Net income (loss)................................................... $(2,506,000) $(4,867,000) $(20,645,000) ----------- ----------- ------------ Weighted average number of common shares and equivalents outstanding....................................................... 40,879 36,008,000 30,161,000 Net income (loss) applicable to common stock: Net income (loss).............................................. $(2,506,000) $(4,867,000) $(20,645,000) Less preferred stock dividend.................................. (1,725,000) (1,725,000) (1,681,000) ----------- ----------- ------------ Net income (loss) applicable to common stock........................ $(4,231,000) $(6,592,000) $(22,326,000) ----------- ----------- ------------ Net income (loss) per share......................................... $ (0.10) $ (0.18) $ (0.74) ----------- ----------- ------------ SIGNIFICANT AMOUNTS APPLICABLE TO RELATED PARTIES Operating costs -- Insurance expense................................ $ -- $ -- $ 74,000 Selling, general and administrative: Interest expense............................................... $ 293,000 $ 101,000 $ 105,000 Interest income................................................ $ -- $ 23,000 $ 164,000
The accompanying notes are an integral part of these statements. F-3 AIRSHIP INTERNATIONAL LTD. STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (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, 1993...................... 2,875,000 $29,000 27,946,000 $279,000 $14,442,000 $21,136,000 $(17,651,000) Issuance of common stock from private placement, less expenses of $7,000.... -- -- 1,344,000 14,000 -- 169,000 -- Dividends paid on preferred stock: In cash............. -- -- -- -- -- -- (172,000) In common stock..... -- -- 2,066,000 21,000 -- 626,000 (647,000) Accrued common stock dividend.......... -- -- -- -- -- -- (862,000) Loss.................... -- -- -- -- -- -- (20,645,000) ---------- --------- ----------- --------- ----------- ----------- ------------ Balance at December 31, 1994...................... 2,875,000 $29,000 31,356,000 $314,000 $14,442,000 $21,931,000 $(39,977,000) Conversion of preferred stock into common stock................. (78,000) (1,000) 467,000 5,000 1,000 (5,000) -- Exercise of stock options as compensation.......... -- -- 5,000,000 50,000 -- 50,000 -- Issuance of common stock to Trans Continental for loan guarantee.... -- -- 3,667,000 36,000 -- 110,000 -- Dividends paid on preferred stock: Accrued common stock dividend.......... -- -- -- -- -- -- (1,725,000) Loss.................... -- -- -- -- -- -- (4,867,000) Balance at December 31, 1995...................... 2,797,000 28,000 40,490,000 405,000 14,443,000 22,086,000 (46,569,000) ---------- --------- ----------- --------- ----------- ----------- ------------ ---------- --------- ----------- --------- ----------- ----------- ------------
The accompanying notes are an integral part of these statements. F-4 AIRSHIP INTERNATIONAL LTD. STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
CAPITAL IN EXCESS OF PAR VALUE PREFERRED STOCK COMMON STOCK -------------------------- ----------------------- ------------------------ PREFERRED COMMON ACCUMULATED SHARES PAR VALUE SHARES PAR VALUE STOCK STOCK DEFICIT ---------- --------- ----------- --------- ----------- ----------- ------------ Conversion of preferred stock into common stock... (85,000) (1,000) 512,000 5,000 1,000 (5,000) -- Dividends paid on preferred stock: Accrued common stock -- dividend.............. -- -- -- -- -- (1,725,000) Loss........................ -- -- -- -- -- -- (2,506,000) ---------- --------- ----------- --------- ----------- ----------- ------------ Balance at December 31, 1996...................... 2,712,000 $27,000 41,002,000 $410,000 $14,444,000 $22,081,000 $(50,800,000) ---------- --------- ----------- --------- ----------- ----------- ------------ ---------- --------- ----------- --------- ----------- ----------- ------------
The accompanying notes are an integral part of these statements. F-5 AIRSHIP INTERNATIONAL LTD. STATEMENTS OF CASH FLOWS FOR THE YEAR ENDED DECEMBER 31, Increase (decrease) in cash and cash equivalents
1996 1995 1994 ---------- ---------- ----------- Cash flows from operating activities Net income (loss)................................................ $(2,506,000) $(4,867,000) $(20,645,000) Adjustments to reconcile net income (loss) to net cash flows used in operating activities: Issuance of common stock through exercise of options........ -- 100,000 -- Issuance of common stock in exchange for Trans Continental debt guarantee............................................ -- 146,000 -- Depreciation and amortization............................... 462,000 661,000 2,389,000 Realized gain on sale leaseback............................. (44,000) (26,000) -- Loss from impairment of long-lived assets................... -- 1,462,000 9,634,000 Gain (loss) on disposition of airship components and related assets.................................................... (34,000) 704,000 153,000 Loss on insurance settlement................................ -- -- 1,467,000 Loss on abandonment of Blimp USA............................ -- -- 479,000 Other -- net................................................ -- -- -- Loss on disposition of airship component.................... -- -- -- Changes in operating assets and liabilities: Prepaid insurance...................................... 81,000 545,000 807,000 Other assets........................................... 74,000 95,000 262,000 Accounts payable -- trade.............................. (75,000) (2,378,000) 3,153,000 Customer payments on future services................... -- (813,000) 1,117,000 Insurance financing.................................... (66,000) (187,000) (1,213,000) Accrued expenses and other liabilities................. (27,000) (329,000) 253,000 ---------- ---------- ----------- Net cash flows used in operating activities....... (2,135,000) (4,887,000) (2,144,000) ---------- ---------- ----------- Cash flows from investing activities: Proceeds from sale of airship components......................... 88,000 20,000 55,000 Acquisition of airships and related equipment.................... (19,000) (21,000) (317,000) Net change in due from Trans Continental......................... (99,000) 1,632,000 717,000 ---------- ---------- ----------- Net cash flows provided by (used in) investing activities...................................... (30,000) 1,631,000 455,000 ---------- ---------- -----------
The accompanying notes are an integral part of these statements. F-6 AIRSHIP INTERNATIONAL LTD. STATEMENTS OF CASH FLOWS--CONTINUED FOR THE YEAR ENDED DECEMBER 31,
Increase (decrease) in cash and cash equivalents 1996 1995 1994 ---------- ---------- ----------- Cash flows from financing activities: Proceeds from issuance of loans payable.......................... -- 3,500,00 1,432,000 Principal payments on capital leases and loans................... (863,000) (1,415,000) (479,000) Principal payments to related party.............................. -- -- 104,000 Net proceeds from private placement of debt...................... -- -- 183,000 Payment of dividends............................................. -- -- (173,000) Proceeds from loans by stockholder............................... 3,004,000 654,000 -- Net cash flows from financing activities......................... 2,141,000 2,739,000 1,067,000 ---------- ---------- ----------- Net changes in cash and equivalents................................... (24,000) (517,000) (622,000) Cash and equivalents, beginning of year............................... 26,000 543,000 1,165,000 ---------- ---------- ----------- Cash and equivalents, end of year..................................... $ 2,000 $ 26,000 $ 543,000 ---------- ---------- ----------- ---------- ---------- -----------
