UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
/ X / QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Quarter Ended September 30, 1998
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 ( d ) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____________ to_______________.
Commission File Number: 0-27256
ATLANTIC INTERNATIONAL ENTERTAINMENT, LTD.
(Exact name of small business issuer as specified in its charter)
DELAWARE 65-0512785
(State or other jurisdiction of I.R.S. Employer Identification number)
incorporation or organization)
200 East Palmetto Park Road, Suite 200, Boca Raton, Florida 33432
(Address of principal executive offices)
Registrant's telephone no., including area code: (561) 393-6685
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15 (d) of the Securities Exchange Act of 1934 during the past 12 months
(or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days.
YES / X / NO / /
APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date.
CLASS OUTSTANDING AS OF NOVEMBER 16, 1998
------------------------------- -----------------------------------
Common Stock, $.001 par value 12,102,668
TABLE OF CONTENTS
Heading Page
PART 1. - FINANCIAL INFORMATION
Item 1. Financial Statements ...............................................2
Consolidated Balance Sheet - September 30, 1998 (Unaudited).......3-4
Consolidated Statement of Income and Comprehensive
Income (Unaudited) .................................................5
Consolidated Statement of Changes in Stockholders'
Equity (Unaudited)..................................................6
Consolidated Statement of Cash Flows - Nine Months ended
September 30, 1998 (Unaudited) .................................7-8
Notes to Consolidated Financial Statements (Unaudited) ..........9-15
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations ......................................16-18
PART II. - OTHER INFORMATION
Item 1. Legal Proceedings..................................................19
Item 2. Changes In Securities..............................................19
Item 3. Defaults Upon Senior Securities....................................19
Item 4. Submission of Matters to a Vote of Securities Holders .............19
Item 5. Other Information .................................................19
Item 6. Exhibits and Reports on Form 8-K...................................19
Signatures ........................................................20
PART 1
Item 1. Financial Statements
The following unaudited financial Statements for the period ended
September 30, 1998, have been prepared by Atlantic International
Entertainment, Ltd. (the "Company") and Subsidiaries.
ATLANTIC INTERNATIONAL ENTERTAINMENT, LTD. AND SUBSIDIARIES
Financial Statements
September 30, 1998
2
ATLANTIC INTERNATIONAL ENTERTAINMENT, LTD. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET (UNAUDITED)
AS OF SEPTEMBER 30, 1998
SEPTEMBER 30, 1998
------------------
(Unaudited)
ASSETS
CURRENT ASSETS
Cash and Cash Equivalents $ 96,024
Accounts Receivable [Net of Allowance for Doubtful Accounts of $ 37,180] 52,720
Notes Receivable 534,763
Refundable Income Tax 77,215
Deferred Tax Asset 51,000
Prepaid Expenses 12,940
Investment 3,770,000
Other Current Assets 96,570
---------------
TOTAL CURRENT ASSETS: 4,691,232
---------------
Furniture, Fixtures and Equipment - (Net of Accumulated Depreciation of $ 184,830) 545,158
Software (Net of Accumulated Amortization of $ 579,422) 1,773,569
Cost in Excess of Net Assets of Business Acquired
(Net of Accumulated Amortization of $ 155,296) 1,387,985
OTHER ASSETS
Due From Related Parties 77,879
Other Assets 17,756
Investments 4,777,892
Notes Receivable (Net of Discounts and Reserve) 1,791,754
---------------
TOTAL OTHER ASSETS 6,665,281
---------------
TOTAL ASSETS $ 15,063,225
===============
The Accompanying Notes are an Integral Part of these Consolidated Financial
Statements
3
ATLANTIC INTERNATIONAL ENTERTAINMENT, LTD. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET (UNAUDITED) (Continued)
AS OF SEPTEMBER 30, 1998
September 30,
1998
-------------
(Unaudited)
LIABILITIES AND STOCKHOLDERS'EQUITY:
CURRENT LIABILITIES
Accounts Payable and Accrued Expenses $ 775,509
Notes Payable - Officers 49,795
Current Portion of Long-Term Debt 100,828
Current Portion of Capital Lease Obligations 30,905
Income Taxes Payable - Federal 535,884
Income Taxes Payable - State 20,014
Other Current Liabilities 39,250
-------------
TOTAL CURRENT LIABILITIES 1,552,185
Long-Term Debt -
Capital Lease Obligations 28,250
-------------
TOTAL LIABILITIES 1,580,435
-------------
STOCKHOLDERS' EQUITY:
Preferred Stock - Par Value $.001 Per Share, Authorized
10,000 Shares, Issued and Outstanding 9
Common Stock - Par Value $.001 Per Share;
Authorized 100,000,000 Shares, Issued and
Outstanding 12,039,149 Shares 12,039
Additional Paid - in - Capital 13,365,359
Unrealized Holding Loss on Marketable Securities (38,859)
Retained Earnings 144,242
-------------
Total Stockholders' Equity 13,482,790
-------------
Total Liabilities and Stockholders' Equity $ 15,063,225
=============
The Accompanying Notes are an Integral Part of these Consolidated Financial
Statements.
