<PAGE> 1
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U. S SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended October 31, 1998
-----------------------------------
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE
EXCHANGE ACT
For the transition period from to
--------------- -------------
Commission file number 000-20759
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AMERICAN ARTISTS ENTERTAINMENT CORPORATION
(FORMERLY AMERICAN ARTISTS FILM CORPORATION)
(Exact name of small business issuer as specified in its charter)
MISSOURI 58-1950450
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
6600 PEACHTREE DUNWOODY ROAD
BUILDING 600, SUITE 250
ATLANTA, GEORGIA 30328
(Address of principal executive offices)
(770) 390-9180
Issuer's telephone number
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Yes X No
--- ---
State the number of shares outstanding of each of the issuer's classes
of common equity: 3,319,745 shares of Class A Common Stock, $.001 par value per
share, and 3,225,516 shares of Class B Common Stock, $.001 par value per share,
were outstanding at March 2, 1999.
Transitional Small Business Disclosure Format: Yes No X
--- ---
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<PAGE> 2
AMERICAN ARTISTS ENTERTAINMENT CORPORATION
FORM 10-QSB
CONTENTS
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
<TABLE>
<S> <C> <C>
Condensed Consolidated Financial Statements:
Balance sheets at October 31, 1998 and July 31, 1998............................ F-1/F-2
Statements of operations for the three months ended October 31, 1998 and
October, 31, 1997............................................................... F-3
Statements of cash flows for the three months ended October 31, 1998 and
October 31, 1997................................................................ F-4
Notes to Condensed Consolidated Financial Statements............................ F-5/F-9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION............................. F-10/F-13
PART II - OTHER INFORMATION
Item 2. Changes in Securities................................................................. F-13
Item 6. Exhibits and Reports on Form 8-K...................................................... F-14
SIGNATURES..................................................................................... F-15
</TABLE>
<PAGE> 3
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
AMERICAN ARTISTS ENTERTAINMENT CORPORATION
AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
October 31, July 31,
------------- -----------
1998 1998
------------- -----------
<S> <C> <C>
ASSETS
CASH $ 815 $ 35,568
ACCOUNTS RECEIVABLE 49,583 99,998
FILM COSTS, NET OF ACCUMULATED AMORTIZATION 1,280,537 1,230,231
PROPERTY AND EQUIPMENT, NET 22,906 28,221
ADVANCES TO OFFICERS 236,040 253,012
------------- -----------
$ 1,589,881 $1,647,030
============= ===========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
F-1
<PAGE> 4
AMERICAN ARTISTS ENTERTAINMENT CORPORATION
AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS - CONTINUED
(UNAUDITED)
<TABLE>
<CAPTION>
October 31, July 31,
----------- -----------
1998 1998
----------- -----------
<S> <C> <C>
LIABILITIES
Line of credit $ -- $ 52,549
Accounts payable 472,407 392,421
Accrued expenses 59,453 72,026
Accrued professional fees 176,583 161,816
Deferred revenues 28,662 --
Common stock issuable 10,000 45,313
Notes payable 419,286 406,426
Notes payable/related parties 714,764 620,500
----------- ----------
TOTAL LIABILITIES 1,881,155 1,751,051
----------- ----------
MINORITY INTERESTS 625,610 545,610
CONTINGENCIES
CAPITAL DEFICIT
Preferred stock, $.001 par - shares authorized
10,000,000; none issued -- --
Common Stock, $.001 par:
Class A - shares authorized 20,000,000; issued and
outstanding 3,235,937 and 3,157,789 3,236 3,158
Class B - shares authorized 20,000,000; issued and
outstanding 3,229,324 and 3,282,472 3,229 3,282
Additional paid-in capital 3,962,221 3,916,933
Accumulated deficit (4,885,570) (4,573,004)
----------- ----------
TOTAL CAPITAL DEFICIT (916,884) (649,631)
----------- ----------
$ 1,589,881 $1,647,030
=========== ==========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
F-2
<PAGE> 5
AMERICAN ARTISTS ENTERTAINMENT CORPORATION
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended October 31,
------------------------------
1998 1997
----------- ----------
<S> <C> <C>
REVENUES
Commercial production $ 6,000 $1,505,577
Film revenues 25,000 --
----------- ----------
31,000 1,505,577
----------- ----------
COSTS AND EXPENSES
