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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended July 31, 1996
[_] TRANSITION REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1943
For the transition period from ________________ to _________________
Commission file number: 000-20759
AMERICAN ARTISTS FILM CORPORATION
(Exact Name of Small Business Issuer as Specified in its Charter)
MISSOURI 43-1717111
(State or jurisdiction of (I.R.S. employer
incorporation or organization) identification No.)
1245 FOWLER ST., N.W. ATLANTA, GEORGIA 30318
(Address Principal Executive Offices) (Zip code)
Issuers telephone number, including area code (404) 876-7373
Securities registered under to Section 12(b) of the Exchange Act:
NONE
Securities registered under Section 12 (g) of the Exchange Act:
CLASS A COMMON STOCK, $.001 PAR VALUE PER SHARE
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days. Yes X No___
---
Check if there is no disclosure of delinquent filers in response to Item
405 of Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendments to this Form 10-KSB.[_]
State issuer's revenues for its most recent fiscal year: $1,711,639
The aggregate market value of the voting stock held by non-affiliates of
the Registrant amounted to $3,970,010 at the close of business on December 1,
1996: Class A Common Stock, .001 par value, $3,970,010. There is no established
market for Class B Common Stock, $.001 par value.
State the number of shares outstanding of each of the issuer's classes of
common equity: 732,620 shares of Class A Common Stock, $.001 par value per
share, and 5,502,277 shares of Class B Common Stock, $.001 par value per share,
were outstanding at December 1, 1996.
Documents incorporated by reference: NONE
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AMERICAN ARTISTS FILM CORPORATION
FORM 10-KSB
TABLE OF CONTENTS
PART I Page
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Item 1. Business................................................ 1
Item 2. Properties.............................................. 6
Item 3. Legal Proceedings....................................... 6
Item 4. Submission of Matters to a Vote of
Security Holders....................................... 7
PART II
Item 5. Market for the Company's Common Equity
and Related Stockholder Matters........................ 7
Item 6. Management's Discussion and Analysis or
Plan of Operation...................................... 7
Item 7. Financial Statements.................................... 11
Item 8. Changes in and Disagreements With
Accountants on Accounting and Financial
Disclosures............................................ 11
PART III
Item 9. Directors, Executive Officers, Promoters and
Control Persons of the Registrant; Compliance
with Section 16(a) of the Exchange Act of 1934......... 12
Item 10. Executive Compensation.................................. 14
Item 11. Security Ownership of Certain Beneficial
Owners and Management.................................. 16
Item 12. Certain Relationships and Related
Transactions........................................... 17
PART IV
Item 13. Exhibits, Financial Statement Schedules
and Reports on Form 8-K................................ 19
SIGNATURES................................................................ 21
INDEX TO FINANCIAL STATEMENTS.............................................F-1
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PART I
ITEM 1. BUSINESS
INTRODUCTION
The Company was incorporated as Setab Alpha, Inc. ("Setab Alpha") in July
1995 under the laws of the State of Missouri for the purpose of engaging in a
merger or other business combination with a then unidentified operating company.
In May 1996 Setab Alpha entered into an agreement ("Merger Agreement") with
American Artists Film Corporation ("Old American Artists") for the merger ("the
Merger") of Setab Alpha and Old American Artists on the terms described below.
The Merger was consummated on October 7, 1996 (the "Merger Date"), at which time
the name of the Company was changed to American Artists Film Corporation.
Old American Artists, a Georgia corporation, was formed in July 1991. Old
American Artists and its subsidiaries were engaged in the production of
television commercials, the development and production of television specials
and related properties, and the development of feature-length motion picture
screenplays and other media products for possible future production or license.
In August 1993 Old American Artists acquired all of the outstanding capital
stock of First Light Entertainment Corporation ("First Light") from its founder
and sole shareholder Vivian Jones. In June 1994 Old American Artists subscribed
for 49% of the outstanding capital stock of Diversity Filmworks, Inc.
("Diversity"), formerly First Light Diversity, Inc., which was organized and is
51%-owned by Tyrone C. Johnson. See Item 12. - " Certain Relationships and
Related Transactions."
On October 7, 1996, Setab Alpha completed a public offering (the "Public
Offering") of 700,000 shares of its Class A common stock, par value $.001 per
share (the "Class A Common Stock"). The net proceeds of its Public Offering were
$15,477, which Setab Alpha used to pay existing liabilities.
Unless the context otherwise requires, the Company is referred to herein as
"the Company" or "American Artists," and the Company, together with its
subsidiaries, is referred to as "AAFC Group." Old American Artists is deemed to
be the predecessor of the Company, and, unless the context otherwise requires,
discussion of the business or operations of the Company and AAFC Group include
those of the Old American Artists.
The Company's executive offices are located at 1245 Fowler Street, N.W.,
Atlanta, Georgia 30318, and its telephone number is 404-876-7373.
THE MERGER
By reason of the Merger, the stockholders of Old American Artists became
shareholders of the surviving corporation, the separate existence of Old
American Artists ceased and the business and management of Old American Artists
became the business and management of the Company. Each of the 9,407,837
outstanding shares of Old American Artists common stock became 0.5862 share of
the capital stock of the Company, of which the first 100 shares issued to each
Old American Artists shareholder was issued as Class A Common Stock (the "Class
A Common Stock") and the remainder as Class B common stock, $0.001 par value per
share (the "Class B Common Stock"), and outstanding options and warrants to
purchase an aggregate of 3,840,328 shares of common stock of Old American
Artists became options and warrants to purchase an aggregate of 2,251,200 shares
of Class B Common Stock.
As a result of the consummation of the Merger, the Old American Artists
shareholders held, immediately following the Merger Date, 88.7% of the
outstanding capital stock of the Company (including all of the outstanding
shares of Class B Common Stock), and the pre-Merger shareholders of Setab Alpha
(including those persons who purchased Class A Common Stock in the Public
Offering) held the remaining 11.3% of the capital stock of the Company. Each
share of Class B Common Stock is convertible at any time at the election of the
holder into one share of Class A Common Stock. The Class A Common Stock and the
Class B Common Stock are identical in all respects and the holders thereof will
have equal rights and privileges, except with respect to the election of
directors. With respect to the election of directors, holders of Class B Common
Stock, voting as a separate class, are entitled to elect a number of directors
equal to the greater of (i) the number (rounded to the
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nearest whole number) that bears to the total number of directors of the Company
the same ratio that the number of outstanding shares of Class B Common Stock
bears to the aggregate number of outstanding shares of Class A and Class B
Common Stock, or (ii) the smallest number of directors that constitutes a
majority of the Board of Directors. Holders of Class A Common Stock voting as a
separate class will be entitled to elect all of the other members of the Board
of Directors.
Pursuant to the Merger Agreement, for a period of 365 days after the Merger
Date, none of the shares of Class A or Class B Common Stock received in the
Merger, the shares of Class B Common Stock issued upon exercise of options and
warrants outstanding at the Merger Date, or shares of Class A Common Stock
issued upon conversion of Class B Common Stock issued in the Merger, may be
sold, transferred or otherwise disposed of without the prior written consent of
the Company.
BUSINESS OF AMERICAN ARTISTS
Since its organization by Steven D. Brown and Rex Hauck in July 1991,
American Artists' activities have consisted primarily of producing network
television specials, developing other television specials for possible future
production, developing various feature-film screenplays and treatments for
possible future production, and seeking to arrange financing for production and
exploitation of one or more of its feature-film properties.
Angels. In 1994 AAFC Group produced with Greystone Communications, Inc.
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("Greystone"), two 2-hour prime time specials for the NBC television network:
"Angels: The Mysterious Messengers," hosted by Patty Duke, and "Angels II:
Beyond the Light," hosted by Stephanie Powers. Both programs were initially
licensed to NBC, which aired the first program twice and the second program
once. NBC's rights to further airings expired in November, 1996.
AAFC Group also entered a 3-year agreement in July 1994 with Alfred Haber
Distribution, Inc. for foreign distribution of the Angels programs. Under that
agreement AAFC Group and Greystone receive 75% of any license fees, less
expenses, obtained from licensing the Angels programs outside the United States.
License fees have now been received for television, cable and satellite
broadcasts of the programs in more than 55 countries.
Under a May, 1994 agreement, Calling Card Company, Inc. ("CCC") marketed home
videos of the Angels programs through advertising during the NBC network
broadcast, providing royalties, which were shared by NBC, American Artists and
Greystone, of $223,000 through July 31, 1996. In addition, a video edition of
the first Angels program has been separately marketed by Time-Life Video under
an August 1994 agreement which granted Time-Life exclusive home-video rights to
the program in the United States and Canada for a five-year term. The agreement
provided for $100,000 in non-refundable advance royalties and guaranteed minimum
royalties of $10,000 per year for the duration of the agreement after recoupment
of the advanced royalties. Royalties under the agreement are shared among NBC,
American Artists, and Greystone.
In June 1996 AAFC Group entered a three-year license agreement authorizing
Turner Original Productions, Inc. ("Turner") to broadcast re-edited versions of
two programs previously co-produced on the subject of "Angels" on TBS
Superstation for a total license fee of $100,000. Turner is permitted to air
each of the Angels programs 18 times over the three year period. AAFC Group
bears any obligation for residuals and must refrain from licensing the programs
to any other broadcaster in the United States during the term of the license.
Turner began airing the programs in October 1996.
Another short treatment of the Angels theme was developed and produced for
CCC at a cost to AAFC Group of approximately $30,000. Payments to AAFC Group
are based on revenues generated by CCC through use of the treatment as a sales
aid. In fiscal 1996, AAFC Group determined that because of the low current
level of sales experienced by CCC, revenues due to AAFC Group from CCC for this
project are likely to be insufficient to cover the associated costs to AAFC
Group.
AAFC Group also developed a book entitled Angels: The Mysterious Messengers,
edited for American Artists by Mr. Hauck and published by Ballantine Books, Inc.
The book has also been published in German, Italian, French and Spanish
editions. Advance royalties for the book amounted to $250,000.
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The agreement among American Artists, Greystone and NBC provided for (i) the
payment of license fees by NBC to American Artists and Greystone and (ii) the
payment to NBC of 50% of the royalties from videos sold during the NBC
broadcasts and 20% of the royalties from videos sold by Time-Life Videos. Under
an agreement dated May 1994 AAFC Group and Greystone agreed to divide equally
all revenues from the two television specials and certain derivative properties.
The scope of that agreement and the definition of allowable expenses have become
the subject of dispute between the parties and are the subject of a pending
arbitration proceeding in Los Angeles, California. See " - Intellectual
Property" and Item 3. - "Legal Proceedings."
AAFC Group financed development of the initial Angels program primarily
through the private placement of $128,000 of its Revenue Participating Joint
Venture Investment Units with eight accredited investors. The private placement
was completed in February 1994. Investors receive 100% of AAFC Group's revenues
from the first television special and ancillary rights until their initial
investment has been returned, 50% thereafter until an equal additional amount
has been received, and 25% of any further revenues. The investors also receive
5% of AAFC Group's revenues from the second television special. Through July
1996 the investors had received $1.30 for each dollar of their investment.
Additional distributions may be made later depending on future revenues of the
Angels programs.
Other Television Projects. Turner Original Productions, Inc., has exercised
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its option pursuant to a development agreement ("Development Agreement") with
AAFC dated June 14, 1996, to fund the production of a one-hour show currently
titled Target Earth to be completed and delivered to Turner on or before
February 16, 1997. The budgeted cost of Target Earth is approximately $350,000
inclusive of development monies previously paid under the Development Agreement.
Turner has exclusive rights to Target Earth in the United States while AAFC
retains a limited participation interest in any foreign revenues.
Since 1995 AAFC Group has been developing, under Mr. Hauck's supervision, the
concept for a related group of television specials and other media properties
pertaining to the forthcoming end of the second millennium of the modern era.
The development work has included historical and scientific research,
development of themes and preparation of story treatments.
AAFC Group has presented its "millennium" concept and certain treatments to
several over-the-air and cable television networks. Several networks have
indicated interest in the properties but AAFC Group is unable to state whether
the interest will continue or whether the parties will reach a mutually
satisfactory agreement through negotiation. AAFC Group's goal is also to derive
related video and book properties from any television program that might be
produced.
In October 1994 AAFC Group organized Millennium Group, L.L.C. ("MG"), as a
Georgia limited liability company with itself as Manager, for the purpose of
producing and exploiting an initial one-hour television special on the subject
of the millennium. MG has financed certain research and development of the
millennium materials through a private placement of $50,000 of limited liability
company interests with three accredited investors. If MG is able to obtain
network or other funding for producing the program, the investors are entitled
to recover 100% of MG's net income from the program until their initial
investment has been returned, 50% thereafter until an equal additional amount
has been received, and 10% of any further net income. All other net income
would be paid to AAFC Group as management fees.
Feature Films. In April 1996 AAFC Group organized Death and Taxes Film
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Company, L.L.C. ("D&T"), as a Georgia limited liability company with itself as
Manager, for the purpose of producing a feature-length motion picture based on a
screenplay written by Mr. Hauck currently titled "I.R.S., Death and Taxes."
AAFC Group has begun its efforts to finance D&T's production and distribution
costs for the film through a private placement of up to $4,000,000 of limited
liability company interests in an offering limited to "accredited investors."
After providing for costs associated with production of the film, the investors
would receive all available funds of D&T up to 110% of their initial investment.
Thereafter, all revenues would be divided equally between AAFC Group (as license
fees for the film property) and the investors.
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If the full amount of the $4,000,000 sought is obtained, AAFC Group believes
that "I.R.S., Death and Taxes" could be produced with that financing. In the
event the offering raises the minimum of $2,000,000, it is anticipated that the
remaining production budget could be financed through one or both of the
proceeds from other equity offerings or fees from the pre-production sale of
certain distribution rights. There can be no assurance that D&T will be able to
complete the private placement or finance the proposed film in an alternative
way, nor that the film would provide a profit to AAFC Group if produced.
AAFC Group also has several other film properties (screenplay or treatment)
in various stages of development, and holds an option to acquire one film
property. No commitments have been obtained for financing production of any of
those properties.
In addition, AAFC Group is also negotiating with potential advertisers,
investors and other parties for erecting at the Underground Atlanta area in
Atlanta, Georgia, a large screen video display for news and advertising similar
to the one at Times Square in New York. This project is in the development stage
and is subject to a variety of conditions, including sufficient commitments by
advertisers, the availability of financing, governmental approval and compliance
with applicable regulatory requirements. There is no assurance that the project
can be brought to fruition or would be profitable for AAFC Group if completed.
Under a February 1992 agreement, AAFC Group issued 250,000 shares of its
common stock to Icon International, Inc. ("Icon"), in exchange for $500,000 in
credits for certain media advertising. The availability of the media credits
expires December 31, 1997, but up to one-half of any credits not used by that
date may be returned to Icon in exchange for a portion of the shares previously
issued (calculated at the rate of $2.00 of unused media credits for each share
of stock). AAFC Group anticipates using the credits, at least in part, for
promoting its film and video properties.
FIRST LIGHT ENTERTAINMENT CORPORATION AND DIVERSITY FILMWORKS, INC.
First Light and Diversity (collectively, the "Commercials Companies") produce
television commercials on a contract basis for advertisers and their agencies.
They typically enter short-term agreements for the production of the
commercials, whose scripts or story outlines ("story boards") are provided by
the client. The Commercials Companies then typically arrange all production
aspects of the commercials, including casting, location selection and
contractual arrangements with the director and other production personnel. The
Commercials Companies use on a regular basis, the services of approximately
eight independent directors, some of whom direct only commercials by the
Commercials Companies. These directors are paid on a fixed fee basis determined
by mutual agreement during the commercial production budgeting process, although
other compensation arrangements may be used from time to time, including
director participation in the gross profits of commercials.
The Commercials Companies produce their commercials on a "firm bid" basis as
opposed to a "cost plus fixed fee" basis. If a commercial is produced within the
framework of "firm bid," the production company is responsible for costs in
excess of the budget, unless approved by the client. If the commercial is
filmed under "cost plus fixed fee" arrangement, the Commercials Companies
receive a predetermined fee for their work and approved production costs are
charged to the client as incurred. Despite the differences in the structure of
the two forms of bids, the risk of costs overage to the Commercials Companies
are not substantially greater for "firm bid" because the Commercials Companies
are also responsible for unapproved costs overages that exceed the budget for a
"cost plus fixed fee" bid. Production company personnel in tandem with the
advertising agency responsible for the commercial, must carefully monitor costs
throughout the filming process, whether a "firm bid" or "cost plus fixed fee"
arrangement is operating. The agreed upon bid might be altered because the
agency, client and director agree upon a new creative option or because of
unexpected occurrences such as inclement weather or unavailability of location.
In most circumstances, the Commercials Companies bill the advertising agency for
50% of the entire budget as stated in the bid, to be paid in advance of, or on
the first day of, principal photography. The remainder of the bid price is
generally paid in one or more installments by the agency within 30 to 120 days
after completion of principal photography.
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In marketing their services the Commercials Companies emphasize the talents
of the directors with whom they work, their skills in cost control and timely
production, and the advantages of Atlanta as a production center. In its work,
Diversity especially emphasizes use of directors and other production staff from
diverse cultural and ethnic backgrounds. Although most of the commercials
produced by the Commercials Companies are filmed in Atlanta, they are
experienced at producing commercials throughout North America.
In fiscal 1996 the Commercials Companies produced 41 commercials for net
revenues of $2,467,000, compared to 95 commercials and $3,057,000 in net
revenues for fiscal 1995. Based on the volume of story boards presently being
submitted to it for bids or cost estimates, management of AAFC Group anticipates
an improvement in revenue levels of the Commercials Companies during fiscal
1997. For fiscal 1996, three of the Commercial Companies' customers accounted
for fees equal to 18.5%, 12.5% and 10.3% of consolidated revenues. The
Commerical Companies obtain their revenues from discrete project assignments
obtained from various clients. Accordingly, while the fees from one or more
clients may, in any year, be significant as the result of the size of a project
undertaken for that cleint, the Commmerical Companies are not dependent on any
one client for a material amount of their revenues.
