AMERICAN ENTERTAINMENT GROUP INC, ARS, 1996-05-24

AMERICAN ENTERTAINMENT GROUP INC
ARS, 1996-05-24
BLANK CHECKS

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1995 ANNUAL REPORT

FOR

AMERICAN ENTERTAINMENT GROUP, INC.

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American Entertainment Group, Inc.
160 Bedford Road, Suite 306
Toronto, Ontario, Canada M5R 2K9

__________________________________

ANNUAL REPORT FOR
THE FISCAL YEAR ENDED DECEMBER 31, 1995
__________________________________

Dear Shareholders:

Fiscal 1995 has been an unusual and exceptional year in the development
of our company. The strategic plan initiated by your Board regarding the
scope, assets, revenues and earnings of our company began to show results at
the end of the fiscal year. We closed the financing transaction with Banque
National de Paris on behalf of our client, VIP Phone Club. This one
transaction assures profitability for our company in the coming fiscal year.
In addition we expect to close the Peter A. Wray and Future Arts Limited
acquisitions after the annual meeting, which will mean that our company will
be in the forefront of media technology development.

By virtue of the Board's actions and these transactions, American
Entertainment Group, Inc. can now be categorized as an emerging growth
company, with a select variety of potentially profitable subsidiaries.
Our unique combination of companies provide a synergistic environment,
structured to capitalize upon immediate and future accelerating sources
of revenues, with corollary advances in assets and earnings; advances
that could favorably impact upon the price of the company's shares.

We believe that American Entertainment Group, Inc., is positioned to
become a quality growth company, developing valuable assets for capital
appreciation on a corporate, as well as shareholder level. The benefits of
the company's strategic alliances are proving to be far reaching in
accomplishments and potential profits.

We look forward to a bright, profitable fiscal year ahead.

Very truly yours,

Joel Wagman
Chairman

<PAGE>

AMERICAN ENTERTAINMENT GROUP, INC.

GENERAL DEVELOPMENT OF BUSINESS

American Entertainment Group, Inc. (the "Company") is a development stage
Colorado corporation that is engaged in the business of developing and
marketing entertainment-related goods and services. The Company was
originally incorporated in Colorado as C & M Capital Corp. ("C & M") to
evaluate, structure and complete a merger with, or acquisition of, prospects
consisting of private companies, partnerships and sole proprietorships.

In July, 1986, C & M sold 17,500,000 Units, each Unit consisting of one
share of no par value common stock and ten common stock purchase warrants
(the "Units") at $ 0.01 per Unit, for total proceeds of $ 157,500 (after
sales commissions) in a public offering. C & M was a development stage
company with no substantial operations. Most of C & M's efforts were focused
on finding an appropriate acquisition candidate.

In March, 1993, C & M reverse split its common stock on the basis of one
share for every one thousand shares previously outstanding. As a result of
the reverse split, there was a total of 700,000 common shares outstanding.

On March 15, 1993, C & M exchanged 6,300,000 common shares for one
hundred percent of the issued and outstanding shares of Corporatel
International, Inc. ("Corporatel"), a private Delaware corporation, in a
tax-free stock-for-stock exchange. As a result of the share exchange, the
shareholders of Corporatel owned approximately ninety percent of the Company
as of March 15, 1993. Also, as a result of the share exchange, Corporatel
became a wholly-owned subsidiary of the Company.

Until the exchange of shares with Corporatel in 1993, the Company had no
material assets, having spent all of the net proceeds of its public offering
in the intervening years since 1986. After the exchange, the assets,
liabilities, management and proposed operations of the Company all became
those of Corporatel.

On December 26, 1992, Corporatel executed an agreement with two
companies for the purchase, in perpetuum, of certain rights to a film library
which included, but were not limited to, Informercial rights. A dispute arose
between the seller of these rights and the Company. After examining the
situation, the Company decided that these rights, which had been carried on
the books of the Company at historical cost, had no remaining value and wrote
them off as of December 31, 1995.

On May 17, 1993, the Company changed its name to American Entertainment
Group, Inc.

The Company has not been subject to any bankruptcy, receivership or
similar proceeding.

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In March, 1994, the Company entered into an Agreement with Baton
Broadcasting Incorporated, an Ontario corporation whose stock is traded on
the Toronto and Montreal Stock Exchanges ("Baton"), for the mutual
commercial exploitation of the Company's Film Library inventory by Baton and
the Company. Both parties have agreed to cooperate and coordinate their
efforts to license, distribute, and otherwise commercially exploit both the
Film Library inventory and new programs which may derive therefrom. The
Company will provide its Film Library inventory. Baton will provide its
production and duplication facilities. Subject to Baton providing telecast
time for the Company's direct response commercials on Baton's television
stations, Baton also has the non-exclusive right to telecast films from the
Film Library inventory for unlimited runs in perpetuity without any payment
to the Company. The agreement otherwise provides a schedule for the
allocation between the parties of costs and all royalties, fees, and other
receipts derived from the use of the second Film Library inventory. In
November of 1995, Baton and the Company terminated this agreement.

The Company entered into an Agreement dated April 1, 1994, with Glen
Southern, Inc., a Mississippi corporation, and Harborough Properties Inc., an
Ontario corporation, for the acquisition by the Company of a total of
$4,500,000 worth of income producing real properties, in consideration of the
issuance of common shares of the Company and the assumption by the Company of
mortgages totalling $3,300,000. The final Agreement was subject to a number
of conditions respecting closing, including (among other matters), the
voiding of the transaction by the companies at their option if all consents
and approvals from regulatory authorities could not be obtained, and the
completion of due diligence by both parties. This transaction did not close,
and the parties to the Agreements settled all issues between them by issuance
of the Warrants and 150,000 restricted common shares.

On November 5, 1994, the Company entered into an agreement with
Klassical Klassics Ltd. (Klassical), a Canadian corporation, to sell 5,000
dubbed film masters for an aggregate sale price of $7,000,000. The proceeds
of the sales were to be paid concurrent with the delivery of the dubbed film
masters, which was anticipated to occur during 1995. The agreement called
for the Company to pay a transaction commission, as well as incentive and
other fees throughout the seven year term of the contract. It further
provided rights for conversion of any portion of the outstanding cash
obligation amounts to common shares of the Company at rates commencing at $
3.00 per share in 1995 and increasing regularly by $.50 in each subsequent
year. Klassical Klassics has been unable to fulfill its obligations under
this agreement, and the Company deems it to be of no further force and effect.

On November 23, 1994, the Company entered into an agreement with the
Anscombe Group of Buffalo, New York to create a new cable classic television
network to be called the Classic Entertainment Network. This agreement has
expired and is no longer in effect.

On January 28, 1995, Geo Vision International Corp. entered into a joint
venture Agreement with the Company to develop, commercially exploit and
market a collection of the Company's classic motion pictures and television
series entitled the American Classics Collection

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(the "Collection") through production and broadcast/cablecast by Direct
Response Marketing to achieve sale and distribution of video tapes of the
Collection via a continuity revenue program. This agreement has expired and
is of no further effect.

On February 4, 1995, the Company entered into an agreement with
MediaLinx Interactive Inc. for the purpose of delivery of the product of its
film library for test purposes by telephone communication to television sets
(Video-on-Demand).

MediaLinx Interactive Inc. (MediaLinx) is a company established for the
purpose of delivering to the public goods and services by telephone
transmission within Canada to television sets (Video-on-Demand) The Company
is a participant in such test and will supply a limited amount of titles for
such purpose.

On February 6, 1995, the Company executed an agreement with Young Lee
Trading Company of Concord, Ontario, Canada, regarding the marketing and sale
of the product of the Company's second film library for both retail and
broadcast purposes within South Korea, and other south-east Asian markets.
This agreement has expired and is of no further effect.

On February 25, 1995, the Company executed an agreement with Jaffa Road
LIV Limited Partnership (a Canadian entity). This agreement has now expired.

On March 3, 1995, the Company executed a letter of intent to acquire
SunWest Media Marketing Group, Inc. and SunWest Media Group, Inc., privately
owned, U.S. based, production and video distribution companies, that
specialize in historical and educational productions. This letter of intent
has now expired.

On March 22, 1995, the company entered into a preliminary agreement with
MT Asia, Inc. of Manilla in the Phillipine Republic (MT) (a Phillipine
corporation) respecting the sale to MT of 5,000 dubbed masters comprising the
motion picture and television series titles of the Company's film library.
This preliminary agreement has expired.

NARRATIVE DESCRIPTION OF BUSINESS

GENERAL

From inception to March 15, 1993, C & M searched for mergers or
acquisitions with entities which C & M management believed would be
advantageous to its shareholders. C & M carried no inventories or accounts
receivable during this period, except for the accounts receivable relating to
Kala-O-Mine Industries, Inc., which is discussed below. No independent market
surveys were conducted to determine the demand for C & M's products and
services. During this period, C & M carried on no operations and generated no
revenues.