4
ATLANTIC INTERNATIONAL ENTERTAINMENT, LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
FOR THE THREE MONTHS ENDED FOR THE NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------------------------------------------------------------------------
1998 1997 1998 1997
--------------------------------------------------------------------------------
REVENUE $ 789,013 $ 2,306,017 $ 3,497,281 $ 4,070,440
Cost of Sales 114,413 145,935 489,817 288,306
General and Administrative 636,312 508,259 1,783,615 1,155,276
Provision for Doubtful Accounts 1,046,295 - 1,213,349
Depreciation and Amortization 153,283 109,861 433,220 316,228
Other Losses and (Gains) (127,055) 4,072 (77,920) 22,484
------------ ------------- -------------- ------------
Income (Loss) from Continuing Operations
Before Income Tax Expense (1,034,235) 1,537,890 (344,800) 2,288,146
Income Tax Benefit (Expense) 99,095 - (47,374) (119,068)
------------ ------------- ------------ ------------
Income (Loss) From Continuing Operations (935,140) 1,537,890 (392,174) 2,169,078
Discontinued Operations
Loss from Discontinued Operations - - - (69,531)
Gain on Sale of Discontinued Operations - - - 120,895
------------ ------------- ------------ ------------
NET INCOME (LOSS) (935,140) 1,537,890 (392,174) 2,220,442
Unrealized Holding Loss Arising During Period (1,021) - (52,309) -
------------ ------------- ------------ ------------
Comprehensive Income (Loss) $ (936,161) $ 1,537,890 $ (444,483) $ 2,220,442
------------ ------------- ------------ ------------
Income (Loss) Per Common Share
Continuing Operations $ (0.09) $ 0.16 $ (0.04) $ 0.23
Discontinued Operations - - - -
------------ ------------- ------------ ------------
Basic Net Income Per Share of
Common Stock $ (0.09) $ 0.16 $ (0.04) $ 0.23
------------ ------------- ------------ ------------
Fully Diluted Net Income Per Share of
Common Stock $ (0.09) $ 0.16 $ (0.04) $ 0.23
------------ ------------- -------------- ------------
Weighted Average Shares of Common
Stock Outstanding 10,854,290 9,465,184 10,312,479 9,429,434
------------ ------------- -------------- ------------
Weighted Average Fully Diluted Shares Of
Common Stock Outstanding 10,854,290 9,465,184 10,312,479 9,429,434
------------ ------------- -------------- ------------
The Accompanying Notes are an Integral Part of these Consolidated Financial
Statements
5
ATLANTIC INTERNATIONAL ENTERTAINMENT, LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
UNREALIZED
PREFERRED STOCK COMMON STOCK ADDITIONAL LOSS ON RETAINED TOTAL
NUMBER OF NUMBER OF PAID IN MARKETABLE EARNINGS SOCKHOLDERS'
SHARES AMOUNT SHARES AMOUNT CAPITAL SECURITIES (DEFICIT) EQUITY
BALANCE - JANUARY 1, 1997 -- -- 9,190,184 $ 9,190 $ 1,887,376 $ -- $ (217,431) $ 1,679,135
Sale of Common Stock -- -- 75,000 75 350,175 -- -- 350,250
Sale of Common Stock -- -- 25,000 25 -- -- -- 25
Asset Acquisition [Note 8] -- -- 200,000 200 1,598,880 -- -- 1,599,080
Conversion of Debt to Equity -- -- -- -- 313,475 -- -- 313,475
Issuance of Shares in Escrow -- -- 100,000 100 -- -- -- 100
Unrealized Holding Loss on -- -- -- -- -- (42,763) -- (42,763)
On Marketable Securities
Income from Continuing
Operations -- -- -- -- -- -- 948,225 948,225
Income from Discontinued
Operations -- -- -- -- -- -- 99,092 99,092
-------------------------------------------------------------------------------------------------
BALANCE - DECEMBER 31, 1997 -- -- 9,590,184 9,590 4,149,906 (42,763) 829,886 4,946,619
Sale of Common Stock
Shares in Escrow -- -- -- -- 299,900 -- -- 299,900
Unrealized Holding Loss on
Marketable Securities -- -- -- -- -- 3,904 -- 3,904
Sale of Common Stock -- -- 12,110,000 12,110 7,767,590 -- -- 7,779,700