COMPETITION
The industries in which AAFC Group operates are extremely competitive,
including extreme price competition in the television commercial industry. Many
of the competitors are major corporations with substantially greater resources
than AAFC Group. Although the demand for low-cost quality media products has
expanded dramatically with the growth of cable, video and foreign markets, the
production of television specials and feature films remains dominated by major
studios and distributors. Some major distributors such as Walt Disney, Turner
Broadcasting and Fox Broadcasting have acquired or developed their own
production companies. In this environment AAFC Group competes on the basis of
the artistic creativity of its projects and its commitment to low-cost quality
production.
The production of television commercials is highly fragmented and AAFC Group
competes in that field with numerous national and regional companies, no one of
which has a major share. AAFC Group competes primarily on the basis of the
skills of its executive producers, directors and production staff, and the
advantages of Atlanta as a production center.
INTELLECTUAL PROPERTY
AAFC Group's success and ability to compete will be dependent in part upon
its ability to obtain and maintain protection for its current and future
literary properties, to defend its intellectual property rights and to operate
without infringing on the proprietary rights of others. While AAFC Group relies
on a combination of copyrights and trademarks to establish and protect its
intellectual property rights, the management of AAFC Group believes that factors
such as the technical and creative skills of its personnel are more essential to
its success and ability to compete. There can be no assurance that any
intellectual property rights of AAFC Group will provide competitive advantages
or will not be challenged, invalidated or circumvented by competitors. There can
be no assurance that disputes will not arise concerning the ownership of
intellectual property. Furthermore, there can be no assurance that intellectual
properties will not become known or be independently developed by competitors or
that AAFC Group will be able to maintain the confidentiality of information
relating to its literary properties.
EMPLOYEES
In its production activities AAFC Group relies primarily upon independent
third parties for production facilities and personnel. AAFC Group currently has
ten full-time employees. A portion of the salaries payable to AAFC Group's
employees is paid, from time to time, directly from the production budgets of
the projects on which the individuals are working. AAFC Group hires additional
personnel for projects on a contract basis as needed.
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Such individuals are generally paid directly from the budget of the projects on
which they are working. AAFC Group is a Signatory of The Writers Guild of
America and is subject to its industry-wide collective bargaining agreement.
AAFC Group is not a party to any other collective bargaining agreement. However,
it is possible that some of AAFC Group's business activities may be affected by
the existence of collective bargaining agreements since many of the performing
artists and technical personnel, such as cameramen and film editors that it
employs from time to time on specific projects are members of unions. The
extent to which collective bargaining agreements may affect AAFC Group is
difficult to estimate and strikes related to collective bargaining or other
collective action by union members could, in the future, delay or disrupt
activities.
ITEM 2. PROPERTIES
AAFC Group leases as its headquarters a facility of approximately 8,000
square feet located at 1245 Fowler St., N.W., in Atlanta, Georgia. Rent under
the lease, which expires in November 1997, is $3,300 per month. AAFC Group does
not own sound stages and related production facilities (generally referred to as
a "studio") and, accordingly, does not have the fixed payroll, general,
administrative and other expenses resulting from ownership and operation of a
studio. Studio facilities are generally available for rental as needed.
ITEM 3. LEGAL PROCEEDINGS
On or about May 1, 1995, Greystone Communications, Inc. (Greystone"), AAFC
Group's co-producer of the Angels television specials, commenced an arbitration
proceeding against Old American Artists before the American Arbitration
Association Commercial Arbitration Tribunal ("AAA") in Los Angeles, California,
concerning relations under their 1994 co-production agreement. Greystone's
principal issues relate to certain costs claimed by AAFC Group and to
Greystone's contention that it is entitled to participate in revenues from the
book Angels: The Mysterious Messengers. AAFC Group, in its counterclaim,
alleges that Greystone has received excess revenue distributions based upon
overstatement of its expenses. Greystone is seeking compensatory and punitive
damages, attorney's fees, costs and interest. In December 1995, the arbitrator
issued an order excluding certain claims by Greystone. The remaining claims of
the parties have been scheduled for hearing by the AAA on January 28, 1997.
While it is unable to predict the results of the arbitration proceedings,
management believes that the possibility is remote that any recovery by
Greystone would exceed $150,000.
A law suit filed by a former employee in the Superior Court of Fulton County,
Georgia, against both Old American Artists and its chief executive officer for
alleged damages arising from circumstances relating to termination of his
employment and for alleged unpaid compensation was dismissed September 19, 1996,
on motion of the plaintiff.
There has been substantial litigation in the entertainment industry with
respect to literary properties. AAFC Group has no formal procedure for
monitoring the possible infringement of its literary properties by others or for
confirming that its literary properties do not infringe the rights of others,
but AAFC Group does address specific issues as they are brought to its attention
from time to time. In 1992 AAFC Group received approximately $350,000 in
settlement of its claim that a certain motion picture then in production
infringed upon a literary property of AAFC Group.
In 1996 counsel for MovieAmerica Corporation expressed to AAFC Group
"concerns" that the four feature film properties transferred by Messrs. Steven
D. Brown and Rex Hauck to Old American Artists at the time of its organization
in 1991 were or should have been properties of MovieAmerica Corporation by
reason of Mr. Brown's duties while he was an employee of MovieAmerica
Corporation. See Item 9 - "Directors, Executive Officers, Promoters, and Control
Persons of the Registrant." Messrs. Brown and Hauck have assured AAFC Group that
MovieAmerica Corporation has no ownership interest in the four literary
properties. No legal opinion on this issue has been sought by AAFC Group.
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ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
PART II
ITEM 5. MARKETS FOR THE COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Class A Common Stock was approved by the National Association of Security
Dealers (NASD) for an unpriced quotation on the Over-the-Counter (OTC)
Electronic Bulletin Board under the symbol "AAFC" on November 15, 1996. As of
the Decemeber 1, 1996, there were 732,620 shares of Class A Common Stock
outstanding and 199 record holders of such shares. The Class B Common Stock is
not traded on any established public market. As of the December 1, 1996, there
were 5,502,277 shares of Class B Common Stock outstanding and 126 record holders
of such shares. The Company has not declared or paid any cash dividends on its
Class A or Class B Common Stock since its formation, and the board of directors
currently intends to retain all of its earnings, if any, for its business. The
declaration and payment of cash dividends will be at the discretion of the board
of directors. As of December 1, 1996, there were options and warrants
outstanding to purchase an aggregate of 2,286,074 shares of Class B Common
Stock.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
GENERAL
As discussed elsewhere herein, on October 7, 1996, Old American Artists and
Setab Alpha merged in a transaction in which each of the 9,407,837 shares of Old
American Artists common stock became .5862 shares of Common Stock of the
Company, and the Company succeeded to the business of Old American Artists.
Old American Artists is considered the predecessor to the Company, and prior
to and at the completion of the Merger, the Company, then Setab Alpha, had no
material assets, liabilities or operations. Additionally, for accounting
purposes, the Merger is being accounted for as a recapitalization of Old
American Artists, with the operating results of Old American Artists prior to
the Merger becoming the operating results of the Company for that period.
Accordingly, the following discussion of financial condition and results of
operations focuses on the financial condition and results of operations of Old
American Artists.
AAFC Group is engaged in two lines of business; the development and
production of television, cable and feature films, including documentaries, and
in the contract production of films, generally television commercials.
Revenues from the license or sale of films produced by American Artists are
generally recognized when the film is exhibited or is available for distribution
in the applicable market. In general, the majority of the revenue to be derived
from a film will be earned during the two to three years following its initial
release. Accordingly, film revenues will fluctuate dependent on the timing of
AAFC Group's production and release of films.
Additionally, in some instances the level of revenues generated by a film in
the periods immediately following its release may not be directly related to the
film's success. As described below, AAFC Group might sell certain distribution
rights, in advance of production, for fixed amounts as a means of financing
production costs. In those instances, the film's success might not affect
revenues initially, but could generate revenues later as the result of
distribution in secondary markets or the sale of ancillary products.
AAFC Group capitalizes the costs incurred to develop, produce and print
films, as well as advertising and other costs that benefit future periods.
Capitalized film costs are amortized, using the individual film forecast method,
under which capitalized costs are amortized based on total projected gross
revenues.
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Several factors can affect the relationship that amortized film costs bear to
film revenues. AAFC Group has in the past exchanged, and may in the future,
exchange interest in the revenues from certain or all distribution for
contributions towards the costs of production. Capitalized costs, and the
related amortization, are reduced by such contributions, while revenues are
reduced for outside interests. Accordingly, the terms of the arrangements,
which can vary from film to film, in addition to the total costs of the film,
will affect the relationship of film costs to film revenues.
AAFC Group engages in the commercial production business through its wholly-
owned subsidiary, First Light, and through American Artists' 49% ownership of
Diversity (First Light and Diversity, together, being referred to as the
"Commercials Companies"). AAFC Group's commercial production services are
performed by the Commercials Companies under short-term (typically less than two
months) agreements. The Commercials Companies generally use fixed fee
agreements. Revenues and costs will therefore vary based on the number of
production assignments obtained and completed in any particular period, and the
profitability of the individual assignments. The number of production
assignments obtained in any particular period will be influenced by both the
overall level of commercial production activity in the markets in which the
Commercials Companies operate, and their success in competitive biddings, and
can therefore fluctuate significantly. Overall commercial production activities
are influenced by, among other things, the general economic trends that effect
the advertising plans and expenditures of commercial and not-for-profit
industries and enterprises in the Commercials Companies' geographic markets.
Such general economic trends and conditions can neither be controlled, nor
predicted by AAFC Group. The Commercials Companies' success in competitive
biddings will depend on the potential customer's assessment, relative to other
bidders, of the production, talent and capabilities offered by AAFC Group and
the quoted fee.
The consolidated financial statements of Old American Artists included
elsewhere herein reflect the investment in Diversity accounted for using the
equity method of accounting, under which American Artists' interest in
Diversity's operating results is presented as a single, separate line item in
the consolidated statement of operations, and American Artists' net investment
in and advances to Diversity are presented as a single item in the consolidated
balance sheet. Revenues, as reflected in the consolidated statement of
operations, do not include the revenues of Diversity. Financial information for
Diversity is presented separately in Note 1 of Notes to Old American Artists'
Consolidated Financial Statements. However, in anticipation of the Merger, in
September 1996, Old American Artists and the other stockholder of Diversity
entered into an agreement concerning the size and composition of Diversity's
board of directors. See "Item 12 - Certain Relationships and Related
Transactions." As a result, effective August 1, 1996, American Artists will
consolidate the accounts of Diversity in its consolidated financial statements,
as a result of which the consolidated financial statements in fiscal 1997 will
lack comparability in certain respects to those for the earlier periods.
RISK FACTORS
Certain statements in the following discussion of financial condition and the
results of operations, or elsewhere in this report, represent "forward-looking"
statements as defined in the Private Securities Litigation Reform Act of 1996.
Such statements involve matters that are subject to certain risks and
uncertainties, as a result of which actual future results or events many differ
materially depending on a variety of factors.
The future results of the Company's production of feature films and
television specials are subject to a substantial degree of risk. Each project
is an individual artistic work, and its commercial success is primarily
determined by the reactions of distributors and the general public, each of
which is unpredictable. Historically, many feature films do not generate a net
profit or a return on investment, and there is a substantial degree of risk that
the production and exploitation of a film by AAFC Group would not allow a
recovery of the costs incurred by AAFC Group in its production. Additionally,
as discussed elsewhere herein, AAFC Group will be required to raise significant
capital to pursue the production of the films it is presently developing, either
through the sale of revenue interests in the films, the pre-production sale of
distribution rights, or the sale of equity or debt securities by the Company.
There can be no assurance that the Company will be able to raise the necessary
funds to pursue the production of these films, which creates an additional
uncertainty.
-8-
<PAGE>
In the commercial production of commercials and other properties by the
Commercials Companies, AAFC Group competes in an industry that is highly
fragmented, and the result of the operations of the Commercials Companies will
vary depending on the number of production assignments obtained. The number of
production assignments the Commercials Companies obtain is affected by various
factors discussed above.
RESULTS OF OPERATIONS
YEAR ENDED JULY 31, 1996 COMPARED TO YEAR ENDED JULY 31, 1995
Revenues for the year ended July 31, 1996 ("fiscal 1996") were $1,711,639
which represented a $1,990,082 or 53.8% decline from revenues of $3,701,721 for
the year ended July 31, 1995. However, revenues for Diversity, which is
accounted for on the equity method and therefore not included in consolidated
revenues, increased 327% from $237,810 for the year ended July 31, 1995 to
$777,309 for fiscal 1996. A decline in American Artists' film revenues, from
$882,331 for the year ended July 31, 1995 to $21,995 for fiscal 1996, was the
cause for $860,336 of the decline in revenues. As previously discussed, the
majority of the revenues from a film will be earned during the two to three
years following its initial release. The last film released by American
Artists, Angels II, was released in October 1994, and the decline in revenues is
consistent with the absence of more recently released films.
First Light's revenues from commercial production declined by $1,129,746 or
40.0% from the year ended July 31, 1995 to fiscal 1996, due to a decline in the
volume of assignments obtained. On a combined basis with Diversity, commercial
production revenues declined by 19.4%. Commercial production revenue declined
for the first nine months of fiscal 1996 as a result of both an overall decline
of commercial production activity in the Commercials Companies' markets and a
decline in their rate of success in competitive bids. The increase experienced
by Diversity resulted from the fact that fiscal 1995 represented its first year
of operations, and therefore during the 1995 period Diversity was still in its
start-up phase. During the fourth quarter of fiscal 1996 the Commercials
Companies had revenues of $769,740, representing an increase of $409,235 over
their revenues for the fourth quarter of fiscal 1995. The increase in the
revenues in the fourth quarter of fiscal 1996 reflected increases experienced by
the Commercials Companies in both the number of requests for production
proposals they received, and their rate of success in competitive bidding
situations. On the basis of that experience, management believes that the
decline in revenues experienced in the first nine months of fiscal 1996 was not
necessarily indicative of permanent developments, and believes that commercial
production revenues will increase in fiscal 1997.
Film cost amortization was $15,963 for fiscal 1996, compared to $639,236 for
the year ended July 31, 1995. The decline was due to the decline in film
revenues. First Light's commercial production costs, as a percentage of related
revenues, were 78.8% for the year ended July 31, 1996 as compared to 77.9% for
fiscal 1995. Resulting gross profits for commercial production were $359,040
and $622,674 for the years ended July 31, 1996 and 1995, respectively.
Selling, general and administrative expenses increased $550,121 to $1,351,227
for the year ended July 31, 1996 from $801,106 for fiscal 1995. An increase in
marketing related expenses of approximately $60,000 was a cause of the increase
in SG&A expenses. That increase resulted from increased marketing efforts being
undertaken by the Commercials Companies in an effort to reverse the decline in
their revenues. Also, contributing to the increase in SG&A were costs of $90,000
incurred in pursuing financing for the production of "I.R.S., Death and Taxes,"
and other projects, and legal fees of $60,000 related to the Greystone
arbitration. The remaining increase in SG&A expenses reflect increases in
essentially all categories of SG&A expenses, including an increase of
approximately $226,000 in salaries from the addition of personnel, resulting
from the increase in pre-production activity for "I.R.S., Death and Taxes" and
the Millennium related projects and the Company's change to a public reporting
company.
Interest expense declined from $12,810 in fiscal 1995 to $6,777 for fiscal
1996 due to a decline in outstanding debt.
-9-
<PAGE>
American Artists recognized losses of $194,006 and $59,646 in fiscal 1996 and
1995, respectively, from its investment in Diversity. See Note 1 of Notes to
Old American Artists' Consolidated Financial Statements.
As a result of the foregoing factors (principally the decline in film
revenues, the decline in commercial production revenues, and the increase in
SG&A expenses), AAFC Group incurred a net loss of $1,186,938 for fiscal 1996,
compared to a net loss of $7,793 for the year ended July 31, 1995.
LIQUIDITY AND CAPITAL RESOURCES
AAFC Group's strategy is to finance its operating (i.e. selling, general and
administrative) expenses from the gross profits generated by both its film and
commercial production operations while utilizing equity financing, pre-
production license revenues, and co-producer contributions to finance the
production of its films. Using this strategy, AAFC hopes to insulate itself
from the risks of significant operating losses and negative cash flows, while
retaining the potential for significant profits and positive cash flows from
highly successful films. The success of such a strategy is, however, dependent
on AAFC Group's ability to obtain sufficient, and sufficiently profitable,
commercial production contracts and its ability to produce profitable film
projects.
Operating cash flows were $19,958 in fiscal 1995 and a negative $1,074,135 in
fiscal 1996. These operating cash flows were supplemented by the proceeds from
the issuance of shares of common stock.
Operating cash flows include as a cash outflow expenditures capitalized to
develop and produce motion pictures. Such expenditures were $76,119 and
$714,486 for fiscal 1996 and 1995 respectively. These amounts exclude
development and production costs financed by outside investors which
approximated $347,000 in fiscal 1995. AAFC Group will continue to depend on
financing provided by outside investors, the pre-production sale of distribution
rights, or the proceeds from the sale of its equity securities, to finance the
production of motion pictures. Accordingly, the timing of the production of
motion pictures will depend on the availability of such financing.
AAFC Group is currently planning to film "I.R.S., Death and Taxes," in fiscal
1997, and is currently offering interests of up to $4,000,000 in Death and Taxes
Film Company, L.L.C. ("D&T"), a Georgia limited liability company of which AAFC
Group will be the manager, to obtain production financing. If the full amount
of the $4,000,000 sought is obtained, AAFC Group believes that "I.R.S., Death
and Taxes" could be produced with that financing. In the event the offering
raises the minimum of $2,000,000, it is anticipated that the remaining
production budget could be financed through one or both of the proceeds from
other equity offerings or fees from the pre-production sale of certain
distribution rights. The amounts raised from the sale of interests in D&T will
be used to reduce AAFC Group's investment in the production of the film.
Assuming that financing is obtained on the basis presently proposed, investors
will be entitled to receive, from the revenue interests retained by AAFC Group
(as opposed to granted to other co-producers), all of the revenue up to 110% of
the amount invested, and thereafter 50% of the revenue. The precise effect that
the formation of D&T will have on AAFC Group's future result of operations and
financial condition will depend on the amount raised, and the costs and revenues
from the film, and, therefore, cannot be predicted at this time. There can be no
assurance that AAFC Group will be able to complete the private placement of
interests in D&T, or finance the proposed film in an alternative way, nor that
the film would provide a profit to AAFC Group if produced.