<PAGE>

On November 12, 1986, C & M loaned $100,000 to Kala-O-Mine Industries,
Inc. The note was due November 12, 1987. The note had no interest rate. As
consideration for the loan, Kala-O-Mine Industries, Inc., assigned a 75%
interest in an oil lease located in Southwestern Colorado. C & M allowed the
lease to expire in February, 1990 after receiving poor initial test results
and because C & M lacked sufficient funds to further develop the lease.

On October 15, 1987, C & M notified Kala-O-Mine that the $100,000 loan
was due on November 12, 1987, and that there would be no extensions on the
loan. C & M subsequently filed suit against Kala-O-Mine Industries, Inc. in
an attempt to collect the principal sum of $100,000, attorneys fees, and
costs of collection. C & M obtained a judgement against Kala-O-Mine
Industries, Inc. in August, 1988. The judgement was assigned by C & M in
1992.

On March 15, 1993, the Company acquired one hundred percent of the
issued and outstanding common shares of Corporatel International, Inc.
("Corporatel"), a private Delaware corporation. Corporatel, which is now a
wholly-owned subsidiary of the Company, was created in April, 1992, to
develop, market and sell entertainment related goods and services via
television.

OPERATIONS

Based upon the Company's film library, the Company has entered into
several agreements pertaining to both the development and commercial
exploitation of the film library. The Company has commenced the marketing and
sale of its film library product to both mass market and general retailers.
The Company also plans to sell videos of motion pictures derived from its
films by means of joint ventures with broadcasters and by Video-on-Demand
telephone-linked-transmission.

On September 13, 1995, the Company entered into a letter of Intent to
acquire all of the business interest, both personal and corporate, of Mr.
Peter A. Wray. These interests consist of computerized software for image
and animation (and integrated processes in connection therewith) relative to
the creation and manipulation of motion pictures and associates uses.
Pursuant to an Agreement entered into between the Company and Peter A. Wray
dated January 15, 1996, all of Mr. Wray's interests regarding the foregoing,
in a company known as Imaginetics Inc. has been purchased by the Company in
consideration of the sum of $US 500,000 which sum is evidenced by a
Promissory Note payable in preferred shares of the Company.

On October 17, 1995, the Company entered into a Letter of Intent to
acquire certain cartoon cels pertaining to "Teenage Mutant Ninja Turtles", as
well as other cartoon characters. These cels are to be acquired from a
private individual owner for the proposed purchase price of $5,000,000,
consisting of $50,000 in cash and the remainder in the form of the company's
common stock valued at $5.00 per share. This purchase, which was to close on
or before December 15, 1995, was subject to appropriate due diligence by the
parties, including a valuation opinion as to the cels. Although this Letter
of Intent has expired, a further Letter of Intent was entered into between
the Company and Future Arts Limited, which was dated March 15, 1996.

<PAGE>

"The Letter of Intent dated March 15, 1996, sets forth the terms related
to the purchase of cels relating to "Care Bears". The purchase of the cels is
payable by way of a promissory note in the principal sum of $US 5,000,000,
which note is further payable in preferred shares of the Company". The new
scheduled closing of the transaction is July 20, 1996.

Pursuant to Agreements respectively dated November 28, 1995, November
29, 1995, January 30, 1996, and February 27, 1996, the Company via its
wholly owned Canadian subsidiary, American Entertainment Limited (AEL),
granted a license to VIP Phone, Inc. (VIP Phone), a Delaware corporation with
headquarters in Baltimore, Maryland, to market, sell and distribute the
company's film library consisting of 5,000 vintage motion picture and
television series episodes. These Agreements were contingent upon the company
and AEL arranging financing with an international banking source regarding
VIP Phone's accounts receivable. A commitment regarding a revolving line of
credit in the sum of $US 5,000,000 was received by AEL from Banque Nationale
de Paris (Canada) (BNP) on February 21, 1996, and the transactions respecting
both the financing and the licensing were completed on March 22, 1996.

On February 4, 1995, the Company entered into an agreement with
MediaLinx Interactive Inc. for the purpose of delivery for test purposes of
the product of its library by telephone communication to television sets
(Video-on-Demand).

On February 6, 1995, the Company executed an agreement with Young Lee
Trading Company of Concord, Ontario, Canada, regarding the marketing and sale
of the product of the Company's film library for both retail and broadcast
purposes within South Korea, and other south-east Asian markets. This
agreement has expired and is of no further effect.

ACQUISITIONS

On June 25, 1993, the Company acquired a film library which has
approximately 5,000 titles. The Company acquired ownership of this film
library from an unaffiliated third party in an arms-length transaction for a
total consideration of $2,000,000, with the purchase price to be paid by a
note payable in the amount of $1,000,000, which has been discounted based
upon an imputed interest rate of 8% payable over a period of approximately
four years, along with the issuance of 400,000 shares of the Company's common
stock valued at $1,000,000. The June 25, 1993. Agreement originally set out a
purchase price of $5.00 per share, subject to a provision requiring a
subsequent adjustment as to the said price per share. By an amendment to the
Agreement dated October 26, 1993, the June 25th Agreement adjustment of the
price per share was deleted. This amendment to the June 25th Agreement fixed
the purchase price at $2.50 per share. The per share

<PAGE>

price was arrived at by bargaining between two independent parties. All other
terms and conditions of the June 25th Agreement remain the same.

In connection with the June 25th Agreement, the Company has had an
independent evaluation performed relating to the 5,000 English language
titles acquired under the Agreement. The independent evaluator was Mr. Arthur
Pickens. He was selected by the Board of Directors to evaluate the film
library and concluded that the evaluated amount is at least $5,000,000.

On June 17, 1993, the Company entered into a Consulting Agreement with
Interfran Systems Canada, Inc. ("Interfran"), which is not affiliated in any
way except as to this Agreement, to develop franchises for Company video
stores. Under the terms of the Agreement, Interfran will provide various
services, including market and feasibility studies, operations and systems
reviews, marketing and promotion support, franchise recruiting and such other
activities as may be necessary to establish the Company's franchise system.
The fee for the contemplated services is the sum of $1,300 in cash, the
issuance of 44,915 shares of the Company's common stock, valued at $.50 per
share, and the payment of the greater of $4,000 or 40% of the Company's
license fee for the issuance of each franchise that Interfran establishes for
the Company. The per share price was arrived at by bargaining between two
independent parties and was based upon the value of other sales for common
stock at the time. To date, no services have been performed nor have any
shares been issued under this Consulting Agreement.

ORGANIZATION

The Company has recently consolidated its internal operations. As of
December 31, 1995, revenues from all divisions were $634,523.

The Commercial Production Division

This division was operated by Chaos International, Inc. (Chaos), a
Canadian wholly owned subsidiary of the Company, which produces television
commercials for national advertisers.

Neither Chaos nor the Company itself own any production equipment or
facilities.

<PAGE>

As of December 31, 1995, this division has generated revenues in the sum
of $634,523. On August 1, 1995, the Company discontinued operations of this
division as a result of a change in corporate philosophy. No future
operations are anticipated at this time.

The Feature Film Division

This division was operated by Chaos Productions, Inc. (CPI), a wholly
owned subsidiary of the Company, which was responsible for U.S. and
international feature film productions. In the next fiscal year, the Company
will operate the division directly.

The plan for this division is to concentrate on films budgeted between
the sums of $3,000,000 and $6,000,000 primarily intended for distribution via
national "movie" cable channels, such as "HBO", "Showtime", or other similar
programmers. Additionally, this division will seek world-wide distribution of
such feature films.

Company policy is not to invest its own funds into the production of
feature films but to act in the capacity of an Executive Producer in
consideration of a fee, percentage of gross royalties, and other benefits.

Cable Television Division and Video-On-Demand

On February 4, 1995, the Company entered into an agreement with
MediaLinx Interactive Inc. for the purpose of delivering the product of its
film library for test purposes by telephone transmission to television sets
(Video-on-Demand).

Overseas and Foreign Markets Division

On February 6, 1995, the Company executed an agreement with Young Lee
Trading of Concord, Ontario, Canada, regarding the marketing and sale of the
product of the film library for both retail and broadcast purposes within
South Korea and other south east Asia countries. This agreement has expired
and is of no further effect.

OPERATIONS

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From inception until December 31, 1995, the Company and all of its
subsidiaries and divisions have produced $2,007,349 in revenues.

It is the belief of management that the Company will continue, through
itself, and by its subsidiaries, to develop agreements which will allow the
Company to begin generating substantial revenues during the current and
future fiscal years. The first priority of the Company during this current
fiscal year will be to establish and penetrate viable markets with its
products and services. However, the total fiscal impact cannot be determined
at this time.

In addition, the Company plans to augment its business operations by
acquiring established operating private companies which are in businesses
compatible with the Company. The Company plans an ongoing program of mergers
and acquisitions, in addition to its primary business focus. As of the date
hereof, except with regard to Imaginetics, Inc., the Company has not entered
into any formal agreements with any acquisition candidates.

