AMERICAN ENTERTAINMENT GROUP INC, 10KSB, 1997-04-14

AMERICAN ENTERTAINMENT GROUP INC
10KSB, 1997-04-14
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-KSB
Annual Report Under Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the Fiscal Year Ended: December 31, 1996
Commission File No. 0-22174

AMERICAN ENTERTAINMENT GROUP, INC.
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(Exact Name of Registrant as Specified in its Charter)

COLORADO 83-0277375
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(State or Other Jurisdiction of I.R.S. Employer
Incorporation or Organization) Identification No.)

160 Bedford Road, Suite 306
Toronto, Ontario, Canada M5R 2K9
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(Address of Principal Executive Offices) (Zip Code)

(416) 920-1919
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Registrant's Telephone Number, Including Area Code

Securities Registered Pursuant to Section 12(g) of the Act:
Common Stock, no par value

Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes: X No:
----- -----

Check if there is no disclosure of delinquent filers in response to Item
405 of Regulation S-B as contained in this form and no disclosure will be
contained, to the best of Registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form
10-KSB. [ ]

State issuer's revenues for its most recent fiscal year $235,269.

The aggregate market value of the voting stock of the Registrant held by
non-affiliates as of December 31, 1996 was $1,982,442.

The number of shares outstanding of the Registrant's common stock, as of
the latest practicable date, March 15, 1997, was 3,187,010.

DOCUMENTS INCORPORATED BY REFERENCE

Documents incorporated by reference are found in Item 13.

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PART I

Item 1. DESCRIPTION OF BUSINESS.

(a) 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/telecommunications-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,
both of which are now shareholders of the Company, for the purchase, in
perpetum, of certain rights to a film library which included, but were not
limited to, Infomercial 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.

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).

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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 March 22, 1996, the Banque National de Paris (Canada) (BNP) provided
financing to American Entertainment Limited (AEL), a wholly-owned Canadian
subsidiary of the Company, of a $5,000,000 US revolving line of credit to be
used to finance the accounts receivable and contract amounts receivable of VIP
Phone Club, Inc. (VIP), a private Delaware corporation, which was part of an
affiliated group, which, in November, 1995 and in January, 1996, had assigned
its accounts receivable and contract accounts receivable to AEL. Additionally,
the Company and AEL had granted a license to VIP to make available to VIP's
telephone subscribers the titles contained in the Company's film Library. In
December, 1996, the Company received a notification from (BNP) of a default in
the loan between VIP and BNP, of which AEL is the debtor and the Company one of
the guarantors. At this time, the Company acknowledged this default on the part
of VIP and agreed to cooperate with BNP in securing the collection of the
outstanding loan balance. Notwithstanding the foregoing, on April 8, 1997, the
Company informed BNP that due to the conduct of BNP respecting both the loan to
VIP and its Receiver thereof, the Company and AEL by operation of law have been
released respectively from said guarantee of the Company and the loan to AEL. As
of the date hereof, the Company has received no response from BNP.

On March 27, 1997, the Company agreed to acquire Telephonetics Overseas
Corporation (TOC). The Agreement of March 27, 1997 is subject to a further
definitive Agreement to be executed on or before April 15, 1996. Under such
Agreements, the Company will acquire all the issued and outstanding shares of
TOC for the acquisition price of $1,250,000 payable in shares in the common
stock of the Company valued at $4.00 per share.

TOC holds rights and licenses from Telephonetics International Inc., (TII)
to market and sell world wide TII's "On Hold" media technology, hardware and
programming. For over a decade TII has been a joint marketing alliance partner
and exclusive supplier to AT&T (now Lucent Technologies) for Simply Magic
Productions for Magic On-Hold. Additionally, on closing, The Company will fund,
if necessary, a maximum of $500,000 to effectuate TOC's business plan during the
1997 calendar year.

Present TOC management will continue after closing which is scheduled to
occur on or before May 15, 1997. The Company's management is of the opinion
that the TOC acquisition will garner both substantial revenues and net
profits for AETG.

(b) 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. 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.

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

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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 and plans to sell film product derived from its library by means
of transactions with broadcasters and by Video-on-Demand (VOD) and VOD related
transmission methodology.

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, 1995, 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. This transaction was terminated in 1996.

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. This agreement was terminated in
1996.

"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 transaction
was terminated in late 1996.

Pursuant to Agreements entered into between the Company and its wholly
owned subsidiary, AEG Entertainment Limited, (AEL) and VIP Phone, Inc. and its
associated companies respectively dated November 28, 1995, November 29, 1995,
January 30, 1996, and February 27, 1996, the Company via its subsidiary AEL
granted a license to VIP Phone, Inc. a Delaware corporation of 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 and
contract receivables. 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. Additionally, the Company
and AEL had granted a license to VIP to make available to VIP's telephone
subscribers the titles contained in the Company's film Library.

In December, 1996, the Company received a notification from (BNP) of a
default in the loan between VIP and BNP, of which AEL is the debtor and the
Company one of the guarantors. At the time, the Company had acknowledged this
default on the part of VIP and had agreed to cooperate

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with BNP in securing the collection of the outstanding loan balance.
Notwithstanding the foregoing, on April 9, 1997, the Company informed BNP
that due to the conduct of BNP respecting both the loan to VIP and its
Receiver thereof, the Company and AEL by operation of law have been released
respectively from said guarantee of the Company and the loan to AEL. As of
the date hereof, the Company has received no response from BNP.

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).

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 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. However, the
Company's auditors, for accounting purposes, determined the value of said
Library at December 31, 1996 at $1,000,000.

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Present TOC management will continue after closing which is scheduled to
occur on or before May 15, 1997. The Company management is of the opinion that
the TOC acquisition could have a positive effect on both revenues and net
profits for the Company and could potentially play a significant role in the
furtherance of the Company's plans to create a state of the art content driven
entertainment-telecommunications corporation.

ORGANIZATION

The Company has recently consolidated its internal operations. As of
December 31, 1996, revenues from all divisions were $235,269.

THE FEATURE FILM DIVISION

This division was previously 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 last fiscal year, the Company
operated the division directly and did not generate any revenues.

The plan for this division is to concentrate on films budgeted between the
sums of $3,000,000 and $6,000,000 and will seek world-wide distribution of such
feature films.

At present, 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.

RADIO

On February 4, 1997, the Company, via its wholly owned subsidiary Comex
Interactive Network Limited, entered into an Agreement with Pelmorex Inc. of
Toronto, Canada respecting the sale over the next two years of 104 episodes of
"Classic Movies on Radio". The series is based on the Company's Audio Classic
Movies which will bring to the North American public, via radio, vintage movies
derived from the Company's film library.

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).

TELECOMMUNICATIONS

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outstanding shares of TOC for the acquisition price of $1,250,000 payable in
shares in the common stock of the Company valued at $4.00 per share.

From inception until December 31, 1996, the Company and all of its
subsidiaries and divisions have produced $272,201 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.

In that respect, the Company plans to augment its business operations by
acquiring 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, the Company
has entered into an Agreement dated March 27, 1997, to acquire Telephonetics
Overseas Corporation (TOC). The Agreement of March 27, 1997 is subject to a
further definitive Agreement to be executed on or before April 15, 1996. Under
such Agreements, the Company will acquire all the issued and outstanding shares
of TOC for the acquisition price of $1,250,000 payable in shares in the common
stock of the Company valued at $4.00 per share.

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(d) 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
marketing and sales functions as may be required by the Company.

(e) 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.

(f) 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

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.

(g) BACKLOG

At December 31, 1996, the Company had no backlogs.

(h) 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.

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(i) PROPRIETARY INFORMATION

The Company's film library relate 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.

(j) GOVERNMENT REGULATION

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

(k) RESEARCH AND DEVELOPMENT

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

(l) ENVIRONMENTAL COMPLIANCE

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

(m) SUBSEQUENT EVENTS

On March 21, 1997, the Company sold a total of $500,000 of 7%
convertible debentures, each with a face amount of $10,000, to two
corporations. The debentures are convertible into the Company's common stock
beginning forty-five days after March 21, 1997 at the lesser of (a) the
market price on closing, or (b) 70% of the market price on the conversion
date.

On March 27, 1997, the Company agreed to acquire Telephonetics Overseas
Corporation ("TOC"). The Agreement of March 27, 1997 is subject to a further
definitive Agreement to be executed on or before April 15, 1997. Under such
Agreements, the Company will acquire all the issued and outstanding shares of
TOC for the acquisition price of $1,250,000 payable in shares of the common
stock of the Company valued at $4 per share.