AAFC Group has also been developing a concept for a related group of
television specials and other media preparations pertaining to the forthcoming
end of the second millennium of the modern era. In October 1994 AAFC Group
organized Millennium Group, L.L.C. ("MG"), as a Georgia limited liability
company with itself as Manager, for the purpose of producing and exploiting an
initial one-hour television special on the subject of the millennium. MG has
financed certain research and development of the millennium materials through a
private placement of $50,000 of limited liability company interests with three
accredited investors. AAFC Group has presented its "millennium" concept and
certain treatments to several over-the-air and cable television networks.
-10-
<PAGE>
Several networks have indicated interest in the properties but AAFC Group is
unable to state whether the interest will continue or whether the parties will
reach a mutually satisfactory agreement through negotiation. AAFC Group's goal
is also to derive related video and book properties from any television program
that might be produced. If MG is able to obtain network or other funding for
producing the program, which is currently projected to have a production budget
ranging from $30,000 to $100,000, the investors are entitled to recover 100% of
MG's net income from the program until their initial investment has been
returned, 50% thereafter until an equal additional amount has been received, and
10% of any further net income. All other net income would be paid to AAFC Group
as management fees. Accordingly, the timing of the production of this program,
or the source of the production financing cannot be predicted.
AAFC Group's negative operating cash flows, which include the funding of
Diversity's losses ($194,006 and $59,646 in fiscal 1996 and 1995, respectively)
have, as previously stated, generally been caused by a shortfall in the coverage
of SG&A by film and commercial production profits. Such shortfalls in the
coverage of SG&A by film and commercial production profits will cause AAFC
Group's liquidity to be constrained until film and commercial production
revenues, and the resulting profits, increase. During fiscal 1996, AAFC Group
again financed this shortfall principally by issuing equity securities, and
management anticipates the same will occur in the first half of fiscal 1997. The
use of equity or debt financing will continue to be necessary until film and
commercial production profits are sufficient to cover SG&A expenses, which
cannot be assured. In November 1996 the Company commenced a private placement
offering under Regulation D of the Securities Act of 1933 of an aggregate of
100,000 shares of its Class A Common Stock together with warrants for the
purchase of 33,330 shares of its Class A Common Stock exercisable at a price of
$3.00 per share through June 30, 2000. As of December 9, 1996, the Company had
received $50,000 from the sale of 20,000 shares together with 6,666 warrants.
The Company has also had discussions concerning other private placements of its
debt or equity securities, and as a result thereof believes that there will be
available sufficient capital to finance its business plans for fiscal 1997.
However, except for the capital that the Company has raised to date, there can
be no assurance that any such debt or equity financing will be available to AAFC
Group, or if available, that such financing would be available on terms
considered acceptable to AAFC Group. The inability to obtain such equity or debt
financing as needed would require AAFC Group to have to reduce the scope of its
operations.
OTHER
In March 1995, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standard ("SFAS") No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of."
AAFC Group will adopt SFAS No. 121 as of August 1, 1996 and its implementation
is not expected to have a material effect on AAFC Group's consolidated financial
statements.
In October 1995, the FASB issued SFAS No. 123, "Accounting for Stock-Based
Compensation." SFAS No. 123 is effective December 15, 1995, and requires either
the application of an option pricing model measurement for stock compensation,
or, if a company elects to continue to measure stock compensation based on the
difference between the market price of the company's common stock and the
exercise price of the employer stock option, disclosure of what the effects of
the application of option pricing model measurement would have been. AAFC Group
will initially apply SFAS No. 123 in fiscal 1997, and will elect to disclose the
effect that the application of option pricing model measurement would have had
for options granted from August 1, 1995. The adoption of SFAS 123 will not
impact AAFC Group's consolidated results of operations, financial position, or
cash flows.
ITEM 7. FINANCIAL STATEMENTS
See index to financial statements on page F-1.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not Applicable
-11-
<PAGE>
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS OF THE
REGISTRANT; COMPLIANCE WITH 16(A) OF THE EXCHANGE ACT.
The officers and directors of the Company are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Steven D. Brown (1) (2) 50 Director, Co-Chairman of the Board, Chief Executive Officer
Rex Hauck (2) 45 Director, Co-Chairman of the Board, Co-President
Vivian W. Jones (1) 44 Director, Co-President
Robert A. Martinez 33 Vice President - Finance, Treasurer
J. Eric Van Atta 32 Vice President, Secretary
John Boyd 59 Director
V. Robert Colton 66 Director
Malcolm C.
Davenport, V 44 Director
Ron L. Loveless 53 Director
Glen C. Warren (1) 65 Director
Dan W. Holloway 74 Director
Norman J. Hoskin 62 Director
</TABLE>
____________________________
(1) Member of the Executive Committee of the board of directors
(2) Member of the Compensation Committee of the board of directors
All of the directors and executive officers of the Company assumed these
positions upon completion of the Merger in October 1996, prior to which they
each held those same positions in Old American Artists.
STEVEN D. BROWN. Mr. Brown founded Old American Artists in July 1991 with Mr.
Hauck and served as Co-Chairman of the Board and Chief Executive Officer from
that date until completion of the Merger.
REX HAUCK. Mr. Hauck founded Old American Artists in July 1991 with Mr.
Brown. He served as Executive Vice President from the inception of Old American
Artists until July 1994, when he was elected Co-Chairman and Co-President of Old
American Artists. He held those positions until completion of the Merger.
VIVIAN W. JONES. Ms. Jones, who has been involved in the film industry for
19 years, founded First Light Entertainment Corporation ("First Light"),
originally Current Corporation, in 1993 to purchase certain assets of Jayan
House, Ltd., a commercial production company, where she had been employed as
General Manager and Executive Producer since 1990. She has been president of
First Light since its founding and, after First Light's acquisition by Old
American Artists in 1993, co-president of Old American Artists as well. She held
those positions until completion of the Merger.
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<PAGE>
ROBERT A. MARTINEZ. Mr. Martinez joined Old American Artists in December
1995 after nine years as an accountant with BDO Seidman, LLP. Mr. Martinez
became Vice President-Finance and Treasurer of Old American Artists in April
1996 and held those positions until completion of the Merger.
J. ERIC VAN ATTA. Mr. Van Atta served as Vice President and Secretary of Old
American Artists at its inception in July 1991 and held those positions until
completion of the Merger.
JOHN BOYD, a private investor, was a physician on the staff of Southwest
Regional Medical Center from 1969 to January 1996 and President of Boyd Medical
Center in McComb, Mississippi, from 1965 to December 1995. Dr. Boyd became a
director of Old American Artists at its inception in July 1991.
V. ROBERT COLTON, a private investor, has been a consultant and advisor to
various businesses in the United States and abroad for more than the past five
years. He serves as a director of Air Sensors, Inc., an auto emissions
technology company. Dr. Colton became a director of Old American Artists at its
inception in July 1991.
MALCOLM C. DAVENPORT, V, has practiced law in West Point, Georgia, since
October 1993, originally as a sole practitioner and since 1996 as a partner in
the firm of Coulter & Davenport. Mr. Davenport previously practiced law in
Dalton, Georgia, as a sole practitioner from 1984 to 1991 and as a partner in
Ponder & Davenport, P.C., from 1991 to 1993. He is a former director of ITC
Holding Company, a communications holding company, and Spintek Gaming
Technologies, Inc., a gaming equipment manufacturer and licensor. Mr. Davenport
became a director of Old American Artists in July 1994.
RON L. LOVELESS, a private investor and business consultant from 1986 to 1995
and Senior Vice President-Marketing for Member Services, Inc., since October
1995, was previously Senior Vice President and General Manager of Sam's
Wholesale Club, a division of Wal-Mart Stores, Inc. Mr. Loveless became a
director of Old American Artists in July 1994.
GLEN C. WARREN has served as Chairman of the Board of River Oaks Hospital in
Jackson, Mississippi, since 1988, President of Mississippi Diagnostic Imaging
Center, Ltd., since 1986 and a clinical professor of neurological surgery at the
University of Mississippi School of Medicine since 1972. Dr. Warren became a
director of Old American Artists in July 1994.
DAN W. HOLLOWAY is a physician in private practice in Las Vegas, Nevada,
affiliated with Desert Springs Hospital, where he is presently Chairman of the
Department of Family Practice. Dr. Holloway became a director of Old American
Artists in September 1996.
NORMAN J. HOSKIN has been Chairman of the Board of Directors of Atlantic
International Capital, Inc. since July 1994. He was previously Chairman of
Atlantic Capital Group, Ltd., a venture capital advisory service, from 1986. Mr.
Hoskin is a director of Aquacare Systems, Inc., a producer of water purification
equipment, Consolidated Technologies Corp., a diversified manufacturing company,
Concept Technologies Group, Inc., which specializes in high-tech 3-D technology,
Trans Global Services, Inc., a telephone and internet communications company and
Sequential Information Systems, Inc., a high-tech aircraft equipment company.
Mr. Hoskin became a director of Old American Artists in September 1996.
Each of the Company's directors is elected at the annual meeting of
stockholders and serves until the next annual meeting or until his successor has
been elected and qualified. Holders of Class A Common Stock and Class B Common
Stock respectfully, can elect a number of members of the board of directors
proportionate to the percentage which shares of the respective classes
constitute of the total outstanding shares of both classes, except that holders
of Class B shares in any event elect at least a majority of the directors.
Vacancies in the board of directors are filled by a majority vote of the
remaining members of the board of directors who were elected by the same class
of shareholders. Currently, there are no standing compensation arrangements for
non-executive board of director members.
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<PAGE>
Executive officers of the Company are elected by and serve at the discretion
of the board of directors.
COMPLIANCE WITH SECTION 16(A) OF THE SECURITIES EXCHANGE ACT OF 1934
Section 16(a) of the Securities Exchange Act of 1934 requires the Company's
officers, directors, and persons who own more than 10% of the registered class
of the Company's equity securities to file reports of ownership with the
Securities and Exchange Commission. Officers, directors and greater than 10%
stockholders are required by the regulations of the Securities and Exchange
Commission to furnish the Company with copies of all Section 16(a) forms they
file.
Based solely on a review of the Forms 3 and 4 furnished to the Company, the
Company believes that all filing requirements applicable to its officers,
directors and greater than 10% beneficial owners were complied with, except that
Australian Advisors Corporation may not have filed a Form 3 Report with respect
to its 300,000 shares of Class A Common Stock of the Company (comprising 4.8% of
the Company's voting stock and 41% of its Class A Common Stock).
Form 5 is not required to be filed if there are not previously unreported
transactions or holdings to report. Nevertheless, the Company is required to
disclose the name of directors, executive officers and 10% shareholders who did
not file a Form 5, unless the Company has obtained a written statement that no
filing is due. The Company has been advised by those required to file Form 5
that no filings were due.
ITEM 10. EXECUTIVE COMPENSATION
EXECUTIVE COMPENSATION
The following table furnishes compensation information for the year ended
July 31, 1996, for the chief executive officer and the other most highly
compensated executive officers who during such year earned more than $100,000 in
base salary for services rendered in all capacities. During fiscal 1996 none of
such named executive officers received, and as of July 31, 1996, none of them
held, any stock options or SARs which have been granted in connection with their
service to American Artists in any capacity.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION
-----------------------------
NAME AND OTHER ANNUAL
PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION
------------------ ---- ------ ----- ------------
<S> <C> <C> <C> <C>
Steven D. Brown 1996 $104,040 -0- -0-
Co-Chairman of the Board 1995 94,500 -0- -0-
Chief Executive Officer 1994 64,000 -0- -0-
Rex Hauck 1996 $104,040 -0- -0-
Co-Chairman of the Board of 1995 72,000 -0- -0-
Directors and Co-President 1994 66,000 -0- -0-
Vivian W. Jones 1996 $104,040 -0- -0-
Co-President and Director 1995 72,000 -0- -0-
President of First Light 1994 50,000 -0- -0-
</TABLE>
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<PAGE>
STOCK OPTION PLAN
In May 1996 the Company adopted its 1996 Stock Option Plan (the "Stock Option
Plan"). The purpose of the Stock Option Plan is to encourage growth in
shareholder value by providing financial incentives to selected members of its
board of directors, employees, consultants and advisors who are in positions to
make significant contributions toward that success. The aggregate number of
shares reserved for issuance under the Stock Option Plan is 2,500,000 shares.
Options granted under the Stock Option Plan can be either (i) options intended
to qualify as "incentive stock options" under Section 422 of the Internal
Revenue Code of 1986, as amended (the "Code"), or (ii) non-qualified stock
options. The Stock Option Plan permits the grant of stock appreciation rights in
connection with the grant of stock options. The Stock Option Plan is
administered by a compensation committee of the board of directors, consisting
of Messrs. Brown and Hauck. The compensation committee has the authority to
determine exercise prices applicable to the options, the eligible directors,
employees, consultants and advisers to whom options may be granted, the number
of shares and class of common stock subject to each option, and the extent to
which options may be exercisable. The compensation committee is empowered to
interpret the Stock Option Plan and to prescribe, amend and rescind the rules
and regulations pertaining to the Stock Option Plan. No option is transferable
by the optionee other than by will or the laws of descent and distribution, and
each option is exercisable during the lifetime of the optionee only by such
optionee.
No incentive stock option granted under the Stock Option Plan may be granted
at a price less than the fair market value of the underlying common stock on the
date of grant (or less than 110% of fair market value in the case of holders of
10% or more of the total combined voting power of all classes of stock). Non-
qualified stock options may be granted at the exercise price established by the
compensation committee, which may not be less than the fair market value of the
common stock on the date of grant.
Each option granted under the Stock Option Plan is exercisable for a period
not to exceed ten years from the date of grant (or five years in the case of a
holder of more than 10% of the total combined power of all classes of stock) and
shall lapse upon expiration of such period, or earlier upon termination of the
recipient's employment with the Company or as determined by the compensation
committee.
Pursuant to the Merger Agreement, options to purchase 2,251,200 shares of the
Company's Class B Common Stock were issued under the Stock Option Plan to
replace options previously granted by Old American Artists (under a comparable
stock option plan) and then outstanding, to purchase 3,840,328 shares of Old
American Artists' common stock. No shares of common stock have been issued upon
exercise of options granted under the Stock Option Plan.
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<PAGE>
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table shows beneficial ownership of capital stock of the
Company at December 1, 1996, for the directors and officers of the Company, and
for each beneficial owner of 5% or more of either class of the Company's common
stock.
<TABLE>
<CAPTION>
SHARES OF CLASS A SHARES OF CLASS B
COMMON STOCK COMMON STOCK
NAME NUMBER % * NUMBER %*
------- ------ ----- ------- ----
<S> <C> <C> <C> <C>
Steven D. Brown (1)(6) 100 - 1,256,127 22.8%
Rex Hauck (1)(2)(6) 300 - 1,311,029 23.8%
Vivian W. Jones (1)(3)(6) 600 - 1,318,350 20.4%
Robert A. Martinez (1)(4) - - 11,724 -
J. Eric Van Atta (1)(5) 2,767 - 125,346 2.2%
John W. Boyd (1) 400 - 341,941 6.2%
Glen W. Warren (1)(6)(7) 200 - 320,635 5.8%
Ron L. Loveless (1) 10,100 1.4% 50,469 -
V. Robert Colton (1) 100 - 5,762 -
Malcolm C.
Davenport, V(1)(8) 200 - 131,006 2.4%
Norman J. Hoskin (1) - - - -
Dan Holloway (1) 2,667 - - -
Douglas J. Bates 117,020 16.0% - -
244 B Greenwood Drive
Ballwin, Missouri 63011
Alan G. Johnson 125,720 17.2% - -
325 Highway DD
Defiance, Missouri 63341
Austrialian Advisors Corp. 300,000 41.0% - -
Bay & Deveaux St. 2nd Fl.
P.O. Box N-1000
Nassau, Bahamas
All Officers and Directors as a
Group (12 persons)(2)(3)(4)(5)(7)(8) 17,434 2.4% 4,872,389 75.2%
- ------------------------------------
</TABLE>
* Any percentages under one percent (1%) are not shown.
(1) The address for the officers and directors is the corporate office of the
Company located at 1245 Fowler St., N.W., Atlanta, Georgia 30318.
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<PAGE>
(2) Includes 11,524 shares of Class B Common Stock and 200 shares of Class A
Common Stock owned by Mr. Hauck's minor children, as to which Mr. Hauck
disclaims beneficial ownership.
(3) Includes 879,300 shares of Class B Common Stock subject to purchase under
currently exercisable options. Also includes 14,555 shares of Class B Common
Stock and 100 shares of Class A Common Stock owned by Ms. Jones' minor son, as
to which Ms. Jones disclaims beneficial ownership, and 72,875 shares of Class B
Common Stock and 400 shares of Class A Common Stock transferred by Ms. Jones to
other relatives, which shares continue to be subject of the voting agreement
between Messrs. Brown, Hauck, Warren and Ms. Jones. See Note (6) below.
(4) Includes 11,724 shares of Class B Common Stock subject to purchase under
currently exercisable options.
(5) Includes 87,343 shares of Class B Common Stock subject to purchase under
currently exercisable options.
(6) Under an agreement (the "Voting Agreement") dated April 1996 Messrs.
Brown, Hauck and Warren and Ms. Jones agreed to vote all their shares of Common
Stock of the Company ("Committed Shares") as a block in accordance with the
majority vote (by shares) among themselves. The Voting Agreement will remain in
effect for five years from the date of signing, unless sooner terminated by a
written agreement executed by shareholders holding of record a majority of the
Committed Shares then subject to the Agreement.
(7) Includes 12,315 shares of Class B Common Stock and 100 shares of Class A
Common Stock owned by Mr. Warren's spouse, as to which Mr. Warren disclaims
beneficial ownership.
(8) Includes 87,830 shares of Class B Common Stock and 100 shares of Class A
Common Stock, held by Mr. Davenport as trustee of a family trust.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Pursuant to an agreement dated August 31, 1993, and restructured November 3,
1995, AAFC Group acquired all of the outstanding stock of Current Corporation
(later renamed First Light Entertainment Corporation) from Ms. Jones in exchange
for 750,000 shares of common stock of Old American Artists and an option to
purchase up to 1,500,000 additional shares on or before September 1, 2003, at a
price of $0.50 per share. Ms. Jones' options became exercisable in three annual
increments of 500,000 shares each, the last of which vested September 1, 1996.