Cost of commercial production 4,290 1,038,968
Film cost amortization 23,035 --
Selling, general and administrative 288,036 361,015
----------- ----------
315,361 1,399,983
----------- ----------
INCOME (LOSS) FROM OPERATIONS (284,361) 105,594
Interest expense 28,205 8,507
----------- ----------
NET INCOME (LOSS) $ (312,566) $ 97,087
=========== ==========
NET INCOME (LOSS) PER SHARE - BASIC (.05) .02
=========== ==========
NET INCOME (LOSS) PER SHARE - DILUTED (.05) .01
=========== ==========
WEIGHTED AVERAGE COMMON
SHARES - BASIC 6,456,928 6,403,140
=========== ==========
WEIGHTED AVERAGE COMMON
SHARES - DILUTED 6,456,928 7,744,747
=========== ==========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
F-3
<PAGE> 6
AMERICAN ARTISTS ENTERTAINMENT CORPORATION
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended October 31,
------------------------------
1998 1997
--------- ----------
<S> <C> <C>
OPERATING ACTIVITIES
Net income (loss) $(312,566) $ 97,087
Adjustments to reconcile net income (loss) to cash used in
operating activities:
Film costs amortization 23,035 --
Depreciation and amortization 5,315 14,833
Changes in assets and liabilities:
Accounts receivable 50,415 (124,751)
Film costs additions (73,341) (36,394)
Other assets 16,972 (32,121)
Accounts payable 79,986 117,903
Accrued expenses 12,194 (125,743)
Deferred revenue 28,662 21,703
--------- ---------
Cash used in operating activities (169,328) (67,483)
INVESTING ACTIVITIES
Capital expenditures -- (2,321)
--------- ---------
FINANCING ACTIVITIES
Repayment of notes payable (10,140) (42,946)
Borrowings under notes payable 117,264 --
Borrowings under line of credit, net (52,549) --
Issuance of minority interests 80,000 117
Issuance of common stock -- 100,000
--------- ---------
Cash provided by financing activities 134,575 57,171
NET DECREASE IN CASH (34,753) (12,633)
--------- ---------
CASH, beginning of period 35,568 31,379
--------- ---------
CASH, end of period $ 815 $ 18,746
========= =========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
F-4
<PAGE> 7
AMERICAN ARTISTS ENTERTAINMENT CORPORATION
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 - BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements
have been prepared in accordance with generally accepted accounting principles
for interim financial information and with the instructions to Form 10-QSB and
Item 310(b) of Regulation S-B. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements. The financial statements are unaudited, but
in the opinion of management, contain all adjustments, consisting of normal
recurring accruals, necessary to present fairly the financial position, results
of operations and cash flows for the periods presented. Results of operations
and cash flows for the interim three month periods are not necessarily
indicative of what the results of operations and cash flows will be for an
entire fiscal year. The accompanying condensed consolidated financial statements
should be read in conjunction with the consolidated financial statements and
notes thereto included in the Company's Annual Report on Form 10-KSB for the
year ended July 31, 1998.
NOTE 2 - FIRST LIGHT ENTERTAINMENT CORPORATION ("FIRST LIGHT")
Through the end of fiscal 1998 the Company conducted its contract
commercial production operations through its First Light subsidiary. First Light
suffered a significant decline in revenues during the fourth quarter of fiscal
1998, and as a result incurred an operating loss. In October 1998, the Company
decided to temporarily cease First Light's operations while it evaluated the
form and direction of its future contract commercial production operations. That
study is ongoing and the Company has not yet determined whether it will renew
these operations, and if so whether it will do so under the First Light name,
through American Artists Films, or through another entity.
Although the Company has temporarily ceased the operations of First
Light, it continues to consolidate its accounts. The Company is presently
deferring the payment of First Light's liabilities, which consist primarily of
its accounts payable which amounted to $116,486 at October 31, 1998 and $113,777
as of March 2, 1999. First Light has no significant assets, with the exception
of certain property and equipment, which the Company can continue to use in its
operations.
As a result of the Company's decision to temporarily cease First
Light's operations, Ms. Vivian Jones, the president of First Light and a
director and co-president of the Company, tendered her resignation in October
1998.