The accompanying notes are an integral part of these statements. F-7 Airship International Ltd. NOTES TO FINANCIAL STATEMENTS December 31, 1996, 1995 and 1994 NOTE A - NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Nature of Business - The Company operates lighter-than-air airships used to advertise and promote the products and services of the Company's clients. At December 31, 1996, the Company had no airships in operation. Cash and Equivalents - The Company considers unrestricted short-term, highly liquid investments with maturities of three months or less at the time of purchase to be cash equivalents. Revenue Recognition - Airship revenues, when available, are recognized during the period in which services are provided. Whenever significant flight time is owed to a customer, the incremental cost of providing services is accrued. No amounts are accrued at December 31, 1996 or 1995. Flight Crew Training Costs - Significant flight crew training costs for new blimps are amortized over twelve months from the date related revenues commence. Airships and Related Equipment - Property and Equipment are stated at cost. Depreciation is provided by the straight line method over the estimated useful lives of the assets - 10 to 20 years (airships), 4 to 8 years (vehicles), 3 to 5 years (parts and equipment) and 2 to 3 years (improvements). Airship components are not depreciated until placed in service. Construction in Progress - The Company has abandoned its plans to build a manufacturing complex and aviation hangar to be called Blimp Port USA'tm' which will be located at a site near its Orlando, Florida base of operations. The Company intended to use this facility to manufacture, assemble and maintain airships for commercial and governmental use and provide offices for technical and executive personnel. The Company has acquired a Federal Aviation Administration (FAA) license necessary for the assembly and maintenance of airships. Capitalized costs, including interest, relating to the facilities amounted to $479,000 were written off during the year ended December 31, 1994. Such costs included incremental costs directly identifiable with the facility, such as land lease rental, property taxes, insurance and other costs directly associated with the acquisition, development and construction of the project. To date costs capitalized represent consulting, architectural and design fees. Deferred Financing and Offering Costs - Costs incurred to obtain debt financing are capitalized and amortized over the terms of the related loans. Such costs include incremental payments to consultants, lenders and other out of pocket expenses, as well as the fair value of options and warrants issued to persons other than lenders. The fair value of options and warrants issued to lenders are reported as debt discount and amortized over the term of the related loan. In determining the fair value of warrants issued, substantial discounts have been provided for the effects of restrictions on sale, the volume of shares involved and other factors. Use of Estimates - The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. F-8 Airship International Ltd. NOTES TO FINANCIAL STATEMENTS December 31, 1996, 1995 and 1994 NOTE A - NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Continued 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. Impairment of Long-Lived Assets - In March 1995, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets to be Disposed Of ("SFAS 121"). SFAS 121 requires that long-lived assets held and used by an entity be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. The adoption of this standard in the fourth quarter of the fiscal year ended December 31, 1994 resulted in an adjustment of $9,634,000 or $0.32 per share to the Company's financial statements. The Company obtained an independent appraisal on its airship components in August 1997, which reflects a range of values from $2,174,000 (on a liquidation sale value) to $5,096,000 (on a market value basis). Based on the fact that the Company had two airships in operation at December 31, 1994, the Company adjusted the carrying value to $3,635,000 or the midpoint of the above range. At December 31, 1995, the Company decided to write down the balance of the airship components to liquidation sale value, which resulted in an additional adjustment of $1,462,000 or $0.04 per share. The Company reviews all of its long-lived assets for impairment in accordance with SFAS 121. Prior to the adoption of SFAS 121, all long-lived assets, were reviewed for impairment by comparing the carrying value of such assets to future expected net cash flows. Change in Accounting Estimate - Effective April 1, 1994, the Company revised its estimate of useful lives of airships and airship components. Previously, airship envelopes and Nightsigns'tm' on operating airships were depreciated over 20 years. The Company has changed the useful lives to 4 1/2 on airship envelopes years and 10 years for Nightsigns'tm' resulting in an additional charge to income of $774,000 or $.03 per share. Net Income (Loss) Per Share - Net income (loss) per share is based on the weighted average number of shares outstanding during the periods. 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. When net income is reported, warrants and options are included using the treasury stock method, provided exercise prices are less than the average market price; warrants convertible into common stock are included when such inclusion results in further dilution. Recently Issued Pronouncements - In October 1995, the FASB issued Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation", ("SFAS 123") which sets forth accounting and disclosure requirements for stock-based compensation arrangements. The new statement encourages, but does not require, companies to measure stock-based compensation cost using a fair-value method, rather than the intrinsic-value method prescribed by Accounting Principles Board Opinion No. 25 ("APB Opinion 25"). The Company will adopt the disclosure requirements of SFAS 123 in 1995 and will F-9 Airship International Ltd. NOTES TO FINANCIAL STATEMENTS December 31, 1996, 1995 and 1994 NOTE A - NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Continued elect to continue to record stock-based compensation expense using the intrinsic-value approach prescribed by APB Opinion 25. Accordingly, the Company computes compensation cost for each employee stock option granted as the amount by which the quoted market price of the Company's Common Stock on the date of grant exceeds the amount the employee must pay to acquire the stock. The amount of compensation costs, if any, will be charged to operations over the vesting period. In February 1997, the FASB issued Statement of Financial Accounting Standards No. 128, "Earnings Per Share" ("SFAS 128") and Statement of Financial Accounting Standards No. 129, "Disclosure of Information about Capital Structure" ("SFAS 129"). SFAS 128 specifies the computation of earnings per share, and SFAS 129 specifies the presentation and disclosure requirements about an entity's capital structure. Both SFAS 128 and 129 shall be adopted in the fourth quarter of 1997 with restatement back to January 1, 1997. The initial adoption of these standards are not expected to have a material effect on the Company's earnings per share as disclosed. 