Current Corporation, organized by Ms. Jones in August 1993, had acquired certain
assets of Jayan House, Ltd., a commercial production business with which she had
been employed, in exchange for its 4.37% note, $100,000 principal amount,
payable in 20 equal quarterly installments of principal and interest commencing
November 1993.
From December 1993 through the Merger Date, Dr. Warren purchased 147,060
shares of common stock of Old American Artists at an aggregate price of $125,000
($0.85 per share). In connection with certain of these purchases, Dr. Warren
also received warrants for the purchase of 44,118 shares of Old American Artists
common stock at a price, to be determined by the related agreement, between
$1.50 and $2.00. These warrants are exercisable through June 1998. In November
1995, Old American Artists granted Dr. Warren an option under its 1995 Stock
Option Plan to purchase 200,000 shares of Old American Artists common stock at
$0.85 per share. The option, which by reason of the Merger now relates to
117,240 shares of Class B Common Stock purchasable at $1.45 per share, expires
in June 1998.
Effective July 1995, Old American Artists agreed with Dr. Warren and Mr. Boyd
to cancel February, 1993 transactions in which the two individuals each
purchased, by delivery of their respective non-recourse promissory notes,
111,111 shares of Old American Artists common stock at an aggregate price of
$100,000 ($0.90 per share).
-17-
<PAGE>
In July 1993, Dr. Glen Warren and Dr. John Boyd opened a $100,000 revolving
bank line of credit with Deposit Guaranty National Bank for the benefit of Old
American Artists. In September 1994, the revolving line of credit was replaced
by a note which the Company is repaying in monthly installments. At July 31,
1996, the principal balance was $29,280.
In May 1996, Old American Artists agreed with Dr. Glen Warren to issue to Dr.
Warren options for the purchase, at $1.00 per share, of 48,120 shares of common
stock of Old American Artists in return for, and at such time as, Dr. Warren
arranged or made available to Old American Artists, a three month $75,000 line
of credit. The line of credit was arranged in July 1996 at which time Old
American Artists issued the options to Dr. Warren. The line of credit was
converted (at its expiration) into a six month unsecured note with a per annum
interest rate of 8.75%. Dr. Warren is the co-signer of the note.
In June 1994, Old American Artists purchased a 49% interest in Diversity
Filmworks, Inc., a newly incorporated corporation, consisting of 490 shares of
common stock, for a purchase price of $245. The owner of the other 51% is Tyrone
C. Johnson. In September 1996, Old American Artists and Mr. Johnson entered into
a stockholder agreement pursuant to which the size of Diversity's board of
directors was set at five, of which three will be individuals designated by Old
American Artists.
In April 1996 Messrs. Brown, Hauck and Warren and Ms. Jones entered an
agreement under which they agreed to vote all their shares of stock of Old
American Artists as a block in accordance with the majority vote (by shares)
among themselves. Those shares of Old American Artists common stock were
exchanged, in the Merger, for shares of Class A common Stock and Class B common
stock of the Company, which shares are subject to the voting agreement. By
reason of their corporate offices, share ownership and voting agreements they
may be deemed "controlling persons" of the Company.
From December 1993 to August 1995, Old American Artists made five loans
totaling $53,730 to Steven D. Brown, each of which was represented by an
unsecured promissory note due December 1998, with accumulated interest of 7% per
annum. Old American Artists also made advances to Mr. Brown, without interest,
in the amount of $12,303, which are due on demand.
In December 1993 and May 1995, Old American Artists made two loans totaling
$50,000 to Vivian Jones, each of which was represented by an unsecured
promissory note due December 1998, with accumulated interest at 7% per annum.
Old American Artists also made advances to Ms. Jones, without interest, in the
amount of $34,500, which Ms. Jones paid $23,000 in October 1996. The remaining
$11,500 is due on demand.
Old American Artists' agreement dated May 16, 1995, as amended, with Atlantic
International Capital, Ltd., ("AIC"), of which Norman Hoskins is an officer and
stockholder, was terminated by mutual consent on September 27, 1996. Old
American Artists then entered a new agreement retaining AIC, effective October
1, 1996, (i) to advise and counsel Old American Artists concerning
communications and relations with investors and with market makers in the common
stock of Old American Artists, and (ii) to provide Old American Artists other
business advice and counsel. The new advisory agreement will remain in effect
(unless terminated upon 90 days' prior written notice by either party) until
September 31, 1997. The Company replaced Old American Artists under this
agreement upon the completion of is Merger. The Company will pay AIC $3,000 per
month for such services.
In October 1996, Glen C. Warren and Malcolm C. Davenport, V each loaned
$25,000 to the Company for use as working capital and to fund operating losses.
The loans are due August 1, 1997, or sooner upon demand by the respective
holders, and bear interest at the prime rate plus one percentage point. As
additional consideration, the Company issued each of the lenders an option to
purchase up to 9,403 of Class B Common Stock at $1.71 per share at any time
through June 30, 2000.
In November 1996, Ron L. Loveless purchased 10,000 shares of the Company's
Class A Common Stock for an aggregate price of $25,000 ($2.50 per share) and for
no additional consideration received a warrant to purchase an additional 3,333
shares of Class A Common Stock at a price of $3.00 per share, exercisable
through June 30, 2000.
-18-
<PAGE>
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(A) EXHIBIT LIST
EXHIBIT NUMBER DESCRIPTION
- -------------- -----------
2.1* Agreement and Plan of Merger dated as of May 1, 1996 with American
Artists Film Corporation
3.1* Articles of Incorporation of the Registrant
3.2* Amended and Restated Bylaws of the Registrant
3.3* Amendment to Articles of Incorporation of the Registrant adopted May 1,
1996
3.4* Articles of Incorporation of American Artists
3.5* Bylaws of American Artists
10.1* Form of Indemnification Agreement
10.2* Consulting Agreement with Douglas J. Bates
10.3* Consulting Agreement with Alan G. Johnson
10.4* Promissory Note with Douglas J. Bates
10.5* Promissory Note with Alan G. Johnson
10.6* Common Stock Investment Agreement, dated February 24, 1992, and the
Agreement dated February 24, 1992, between American Artists and Icon
International, Inc., as extended by letter dated August 21, 1995
10.7* Asset Purchase Agreement, dated August 1, 1993, between Current
Corporation and First Light Entertainment Corporation
10.8* Lease Agreement, dated August 5, 1993, between Kee Joint Venture and
Current Corporation, as renewed June 15, 1995 between Kee Joint Venture
and First Light Entertainment Corporation
10.9* Share Purchase Agreement, dated August 31, 1993, and Amendment
Agreement, dated November 3, 1995, between American Artists and Vivian
Walker Jones, with respect to shares of First Light Entertainment
Corporation
10.10* Agreement, dated April ___, 1994, between NBC Entertainment and
Greystone Communications, Inc., as supplemented by letter agreement
dated April 7, 1994, regarding Angels I
10.11* License Agreement, dated April 13, 1994, between Calling Card Company,
Inc. and American Artists, as supplemented by letter agreement dated
July 28, 1994
10.12* Letter Agreement, dated May 13, 1994, between Calling Card Company,
Inc. and American Artists
10.13* Joint Venture Agreement, dated May 20, 1994, between Greystone
Communications, Inc. and American Artists
10.14* Subscription Agreement, dated June 29, 1994, between American Artists
and First Light Diversity, Inc.
10.15* Agreement, dated July 26, 1994, between NBC Entertainment and Greystone
Communications, Inc., as supplemented by agreement dated July 26, 1994,
regarding Angels II
10.16* Distribution Agreement, dated July 26, 1994, as revised October 10,
1994, between Alfred Haber Distribution, Inc. and American Artists
10.17* Agreement, dated August 3, 1994, between American Artists and
Ballantine Books
10.18* License Agreement, dated as of August 8, 1994, between Time-Life Video
and American Artists
10.19* Promissory Note, dated September 13, 1994, made by John W. Boyd and
Glen C. Warren, to be paid to the order of Deposit Guaranty National
Bank
-19-
<PAGE>
10.20* Financial Consulting Agreement, dated May 6, 1995, between Atlantic
International Capital, Ltd. and American Artists, as amended by letter
agreement dated May 1, 1996
10.21* American Artists 1995 Stock Option Plan, approved December 1, 1995
10.22* Voting Agreement, dated april 29, 1996, among Rex Hauck, Steve Brown,
Dr. Glen Warren, and Vivian Jones
10.23* License Agreement, dated as of April 30, 1996, between American Artists
and Turner Original Productions, Inc., regarding Angels I and Angels II
10.24* Development Agreement, dated June 14, 1996, between American Artists
and Turner Original Productions, Inc.
10.25* Articles of Incorporation of Millennium Group, L.L.C.
10.26* Operating Agreement of Millennium Group, L.L.C.
10.27* Articles of Organization of Death and Taxes Film Company, L.L.C.
10.28* Form of Operating Agreement of Death and Taxes Film Company, L.L.C.
10.29* Articles of Incorporation of First Light Entertainment Corporation
10.30* Bylaws of First Light Entertainment Corporation
10.31* Articles of Incorporation of Diversity Film Works, Inc.
10.32* Bylaws of Diversity Film Works, Inc.
10.33* Unsecured Promissory Note dated July 17, 1996 issued to Deposit
Guaranty National Bank
10.34* Agreement with Liberty Transfer Co.
10.35** Voting Agreement between American Artists Film Corporation and Tyrone
C. Johnson
10.36 Lease Agreement, dated August 15, 1996, between Kee Joint Venture and
First Light Entertainment Corporation
10.37 Promissory Note, dated November 21, 1996, made by American Artists Film
Corporation and co-signed by Glen C. Warren, to be paid to the order of
Deposit Guaranty National Bank
10.38 Financial Consulting Agreement, dated May 16, 1995, between Atlantic
International Capital, Ltd. and American Artists, as amended by letter
agreements dated May 1, 1996 and September 27, 1996
10.39 Overhead Allocation Agreement between American Artists Film Corporation
and Diversity Filmworks, Inc. , dated July 31, 1996
10.40 Production Agreement, dated October 11, 1996, between American Artists
and Turner Original Productions, Inc.
10.41 Common Stock Investment Agreement, dated February 24, 1992, and the
Agreement dated February 24, 1992, between American Artists and Icon
International, Inc., as extended by letter agreements dated August 21,
1995 and December 10, 1996
27.1 Setab Alpha Financial Data Schedule
27.2 American Artists Financial Data Schedule
__________________
* Registration Statement on Form SB-2 (File No. 33-97196C) of Setab Alpha,
Inc., filed on September 16, 1996.
** Registration Statement on Form S-4 (File No. 333-4159) of Setab Alpha, Inc.,
filed September 16, 1996.
(B) REPORTS ON FORM 8-K.
No reports on form 8-K have been filed by the Company during the quarter
ended July 31, 1996.
-20-
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
Date: December 19, 1996
AMERICAN ARTISTS FILM CORPORATION
By : /s/ Steven D. Brown
-----------------------------------------
Steven D. Brown
Chief Executive Officer
In accordance with the Exchange Act, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicate.
<TABLE>
<S> <C> <C>
/s/ Rex Hauck Director, Co-Chairman of the Board, December 19, 1996
- ---------------------------
Rex Hauck and Co-President
/s/ Vivian Jones Director, Co-President December 19, 1996
- ---------------------------
Vivian Jones
/s/ Robert A. Martinez Vice President/Finance, Treasurer December 19, 1996
- ---------------------------
Robert A. Martinez
/s/ V. Robert Colton Director December 19, 1996
- ---------------------------
V. Robert Colton
/s/ John W. Boyd Director December 19, 1996
- ---------------------------
John W. Boyd
/s/ Malcolm C. Davenport, V Director December 19, 1996
- ---------------------------
Malcolm C. Davenport, V
/s/ Ron L. Loveless Director December 19, 1996
- ---------------------------
Ron L. Loveless
/s/ Glen Warren Director December 19, 1996
- ---------------------------
Glen Warren
/s/ Dan Holloway Director December 19, 1996
- ---------------------------
Dan Holloway
/s/ Norman Hoskin Director December 19, 1996
- ---------------------------
Norman Hoskin
</TABLE>
-21-
<PAGE>
AMERICAN ARTISTS FILM CORPORATION
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Setab Alpha, Inc. ("Setab Alpha") Page
--------------------------------- ----
<S> <C>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS F-2
Balance sheet F-3
Statement of operations F-4
Statement of stockholders' deficit F-5
Statement of cash flows F-6
Summary of accounting policies F-7
Notes to financial statements F-8
American Artists Film Corporation ("Old American Artists")
----------------------------------------------------------
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS F-9
Consolidated balance sheets F-10
Consolidated statements of operations F-12
Consolidated statements of stockholders' equity F-13
Consolidated statements of cash flows F-14
Notes to consolidated financial statements F-15
Pro Forma Financial Statements
------------------------------
Introduction F-27
Pro forma consolidated balance sheet F-29
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors
Setab Alpha, Inc.
Ballwin, Missouri
We have audited the balance sheet of Setab Alpha, Inc. (a development stage
company) as of July 31, 1996, and the related statements of operations,
stockholders' deficit and cash flows for the period from July 5, 1995 (date
of inception) through July 31, 1996. These financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Setab Alpha, Inc. at July
31, 1996 and the results of its operations and its cash flows for the period
from July 5, 1995 (date of inception) through July 31, 1996 in conformity
with generally accepted accounting principles.
BDO SEIDMAN, LLP
St. Louis, Missouri
December 5, 1996
F-2
<PAGE>
SETAB ALPHA, INC.
(A DEVELOPMENT STAGE COMPANY)
Balance Sheet
July 31, 1996
<TABLE>
<S> <C>
ASSETS
CURRENT
Cash $ 0.20
Deferred offering costs (Note 2) 10,000.00
----------
$10,000.20
==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT
Accounts payable (Note 2) $10,500.00
Accrued interest 164.95
Note payable - related party (Note 2) 4,812.80
----------
TOTAL LIABILITIES 15,477.75
----------
STOCKHOLDERS' DEFICIT (Note 2)
Preferred stock, $0.001 par - shares authorized 10,000,000
issued and outstanding, 0 -
Common stock, $0.001 par:
Class A - shares authorized, 20,000,000; issued
and outstanding, 20 0.02
Class B - shares authorized, 20,000,000, issued
and outstanding, 0 -
Additional paid-in capital 0.18
Deficit accumulated during the development stage (5,477.75)
----------
TOTAL STOCKHOLDERS' DEFICIT (5,477.55)
----------
$10,000.20
==========
</TABLE>
See accompanying summary of accounting policies and notes to financial
statements.
F-3
<PAGE>
SETAB ALPHA, INC.
(A DEVELOPMENT STAGE COMPANY)
Statement of Operations
For the Period July 5, 1995 (date of inception)
through July 31, 1996
<TABLE>
<S> <C>
REVENUES $ 0.00
EXPENSES 5,477.75
----------
NET LOSS $(5,477.75)
==========
NET LOSS PER SHARE $ (273.89)
==========
WEIGHTED AVERAGE NET SHARES OUTSTANDING 20
==========
</TABLE>
See accompanying summary of accounting policies and notes to financial
statements.
F-4
<PAGE>
SETAB ALPHA, INC.
(A DEVELOPMENT STAGE COMPANY)
Statement of Stockholders' Deficit
For the Period July 5, 1995 (date of inception)
through July 31, 1996
<TABLE>
<CAPTION>
Deficit
accumulated
Additional during the Total
Common Stock paid-in development stockholders'
-------------------
Shares Amount capital stage equity
------ ------ ---------- ------------ --------------
<S> <C> <C> <C> <C> <C>
Issuance of common stock
on July 5, 1995 (date of
inception) for cash 20 $0.02 $0.18 $ 0.00 $ 0.20
Net loss 0 0.00 0.00 (5,477.75) (5,477.75)
-- ----- ----- ---------- ----------
Balance, July 31, 1996 20 $0.02 $0.18 $(5,477.75) $(5,477.55)
== ===== ===== ========== ==========
</TABLE>
See accompanying summary of accounting policies and notes to financial
statements.
F-5
<PAGE>
SETAB ALPHA, INC.
(A DEVELOPMENT STAGE COMPANY)
Statement of Cash Flows
For the Period July 5, 1995 (date of inception)
through July 31, 1996
<TABLE>
<S> <C>
OPERATING ACTIVITIES
Net loss $(5,477.75)
Adjustments to reconcile net loss to net cash used in
operating activities:
Increase in accounts payable 500.00
Increase in accrued interest 164.95
----------
CASH USED IN OPERATING ACTIVITIES (4,812.80)
----------
FINANCING ACTIVITIES
Borrowings under note payable 4,812.80
Proceeds from issuance of common stock 0.20
----------
CASH PROVIDED BY FINANCING ACTIVITIES 4,813.00
----------
INCREASE IN CASH 0.20
CASH, beginning of period 0.00
----------
CASH, end of period $ 0.20
==========
</TABLE>
See accompanying summary of accounting policies and notes to financial
statements.
F-6
<PAGE>
SETAB ALPHA, INC.
(A DEVELOPMENT STAGE COMPANY)
Summary of Accounting Policies
BUSINESS Setab Alpha, Inc. (the Company) was formed as a
Missouri corporation for the purpose of engaging
in a merger or other business combination with an
operating company. On October 7, 1996, the
Company effected a merger ("the Merger") with
American Artists Film Corporation, a Georgia
corporation which is engaged in the independent
production of feature films, television/cable
programming and commercials. The Merger resulted
in the issuance of previously authorized but
unissued shares of Class A and Class B common
stock, respectively, and a change in control of
the Company. Since the planned principal
operations had not commenced during the period
presented, the Company is considered to be a
development stage company, as defined in Financial
Accounting Standards No. 7.
ORGANIZATION The Company was formed on July 5, 1995 under the
laws of the State of Missouri. The Company has
adopted a fiscal year ending on July 31.
CASH EQUIVALENTS The Company considers all highly liquid
instruments with an initial maturity of three
months or less to be cash equivalents.