Item 2. DESCRIPTION OF PROPERTIES.

As of the end of its fiscal year, the principal office of the Company was
located at 160 Bedford Road, Suite 300, Toronto, Ontario M5R 2K9. The Company
has leased this location for $2,518 per month under a lease which expires July
31, 1997. The Company also owns rights to a film library and miscellaneous
office furniture and equipment.

Item 3. LEGAL PROCEEDINGS.

On September 26, 1995, the Company filed a lawsuit in the US District
Court, Northern District of Texas, Dallas Division, against Securities Transfer
Corporation (the Company's stock transfer agent), Harve Sherman, Steven Waxman,
Chaos Corporation, Max Sherman Trust, Richview Holdings Limited, and Janice Fox.
Messrs. Sherman and Waxman are former officers and directors of the Company, the
remaining parties, except for Securities Transfer Corporation, are related
persons and entities to Messrs. Sherman and Waxman.

The action requests the following relief:

a. That Defendant Securities Transfer Corporation be ordered to maintain
all restrictions and legends on the shares and share certificates of the
Company's shares controlled by the other Defendants, pending further
instructions from the Court;

b. That the Company's shares of Defendants Harve Sherman, Marcia Sherman,
Max Sherman Trust, Chaos Corporation, Richview Holdings, Ltd., Steven Waxman and
Janice Fox be ordered canceled and revoked;

c. In the alternative, that the transactions by which Defendants obtained
the Company's shares be rescinded, with any consideration paid by each returned
to each by the Company;

d. That Defendants Harve Sherman, Marcia Sherman and Steven Waxman
disgorge to the Company all profits earned by them on the short-swing
transactions alleged in this matter;

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e. That Defendants Harve Sherman, Marcia Sherman and Steven Waxman pay
all costs of suit and a reasonable attorney fee to the Company; and

f. That the Company recover all other relieve to which it may be entitled
at law or in equity.

On December 10, 1996, an action was commenced in the Province of Ontario,
Canada by Howard Scott as Plaintiff, a former Officer and Director of the
Company, against the Company and its Directors as Defendants claiming $21,545 in
expenses and $25,000 in salaries. The Company is defending this action and
takes the position that no monies whatsoever are due to the Plaintiff. The
proceedings are at an early stage and no discoveries have taken place.

Otherwise, no legal proceedings of a material nature to which the Company
is a party were pending during the reporting period, and the Company knows of no
other legal proceedings of a material nature pending or threatened or judgments
entered against any director or officer of the Company in his capacity as such.

Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.

On December 12, 1996, the Company held a special shareholders' meeting. The
following items were considered by the shareholders and approved with the
necessary votes to pass each proposal:

1. To elect five (5) persons to the Company's Board of Directors, each
such Director to hold office until the next annual meeting of shareholders or
until their successors are elected and qualified;

2. To amend the Company's Articles of Incorporation to authorize
5,000,000 Preferred Shares, which would have such par value, classes and
preferences as the Company's Board of Directors may from time to time
determine;

3. To ratify the Board's one-for-ten reverse split of all issued and
outstanding common shares.

PART II

Item 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.

(a) 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.

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Effective July 29, 1996, the Board of Directors of the Company approved and
implemented a one-for-ten reverse split of the Company's issued and outstanding
common stock. This action was approved and ratified by the shareholders of the
Company on December 12, 1996. Fractional shares after the reverse split were
rounded up to the next whole number. The authorized capitalization or par value
of the Company was not affected by this reverse split.

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 periods
indicated. For 1996, the shares have been shown as if the one-for-ten reverse
split had taken place during the reporting periods. For 1995, the shares are
shown on a pre-split basis. 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.

Quarter Ending High Low

March 31, 1996 $6.20 $1.00

June 30, 1996 $6.25 $3.00

September 30, 1996 $4.90 $1.19

December 31, 1996 $2.56 $1.00

Quarter Ending High Low

March 31, 1995 11.87 4.37

June 30, 1995 12.50 3.90

September 30, 1995 5.00 2.50

December 31, 1995 3.00 0.78

(b) APPROXIMATE NUMBER OF HOLDERS OF COMMON STOCK.

As of December 31, 1996, a total of 2,409,853 common shares were issued and
outstanding. The Company implemented a one-for-ten reverse split effective July
29, 1996. The number of holders of record of the Company's common stock as of
the date hereof, is approximately two hundred (200). 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 D, Class E,
Class H, Class I, Class J, and Class K Warrants outstanding to purchase an
aggregate of 132,000 common shares, as well as options to purchase a total of
2,677,500 common shares.

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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.

Item 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.

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 1996 was to enter into agreements for the
purposes of developing and commercially exploiting the film library and sales to
both distributors and retailers. 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 accord with its business
plan. To that end, the Company has entered into agreements regarding the
development and commercial exploitation of the Company's film library
inventories.

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.

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, 1996, the Company had revenues of $235,269.

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. The Company 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, the
granting of rights regarding the distribution of its film library, and revenues
from its planned acquisitions.

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.

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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 improved revenues in 1997 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 $875,000, which includes general overhead (of
approximately $400,000), salaries ($425,000) 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. At
present, the Company has a material commitment for a capital expenditure in the
sum of $500,000 during the fiscal year 1997 relating to Telephonetics Overseas
Corporation. The Company plans to obtain additional capital for its planned
operations and to defray 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.

LIQUIDITY AND CAPITAL RESOURCES

For the period ending December 31, 1996, and December 31, 1995, cash and
cash equivalents of approximately $807 and $315 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 $875,000 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.

On March 21, 1997, the Company sold a total of $500,000 of 7% Convertible
Debentures, each with a face amount of $10,000 to two corporations. The
Debentures are convertible into the Company's common stock beginning forty five
days subsequent to March 21, 1997 at the lesser of (1) the market price on
closing, or (b) 70% of the market price on the conversion date.

13
<PAGE>

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 1994, 1995, and 1996, the Company had no significant capital
expenditures.

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

Item 7. FINANCIAL STATEMENTS.

The complete financial statements are included at Item 13 herein.

Item 8. DISAGREEMENTS WITH ACCOUNTANTS 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.

PART III

Item 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS, AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT.

The Directors and Executive Officers of the Company, their ages and
positions held in the Company as of December 31, 1996 are as follows:

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

J.R.Y. Hugo 64 Vice Chairman and Director

Allan P. Chapman 57 Vice President/Director

Samuel C. Paul 62 Chief Accounting and Financial
Officer/Treasurer, Director

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

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).

14
<PAGE>

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.

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.

COMPLIANCE WITH SECTION 16(a) OF THE SECURITIES EXCHANGE ACT OF 1934.

Section 16(a) of the Securities Exchange Act of 1934 (the "34 Act")
requires the Company's officers and directors and persons owning more than ten
percent of the Company's Common Stock, to file initial reports of ownership and
changes in ownership with the Securities and Exchange

15
<PAGE>

Commission ("SEC"). Additionally, Item 405 of Regulation S-B under the 34 Act
requires the Company to identify in its Form 10-KSB and proxy statement those
individuals for whom one of the above referenced reports was not filed on a
timely basis during the most recent fiscal year or prior fiscal years. Given
these requirements, the Company has the following report to make under this
section. Messrs. Chapman and Bridgman made late filings of their Forms 3 and
5 in the last fiscal year.

Item 10. EXECUTIVE COMPENSATION.

The following table sets forth the Summary Compensation Table for the Chief
Executive Officer and the other compensated executive officers other than the
Chief Executive Officer who were serving as executive officers at the end of the
last completed fiscal year. Except as indicated in the footnotes to this
section, no other compensation not covered in the following table was paid or
distributed by the Company to such persons during the period covered. Employee
Directors receive no additional compensation for service on the Board of
Directors.