NOTE 3 - NOTES PAYABLE
The Company had the following notes payable activity for the quarter
ended October 31, 1998:
(a) The Company was unable to renew its $225,000 line of credit with the
bank at July 31, 1998. The principal of $225,000 remained outstanding at
October 31, 1998. The Company, its guarantors and the bank are currently
exploring various alternatives means to renew this line of credit. The
Company made the quarterly interest payment due on this line of credit in
October 1998. As of March 1999, the Company had not made the quarterly
interest payment due January 1999 on this line of credit.
(b) At July 31, 1998, the Company was in arrears for the quarterly payment
due May 1, 1998 on a $11,126 secured installment note. As of March 1999,
the Company was in arrears for the final two full quarterly installments,
due May 1 and August 1, on this secured installment note.
(c) In September 1998, a shareholder extended a loan to the Company in the
amount of $23,000. This note is secured, bears interest at the prime rate
plus 1% and is due on demand but no later than September 1, 1999. The
Company has pledged as security its interest in the ordinary LLC shares of
False River, LLC to the extent that any principal and accrued interest
remain unpaid at maturity under this note agreement.
F-5
<PAGE> 8
AMERICAN ARTISTS ENTERTAINMENT CORPORATION
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(d) As of March 1999, the Company was in arrears for payment of principal
and interest in the amount of $9,000 in relation to its $41,750 unsecured
installment note payable to bank. The Company had also not received an
extension of the November 1998 maturity date on this unsecured installment
note.
NOTE 4 - NOTES PAYABLE/RELATED PARTIES
The Company had the following notes payable/related parties activity for
the quarter ended October 31, 1998:
(a) During the period from August 1998 to October 1998, a member of the
board of directors extended loans to the Company amounting to $68,000 in
the aggregate. These amounts are unsecured, bear interest at the prime rate
plus 1% and are due on demand but no later than September 1, 1999.
(b) In August 1998, an officer extended a loan to the Company in the amount
of $26,264. This note is secured, bears interest at the prime rate plus 1%
and is due on demand but no later than September 1, 1999. The Company has
pledged as security its interest in the ordinary LLC shares of False River,
LLC to the extent that any principal and accrued interest remain unpaid at
maturity under this note agreement.
NOTE 5 - FALSE RIVER, LLC
During the period from August 1998 to October 1998, False River sold
additional shares of its preferred distribution LLC shares for proceeds
amounting to $80,000. An officer and certain members of the board of directors
purchased $60,000 of these preferred distribution LLC share interests.
NOTE 6 - STOCKHOLDERS' EQUITY
(a) Changes in the Company's Class A and Class B common stock during the
three months ended October 31, 1998 were as follows:
<TABLE>
<CAPTION>
------------------------------------------------------------
Class A Class B Additional
Shares Common Stock Common Stock Paid-in Capital
-------------------------------------------------------------
<S> <C> <C> <C> <C>
Issuance of 25,000 shares of Class A
common stock related to acquisition
of Millennium LLC shares 25,000 25 - $ 45,288
Conversions of Class B shares to
Class A shares 53,148 53 (53) -
--------------------------------------------------
78 (53) $ 45,288
============================================================
</TABLE>
(b) In October 1998, the Company commenced a private placement of units, at
$25,000 per unit, comprised of 50,000 shares of the Company's Class A
common stock. The units also includes a warrant to purchase 25,000 shares
of Class A common stock at $1.30 per share, exercisable through December
2001.
The Company received proceeds amounting to $10,000 from the sale of .4
units in October 1998. These shares were not issued as of October 31, 1998
and the liability related to the contractual obligation to issue these
shares is presented as a component of liabilities in the condensed
consolidated balance sheet at October 31, 1998.
F-6
<PAGE> 9
AMERICAN ARTISTS ENTERTAINMENT CORPORATION
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 7 - EARNINGS PER SHARE
The Company adopted the requirements of Statement of Financial
Accounting Standards No. 128, "Earnings Per Share," effective January 31, 1998,
and restated the earnings per share amounts for prior periods. The restatement
did not have any material affect on previously presented earnings per share
amounts.