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 $50,800,000 at December 31, 1996. During the year ended December 31, 1996, the Company did not generate any revenues from airship operations and it reported a net loss of $2,506,000 and has negative working capital of $12,588,000 at December 31, 1996. These conditions raise substantial doubt about the Company's ability to continue as a going concern. Management's plans 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 Airlines, Inc., a company related through common directorship and ownership, to provide funds on a monthly basis as a loan and acquiring assets and operations of one or more entities, which the Company has been exploring. Management's hope is that such business combination, if completed, would provide additional cash flow and net income to the Company. Though management believes the Company will secure additional capital and/or attain one or more of the above goals, there can be no assurance that any acquisition, financing or other plan will be effected. Any acquisition or securities offering is subject to the Company's due diligence, the state of the general securities markets and of the specific market for the Company's securities, and any necessary regulatory review. While the Company believes that its plans for additional funding or 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-10 Airship International Ltd. NOTES TO FINANCIAL STATEMENTS December 31, 1996, 1995 and 1994 NOTE B - SIGNIFICANT UNCERTAINTIES AND MANAGEMENT'S PLANS TO OVERCOME OPERATING DIFFICULTIES AND MEET CASH REQUIREMENTS - Continued Though management believes the company will secure additional capital and/or attain one or more of the above goals, there can be no assurance that any acquisition, financing or other plan will be effected. Any acquisition or securities offering is subject to the Company's due diligence, the state of the general securities markets and of the specific market for the Company's securities, and any necessary regulatory review. NOTE C - TRANSACTIONS WITH STOCKHOLDERS, RELATED PARTIES AND OTHERS Due from Affiliate - At December 31, 1994, the Company made advances netting to $1,809,000 to Trans Continental Airlines, Inc. ("Trans Continental"), an affiliated aircraft leasing company and stockholder of the Company. Louis J. Pearlman ("Mr. Pearlman") owns 21% of Trans Continental and is the Company's Chairman of the Board, President and Principal Stockholder. Trans Continental pledged a $2,500,000 money market account as collateral for this advance. The deposit was returned to the Company during 1995. Interest earned on this deposit amounted to $23,467 and $164,000 for years ended December 31, 1995 and 1994, respectively. No interest was earned during the year ended December 31, 1996, as the Company used these funds to reduce liabilities. Personal Guarantees - Mr. Pearlman and Trans Continental have guaranteed all capital leases and loans of the Company (see Note E). Loans from Principal Stockholder - In May 1992, all amounts due to Mr. Pearlman, consisting of 10% notes payable, accrued salaries, bonuses and interest were consolidated into one single loan of $1,845,000. The loan was payable in equal quarterly installments of $135,000 per year including interest at 8 1/2% per annum, and commenced in July 1992. This payment schedule continued until a loan payable to a bank for the SeaWorld airship was paid (with the preferred stock proceeds - see Note H), at which time the loan became payable at the discretion of the Company. All unpaid principal and interest is due in May 1997 and has been deferred by Mr. Pearlman for an indefinite period of time. Interest on the loan payable was $93,000, $85,000, and $105,000 for the years ended 1996, 1995, and 1994, respectively. On June 30, 1993, the Company made a $789,000 loan (the "Loan") to an individual who had previously facilitated financing for the Company. Mr. Pearlman has guaranteed repayment of the Loan. The Loan is being repaid by Mr. Pearlman in equal monthly installments of $6,209 per month, including interest at the rate of 8.75%. The remaining unpaid principal balance of the Loan was due on June 30, 1995. It has been agreed that the Company's obligation to repay principal and interest on the loan to Mr. Pearlman shall be reduced to reflect the outstanding balance on this Loan for so long as it shall remain outstanding. Amounts due to Mr. Pearlman at December 31, 1996 and 1995 totaled $1,040,000 and $950,000, respectively, net of unamortized discount. During the years ended December 31, 1996 and 1995, Trans Continental advanced the Company funds that were used for operations in the amount of $3,470,000. The balance owed to Trans Continental is accruing interest at the rate of 10% per annum and is due on demand. F-11 Airship International Ltd. NOTES TO FINANCIAL STATEMENTS December 31, 1996, 1995 and 1994 NOTE C - TRANSACTIONS WITH STOCKHOLDERS, RELATED PARTIES and OTHERS - Continued Transactions with Stockholder and His Affiliate - Mr. Julian Benscher ("Mr. Benscher") beneficially owned 4.0% of the common stock of the Company at December 31, 1994. Mr. Benscher is also a stockholder and director of J&B Enterprises Limited (UK) Corp. ("J&B"). The Company and Mr. Benscher have been involved in certain transactions as follows: Rental Arrangement and Travel Agency Service - Trans Continental serves as the Company's travel agent for substantially all of its travel arrangements and the Company is its principal customer. In the opinion of management, the terms and prices received from the corporation are similar to those available from other travel agencies. During 1996, 1995 and 1994, the Company utilized the travel agency services for reservations, while primarily paying certain costs directly to the provider. Hull and Liability Insurance - The Company purchases hull and liability insurance with respect to the Company's airships through Alexander Howden, Inc., an international insurance brokerage firm of which James J. Ryan is the Senior Vice President of its Aviation Aerospace Division. Mr. Ryan is also a director of the Company. Insurance expense for Alexander Howden was $131,000 and $72,000 in 1995 and 1994, respectively. Warrants - Reference should be made to Note H for warrants issued in connection with certain of the above transactions. Corporate Offices - The Company provides office space to affiliates free of charge. The Company is reimbursed by the affiliates for telephone charges. NOTE D - INCOME TAXES At December 31, 1995, the Company had net operating loss carryforwards for income taxes of approximately $38,141,000 available as offsets against future taxable income. During 1991, the Company experienced changes in the Company's ownership as defined in Section 382 of the Internal Revenue Code ("IRC"). The effect of these changes in ownership 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, only approximately $23,460,000 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 certain dollar amount each year. The net operating loss carryforwards expire during the years 2000 to 2013. The company also has unused investment tax credits of $140,000 which expire principally in the year 2000. F-12 Airship International Ltd. NOTES TO FINANCIAL STATEMENTS December 31, 1996, 1995 and 1994 NOTE D - INCOME TAXES - Continued The tax effect of temporary differences that give rise to significant positions of the deferred tax assets and deferred tax liabilities, consist of the following at December 31:
1996 1995 - ------------------------------------------------------------------------------- Deferred tax assets: Net operating loss...................... $11,953,000 $10,595,000 Accrued expenses........................ 358,000 323,000 - -------------------------------------------------------------------------------- 12,311,000 10,918,000 Less: Valuation allowance............... 10,128,000 8,491,000 - -------------------------------------------------------------------------------- Deferred tax liabilities: Airships and related equipment.......... (2,183,000) (2,427,000) - -------------------------------------------------------------------------------- (2,183,000) (2,427,000) - -------------------------------------------------------------------------------- Net deferred tax asset..................... $ -- $ -- - --------------------------------------------------------------------------------
The net change in the valuation allowance was approximately $244,000 relating to net operating losses from 1996. NOTE E - CAPITAL LEASES AND LOANS PAYABLE Capital Leases - In October 1989, the Company purchased a new Skyship 600 Series airship (the "MetLife airship") from Airship UK. The MetLife airship and related equipment were financed primarily by net proceeds of $6,200,000 from a capital lease obtained through ORIX Commercial Credit Corp. ("ORIX"). The capital lease initially required monthly payments of $135,000 through November 1992. In December 1992, the lease was renewed for an additional three-year term at monthly payments of $121,000. At the end of the additional three year term the Company had the option to purchase this airship for $1,000,000 or renew the lease for another three year term at monthly payments of $35,000. At the completion of the third lease term, title is to be transferred to the Company upon payment of $1. On January 11, 1994 the Company renegotiated the lease to reduce the $121,000 payments. Even after the payment modifications the Company was unable to make the payments and went into default. Effective June 2, 1995, the lease was renegotiated calling for payments of principle only of $20,000 for twelve months. At the end of the initial twelve-month period, the Company began to make principle and interest payments at the rate of prime plus 1% of $40,000 for the next six months, followed by payments of $60,000 for an next six months and finally payments equaling the higher of $80,000 or 50% of the annual cash flows for the fiscal year immediately prior to the commencement of each applicable twelve-month period for the remaining term of the lease until the lease is fully amortized or a larger payment is made based upon the annual cash flow of the year. Based upon the revised payment schedule, the payments are not sufficient to cover the interest expense. Thus negative amortization results in 1994 and 1995 and the ending principal balance is increased. The balance under this capital lease amounted to $3,158,000 and $3,348,000 at December 31, 1996 and 1995. F-13 Airship International Ltd. NOTES TO FINANCIAL STATEMENTS December 31, 1996, 1995 and 1994 NOTE E - CAPITAL LEASES AND LOANS PAYABLE - Continued The airship and related equipment financed by the capital leases had a cost of $6,687,000 and accumulated depreciation of $1,077,000 at December 31, 1993. During 1994 the leased airship was damaged and taken out of service. A cost of $2,699,000 and accumulated depreciation of $1,232,000 were written off due to the damage. The remaining cost basis of approximately $3,500,000 was transferred to spare parts and air ship components. The resulting net book value was later analyzed as part of the SFAS 121 writedown as described in Note A. The following is a schedule by year of future minimum lease payments pursuant to the capital leases together with the present value of the net minimum lease payments as of December 31, 1995: 1997.......................................... $ 860,000 1998.......................................... 960,000 1999.......................................... 960,000 2000.......................................... 960,000 Thereafter.................................... 28,000 ----------- Total minimum lease payments.................. 3,768,000 Less amount representing interest............. 610,000 ----------- Present value of net minimum lease payments... $3,158,000 ----------- Loan Payable to Senstar (Allstate) - The Company entered into an accounts receivable factoring security agreement on September 19, 1994 which was modified on November 16, 1994 and November 23, 1994. The maximum borrowing amount under the November 23rd agreement was $1,500,000. The loan balance was to be reduced by $75,000 per month beginning December 1, 1994. A fee of 0.125% per month is payable each month on the higher of funds outstanding or $1,500,000. The loan was used to payoff certain liabilities and provide a source of working capital. The balance due to Allstate as of December 31, 1994 amounted to $1,250,000. The loan was secured by accounts receivable, inventory, certain airships and equipment. On June 22, 1995, the Allstate loan was repaid when Transcontinental Leasing, Inc. ("TLI"), a wholly-owned subsidiary of Trans Continental, entered into a sale-leaseback agreement with the Company. Pursuant to which, the Bud One Airship was sold by the Company to TLI for the purchase price of $2,060,000, which in turn was leased back to the Company. On November 30, 1995, the Company entered into an arrangement with Senstar Capital Corporation ("Senstar") pursuant to which the sale-leaseback arrangement with TLI was reversed. The Company borrowed a total of $3,500,000 from Senstar, part of which has been used to repay the loan from Phoenixcor, Inc., the lender for TLI's transaction. The loan from Senstar is repayable over 5 years in sixty monthly payments of approximately $63,000 each, with a balance due at the end of the five year term of approximately $700,000, and secured by a lien on the Airship and is guaranteed by Trans Continental. The balance due under this loan amounted to $3,004,000 and $3,463,000 at December 31, 1996 and 1995, respectively. F-14 Airship International Ltd. NOTES TO FINANCIAL STATEMENTS December 31, 1996, 1995 and 1994 NOTE E - CAPITAL LEASES AND LOANS PAYABLE - Continued Other Long-Term Debt - The Company has other long-term debt in the amount of $12,000 and $215,000 at December 31, 1996 and 1995, respectively. These loans mature through December 31, 2001 at various annual interest rates. Current maturities of long-term are as follows: 1997.......................................... $ 541,000 1998.......................................... 583,000 1999.......................................... 605,000 2000.......................................... 664,000 Thereafter.................................... 623,000 ----------- Total ........................................ $3,016,000 ----------- ----------- Warrants - Reference should be made to Note H for warrants issued in connection with certain of these transactions. NOTE F - LEGAL PROCEEDINGS Capital Funding Group Ltd. - In February 1992, Capital Funding Group Ltd. ("CFG") commenced an action against the Company and others seeking in excess of $1,000,000 in damages based on the alleged failure by the Company to provide adequate collateral and security in connection with certain alleged financial agreements with CFG. The Company retained CFG in July 1991, paid a commitment fee (which was written off in 1991) and received a commitment from CFG which then failed to provide the funding. The Company and the other defendants answered the complaint in February 1992 by denying all of the substantive allegations and asserting several affirmative defenses. In addition, the Company asserted certain counterclaims against CFG and its two principals for breach of a commitment letter pursuant to which CFG was to arrange for a $9 million loan to the Company, breach of a compromise agreement accepted by CFG in January 1992, pursuant to which CFG was to provide funding to the Company in the amount of $7 million, breach of an escrow agreement, pursuant to which CFG was to return $200,000 of the commitment fee paid by the Company and various other counterclaims. In March 1993, the Company was awarded a default judgment of $8,000,000 against CFG. No balances have been returned to the Company as of December 31, 1995. Watermark Group PLC and Von Tech Corporation - In January 1993, a second amended complaint to a lawsuit, which was initially commenced in March 1991 and subsequently dismissed twice without prejudice, was filed against the Company and Mr. Pearlman by Watermark Group PLC and Von Tech Corporation, a general partners of Company communications (collectively the "W/VT Plaintiffs") alleging breach of an alleged joint venture agreement involving Company Communications and Airship Enterprises Ltd. (a company that was owned by Mr. Pearlman and that was not in any way owned or controlled by the Company); breach of an alleged agreement by the Company regarding the lease and operation of a particular airship; and breach of an alleged oral commission agreement by the Company relating to the Company's acquisition of two airships it presently owns. F-15 Airship International Ltd. NOTES TO FINANCIAL STATEMENTS December 31, 1996, 1995 and 1994 NOTE F - LEGAL PROCEEDINGS - Continued The W/VT Plaintiffs seek various legal and equitable remedies, including monetary damages against the Company and Mr. Pearlman in excess of $800,000 together with a claim for some portion of the advertising revenue the Company has received, and will continue to receive, from the operation of some of its airships. In March 1993, the second amended complaint filed against the Company and Mr. Pearlman by W/VT Plaintiffs was dismissed without prejudice. Since the Company denies any involvement with any of the transactions set forth in the second amended complaint, the Company believes that its liability, if any, on the claims made by the W/VT Plaintiffs will not be material. This case was settled on October 3, 1995 for $40,000. Sequel Capital Corporation - In December 1992 a lawsuit was filed against the Company, Mr. Pearlman and an advertising customer of the Company by Sequel Capital Corporation ("Sequel"). The complaint (as amended) contains claims for default on an $800,000 loan from Sequel (the "Sequel Loan") as a result of an alleged failure to provide collateral consisting of monthly payments being made to the Company by a third party on an airship advertising agreement. The proceeds of the Sequel Loan, which was personally guaranteed by Mr. Pearlman, were applied by the Company towards the purchase of a new airship from the Seoul Olympic Sports Promotion Foundation. The amended complaint also includes a claim for breach of an alleged contract to enter into a sale leaseback agreement with respect to one of the company's airships and a claim for allegedly fraudulently inducing Sequel to make the Loan to the Company. This claim was settled by the Company in 1993 for approximately $741,000 including legal expenses. Tenerten and Drake, Inc. - On September 15, 1994, Tenerten and Drake, Inc. ("TDI") filed a complaint against the Company. The complaint alleges that the Company failed to pay certain sums of money due to TDI under an agreement to perform advertising and related services for the Company. The Company filed its answer and raised its affirmative defenses to said complaint alleging that the services allegedly performed by TDI were defective in numerous respects. A final judgment was entered against the Company on July 20, 1995 in the amount of $24,000, which has been placed in escrow pending appeal. Westinghouse Airships, Inc. - On September 14, 1994, Westinghouse Airships, Inc. ("WAI") filed a complaint against the Company alleging that the Company and Mr. Pearlman breached an agreement to purchase two gondolas from WAI. Specifically, the complaint alleges that WAI delivered both gondolas at issue and that the Company failed to make certain installments to WAI under the agreement. The complaint also alleges that the Company breached a sub-lease to occupy certain hanger space located in North Carolina. On June 19, 1995, the Company and WAI agreed to settle the case for $32,000. Other Proceedings - The Company is a defendant in a number of other legal proceedings, which occurred in the normal the course of business. Those cases in which the ultimate settlement is known or estimable have been accrued in the financial statements. It is not possible at this time to predict the outcome of the unsettled legal actions; however, in the opinion of management and informal advice of counsel, the disposition of these other lawsuits will not have a material effect on the financial statements. F-16 Airship International Ltd. NOTES TO FINANCIAL STATEMENTS December 31, 1996, 1995 and 1994 NOTE G - COMMITMENTS AND CONTINGENCIES Possible Future Tax Claims - Because blimp advertising services differ from many other forms of advertising, state and local tax authorities may assert claims based on interpretations of law which differ from interpretations by management. In the opinion of management, its positions are consistent with similar entities. Employment Agreements - In 1993 the Company and Mr. Pearlman entered into an employment agreement which expires in December 1994. The agreement provides for an annual salary to Mr. Pearlman of $200,000 for the first year of the agreement and for annual increases thereafter in an amount equal to the greater of 5% of his previous year's salary or the increase, if any, in the Consumer Price Index for All Urban Consumers, Central Florida. The agreement also provides for an annual bonus payable to Mr. Pearlman in an amount equal to 4% of the first $1 million of the Company's net after-tax profits for such fiscal year. Pursuant to this agreement, Mr. Pearlman's annual compensation, including salary and bonus is limited to $340,000 per year. Accrued and unpaid salaries through December 31, 1995 are $391,000 and are included in amounts due to related party. On March 1, 1994 the Company agreed to reimburse Mr. Pearlman $4,000 per month in expenses, effective January 1, 1993, due to Mr. Pearlman's out-of-pocket expenses for the Company's business. The Company entered into employment agreements as of January 1, 1993 with each of two officers and another employee. Each agreement expires on January 1, 1998 and provides for annual salaries of $75,000 for the first year of the agreement and annual increases thereafter in an amount equal to the greater of 5% of his previous years salary or the increase, if any, in the Consumer Price Index for All Urban Consumers, Central Florida. Each agreement also provides for an annual bonus payable in an amount equal to 1 1/2% of the Company's net aftertax profits for such fiscal year plus an additional amount determined at the discretion of the Board of Directors. Operating Leases - The Company has various operating leases which will expire at various dates through May 1996 with unrelated parties for its executive offices, warehouse space, maintenance facility, and the Gulf airship discussed in Note I. Future minimum payments under these operating leases at December 31, 1996 are as follows: 1997.......................................... $27,000 1998.......................................... 