Sale of Preferred Stock 10,000 10 -- -- 906,840 -- -- 906,850
Cancellation of Common Stock -- -- (9,700,000) (9,700) -- -- -- (9,700)
Conversion of Preferred Stock (1,050) (1) 38,965 39 (38) -- -- --
Beneficial Conversion of
Preferred Stock -- -- -- -- 241,161 -- (241,161) --
Income from Continuing
Operations -- $ -- -- -- -- -- (444,483) (444,483)
------ ---- ---------- ------- ----------- ---------- ---------- ------------
BALANCE - SEPTEMBER 30, 1998 8,950 $ 9 12,039,149 $12,039 $13,365,359 $ (38,859) $ 144,242 $ 13,482,790
------ ---- ---------- ------- ----------- ----------- ---------- ------------
The accompanying Notes are an Integral Part of these Consolidated Financial
Statements 6
6
ATLANTIC INTERNATIONAL ENTERTAINMENT, LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
NINE MONTHS ENDED
SEPTEMBER 30,
1 9 9 8 1 9 9 7
------- -------
OPERATING ACTIVITIES:
Income [Loss] Income from Continuing Operations $ (444,483) $ 2,169,078
Adjustments to Reconcile Net Income [Loss] to
Net Cash Provided by [Used for] Operating Activities:
Depreciation and Amortization 433,220 316,228
Deferred Taxes 125,812 --
Provision for Doubtful Accounts 1,213,349 --
Gain on Sale of Assets (48,726) --
Gain (Loss) on Sale of Investments -- (20,784)
Regulated Loss on Carrying Value of Investments 47,385 --
Unregulated Loss on Carrying Value of Investments (3,904) --
Changes in Assets and Liabilities:
[Increase] Decrease in:
Accounts Receivable (88,546) (3,726,296)
Prepaid Expenses (6,376) 70,323
Security Deposits -- (23,831)
Investments -- (52,962)
Refundable Income Tax -- 77,215
Notes Receivable (110,982) --
Deferred Income Taxes -- (548,400)
Other Assets (2,097,341) (552)
Increase [Decrease] in:
Accounts Payable and Accrued Expenses (176,083) 292,280
Income Taxes Payable (78,438) --
Other Current Liabilities (10,457) 76,754
Due to Customer (20,721) 64,026
Loans payable - stockholders -- (9,709)
Deferred Income Taxes -- 585,405
----------- -----------
NET CASH - CONTINUING OPERATIONS (1,266,291) (731,225)
----------- -----------
DISCONTINUED OPERATIONS:
[Loss] from Discontinued Operations (69,531)
Gain on disposal of Discontinued Operations -- 120,895
Adjustments to Reconcile Net [loss] to Net Cash Operations:
Depreciation -- 1,366
----------- -----------
-- 52,730
CHANGES IN ASSETS AND LIABILITIES:
(Increase) Decrease in Other Assets -- 815
Increase (Decrease in Accounts Payable -- (14,808)
Customer Deposits -- (27,648)
----------- -----------
TOTAL ADJUSTMENTS -- (41,641)
----------- -----------
NET CASH - DISCONTINUED OPERATIONS -- 11,089
----------- -----------
NET CASH - OPERATING ACTIVITIES - FORWARD (1,266,291) (720,136)
----------- -----------
INVESTING ACTIVITIES - CONTINUING OPERATIONS:
Increase in Due from Related Parties (28,024) --
Purchase of Investments (6,766,623) (73,746)
Purchase of Property and Equipment (929,070) (322,870)
Sale of Investments 177,371 --
Sale (Purchase) of Subsidiary -- (1,620,000)
----------- -----------
NET CASH - INVESTING ACTIVITIES - CONTINUING OPERATIONS - $(7,546,346) $(2,016,616)
FORWARD
The Accompanying Notes are an Integral Part of these Consolidated Financial
Statements
7
ATLANTIC INTERNATIONAL ENTERTAINMENT, LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
NINE MONTHS ENDED
SEPTEMBER 30,
1 9 9 8 1 9 9 7
------- -------
NET CASH - INVESTING ACTIVITIES - CONTINUING OPERATIONS: - $(7,546,346) $(2,016,616)
FORWARD
INVESTING ACTIVITIES - DISCONTINUING OPERATIONS
Disposition of Property and Equipment -- 11,110
----------- -----------
NET CASH INVESTING ACTIVITIES (7,546,346) (2,005,506)
NET CASH - OPERATING ACTIVITIES - FORWARDED (1,266,291) (720,136)
----------- -----------
FINANCING ACTIVITIES - CONTINUING OPERATIONS:
Proceeds from the Conversion of Debt to Equity -- --
Proceeds from Issuance of Common Stock 12,110 1,949,330
Proceeds from Issuance of Preferred Stock 10
Decrease in Loan Payable to Shareholder (116,841) (9,709)
Proceeds from Long-Term Debt 123,500 155,000
Line of Credit -- --
Payment of Notes Payable (89,160) --
Payment of Lease Payable (6,548) --
Additional Paid In Capital 8,974,330 27,713
Increase in equipment loans -- 95,557
Principal payments on capitalized lease and not borrowing -- (10,565)
----------- -----------
NET CASH - FINANCING ACTIVITIES - CONTINUING OPERATIONS 8,897,401 2,207,326
Financing - Activities - Discontinued Operations
Additions to Paid In Capital -- 98,775
----------- -----------
NET CASH - FINANCING ACTIVITIES 8,897,401 2,306,101
----------- -----------
NET INCREASE DECREASE IN CASH AND CASH EQUIVALENTS 84,764 (419,541)
CASH AND CASH EQUIVALENTS - BEGINNING OF PERIOD 11,260 421,188
----------- -----------
CASH AND CASH EQUIVALENTS - END OF PERIOD $ 96,024 $ 1,647
=========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the years for:
Interest $ 14,616 $ 5,441
Income Taxes $ -- $ 77,215
Income Tax Refund (Applied) $ -- $ 119,068
SUPPLEMENTAL SCHEDULE OF NON CASH INVESTING AND FINANCIAL ACTIVITIES:
During the third quarter of 1998, $105,000 worth of convertible preferred
stock was converted into 38,965 shares of common stock.
The Accompanying Notes are an Integral Part of these Consolidated Financial
Statements
8
ATLANTIC INTERNATIONAL ENTERTAINMENT, LTD.
Notes to Consolidated Financial Statements (Uunaudited)
September 30, 1998
Note 1 - BASIS OF PREPARATION
The accompanying unaudited interim financial statements include all
adjustments (consisting only of those of a normal recurring nature)
necessary for a fair statement of the results for the interim
periods. The results of operations for the three-month period ended
September 30, 1998, are not necessarily indicative of the results of
operations to be reported for the full year ending December 31,
1998.
Note 2 - BUSINESS ACQUISITIONS
The business acquisition in the first quarter of 1997 has been
accounted for under the purchase method. The results of operations
of the acquired business are included in the consolidated financial
statements from the date of acquisition onward.
On March 26, 1997, the Company concluded its acquisition of 100% of
the outstanding stock of The EmiNet Domain, Inc., located in Boynton
Beach, Florida. EmiNet is an Internet Service Provider (ISP), and
developer of Internet related software products as well as hosting
commercial Web sites. The Company paid $20,000 in cash and issued
200,000 shares of the Company's common stock (approximate market
value on date of issue $2,000,000). The Stock Purchase Agreement
also contains additional payments contingent on the future earnings
performance of EmiNet. Any additional payments made, when the
contingency is resolved, will be accounted for as additional costs
of the acquired assets and amortized over the remaining life of the
assets.
The following unaudited pro forma consolidated results of operations
for the year ended December 31, 1997 is presented as if the EmiNet
acquisition has been made at the beginning of the period presented.
The EmiNet Domain, Inc. operated as an S Corporation prior to
acquisition. Included in the expenses to arrive at Net Earnings are
reclassifications of Shareholders' Draw to Officers Salaries and
Income Tax Expense in the amount of $86,000 for 1997. The unaudited
pro forma information is not necessarily indicative of either the
results of operations that would have occurred had the purchase been
made during the periods presented or the future results of the
combined operations.