MARKETS

The Company's marketing plan is focused on national and international
sales respecting the product and development of its film library. This plan
will be the primary focus for the Company as prior described herein.

During the present fiscal year, the Company's primary marketing has been
through management's personal and corporate contacts. Commission sales
representatives of the Company are also utilized in order to perform various
direct and mass marketing functions as may be required by the Company.

RAW MATERIALS

The Company principally uses finished goods in its operations, which are
readily available. Therefore, raw materials are not a material factor in the
Company's operations.

CUSTOMERS AND COMPETITION

General

The principal customers of the Company are the end users of the
Company's products and services throughout the United States, Canada and
other global markets. There are a number of companies which sell similar
competing products and services as those of the Company. To the extent that
the Company is unable to interest users to accept its goods and services, the
Company will have difficulty in either achieving its goals and objectives, or
of ever becoming profitable.

Divisions of the Company

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The Company's competitive business conditions and its position in each
of its divisions is expected to be substantially the same. The Company
expects competition to be intense. Further, the market for all of the
Company's products and services is still relatively new and probably has
limited barriers to entry for other competing operations. Consequently, the
Company cannot predict the size of the market for any of its products or
services. The number of competitors are expected to be substantial, although,
at this time, the Company has not identified its principal competitors.

BACKLOG

At December 31, 1995, the Company had no backlogs.

EMPLOYEES

At as of the date hereof, the Company has 6 full-time employees which
consist of 5 members of management and one staff employee. The Company's
employees are not represented by any union or collective bargaining group,
and there is no history of any labor problems, or disputes. The Company does
not have the human resources at present to fulfill its complete business
plan, and expects to hire additional employees in the future.

PROPRIETARY INFORMATION

The Company's film library relates to public domain motion pictures and
television series episodes. However, when selling video products derived
therefrom, as between the Company and its purchasers, such purchases are
proprietary property since they relate to specific film masters.

GOVERNMENT REGULATION

The Company is not subject to any material governmental regulation or
approvals.

RESEARCH AND DEVELOPMENT

The Company has not spent any material amount in research and development.

ENVIRONMENTAL COMPLIANCE

The Company is not subject to any material costs for compliance with any
environmental laws.

SUBSEQUENT EVENTS

Pursuant to Agreements respectively dated November 28, 1995, November
29, 1995, January 30, 1996, and February 27, 1996, the Company via its
wholly owned Canadian

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subsidiary, American Entertainment Limited (AEL), granted a license to VIP
Phone, Inc. (VIP Phone), a Delaware corporation with headquarters in
Baltimore, Maryland, to market, sell and distribute the company's film
library consisting of 5,000 vintage motion picture and television series
episodes. These Agreements were contingent upon the company and AEL arranging
financing with an international banking source regarding VIP Phone's accounts
receivable. A commitment regarding a revolving line of credit in the sum of
$US 5,000,000 was received by AEL from Banque Nationale de Paris (Canada)
(BNP) on February 21, 1996, and the transactions respecting both the
financing and the licensing were completed on March 22, 1996.

PRINCIPAL MARKET OR MARKETS

From January 1990 until July, 1994, the Company's securities did not
trade in a public market. Prior to January, 1990 the Company's securities
traded as Units in the over-the-counter market, each Unit consisting of one
common share and ten warrants to purchase common shares. All warrants which
were a part of these Units have expired prior to the reporting periods herein.

Since July, 1994, the Company's common shares have traded Over The
Counter on the National Association of Securities Dealers' Bulletin Board.
Market makers and other dealers provide bid and ask quotations for the
Company's common stock. The Bulletin Board symbol is AETG.

The table below illustrates the range of high and low bid quotations for
the Company's common shares, as tracked by NASD during each reporting period
since the Company's common shares began trading. These bid price market
quotations represent prices between dealers and do not include retail
mark-up, markdown, or commissions. Therefore, they may not represent actual
transactions.

<TABLE>
<CAPTION>
QUARTER ENDING HIGH LOW
- -------------- ---- ---
<S> <C> <C>
March 31, 1995 1.1875 0.4375
</TABLE>

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June 30, 1995 1.25 0.39

September 30, 1995 0.50 0.25

December 31, 1995 0.30 0.0781

QUARTER ENDING HIGH LOW

SEPTEMBER 30, 1994 2.375 .313

DECEMBER 31, 1994 1.375 .313
</TABLE>

APPROXIMATE NUMBER OF HOLDERS OF COMMON STOCK.

As of December 31, 1995, a total of 14,629,843 common shares are issued
and outstanding. The number of holders of record of the Company's common
stock as of the date hereof, is approximately one hundred fifty (150).
However, the Company estimates that it has a significantly greater number of
shareholders because a substantial number of the Company's shares are held in
nominee names by the Company's market makers, and in street form. There are
also Class A, Class B, Class C, Class D, Class E, Class H, Class I, Class J,
and Class K Warrants outstanding to purchase an aggregate of 4,159,539 common
shares, as well as options to purchase a total of 10,480,000 common shares.

DIVIDENDS.

Holders of common stock are entitled to receive such dividends as may be
declared by the Company's Board of Directors. No dividends on the common
stock were paid by the Company during the period from January, 1990 to the
date hereof, nor does the Company anticipate paying dividends in the
foreseeable future.

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS.

RESULTS OF OPERATIONS

As of March 15, 1993, the Company concluded the acquisition of
Corporatel International, Inc., which is a development stage corporation.
The main thrust of the Company's activities for 1995 was to enter into
agreements for the purposes of developing and commercially exploiting the
film library and sales to both distributors and retailers. This purpose was
significantly advanced by the transaction, after the close of the fiscal
year, with The VIP Phone Club, Inc. and the license issued to them regarding
the film library by one of the Company's subsidiaries. The Company also plans
to sell its video product via joint ventures and licensing arrangements with
general broadcast, cable, and satellite generated television stations in
accordance with its

<PAGE>

previously developed business plan. To that end, the Company has entered into
several agreements regarding the development and commercial exploitation of
the Company's film library inventories.

As of August 1, 1995, the Company's commercial production division,
Chaos International, Inc., discontinued the production of television
commercials. The Company will continue with its plans to develop feature
motion picture(s) through its film production division. In this regard, the
areas of both film production and distribution thereof are expected to
advance in the next fiscal period, including the addition to management of
expert personnel.

The Company's business plan calls for the generation of significant
revenues in the first three years of operations emanating from all of its
divisions. However, there can be no guarantee that the Company can achieve
this goal.

As of December 31, 1995, the Company had revenues of $634,523.

Since commencement, the Company has devoted the majority of its efforts
to researching and refining its marketing activities with a view to
developing comprehensive business and merchandising plans that in
management's opinion, when fully implemented, will result in the successful
sale and distribution of the Company's goods and services to the general
public.

As prior noted, the Company has successfully completed the acquisition
of a film library. The Company's intention to acquire further film libraries
in the future will be dependent upon the availability of its financial
resources to do so. Although to date the Company has generated virtually all
of its revenue from its commercial production division, it also has commenced
to obtain revenues from its film library and, furthermore, expects that in
the coming fiscal year, the majority of its revenues will be derived from
sales of product based upon its film library and the granting of rights
regarding the distribution of its film library.

As its operating results are addressed and new markets are
appropriately developed such as premium sales and international sales, the
Company expects to derive a substantial portion of its revenue from product
sales and licenses associated with its film library. The Company's revenue,
however, will vary to the extent that the Company is able to satisfy consumer
preferences. The Company's revenue may also experience variations as a result
of the demand for a particular film title and entry into specific markets.
Such demand may be further affected consequent upon a number of factors
including competitors' products and their pricing policies.

As previously noted, on March 22, 1996, the Banque Nationale de Paris
("BNP") provided financing to AEG Entertainment Limited ("AEL"), a
wholly-owned Canadian subsidiary of the Company, of a $5,000,000US revolving
line of credit to be used to finance the accounts receivable of The VIP Phone
Club, Inc. ("VIP"), a private Delaware corporation, which was part of an
affiliated group which, in November, 1995 and in January, 1996, assigned its
accounts receivable to AEL, contingent upon the Company obtaining
institutional bank financing for the accounts receivable. This extension of
credit by BNP fulfills that financing contingency. In consideration of

<PAGE>

obtaining this financing, the Company is to receive a monthly fee equal to 3%
of the monthly accounts receivable financing advanced by BNP. The maximum
amount under this line of credit will not exceed 90% of the VIP accounts
receivable less all monies owed to prior ranking and/or preferred creditors.
During the term of the financing arrangement, based upon this criteria, the
average monthly accounts receivable financing is anticipated to be around
$5,000,000. Additionally, the Company and AEL have granted a license to VIP
to make available to VIP's telephone subscribers the titles contained in the
Company's film library.

