<PAGE>
U.S. SECURITIES & EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(x) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended September 30, 1997.
or
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________ to __________.
Commission File No. 0-22174
AMERICAN ENTERTAINMENT GROUP, INC.
----------------------------------
(Exact name of small business issuer as specified in its charter)
COLORADO 83-0277375
- ------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization Identification No.)
160 BEDFORD ROAD, SUITE 306, TORONTO, ONTARIO, CANADA M5R 2K9
- ----------------------------------------------------- --------
(Address of principal executive offices) Zip Code
Issuer's telephone number, including area code (416) 920-1919, or toll free
1-800-358-1919
Indicate by check mark whether the Issuer (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 Company
was required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
--- ---
The number of shares outstanding of Company's common stock, as of the latest
practicable date, November 3, 1997, was 4,841,659.
Total number of sequentially numbered pages in this document: 25
<PAGE>
AMERICAN ENTERTAINMENT GROUP, INC.
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements Page No.
Condensed Consolidated Balance Sheets-
September 30, 1997 and December 31, 1996 1-2
Condensed Consolidated Statements of
Operations - Nine Month periods Ended
September 30, 1997 and Sept. 30, 1996 3
Condensed Consolidated Statement of Changes
in Stockholders' Equity- Nine and Three-Month
Periods Ended September 30, 1997 4 & 4B
Condensed Consolidated Statement of Cash Flows-
Nine Months Ended September 30, 1997 and
September 30, 1996 5
Notes to Condensed Consolidated Financial Statements 6-14
Item 2. Management's Discussion and Analysis of Results of
Operations and Financial Condition 15-17
PART II. OTHER INFORMATION 18-24
Signatures 25
<PAGE>
AMERICAN ENTERTAINMENT GROUP, INC.
AND SUBSIDIARIES
A DEVELOPMENT STAGE COMPANY
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
ASSETS
SEPTEMBER 30, 1997 DECEMBER 31, 1996
(UNAUDITED) (AUDITED)
CURRENT ASSETS:
CASH $ 3,798 $ 802
DUE FROM THIRD PARTY 2,996,947 3,549,647
DEPOSIT - TEXAS PROCEEDINGS 159,223 -
PREPAID EXPENSES AND DEPOSITS 24,436 8,442
---------- ----------
TOTAL CURRENT ASSETS 3,184,404 3,558,891
---------- ----------
PROPERTY AND EQUIPMENT, AT COST
OFFICE FURNITURE AND EQUIPMENT 16,740 16,898
COMPUTER EQUIPMENT 9,854 9,854
---------- ----------
26,594 26,752
LESS ACCUMULATED DEPRECIATION 20,475 16,566
---------- ----------
NET PROPERTY AND EQUIPMENT 6,119 10,186
---------- ----------
OTHER ASSETS:
AUDIO MASTERS PRODUCTION 86,459
FILM LIBRARY OWNERSHIP 1,000,000 1,000,000
OTHER ASSETS 1,486 3,983
---------- ----------
TOTAL OTHER ASSETS 1,087,945 1,003,983
---------- ----------
$4,278,468 $4,573,060
---------- ----------
---------- ----------
SEE NOTES TO FINANCIAL STATEMENTS
-1-
<PAGE>
AMERICAN ENTERTAINMENT GROUP, INC.