Basic and diluted earnings per share are computed on the basis of net
income or loss divided by the weighted average number of common shares (Class A
and Class B) outstanding during the relevant period. The following table
reconciles the numerator and denominator used in the calculation of basic and
diluted earnings per share for the quarters ended October 31, 1998 and 1997:
<TABLE>
<CAPTION>
Three Months Ended October 31,
----------------------------------
1998 1997
----------------------------------
<S> <C> <C>
Numerators: Numerator for both basic
and diluted earnings per share, net
income (loss) $ (312,566) $ 97,087
==================================
Denominators: Denominator for basic
earnings per share, weighted average
common shares outstanding 6,456,928 6,403,140
Potential dilutive shares resulting
from outstanding stock options and
warrants - 1,341,607
----------------------------------
Denominator for diluted earnings per
share 6,456,928 7,744,747
==================================
</TABLE>
Diluted earnings per share for the three months ended October 31, 1998
excludes the effects of stock options and warrants (and is therefore the same as
basic earnings per share) as their effects would be anti-dilutive due to the net
loss. There were 3,634,618 anti-dilutive common stock options and common stock
warrants outstanding at October 31, 1998.
NOTE 8 - SUBSEQUENT EVENTS
The Company completed the following transactions subsequent to October 31,
1998:
(a) During the period from November 1998 to February 1999, False River sold
shares of its preferred distribution LLC shares for proceeds amounting to
$114,864. Certain members of the board of directors purchased $104,864 of
these preferred distribution LLC share interests.
(b) In November 1998, the Company entered into an investor relation
services agreement with an investor relations firm, that provides for,
among other things, certain investor relations and capital formation
services. The consideration for this agreement included the issuance of
50,000 shares of the Company's Class A common stock.
F-7
<PAGE> 10
AMERICAN ARTISTS ENTERTAINMENT CORPORATION
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(c) In December 1998, the Company entered into a consulting agreement
("Programming Agreement") with an individual who possesses a number of
years of experience in the television programming industry. The Programming
Agreement calls for the consultant to assist the Company in the creation,
development, packaging and production of certain television and feature
film properties ("Properties"), including television series. As
consideration for his services, the consultant will receive, in addition to
certain "on screen" credits, thirty-three percent (33%) of all net profits,
as defined (generally revenues after the recovery of all production and
distribution costs), generated from Properties introduced to the Company
under this Programming Agreement. The Programming Agreement generally will
relate to properties identified by the consultant and exclude project ideas
identified by the Company.
(d) In December 1998, the Company re-priced the exercise price of certain
stock options that had been previously granted under its employee stock
option plan. The Company re-priced these options as follows: 1) 52,345
stock options granted between November 21, 1995 and December 8, 1997 with
exercise prices ranging from $1.45 to $3.75 were re-priced to an exercise
price of $1.00, and 2) 272,844 stock options granted between November 21,
1995 and December 8, 1997 with exercise prices ranging from $1.45 to $3.75
were re-priced to an exercise price of $.50. Neither the Chief Executive
Officer nor President of the Company had any stock options affected by this
re-pricing.
(e) In December 1998, the Company extended the due dates of all of its
notes issued in connection with certain advances to officers. The due dates
were extended from December 1998 to December 1999.
(f) During the period from December 1998 to January 1999, a member of the
board of directors extended loans to the Company amounting to $137,000.
These loans are unsecured, bear interest at the prime rate plus 1% and are
due on demand.
(g) In January 1999, a shareholder extended a loan to the Company amounting
to $19,500. This note is secured, bears interest at the prime rate plus 1%
and is due on demand but no later than September 1, 1999. The Company has
pledged as security its interest in the ordinary LLC shares of False River,
LLC to the extent that any principal and accrued interest remain unpaid at
maturity under this note agreement.
(h) Subsequent to October 31, 1998, the Company received $110,000 from the
sale of 4.4 units in the private placement of the Company's Class A common
stock. (See Note 6(b)).
(i) In February 1999, the Company issued a member of the board of directors
a warrant to purchase 100,000 shares of the Company's Class A common stock
as additional consideration for his commitment to invest $50,000 in False
River, LLC. The warrant is exercisable at $.20 per share, through January
2004.