SUMMARY COMPENSATION TABLE
<TABLE>
Annual Compensation Long Term Compensation
---------------------- ----------------------------------
Awards Payouts
-------- --------
Name Other Restricted All
and Salary Annual Stock(1)(3) LTIP Other
Principal(1)(2)(3) Compen- Bonus Compen- Award(s) Options/
Position Year ($) ($) ($)
- --------------- ---- -------- ------ ----------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Joel Wagman 1996 253,500 -- -- -- --
Chairman 1995 120,000 -- -- --
1994 82,140 -- --

J.R.Y. Hugo 1996 132,500 -- -- -- --
Vice Chrmn. 1995 120,000 -- -- -- --
1994 41,982 -- -- -- --

Jon Bridgman 1996 45,000 -- -- -- --
Vice Pres. 1995 10,000 -- -- -- --
1994 -- -- -- -- --

Samuel C. Paul 1996 132,500 -- -- --
Treasurer 1995 100,000 -- -- --
1994 38,982 -- 26,500 -- --

Allan P. Chapman 1996 132,500 -- -- --
Vice Pres. -- -- -- -- --
-- -- -- -- --
</TABLE>

(1) All compensation amounts herein were paid in common stock. See Item 12
herein.

(2) As of March 11, 1994, Mr. Wagman executed a written employment contract
with the Company. The contract was for a period of seven years and was
thereafter renewable on a year-to-year basis. Mr. Wagman was to receive a salary
of $120,000 per annum under his individual contract

16
<PAGE>

plus the reimbursement of automobile and certain out-of-pocket expenses. In
addition, for the fiscal year ended December 31, 1993 he was eligible to
receive a salary bonus of 3% at such time as the Company generated gross
revenues of between $10,000,000 and $50,000,000; 2% of the Company's gross
revenues between $50,000,001 and $100,000,000; and 1% of the Company's gross
revenues in excess of $100,000,000. No such bonus was paid under this bonus
arrangement. For the fiscal year to end on December 31, 1996, Mr. Wagman was
eligible to participate, along with other Company executives, in a Company
bonus pool not to exceed 12% of the pre-tax operating profits of the Company.
The amount and allocation of distribution will be determined in the sole
discretion of the Compensation Committee of the Company (of which Messrs.
Wagman, Hugo, and Chapman are the members). Such bonuses will be payable 80%
within 90 days of the end of each fiscal quarter, with the remainder due
within 90 days of the end of each fiscal year. No such bonus was paid to Mr.
Wagman.

Pursuant to stock options in his written employment agreement, Mr. Wagman
was eligible to exercise options of up to 80,000 common shares at any time on
or before January 1, 1997 at a price of $5.00 per share. These options were
exercised on April 9, 1996. Consideration for these shares is by means of a
Note Payable to the Corporation in the amount of $400,000. Additionally, Mr.
Wagman is eligible to exercise options of up to 100,000 shares vesting
January 1, 1994, at a price of $20.00 per share, on a schedule to exercise
33,333 shares each year, cumulative, beginning on January 1, 1996 and ending
on January 1, 1998. On October 30, 1995, the exercise price regarding 100,000
shares was amended to reflect the following: 20,000 options exercisable at
$5.00 per share; 20,000 at $7.50 per share; 20,000 at $10.00 per share;
20,000 at $12.50 per share; 20,000 at $15.00 per share. The dates of vesting
and the term remain the same.

Effective January 1, 1996, Mr. Wagman's compensation was raised to
$170,000 per annum, and all terms and conditions relating to the Employment
Agreement of March 11, 1994 were to remain in effect.

Pursuant to arrangements negotiated with Mr. Wagman, Mr. Wagman's
Employment Agreement made as of March 11, 1994 was terminated effective
September 30, 1996. On October 1, 1996 new terms and conditions relating to
Mr. Wagman came into effect. These terms and conditions are:

- Mr. Wagman's remuneration rate is to be calculated at $120,000 per
annum.

- Mr. Wagman received a Grant of Option relative to the unexpired
portion of his Agreement of March 11, 1994 totaling 325,000 shares
at $1.50 per share. This Option is to expire on March 15, 2003.

Additionally, Mr. Wagman received options at $1.00 per share for a total of
120,000 shares which said options are to expire as follows:

- January 1, 1997 to December 31, 1997 30,000 shares

- January 1, 1998 to December 31, 1998 30,000 shares

- January 1, 1999 to December 31, 1999 30,000 shares

- January 1, 2000 to December 31, 2000 30,000 shares

All other terms and conditions relative to Mr. Wagman's Employment
Agreement are to be the same as set out in the original agreement and shall
remain in full force and effect until March 15, 2003.

17
<PAGE>

As of March 11, 1994, Mr. Paul executed a written employment contract
with the Company which superseded all prior agreements. This contract was for
a period of seven years and was thereafter renewable on a year-to-year basis.
Mr. Paul was to receive a salary of $50,000 per annum under his contract.
Commencing with the fiscal year end of December 31, 1994, Mr. Paul was
eligible to participate, along with other Company executives, in a Company
bonus pool not to exceed 12% of the pre-tax operating profits of the Company.
The amount and allocation of distribution will be determined in the sole
discretion of the Compensation Committee of the Company (of which Messrs.
Wagman, Hugo, and Chapman are the members). Such bonuses will be payable 80%
within 90 days of the end of each fiscal quarter, with the remainder due
within 90 days of the end of each fiscal year. To date, no bonus has been
paid to Mr. Paul. On October 30, 1995, the salary of Mr. Paul was
retroactively increased to $100,000 per annum, commencing April 1, 1994.

On October 30, 1995, the employment contract with Mr. Paul was modified.
Pursuant to stock options in his written employment agreement, Mr. Paul had
been eligible to exercise options of up to 4,000 common shares at any time on
or before January 1, 1997 at a price of $5.00 per share. As of March 1, 1996,
Mr. Paul's previous options were cancelled. He obtained options to acquire as
an aggregate of 180,000 shares in the common stock of the Company as follows:
a) up to 80,000 common shares at any time on or before January 1, 1997 at a
price of $5.00 per share; and b) 20,000 options exercisable at $5.00 per
share; 20,000 at $7.50 per share; 20,000 at $10.00 per share; 20,000 at
$12.50 per share; 20,000 at $15.00 per share. Options for the 80,000 shares
at $5.00 per share were exercised on April 9, 1996. Consideration for these
shares is by means of a Note Payable to the Corporation in the amount of
$400,000. The dates of vesting and the term remain the same.

Effective January 1, 1996, Mr. Paul's compensation was raised to
$150,000 per annum, and all terms and conditions relating to the Employment
Agreement of March 11, 1994 were to remain in effect.

Pursuant to arrangements negotiated with Mr. Paul, Mr. Paul's Employment
Agreement made as of March 11, 1994 was terminated effective September 30,
1996. On October 1, 1996 new terms and conditions relating to Mr. Paul came
into effect. These terms and conditions are:

- Mr. Paul's remuneration rate is to be calculated at $80,000 per annum.

- Mr. Paul received a Grant of Option relative to the unexpired portion
of his Agreement of March 11, 1994 totaling 245,000 shares at $1.50
per share. This Option is to expire on September 30, 2001.

Additionally, Mr. Paul received options at $1.00 per share for a total of
80,000 shares which said options are to expire as follows:

- January 1, 1997 to December 31, 1997 20,000 shares

- January 1, 1998 to December 31, 1998 20,000 shares

- January 1, 1999 to December 31, 1999 20,000 shares

- January 1, 2000 to December 31, 2000 20,000 shares

All other terms and conditions relative to Mr. Paul's Employment Agreement
are to be the same as set out in the original agreement and shall remain in full
force and effect until March 16, 2000.

18
<PAGE>

As of April 15, 1994, John R.Y. Hugo executed a written employment contract
with the Company which superseded all prior agreements, save and except for an
option in favor of Mr. Hugo respecting 20,000 common shares to be issued to Mr.
Hugo at $5.00 per share. Said option is to expire January 1, 1997. This
contract is for a period of seven years and is thereafter renewable on a year-
to-year basis. Mr. Hugo is to receive a salary of $120,000 per annum under the
contract.

Commencing with the fiscal year end of December 31, 1994, Mr. Hugo will be
eligible to participate, along with other Company executives, in a Company bonus
pool not to exceed 12% of the pre-tax operating profits of the Company. The
amount and allocation of distribution will be determined in the sole discretion
of the Compensation Committee of the Company (of which Messrs. Wagman, Hugo, and
Chapman are the members). Such bonuses will be payable 80% within 90 days of the
end of each fiscal quarter, with the remainder due within 90 days of the end of
each fiscal year. To date no bonus has been paid to Mr. Hugo.