AND SUBSIDIARIES
A DEVELOPMENT STAGE COMPANY
CONDENSED CONSOLIDATED BALANCE SHEETS (CONTINUED)
(UNAUDITED)
LIABILITIES AND STOCKHOLDERS' EQUITY
SEPTEMBER 30, 1997 DECEMBER 31, 1996
(UNAUDITED) (AUDITED)
CURRENT LIABILITIES:
NOTE PAYABLE TO A BANK $ 2,996,947 $ 3,549,647
CURRENT PORTION OF LONG-TERM DEBT *** 810,156 790,402
CONVERTIBLE DEBENTURES PAYABLE 400,000 --
ACCOUNTS PAYABLE 341,142 363,068
ACCRUED EXPENSES 471,450 774,711
----------- -----------
TOTAL CURRENT LIABILITIES 5,019,695 5,477,828
----------- -----------
STOCKHOLDERS' EQUITY:
COMMON STOCK, NO PAR VALUE:
AUTHORIZED 700,000,000 SHARES;
ISSUED 4,878,326 AND 2,409,853 SHARES 7,235,400 6,882,014
COMMON STOCK TO BE ISSUED 15,000 458,426
FOREIGN CURRENCY TRANSLATION ADJUSTMENT (53,805) (54,014)
DEFICIT ACCUMULATED DURING THE DEVELOPMENT
STAGE (7,937,822) (6,621,435)
----------- -----------
(741,227) 664,991
LESS: SUBSCRIPTION RECEIVABLE - (1,569,759)
----------- -----------
TOTAL STOCKHOLDERS' EQUITY (DEFICIT) (741,227) (904,768)
----------- -----------
$ 4,278,468 $ 4,573,060
----------- -----------
----------- -----------
*** SEE NOTE "SUBSEQUENT EVENTS"
SEE NOTES TO FINANCIAL STATEMENTS
-2-
<PAGE>
AMERICAN ENTERTAINMENT GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
NINE AND THREE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
(UNAUDITED)
<TABLE>
CUMULATIVE SINCE NINE MONTHS ENDED THREE MONTHS ENDED
INCEPTION SEPT. 30, 1997 SEPT. 30, 1996 SEPT. 30, 1997 SEPT. 30, 1996
<S> <C> <C> <C> <C> <C>
SALES $ 36,932 $ - $ - $ - $ 20,000
COST OF SALES 22,118 7,698 614
------------- ------------- ----------- ----------- -----------
GROSS PROFIT 14,814 - (7,698) - 19,386
------------- ------------- ----------- ----------- -----------
OPERATING EXPENSES:
GENERAL AND ADMINISTRATIVE
EXPENSES 7,097,941 1,297,344 729,252 346,771 237,465
WRITE-DOWN OF FILM LIBRARY
OWNERSHIP TO MARKET VALUE 847,478 - - - -
INTEREST 209,501 19,043 34,585 143 14,943
------------- ------------- ----------- ----------- -----------
TOTAL OPERATING EXPENSES $ 8,154,920 $ 1,316,387 $ 763,837 $ 346,914 $ 252,408
------------- ------------- ----------- ----------- -----------
OPERATING LOSS (8,140,106) (1,316,387) (771,535) (346,914) (233,022)
OTHER INCOME 235,269 - 201,803 - -
------------- ------------- ----------- ----------- -----------
LOSS FROM CONTINUING OPERATIONS (7,904,837) (1,316,387) (569,732) (346,914) (233,022)
DISCONTINUED OPERATIONS
LOSS FROM DISCONTINUED OPERATIONS (32,985) - - - -
------------- ------------- ----------- ----------- -----------
NET LOSS $ (7,937,822) $ (1,316,387) $ (569,732) $ (346,914) $ (233,022)
------------- ------------- ----------- ----------- -----------
------------- ------------- ----------- ----------- -----------
LOSS PER SHARE:
LOSS FROM CONTINUING OPERATIONS (5.632) (0.369) (0.32) (0.075) (0.20)
LOSS FROM DISCONTINUED OPERATIONS (0.024) - - - -
------------- ------------- ----------- ----------- -----------
NET LOSS (5.656) (0.369) (0.32) (0.075) (0.20)
------------- ------------- ----------- ----------- -----------
WEIGHTED AVERAGE 1,409,366 3,566,420 1,759,234 4,600,789 1,194,782
------------- ------------- ----------- ----------- -----------
------------- ------------- ----------- ----------- -----------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
- 3 -
<PAGE>
AMERICAN ENTERTAINMENT GROUP, INC.