The Company is at an early stage of development and is subject to all of
the risks inherent in the establishment of a new business enterprise. To
address these risks, the Company must, among other matters, continue to
research and to successfully market its proposed products, attract, retain
and motivate qualified personnel and respond to competitive developments.

The Company believes that it will generate significant revenues in 1996
and that the industry's significant growth potential will create demand for
its products and services that will contribute to continued revenue growth in
ensuing periods. As reflected in the "Description of Business" herein, the
major cost components associated with the Company's revenues (with the
exception of its media costs), are variable in nature and the Company
believes that sufficient revenues will be obtained in order to meet both
media costs and the Company's general overhead. The Company's fixed costs for
the coming year are estimated to be approximately $1,075,000, which includes
general overhead (of approximately $500,000), salaries ($525,000) and rent on
its offices ($50,000). Moreover, the Company believes that as its revenues
increase in subsequent periods, its profitability will also respond
accordingly.

The Company has utilized a five year time period to amortize the costs
of the rights associated with the film library.

Amortization of these costs as to the film library has been determined
based upon the straight line method over a five year period. Amortization as
to the film library has been based upon the straight-line method over a five
year period. Utilizing this methodology, 60% of the film library costs will
be amortized over the first three years, with the remaining unamortized costs
being amortized over the final two years of the amortization period.

The Company is currently analyzing all of its various divisions to
determine what changes can be made to allow the Company to become profitable
on an ongoing basis. This analysis includes, but is not limited to,
discontinuing certain portions of the business, streamlining other portions
of the business, increasing marketing efforts, expanding the most potentially
profitable portions of the Company's current operations, and seeking
acquisition candidates. A the present time, the Company has no material
commitments for capital expenditures in the next twelve months but plans to
obtain additional capital in view of its prior operating losses. The Company
may seek capital for its purposes through a combination of borrowings, equity
offerings, and internally generated profits, if any.

<PAGE>

LIQUIDITY AND CAPITAL RESOURCES

For the period ending December 31, 1995, and December 31, 1994, cash and
cash equivalents of approximately $315 and $33,000 were available to the
Company to move forward in the various stages of its development plans. The
Company expects to require additional capital of approximately $1,075,000
throughout next fiscal year, which it will use for all of its operating
divisions. The Company will generate such capital through revenues and a
combination of private placements, bank operating lines of credit, and
potential operating profits.

Prior to its acquisition of Corporatel the Company had no substantial
operations and thus had no working capital requirements. As of the fiscal
year ends for 1993, 1994, and 1995, the Company had no significant capital
expenditures.

The Company does not intend to pay dividends in the foreseeable future.

DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

The Company did not have any disagreements on accounting and financial
disclosures with its present accounting firm during the reporting period.

DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY

The Directors and Executive Officers of the Company, their ages and
positions held in the Company as of December 31, 1995 are as follows:

NAME AGE POSITION HELD
- ---- --- -------------
<S> <C> <C>
Joel Wagman 63 Chief Executive Officer/President
Chairman of the Board

J.R.Y. Hugo 63 Vice Chairman and Director

Allan P. Chapman 57 Vice President/Distribution/
Director

Samuel C. Paul 62 Chief Accounting Officer/Treasurer
Director

Jon D. Bridgman 53 Vice President, Corporate
Affairs/Director

Dirk Peper 68 Chief Financial Officer
</TABLE>

<PAGE>

The Company's Directors will serve in such capacity until the next
annual meeting of the Company's shareholders and until their successors have
been elected and qualified. The Officers serve at the discretion of the
Company's Directors. There are no family relationships among the Company's
officers and directors nor are there any arrangements or understandings
between any of the directors or officers of the Company or any other person
pursuant to which any officer or director was or is to be selected as an
officer or director.

JOEL WAGMAN. Mr. Wagman has been the Chairman of the Board of Directors,
Chief Executive Officer and a Director since March, 1993. On October 18,
1995, Mr. Wagman became President of the Company. Mr. Wagman received his
Bachelor of Arts Degree (BA), in 1955 from the University of Toronto
(Toronto, Ontario).

Mr. Wagman is also a graduate of Osgoode Hall Law School (LL.B. York
University, Toronto, Canada)(1959). Mr. Wagman was appointed a "Queens
Counsel" in 1971. During the past five years, Mr. Wagman has been engaged in
and with corporations dealing with merchandising - telecommunications -
television.

From September 1987 to July 1991, Mr. Wagman served as President and
Chief Executive Officer of the Telecommerce Corporation (at that time, a
Canadian public reporting company). While Mr. Wagman was President and CEO
of Telecommerce, it was engaged in data-telecommunications relating to the
marketing and sale of goods and services via Regional Bell Operating
Companies (RBOC's).

From August, 1991 until December, 1991, Mr. Wagman served as President
of Corporatel America, Inc., a non-related U.S. private company, engaged in
the production of non-entertainment related Infomercials and the sale of
goods and services thereby. From January, 1992, until the date hereof, Mr.
Wagman has at various times served on a full-time basis as President, Chief
Executive Officer and Chairman of the Board of Corporatel International, Inc.
(a subsidiary of American Entertainment Group, Inc.).

J.R.Y. HUGO. Mr. Hugo has been the Vice Chairman and a Director since 1994.
He has been in the corporate and finance business since 1989. Prior to that
time, he was a practicing attorney in the corporate and securities area in
Toronto. He obtained undergraduate degrees from the University of Toronto and
his law degree from Osgoode Hall Law School in Toronto.

ALLAN P. CHAPMAN. Mr. Chapman became a Vice President and Director of the
Company in September, 1995. During the past thirty-four years, Mr. Chapman
has been associated with the Baton Broadcasting organization in various
capacities, including Vice President, Managing Director, and President of
Glen-Warren Productions Limited, a wholly-owned subsidiary of Baton
Broadcasting Incorporated and the largest full-service production company in
Canada. From 1992 until he joined the Company, he was President of BBS
Entertainment. Mr. Chapman attended the University of Western Ontario.

<PAGE>

SAMUEL C. PAUL. Mr. Paul has been a Director of the Company since March,
1994 and the Secretary/Treasurer since 1995. Mr. Paul graduated from
McMaster University (Hamilton, Ontario, Canada) in 1958 with a degree in
Economics and Business. In 1962, Mr. Paul received a Chartered Accountant
designation (C.A.), having completed post graduate work at Queens University,
(Kingston, Ontario, Canada).

Mr. Paul's career spans practicing both in public accounting firms and
in various management positions within the electronics and construction
industry. Until his retirement from public accounting practice in March 1994,
Mr. Paul had been a founding member of the chartered accounting firm of Paul
and Paul, of Toronto, Ontario, Canada, specializing in financial and
consulting services to small and medium sized clients, both of a private and
public nature.

JON D. BRIDGMAN. Mr. Bridgman has been a Vice President and Director of the
Company since September, 1995. Mr. Bridgman has been involved in the
investment industry for over thirty years and has experience with three major
Canadian brokerage firms and a U.S. insurance company. He has been a
co-founder of five businesses and a Director of two public companies in
Canada: Eclipse Capital, Inc. and Rampart Mercantile, Inc. From 1992 to 1993,
he was Executive Vice President of Rampart Mercantile, Inc. From 1994 until
he became associated with the Company, he was President and Chief Executive
Officer of United Mercantile, Inc. From 1993 to 1994, he was Executive Vice
President of Rampart Mercantile, Inc. From 1991 to 1992, he was Director of
US marketing for Eco Corporation. From 1988 to 1992, he owned J. Bridgman
Consulting, a corporate finance consulting firm. He has attended Concordia
University of Montreal, Quebec and the University of Manitoba.

DIRK PEPER. Mr. Peper has been the Chief Financial Officer since August 16,
1995. Mr. Peper was appointed a Director of the Company on August 10, 1995
and resigned as a Director on September 27, 1995 and Chief Financial Officer
on April 2, 1996. From 1992 until he joined the Company, he was a Management
Consultant with Canadian Executive Overseas Services. From 1988 to 1992, he
served as Senior Vice President (Special Projects) for Central Capital
Corporation. From May, 1978 to April, 1988, Mr. Peper was the Treasurer of
the Ontario Hydro Electric Power Commission. From October, 1974 to May,
1978, hew served as Treasurer and Commissioner of Finance of the Regional
Municipality of Peel(Province of Ontario). From May, 1967 to September, 1974,
he was Deputy Minister of Finance for the Province of Newfoundland and
Labrador. From 1963 to 1967, he was a Senior Management Consultant with Peat,
Marwick, Mitchell & Company. He was educated at Queensland University,
Brisbane, Australia.