Year ended December 31
1997
----
Net Sales $ 4,593,078
Net Earnings Income (Loss) $ 1,096,976
Basic Net Income (Loss) per common share $ .12
Diluted Net Income (Loss) per common share $ .12
9
ATLANTIC INTERNATIONAL ENTERTAINMENT, LTD. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Uunaudited) (Continued)
September 30, 1998
Note 3 - MAJOR CUSTOMERS
Income fees derived from major customers are tabulated
as follow:
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1997 1998 1997 1998
(UNAUDITED) (UNAUDITED)
----------------------------------------------------------------------
Customer A (Software System) 375,000 -- 375,000 --
Customer B (Software System) 600,000 -- 600,000 --
Customer C (Software System) 450,000 -- 450,000 --
Customer D (Software System) 150,000 -- 150,000 --
Customer E (Software System) -- -- 600,000 --
Customer F (Software System) -- -- 410,000 --
Customer G (Software System) -- -- 450,000 --
Customer H (Software System) -- -- 150,000 --
Customer I (Software System) 585,000 -- 585,000 --
Customer J (Software System) -- -- -- --
Customer K (Software System) -- -- -- 450,000
Customer L (Software System) -- -- -- 220,000
Customer M (Software System) -- -- -- 350,000
Customer N (Software System) -- -- -- 615,000
Customer O (Software System) -- -- -- 675,000
Customer P (Software System) -- 450,000 -- 450,000
Customer Q (Software System) -- 175,000 -- 175,000
Note 4 - CAPITAL STOCK
-------------
On September 18, 1996 and October 31, 1996, the Company issued
521,500 and 365,200 shares, respectively of common stock in a
private placement of its securities. The Company received net
proceeds of approximately $826,881.
On January 16, 1997, the Company entered into a stock purchase
agreement with Brindenberg Securities, A/S under Regulation S of the
Securities and Exchange Commission. A total of 75,000 shares were
issued under the agreement for $525,000 net of offering costs and
expenses of approximately $175,000.
In February 1997, the Company issued 25,000 shares of its common
stock to an outside consultant for services to be rendered. The
consultant never performed the required services and therefore, the
common shares issued will be returned in 1998.
In March 1997, the Company issued 200,000 shares of the Company's
common stock as part of the acquisition of EmiNet Domain, Inc. [See
Note 2].
10
ATLANTIC INTERNATIONAL ENTERTAINMENT, LTD. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Uunaudited) (Continued)
September 30, 1998
Note 4 - CAPITAL STOCK - CONTINUED
-------------------------
In December of 1997, the Company sold 100,000 shares of the
Company's common stock to Australian Advisors for a total of
$300,000 pursuant to the Registration Statement S-8.
Also in December 1997, the Company converted debt totaling $313,475
to equity. The shares related to the conversion were unissued at
December 31, 1997 and the conversion ratio has been set at $4.00 per
share.
In the second quarter of 1998, the Company sold 1,000,000 shares for
a total of $4,000,000 pursuant to Regulation D.
Also in the second quarter of 1998, 9,700,000 shares of common stock
were issued to Atlantic International Entertainment Australia, a
wholly owned subsidiary for use in a proposed takeover of the
Australian Company, Coms21. In the third quarter of 1998, 1,160,000
shares of the above 9,700,000 shares were issued to the accepting
COMS21 stockholders pursuant to the company's offer for Coms21 stock
and the balance of 9,700,000 shares issued were cancelled.
In the second quarter of 1998, 10,000 shares of 5% Convertible
Preferred Stock, $.001 par value, were issued for cash. Each share
is convertible into common stock by virtue of a formula contained in
the Purchase Agreement which relates to the average price per share
of common stock within the conversion period.
During the third quarter of 1998, $105,000 worth of convertible
preferred stock was converted into 38,965 shares of common stock by
virtue of a formula contained in the purchase agreement which
relates to the average price per share of common stock within the
conversion period.
Note 5 - PER SHARE DATA
Per share data are based on the weighted average number of common
shares outstanding during the respective periods, retroactively
adjusted to reflect the common shares issued in exchange for all
outstanding common shares of The EmiNet Domain, Inc., including the
additional shares sold pursuant to a "Reg S" offering in February,
1997. The diluted net income per share is based upon the options
issued and outstanding as well as the assumed conversion of the
Company's issued and outstanding preferred stock.
Note 6 - INCENTIVE STOCK OPTION PLAN
On January 1, 1997, the Company adopted an Incentive Stock Option
Plan for Employees, Directors, Consultants and Advisors [the
"Plan"]. The Plan will expire December 31, 2006 unless further
extended by appropriate action of the Board of Directors.
11
ATLANTIC INTERNATIONAL ENTERTAINMENT, LTD. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Uunaudited) (Continued)
September 30, 1998
Note 6 - INCENTIVE STOCK OPTION PLAN (CONTINUED)
Employees, directors, consultants and advisors of the Company, or
any of its subsidiary corporations, are eligible for participation
in the Plan. The Plan provides for stock to be issued pursuant to
options granted and shall be limited to 250,000 shares of Common
Stock, $.001 par value. The shares have been reserved for issuance
in accordance with the terms of the Plan. The exercise of these
options may be for all or any portion of the option and any portion
not exercised will remain with the holder until the expiration of
the option period. The options expire on December 23, 2002.