(j) In February 1999, an officer extended a loan to the Company in the
amount of $11,000. This note is secured, bears interest at the prime rate
plus 1% and is due on demand but no later than September 1, 1999. The
Company has pledged as security its interest in the ordinary LLC shares of
False River, LLC to the extent that any principal and accrued interest
remain unpaid at maturity under this note agreement.
(k) In February 1999, a member of the board of directors extended a loan to
the Company in the amount of $10,000. This loan is unsecured, bears
interest at the prime rate plus 1% and is due on demand, but no later than
September 1, 1999.
F-8
<PAGE> 11
AMERICAN ARTISTS ENTERTAINMENT CORPORATION
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(l) In February 1999, the Company entered into two consulting agreements
("Consulting Agreements") with two entities for the performance of certain
strategic financial planning services and consulting in the areas of filmed
entertainment and LSVD operations. The Consulting Agreements call for these
entities to provide these services over a period of six month in exchange
for 1,200,000 shares of the Company's Class A common stock, in the
aggregate. The Company has agreed to file a Form S-8 to register the
issuance of these shares.
(m) In February 1999, the Company legally effected a change in name from
"American Artists Film Corporation" to "American Artists Entertainment
Corporation." This name change had been previously approved by the
shareholders of the Company in January 1998.
F-9
<PAGE> 12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
RESULTS OF OPERATIONS
THREE MONTHS ENDED OCTOBER 31, 1998 COMPARED TO THE THREE MONTHS ENDED
OCTOBER 31, 1997
Revenues for the first three months of fiscal 1999 decreased as
compared to revenues for the first three months of fiscal 1998, principally as a
result of a significant decrease in the level of commercial production revenues
in the first quarter of fiscal 1999.
Commercial production revenues were $6,000 for the first three months
of fiscal 1999, representing a decrease of $1,499,577 or 99.6% from commercial
production revenues of $1,505,577 for the three months of fiscal 1998.
The decrease in commercial production revenues was primarily the result
of the commencement of a reassessment of the Company's commercial production
operations in the first quarter of fiscal 1999. Through the end of fiscal 1998
the Company conducted its contract commercial production operations through its
First Light Entertainment Corporation ("First Light") subsidiary. First Light
suffered a significant decline in revenues during the fourth quarter of fiscal
1998, and as a result incurred a significant operating loss. In October 1998,
the Company decided to temporarily cease First Light's operations while it
evaluated the form and direction of its future contract commercial production
operations. That study is ongoing and the Company has not yet determined whether
it will renew these operations, and if so whether it will do so under the First
Light name, through American Artists Films, or through another entity.
Gross profits for commercial production were $1,710 and $466,409 for
the three months ended October 31, 1998 and 1997, respectively. Commercial
production costs, as a percentage of related revenues, were 71.5% and 69.0% for
the three months ended October 31, 1998 and 1997, respectively.
There were film revenues of $25,000 for the first three months of
fiscal 1999 as compared to no film revenues for the three months ended October
31, 1997. The Company entered into agreements related to two film projects
during this period. Revenues of $20,662 have been deferred pending completion of
one of the projects.
Film costs amortization increased by $23,035 for the first three months
of fiscal 1999 as a result of the recognition of related film revenues during
the same period.
Selling, general and administrative ("SG&A") expenses decreased $72,979
or 20.2% to $288,036 for the three months ended October 31, 1998 from $361,015
for the three months ended October 31, 1997. SG&A decreased primarily as a
result of a cessation of operations at First Light, the departure of several
employee from the Company's LSVD operations and an absence of several consulting
agreements that were in effect during the three months ended October 31, 1997.
Interest expense increased to $28,205 for the first three months of
fiscal 1999 from $8,507 for the first three months of fiscal 1998. This increase
was the result of an increase in outstanding debt during the first three months
of fiscal 1999 as compared to the first three months of fiscal 1998.
As a result of the foregoing factors the Company incurred a net loss
$312,566 for the three months ended October 31, 1998 as compared to net income
of $97,087 for the three months ended October 31, 1997.