FORM 10-KSB

A copy of the Form 10-KSB filed with the U.S. Securities and Exchange
Commission is available to any shareholder upon written request to:

Corporate Secretary
American Entertainment Group, Inc.
160 Bedford Road, Suite 306
Toronto, Ontario, Canada M5R 2K9

<PAGE>

SHAREHOLDER INFORMATION
Corporate Offices:
160 Bedford Road, Suite 306
Toronto, Ontario, Canada M5R 2K9

Independent Auditor:
Rollins & Associates, P.C.
1201 Peachtree Street, N.E.
400 Colony Square, Suite 1500
Atlanta, Georgia 30361
Transfer Agent:
Securities Transfer Corp

SPECIAL ANNUAL MEETING

Stockholders of the Company are invited to attend the Special Annual
Meeting of Shareholders of the Company at 10:00 a.m. local time, on July 11,
1996, at 11355 Chester Road, Sharonville, Ohio 45246.

A Proxy Statement will be sent to shareholders of record as of May 31,
1996.

<PAGE>

AMERICAN ENTERTAINMENT GROUP, INC.
(A DEVELOPMENT STAGE COMPANY)

CONSOLIDATED FINANCIAL STATEMENTS

YEARS ENDED DECEMBER 31, 1995 and 1994

WITH

INDEPENDENT AUDITORS' REPORT

<PAGE>

TABLE OF CONTENTS

PAGE
----
CONSOLIDATED FINANCIAL STATEMENTS:

Independent Auditors' Report 1

Consolidated Balance Sheets 2

Consolidated Statements of Operations 3

Consolidated Statements of Changes in Stockholders' Equity (Deficit) 5

Consolidated Statements of Cash Flows 6

Notes to Consolidated Financial Statements 7

<PAGE>

INDEPENDENT AUDITORS' REPORT

To the Board of Directors of
American Entertainment Group, Inc.
160 Bedford Road, Suite 306
Toronto, Ontario M5R 2K9

We have audited the accompanying consolidated balance sheets of American
Entertainment Group, Inc. (a development stage company) and subsidiaries as
of December 31, 1995 and 1994, and the related consolidated statements of
operations, changes in stockholders' equity (deficit) and cash flows for the
years then ended and for the period from the date of inception (April 23,
1992) to December 31, 1995. 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 financial statements referred to above present fairly, in
all material respects, the consolidated financial position of American
Entertainment Group, Inc. and subsidiaries as of December 31, 1995 and 1994,
and the consolidated results of their operations and their cash flows for the
years then ended and from the date of inception (April 23, 1992) to December
31, 1995, in conformity with generally accepted accounting principles.

The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 14 to the
financial statements, the Company has suffered recurring losses from
operations and has a net capital deficiency, which raise substantial doubt
about its ability to continue as a going concern. Management's plans
regarding those matters also are described in Note 14. The financial
statements do not include any adjustments that might result from the outcome
of this uncertainty.

Atlanta, Georgia
March 30, 1996

-1-

<PAGE>

AMERICAN ENTERTAINMENT GROUP, INC.
AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)

CONSOLIDATED BALANCE SHEETS

DECEMBER 31, 1995 AND 1994

ASSETS
<TABLE>
<CAPTION>
1995 1994
---------- ----------
<S> <C> <C>
Current assets:
Cash $ 315 $ 32,590

Trade accounts receivable - 1,587

Inventory (Note 1) 7,801 7,728

Prepaid expenses and deposits 6,711 16,821
---------- ----------

Total current assets 14,827 58,726
---------- ----------

Property and equipment, at cost (Note 1):
Office furniture and equipment 16,976 15,874
Computer equipment 9,854 9,854
---------- ----------

26,830 25,728
Less: accumulated depreciation 11,315 6,045
---------- ----------

Net property and equipment 15,515 19,683
---------- ----------

Other assets:
Film library ownership (Notes 1, 3 and 5) 1,847,478 1,847,478
Infomercial and other film rights (Note 3) - 120,000
Organization costs, less accumulated
amortization of $9,377 and $6,258 in
1995 and 1994, respectively (Note 1) 6,324 9,443
Other - 8,125
---------- ----------
Total other assets 1,853,802 1,985,046
---------- ----------

$1,884,144 $2,063,455
---------- ----------
---------- ----------
</TABLE>

-2-
<PAGE>

LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)

<TABLE>
<CAPTION>
1995 1994
---------- ----------
<S> <C> <C>
Current liabilities:
Current portion of long-term debt
(Notes 3 and 5) $ 612,982 $ 396,123
Short-term note payable (Note 4) - 115,000
Accounts payable 535,611 321,820
Accrued expenses 585,336 547,004
Income taxes payable (Notes 1 and 6) - -
----------- -----------

Total current liabilities 1,733,929 1,379,947
----------- -----------

Long-term debt, original face amount of
$1,000,000, less unamortized discount of
$26,815 and $75,792 in 1995 and 1994,
respectively, and current portion
shown above (Notes 3 and 5) 155,303 373,185
----------- -----------

Commitments and contingencies (Notes 11 and 12)

Stockholders' equity (deficit):
Common stock, no par value;
700,000,000 shares authorized;
14,629,843 and 10,500,319 shares
issued and outstanding in 1995 and 1994,
respectively (Notes 1, 3, 4, 7, 8, 10,
11 and 12) 4,903,289 3,415,441
Common stock to be issued - 123,637
Unearned compensation (13,900) (41,667)
Foreign currency translation adjustment
(Note 9) (12,369) (1,916)
Deficit accumulated during the develop-
ment stage (4,882,108) (3,040,635)
----------- -----------

(5,088) 454,860
Less: Subscriptions receivable - (144,537)
----------- -----------

Total stockholders' equity (deficit) (5,088) 310,323
----------- -----------

$1,884,144 $2,063,455
----------- -----------
----------- -----------
</TABLE>

The accompanying notes are an integral part of these statements.

-3-
<PAGE>
AMERICAN ENTERTAINMENT GROUP, INC.
AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)

CONSOLIDATED STATEMENTS OF OPERATIONS

YEARS ENDED DECEMBER 31, 1995 AND 1994, AND
THE PERIOD FROM THE DATE OF INCEPTION
(APRIL 23, 1992) TO DECEMBER 31, 1995

<TABLE>
<CAPTION>
CUMULATIVE
SINCE
INCEPTION 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
Sales (Notes 1 and 2) $ 36,932 $ 20,000 $ 4,269
Cost of sales 14,317 614 7,240
----------- ----------- -----------

Gross profit (loss) 22,615 19,386 (2,971)
----------- ----------- -----------

Operating expenses:
General and administrative
expenses 4,721,570 1,805,966 1,272,639
Interest 150,168 61,789 52,925
----------- ----------- -----------

Total operating expenses 4,871,738 1,867,755 1,325,564
----------- ----------- -----------

Loss from continuing operations
before provision for income
taxes (4,849,123) (1,848,369) (1,328,535)

Provision for income taxes
(Notes 1 and 6) - - -
----------- ----------- -----------

Loss from continuing operations (4,849,123) (1,848,369) (1,328,535)

Discontinued operations (Note 2):
Income (loss) from operations
of discontinued subsidiary (32,985) 6,896 (14,047)
Loss on disposal of subsidiary - - -
----------- ----------- -----------

Gain (loss) on discontinued
operations (32,985) 6,896 (14,047)
----------- ----------- -----------

NET LOSS $(4,882,108) $(1,841,473) $(1,342,582)
----------- ----------- -----------
----------- ----------- -----------

</TABLE>

The accompanying notes are an integral part of these statements.

-4-
<PAGE>

AMERICAN ENTERTAINMENT GROUP, INC.
AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)

CONSOLIDATED STATEMENTS OF OPERATIONS
(CONTINUED)

YEARS ENDED DECEMBER 31, 1995 AND 1994, AND
THE PERIOD FROM THE DATE OF INCEPTION
(APRIL 23, 1992) TO DECEMBER 31, 1995

<TABLE>
<CAPTION>
CUMULATIVE
SINCE
INCEPTION 1995 1994
--------- ---------- ---------
<S> <C> <C> <C>
LOSS PER SHARE:
Loss from continuing
operations $(.59) $(.15) $(.14)
Loss from discontinued
operations (.01) - -
Loss on disposal of subsidiary - - -
--------- ---------- ---------

NET LOSS $(.60) $(.15) $(.14)
--------- ---------- ---------
--------- ---------- ---------

Weighted average shares
outstanding 8,170,951 12,259,590 9,823,985
--------- ---------- ---------
--------- ---------- ---------
</TABLE>

The accompanying notes are an integral part of these statements.