In addition, options were granted to the Board of Directors on April
2, 1998 for an aggregate amount of 700,000 options. A summary of the
changes in outstanding Common Stock options for all outstanding
plans is as follows:
Weighted-average
----------------
Shares Exercise Price
------ --------------
OUTSTANDING AT DECEMBER 31, 1995 -- --
Granted -- --
Exercised -- --
Canceled -- --
OUTSTANDING AT DECEMBER 31, 1996 -- --
Granted 175,000 3.25
Exercised -- --
Canceled -- --
------- -----
OUTSTANDING AT DECEMBER 31, 1997 175,000 3.25
------- -----
EXERCISABLE AT DECEMBER 31, 1997 175,000 3.25
------- -----
GRANTED AT APRIL 2, 1998 700,000 4.125
------- -----
GRANTED AT SEPTEMBER 30, 1998 88,000 2.50
------- -----
OUTSTANDING AT SEPTEMBER 30, 1998 963,000 3.83
------- -----
12
ATLANTIC INTERNATIONAL ENTERTAINMENT, LTD. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Uunaudited) (Continued)
September 30, 1998
Note 6 - INCENTIVE STOCK OPTION PLAN (CONTINUED)
The following table summarizes information about stock options at September 30,
1998:
Exercisable
Outstanding Stock Options Stock Options
Weighted-average
Range Of Remaining Weighted-average Weighted Average
- - -------- ----------------------------------- ----------------
Exercise Prices Shares Contractual Life Exercise Price Shares Exercise Price
- - --------------- ------ --------------------------- ----- ------ --------------
$ 3.25 175,000 4.50 $ 3.25 175,000 $ 3.25
$ 4.125 700,000 4.75 $ 4.75 700,000 $ 4.75
$ 2.50 88,000 5.00 $ 2.50 88,000 $ 2.50
The Company applies Accounting Principles Board Opinion No. 25,
Accounting for Stock Issued to Employees, and related
interpretations, for stock options issued to employees in accounting
for its stock option plans. The exercise price of certain options
issued during 1997 and 1998 was the market price at the date of
grant. Accordingly, no compensation expense has been recognized for
the Company's stock-based compensation plans for fiscal year 1997
and 1998.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting
restrictions and are fully transferable. In addition, option
valuation models require the input of highly subjective assumptions
including the expected stock price volatility. The weighted average
fair value of stock options granted to employees used in determining
pro forma amounts is estimated at $4.13 and $2.50 during the nine
and three months ended September 30, 1998.
Pro forma information regarding net loss and net loss per share has
been determined as if the Company has accounted for its employee
stock options under the fair value method prescribed under SFAS No.
123, Accounting for Stock Based Compensation. The fair value of
these options was estimated at the date of grant using the
Black-Scholes option-pricing model for the pro forma amounts with
the following weighted average assumptions:
Three Months Ended Nine Months Ended
September 30, September 30,
1998 1997 1998 1997
------------------- ------------------
Risk-Free Interest Rate 5.6% -- 5.6% --
Expected Life 5 years -- 5 years --
Expected Volatility 153.0% -- 153.0% --
Expected Dividends -- -- -- --
13
ATLANTIC INTERNATIONAL ENTERTAINMENT, LTD. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Uunaudited) (Continued)
September 30, 1998
Note 6 - INCENTIVE STOCK OPTION PLAN (CONTINUED)
The pro forma amounts are indicated below (in thousands, except per share
amounts):
Three Months Ended Nine Months Ended
September 30, September 30,
1998 1998
---- ----
Net Income (Loss):
As Reported (935,140) (392,174)
Pro Forma (1,180,950) (3,306,665)
Basic Net Income (Loss) Per Share of Common Stock:
As Reported (.09) (.04)
Pro Forma (.11) (.32)
Diluted Net Income (Loss) Per Share of Common Stock:
As Reported (.09) (.04)
Pro Forma (.11) (.32)
Note 7 - BUSINESS AGREEMENTS
In February 1998, the Company entered into an agreement with ELG
Health Management Services ["ELG"] to market the Atlantic
International Medical ["AIM"] products and services. ELG will
provide the Company 40% of the net profits from the sale and
distribution of medical products.
In February 1998, the Company entered into a Development Service
Agreement with International Transaction System Corp. ["ITS']. The
Company's responsibilities under the agreement include engaging in
the development activity required to host ITS on the Company's
software and selling debt card processing [`DCP']. ITS'
responsibilities include development activity required to develop
the DCP test methodology and/or test cases so that the Company may
validate correct operation of the DCP and provide service support.