LIQUIDITY AND CAPITAL RESOURCES
The Company's strategic goal has been to finance its operating (i.e.
selling, general and administrative) expenses from the gross profits generated
by its television film, contract production operations and proposed LSVD
operations while utilizing equity financing, pre-production license revenues,
and co-producer contributions to finance the production of feature films. Using
this strategy, the Company seeks to reduce or eliminate the burden of
significant operating losses and negative cash flows, while retaining the
potential for significant profits and positive cash flows from successful
feature films. The success of such a strategy is, however, dependent on the
Company's
F-10
<PAGE> 13
ability to control operating expenses, to obtain sufficient, and sufficiently
profitable, commercial production contracts and television film projects, and to
fully develop its LSVD operations.
Operating cash flows were a negative $169,328 for the three months
ended October 31, 1998 and were primarily the result of the net loss caused by a
significant decline in the level of commercial production revenues and the
related gross profit, therefrom. The negative operating cash flows were less
than the net loss for the quarter ended October 31, 1998 principally due to the
collection of the contract commercial production receivables that remained at
July 31, 1998, and an increase in accounts payable. The Company may experience
negative operating cash flows in periods when television film and commercial
production revenues fail to cover SG&A expenses. Cash flows may also be negative
in periods of profitable operations if growth in the Company's level of
operations causes costs to rise in advance of collections and the increase is
not offset by increases in accounts payable or accrued expenses. Negative
operating cash flows, from either cause, will constrain the Company's liquidity,
and necessitate the use of debt or equity financing.
Cash provided by financing activities amounted to $134,575 for the
three months ended October 31, 1998. During the first quarter of fiscal 1999,
the Company raised $117,264 (partially offset by $10,140 in repayments) in
borrowings under notes payable from a member of the board of directors, an
officer and a shareholder. Additionally, $80,000, obtained from the issuance of
minority interests, was used fund the activities of False River.
The Company's consolidated financial statements have been prepared on
the basis of the continuation of the Company as a going concern, which
contemplates the realization of assets and the settlement of liabilities in the
normal course of business. The consolidated financial statements do not reflect
any adjustments which might be necessary if the Company were to be unable to
continue as a going concern.
Since its inception, the Company has experienced a history of operating
losses and constrained cash flows, and has been unable to fully implement its
business plan due to insufficient capital resources. In the first three months
of fiscal 1999, the Company incurred a net loss of $312,566, and negative
operating cash flows of $169,328, due to losses suffered by its contract
commercial production operations and the expenses incurred in pursuing its film
and LSVD projects. At October 31, 1998 the Company had a deficit in
stockholders' equity of $916,884 and a significant working capital deficit. The
Company was unable to meet certain debt service requirements both during fiscal
1998 and in the first quarter of fiscal 1999. A significant portion of notes
payable and notes payable to related parties, which amount to $1,134,050, is due
on demand or matures in fiscal 1999, and the Company is in arrears on and has
been unable to renew its $225,000 bank line of credit. Since October 31, 1998
the Company has obtained $177,500 through additional loans, principally from
members of the board of directors or shareholders, which for the most part have
been used to fund operations. As a result, at March 2, 1999 the Company's total
indebtedness under notes payable and notes payable to related parties, net of
debt repayments, has increased to $1,307,221, of which a substantial portion is
due on demand or matures in fiscal 1999.
These conditions raise substantial doubt concerning the Company's
ability to continue as a going concern. To continue in operations and pursue its
business plan, the Company must over the short-term raise additional capital and
reduce expenditures so as to be able to fund its operations and the payment of
those items of indebtedness that cannot be restructured or deferred, and over
the longer term must raise the capital necessary to complete a portion of its
film and LSVD projects and generate profits and positive cash flows therefrom.
Management has developed a plan to address these requirements. The
elements of the short-term plan include the following:
RAISE ADDITIONAL CAPITAL
- Private placement offering. In October 1998, the Company commenced a
$500,000 private placement offering of units comprised of the Company's
Class A common stock and a common stock purchase warrants. The Company
has raised $120,000 from the sale of 4.8 units through March 2, 1999.
- Pursue other sources of capital. Subsequent to year end, the Company
engaged several firms to assist it in its capital raising efforts. To
date these firms have introduced the Company to a number of potential
capital sources, and on the basis of initial meetings the Company is
cautiously optimistic that these efforts will provide the Company with
new equity financing opportunities.