A DEVELOPMENT STAGE COMPANY
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
SEPTEMBER 30, 1997
<TABLE>
COMMON STOCK OUTSTANDING COMMON
STOCK TO BE UNEARNED
SHARES AMOUNTS ISSUED COMPENSATN
------------------------------------------------------
<S> <C> <C> <C> <C>
BALANCE AT APRIL 23, 1992 (INCEPTION)
ISSUANCE OF COMMON STOCK 428,000 $ 150 -- --
NET LOSS
------------------------------------------------------
BALANCE AT DECEMBER 31, 1992 428,000 $ 150 -- --
ISSUANCE OF COMMON STOCK 406,914 2,719,197 -- --
COMMON STOCK ISSSUED IN REVERSE
ACQUISITION (NOTE B) 70,000 -- -- --
COMMON STOCK SUBSCRIBED -- -- 62,066 --
NET LOSS -- -- -- --
------------------------------------------------------
BALANCE AT DECEMBER 31, 1993 904,914 $2,719,347 62,066 --
ISSUANCE OF COMMON STOCK 145,118 696,094 (8,449) --
COMMON STOCK SUBSCRIBED -- -- 70,000 --
UNEARNED COMPENSATION RELATED TO --
ISSUANCE OF STOCK FOR SERVICES -- -- -- (75,000)
AMORTIZATION OF UNEARNED COMPENSATION -- -- 33,333
FOREIGN CURRENCY TRANSLATION ADJUSTMENT -- -- -- --
NET LOSS -- -- -- --
------------------------------------------------------
BALANCE AT DECEMBER 31, 1994 1,050,032 $3,415,441 123,637 $(41,667)
ISSUANCE OF COMMON STOCK 412,953 1,487,848 -- --
COMMON STOCK SUBSCRIBED -- -- (123,637) --
UNEARNED COMPENSATION RELATED TO
ISSUANCE OF STOCK FOR SERVICES -- -- -- (13,900)
AMORTIZATION OF UNEARNED COMPENSATION -- -- 41,667
FOREIGN CURRENCY TRANSLATION ADJUSTMENT -- -- --
NET LOSS -- -- -- --
------------------------------------------------------
BALANCE AT DECEMBER 31, 1995 1,462,985 $4,903,289 -- $(13,900)
ISSUANCE OF COMMON STOCK 946,868 1,978,725 -- --
UNEARNED COMPENSATION RELATED TO --
ISSUANCE OF STOCK FOR SERVICES -- -- -- 13,900
COMMON STOCK SUBSCRIBED -- -- 458,426 --
FOREIGN CURRENCY TRANSLATION ADJUSTMENT -- -- --
NET LOSS -- -- -- --
------------------------------------------------------
BALANCE AT DECEMBER 31, 1996 2,409,853 $6,882,014 458,426 $ --
</TABLE>
<TABLE>
FOREIGN DEFICIT
CURRENCY ACCUMULATED NOTES /
TRANSLATION DURING THE SUBSCRIPTIONS
ADJUSTMENT DEVELOPMENT STAGE RECEIVABLE TOTAL
--------------------------------------------------------------
<S> <C> <C> <C> <C>
BALANCE AT APRIL 23, 1992 (INCEPTION)
ISSUANCE OF COMMON STOCK -- $ -- $ (150) --
NET LOSS (89,500) (89,500)
--------------------------------------------------------------
BALANCE AT DECEMBER 31, 1992 -- $ (89,500) $ (150) $ (89,500)
ISSUANCE OF COMMON STOCK -- -- (12,745) 2,706,452
COMMON STOCK ISSSUED IN REVERSE
ACQUISITION (NOTE B) -- -- -- --
COMMON STOCK SUBSCRIBED -- -- (61,586) 500
NET LOSS -- (1,608,553) -- (1,608,553)
--------------------------------------------------------------
BALANCE AT DECEMBER 31, 1993 $ (40) $(1,698,053) $ (74,461) $ 1,006,859