ORGANIZATION COSTS Organization costs are expensed as incurred.
FAIR VALUE OF The fair values of financial instruments do not
FINANCIAL INSTRUMENTS differ materially from their recorded amounts.
F-7
<PAGE>
SETAB ALPHA, INC.
(A DEVELOPMENT STAGE COMPANY)
Notes to Financial Statements
1. PUBLIC OFFERING On October 7, 1996, the Company completed a public
offering of 700,000 shares of its Class A common
stock at an offering price of $0.05 per share,
resulting in gross proceeds of $35,000 and net
proceeds to the Company of $15,477.
2. RELATED PARTY In July 1995, the Company was incorporated in the
TRANSACTIONS State of Missouri with an authorized capital of
30,000,000 shares of common stock at a par value
of $.001 per share. In connection with its
organization, the Company issued to Alan G.
Johnson and to Douglas J. Bates 10 shares of
common stock each, at a purchase price of $.01 per
share. In May 1996, the Company's Articles of
Incorporation were amended to authorize 20,000,000
shares of Class A common stock, 20,000,000 shares
of Class B common stock and 10,000,000 shares of
Preferred Stock, each having a par value of $0.001
per share. All outstanding shares of common stock
were converted into an equal number of shares of
Class A common stock.
At July 31, 1996, the Company was indebted to
Messrs. Bates and Johnson in the aggregate
principal amounts of $2,757.47 and $2,055.33,
respectively. Such amounts were advanced to the
Company for the purpose of funding disbursements
relating to the organization of the Company. The
indebtedness of the Company to Messrs. Bates and
Johnson is unsecured, bears interest at an annual
rate equal to the prime rate plus 2% and is
payable on the date a business combination is
effected.
Pursuant to separate letters of engagement dated
July 5, 1995, the Company has agreed to pay to
Alan G. Johnson and Douglas J. Bates the sum of
$5,000 each on the effective date of the
Registration Statement, as consideration for
services rendered by such persons in connection
with the formation and organization of the
Company. These amounts are reflected on the
balance sheets as deferred offering costs and
accounts payable.
F-8
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors
American Artists Film Corporation
Atlanta, Georgia
We have audited the accompanying consolidated balance sheets of American
Artists Film Corporation and Subsidiaries as of July 31, 1996 and 1995, and
the related consolidated statements of operations, stockholders' equity, and
cash flows for each of the years then ended. These financial statements are
the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position
of American Artists Film Corporation and Subsidiaries as of July 31, 1996 and
1995, and the consolidated results of their operations and their cash flows
for each of the years then ended, in conformity with generally accepted
accounting principles.
BDO SEIDMAN, LLP
Atlanta, Georgia
December 5, 1996
F-9
<PAGE>
AMERICAN ARTISTS FILM CORPORATION
AND SUBSIDIARIES
Consolidated Balance Sheets
<TABLE>
<CAPTION>
July 31,
-------------------------------
1996 1995
------------- -----------
ASSETS
<S> <C> <C>
CASH $ - $ 122,197
ACCOUNTS RECEIVABLE 107,457 186,793
FILM COSTS, NET OF ACCUMULATED
AMORTIZATION (Note 1) 475,877 415,721
PROPERTY AND EQUIPMENT, NET (Notes 1, 2 52,128 78,962
and 3)
GOODWILL, NET OF ACCUMULATED
AMORTIZATION (Note 2) 156,572 195,714
DEFERRED OFFERING COSTS (Note 1) 105,000 105,000
ADVANCES TO OFFICERS (Note 1) 217,247 156,178
OTHER (Note 1) 112 27,297
---------- ----------
$1,114,393 $1,287,862
========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
F-10
<PAGE>
AMERICAN ARTISTS FILM CORPORATION
AND SUBSIDIARIES
Consolidated Balance Sheets
<TABLE>
<CAPTION>
July 31,
--------------------------
1996 1995
------------ ----------
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Accounts payable $ 169,781 $ 179,073
Accrued expenses 112,115 106,561
Accrued accounting and legal 152,985 105,000
Accrued payroll taxes 103,630 -
Film revenue participations - 41,910
Deferred revenue 11,867 56,303
Notes payable (Notes 2 and 3) 76,976 130,739
----------- ----------
TOTAL LIABILITIES 627,354 619,586
----------- ----------
MINORITY INTEREST (Note 1) 50,000 -
CONTINGENCIES (Note 6)
STOCKHOLDERS' EQUITY (Note 4)
Preferred stock, 10,000,000
shares authorized, none issued - -
Common stock, stated value $.05 per share,
30,000,000 shares authorized, 470,392 418,411
9,407,837 and 8,368,220 issued and outstanding
Additional paid-in capital 2,125,117 1,221,397
Unamortized advertising credits (Note 1) (122,618) (122,618)
Accumulated deficit (2,035,852) (848,914)
----------- ----------
TOTAL STOCKHOLDERS' EQUITY 437,039 668,276
----------- ----------
$ 1,114,393 $1,287,862
=========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
F-11
<PAGE>
AMERICAN ARTISTS FILM CORPORATION
AND SUBSIDIARIES
Consolidated Balance Sheets
<TABLE>
<CAPTION>
Year ended July 31,
--------------------------
1996 1995
----------- -----------
<S> <C> <C>
REVENUES (Note 1)
Commercial production $ 1,689,644 $2,819,390
Film revenues (Note 1) 21,995 882,331
----------- ----------
1,711,639 3,701,721
----------- ----------
COSTS AND EXPENSES
Cost of commercial production 1,330,604 2,196,716
Film cost amortization 15,963 639,236
Selling, general and 1,351,227 801,106
administrative ----------- ----------
2,697,794 3,637,058
----------- ----------
INCOME (LOSS) FROM OPERATIONS (986,155) 64,663
Interest expense 6,777 12,810
Equity in loss of Diversity Filmworks, 194,006 59,646
Inc. (Note 1) ----------- ----------
NET LOSS $(1,186,938) $ (7,793)
=========== ==========
PRO FORMA NET LOSS PER SHARE (NOTE 1) $ (.22) $ -
=========== ==========
PRO FORMA WEIGHTED AVERAGE COMMON
SHARES AND EQUIVALENT SHARES
OUTSTANDING (NOTE 1) 5,305,652 4,841,348
=========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
F-12
<PAGE>
AMERICAN ARTISTS FILM CORPORATION
AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity
<TABLE>
<CAPTION>
Additional Unamortized Total
Common Stock Paid-In Advertising Accumulated Stockholders'
---------------------
Shares Amount Capital Credits Deficit Equity
------ ------ ------- ------- ------- ------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, July 31, 1993 6,754,480 $337,724 $ 275,834 $(122,618) $ (374,554) $ 116,386
Issuances of common stock:
Cash 588,240 29,412 470,588 - - 500,000
Acquisition of First Light (Note 2) 750,000 37,500 337,500 - - 375,000
Net loss - - - - (466,567) (466,567)
--------- -------- ---------- ----------- ----------- -----------
BALANCE, July 31, 1994 8,092,720 404,636 1,083,922 (122,618) (841,121) 524,819
Issuances of common stock:
Cash 185,286 9,264 141,986 - - 151,250
Option conversion (Note 9(b)) 90,214 4,511 (4,511) - - -
Net loss - - - - (7,793) (7,793)
--------- -------- ---------- ----------- ----------- -----------
BALANCE, July 31, 1995 8,368,220 418,411 1,221,397 (122,618) (848,914) 668,276
Issuances of common stock for cash 1,039,617 51,981 903,720 - - 955,701
Net loss - - - - (1,186,938) (1,186,938)
--------- -------- ---------- ----------- ----------- -----------
-
BALANCE, July 31, 1996 9,407,837 $470,392 $2,125,117 $(122,618) $(2,035,852) $ 437,039
========= ======== ========== =========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-13
<PAGE>
AMERICAN ARTISTS FILM CORPORATION
AND SUBSIDIARIES
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Year ended July 31,
-------------------------
1996 1995
------------ ------------
OPERATING ACTIVITIES
<S> <C> <C>
Net loss $(1,186,938) $ (7,793)
Adjustments to reconcile net loss to
cash (used in)
provided by operating activities:
Film cost amortization 15,963 575,980
Depreciation and amortization 63,354 67,134
Loss on disposition of assets 2,622 -
Equity in loss of Diversity 194,006 59,646
Filmworks, Inc.
Changes in assets and liabilities
Accounts receivable 79,336 87,655
Film costs additions (76,119) (714,486)
Other assets (227,890) (161,781)
Accounts payable (9,292) (11,468)
Accrued expenses 157,169 64,656
Film revenue participations (41,910) 4,112
Deferred revenues (44,436) 56,303
----------- ---------
Cash (used in) provided by operating (1,074,135) 19,958
activities ----------- ---------
INVESTING ACTIVITY
Capital expenditures - (19,842)
----------- ---------
FINANCING ACTIVITIES
Repayment of notes payable (53,763) (73,655)
Issuances of common stock 955,701 151,250
Increase in deferred offering costs - (105,000)
Minority interest 50,000 -
----------- ---------
Cash provided by (used in) financing 951,938 (27,405)
activities ----------- ---------
NET DECREASE IN CASH (122,197) (27,289)
CASH, beginning of year 122,197 149,486
----------- ---------
CASH, end of year $ - $ 122,197
=========== =========
</TABLE>
See accompanying notes to consolidated financial statements.
F-14
<PAGE>
AMERICAN ARTISTS FILM CORPORATION
AND SUBSIDARIES
Notes to Consolidated Financial Statements
1. SUMMARY OF SIGNIFICANT NATURE OF BUSINESS
ACCOUNTING POLICIES
American Artists Film Corporation ("American
Artists", and together with its subsidiaries
"AAFC Group"), directly and through its
subsidiaries, engages in the development,
production and exploitation of made-for-
television and feature length motion pictures,
and in the commercial contract productions of
film products, principally television
commercials. The Company classifies its
operations in two business segments: (i) film
development and production and (ii) contract
production. The Company's film development and
production operations involve the granting of
credit to film exhibitors and distributors. The
Company's contract production operations involve
the granting of credit to advertising agencies
that represent clients in various industries.
For fiscal 1996, three of the Company's customers
accounted for fees equal to 18.5%, 12.5% and
10.3% of consolidated revenues. The Company
obtains its revenues from discrete project
assignments obtained from various clients.
Accordingly, while the fees from one or more
clients may, in any year, be significant as the
result of the size of a project undertaken for
that client, the Company is not dependent on any
one client for a material amount of its revenues.
BASIS OF PRESENTATION
The consolidated financial statements include the
accounts of American Artists and First Light
Entertainment Corporation ("First Light"), a 100
percent-owned subsidiary and those of Millennium
Group, L.L.C. ("Millennium").
Millennium is a limited liability corporation in
which the Company exercises significant control
through its capacity as manager, which position
allows it to direct the operations of Millennium,
Millennium's purchase and sale of assets,
issuance of debt or equity securities, and
Millennium's execution of contracts and
agreements, without the approval of the other
stockholders. Millennium was formed to produce
and distribute a sixty minute video. American
Artists will be entitled to (i) 50 percent of net
income after the minority stockholders have
recovered their investment up to a point where
the minority stockholders have received a 200%
return and (ii) 90% thereafter. As of July 31,
1996, Millennium's activities have been limited
to organization and pre-production story
development. The minority interest at July 31,
1996 relates to Millennium.
F-15
<PAGE>
AMERICAN ARTISTS FILM CORPORATION
AND SUBSIDARIES
Notes to Consolidated Financial Statements
In accordance with Statement of
Financial Accounting Standards No. 53
"Financial Reporting by Producers and
Distributors of Motion Picture Films"
("SFAS No. 53"), AAFC Group presents an
unclassified balance sheet.
Included in accounts payable at July 31,
1996, is $5,378 representing checks
issued against future deposits.
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.
Certain prior periods amounts have been
reclassified for comparative purposes.
INVESTMENT IN DIVERSITY FILMWORKS, INC.
American Artists owns 49% of the
outstanding common stock of Diversity
Filmworks, Inc. ("Diversity"). Diversity
was formed by American Artists and a
qualified minority owner to engage in
contract production as a qualified
minority contractor. American Artists
accounts for its investment in Diversity
using the equity method of accounting.
The following sets forth certain
summarized financial information about
Diversity:
<TABLE>
<CAPTION>
July 31,
---------------------------------
1996 1995
---- ----
<S> <C> <C>
Current assets $ 31,999 $ 17,783
========= ========
Due to American Artists 255,409 75,494
Other current liabilities 31,887 3,079
--------- --------
Total liabilities 287,296 78,573
Stockholders' deficit (255,297) (60,790)
--------- --------
$ 31,999 $ 17,783
========= ========
</TABLE>
F-16
<PAGE>
AMERICAN ARTISTS FILM CORPORATION
AND SUBSIDARIES
Notes to Consolidated Financial Statements
<TABLE>
<CAPTION>
July 31,
------------------------
1996 1995
---- ----
<S> <C> <C>
Sales $ 777,309 $ 237,810
Costs of production
and selling, general
and administrative
expenses 971,315 297,456
--------- ---------
Net loss $(194,006) $ (59,646)
========= =========
</TABLE>
Diversity's net losses have been
financed by American Artists, and
accordingly, in fiscal 1996 and 1995
American Artists recorded 100% of
Diversity's losses. Effective July 31,
1996, American Artists and Diversity
executed an agreement that changed,
retroactively to August 1, 1995, the
manner in which certain of American
Artists' operating expenses are
allocated and charged to Diversity. As a
result, expenses of $151,308 relating to
the first three quarters of fiscal 1996
were charged to Diversity in the fourth
quarter of fiscal 1996. The change had
no effect on the consolidated net loss
as American Artists recorded 100% of
Diversity's loss.
American Artists' advances to and
investment in Diversity, adjusted for
the Diversity income or losses included
in American Artists' net income, were
$112 and $14,204 at July 31, 1996 and
1995, respectively, and are included in
other assets.
FILM COSTS AND REVENUES
Costs incurred to develop stories,
acquire story rights, produce and print
films, and advertising or other
distribution costs which benefit future
markets, are capitalized as film costs
when incurred. All other advertising and
distribution costs are expensed as
incurred.
AAFC Group finances certain of its
projects by granting revenue
participations to outside investors in
exchange for investments in the
production of the film. Capitalized film
costs are reduced by the financing
provided under these arrangements.
Capitalized film cost are amortized
using the individual film forecast
method under which capitalized costs are
amortized based on the relationship
between the gross revenue realized and
the estimate of the total gross revenues
to be earned by the film over its life.
Revenue estimates are reviewed
periodically and, when appropriate, are
revised. Where unamortized film costs
exceed a revised estimate of total
future gross revenues, film costs are
written down to net realizable value.
F-17
<PAGE>
AMERICAN ARTISTS FILM CORPORATION
AND SUBSIDARIES
Notes to Consolidated Financial Statements
The components of capitalized film costs
were as follows:
<TABLE>
<CAPTION>
July 31,
---------------------------------
1996 1995
---- ----
<S> <C> <C>
Released $ 867,256 $ 888,517
Accumulated (812,429) (796,466)
amortization --------- ---------
54,827 92,051
In production 128,366 71,508
In development 292,684 252,162
--------- ---------
$ 475,877 $ 415,721
========= =========
</TABLE>
The above amounts do not include any
value for four developed scripts
contributed to AAFC Group in 1991 by its
founding stockholders in exchange for
common stock. In accordance with
generally accepted accounting
principles, the scripts were recorded at
zero, which, because no amounts had been
expended for the development of scripts,
represented the cost basis of the
contributing stockholders, and the
stated value of the common shares
issued, $238,000, was charged against
additional paid-in capital.
In general, the majority of the revenue
to be derived from a film will be earned
during the two to three years following
its release. On the basis of American
Artists' current production projections,
which could change in the future based
on the availability of production
funding, film demand and other factors,
40% of the unamortized film costs will
be amortized over the three years that
will end July 31, 1999, and 60% will be
amortized over the four year period that
will end July 31, 2000.
Film revenues are recognized, in
accordance with SFAS No. 53, generally
when the film has been accepted by the
licensee, where applicable, collection
of license fee is reasonably assured,
and the film is exhibited or is
available for distribution in the
applicable market. Films are generally
first exhibited in television markets,
and then are distributed on videotape.
Revenues from the foreign exhibition or
sale of films are denominated in U. S.
dollars. Minimum guaranteed amounts from
video license agreements, and from book
royalties, are recognized when the
applicable license period begins and the
film or book is available to the
distributor; amounts in excess of the
minimum guarantee are recognized when
earned. Revenues are reduced for amounts
payable on account of revenue
participations, which are accrued on the
same basis as film costs are amortized.
The components of film revenues were as
follows:
F-18
<PAGE>
AMERICAN ARTISTS FILM CORPORATION
AND SUBSIDARIES
Notes to Consolidated Financial Statements
<TABLE>
<CAPTION>
July 31,
----------------------------
1996 1995
---- ----
<S> <C> <C>
Television $ - $451,250
Book royalties - 297,491
Foreign video 21,995 75,064
Domestic video - 58,526
------- --------
$21,995 $882,331
======= ========
</TABLE>
COMMERCIAL PRODUCTION
AAFC Group produces film products,
primarily television commercials, for
customers under fixed fee arrangements,
which typically are less than two months
in duration. Revenues and costs
attributable to these contracts are
recognized over the life of the contract
using percentage-of-completion of
accounting. Under that method, revenue,
and related costs, are recognized based
on the percentage of the contract
completed, which is estimated on the
basis of the relationship of the costs
incurred to total estimated costs,
except that provision is made currently
for the full amount of any anticipated
losses on contracts in progress.
Previously, as of July 31, 1995 AAFC
Group was on the completed contract
method which did not differ materially
from the percentage of completion
method.
PROPERTY AND EQUIPMENT
Property and equipment are stated at
cost. Depreciation is provided using the
straight-line method over the estimated
life of the related asset. The
components of property and equipment are
as follows:
<TABLE>
<CAPTION>
Useful July 31,
----------------------
Lives 1996 1995
---- ----
<S> <C> <C> <C>
Office
furniture 5-7 $ 80,015 $ 82,057
and fixtures
Leasehold
improvements 1 35,000 35,580
Production 5-7 7,498 7,498
equipment -------- --------
122,513 125,135
Less
accumulated
depreciation
and
amortization 70,385 46,173
-------- --------
$ 52,128 $ 78,962
======== ========
</TABLE>
F-19
<PAGE>
AMERICAN ARTISTS FILM CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
ADVANCES TO OFFICERS
AAFC Group has, on certain occasions, made
cash advances to certain officers which
generally bear interest at 7% per annum.