F-11
<PAGE> 14
- Borrowings from directors and stockholders. Subsequent to July 31,
1998 the Company obtained loans from certain members of the board of
directors and certain stockholders. The Company will attempt to
continue to make use, if available, of these borrowings on a short-term
basis while it pursues other capital.
REDUCE OPERATING EXPENSES AND NET LOSSES
- Temporary cessation of contract commercial production operations. As
previously discussed, in October 1998 the Company temporarily ceased
its contract commercial production operations, which had suffered a
decline in revenues and a net loss in the last quarter of fiscal 1998.
The Company is evaluating the form and direction of its future contract
commercial production operations. While such operations are suspended,
the Company estimates that it will realize cost savings of
approximately $30,000 per month.
- Voluntary salary reductions. In March 1998 the Company requested that
all employees voluntarily reduce their salary levels. All employees
participated in this voluntary reduction, which remains in effect.
- Reduce staffing levels. The Company has reduced its staffing levels
subsequent to July 31, 1998, principally through attrition, and has the
ability to temporarily eliminate certain other positions, without
suffering short-term revenue losses, if cash flow conditions require.
Management will therefore continue to monitor and if necessary adjust
staffing levels for certain projects to match cash flow availability.
- Maximize short-term cash inflows from film projects. As previously
discussed, the Company's False River film was screened as part of a
special screening series in February 1999. Such screening marked the
beginning of a process aimed at exposing the film to potential
distributors. The Company also plans to submit False River for entry
into several film festivals as part of its strategy to market this
feature film project. The Company will, in negotiating with
distributors, seek a license and/or sales agreement that maximizes the
immediate or near-term cash payment it receives and offers the Company
commitments for additional projects, in return for accepting a lesser
than normal, or no, participation in the revenues or residual payments
from the distribution of the film. A larger initial cash payment would
allow the Company to both fund its operating expenses and finance the
completion of certain other film projects, which then in turn could
generate cash flows over the longer term.
The elements of management's longer term plan include:
- Revised approach to LSVD financing. Through fiscal 1998 the Company
has been attempting to obtain traditional debt or equity financing for
its proposed LSVD operations. Recently the Company modified its
approach, and is now also seeking joint venture/strategic alliance
partners among larger companies in related businesses. The Company
believes that this approach may be more likely to attract the financing
necessary to commence the proposed LSVD operation in Atlanta, which in
turn would provide cash flows for operations and the pursuit of other
LSVD and film projects.
- Series programming relationship. The Company has increased its
efforts to pursue relationships with cable television networks for the
production of a series of programs, as a means of providing the Company
with a more predictable backlog of projects and potential revenues. The
Company is currently in negotiations for several specific series with
one large cable network, and additionally has engaged as a consultant
an individual from the cable network industry whose experience and
relationships in that industry could, management believes,
substantially improve the Company's ability to implement this strategy.
There can be no assurance that any or all of the elements of the
Company's short-term or longer term plans can or will be successfully
implemented. Additionally, even if such initiatives are successful, they may not
be sufficient to alleviate the Company's short term cash flow and liquidity
problems, or in the long term generate revenues sufficient to sustain profitable
operations. Should the Company fail to alleviate its short-term cash flow and
liquidity problems, or over the longer term achieve profitable operations, the
Company will have to either reduce the scope of its activities or cease its
operations.
F-12
<PAGE> 15
YEAR 2000
The year 2000 issue relates to computer programs and systems that
recognize dates using two digit year data rather than four digit year data. As a
result, such programs and systems may fail or provide incorrect information for
dates after December 31, 1999. If the year 2000 issue were to cause disruption
to the Company's internal information technology systems or to the information
technology systems of entities with whom the Company has commercial
relationships, material adverse effects to the Company's operations could
result.
The Company's internal computer programs and systems consist of
programs and systems relating to virtually all segments of the Company's
business, including customer database management, marketing, production
budgeting and accounting, financial reporting, investor relations, proposal
generation, cash management and other key information systems. These programs
and systems are primarily comprised of:
- Personal computers. These systems are used for all of the Company's
computer programs and systems.
- Telecommunications systems. These systems enable the Company to
manage all its telecommunication services, including incoming/outgoing
telephone calls and all connections to the internet.