4,000 1999.......................................... 1,000 ----------- $31,000 ----------- ----------- Rent expense amounted to $52,000, $(18,000) and $819,000 for the year ended 1996, 1995 and 1994, respectively. F-17 Airship International Ltd. NOTES TO FINANCIAL STATEMENTS December 31, 1996, 1995 and 1994 NOTE H - STOCKHOLDERS' EQUITY Preferred Stock - In February 1993, the Company completed a public offering ("the Offering") of 2,875,000 shares of its Class A 8% Cumulative Convertible Voting Preferred Stock ("Preferred Stock") at $6.00 per share. Each share of Preferred Stock is convertible, at any time after the earlier of February 16, 1994 or a date determined by the underwriters at their sole discretion (which date was not to be prior to April 19, 1993), into 6 shares of common stock, subject to future adjustment. Dividends on the Preferred Stock are payable quarterly and the first four dividends were paid, on an annualized basis, 50% in cash and 50% in shares of the Company's common stock. The Preferred Stock accrues dividends at the annual rate of $.60 per share for dividends paid in shares of common stock, and $.48 per share for dividends paid in cash. If available cash is not sufficient to pay any or all of the subsequent dividend payments, the balance of the dividend will be paid in shares of the common stock. The Preferred Stock is redeemable at the option of the Company, in whole or in part, at $6.60, together with all accrued and unpaid dividends, at any time after February 16, 1996. The liquidation preference of the Preferred Stock is $6.00 per share. In connection with the offering, the Company issued to the two representatives of the several underwriters, warrants to purchase an additional 10% of the Preferred Stock sold in the Offering. The Preferred Stock warrants are exercisable for four years commencing February 1994 at an exercise price equal to 165% of the initial offering price of the Preferred Stock, subject to certain anti-dilution provisions. Private Placement of Common Stock - During the first and second quarters of 1994, the Company sold common stock to certain investors pursuant to a share subscription agreement. The number of shares initially sold were 5,301,164 at an average purchase price of $.20 per share. These shares were not sold pursuant to a formal offering memorandum. Therefore, the Company offered a right of recession, which the majority of the purchasers of the common stock exercised. Warrants and Options - Outstanding warrants and options at December 31, 1995, 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 in connection with public offering in 1991: Officer and others in 1989 and 1991............. 215,000 $0.94 to $1.28 February 1990 to October 2001
F-18 Airship International, Ltd. NOTES TO FINANCIAL STATEMENTS December 31, 1996, 1995 and 1994 NOTE H - STOCKHOLDERS' EQUITY - Continued Incentive Stock Option Plan - The Company has an incentive stock option plan (the "Plan") for key employees under which it may grant options to purchase the Company's common stock over a term of up to ten years at the fair market value at the time of the grant. Options granted to a ten percent or more shareholder, an officer, or a director, may not be for less than 110% of fair market value and must be exercised within five years. The Plan was amended in December 1991 increasing to 750,000 the number of shares reserved for issuance. The Plan terminated on October 31, 1994. Options under the Plan are summarized as follows:
1996 1995 1994 - ------------------------------------------------------------------------------- Options outstanding at beginning of year........ -- -- 265,000 Options granted................................. -- -- -- Options exercised............................... -- -- -- Options cancelled............................... -- -- 265,000 - ------------------------------------------------------------------------------- Options outstanding at end of year.............. -- -- -- - ------------------------------------------------------------------------------- Options price per share......................... -- -- $.94-$1.28 Options exercisable: Number of shares............................. -- -- -- ----------------------------
Employee Share Purchase Plan - The Company has an employee share option plan (the "Plan") for employees of the Company and any present or future "subsidiary corporations." The Company intends the Plan to be an "employee stock purchase plan" as defined in Section 423 of the Internal Revenue Code of 1986, as amended (the "Code"). The Plan was effective November 1, 1994. All employees are eligible to participate in the Plan, except that the Company's appointed committee may exclude any or all of the following groups of employees from any offering: (i) employees who have been employed for less than 2 years; (ii) employees whose customary employment is 20 hours or less per week; (iii) employees whose customary employment is not more that 5 months in any calendar year; and (iv) highly compensated employees (within the meaning of Code Section 414(q). The shares issuable under the Plan shall be common shares of the Company subject to certain restrictions up to a maximum of 1,000,000 shares. The committee shall determine the length of each offering but no offering may exceed 27 months. The option price for options granted in each offering may not be less than the less of (i) 85% of the fair value of the shares on the day of the offering, or (ii) 85% of the fair market value of the shares at the time the option is exercised. F-19 Airship International, Ltd. NOTES TO FINANCIAL STATEMENTS December 31, 1996, 1995 and 1994 NOTE I - AIRSHIP REVENUES, MAJOR CUSTOMERS AND CREDIT CONCENTRATION Metropolitan Life - During 1993, the Company derived airship revenue from Metropolitan Life Insurance Company ("MetLife") pursuant to an amended aerial advertising agreement which expired in October 1993. The agreement provided for minimum monthly revenues plus travel expense reimbursements. The Company was responsible for all costs associated with the ownership, use or operation of the MetLife airship, including repairs, maintenance supplies, insurance and taxes. No revenues were earned on the MetLife airship during the period subsequent to the airship accident described below until October 15, 1992. The Company collected $585,000 of business interruption insurance proceeds relating to the loss of revenues during the months that the MetLife airship was under repair due to damage. In January 1994, the Company entered into an advertising agreement with Kingstreet Tours Limited (UK) for the use of the MetLife airship promoting Pink Floyd. The term of the agreement was originally for six months commencing January 18, 1994. The Company was responsible for all costs associated with the operations of the airship, including travel costs, repairs, maintenance, insurance and taxes. On June 20, 1994, the MetLife airship was damaged in a storm and the contract was cancelled (See Note E). Anheuser-Busch/Sea World - On January 2, 1994, the Company entered into an agreement with Anheuser-Busch, whereby the Company was permitted to provide passenger rides and to display advertising. The contract did not provide for usage fees or for a monthly operating fee, but permits the Company to use this airship while it still carries Sea World's logos/markings. The term of this agreement was to expire on December 31, 1994. However, the Company exercised its right under the contract to voluntarily suspend operations of the airship in