-5-

<PAGE>
AMERICAN ENTERTAINMENT GROUP, INC.
AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)

CONSOLIDATED STATEMENTS OF CHANGES
IN STOCKHOLDERS' EQUITY (DEFICIT)

PERIOD FROM THE DATE OF INCEPTION
(APRIL 23, 1992) TO DECEMBER 31, 1995

<TABLE>
<CAPTION>
DEFICIT
COMMON FOREIGN ACCUMULATED
COMMON STOCK STOCK UNEARNED CURRENCY DURING THE
OUTSTANDING TO BE COMPEN- TRANSLATION DEVELOPMENT
SHARES AMOUNTS ISSUED SATION ADJUSTMENT STAGE
----------- ---------- --------- -------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Balance at April 23, 1992 (Inception) - $ - $ - $ - $ - $ -

Issuance of common stock 4,280,000 150 - - - -
NET LOS - - - - - (89,500)
----------- ---------- --------- -------- -------- -----------

Balance at December 31, 1992 4,280,000 150 - - - (89,500)

Issuance of common stock 4,069,140 2,719,197 - - - -
Common stock issued in reverse
acquisition 700,000 - - - - -
Common stock subscribed - - 62,086 - - -
Foreign currency translation adjustment - - - - (40) -
NET LOSS - - - - - (1,608,553)
----------- ---------- --------- -------- -------- -----------

Balance at December 31, 1993 9,049,140 2,719,347 62,086 - (40) (1,698,053)

Issuance of common stock 1,451,179 696,094 (8,449) - - -
Common stock subscribed - - 70,000 - - -
Unearned compensation related to
issuance of stock for services - - - (75,000) - -
Amortization of unearned compensation - - - 33,333 - -
Foreign currency translation adjustment - - - - (1,876) -
NET LOSS - - - - - (1,342,582)
----------- ---------- --------- -------- -------- -----------

Balance at December 31, 1994 10,500,319 $3,415,441 123,637 (41,667) (1,916) (3,040,635)

Issuance of common stock 4,129,524 1,487,848 - - - -
Common stock subscribed - - (123,637) - - -
Unearned compensation related to
issuance of stock for services - - - (13,900) - -
Amortization of unearned compensation - - - 41,667 - -
Foreign currency translation adjustment - - - - (10,453) -
NET LOSS - - - - - (1,841,473)
----------- ---------- --------- -------- -------- -----------
Balance at December 31, 1995 14,629,843 $4,903,289 $ - $(13,900) $(12,369) $(4,882,108)
----------- ---------- --------- -------- -------- -----------
----------- ---------- --------- -------- -------- -----------

SUBSCRIP-
TIONS
RECEIVABLE TOTAL
----------- -----------
<S> <C> <C>
Balance at April 23, 1992 (Inception) $ - $ -

Issuance of common stock (150) -
NET LOSS - (89,500)
--------- -----------

Balance at December 31, 1992 (150) (89,500)

Issuance of common stock (12,745) 2,706,452
Common stock issued in reverse
acquisition - -
Common stock subscribed (61,586) 500
Foreign currency translation adjustment - (40)
NET LOSS - (1,608,553)
--------- -----------

Balance at December 31, 1993 (74,481) 1,008,859

Issuance of common stock (56) 687,589
Common stock subscribed (70,000) -
Unearned compensation related to
issuance of stock for services - (75,000)
Amortization of unearned compensation - 33,333
Foreign currency translation adjustment - (1,876)
NET LOSS - (1,342,582)
--------- -----------

Balance at December 31, 1994 (144,537) 310,323

Issuance of common stock - 1,487,848
Common stock subscribed 144,537 20,900
Unearned compensation related to
issuance of stock for services - (13,900)
Amortization of unearned compensation - 41,667
Foreign currency translation adjustment - (10,453)
NET LOSS - (1,841,473)
--------- -----------
Balance at December 31, 1995 $ - $ (5,088)
--------- -----------
--------- -----------

</TABLE>

The accompanying notes are an integral part of these statements.

-6-
<PAGE>

AMERICAN ENTERTAINMENT GROUP, INC.
AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)

CONSOLIDATED STATEMENTS OF CASH FLOWS

YEARS ENDED DECEMBER 31, 1995 and 1994, and
THE PERIOD FROM THE DATE OF INCEPTION
(APRIL 23, 1992) TO DECEMBER 31, 1995

<TABLE>
<CAPTION>
CUMULATIVE
SINCE
INCEPTION 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
Cash flows from operating activities:
NET LOSS $(4,882,108) $(1,841,473) $(1,342,582)
Adjustments to reconcile net loss
to net cash used by operating
activities:
Depreciation and amortization 20,692 8,389 7,491
Interest portion of amount due
for film library 47,101 31,322 12,178
Common stock issued for services 1,794,444 958,017 147,969
Foreign currency translation (12,369) (10,453) (1,876)
Changes in:
Trade accounts receivable and inventory (7,801) 1,514 13,270
Prepaid expenses and deposits (6,711) 10,110 37,567
Accounts payable and other 1,269,367 400,543 489,005
----------- ----------- -----------

Net cash used by operating activities (1,777,385) (442,031) (636,978)
----------- ----------- -----------

Cash flows from investing activities:
Purchase of infomercial and other film rights (120,000) - -
Purchase of property and equipment (26,830) (1,102) (8,674)
Decrease (increase) in other assets 110,549 128,125 (1,875)
----------- ----------- -----------

Net cash provided (used) by investing activities (36,281) 127,023 (10,549)
----------- ----------- -----------

Cash flows from financing activities:
Proceeds from issuance of common stock (net of
stock issue costs of $4,000 in 1994) 1,775,275 315,078 497,953
Increase in short-term note payable 115,000 - 115,000
Repayment of long-term debt (126,294) (32,345) (67,395)
Increase (decrease) in due to officer 50,000 - (50,000)
----------- ----------- -----------

Net cash provided by financing activities 1,813,981 282,733 495,558
----------- ----------- -----------

NET INCREASE (DECREASE) IN CASH 315 (32,275) (151,969)

Cash, at the beginning of the period - 32,590 184,559
----------- ----------- -----------

Cash, at the end of the period $ 315 $ 315 $ 32,590
----------- ----------- -----------
----------- ----------- -----------
</TABLE>

The accompanying notes are an integral part of these statements.

-7-

<PAGE>

AMERICAN ENTERTAINMENT GROUP, INC.
AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 1995 AND 1994

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

The accompanying consolidated financial statements include the
accounts of American Entertainment Group, Inc. (a development stage company)
(the "Company"), a Colorado corporation incorporated on October 17, 1985, and
its wholly-owned subsidiaries, Corporatel International, Inc., Chaos
International, Inc., Chaos Productions, Inc. and AEG Entertainment, Ltd. All
intercompany transactions and accounts have been eliminated in consolidation.

Nature of Operations: The Company was formed primarily to
evaluate, structure and complete a merger with, or acquisition of,
prospective private entities. The Company's Chaos subsidiary, which
functions as executive producer of television commercials, entered into
contracts and began operations in 1993 (See Note 2). However, the Company's
main activities to December 31, 1995 have been primarily developmental and
exploratory in nature, with no principal operations to that date.

The accounting policies employed by the Company are consistent with
generally accepted accounting principles. In instances where more than one
generally accepted accounting principle may be applied, the Company has
adopted the one that it believes most accurately and fairly reflects the
circumstances.

A. Assets and liabilities, revenues and expenses are recorded using the
accrual basis of accounting. Revenues from executive producer fees for
the Company's Chaos subsidiary are recognized at the point of substantial
completion of the contract. At December 31, 1995 and 1994, there were no
contracts in progress (See Note 2).

B. Inventory is stated at the lower of first-in, first-out (FIFO) cost or
market value.

C. Property and equipment are stated at cost. Expenditures for renewals and
improvements that significantly add to productive capacity or extend the
useful life of an asset are capitalized. Expenditures for maintenance and
repairs are charged to current operations. When depreciable properties
are retired or otherwise disposed of, the cost and related accumulated
depreciation are eliminated from the accounts of the Company and the
resultant gain or loss is reflected in the Company's statement of
operations during the applicable period.

-7-

<PAGE>

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

For financial statement purposes, depreciation of property and equipment
is computed principally using the straight-line method of depreciation
over the following estimated useful lives:

<TABLE>
<CAPTION>
ESTIMATED
DESCRIPTION USEFUL LIVES
------------------------------ ------------
<S> <C>
Office furniture and equipment 5 years
Computer equipment 5 years
</TABLE>

For income tax purposes, qualified property and equipment placed in
service after December 31, 1986 are depreciated by accelerated methods as
prescribed under the Tax Reform Act of 1986 and the Revenue
Reconciliation Act of 1993, and, to the extent practicable, expensed
under Internal Revenue Code Section 179.

D. Film library ownership will be amortized under the straight-line method
over a five year period. On a periodic basis, the Company will assess
the adequacy of the five year life and will adjust this life if
necessary. At December 31, 1995, no amortization has been recorded to
date since the Company is still in the development stage and full
operations have not yet commenced.

E. On a periodic basis, the film library ownership asset will be reviewed to
assess whether an impairment of this asset has occurred. If it is
probable that estimated undiscounted future net cash flows will be less
than the net book value of the asset, an impairment will be deemed to
have occurred and losses will be recorded in the current period as a
result of this impairment. For purposes of this analysis, "future net
cash flows" is measured by the gross revenues generated by the asset, net
of all significant costs associated with these revenues, mainly costs of
production, broadcasting and distribution.