Pursuant to stock options in his written employment agreement, Mr. Hugo is
eligible to exercise options of up to 60,000 common shares at any time on or
before January 1, 1997 at a price of $5.00 per share. Options for the total
80,000 shares at $5.00 per share were exercised on April 9, 1996. Consideration
for these shares is by means of a Note Payable to the Corporation in the amount
of $400,000. Additionally, Mr. Hugo is eligible to exercise options of up to
100,000 shares vesting January 1, 1994, at a price of $20.00 per share, on a
schedule to exercise 33,333 shares each year, cumulative, beginning on January
1, 1996 and ending on January 1, 1998. On October 30, 1995, the exercise price
regarding 100,000 shares was amended to reflect the following: 20,000 options
exercisable at $5.00 per share; 20,000 at $7.50 per share; 20,000 at $10.00 per
share; 20,000 at $12.50 per share; 20,000 at $15.00 per share. The dates of
vesting and the term remain the same.

Effective January 1, 1996, Mr. Hugo's compensation was raised to $150,000
per annum, and all terms and conditions relating to the Employment Agreement of
April 15, 1994 were to remain in effect.

Pursuant to arrangements negotiated with Mr. Hugo, Mr. Hugo's Employment
Agreement made as of April 15, 1994 was terminated effective September 30, 1996.
On October 1, 1996 new terms and conditions relating to Mr. Hugo came into
effect. These terms and conditions are:

- Mr. Hugo's remuneration rate is to be calculated at $80,000 per annum.

- Mr. Hugo received a Grant of Option relative to the unexpired portion
of his Agreement of April 15, 1994 totaling 245,000 shares at $1.50
per share. This Option is to expire on September 30, 2001.

Additionally, Mr. Hugo received options at $1.00 per share for a total of
80,000 shares which said options are to expire as follows:

- January 1, 1997 to December 31, 1997 20,000 shares

- January 1, 1998 to December 31, 1998 20,000 shares

- January 1, 1999 to December 31, 1999 20,000 shares

- January 1, 2000 to December 31, 2000 20,000 shares

All other terms and conditions relative to Mr. Hugo's Employment Agreement
are to be the same as set out in the original agreement and shall remain in full
force and effect until March 15, 2000.

19
<PAGE>

As of November 24, 1995, Mr. Jon Bridgman executed a written employment
contract with the Company which supersedes all prior agreements with Mr.
Bridgman. This contract is for a period of four years and is thereafter
renewable on a year to year basis. Pursuant to the contract, Mr. Bridgman is to
receive a salary of $60,000 per annum. Additionally, Mr. Bridgman was granted
common stock options in the Company, to expire on November 30, 1999, as follows:
20,000 shares at $7.50 per share; 20,000 shares at $10.00 per share; 20,000
shares at $12.50 per share; and 20,000 shares at $15.00 per share.

On September 12, 1996, Mr. Bridgman and the Company entered into a new
arrangement whereby Mr. Bridgman's written Employment Contract of November 24,
1995 was cancelled. Under the new arrangements, Mr. Bridgman is to be a
Consultant to the Company. In respect to the unexpired portion of Mr.
Bridgman's contract, Mr. Bridgman received 30,000 shares in the common stock of
American Entertainment Group, Inc. At the present time Mr. Bridgman is a
Director of the Company, and was paid the sum of $250.00 per week from October
1, 1996 to and including December 31, 1996.

On August 22, 1996, Mr. Allan P. Chapman, who was formerly employed by the
Company as a Consultant, entered into an Employment Agreement with the Company.
This Agreement was terminated as of September 30, 1996 and a revised Employment
Agreement became effective as of October 1, 1996. The new terms and conditions
relating to Mr. Chapman are:

- Mr. Chapman's remuneration rate is to be calculated at $80,000 per
annum.

- Mr. Chapman received a Grant of Option relative to the unexpired
portion of his Agreement of August 22, 1996 totaling 245,000 shares
at $1.50 per share. This Option is to expire on September 30, 2001.

Additionally, Mr. Chapman received options at $1.00 per share for a total
of 80,000 shares which said options are to expire as follows:

- January 1, 1997 to December 31, 1997 20,000 shares

- January 1, 1998 to December 31, 1998 20,000 shares

- January 1, 1999 to December 31, 1999 20,000 shares

- January 1, 2000 to December 31, 2000 20,000 shares

All other terms and conditions relative to Mr. Chapman's Employment
Agreement are to be the same as set out in the original agreement and shall
remain in full force and effect until September 30, 2000.

3) On October 30, 1995, the Company authorized a bonus to Messrs. Wagman,
Hugo, and Paul each of 25,000 restricted common shares of the Company. These
shares were issued April 15, 1996.

There are no other written employment contracts or stock options with
officers, directors, or employees of the Company.

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

20
<PAGE>

As of November 19, 1993, the Company had a Compensation Committee, which is
currently made up of three members of the Board of Directors, Messrs. Wagman,
Hugo, and Chapman. This Compensation Committee had a total of two meetings
during the fiscal year ended December 31, 1996.

The Company has no retirement or pension plans covering its Officers and
Directors, but anticipates the formulation of such a plan, to be subsequently
approved by its Board of Directors, although no specific plan terms have been
formulated as of the date hereof. There is a recently implemented bonus plan
which is described in the preceding section.

Item 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.

As of December 31, 1996, there were an aggregate of 2,409,853 common shares
issued and outstanding. The following sets forth the number of shares of the
Company's no par value common stock beneficially owned by (i) each person who,
as of December 31, 1996, was known by the Company to own beneficially more than
five percent (5%) of its common stock, (ii) the individual Directors of the
Company, and (iii) the Officers and Directors of the Company as a group.

NAME AND ADDRESS AMOUNT AND NATURE PERCENT OF
OF BENEFICIAL OWNER OF BENEFICIAL OWNERSHIP (1)(2) CLASS
- ------------------- ------------------------------ ----------
Joel Wagman (3) 490,086 20.33%
160 Bedford Road, Ste. 306
Toronto, Canada M5R 2K9

Allan P. Chapman 67,233 2.79%
160 Bedford Road, Ste. 306
Toronto, Canada M5R 2K9

J.R.Y Hugo (4) 203,781 8.46%
1 Clarendon Avenue, Ste. 201
Toronto, Ontario M4V 1H8

Samuel C. Paul 172,797 7.17%
160 Bedford Road, Ste. 306
Toronto, Canada M5R 2K9

Jon Bridgman 33,984 1.41%
1006 Streambank Drive
Mississauga, Canada
L4H 3Z1

Harve Sherman (5) 222,008 9.21%
15 Lonsdale Road
Toronto, Canada

Officers and Directors 967,881 40.16%
as a Group (5 persons)

21
<PAGE>

(1) All ownership is beneficial and of record except as specifically indicated
otherwise.

(2) Beneficial owners listed above have sole voting and investment power with
respect to the shares shown unless otherwise indicated.

(3) Owned by Mr. Wagman, including shares owned of record by The Falconette
Corporation and Nine Infinitum Holdings Limited.

(4) Includes shares owned of record by Gloria Hugo, the wife of J.R.Y. Hugo and
600433 Ontario Ltd. and HMSG Corporation.

(5) Owned by Mr. Sherman and his wife beneficially, including shares owned of
record by various corporations. Mr. Sherman resigned from the Board of
Directors in June, 1995. See Legal Proceedings with respect to these
shares. The shares listed herein represent the Company's best information
and belief with respect to Mr. Sherman's direct and indirect ownership
thereof.

Item 12. Certain Relationships and Related Transactions.

During 1996, 441,113 shares of the Company's common stock, valued at
$369,976, were issued to Directors of the Company, or to related entities of
the Directors, in lieu of cash for salaries.

During 1996, three directors of the Company exercised options to each
purchase 80,000 shares of the Company's common stock for $5 per share. At
December 31, 1996, and at the report date, the purchase price of $1,200,000
is still owed to the Company, and is reflected in subscriptions receivable on
the Company's consolidated balance sheets.

During 1996, the Company issued 1,870,000 options to directors of the
Company at an average exercise price of $1.64 per share.

During 1996, the Board of Directors of the Company voted to extend
certain options held by directors of the Company to purchase 300,000 shares
of the Company's common stock at an average price of $10 per share through
March 31, 2001 and 2003.

In 1996, a Director of the Company made advances to the Company for
working capital purposes and also paid various operating expenses on behalf
of the Company. During 1996, this Director was issued 30,000 shares of the
Company's common stock, valued at $30,000, as a partial reimbursement for
these advances. At December 31, 1996, there was no amount due to this
Director on these advances.