April 1994. Anheuser-Busch/Bud One - In March 1992, the Company entered into an agreement similar to the above with Anheuser-Busch for the use of the Bud One airship. Pursuant to this agreement, the Company agreed to convert the Bud One airship (then being used as a passenger airship) into an airship operated to promote the goods and products of Anheuser-Busch. The agreement provides for an initial term of six months with renewals for additional terms totaling three years. Anheuser-Busch may terminate the agreement during the first or at the end of the second annual period by giving proper notice to the Company (see Note L). The Company had operated this airship to advertise and promote the Sea World theme park from September 1991 to March 1992 under a prior agreement with Anheuser-Busch which enabled the Company to operate sightseeing tours for passengers on a fee basis at Kissimmee Airport. Pursuant to an amendment dated March 4, 1994, monthly fees under the Bud One agreement were reduced by 50% effective February 1994 through July 1994 and the term of the contract ended in August 1994. The Bud One contract was amended in July 1994 and provided for operations at the full price from August 1994 through December 1996. However, during December 1995, it was determined that the envelope was in need of replacement. Therefore, the Company removed the airship from service. F-20 Airship International Ltd. NOTES TO FINANCIAL STATEMENTS December 31, 1996, 1995 and 1994 NOTE I - AIRSHIP REVENUES, MAJOR CUSTOMERS AND CREDIT CONCENTRATION - Continued Catamount Petroleum Corporation/Gulf Oil - In May 1993, the Company entered into an agreement with Catamount Petroleum Corporation for the use of the Gulf airship. The initial term of the agreement is for three years. Notwithstanding this term, the agreement may be terminated by either party upon proper written notice. During 1993, the airship was in operation from July through October upon which, at the request of Catamount, the agreement was suspended through April 1994, at which time the airship resumed operations through September 1994. The Company was responsible for all costs associated with the operation of the Gulf airship, including repairs, maintenance, insurance and taxes. Mastellone Hnos, S.A. - On December 15, 1994, the Company and its wholly-owned subsidiary Airship Operations, Inc. consummated an Aircraft Lease Agreement (the "Argentina Lease Agreement") and an Airship Operations Agreement (the "Argentina Operations Agreement"), respectively, with Mastellone Hnos, S.A. ("Mastellone") for the promotion of the products of Mastellone (the "Argentina Airship"). The Company received a deposit from Mastellone in the amount of $500,000. The operations for the Argentina Airship were never commenced. On May 24, 1995, prior to commencement of operations of the Argentina Airship and pursuant to an Aircraft Purchase and Lease Assignment and Assumption between the Company and First Security Bank of Utah, as trustee for the benefit of Aviation Support Group, Ltd. ("Aviation"), the Argentina Airship was sold and the Argentina Lease Agreement was assigned to First Security. In consideration for such sale and assignment, First Security assumed the Company's obligations under the Argentina Lease Agreement. The Company is entitled to receive, during a ten-month renewal term provided for in the Argentina Lease and Argentina Operations Agreements, a portion of the rental income generated should Mastellone exercise its right to extend the terms of such agreement. In addition, by notifying First Security prior to December 15, 1995 (extended to January 15, 1996), the Company had the right to repurchase the airship for 120% of the out-of-pocket expenses and the assumption of all liabilities incurred by First Security and Aviation in connection with the Argentina Airship. The Company did not exercise the right to repurchase the airship. Concurrently with the execution and delivery of the Purchase and Assumption Agreement, the Company sold to Aviation all of the issued and outstanding shares of the capital stock of Airship Operations, Inc. Mr. Benscher, who is a shareholder of the Company, is a principal stockholder of Aviation. See Note C - Transactions With Stockholders, Related Parties And Others. In December 1995 the Company entered into an Envelope Purchase agreement with Hampstead Technologies Limited, an affiliate of Julian Benscher, for the purchase of a new envelope for the Bud One Airship. The Company made a non- refundable deposit of $630,000. This purchase was never consummated and as such the deposit was written off in 1995. On May 31, 1995 the Company entered into an Aircraft Lease Agreement with Trans Continental Leasing, Inc. As part of the transaction, the Company sold and leased back the Bud One ariship and related components. The selling price was for $2,060,000 which was financed by Phoenixcor. In accordance with SFAS 98, "Accounting for Leases," any gain on the sale is deferred and amortized in proportion to the amortization of the leased asset. The resulting gain of $873,393 was capitalized as part of the airship cost and is being amortized over 20 years equal to the corresponding increased depreciation. This sale and lease back agreement was substituted by another Aircraft Lease Agreement with Trans Continental Leasing, Inc. on December 24, 1996. As part of this agreement, Senstar was paid off and $4,708,661 was borrowed from Norwest Equipment Finance, Inc by Trans Continental. The increase in loan proceeds was the result of the contract being modified to include a new envelope used on the Bud One Airship. F-21 Airship International Ltd. NOTES TO FINANCIAL STATEMENTS December 31, 1996, 1995 and 1994 NOTE J - EMPLOYEE SAVINGS PLAN The Company has an employee savings plan (the "Savings Plan") that qualifies as a deferred salary arrangement under Section 401(k) of the Internal Revenue Code. Under the Savings Plan, participating employees may defer a portion of their pretax earnings, up to the Internal Revenue Service annual contribution limit of 15% of the employees salary. The Company matches 25% of each employees contributions for 1993 and 5% for 1995 and 1994, depending on length of service, up to a maximum of 6% of the employee's earnings. The Company's matching contributions to the Savings Plan was $1,948 and $11,000 for 1995 and 1994, respectively. NOTE K - SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
1996 1995 1994 ---------- ---------- -------- Cash paid during the year for: Interest........................................ $ 475,000 $1,018,000 $392,000 Supplemental non-cash activity: Accrued common stock dividend................... $1,725,000 $1,725,000 $862,000
NOTE L - SUBSEQUENT EVENTS On December 24, 1996, Transcontinental 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. The financing did not close until January 1997. F-22 REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOLINTANTS ON SCHEDULES Board of Directors and Stockholders Airship International Ltd. In connection with our audit of the financial statements of Airship International Ltd. referred to in our report dated August 22, 1997 (that contains an explanatory paragraph pertaining to a going concern and other uncertainties), which is included in the Annual Report on SEC Form 10-K for the year ended December 31, 1996 and 1995, we have also audited Schedules II, IV, V and VI, for the year ended December 31, 1996 and 1995. In our opinion, these schedules present fairly, in all material respects, the information required to be set forth therein. CHARLIE M. MEEKS, C.P.A., P.A. Maitland, Florida September 5, 1997 F-23 AIRSHIP INTERNATIONAL LTD. SCHEDULE II AMOUNTS RECEIVABLE FROM RELATED PARTIES