F. Organization costs, which consist of legal and accounting fees incurred in
connection with establishing the Company, are being amortized by the
straight-line method over five years.

G. 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.

-8-

<PAGE>

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

H. Net loss per common share is calculated by dividing net loss by the weighted
average common shares actually outstanding plus the shares that would be
outstanding assuming exercise of dilutive stock warrants and options, all
of which are considered to be common stock equivalents. The stock
options and warrants described in Notes 7 and 8 are antidilutive and
therefore not included in the calculation of loss per share in 1995 and
1994.

I. Certain reclassifications have been made to the 1994 financial statements
to conform to the 1995 presentation.

2. DISCONTINUED OPERATIONS

On August 1, 1995, the Company discontinued operations of its Chaos
International, Inc. subsidiary. This subsidiary (a Canadian corporation)
functioned as executive producer of television commercials and began
operations in 1993. Due to a change in corporate philosophy, this subsidiary
was discontinued in August, 1995. The Company incurred no material gain or
loss on the discontinuance of this subsidiary. Operating results of the
Chaos subsidiary for the seven months ended July 31, 1995 are shown
separately in the accompanying statement of operations. The statement of
operations for 1994 has been restated and operating results of the Chaos
subsidiary are also shown separately. Net sales of the Chaos subsidiary for
1995 and 1994 are approximately $635,000 and $1,246,000, respectively. These
amounts are not included in sales of the Company in the accompanying
statements of operations.

3. INFOMERCIAL AND OTHER FILM RIGHTS AND FILM LIBRARY OWNERSHIP

The Company, through its predecessor Corporatel International,
Inc., executed an agreement on December 26, 1992 with two companies, both of
which are stockholders of the Company, for the purchase, in perpetuum, of
certain rights to a film library. The purchase price of the rights was
established at $4,200,000, payable in cash in the amount of $120,000 on or
before February 28, 1993, and by the issuance of 80,000 shares of
Corporatel's common stock, valued at $4,080,000. These film rights were
recorded on the books of the Company at $120,000, which is the cash paid to
date.

In June, 1993, the Company received notice from a third party
asserting some discrepancies in the title to the infomercial rights. The
Company has decided that it will no longer be cost effective to pursue the
enforcement of this agreement due to time constraints and legal fees that
would be involved. Management will continue to negotiate for the refund of
the $120,000 downpayment, but believes the likelihood of its return is
remote. Therefore, the infomercial and other film rights asset is deemed to
have no remaining value and has been written off at December 31, 1995.

-9-

<PAGE>

3. INFOMERCIAL AND OTHER FILM RIGHTS AND FILM LIBRARY OWNERSHIP (CONTINUED)

On June 25, 1993, and as amended in October, 1993, the Company
entered into an agreement to purchase a film library consisting of five
thousand (5,000) English language titles for a total purchase price of
$2,000,000. The purchase price is to be paid by a non-interest bearing note
payable in the amount of $1,000,000, which has been discounted based on an
imputed interest rate of 8%, payable over a period of approximately four
years, and by the issuance of 400,000 shares of the Company's common stock,
valued at $1,000,000.

An independent evaluation of this film library performed in 1993
concluded that the fair market value of the film library was greater than the
purchase price of $2,000,000. The film library has been recorded on the
Company's books net of imputed interest on the non-interest bearing note
payable mentioned above. An independent evaluation of the above film library
indicates no impairment of the film library as of the balance sheet date.

4. SHORT-TERM NOTE PAYABLE

At December 31, 1994, the Company had outstanding a note payable
to a trust in the amount of $115,000. This note payable, dated June 15,
1994, accrues interest at 7% annually and became due in full in December,
1994. As a part of the note agreement, the note payable is convertible into
common stock of the Company at a price per share of $.50. Also, as a part of
the conversion, the trust would receive warrants which would entitle it to
purchase one additional share of common stock per warrant at a price of $1.50
per share. In January, 1995, the trust elected to exercise the convertible
provision of the note and received approximately 240,000 shares and 240,000
warrants in converting the entire note payable, including accrued interest,
that was payable at year end.

-10-

<PAGE>

5. LONG-TERM DEBT

The Company's long-term debt at December 31, 1995 and 1994 is
summarized as follows:

<TABLE>
<CAPTION>
DESCRIPTION 1995 1994
----------- -------- --------
<S> <C> <C>
Non-interest bearing note payable to a corporation, face amount of
$1,000,000, due in equal monthly installments of approximately
$20,000, which includes interest,through August, 1997,
secured by a film library $795,100 $845,100
Less: unamortized discount based on an imputed interest rate of 8% 26,815 75,792
-------- --------
Total long-term debt 768,285 769,308

Less current portion 612,982 396,123
-------- --------

Long-term debt less current portion $155,303 $373,185
-------- --------
-------- --------
</TABLE>

The note payable is due at the rate of $200 per one inch film
master, for a total of 5,000 film masters, and is to be paid at the time they
are received by the Company. It is the intent of Management to receive the
maximum number of film masters available each month, which is specified in
the note agreement as 100. At December 31, 1995, approximately $205,000 has
been paid in connection with actual film masters received to date.
Management expects the balance of the loan to be repaid in full by August,
1997.

The aggregate amounts of principal payments due on long-term debt at
December 31, 1995 are as follows:

<TABLE>
<CAPTION>
YEAR AMOUNTS
---- --------
<S> <C>
1996 $612,982
1997 155,303
--------
Total long-term debt $768,285
--------
--------
</TABLE>

The fair value of the Company's long-term debt is estimated based on
the current rates offered to the Company for debt of the same remaining
maturities. At December 31, 1995 and 1994, the fair value of the long-term
debt approximate the amounts recorded in the financial statements.

-11-

<PAGE>

6. INCOME TAXES

The Company has reported no income taxes currently payable for the years
ended December 31, 1995 and 1994 as a result of incurring net operating
losses and utilizing net operating loss carryforwards.

A reconciliation of income tax at the statutory rate to the
Company's effective rate for the years ended December 31, 1995 and 1994 is as
follows:

<TABLE>
<CAPTION>
DESCRIPTION 1995 1994
----------- ---- ----
<S> <C> <C>
Federal income tax at statutory rate 34.0% 34.0%

State income tax, net of Federal tax benefit 3.6 3.6

Benefit of net operating loss carryforward (37.6) (37.6)
----- -----
Income tax expense - -
----- -----
----- -----
</TABLE>

The Company determines deferred tax assets and liabilities based on
the difference between the financial statement and tax bases of assets and
liabilities as measured by the enacted tax rates which will be in effect when
these differences reverse. Deferred tax assets are reduced by a valuation
allowance if, based on the weight of available evidence, it is more likely
than not that some portion or all of the deferred tax assets will not be
realized.

The deferred tax asset at December 31, 1995 and 1994 consists of
the following:

<TABLE>
<CAPTION>
DESCRIPTION 1995 1994
----------- ----------- ---------
<S> <C> <C>
Net operating loss carryforward $ 1,430,000 $ 843,000

Valuation allowance (1,430,000 (843,000)
----------- ---------
Deferred tax asset $ - $ -
----------- ---------
----------- ---------
</TABLE>

As of December 31, 1995, the Company has a U.S. net operating loss
carryforward of approximately $3,800,000 for which no financial statement
benefit has been recognized. The U.S. net operating losses expire between
the years 2007 and 2010. Future recognition of these carryforwards will be
reflected if the Company has sufficient earnings before the expiration of the
respective loss carryforwards.

-12-

<PAGE>

7. STOCK OPTIONS

During 1995 and 1994, common stock options were issued to
employees and officers of the Company under various compensation agreements.
All stock options were issued at no less than market value at the time of
grant. Also, during 1995, the Company elected to reduce the exercise price
on 4,000,000 options, which were held by Directors of the Company, from $2.00
per share in 1994 to an average of $1.00 per share in 1995, expiring on
January 1, 1998. A summary of common stock options outstanding at December
31, 1995 and 1994 is as follows:

<TABLE>
<CAPTION>
1995 1994
----------------- ------------------
NUMBER AVERAGE NUMBER AVERAGE
OF OPTION OF OPTION
DESCRIPTION OPTIONS PRICE OPTIONS PRICE
----------- --------- ------- --------- -------
<S> <C> <C> <C> <C>
Beginning of year 9,655,567 $ 1.27 5,585,567 $ .73

Granted 3,200,000 1.05 4,600,000 1.80

Exercised (40,000) .01 (330,000) .001

Expired (2,335,567) 1.10 (200,000) .50
---------- ------ --------- ------
End of year 10,480,000 $ 1.01 9,655,567 $ 1.27
---------- ------ --------- ------
---------- ------ --------- ------
</TABLE>

8. STOCK WARRANTS

During 1995 and 1994, the Company issued several classes of stock
warrants in conjunction with the issuance of common stock and in conjunction
with the rescinding of a prior agreement to purchase real estate. Also, in
1995, the Board of Directors elected to extend all series "A", "B", and "C"
warrants for an additional one year period expiring on December 31, 1996, and
reduced the average exercise price from $2.22 per share in 1995 to $1.15 per
share in 1996.