In the ordinary course of business, the Company accrues management
salaries based on the salary levels as specified in the employment contracts.
At December 31, 1996, approximately $366,000 of management's salaries were
accrued, which were paid subsequent to the balance sheet data by the issuance
of 452,643 shares of the Company's common stock.

During 1995, 2,500 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, 5,500 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 221,682 shares of the Company's common
stock valued at $702,956.

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

During 1995, a Director of the Company was granted options under an
employment agreement to purchase 80,000 shares of the Company's common stock
at a price of $5.00 per share through January 1, 1997, and options to purchase
100,000 shares of the Company's common stock at an average price of $10.00 per
share through January 1, 1998.

During 1995, a Director of the Company was granted options under an
employment agreement to purchase 80,000 shares of the Company's common stock
at an average price of $11.30 per share through November 30, 1999.

22
<PAGE>

PART IV

Item 13. EXHIBITS AND REPORTS ON FORM 8-K.

(a) The following financial information is filed as part of this report:

(1) FINANCIAL STATEMENTS

(2) SCHEDULES

(3) EXHIBITS. The following exhibits required by Item 601 to be
filed herewith are incorporated by reference to previously filed
documents:

ITEM 601 REGISTRATION STATEMENT
EXHIBIT NO. DESCRIPTION ON FORM S-18 (NO.33-2581-NY)
- ----------- ----------- ----------------------------
3-A Articles of 3-A
Incorporation
3-B Bylaws 3-B

EXHIBIT NUMBER TO
EXHIBIT NO. DESCRIPTION FORM 10-SB (NO. 0-22174)
- ----------- ----------- ------------------------
3-C Amended Articles 3-C
of Incorporation

EXHIBIT NO. DESCRIPTION
- ----------- -----------
10-1+ Agreements With Banque National de Paris
Regarding Financing for VIP Network

10-2+ Agreements With Imaginetics

+ Previously filed

(b) REPORTS ON FORM 8-K. The Company filed three reports on Form
8-K during the fourth quarter of the fiscal year ended December 31, 1996,
dated December 17, 1996, November 18, 1996, and October 18, 1996,
respectively.

23
<PAGE>

SIGNATURES

In accordance with Section 13 or 15(d) of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.

AMERICAN ENTERTAINMENT GROUP, INC.

Dated: 4-8-97 By: /s/ JOEL WAGMAN
-------- -----------------------------------
Joel Wagman
Chairman of the Board; President
Chief Executive Officer

In accordance with the Exchange Act, this report has been signed below
by the following persons on behalf of the Registrant and in the capacities
and on the dates indicated.

CHIEF ACCOUNTING AND FINANCIAL OFFICER

Dated: 4-8-97 By: /s/ SAMUEL C. PAUL
-------- -----------------------------------
Samuel C. Paul

MAJORITY OF BOARD OF DIRECTORS:

Dated: 4-8-97 By: /s/ JOEL WAGMAN
-----------------------------------
Joel Wagman

Dated: 4-8-97 By: /s/ ALLAN P. CHAPMAN
-----------------------------------
Allan P. Chapman

Dated: 4-8-97 By: /s/ JOHN R.Y. HUGO
-----------------------------------
John R.Y. Hugo

Dated: 4-8-97 By: /s/ JON D. BRIDGMAN
-----------------------------------
Jon D. Bridgman

Dated: 4-8-97 By: /s/ SAMUEL C. PAUL
-----------------------------------
Samuel C. Paul

24
<PAGE>

SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-KSB
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

EXHIBITS
TO
AMERICAN ENTERTAINMENT GROUP, INC.

25
<PAGE>
INDEX TO EXHIBITS

EXHIBIT
NUMBER DESCRIPTION
------- -----------
3-A Articles of Incorporation +

3-B Bylaws +

3-C Amendment to Articles of Incorporation*

10-1 Agreements With Banque National de Paris
Regarding Financing for VIP Network**

10-2 Agreements With Imaginetics**

- -------------------
+ Incorporated by Reference to Registration Statement of Form S-18, No.
33-2581-NY and Amendments thereof.

* Incorporated by Reference to Form 10-SB (No. 0-22174) and Amendments
thereof.

** Previously Filed

26
<PAGE>

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

CONSOLIDATED FINANCIAL STATEMENTS

YEARS ENDED DECEMBER 31, 1996 AND 1995

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>

[LETTERHEAD]

INDEPENDENT AUDITORS' REPORT

TO THE BOARD OF DIRECTORS OF
AMERICAN ENTERTAINMENT GROUP, INC.
160 BEDFORD ROAD, SUITE 306
TORONTO, ONTARIO M5R 2K9

WE WERE ENGAGED TO AUDIT THE ACCOMPANYING BALANCE SHEETS OF AMERICAN
ENTERTAINMENT GROUP, INC. (A DEVELOPMENT STAGE COMPANY) AND SUBSIDIARIES AS OF
DECEMBER 31, 1996 AND 1995, 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, 1996. THESE FINANCIAL STATEMENTS ARE THE RESPONSIBILITY
OF THE COMPANY'S MANAGEMENT.

THE ACCOMPANYING CONSOLIDATED FINANCIAL STATEMENTS HAVE BEEN PREPARED ASSUMING
THAT THE COMPANY WILL CONTINUE AS A GOING CONCERN. AS DISCUSSED IN NOTE 4 TO
THE CONSOLIDATED FINANCIAL STATEMENTS, A SUBSIDIARY OF THE COMPANY IS THE
PRIMARY OBLIGOR ON A LOAN MADE BY A BANK TO AN UNRELATED THIRD PARTY, THE
BALANCE OF WHICH WAS $3,549,647 AT DECEMBER 31, 1996. THE BANK DECLARED THE
LOAN TO BE IN DEFAULT AND CALLED THE LOAN ON DECEMBER 11, 1996, AND ENGAGED A
RECEIVER TO RECOVER THE OUTSTANDING LOAN BALANCE FROM THE UNRELATED THIRD
PARTY. AS OF THE DATE OF THIS REPORT, FUTURE COLLECTION OF THE LOAN IS NOT
DETERMINABLE. SINCE ALL OF THE COMPANY'S ASSETS ARE PLEDGED AS COLLATERAL FOR
THE LOAN, FORECLOSURE BY THE BANK WOULD SERIOUSLY IMPAIR THE COMPANY'S ABILITY
TO CONTINUE AS A GOING CONCERN AND TO REALIZE ITS INVESTMENT IN ASSETS THROUGH
FUTURE SUCCESSFUL OPERATIONS. THE AFOREMENTIONED CONDITIONS RAISE SUBSTANTIAL
DOUBT ABOUT THE COMPANY'S ABILITY TO CONTINUE AS A GOING CONCERN.

AS REFLECTED IN THE ACCOMPANYING CONSOLIDATED FINANCIAL STATEMENTS, THE
COMPANY INCURRED A NET LOSS IN THE AMOUNT OF $1,739,327 FOR THE YEAR ENDED
DECEMBER 31, 1996. AS DISCUSSED IN NOTE 3 TO THE CONSOLIDATED FINANCIAL
STATEMENTS, THE COMPANY REDUCED THE CARRYING AMOUNT OF ITS FILM LIBRARY
OWNERSHIP BY $847,478, AND TO DATE, NO SIGNIFICANT REVENUES HAVE BEEN
GENERATED IN CONNECTION WITH THIS FILM LIBRARY. REALIZATION OF THE CARRYING
AMOUNT OF THE ASSETS INCLUDED IN THE CONSOLIDATED BALANCE SHEETS REFERRED TO
ABOVE IS DEPENDENT ON THE COMPANY'S SUCCESSFUL FUTURE OPERATIONS.

BECAUSE OF THE SIGNIFICANCE OF THE UNCERTAINTIES AS DESCRIBED IN THE PRECEDING
PARAGRAPHS, WE ARE UNABLE TO EXPRESS, AND WE DO NOT EXPRESS, AN OPINION ON THE
FINANCIAL STATEMENTS REFERRED TO IN THE FIRST PARAGRAPH.

/s/ ROLLINS & ASSOCIATES, P.C.