Management anticipates that these advances
will be repaid through their offset against
future compensation.
DEFERRED OFFERING COSTS
Deferred offering costs are comprised principally
of audit and other fees incurred in connection
with AAFC Group's proposed merger with Setab
Alpha, Inc. ("Setab Alpha"). Such costs will be
charged against stockholders' equity in the first
quarter of fiscal 1997 as a result of the October
7, 1996 completion of the merger.
UNAMORTIZED ADVERTISING COSTS
In fiscal 1992 AAFC Group issued 250,000 shares of
its common stock in exchange for advertising
credits that entitle AAFC Group to purchase media
advertising credits having an aggregate "standard
cost" value of $500,000. The credits were
recorded on the basis of $0.50 per share, based on
per share prices in Issuances of shares of common
stock for cash during the same period. The
unamoritzed advertising credits are presented as a
reduction of stockholders' equity reflecting the
acquisition of the credit for common stock.
The recoverability of the advertising credits is
assessed based on the current market price for
similar advertising and AAFC Group's ability to
utilize the credits. The credits may be used by
AAFC Group through December 31, 1997.
INCOME TAXES
AAFC Group files a consolidated income tax return
and provides for income taxes under Statement of
Financial Accounting Standards No. 109 "Accounting
for Income Taxes." Under that standard, deferred
income taxes are provided on the difference
between the financial reporting and tax bases of
assets and liabilities.
PRO FORMA EARNINGS PER SHARE
As described elsewhere herein, on October 7, 1996,
American Artists and Setab Alpha completed a
merger ("the Merger") under which Setab Alpha
acquired 100 percent of the outstanding common
stock of American Artists in exchange for the
issuance of 12,600 shares of Setab Alpha Class A
common stock and 5,502,277 shares of Setab Alpha
Class B common stock. The
F-20
<PAGE>
AMERICAN ARTISTS FILM CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Merger is being accounted for as a recapitalization
of American Artists, as a result of which American
Artists will be deemed to have, on October 7, 1996,
(I) changed its capitalization to provide for two
classes of Common Stock (Class A and Class B), and
(ii) effected a recapitalization in which an
aggregate of 12,600 shares of Class A Common Stock
and 5,502,277 shares of Class B common stock are
exchanged for the outstanding shares of its common
stock (an exchange ratio of an aggregate of .5862
Class A or Class B shares for each presently
outstanding share). Pro forma earnings (loss) per
share, computed to reflect the effect of such a
reverse stock split on the historical shares
outstanding, is presented in lieu of historical
earnings (loss) per share as the pro forma
presentation is considered to be more relevant.
Pro forma earnings per share are computed on the
basis of the pro forma weighted average common
shares and dilutive common share equivalents
outstanding. Common stock equivalents consist of
outstanding stock options and warrants.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents are generally comprised
of demand deposits and time deposits or highly
liquid debt instruments with original maturities
of three months or less. The Company's cash
balances do not involve any significant
concentrations of credit risk.
RECENT ACCOUNTING PRONOUNCEMENTS
In March 1995, the Financial Accounting Standards
Board ("FASB") issued Statement on Financial
Accounting Standards ("SFAS") No. 121, "Accounting
for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed of". AAFC Group
will adopt SFAS No. 121 as of August 1, 1996 and
its implementation is not expected to have a
material effect on AAFC Group's consolidated
financial statements.
In October 1995, the FASB issued SFAS No. 123,
"Accounting for Stock Based Compensation". SFAS
No. 123 is effective for transactions entered into
in fiscal years beginning after December 15, 1995,
and requires either the application of an option
pricing model measurement for stock compensation,
or, if a company elects to continue to measure
stock compensation based on the difference between
the market price of the company's common stock and
the exercise price of the employer stock option,
disclosure of what the effect of the application
of option pricing model measurement would have
been. AAFC Group will initially apply SFAS No.
123 in the fiscal year beginning August 1, 1996,
and will elect to disclose the effect that the
application of option
F-21
<PAGE>
AMERICAN ARTISTS FILM CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
pricing model measurement would have had for
options granted from August 1, 1996. The adoption
of SFAS 123 will not impact AAFC Group's
consolidated results of operations, financial
position, or cash flows.
2. ACQUISITION On August 31, 1993, American Artists acquired 100
percent of the outstanding common stock of First
Light in exchange for the issuance of 750,000
shares of its common stock and the assumption of
First Light's liabilities, which consisted
primarily of a $100,000 note payable secured by
First Light's property, equipment and tradename.
The acquisition was accounted for as a purchase;
accordingly, the purchase price, with the common
stock issued recorded at $.50 per share,
representing a discount deemed appropriate for
such a block of shares, was allocated to First
Light's tangible assets (comprised principally of
equipment, leasehold improvements, First Light's
tradename, and contracts in progress), with the
remainder allocated to goodwill, as follows:
<TABLE>
<S> <C>
Contracts in progress $101,000
Furniture and fixtures 55,000
Leasehold improvements 35,000
Tradename 10,000
Goodwill 274,000
--------
$475,000
========
</TABLE>
The goodwill is being amortized on a straight line
basis over seven years. Accumulated amortization
was $117,428 and $78,286 at July 31, 1996 and
1995. AAFC Group annually assesses the
recoverability of unamortized goodwill by
comparison to projections of undiscounted cash
flows from First Light's operations over the
remaining amortization period.
In connection with the acquisition, the president
of First Light was granted stock options for the
purchase of 1.5 million shares of common stock,
which vest over three years and are exercisable at
a price of $.50 per share for ten years.
F-22
<PAGE>
AMERICAN ARTISTS FILM CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
3. NOTES PAYABLE Notes payable consisted of the following:
<TABLE>
<CAPTION>
1995 1994
---- ----
<S> <C> <C>
Unsecured installment note
payable to bank, interest
at 1% above the prime rate
(8.25% at July 31, 1996),
due in monthly installments
through March 1997 $29,280 $ 68,153
Secured installment note,
collateralized by property,
equipment and tradename of
First Light, due with
interest at 4.37% per annum
in quarterly installments
through July 1998 47,696 62,586
------- --------
$76,976 $130,739
======= ========
</TABLE>
Aggregate maturities of notes payable at July 31,
1996 are as follows:
<TABLE>
<CAPTION>
Amount
------
<S> <C>
1997 $ 49,902
1998 21,536
1999 5,538
--------
$ 76,976
========
</TABLE>
4. STOCKHOLDERS' (a) Stock Options
EQUITY
AAFC Group adopted a stock option plan in 1991
which, as revised, permits the issuance of stock
options for the purchase of up to 4 million shares
of American Artists' common stock. Stock options
may be granted to officers, directors, employees
and consultants and may be either "incentive stock
options" (as defined in the Internal Revenue Code)
or non-qualified stock options. Stock options are
generally granted at an exercise price equal to
the grant date fair value of American Artists'
common stock, and vest at varying rates over
periods ranging from one to four years.
In December 1995, AAFC Group replaced its existing
stock option plan with the 1995 stock option plan
("1995 Option Plan"). The 1995 Option Plan allows
for the issuance of up to 2.5 million options as
either incentive stock options or nonqualified
stock options, and stock appreciation rights. The
method used in determining the grant price and
vesting period is similar to the method used under
the previous stock option plan.
F-23
<PAGE>
AMERICAN ARTISTS FILM CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Stock options outstanding and vested as of July
31, 1996 are as follows:
<TABLE>
<CAPTION>
Exercise Options Options Exercisable
Price Outstanding Vested Through
----- ------------ ------ -------
<S> <C> <C> <C>
$ .05 140,000 100,000 2004
.50 1,500,000 1,000,000 2003
.85 1,159,750 175,000 2005
1.00 250,620 - 2000
1.50 247,750 - 2005
</TABLE>
(b) Common Stock Purchase Warrants
During fiscal 1995 and fiscal 1996, American
Artists undertook two private placements of units
comprised of shares of common stock and common
stock purchase warrants. During fiscal 1995
American Artists issued, for $.85 per unit, two
units with each unit comprised of 29,412 shares of
common stock and 14,706 common stock purchase
warrants. During fiscal 1996, American Artists
issued 15.7 additional such units. This placement
in fiscal 1996 resulted in the issuance of 230,884
common stock purchase warrants. The second
private placement, at $1.00 per unit, with each
unit comprised of 25,000 shares of common stock
and 12,500 common stock purchase warrants, was
commenced during fiscal 1996. During fiscal 1996
American Artists issued 22.55 such units which
resulted in the issuance of 281,912 common stock
purchase warrants.
<TABLE>
<CAPTION>
Shares
------
<S> <C>
Outstanding, August 1, 1994 -
Issued 29,412
Exercised -
Forfeited -
-------
Outstanding, July 31, 1995 29,412
Issued 512,796
Exercised -
Forfeited -
-------
Outstanding, July 31, 1996 542,208
-------
</TABLE>
F-24
<PAGE>
AMERICAN ARTISTS FILM CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Warrants outstanding at July 31 1996 are as
follows:
<TABLE>
<CAPTION>
Exercise Warrants Exercisable
Price Outstanding Through
----- ----------- -------
<S> <C> <C>
$1.50-$2.00 542,208 June 1998
</TABLE>
5. INCOME TAXES Deferred tax assets result from the following
temporary differences between book and tax bases
of assets:
<TABLE>
<CAPTION>
July 31, 1996 1995
---- ----
<S> <C> <C>
Deferred tax assets:
Investment in Diversity
Filmworks, Inc. $ 97,000 $ 23,000
Net operating loss carry-
forward 647,000 270,000
Valuation allowance (744,000) (293,000
--------- ---------
$ - $ -
========= =========
</TABLE>
AAFC Group has net operating loss carryforwards for
federal tax purposes amounting to approximately
$1,702,000 at July 31, 1996. These net operating
loss carryforwards expire principally in fiscal
years 2008 through 2011. As a result of such net
operating loss carryforwards and the related
valuation allowance, AAFC Group has not provided a
provision for income taxes for the years ended July
31, 1996 and 1995.
6. CONTINGENCIES American Artists is currently involved in an
arbitration with one of its co-producers concerning
the accounting for the costs incurred and revenues
received by each company relating to two co-
produced feature films. The probable outcome of the
arbitration is not presently determinable.
Management believes that it is reasonably possible
that the arbitration may result in a finding
against the Company ranging up to
$150,000.
7. RELATED PARTY (a) In July 1996 a member of the board of
TRANSACTIONS directors established a three month line of credit,
in favor of the Company, for borrowings not to
exceed $75,000. The initial terms of this line of
credit were agreed to in May 1996 in return for the
issuance of 48,120 stock options, with a exercise
price of $1.00. Subsequent to July 31, 1996, the
Company borrowed the maximum amount allowed under
the line of credit. In November 1996, the Company
converted this line of credit into a note which the
Company is paying in monthly installments.
F-25
<PAGE>
AMERICAN ARTISTS FILM CORPORATION
AND SUBSIDIARIES
Notes To Consolidated Financial Statements
(b) In September 1996, two members of the board of
directors loaned the Company $50,000. These notes
are non-interest bearing and are due on demand.
8. SEGMENT INFORMATION Financial information by business segment is as
follows:
<TABLE>
<CAPTION>
Development
and Film Contract
Production Production Consolidated
---------- ---------- ------------
<S> <C> <C> <C>
1996
----
Revenues $ 21,995 $1,689,644 $1,711,639
Loss from
operations 598,072 388,083 986,155
Identifiable assets 491,982 247,924 739,906
Capital expenditures - - -
Depreciation and
amortization 21,013 58,304 79,317
1995
----
Revenues $882,331 $2,819,390 $3,701,721
Income from
operations 26,770 37,893 64,663
Identifiable assets 522,790 275,438 798,228
Capital expenditures 10,895 8,947 19,842
Depreciation and
amortization 578,312 64,802 643,114
</TABLE>
9. SUPPLEMENTAL CASH
FLOW INFORMATION
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Cash paid for interest $ 6,777 $ 10,009
Cash paid for income taxes - 2,498
</TABLE>
(a) The Company acquired First Light, as described
in Note 2, in a non-cash transaction.
(b) In September 1994, the American Artists
converted stock options, which would have allowed
for the purchase of 902,140 shares of common stock
at prices ranging from $1.25 to $2.25, into 90,214
shares of common stock. The transaction was
accounted for as an exchange of equity instruments,
with no gain or loss recognized.
F-26
<PAGE>
AMERICAN ARTISTS FILM CORPORATION
AND SUBSIDIARIES
Pro Forma Financial Statements
(Unaudited)
INTRODUCTION As discussed elsewhere herein, on October 7, 1996
Setab Alpha and Old American Artists completed a
merger ("the Merger") whereby, Setab Alpha, which
at that time constituted the Company acquired 100
percent of the outstanding common stock of Old
American Artists in exchange for the issuance of
12,600 shares of the Company's Class A common
stock and 5,502,277 shares of the Company's Class
B common stock. The consummation of the Merger
was conditioned upon, among other things, Setab
Alpha's prior completion of its public offering,
with not fewer than 200 stockholders' and the
approval of the shareholders of Old American
Artists. Setab Alpha completed its public
offering on October 7, 1996, and Old American
Artists obtained the approval of its shareholders
on September 28, 1996. Upon the completion of the
Merger the name of Setab Alpha was changed to
American Artists Film Corporation ("American
Artists" or "the Company").
The accompanying unaudited pro forma consolidated
balance sheet is presented to illustrate the
effect on the financial statements of the Merger,
and assumes the merger, and the prerequisite
public offering, were completed on July 31, 1996.
The Merger resulted in the issuance of a
controlling interest in the Company to the
stockholders of Old American Artists. Because of
this, and because Setab Alpha had not had any
material operations, the Merger is being accounted
for as a recapitalization of Old American Artists
in which (i) Old American Artists is deemed to
have, on October 7, 1996, (a) created a second
class of common stock, such that its authorized
capital consists of Class A and Class B common
stock, each with a par value of $.001, and (b)
exchanged for the outstanding shares of its common
stock, an aggregate of 12,600 shares of Class A
Common Stock, and 5,502,277 shares of Class B
Common Stock, and (ii) issued 700,020 shares of
Class A common stock, (representing the number of
shares of Setab Alpha common stock outstanding
upon the completion of its public offering) in
exchange for the net assets of Setab Alpha,
recorded at their historical cost.
Old American Artists will be the continuing entity
for accounting and financial reporting purposes,
and accordingly the results of operations to be
reported for periods prior to the Merger will be
those of Old American Artists. Setab Alpha had no
material operations, and as a result the pro forma
results of operations would not differ materially
from Old American Artists' historical results of
operations. Accordingly, pro forma statements of
operations are not presented.
F-27
<PAGE>
AMERICAN ARTISTS FILM CORPORATION
AND SUBSIDIARIES
Pro Forma Financial Statements
(Unaudited)
The following unaudited pro forma information may
not be indicative of future financial position.
The unaudited pro forma information should be read
in conjunction with the historical financial
statements of the Setab Alpha and Old American
Artists presented elsewhere herein.
F-28
<PAGE>
SETAB ALPHA/AMERICAN ARTISTS FILM CORPORATION
Pro Forma Consolidated Balance Sheet
(Unaudited)
<TABLE>
<CAPTION>
American
Artists Film
Corporation Setab Alpha
July 31, July 31, Pro forma
1996 1996 Adjustments Pro forma
---- ---- ----------- ---------
<S> <C> <C> <C> <C>
ASSETS
Cash $ - - $ $ -
Accounts receivable 107,457 107,457
Film assets, net of
accumulated amortization 475,877 - 475,877
Property and equipment, net 52,128 - 52,128
Goodwill, net of accumulated
amortization 156,572 - 156,572
Deferred offering cost 105,000 10,000 (10,000) (B) -
(105,000) [D]
Advances to officers 217,247 - 217,247
Other 112 - 112
----------- -------- -----------
$ 1,114,393 $ 10,000 $ 1,009,393
=========== ======== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Accounts payable $ 246,188 $ 10,500 $ (10,500) [B] $ 246,188
Accrued expenses 292,323 165 (165) [B) 292,323
Film revenue participation - - -
Deferred revenue 11,867 - 11,867
Notes payable 76,976 4,812 (4,812) [B] 76,976
----------- -------- -----------
Total liabilities 627,354 15,477 627,354
MINORITY INTEREST 50,000 - 50,000
STOCKHOLDERS' EQUITY
Preferred stock - - -
American Artists common stock 470,392 (470,392) [A] -
Class A common stock - 700 [C] 713
13 (A)
Class B common stock 5,502 [A] 5,502
Additional paid-in capital 2,125,117 - 464,877 [A] 2,484,294
(700) [C]
(105,000) [D]
Unamortized advertising credits (122,618) - (122,618)
Deficit (2,035,852) - (2,035,852)
Net assets of Setab Alpha (5,477) 5,477 [B] -
----------- -------- -----------
Total stockholders' equity 437,039 (5,477) 332,039
----------- -------- -----------
$ 1,114,393 $ 10,000 $ 1,009,393
=========== ======== ===========
</TABLE>
See notes to pro forma consolidated balance sheet.
F-29
<PAGE>
SETAB ALPHA/AMERICAN ARTISTS FILM CORPORATION
Pro Forma Consolidated Balance Sheet
(Unaudited)
1. BASIS OF PRESENTATION Reference is made to the "Introduction" at page
F-27.
2. PRO FORMA ADJUSTMENTS Adjustments to the pro forma consolidated balance
sheet are as follows:
(A) To reflect Old American Artists' deemed
recapitalization in which it exchanged the
shares of its outstanding common stock for an
aggregate of 12,600 shares of Class A Common
Stock and 5,502,277 shares of Class B Common
Stock.
(B) To reflect Setab Alpha's receipt and
application of the net proceeds of the Public
Offering of 700,000 shares of Class A Common
Stock at $0.05 per share.