- Voicemail systems. These systems are used for receiving and storing
messages to employees.
- Ancillary services systems. These include such systems as heating,
ventilation and air conditioning control systems and security systems.
- Third party software programs. These programs are used throughout the
Company in a number of business applications, including word
processing, spreadsheets, budgeting, financial reporting, proposal
generation, telecommunications management and internet access.
The Company has not yet completed its reviews of these programs and
systems, but does not expect that any remediation relating to such programs and
systems that might be necessary following such reviews will cause the Company to
incur material costs or present implementation challenges that cannot be
addressed prior to the end of calendar 1999. The Company expects to complete its
reviews of these programs and systems during fiscal 1999.
The computer programs and operating systems used by entities with whom
the Company has commercial relationships also pose potential problems relating
to the year 2000 issue, which may affect the Company's operations in a variety
of ways. These risks are more difficult to assess than those posed by internal
programs and systems and the Company has not yet completed the process of
formulating a plan for assessing them.
The Company expects to complete the formulation of its plan for
assessing the programs and systems of the entities with whom it has commercial
relationships and the identification of the related risks and uncertainties by
the end of fiscal 1999. Once such assessment and identification has been
completed, the Company intends to resolve any material risks and uncertainties
that are identified by: 1) communicating further with the relevant vendors and
service providers, 2) working internally to identify alternative sourcing, and
3) formulating contingency plans to deal with such material risks and
uncertainties. The Company expects the resolution of such material risks and
uncertainties to be an ongoing process until all year 2000 problems are
satisfactorily resolved.
PART II - OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES
In September 1998, the Company issued 25,000 shares of its Class A
common stock in consideration of the settlement agreement that it entered into,
in July 1998, in relation to the acquisition of the outstanding shares of
Millennium Group, LLC.
The Company commenced a private placement of its Class A common stock
in October 1998. As of October 31, 1998, the Company had sold .4 units with
proceeds amounting to $10,000. Each unit is comprised of 50,000 shares of Class
A common stock at $.50 per share. The purchaser of a unit also receives in each
unit, without additional consideration, a warrant to purchase up to 25,000
shares of Class A common stock at $1.30 per share, exercisable through December
2001. Purchasers of fractional units received a prorated warrant.
The Class A common stock was sold by the Company, and on behalf of the
Company by directors and executive officers of the Company without commission or
additional compensation. All sales were for cash. The
F-13
<PAGE> 16
sales were made in reliance upon the exemption from registration contained in
Regulation D of the Securities Act of 1933. All of the purchasers were
"accredited investors" within the meaning of Regulation D.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27.1 Financial Data Schedule
(b) Reports on Form 8-K
The following report was filed on Form 8-K by the Company during the
quarter ended October 31, 1998:
(a) Form 8-K filed on October 8, 1998
F-14
<PAGE> 17
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
American Artists Entertainment Corporation
By: /s/ Steven D. Brown March 11, 1999
------------------------------------------
Steven D. Brown
Chief Executive Officer
By: /s/ Robert A. Martinez March 11, 1999
-----------------------------------------
Robert A. Martinez
Vice President/Finance, Chief
Financial Officer and Treasurer
F-15
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM AMERICAN
ARTISTS FILM CORPORATION'S CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOR THE
PERIOD ENDED OCTOBER 31, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1
<CURRENCY> US DOLLARS
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUL-31-1999
<PERIOD-START> AUG-01-1998
<PERIOD-END> OCT-31-1998
<EXCHANGE-RATE> 1
<CASH> 815
<SECURITIES> 0
<RECEIVABLES> 49,583
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 134,181
<DEPRECIATION> 111,275
<TOTAL-ASSETS> 1,589,881
<CURRENT-LIABILITIES> 0
<BONDS> 0
0
0
<COMMON> 6,465
<OTHER-SE> (923,349)
<TOTAL-LIABILITY-AND-EQUITY> 1,589,881
<SALES> 31,000
<TOTAL-REVENUES> 31,000
<CGS> 27,325
<TOTAL-COSTS> 315,361
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 28,205
<INCOME-PRETAX> (312,566)
<INCOME-TAX> 0
<INCOME-CONTINUING> (312,566)
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<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (312,566)
<EPS-PRIMARY> (.05)
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