ATLANTA, GEORGIA
MARCH 15, 1997, EXCEPT FOR NOTE 12, AS TO WHICH THE DATE IS MARCH 27, 1997
AND NOTE 4, AS TO WHICH THE DATE IS MARCH 31, 1997

[LOGO]

<PAGE>

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

CONSOLIDATED BALANCE SHEETS

DECEMBER 31, 1996 AND 1995

ASSETS
------

1996 1995
----------- -----------
Current assets:
Cash $ 802 $ 315
Due from third party (Note 4) 3,549,647 -
Inventory (Note 1) - 7,801
Prepaid expenses and deposits 8,442 6,711
----------- -----------
Total current assets 3,558,891 14,827
----------- -----------

Property and equipment, at cost (Note 1):
Office furniture and equipment 16,898 16,976
Computer equipment 9,854 9,854
----------- -----------
26,752 26,830
Less: accumulated depreciation 16,566 11,315
----------- -----------
Net property and equipment 10,186 15,515
----------- -----------
Other assets:
Film library ownership (Notes 1, 3 and 5) 1,000,000 1,847,478
Organization costs, less accumulated
amortization of $12,639 and $9,377 in
1996 and 1995, respectively (Note 1) 3,983 6,324
----------- -----------
Total other assets 1,003,983 1,853,802
----------- -----------
$ 4,573,060 $ 1,884,144
----------- -----------
----------- -----------

LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
----------------------------------------------

1996 1995
----------- -----------
Current liabilities:
Note payable to a bank (Note 4) $ 3,549,647 $ -
Current portion of long-term debt
(Notes 3 and 5) 790,402 612,982
Accounts payable 363,068 535,611
Accrued expenses 774,711 585,336
Income taxes payable (Notes 1 and 6) - -
----------- -----------
Total current liabilities 5,477,828 1,733,929
----------- -----------
Long-term debt, original face amount of
$1,000,000, less unamortized discount of
$4,698 and $26,815 in 1996 and 1995,
respectively, and current portion
shown above (Notes 3 and 5) - 155,303
----------- -----------

Commitments and contingencies (Notes 11 and 12)

Stockholders' equity (deficit):
Common stock, no par value;
700,000,000 shares authorized;
2,409,853 and 1,462,984 shares
issued and outstanding in 1996 and 1995,
respectively (Notes 1, 3, 7, 8, 10, 11,
13 and 14) 6,882,014 4,903,289
Common stock to be issued 458,426 -
Unearned compensation - (13,900)
Foreign currency translation adjustment
(Note 9) (54,014) (12,369)
Deficit accumulated during the
development stage (6,621,435) (4,882,108)
----------- -----------
664,991 (5,088)
Less: subscriptions receivable (1,569,759) -
----------- -----------
Total stockholders' equity (deficit) (904,768) (5,088)
----------- -----------
$ 4,573,060 $ 1,884,144
----------- -----------
----------- -----------

THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.

-2-

<PAGE>

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

CONSOLIDATED STATEMENTS OF OPERATIONS

YEARS ENDED DECEMBER 31, 1996 AND 1995, AND
THE PERIOD FROM THE DATE OF INCEPTION
(APRIL 23, 1992) TO DECEMBER 31, 1996

Cumulative
Since
Inception 1996 1995
----------- ----------- -----------

Sales $ 36,932 $ - $ 20,000
Cost of sales 22,118 7,801 614
----------- ----------- -----------
Gross profit (loss) 14,814 (7,801) 19,386
----------- ----------- -----------
Operating expenses:
General and administrative
expenses 5,800,597 1,079,027 1,805,966
Write-down of film library
ownership to market value
(Note 3) 847,478 847,478 -
Interest 190,458 40,290 61,789
----------- ----------- -----------
Total operating expenses 6,838,533 1,966,795 1,867,755
----------- ----------- -----------
Operating loss (6,823,719) (1,974,596) (1,848,369)

Other income 235,269 235,269 -
----------- ----------- -----------

Loss from continuing operations
before provision for income
taxes (6,588,450) (1,739,327) (1,848,369)
Provision for income taxes
(Notes 1 and 6) - - -
----------- ----------- -----------
Loss from continuing operations (6,588,450) (1,739,327) (1,848,369)

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

NET LOSS $(6,621,435) $(1,739,327) $(1,841,473)
----------- ----------- -----------
----------- ----------- -----------

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
(CONTINUED)

YEARS ENDED DECEMBER 31, 1996 AND 1995, AND
THE PERIOD FROM THE DATE OF INCEPTION
(APRIL 23, 1992) TO DECEMBER 31, 1996

Cumulative
Since
Inception 1996 1995
---------- --------- ---------
LOSS PER SHARE:
Loss from continuing
operations $ (6.75) $ (.91) $ (1.51)
Income (loss) from discontinued
operations (.03) - .01
Loss on disposal of subsidiary - - -
------- --------- ---------

NET LOSS PER SHARE $ (6.78) $ (.91) $ (1.50)
------- --------- ---------
------- --------- ---------

Weighted average shares
outstanding (Note 14) 976,179 1,917,194 1,225,959
------- --------- ---------
------- --------- ---------

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 CHANGES
IN STOCKHOLDERS' EQUITY (DEFICIT)

PERIOD FROM THE DATE OF INCEPTION
(APRIL 23, 1992) TO DECEMBER 31, 1996

<TABLE>
Deficit
Common Stock Common Foreign Accumulated
Outstanding Stock Unearned Currency During The Subscrip-
------------------------ To Be Compen- Translation Development tions
Shares Amounts Issued sation Adjustment Stage Receivable Total
----------- ---------- --------- -------- ----------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at April 23,
1992 (Inception) - $ - $ - $ - $ - $ - $ - $ -
Issuance of common stock 4,280,000 150 - - - - (150) -
NET LOSS - - - - - (89,500) - (89,500)
----------- ---------- -------- -------- -------- ----------- ----------- -----------
Balance at December 31, 1992 4,280,000 150 - - - (89,500) (150) (89,500)
Issuance of common stock 4,069,140 2,719,197 - - - - (12,745) 2,706,452
Common stock issued in
reverse acquisition 700,000 - - - - - - -
Common stock subscribed - - 62,086 - - - (61,586) 500
Foreign currency
translation adjustment - - - - (40) - - (40)
NET LOSS - - - - - (1,608,553) - (1,608,553)
----------- ---------- -------- -------- -------- ----------- ----------- -----------
Balance at December 31, 1993 9,049,140 2,719,347 62,086 - (40) (1,698,053) (74,481) 1,008,859
Issuance of common stock 1,451,179 696,094 (8,449) - - - (56) 687,589
Common stock subscribed - - 70,000 - - - (70,000) -
Unearned compensation
related to issuance of
stock for services - - - (75,000) - - - (75,000)
Amortization of unearned
compensation - - - 33,333 - - - 33,333
Foreign currency
translation adjustment - - - - (1,876) - - (1,876)
NET LOSS - - - - - (1,342,582) - (1,342,582)
----------- ---------- -------- -------- -------- ----------- ----------- -----------
Balance at December 31,
1994 10,500,319 3,415,441 123,637 (41,667) (1,916) (3,040,635) (144,537) 310,323
Issuance of common stock 4,129,524 1,487,848 - - - - - 1,487,848
Common stock subscribed - - (123,637) - - - 144,537 20,900
Unearned compensation
related to issuance of
stock for services - - - (13,900) - - - (13,900)
Amortization of unearned
compensation - - - 41,667 - - - 41,667
Foreign currency
translation adjustment - - - - (10,453) - - (10,453)
NET LOSS - - - - - (1,841,473) - (1,841,473)
----------- ---------- -------- -------- -------- ----------- ----------- -----------
Balance at December 31,
1995 14,629,843 4,903,289 - (13,900) (12,369) (4,882,108) - (5,088)
Issuance of common stock 946,869 1,978,725 - - - - (1,200,000) 778,725
Share adjustment for
10 for 1 reverse stock
split (Note 14) (13,166,859) - - - - - - -
Common stock subscribed - - 458,426 - - - (369,759) 88,667
Amortization of unearned
compensation - - - 13,900 - - - 13,900
Foreign currency
translation adjustment - - - - (41,645) - - (41,645)
NET LOSS - - - - - (1,739,327) - (1,739,327)
----------- ---------- -------- -------- -------- ----------- ----------- -----------
Balance at December 31,
1996 2,409,853 $6,882,014 $458,426 $ - $(54,014) $(6,621,435) $(1,569,759) $ (904,768)
----------- ---------- -------- -------- -------- ----------- ----------- -----------
----------- ---------- -------- -------- -------- ----------- ----------- -----------
</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 CASH FLOWS