Under the Agreement, the Company paid $20,000 to acquire access to
DCP through ITS for the purpose and exclusive application in the
Company's software. Transaction fees earned by customers will be
distributed 75% and 25% to the Company and ITS, respectively. The
initial term of the agreement is 10 years, and automatically renews
in 5 year consecutive periods, unless terminated by either party.
14
ATLANTIC INTERNATIONAL ENTERTAINMENT, LTD. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Uunaudited) (Continued)
September 30, 1998
Note 7 - BUSINESS AGREEMENTS CONTINUED
On September 28, 1998, the Company entered into and closed on an
agreement of purchase and sale with Cybergames, Inc. for the
purchase of several of the company's licensees and the exchange of
the company's accounts receivable from said licensees. The total
purchase price was $ 3,147,000 payable $ 227,000 in cash and
$2,920,000 in stock of Cybergames, Inc. (730,000 shares).
Note 8 - LEGAL PROCEEDING
On September 3, 1998, Graeme Allan Green, a former director of
COMS21 and Felscot PTY LTD., a company in which Mr. Green has a
substantial interest ("Green Group), filed an application against
the Company, COMS21 and the directors of COMS21 in the Australian
Federal Court. In addition, the Green Group has made its own offer
to purchase the COMS21 stock. The Company has accepted approximately
11,160,000 shares of COMS21 stock in exchange for 1,160,000 shares
of the Company stock. Counsel believes that the above action is
without merit and will not materially affect the Company's results
of operation and cash flow. The Company believes that it can still
complete the acquisition of the majority of the COMS21 stock.
Note 9 - INVESTMENT
In the third quarter of 1998, the Company invested $2,000,000 in a
5% convertible debenture note from a South African company, Atlantic
International Entertainment, Ltd. South Africa. The debenture is
convertible into common stock by December 31, 2000 or the listing of
the South African Company, whichever comes first.
15
ATLANTIC INTERNATIONAL ENTERTAIMENT, LTD. AND SUBSIDIARIES
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS RECENT DEVELOPMENTS
On April 3, 1998 the company entered into a Securities Purchase
Agreement for the sale of $500,000 of a newly created 5% Convertible
Preferred Stock. The Agreement also grants the purchaser the right
to purchase up to an additional $2,500,000 in said class of
securities at market prices. The preferred stock is convertible into
the Company's common stock at the purchaser's option. In June 1998
the second tranche for an additional $500,000 was sold under the
same rights and restrictions.
On April 30, 1998, the Company entered into a Securities Purchase
Agreement with Hosken Consolidated Investments, Ltd. ["HCI"], where
HCI purchased one million shares of the Company's common stock for
$4,000,000 pursuant to Regulation D.
In May 1998, the Company's wholly-owned subsidiary, AIE, Australia,
Ltd. submitted an acquisition bid for an Australian listed company,
Coms21. The Company offered Coms21 shareholders the equivalent of
$.70 Australian dollar per share in the form of the Company's U.S.
shares.
In May of 1998, the Company instituted a Section 125 benefit plan
for its Employees. In June of 1998, the Company instituted a 401K
Employee benefit plan on behalf of its Employees. The Company is not
required to make matching contributions under this plan.
In the second quarter of 1998, the Company completed installations
of four new licenses, two for Internet Casino Extension (ICE) and
two for webSports products.
In the third quarter of 1998, the Company invested $2,000,000 in a
5% convertible debenture issued by a foreign South Africa company
which is partially owned by HCI
On September 28, 1998, the Company entered into and closed on an
agreement of purchase and sale with Cybergames, Inc. for the
purchase of several of the company's licensees and the exchange of
the company's accounts receivable from said licensees. The total
purchase price was $ 3,147,000 payable $ 227,000 in cash and
$2,920,000 in stock of Cybergames, Inc. (730,000 shares).
16
ATLANTIC INTERNATIONAL ENTERTAIMENT, LTD. AND SUBSIDIARIES
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RESULT OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
NET REVENUES. The Company's revenues decreased approximately 66% in
the third quarter 1998 over the same period in 1997. Revenues from
operations in the third quarter 1998 were $ 789,013, as compared
with $ 2,306,017 for the same period in 1997. The decrease in
revenues was the result of the development of the new product
version. The Company stopped promotion of the old version and did
not allocate large resources to sales and marketing. The Company
currently intends to conduct conservative sales and marketing
campaign for its new product and expects revenues to increase
modestly.