BALANCE BALANCE AT BEGINNING AT END OF NAME OF RELATED PARTY OF YEAR ADDITIONS DEDUCTIONS PERIOD - ----------------------------------------------------------- ------------ --------- ---------- ---------- YEAR ENDED DECEMBER 31, 1996: Trans Continental Airlines, Inc....................... $ 176,000 $ 99,000 $ -- $ 275,000 ------------ --------- ---------- ---------- YEAR ENDED DECEMBER 31, 1995: Trans Continental Airlines, Inc....................... $1,809,000 $ 176,000 $1,809,000 $ 176,000 Airship Airways, Inc.................................. $ 82,500 $ -- $ 82,500 $ -- ------------ --------- ---------- ---------- YEAR ENDED DECEMBER 31, 1994: Trans Continental Airlines, Inc....................... $2,526,000 $ 742,500 $1,459,500 $1,809,000 Airship Airways, Inc.................................. $ -- $ 82,500 $ -- $ 82,500 ------------ --------- ---------- ----------
Includes $164,000 of interest income earned on advances for the years ended December 31, 1994. F-24 AIRSHIP INTERNATIONAL LTD. SCHEDULE IV INDEBTEDNESS TO RELATED PARTIES
BALANCE BALANCE AT BEGINNING AT END OF NAME OF RELATED PARTY OF YEAR ADDITIONS(1) DEDUCTIONS PERIOD - ----------------------------------------------------------- ------------ --------- ---------- ---------- YEAR ENDED DECEMBER 31, 1996: Due to related party Trans Continental Airlines, Inc.................. $ 549,000 $2,921,000 $ -- $3,470,000 Louis J. Pearlman................................ $1,039,000 $ 98,000 $ -- $1,137,000 ------------ ---------- ---------- ---------- YEAR ENDED DECEMBER 31, 1995: Due to related party Trans Continental Airlines, Inc.................. $ -- $ 549,000 $ -- $ 549,000 Louis J. Pearlman................................ 949,000 $ 90,000 $ -- $1,039,000 ------------ ---------- ---------- ---------- YEAR ENDED DECEMBER 31, 1994: Due to related party Louis J. Pearlman................................ $ 846,000 $ 103,000 $ -- $ 949,000 ------------ ---------- ---------- ----------
(1) Includes amortization of debt discount of $5,000 per year. (2) Includes reduction for the loan paid to an individual which was treated as a reduction of the balance outstanding (See Note C). F-25 AIRSHIP INTERNATIONAL LTD. SCHEDULE V AIRSHIPS AND RELATED EQUIPMENT
BALANCE AT BALANCE BEGINNING ADDITIONS RECLASSI- AT END CLASSIFICATION OF YEAR AT COST RETIREMENTS FICATIONS OF YEAR - ---------------------------------------------- --------- ----------- ---------- --------- YEAR ENDED DECEMBER 31, 1996: Airships................................. 2,294,000 -- -- -- 2,294,000 Airship components....................... 1,605,000 -- -- -- 1,605,000 Vehicles................................. 1,566,000 (182,000) -- 1,384,000 Parts and equipment...................... 1,197,000 19,000 -- -- 1,216,000 ------------ --------- ----------- ---------- --------- 6,662,000 19,000 (182,000) -- 6,499,000 ------------ --------- ----------- ---------- --------- ------------ --------- ----------- ---------- --------- YEAR ENDED DECEMBER 31, 1995: Airships................................. 2,104,000 900,000 (710,000) -- 2,294,000 Airship components....................... 2,730,000 -- (1,125,000) -- 1,605,000 Vehicles................................. 1,609,000 (43,000) -- 1,566,000 Parts and equipment...................... 1,542,000 -- (345,000) -- 1,197,000 ------------ --------- ----------- ---------- --------- 7,985,000 900,000 (2,223,000) -- 6,662,000 ------------ --------- ----------- ---------- --------- ------------ --------- ----------- ---------- --------- YEAR ENDED DECEMBER 31, 1994: Airships................................. 12,048,000 11,000 (7,043,000) (2,912,000) 2,104,000 Airship components....................... 6,762,000 -- (6,783,000) 2,751,000 2,730,000 Vehicles................................. 1,514,000 241,000 (146,000) -- 1,609,000 Parts and equipment...................... 2,768,000 64,000 (1,451,000) 161,000 1,542,000 Construction in progress................. 479,000 -- (479,000) -- -- ------------ --------- ----------- ---------- --------- 23,571,000 316,000 (15,902,000) -- 7,985,000 ------------ --------- ----------- ---------- --------- ------------ --------- ----------- ---------- ---------
F-26 AIRSHIP INTERNATIONAL LTD. SCHEDULE VI ACCUMULATED DEPRECIATION AND AMORTIZATION OF AIRSHIPS AND RELATED EQUIPMENT
BALANCE ADDITIONS AT CHARGED TO BALANCE BEGINNING COSTS AND RECLASSI- AT END CLASSIFICATION OF YEAR EXPENSES RETIREMENTS FICATIONS OF YEAR - ------------------------------------------------ ---------- ---------- -------- --------- YEAR ENDED DECEMBER 31, 1996: Airships................................... 347,000 131,000 -- -- 478,000 Vehicles................................... 1,068,000 275,000 (127,000) -- 1,216,000 Parts and equipment........................ 543,000 55,000 -- -- 598,000 ------------ ---------- ---------- -------- --------- 1,958,000 461,000 (127,000) -- 2,292,000 ------------ ---------- ---------- -------- --------- ------------ ---------- ---------- -------- --------- YEAR ENDED DECEMBER 31, 1995: Airships................................... 234,000 113,000 -- -- 347,000 Vehicles................................... 805,000 302,000 (39,000) -- 1,068,000 Parts and equipment........................ 453,000 90,000 -- -- 543,000 ------------ ---------- ---------- -------- --------- 1,492,000 505,000 (39,000) -- 1,958,000 ------------ ---------- ---------- -------- --------- YEAR ENDED DECEMBER 31, 1994: ------------ ---------- ---------- -------- --------- Airships................................... 1,976,000 1,119,000 (3,078,000) 137,000 234,000 Vehicles................................... 565,000 331,000 (91,000) -- 805,000 Parts and equipment........................ 716,000 369,000 (632,000) -- 453,000 ------------ ---------- ---------- -------- --------- 3,257,000 1,899,000 (3,801,000) 137,000 1,492,000 ------------ ---------- ---------- -------- --------- ------------ ---------- ---------- -------- ---------
F-27 STATEMENT OF DIFFERENCES The copyright symbol shall be expressed as.............................`c' The registered trademark symbol shall be expressed as..................`r' The trademark symbol shall be expressed as.............................`tm' Characters normally expressed as superscript shall be preceded by.......`pp' EX-11 2 EXHIBIT 11 STATEMENT RE: COMPUTATION OF PER SHARE EARNINGS
YEARS ENDED DECEMBER 31, ------------------------------------------ 1996 1995 1994 ----------- ------------ ----------- Average share outstanding........................................... 40,879,000 36,008,000 30,161,000 Average common and common Equivalent shares outstanding............. 40,879,000 36,008,000 30,161,000 Net income.......................................................... $(2,506,000) $(4,867,000) $(20,645,000) Preferred stock dividend............................................ $(1,725,000) $(1,725,000) $ (1,683,000) Computation of Earnings Per Share = Net Income/Average common equivalent shares................................................. $(4,231,000) $(6,592,000) $(22,328,000) 40,879,000 36,008,000 30,161,000 Earnings per share.................................................. $ (0.10) $ (0.18) $ (0.74)
EX-27 3 EXHIBIT 27
5 1,000 YEAR DEC-31-1996 DEC-31-1996 2,000 0 275,000 0 0 289,000 6,499,000 2,292,000 4,496,000 12,877,000 0 410,000 27,000 27,000 14,275,000 4,496,000 0 0 1,150,000 1,839,000 667,000 0 768,000 2,506,000 0 2,506,000 0 0 0 2,506,000 $(0.10) $(0.10)
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