YEARS ENDED DECEMBER 31, 1996 AND 1995, AND
THE PERIOD FROM THE DATE OF INCEPTION
(APRIL 23, 1992) TO DECEMBER 31, 1996

<TABLE>
Cumulative
Since
Inception 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
Cash flows from operating activities:
NET LOSS $(6,621,435) $(1,739,327) $(1,841,473)
Adjustments to reconcile net loss to
net cash used by operating activities:
Depreciation and amortization 29,283 8,591 8,389
Interest portion of amount due
for film library 69,218 22,117 31,322
Common stock issued for services 2,306,444 512,000 958,017
Foreign currency translation (54,014) (41,645) (10,453)
Changes in:
Trade accounts receivable and
inventory - 7,801 1,514
Prepaid expenses and deposits (8,442) (1,731) 10,110
Accounts payable and other 1,428,074 158,707 400,543
----------- ----------- -----------
Net cash used by operating activities (2,850,872) (1,073,487) (442,031)
----------- ----------- -----------
Cash flows from investing activities:
Purchase of infomercial and other
film rights (120,000) - -
Purchase of property and equipment (26,830) - (1,102)
Decrease in other assets 957,106 846,557 128,125
----------- ----------- -----------
Net cash provided by investing activities 810,276 846,557 127,023
----------- ----------- -----------

Cash flows from financing activities:
Proceeds from issuance of common stock 2,002,692 227,417 315,078
Increase in short-term note payable 115,000 - -
Repayment of long-term debt (126,294) - (32,345)
Increase in due to officer 50,000 - -
----------- ----------- -----------
Net cash provided by financing activities 2,041,398 227,417 282,733
----------- ----------- -----------

NET INCREASE (DECREASE) IN CASH 802 487 (32,275)

Cash, at the beginning of the period - 315 32,590
----------- ----------- -----------
Cash, at the end of the period $ 802 $ 802 $ 315
----------- ----------- -----------
----------- ----------- -----------
</TABLE>

THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.

-6-
<PAGE>

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 1996 AND 1995

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., Comex Interactive
Network, Ltd. and AEG Entertainment, Limited. 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
functioned 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, 1996 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.

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:

Estimated
Description Useful Lives
------------------------------ ------------
Office furniture and equipment 5 years
Computer equipment 5 years

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 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 (See Note
3). 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. At December 31, 1996, no amortization
has been recorded to date since the Company is still in the development
stage and full operations have not yet commenced.

E. 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.

F. 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)

G. A material estimate that is particularly susceptible to significant
change relates to the determination of the fair market value of the
film library ownership. In connection with the determination of the
value of this asset, management used an estimated wholesale price that
a willing buyer and seller would arrive at in an arms-length
transaction for the sale of films comprising the library (See Note 3).

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 net
loss per share in 1996 and 1995.

I. Certain reclassifications have been made to the 1995 financial
statements to conform to the 1996 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 consolidated
statements of operations. Net sales of the Chaos subsidiary for 1995 were
approximately $635,000. These amounts are not included in sales of the
Company in the accompanying consolidated statements of operations.

3. FILM LIBRARY OWNERSHIP

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 40,000 shares of the Company's common
stock, valued at $1,000,000.

-9-

<PAGE>

3. FILM LIBRARY OWNERSHIP (CONTINUED)

In 1996, the Company adopted the provisions of Statement of
Financial Accounting Standards (SFAS) No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of". SFAS No. 121 requires impairment losses to be recorded on long-lived
assets used in operations when indicators of impairment are present and the
undiscounted cash flows estimated to be generated by those assets are less
than the assets' carrying amount. An evaluation of the fair value of the
film library ownership resulted in the determination that the film library
was impaired.

The film library has been written down by $847,478, to a carrying
amount of $1,000,000. Fair value was based on an estimated wholesale price
that a willing buyer and seller would arrive at in an arms-length
transaction for the sale of the films comprising the library. This write-
down is included in operating expenses in the consolidated statements of
operations.

4. NOTE PAYABLE TO A BANK

In February, 1996, a subsidiary of the Company, AEG
Entertainment, Limited. ("AEL"), arranged for a demand operating line-of-
credit of $5,000,000 with a bank on behalf of a third party, V.I.P. Phone
Club, Inc. ("V.I.P."). The line-of-credit provides for floating rate loans
in multiples of $50,000, and money market loans for periods of thirty (30)
days, in multiples of $100,000. Interest is computed on floating rate loans
at the bank's Base Rate, plus .5%. Interest is computed on money market
loans at the bank's cost of funds, plus 3%. In the event of default,
interest will accrue on the outstanding loan balance at the bank's Base
Rate of interest, plus 4.5%. The loan is collateralized by the accounts
receivable of V.I.P. and all of the assets of the Company, and is
guaranteed by V.I.P. and other related entities of V.I.P., an officer of
V.I.P., and the Company. Under the terms of the agreement, AEL is to
receive a fee equal to 3% of all new advances made under the line-of-credit
to V.I.P.

As of October 31, 1996, a total of $7,842,320 had been advanced
under the line-of-credit and repayments were made totalling $4,394,690. In
November, 1996, the bank ceased making further advances under the line-of-
credit due to discrepancies with the reports substantiating the loan
collateral submitted to the bank by V.I.P. On December 11, 1996, the bank
called the entire amount due under the loan and engaged a receiver to
oversee the operations of V.I.P. At December 31, 1996 and March 31, 1997,
the balances due under the loan, including accrued interest, were
$3,549,647 and $2,996,947, respectively.

-10-

<PAGE>

4. NOTE PAYABLE TO A BANK (CONTINUED)

As of the date of this report, it is the bank's intention to
recover the outstanding amount due under the loan through future operating
profits of V.I.P. However, since AEL is the primary obligor under the line-
of-credit, AEL would ultimately be liable for the entire loan amount due if
the assets of V.I.P. were inadequate to satisfy the loan. In this respect,
the Company has recorded the outstanding loan balance at December 31, 1996
in the amount of $3,549,647 as a current liability, and has recorded an
equal amount as a current asset in the consolidated balance sheets.
However, Management of the Company believes that due to certain actions
taken by the Bank in connection with the loan, the Company and its
subsidiaries are not legally liable for the outstanding balance due.

5. LONG-TERM DEBT

The Company's long-term debt at December 31, 1996 and 1995 is
summarized as follows:

Description 1996 1995
--------------------------------------------------- -------- --------
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 $795,100

Less: unamortized discount based on an
imputed interest rate of 8% 4,698 26,815
-------- --------
Total long-term debt 790,402 768,285

Less current portion 790,402 612,982
-------- --------

Long-term debt less current portion $ - $155,303
-------- --------
-------- --------

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, 1996,
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.

-11-

<PAGE>

5. LONG-TERM DEBT (CONTINUED)

The aggregate amounts of principal payments due on long-term debt
at December 31, 1996 are as follows:

Year Amounts
---- --------
1997 $790,402
--------
Total long-term debt $790,402
--------
--------

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, 1996 and 1995, the fair value of the long-term
debt approximates the amounts recorded in the financial statements.

6. INCOME TAXES

The Company has reported no income taxes currently payable for
the years ended December 31, 1996 and 1995 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, 1996 and 1995 is
as follows:

Description 1996 1995
-------------------------------------------- ------ -----
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 - % - %
------ ------
------ ------

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.

-12-

<PAGE>

6. INCOME TAXES (CONTINUED)

The deferred tax asset at December 31, 1996 and 1995 consists of
the following:

Description 1996 1995
------------------------------- ----------- -----------
Net operating loss carryforward $ 2,000,000 $ 1,430,000

Valuation allowance (2,000,000) (1,430,000)
----------- -----------
Deferred tax asset $ - $ -
----------- -----------
----------- -----------

As of December 31, 1996, the Company has a net operating loss
carryforward of approximately $5,319,000 for which no financial statement
benefit has been recognized. The net operating losses expire between the
years 2007 and 2011. Future recognition of these carryforwards will be
reflected if the Company has sufficient earnings before the expiration of
the respective loss carryforwards.

7. STOCK OPTIONS

During 1996 and 1995, 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 300,000 options, which were held by Directors of the Company, from $20.00
per share in 1994 to an average of $10.00 per share in 1995, expiring on
January 1, 1998. During 1996, the Board of Directors voted to extend 200,000
of these options through March 31, 2001 and to extend 100,000 of these
options through March 31, 2003.

The Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 123, "Accounting for Stock-Based
Compensation", in October, 1995. Under SFAS No. 123, companies can either
continue to account for stock compensation plans pursuant to existing
accounting standards or elect to expense the value derived from using an
option pricing model. The Company will continue to apply existing
accounting standards. However, SFAS No. 123 requires disclosure of pro
forma net income (loss) and earnings (loss) per share as if the Company had
adopted the expensing provisions of SFAS No. 123. Based on the above, pro
forma net loss for 1996 and 1995 would be $(1,923,702) and $(1,841,473)
respectively; pro forma net loss per share for 1996 and 1995 would be $(.97)
and $(1.50), respectively.

-13-

<PAGE>

7. STOCK OPTIONS (CONTINUED)

A summary of common stock options outstanding at December 31,
1996 and 1995 is as follows:

1996 1995
----------------- ----------------
Number Average Number Average
of option of option
Description options price options price
----------------- --------- ------- -------- -------
Beginning of year 1,048,000 $10.10 965,557 $12.70

Granted 2,037,500 1.68 320,000 10.50

Exercised (240,000) 5.00 (4,000) .10

Expired (168,000) 5.00 (233,557) 11.00
--------- ------ --------- ------
End of year 2,677,500 $ 3.94 1,048,000 $10.10
--------- ------ --------- ------
--------- ------ --------- ------

8. STOCK WARRANTS

In prior years, 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
1996, the Board of Directors elected to extend all series "K" warrants for
an additional one year period expiring August 22, 1997. No warrants were
exercised in 1996 and 1995. During 1996, 105,635 Class "A" warrants, 132,500
Class "B" warrants, and 45,819 Class "C" warrants expired. During 1995,
790,000 Class "B" warrants and 14,895,390 Class "F" warrants expired.

The following table reflects the Company's issued and outstanding
warrants as of December 31, 1996:

Number of Exercise Expiration
Description Warrants Price Date
------------------ --------- -------- ----------
Class "D" warrants 15,000 $25.00 12-31-98
Class "E" warrants 25,000 $18.10 12-31-98
Class "H" warrants 22,500 $10.00 4-15-97
Class "I" warrants 27,500 $20.00 4-15-97
Class "J" warrants 35,000 $27.50 10-15-98
Class "K" warrants 7,000 $10.00 8-22-97
-------
Total warrants outstanding 132,000
-------
-------

-14-
<PAGE>

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 transaction
gains and losses continue to be reported in net income and were not
significant in any year.

10. RELATED PARTY TRANSACTIONS

During 1996, 441,113 shares of the Company's common stock, valued
at $369,976, were issued to Directors of the Company, or to related
entities of the Directors, in lieu of cash for salaries.

During 1996, three directors of the Company exercised options to
each purchase 80,000 shares of the Company's common stock for $5 per share.
At December 31, 1996, and at the report date, the purchase price of
$1,200,000 is still owed to the Company, and is reflected in subscriptions
receivable on the Company's consolidated balance sheets.

During 1996, the Company issued 1,870,000 options to directors of
the Company at an average exercise price of $1.64 per share.

During 1996, the Board of Directors of the Company voted to
extend certain options held by directors of the Company to purchase 300,000
shares of the Company's common stock at an average price of $10 per share
through March 31, 2001 and 2003.

In 1996, a Director of the Company made advances to the Company
for working capital purposes and also paid various operating expenses on
behalf of the Company. During 1996, this Director was issued 30,000 shares
of the Company's common stock, valued at $30,000, as a partial
reimbursement for these advances. At December 31, 1996, there was no
amount due to this Director on these advances.

In the ordinary course of business, the Company accrues
management salaries based on the salary levels as specified in the
employment contracts. At December 31, 1996, approximately $366,000 of
management's salaries were accrued, which were paid subsequent to the
balance sheet date by the issuance of 452,643 shares of the Company's
common stock.

-15-

<PAGE>

10. RELATED PARTY TRANSACTIONS (CONTINUED)

During 1995, 2,500 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, 5,500 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 221,682 shares of the
Company's common stock valued at $702,956.

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 options under
an employment agreement to purchase 80,000 shares of the Company's common
stock at a price of $5.00 per share through January 1, 1997, and options to
purchase 100,000 shares of the Company's common stock at an average price
of $10.00 per share through January 1, 1998.

During 1995, a Director of the Company was granted options under
an employment agreement to purchase 80,000 shares of the Company's common
stock at an average price of $11.30 per share through November 30, 1999.

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, 1996 are approximately as
follows:

Year Amounts
---- --------
1997 $ 22,000
1998 3,000
--------
Total minimum lease commitments $ 25,000
--------
--------

Rent expense under these leases was approximately $35,000 and
$58,000 in 1996 and 1995, respectively.

-16-

<PAGE>

11. COMMITMENTS AND CONTINGENCIES (CONTINUED)

The Company has executed employment agreements with certain of
its officers, which were amended during 1996 and effective through various
dates through March 15, 2003. Under the terms of the agreements, the
officers will receive salaries ranging from $80,000 to $120,000 annually.

Under these employment agreements, 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.

As specified in their employment agreements, four executive
officers have options to purchase a total of 1,060,000 shares of the
Company's common stock at a price of $1.50 per share through dates ending
September 30, 2001 and 2003. These four executive officers also hold
options to purchase a total of 360,000 shares of the Company's common
stock at a price of $1.00 per share through various dates extending
through December 31, 2003. In addition, all four officers also have the
option to purchase a total of 350,000 shares of the Company's common stock
at prices ranging from $5.00 per share to $15.00 per share through various
dates extending through March 31, 2003. Also, a fifth executive officer
owns options to purchase 80,000 shares of the Company's common stock at an
average price of $11.25 per share through November 30, 1999.

12. SUBSEQUENT EVENTS

On March 21, 1997, the Company sold a total of $500,000 of 7%
convertible debentures, each with a face amount of $10,000, to two
corporations. The debentures are convertible into the Company's common
stock beginning forty-five days after March 21, 1997 at the lesser of (a)
the market price on closing, or (b) 70% of the market price on the
conversion date.

On March 27, 1997, the Company agreed to acquire Telephonetics
Overseas Corporation ("TOC"). The Agreement of March 27, 1997 is subject
to a further definitive Agreement to be executed on or before April 15,
1997. Under such Agreements, the Company will acquire all the issued and
outstanding shares of TOC for the acquisition price of $1,250,000 payable
in shares of the common stock of the Company valued at $4 per share.

-17-

<PAGE>

13. SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION

1996 1995
-------- --------
Cash paid for interest and income taxes
is approximately as follows:
Interest $ 18,000 $ 32,000
Income taxes $ - $ -

During 1996, the Company was the primary obligor on a loan made
by a bank to a third party. At December 31, 1996, the amount due to the
bank, with a corresponding amount due from the third party, was $3,549,647
(See Note 4).

During 1996 and 1995, the Company issued 519,638 and 269,339
shares, respectively, of the Company's common stock, valued at $512,000
and $958,017, respectively, in lieu of cash payment for compensation and
consulting fees.

During 1996 and 1995, the Company issued 131,459 and 59,779
shares, respectively, of the Company's common stock, valued at $141,875
and $148,378, respectively, in lieu of cash payment for prior year accrued
salaries and consulting fees.

During 1995, the Company issued 5,000 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 24,000 shares of the Company's common stock.

14. REVERSE STOCK SPLIT

Effective for shareholders of record on July 29, 1996, the
Board of Directors of the Company approved a ten-for-one reverse stock
split of the issued and outstanding shares of the Company. All common
shares, stock options, stock warrants, and per share amounts have been
retroactively adjusted in the consolidated financial statements to reflect
this reverse stock split.

-18-

<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM YEAR END
AUDITED FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>

<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<CASH> 802
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 3,558,891
<PP&E> 26,752
<DEPRECIATION> 16,566
<TOTAL-ASSETS> 4,573,060
<CURRENT-LIABILITIES> 5,477,828
<BONDS> 0
0
0
<COMMON> 6,882,014
<OTHER-SE> 458,426
<TOTAL-LIABILITY-AND-EQUITY> 4,573,060
<SALES> 0
<TOTAL-REVENUES> 235,267
<CGS> 7,801
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 1,966,795
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 40,290
<INCOME-PRETAX> 0
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,739,327)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,739,327)
<EPS-PRIMARY> (.91)
<EPS-DILUTED> 0

</TABLE>