(C) To record the Merger, accounted for as the
issuance by Old American Artists of 700,020
shares of Class A common stock (representing
the number of shares of Setab Alpha common
stock to be outstanding upon the completion of
the offering) for the net assets of Setab
Alpha.
(D) To charge deferred offering costs against the
proceeds of the offering and the Merger.
F-30
<PAGE>
Exhibit 10.36
[LETTERHEAD OF I. J. KAPPLIN CO.]
THIS LEASE, made this 15TH day of AUGUST, 1996, by and between
KEE JOINT VENTURE, first party, (hereinafter called "Landlord");
and FIRST LIGHT FILMS, second party, (hereinafter called
"Tenant"); and I. J. Kapplin Co., third party, (hereinafter
called "Agent")
W I T N E S S E T H:
PREMISES 1. The Landlord, for and in consideration of the rents,
covenants, agreements, and stipulations hereinafter mentioned,
reserved and contained, to be paid, kept and performed by the
Tenant, has leased and rented, and by these presents does lease
and rent, unto the said Tenant, and said Tenant hereby agrees to
lease and take upon the terms and conditions which hereinafter
appear, the following described property (hereinafter called
premises), to wit:
Office and warehouse area of approximately 8,000 sq ft. and
known as 1245 Fowler Street, N.W., Atlanta, Georgia
No easement for light or air is included in the premises.
TERM 2. To have and to hold for a term of one year beginning on
the 1st day of December, 1996 and ending on the 30th day of
November 1997 at midnight unless sooner terminated as hereinafter
provided.
RENTAL 3. Tenant agrees to pay Landlord, promptly on the first
day of each month in advance, during the term of this lease, a
base monthly rent of:
Three Thousand Three Hundred Dollars ($3,300.00).
LATE 3. All rentals and other charges payable under this lease
CHARGES shall be due and payable as set forth above. Rentals and other
charges received or post marked after the tenth day of each month
shall be charged with and additional late charge in an amount
equal to 5% of the delinquent rent or charge. Notwithstanding any
provision hereof Lessor shall have the right to refuse any
rentals paid after the first day of each month.
AGENT'S 4. The commission to be paid in connection with this
COMMISSION transaction has been negotiated between Landlord and Agent and
Landlord agrees to pay Agent, as compensation for services
rendered in procuring this lease, five percent (5%) of all
rentals thereafter paid by Tenant under this lease and any late
charges collected by Agent, and Landlord, with consent of
Tenant, hereby assigns to Agent aforesaid commission. If Tenant
becomes a Tenant at will or at sufferance or if the term of this
lease is extended, or if new lease is entered into between
Landlord and Tenant covering leased premises, or any part
thereof, or covering any other premises as an expansion of, or
substitute for, the premises herein leased, then in either of
said events, Landlord, in consideration of Agent's having
procured Tenant hereunder, agrees to pay Agent five percent (5%)
of all rentals paid to Landlord by Tenant, under such extension,
amendment, or new lease. Agent agrees that, in the event Landlord
sells leased premises, and upon Landlord's furnishing Agent with
an agreement signed by Purchaser assuming Landlord's obligations
to Agent under this lease, Agent will release original Landlord
from any further obligations to Agent hereunder, Tenant agrees
that if this lease is validly assigned by him that he will secure
from assignee an agreement in writing by assignee recognizing
assignment held by Agent and agreeing to pay rental to Agent
herein named during the term of this lease. Agent is a party to
this contract solely for the purpose of enforcing his rights
under this paragraph and it is understood by all parties hereto
that Agent is acting solely in the capacity as agent for
Landlord, to whom Tenant must look as regards all covenants,
agreements and warranties herein contained, and that Agent shall
never be liable to Tenant in regard to any matter which may arise
by virtue of this lease. Voluntary cancellation of this lease
shall not nullify Agent's right to collect the commission due for
the remaining term of this lease. In the event that the premises
is condemned, or sold under threat of and in lieu of
condemnation, Agent shall, on the date of receipt by Landlord of
the condemnation award or sale proceeds, be paid agent's
commission, which would otherwise be due to the end of the term
contracted for under paragraph 2 above.
In the event that Tenant or any person or related entity or
business organization having any direct or indirect financial
interest in Tenant's business, acquires title to the leased
premises at any time during the term of this lease, any renewals
thereof, or within six months after the expiration of the term
hereof or the extended term hereof, then Landlord shall pay Agent
a commission on the sale of the property of the Landlord in lieu
of any additional rental commissions. Such sales commission, as
negotiated between parties, is to be a minimum of 5% of the sales
price.
UTILITY BILLS 5. Tenant shall pay all utility bills, including, but not
limited to water, sewer, gas, electricity, fuel, light, and heat
bills, for the leased premises and Tenant shall pay all charges
for garbage collection services or other sanitary services
rendered to the leased premises or used by Tenant in connection
therewith. If Tenant fails to pay any of said utility bills or
charges for garbage collection or other sanitary services,
Landlord may pay the same and such payment may be added to the
rental of the premises next due as additional rental.
USE OF 6. The demised premises shall be used only for purpose of
PREMISES video tape & film production, receiving, storing, shipping and
--------------------------------
selling (other than retail) products, materials and merchandise
made and/or distributed by Tenant and for such other lawful
purposes as may be incidental thereto, and subject to any
building or building complex rules and regulations. Outside
storage, including without limitation, trucks and other vehicles,
is prohibited without Landlord's prior written consent, Tenant
shall at its own cost an expense obtain any and all licenses and
permits necessary for any such use. Tenant shall comply with all
governmental laws, ordinances and regulations applicable to the
use of the premises, and shall promptly comply with all
governmental orders and directives for the correction, prevention
and abatement of nuisances in or upon, or connected with, the
premises, all at Tenant's sole expense. Tenant shall not permit
any objectionable or unpleasant odors, smoke, dust, gas, noise or
vibrations to emanate from the premises, nor take any other
action which would constitute a nuisance or would disturb or
endanger any other tenants of the building in which their
premises are situated or unreasonably interfere with their use of
their respective premises. Without Landlord's prior written
consent, Tenant shall not receive, store or otherwise handle any
product, material or merchandise which is explosive or highly
flammable. Tenant will not permit the premises to be used for any
purpose or in any manner (including without limition any method
of storage) which would render the insurance thereon void or the
insurance risk more hazardous or cause the State Board of
Insurance or other insurance authority to disallow any sprinkler
credits. If any increase in the fire and extended coverage
insurance premiums paid by Landlord or other Tenants for the
building in which Tenant occupies space is caused by Tenant's use
and occupancy of the premises, or if Tenant vacates the premises
and causes an increase in such premiums, then Tenant shall pay as
additional rental the amount of such increase to Landlord.
<PAGE>
ABANDONMENT 7. Tenant agrees not to abandon or vacate leased premises
OF LEASED during the period of this lease, and agrees to use said premises
PREMISES for purpose herein leased until the expiration thereof.
REPAIRS BY 8. Landlord agrees to keep in good repair the roof,
LANDLORD foundations, and exterior walls of the premises (exclusive of all
glass and exclusive of all exterior doors), and underground
utility and sewer pipes outside the exterior walls of the
Building, except repairs rendered necessary by the negligence of
Tenant, its agents, employees, or invitees. Landlord gives to
Tenant exclusive control of premises and shall be under no
obligation to inspect said premises. Tenant shall promptly report
in writing to Landlord any defective condition known to it which
Landlord is required to repair, and failure to so report such
defects shall make Tenant responsible to Landlord for any
liability incurred by Landlord by reason of such defects.
REPAIRS BY 8a. Tenant accepts the leased premises in their present
TENANT condition and as suited for the uses intended by Tenant. Tenant
shall, throughout the initial term of this lease and all renewals
thereof, at its expense, maintain in good order and repair the
leased premises, including the building and other improvements
located thereon, except those repairs expressly required to be
made by Landlord. Tenant agrees to return said premises to
Landlord at the expiration, or prior to termination, of this
lease in as good condition and repair as when first received,
natural wear and tear, damage by storm, fire, lightning,
earthquake or other casualty alone excepted. Tenant further
agrees not to permit the storage or abandonment of disabled
vehicles in the parking or loading areas.
TAX & 9. Tenant shall pay upon demand, as additional rental
ESCALATION during the term of this lease and any extension or renewal
thereof, the amount by which all taxes (including, but not
limited to, ad valorem taxes, special assessments and any other
governmental charges), on the premises for each tax year exceeds
all taxes on the premises for the tax year 1993. In the event the
----
premises are less than the entire property assessed for such
taxes for any such tax year, then the tax for any such year
applicable to the premises shall be determined by proration on
the basis that the rentable floor area of the premises bears to
the rentable floor area of the entire property assessed. If the
final year of the lease term fails to coincide with the tax year,
then any excess for the tax year during which the term ends shall
be reduced by the pro rata part of such tax year beyond the lease
term. If such taxes for the year in which the lease terminates
are not ascertainable before payment of the last month's rental,
then the amount of such taxes assessed against the property for
the previous tax year shall be used as basis of determining the
pro rata share, if any, to be paid by Tenant for that portion of
the last lease year. Tenant's pro rata portion of increased
taxes, as provided herein, shall be payable within fifteen days
after receipt of notice from Landlord or Agent as to the amount
due.
DESTRUCTION 10. If premises are totally destroyed by storm, fire,
OF, OR DAMAGE lightning, earthquake or other casualty, this lease shall
TO PREMISES terminate as of the date of such destruction, and rental shall be
accounted for as between Landlord and Tenant as of that date. If
premises are damaged but not wholly destroyed by any such
casualties, rental shall abate in such proportion as use of
premises has been destroyed, and Landlord shall restore premises
to substantially the same condition as before damage as speedily
as practicable, whereupon full rental shall recommence.
INDEMNITY 11. Tenant agrees to indemnify and save harmless the
Landlord against all claims for damages to persons or property by
reason of the use or occupancy of the leased premises, and to
reimburse Landlord for all expenses incurred by Landlord because
thereof, including attorneys' fees and court costs. Landlord
agrees to indemnify and save harmless the Tenant against all
claims for damages to persons or property as a result of
Landlord's occupancy in the building.
GOVERNMENTAL 12. Tenant agrees, at his own expense, to promptly comply
ORDERS with all requirements of any legally constituted public
authority made necessary by reason of Tenant's occupancy. It is
mutually agreed, however, between Landlord and Tenant, that if in
order to comply with such requirements, the cost to Landlord or
Tenant, as the case may be, shall exceed a sum equal to one
year's rent, then Landlord or Tenant who is obligated to comply
with such requirements is privileged to terminate this lease by
giving written notice of termination to the other party, by
registered mail, which termination shall become effective sixty
(60) days after receipt of such notice, and which notice shall
eliminate necessity of compliance with such requirement by party
giving such notice unless party receiving such notice of
termination shall, before termination becomes effective, pay to
party giving notice all cost of compliance in excess of one
year's rent, or secure payment of said sum in manner satisfactory
to party giving notice.
CONDEMNATION 13. If the whole of the leased premises, or such portion
thereof as will make premises unusable for the purposes herein
leased, be condemned by any legally constituted authority for
any public use or purpose, then in either of said events the term
hereby granted shall cease from the date when possession thereof
is taken by public authorities, and rental shall be accounted for
as between Landlord and Tenant as of said date. Such termination,
however, shall be without prejudice to the rights of either
Landlord or Tenant to recover compensation and damage caused by
condemnation from the condemnor. Its is further understood and
agreed that neither the Tenant nor Landlord shall have any rights
in any award made to the other by any condemnation authority
notwithstanding the termination of the lease as herein provided.
Landlord agrees to pay to Agent, from the award made to Landlord
under condemnation, the balance of lease commissions, as provided
in paragraph 4 thereof, and agent may become a party to the
condemnation proceeding for the purpose of enforcing its rights
under this paragraph.
ASSIGNMENT 14. Tenant may sublease portions of the leased premises to
SUBLETTING others provided such sublessee's operation is a part of the
general operation of Tenant and under the supervision and control
of Tenant, and provided such operation is within the purposes
for-which said premises may be used. Except as provided in
preceding sentence. Tenant shall not, without the prior written
consent of premises by any party other than Tenant. Consent to
any assignment or sublease shall not destroy this provision, and
all later assignments or subleases shall be made likewise only on
the prior written consent of Landlord. Assignee of Tenant, at
option of Landlord, shall become directly liable to Landlord for
all obligations of Tenant hereunder, but no sublease or
assignment by Tenant shall relieve Tenant of any liability
hereunder.
REMOVAL OF 15. Tenant may (if not in default hereunder) prior to the
FIXTURES expiration of this lease, or any extension thereof, remove only
trade fixtures and trade equipment which he has placed in
premises, provided Tenant repair all damage to premises caused by
such removal. All improvements and additions made to the premises
by the Tenant shall become the property of the Landlord.
CANCELLATION 16. It is mutually agreed that in the event the Tenant
OF LEASE BY shall default in the payment of rent, including additional rent,
LANDLORD herein reserved, when due, and fails to cure said default within
five (5) days after written notice thereof from Landlord; or if
Tenant shall be in default in performing any of the terms or
provisions of this lease other than the provision requiring the
payment of rent, and fails to cure such default within thirty
(30) days after the date of receipt of written notice of default
from Landlord; or if Tenant commits an act of bankruptcy; or if a
permanent receiver is appointed for Tenant's property and such
receiver is not removed within sixty days after written notice
from Landlord to Tenant to obtain such removal; or if, whether
voluntarily or involuntarily, Tenant takes advantage of any
debtor relief proceedings under any present of future law,
whereby the rent or any part thereof is, or is proposed to be,
reduced or payment thereof is, or is proposed to be, reduced or
payment thereof deferred; or if Tenant makes an assignment for
benefit of creditors; or if Tenant's effects should be levied
upon or attached under process against Tenant, not satisfied or
dissolved within thirty (30) days after written notice from
Landlord to Tenant to obtain satisfaction thereof; then, and in
any of said events, Landlord at his option may at once, or within
six (6) months thereafter (but only during continuance of such
default or condition), terminate this lease by written notice to
Tenant; whereupon this lease shall end. After an authorized
assignment or subletting of the entire premises covered by this
lease, the occurring of any of the foregoing defaults or events
shall affect this lease only if caused by, or happening to, the
assignee or sublessee. Any notice provided in this paragraph may
be given by Landlord, or his attorney, or Agent herein named.
Upon such termination by Landlord, Tenant will at once surrender
possession of the premises to Landlord and remove all of Tenant's
effects therefrom: and Landlord may forthwith re-enter the
premises and repossess himself thereof, and remove all persons
and effects therefrom, using such force as may be necessary
without being guilty of trespass, forcible entry or detainer or
other tort. In the event Tenant's check, given to Landlord in
payment, is returned by the bank for non-payment, Tenant agrees
to pay all expenses incurred by Landlord as a result thereof.
Tenant shall pay all rent payments thereafter by bank cashier's
check or money order, after the second occurrence of a check
returned for non-payment.
<PAGE>
SPECIAL STIPULATIONS
1. Tenant shall deduct the cost of new floor covering for the foyer from the
next month's rent. Such cost not to exceed $450.00.
2. Tenant shall submit for Landlord's approval any modifications or remodeling
of the building prior to commencement of such modification or remodeling. All
such work shall be at Tenant's sole cost and expense and Tenant shall furnish
Landlord with certificate of payment in full from any contractors,
subcontractors and material suppliers and Tenant shall have no right to create a
lien against the property and the leased premises.
3. All such repairs, improvements, remodeling and renovations must conform to
all applicable governmental requirements and regulations.
4. Tenant agrees that upon termination of this lease regardless of reason, all
improvements made to the premises by Tenant shall become the property of
Landlord, including but not limited to air-conditioning and heating systems,
floor covering, wall covering, lighting and plumbing fixtures, with the
exception of personal property not attached to the realty, and at Landlord's
option only, to remove ramp that is planned to be constructed by Tenant.
5. Tenant shall at all times during the term of this lease and so long
thereafter as Tenant shall occupy the premises, cause to be written a policy or
policies of insurance by insurance companies authorized to do business in the
State of Georgia, insuring Tenant and Landlord against any and all insurable
liability in the form generally known as commercial general liability insurance,
insuring Tenant and Landlord against all matters normally insured for under such
policies. Such policies shall have limits of not less than One Million
($1,000,000) dollars for bodily injury and property damage combined per any one
occurrence and a Two Million ($2,000,000) aggregate limit for all occurrences
within the policy year. All such policies shall name Tenant and Landlord as
their respective interests may appear, as the persons insured by such policy or
policies, and the original or a true copy of each such policy shall be delivered
by Tenant to Landlord promptly upon the writing of such a policy or policies
together with adequate evidence of the fact that the premiums are therefore
paid.
6. Tenant further agrees to hold Landlord harmless against third party claims.
7. Tenant further waives any rights to subrogation against Landlord and Landlord
agrees to waive any rights to subrogation against Tenant.
8. It is understood that Tenant will be driving cars into the rear of building
for purposes of photographing them. The cars shall be limited to passenger cars
whose gross weight shall not exceed 5,000 lbs. and Tenant shall exercise care in
the movement of these cars so as not to exert excessive torque by such movement.
The mobile bus used by Tenant shall be kept only at the front end of the
building.
9. Tenant agrees to pay its pro-rata share of any increase in real estate taxes
and insurance based upon square footage of leased premises relative to the base
premises, during the term of this lease.
10. Tenant agrees not to impose other than light storage loading on the elevated
portion of the warehouse and/or any concentrated floor loads over 125 PSF.
<PAGE>
All references in this lease to "the date hereof" or similar
references shall be deemed to refer to the last date, in point of time, on which
all parties hereto have executed this lease.
This lease contains the entire agreement of the parties hereto and no
representations, inducements, promises or agreements, oral or otherwise,
between the parties, not embodied herein, shall be of any force or affect.
IN WITNESS WHEREOF, the parties herein have hereunto set their hands
and seal, the day and year first above written.
Executed by Landlord this 4th day of November, 1996
----- ------------- --
/s/ Warren Epstein
- ----------------------------
(By:) KEE JOINT VENURES
Executed by Tenant, this __________ day of _____________, 19____.
/s/ J. Eric Van Atta
- -----------------------------------------------------------
(By:) J. Eric Van Atta, Vice President FIRST LIGHT FILMS
/s/ Lynn Carden
- -----------------------------------------------------------
(By:) LYNN CARDEN I.J. KAPPLIN CO.