In addition, callable provisions were instituted by the Company in
which under certain conditions the Company has the right to buy back the "A",
"B" and "C" warrants at prices ranging from $1.06 per share to $1.50 per
share. No warrants were exercised in 1995 and 1994. During 1995, 79,000
Class "B" warrants and 1,489,539 Class "F" warrants expired. During 1994,
600,000 Class "A" warrants and 120,000 Class "B" warrants expired.

-13-

<PAGE>

8. STOCK WARRANTS (CONTINUED)

The following table reflects the Company's issued and outstanding
warrants as of December 31, 1995:

<TABLE>
<CAPTION>
NUMBER OF EXERCISE EXPIRATION
DESCRIPTION WARRANTS PRICE DATE
----------- --------- -------- ----------
<S> <C> <C> <C>
Class "A" warrants 1,056,350 $1.38 12-31-96
Class "B" warrants 1,325,000 $ .88 12-31-96
Class "C" warrants 458,189 $1.38 12-31-96
Class "D" warrants 150,000 $2.50 12-31-98
Class "E" warrants 250,000 $1.81 12-31-98
Class "H" warrants 225,000 $1.00 4-15-97
Class "I" warrants 275,000 $2.00 4-15-97
Class "J" warrants 350,000 $2.75 10-15-98
Class "K" warrants 70,000 $1.00 8-21-96
---------
Total warrants outstanding 4,159,539
---------
---------
</TABLE>

9. FOREIGN CURRENCY TRANSLATION

The financial statements of the Company's non-U.S. subsidiary are
translated into U.S. dollars in accordance with Statements of Financial
Accounting Standards (SFAS) No. 52, "Foreign Currency Translation." Net
assets of certain non-U.S. subsidiaries whose "functional" currencies are
other than the U.S. dollar are translated at current rates of exchange.
Income and expense items are translated at the average exchange rate for the
year. The resulting translation adjustments are recorded directly into a
separate component of stockholders' equity. Certain other translation gains
and losses continue to be reported in net income and were not significant in
any year.

10. RELATED PARTY TRANSACTIONS

During 1995, 25,000 shares of the Company's common stock, valued at
$11,250, were issued to a wife of a Director of the Company for consulting
services performed.

During 1995, 55,000 shares of the Company's common stock, valued at
$24,750, were issued to Directors of the Company for consulting services
performed.

During 1995, certain Directors of the Company made advances to the
Company for working capital purposes. These advances, along with accrued
salaries due to these Directors, were assigned by the Directors to third
parties. These assigned debts of the Company were repaid to these third
parties during 1995 by the issuance of 2,216,824 shares of the Company's
common stock valued at $702,956.

-14-

<PAGE>

10. RELATED PARTY TRANSACTIONS (CONTINUED)

In 1995, the Company reduced the exercise prices on options held by
certain Directors of the Company (See Note 7).

During 1995, a Director of the Company was granted under an
employment agreement options to purchase 800,000 shares of the Company's
common stock at a price of $.50 per share through January 1, 1997, and
options to purchase 1,000,000 shares of the Company's common stock at an
average price of $1.00 per share through January 1, 1998.

During 1995, a Director of the Company was granted under an
employment agreement options to purchase 800,000 shares of the Company's
common stock at an average price of $1.13 per share through November 30, 1999.

In 1994, consulting services in the amount of $166,908 were
provided by certain entities whose shareholders were also directors of the
Company.

11. COMMITMENTS AND CONTINGENCIES

The Company has executed various non-cancelable operating leases
for its office space and various equipment. Future minimum rental payments
due under these leases at December 31, 1995 are approximately as follows:

<TABLE>
<CAPTION>
YEAR AMOUNTS
---- -------
<S> <C>
1996 $24,000
1997 5,000
1998 4,000
-------
Total minimum lease commitments $33,000
-------
-------
</TABLE>

Rent expense under these leases was approximately $58,000 and
$39,000 in 1995 and 1994, respectively.

The Company has executed employment agreements with certain of its
officers effective through March 16, 2000. Under the terms of the
agreements, the officers will receive salaries ranging from $60,000 to
$170,000 annually.

Commencing with the Company's year ended December 31, 1994,
officers and employees will be eligible to receive additional compensation in
an amount to be determined at the discretion of Management, to a maximum
aggregate amount of 12% of the Company's consolidated pre-tax operating
profits.

-15-

<PAGE>

11. COMMITMENTS AND CONTINGENCIES (CONTINUED)

As specified in their employment agreements, three executive
officers have the option to each purchase 800,000 shares of the Company's
common stock at a price of $.50 per share through January 1, 1997. In
addition, all three officers also have the option to each purchase an
additional 1,000,000 shares of the Company's common stock at prices ranging
from $.50 per share to $2 per share through January 1, 1998. Also, a fourth
executive officer owns options to purchase 800,000 shares of the Company's
common stock at an average price of $1.13 per share through November 30, 1999.

On October 17, 1995, the Company entered into a letter of intent to
purchase all the rights, title and interest to certain cartoon cels as owned
by a U.S. based company. The purchase price has been established at
$5,000,000, to be paid by the issuance of restricted preferred stock of the
Company, the number of shares to be determined at a later date. These
preferred shares shall include a convertible provision to common stock of
$5.00 per share. In addition, the Company has agreed to redeem preferred
stock, valued at $50,000, provided the Company obtains a listing on the
NASDAQ exchange. The execution of this agreement is pending due diligence
work to be performed by both of the parties. If not executed, the agreement
will expire on May 31, 1996.

12. SUBSEQUENT EVENTS

On January 15, 1996, the Company entered into an agreement to
purchase a privately-owned U.S. based company which is in the business of
developing proprietary image products for the motion picture industry. The
purchase price has been established at $500,000, which will be paid by the
exchange of restricted preferred shares of the Company, the number of shares
to be determined at a later date, for all of the outstanding shares of the
acquired company. These preferred shares are to be created and approved in
the future by the Company's shareholders.

As of the report date, this agreement is still subject to the
delivery of certain documents and the completion of due diligence work by
both parties. If not executed, the agreement will expire on May 15, 1996.

In February, 1996, a wholly-owned subsidiary of the Company
finalized an agreement with a U.S. based company to grant this company the
non-exclusive rights to market, sell and distribute a product of the
Company's film library to the general public. In consideration of granting
this license, the Company is to receive the assignment of all accounts
receivable due to this non-related company. Both the license granted by the
Company and the assignment of the accounts receivable are conditional upon
the Company obtaining from an institutional banking source financing of the
non-related company's accounts receivable.

-16-

<PAGE>

12. SUBSEQUENT EVENTS (CONTINUED)

In consideration of the financing, the Company will receive a fee
equal to 3% of each new advance made, subject to a maximum advance amount of
$5,000,000. On February 21, 1996, the Company received a commitment from a
bank to provide the financing. Under this agreement, the Company, one of
its subsidiaries, and other third party entities and persons, will be liable
for a maximum amount of $5,000,000.

13. SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION

<TABLE>
<CAPTION>
1995 1994
-------- --------
<S> <C> <C>
Cash paid for interest and income taxes
is approximately as follows:
Interest $ 33,000 $ 42,000
Income taxes $ - $ -
</TABLE>

During 1995 and 1994, the Company issued 2,693,389 and 242,979
shares, respectively, of the Company's common stock, valued at $958,017 and
$147,969, respectively in lieu of cash payment for compensation and
consulting fees.

During 1995, the Company issued 592,779 shares of the Company's
common stock, valued at $148,378, in lieu of cash payment for prior year
accrued salaries and consulting fees.

During 1995, the Company issued 50,000 shares of the Company's
common stock, valued at $15,000, in lieu of cash for commissions related to
the issuance of stock.

In January, 1995, a note payable to a trust, including accrued
interest, in the total amount of approximately $120,000 was converted into
approximately 240,000 shares of the Company's common stock.

14. GOING CONCERN

The accompanying financial statements have been prepared in
conformity with generally accepted accounting principles, which contemplates
continuation of the Company as a going concern. However, the Company has
sustained substantial operating losses in recent years. In addition, the
Company has used substantial amounts of working capital in its operations.
Further, at December 31, 1995, current liabilities exceed current assets by
$1,719,102.

-17-

<PAGE>

14. GOING CONCERN (CONTINUED)

In view of these trends, the Company is in the process of seeking
additional working capital through various private placements. Also, the
Company has entered into various contracts which will generate net revenues
in its future operations. Management believes that actions presently being
taken to provide working capital can be effectively implemented and will
allow the Company to continue as a going concern.

-18-