COST OF REVENUES. Cost of revenues as a percentage of net revenues
increased in the third quarter 1998 to 14 percent from 6 percent in
the third quarter 1997. The increase resulted from a decrease in
revenues (cost of revenues is not directly related to revenues) and
expenses related to the development of the new product version.
OPERATING EXPENSES. Operating expenses increased by 28 percent or $
171,475 in the third quarter 1998 over the same period in 1997. The
increase was largely due to global expansion efforts, expenses
related to product development and increased support staffing.
PROVISION FOR DOUBTFUL ACCOUNTS. Provision for doubtful accounts in
the third quarter 1998 were $ 1,046,295 as compared with $ 0 for the
same period in 1997. The increase resulted from a major customer
forced to cease operations due to non-industry and software related
matters, and management taking an conservative approach in recording
its provision for doubtful accounts. The Company currently expects
that the provision for doubtful accounts will not increase at the
same rate going forward.
NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
NET REVENUES The Company's net revenues for the nine months ended
September 30, 1998 were $ 3,497,281 which represented a 14 percent
decrease from the same period of the prior year. The decrease in
revenues was the result of the development of the new product
version. The Company stopped promotion of the old version and did
not allocate large resources to sales and marketing. The Company
currently intends to conduct aggressive sales and marketing campaign
for its new product and expects revenues to increase modestly.
COST OF REVENUES. Cost of revenues as a percentage of net revenues
for the nine months ended September 30, 1998 was 14 percent as
compared to 7 percent for the same period of the prior year. The
increase resulted from a decrease in revenues (cost of revenues is
not directly related to revenues) and expenses related to the
development of the new product version.
17
ATLANTIC INTERNATIONAL ENTERTAIMENT, LTD. AND SUBSIDIARIES
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RESULT OF OPERATIONS CONTINUED
OPERATING EXPENSES. Operating expenses for the nine months ended
September 30, 1998 increased approximately 50 percent to $ 2,216,835
as compared to $ 1,471,504 for the same period of the prior year.
The increase was largely due to global expansion efforts, expenses
related to product development and increased support staffing.
PROVISION FOR DOUBTFUL ACCOUNTS. Provision for doubtful accounts for
the nine months ended September 30, 1998 were $ 1,213,349 as
compared with $ 0 for the same period in 1997. The increase resulted
from a major customer forced to cease operations due to non-industry
and software related matters, and management taking an conservative
approach in recording its provision for doubtful accounts. The
Company currently expects that the provision for doubtful accounts
will not increase at the same rate going forward.
LIQUIDITY AND CAPITAL RESOURCES
Cash, cash equivalents and marketable securities, which consist
primarily of high risk, priced securities totaled $6,439,916 at
September 30, 1998 compared to $21,385 at December 31, 1997. The
increase in cash, cash equivalents and marketable securities was due
primarily to cash proceeds from the sale of Common Stock
($4,000,000) pursuant to Registration Statement S-8, issuance of
Common Stock of a foreign public traded company in a proposed
takeover of the foreign company ($3,770,000) and issuance of Common
Stock of a public traded company (purchaser) in lieu of certain
assets sold to the purchaser ($2,137,000). The increase was
partially offset by cash used for operations and a $2,000,000
debenture note issued by a foreign corporation. Management believes
that existing cash, cash equivalents, marketable securities and
anticipated cash generated from operations will be sufficient to
satisfy the Company's currently anticipated cash requirements.
18
ATLANTIC INTERNATIONAL ENTERTAINMENT, LTD. AND SUBSIDIARIES
PART II
Item 1. Legal Proceedings
Litigation - The Company is party to litigation arising from the
normal course of business. In management's' opinion, this
litigation will not materially affect the Company's financial
position, results of operations or cash flows.
An application has been filed against the Company claiming that the
Company made false and misleading statements in connection with a
proposed takeover. Counsel believes that the application is without
merit and will not materially affect the Company.
Item 2. Changes in Securities
This Item is not applicable to the Company.
Item 3. Defaults upon Senior Securities
This Item is no applicable to the Company.
Item 4. Submission of Matters to a Vote of Security Holders
This Item is not applicable to the Company.
Item 5. Other Information
This Item is not applicable to the Company.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
27 Financial Data Schedule
19
In accordance with the requirements of the Securities Exchange Act
of 1934, the Registrant caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Atlantic International Entertainment, Ltd.
Date: November 16, 1998 By: /s/ Richard A. Iamunno
-----------------------------
(Signature)
Richard A. Iamunno, President
And Chief Executive Officer
Date: November 16, 1998 By: /s/ David P. Halaburda
-----------------------------
(Signature)
David P. Halaburda
Chief Financial Officer
20