<PAGE>
Exhibit 10.37
DEPOSIT GUARANTY NATIONAL BANK
JACKSON, MISSISSIPPI
PROMISSORY NOTE
--------------------------------------------
Borrower Number Note Number
-------------------------------------------
1156611 0535401
-------------------------------------------
American Artists Film Corporation
- ---------------------------------
_________________________________
Borrower Name(s)
Amount of Note Loan Type
#10 Lakeland Circle $75,000.00 223
- --------------------------------- ----------------- --------
Address
Jackson, MS Date of Note Date Due Term Days
- ---------------------------------
City State Nov. 21, 1996 May 20, 1997 180
---------------- -------------- ----------
39216
- ------------
Zip Code
180 days after date, the undersigned (jointly and severally, if
--------------------
more than one) hereinafter called Maker, promises to pay to DEPOSIT GUARANTY
NATIONAL BANK, Jackson, Mississippi, or order, payable at Main Office or any
Branch Seventy Five Thousand And 00/100 Dollars with
-------------------------------------------------------------
interest thereon from date until paid at the per annum rate of: 8.75%
--------
This note is payable in monthly installments of $3000.00 INCLUDING INTEREST
beginning Dec. 10, 1996 and on the 10th day of each succeeding month with the
remaining unpaid principal plus accrued interest due and payable at maturity.
Failure to pay any installment as and when due shall, at the option of the
holder, mature the entire indebtedness.
In the event any installment payment of principal and /or interest is more than
fifteen (15) days past due, Maker promises to pay a late payment charge of $5.00
or four (4%) percent of the amount of the delinquancy, whichever is greater.
On loans of $100,000.00 or less having a stated maturity of five years or less,
the late payment charge shall not exceed $50.00.
At its option, and at one or more times, Bank may, but shall have no obligation
to, debit any deposit account of any Obligor with Bank for all or any part of
any sums then due and payable to Bank hereunder.
Maker has Pledged to Bank as collateral for payment of this and any and
all other liabilities, direct or indirect, absolute or contingent, due or to
become due, now existing or hereafter arising (all hereinafter called
"obligation"), the following property listed below, hereinafter called
Collateral:
UNSECURED
SDB EV
Page 1 of 3 pages Initials ------------------
<PAGE>
================================================================================
Name of Borrower: AMERICAN ARTISTS FILM CORPORATION
- --------------------------------------------------------------------------------
Borrower Number: 1156611 Note Number: 0535401
================================================================================
Any pledge or transferee of this note and the Collateral shall have all
rights of Bank hereunder and Bank shall thereafter be relieved from any
liability with respect to any Collateral so pledged or delivered.
Maker will at all times keep the collateral insured at all times against
all insurable hazards in amounts equal to the full cash value of the collateral.
Such insurance shall be with insurance carriers which are qualified to do
business in Mississippi and in good standing with the Mississippi Department of
Insurance, and shall provide for payment of all losses thereunder to Bank as its
interest may appear, and, if required, Maker will deposit the policies of
insurance with Bank. Any money received by Bank under said policies may be
applied to the payment of the indebtedness secured hereby with such payment
applied first to interest, then to principal and any other charges, whether or
not due and payable, or at Bank's option, may be delivered by Bank to Maker for
the purpose of repairing or restoring the collateral. Maker hereby assigns to
Bank all rights to receive proceeds of insurance not exceeding the amount of
Maker's indebtedness to bank, direct any insurer to pay all proceeds directly to
Bank, and appoints Bank as its attorney-in-fact to endorse any draft or check
made payable to Maker in order to collect the benefit of any such insurance.
Prior to the expiration or cancellation date of Maker's insurance policy on the
collateral, Maker shall provide Bank with a renewal or replacement policy having
an effective date the same as the expiration or cancellation date on Maker's
prior policy and meeting the same requirements as stated hereinabove.
If Maker fails to keep the collateral insured as required by Bank, such
failure shall be a default under the terms and conditions of this note. In
addition, Bank may, at its option, and in addition to any other rights and
remedies the Bank may have under this note or any other agreement with Maker,
purchase insurance at Maker's expense to protect Bank's interest continuously
retroactive to the date of expiration or cancellation of Maker's policy for
Maker's failure to keep the collateral insured. If Bank chooses to purchase
insurance upon Maker's failure to keep the collateral insured, Bank will notify
Maker about the types and amounts of the coverages at the time Bank purchases
such insurance. In addition, the insurance that the Bank purchases likely will
not provide all of the insurance coverage which Maker might normally obtain on
its own, such as liability coverage or coverage for any equity which Maker may
have in the collateral. Also, the deductibles may not be the same as the
deductibles contained in a policy which Maker might normally obtain on its own.
The insurance the Bank purchases likely will not be purchased through the
same carrier and/or agent from which Maker might have previously purchased
insurance on the collateral, and in most cases, the cost of the insurance will
be significantly higher than the insurance which Maker might obtain on its own.
If Bank pays for insurance, such payment shall be secured by the collateral,
and shall bear interest at the ANNUAL PERCENTAGE RATE set forth in Maker's Note
and/or Loan Agreement. Maker agrees to reimburse Bank on demand for any such
payment, plus accrued interest, or otherwise to pay said sums in any manner of
installments required by Bank. Maker authorizes Bank to forward any information
which Bank deems necessary to third parties performing services incidental to
Bank's rights and duties under this Note and any Security Agreement with Maker,
including but not limited to, insurance monitoring and placement services.
Even if Bank purchases insurance on the collateral as set out hereinabove,
Maker has the right to purchase the required insurance from an agent or company
of Maker's choice at any time and provide the insurance policy to Bank. Upon
receipt of such policy, Bank will have the insurance cancelled for any period
during which Maker has the required insurance in force and any refund will be
made to Maker's account.
Maker shall take all necessary steps to preserve rights against prior
parties to instruments or chattel paper constituting Collateral and shall be
responsible generally for its preservation. If the Collateral shall at any time
become unsatisfactory to Bank, Maker shall within twenty-four hours after
demand, pledge as part of the Collateral additional property which is
satisfactory to bank.
Upon the happening of any of the following events, each of which shall
constitute a default hereunder, all liabilities of each Maker to Bank shall
become immediately due and guarantor of this note) to perform any agreement
hereunder or pay any obligation secured hereby when due, including without
limitation, failure to obtain or maintain any required insurance on the
collateral pledged to secured this note; (2) death of any Obligor; (3) filing of
any petition in bankruptcy by or against any Obligor; (4) application for
appointment of a receiver for, making of a general assignment for the benefit of
creditors by, or insolvency of any Obligor, or (5) determination by any officer
of Bank that a material adverse change has occurred in the financial condition
of any Obligor. Upon occurrence of any such event or at any time thereafter,
Bank shall have the remedies of a secured party under Uniform Commercial Code of
Mississippi. Any notice of sale or other intended disposition of the Collateral
sent to Maker at least five days prior to such action shall constitute
reasonable notice to Maker. Bank may waive any default before or after the same
has been declared without impairing its rights to declare a subsequent default
hereunder, this right being a continuing one.
In addition, if Maker is in default under this Note, and Maker has
purchased credit life insurance and/or credit disability insurance in connection
with this Note, then Bank may, at its option, and notwithstanding the terms of
the policy(ies) and/or certificates(s) governing such insurance, cancel such
insurance and credit any unearned premium(s) to your outstanding balance under
this Note.
Any renewals, extensions and/or modifications of this Note may not extend
the expiration date of the credit life insurance and/or the credit disability
insurance written in connection with this Note. You should refer to your credit
life/credit disability policy and/or certificate to determine the expiration
date of such insurance.
This note, or any renewal thereof, may be extended without notice and with
out affecting the liability of any Obligor or any Collateral. The Bank may at
its discretion surrender any Collateral without affecting the liability of any
Obligor.
Bank is hereby given a lien upon and a security interest in any moneys or
property, including any deposits, at any time in possession of Bank belonging to
each Obligor, all of which shall be treated as security for payment of this
note. Bank may, at its option in event of default, set off such moneys, property
or deposits against this note or any other obligation of Maker.
PAGE 2 OF 3 PAGES INITIALS SDB EV
------------------
<PAGE>
================================================================================
Name of Borrower: AMERICAN ARTISTS FILM CORPORATION
- --------------------------------------------------------------------------------
Borrower Number: 1156611 Note Number: 0535401
================================================================================
All Obligors waive protest of this note. If this not is paid when due, all
Obligors agree to pay all costs and expenses of collection, including reasonable
attorney's fee and legal expenses, all of which are secured by the Collateral.
Bank shall in no event be liable to any party hereto for failure to this note,
in whole or in part.
Any demand upon or notice to Marker shall be sufficiently served for all
purpose if personally delivered or placed in the mail addressed to the address
shown below or such other address as may be shown on the Bank's records.
In the event that interest on this note is less than $10.00, Maker agrees
to pay a charge of $10.00 in lieu of interest.
- --------------------------------------------------------------------------------
NOTICE TO COSIGNER
(1) YOU ARE BEING ASKED TO GUARANTEE THIS DEBT. THINK CAREFULLY BEFORE YOU DO.
IF THE MAKER (BORROWER) DOES NOT PAY THE DEBT, YOU WILL HAVE TO. BE SURE
YOU CAN AFFORD TO PAY IF YOU HAVE TO, AND THAT YOU WANT TO ACCEPT THIS
RESPONSIBILITY.
(2) YOU MAY HAVE TO PAY UP TO THE FULL AMOUNT OF THE DEBT IF THE MAKER
(BORROWER) DOES NOT PAY. YOU MAY ALSO HAVE TO PAY LATE FEES OR COLLECTION
COSTS, WHICH INCREASE THIS AMOUNT.
(3) THE BANK CAN COLLECT THIS DEBT FROM YOU WITHOUT FIRST TRYING TO COLLECT
FROM THE MAKER (BORROWER). THE BANK CAN USE THE SAME COLLECTION METHODS
AGAINST YOU THAT CAN BE USED AGAINST THE MAKER (BORROWER), SUCH AS SUING
YOU, GARNISHING YOUR WAGES, ETC. IF THIS DEBT IS EVER IN DEFAULT, THAT FACT
MAY BECOME A PART OF YOUR CREDIT RECORD.
(4) THIS NOTICE IS NOT THE CONTRACT THAT MAKES YOU LIABLE FOR THE DEBT.
- --------------------------------------------------------------------------------
AMERICAN ARTISTS FILM CORPORATION
Endorser or Co-Signer No.
/s/ Glen C. Warren, M.D.
By:------------------------------------------
Glen C. Warren, M.D., BOARD MEMBER
/s/ Steven D. Brown, C.E.O
By:------------------------------------------
Steven D. Brown, C.E.O
/s/ J. Eric Van Attn, Vice Pres.
By:------------------------------------------
J. Eric Van Atta, Vice Pres
__________________________________________
__________________________________________
__________________________________________
__________________________________________
__________________________________________
__________________________________________
-------------------------------------------------------
Approved by New or Renewal
-------------------------------------------------------
Initials Number
LOS/ASG 233 R
-------------------------------------------------------
PAGE 3 OF 3 PAGES
<PAGE>
Exhibit 10.38
[LETTERHEAD OF AMERICAN ARTISTS FILM CORPORATION APPEARS HERE]
September 27, 1996
Atlantic International Capital, Ltd.
2200 Corporate Boulevard
Suite 317
Boca Raton, FL 33431
Attention: Mr. Norman Hoskin, Chairman
and Mr. Richard Iammuno, President
RE: Agreement dated may 16, 1995, as Amended
----------------------------------------
Dear Norm and Richard:
This will confirm the agreement between our companies as follows:
1. On May 16, 1995, we entered a certain agreement (as amended, the "1995
Agreement") relating to services to be provided to American Artists Film
Corporation ("Artists") by Atlantic International Capital, Ltd. ("AIC"). The
1995 Agreement is hereby terminated by mutual consent, effective immediately.
2. (a) Artists hereby retains AIC, effective October 1, 1996, (i) to advise
and counsel Artists concerning communications and relations with investors and
with marketmakers in the common stock of Artists following the pending merger
of Artists with Setab Alpha, Inc., and (ii) to provide to Artists other business
advice and counsel.
(b) For such services Artists will pay AIC the sum of $3,000 per month,
payable in advance at the first of each calendar month.
(c) This advisory agreement shall remain in effect through September 31,
1997, unless sooner terminated upon 90 days' prior written notice by either
party.
(d) We acknowledge that AIC is not registered as a broker-dealer under
state or federal laws. Accordingly, AIC shall not in any event provide any
services hereunder for which such registration shall be required by applicable
law. Artists and AIC each covenant and agree to remain in compliance with
applicable securities laws throughout the term of this advisory agreement.
<PAGE>
Atlantic International Capital, Ltd.
September 27, 1996
Page 2
If the above correctly states our agreement with respect to such matters,
please so indicate by signing a copy of this letter in the space provided below
and returning it to Artists.
Yours truly,
AMERICAN ARTISTS FILM CORPORATION
/s/ Steven D. Brown
By:---------------------------------------
Chief Executive Officer
The above correctly states our
agreement with respect to such
matters.
ATLANTIC INTERNATIONAL CAPITAL, LTD.
/s/ NORMAN HOSKIN
By:---------------------------------------
Chairman
Title:------------------------------------
9-27-96
<PAGE>
Exhibit 10.39
OVERHEAD ALLOCATION AGREEMENT
THIS AGREEMENT is entered into by and between AMERICAN ARTISTS FILM
CORPORATION ("AAFC") and DIVERSITY FILMWORKS, INC. ("DFI"), as of July 31, 1996,
which is the effective date.
Recitals
- --------
AAFC and DFI incur certain common office and other overhead expenses, and
desire to establish procedures for allocating and settling those expenses
between themselves.
Agreement
- ---------
AAFC and DFI agree as follows:
1. Each fiscal year the parties acting through their management will
conduct, and agree upon the results of, an Overhead Allocation Study (the
'Study"). The Study will establish a reasonable and consistent method for
allocating overhead expenses between the parties based on their respective
usage. The Study will utilize that method of define a specific percentage for
allocating overhead expenses between the parties, subject to adjustment from
time to time in accordance with the method established.
2. The Study will be completed within 60 days after the beginning of each
fiscal year, and the percentages defined will be applied to such fiscal year.
The percentages defined for the fiscal year commencing August 1, 1996, will also
be applied to the fiscal year ending July 31, 1996.
3. This Agreement shall be binding upon the respective successors of these
parties, and shall remain in effect until terminated by either party upon 30
days prior written notice.
IN WITNESS WHEREOF, the parties have executed and delivered this Agreement
as of the date first above written.
AMERICAN ARTISTS FILM CORPORATION
/s/ Steven D. Brown CEO
By:------------------------------------
Authorized Officer
DIVERSITY FILMWORKS, INC.
/s/ TYRONE C. JOHNSON
By:------------------------------------
Authorized Officer
<PAGE>
Exhibit 10.41
[LETTERHEAD OF ICON INTERNATIONAL INC. APPEARS HERE]
December 10, 1996
Mr. Steven Brown
American Artists Film Corporation
1245 Fowler Street N.W.
Atlanta, Ga. 30318
Dear Steve;
Bob Aus and I spoke to Eric Van Atta yesterday. We are in agreement to extend
the expiration date of your $500,000 in Trade Credits to 12/31/97, and this
letter so extends them.
I hope you are prospering, and we look forward to continuing our relationship.
Sincerely,
LANCE
c.c. B. Aus
R. Lellio
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
The Schedule contains summary financial information extracted from the Setab
Alpha Inc. financial statements for the period ending July 31, 1996 and is
qualified in its entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1
<CURRENCY> US DOLLARS
<S> <C>
<PERIOD-TYPE> OTHER
<FISCAL-YEAR-END> JUL-31-1996
<PERIOD-START> JUL-5-1995
<PERIOD-END> JUL-31-1996
<EXCHANGE-RATE> 1
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 10,000
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 10,000
<CURRENT-LIABILITIES> 15,478
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> (5,478)
<TOTAL-LIABILITY-AND-EQUITY> 10,000
<SALES> 0
<TOTAL-REVENUES> 0
<CGS> 2
<TOTAL-COSTS> 5,478
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (5,478)
<INCOME-TAX> 0
<INCOME-CONTINUING> (5,478)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (5,478)
<EPS-PRIMARY> (274)
<EPS-DILUTED> 0
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
The Schedule contains summary financial information extracted from the American
Artist Film Corporation consolidated financial statements for the years ended
July 31, 1996 and 1995 and is qualified in its entirety by reference to such
financial statements.
</LEGEND>
<MULTIPLIER> 1
<CURRENCY> US DOLLARS
<S> <C> <C>
<PERIOD-TYPE> 12-MOS 12-MOS
<FISCAL-YEAR-END> JUL-31-1996 JUL-31-1995
<PERIOD-START> AUG-1-1995 AUG-1-1994
<PERIOD-END> JUL-31-1996 JUL-31-1995
<EXCHANGE-RATE> 1 1
<CASH> 0 122,197
<SECURITIES> 0 0
<RECEIVABLES> 107,457 186,793
<ALLOWANCES> 0 0
<INVENTORY> 0 0
<CURRENT-ASSETS> 0 0
<PP&E> 122,513 125,135
<DEPRECIATION> 70,385 46,173
<TOTAL-ASSETS> 1,114,393 1,287,862
<CURRENT-LIABILITIES> 0 0
<BONDS> 0 0
0 0
0 0
<COMMON> 470,392 418,411
<OTHER-SE> (33,353) 249,865
<TOTAL-LIABILITY-AND-EQUITY> 1,114,393 1,287,862
<SALES> 1,711,639 3,701,721
<TOTAL-REVENUES> 1,711,639 3,701,721
<CGS> 0 0
<TOTAL-COSTS> 2,697,794 3,637,058
<OTHER-EXPENSES> 194,006 0
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 6,777 12,810
<INCOME-PRETAX> (1,186,938) (7,793)
<INCOME-TAX> 0 0
<INCOME-CONTINUING> (1,186,938) (7,793)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (1,186,938) (7,793)
<EPS-PRIMARY> (.22) 0
<EPS-DILUTED> 0 0
</TABLE>