ISSUANCE OF COMMON STOCK -- -- (56) 697,589
COMMON STOCK SUBSCRIBED -- -- (70,000) --
UNEARNED COMPENSATION RELATED TO
ISSUANCE OF STOCK FOR SERVICES -- -- -- (75,000)
AMORTIZATION OF UNEARNED COMPENSATION -- -- -- 33,333
FOREIGN CURRENCY TRANSLATION ADJUSTMENT (1,876) -- -- (1,876)
NET LOSS -- (1,342,562) -- (1,342,562)
--------------------------------------------------------------
BALANCE AT DECEMBER 31, 1994 $ (1,916) $(3,040,635) $ (144,537) $ 310,323
ISSUANCE OF COMMON STOCK -- -- -- 1,487,848
COMMON STOCK SUBSCRIBED -- -- (144,537) 20,900
UNEARNED COMPENSATION RELATED TO
ISSUANCE OF STOCK FOR SERVICES -- (13,900) -- (13,900)
AMORTIZATION OF UNEARNED COMPENSATION -- -- -- 41,667
FOREIGN CURRENCY TRANSLATION ADJUSTMENT (10,453) -- -- (10,453)
NET LOSS -- (1,841,473) -- (1,841,473)
--------------------------------------------------------------
BALANCE AT DECEMBER 31, 1995 $(12,369) $(4,882,108) -- $ (5,088)
ISSUANCE OF COMMON STOCK -- -- (1,200,000) 778,725
UNEARNED COMPENSATION RELATED TO
ISSUANCE OF STOCK FOR SERVICES -- -- -- 13,900
COMMON STOCK SUBSCRIBED -- -- (369,759) 88,667
FOREIGN CURRENCY TRANSLATION ADJUSTMENT (41,645) -- -- (41,645)
NET LOSS -- (1,739,327) -- (1,739,327)
--------------------------------------------------------------
BALANCE AT DECEMBER 31, 1996 $(54,014) $(6,621,435) $(1,569,759) $ (904,768)
</TABLE>
-4-
<PAGE>
AMERICAN ENTERTAINMENT GROUP, INC.
A DEVELOPMENT STAGE COMPANY
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
SEPTEMBER 30, 1997
<TABLE>
COMMON STOCK OUTSTANDING COMMON
STOCK TO BE UNEARNED
SHARES AMOUNTS ISSUED COMPENSATION
-----------------------------------------------------
<S> <C> <C> <C> <C>
BALANCE AT DECEMBER 31, 1996 2,409,853 $ 6,882,014 458,426 $ -
ISSUANCE OF COMMON STOCK 802,011 1,061,996
UNEARNED COMPENSATION RELATED TO
COMMON STOCK SUBSCRIBED (391,626)
FOREIGN CURRENCY TRANSLATION ADJUSTMENT
NET LOSS
-----------------------------------------------------
BALANCE AT MARCH 31, 1997 3,211,864 $ 7,944,010 66,800 $ --
ISSUANCE OF COMMON STOCK 793,931 296,976
FOREIGN CURRENCY TRANSLATION ADJUSTMENT
NET LOSS
-----------------------------------------------------
BALANCE AT JUNE 30, 1997 4,005,795 $ 8,240,986 66,800 $ --
COMMON STOCK SUBSCRIBED - (1,200,000) (81,800)
ISSUANCE OF COMMON STOCK 872,531 194,414
FOREIGN CURRENCY TRANSLATION ADJUSTMENT
NET LOSS
-----------------------------------------------------
BALANCE AT SEPTEMBER 30, 1997 4,878,326 $ 7,235,400 (15,000) --
-----------------------------------------------------
-----------------------------------------------------
</TABLE>
<TABLE>
FOREIGN DEFICIT
CURRENCY ACCUMULATED NOTES /
TRANSLATION DURING THE SUBSCRIPTIONS
ADJUSTMENT DEVELOPMENT STAGE RECEIVABLE TOTAL
----------------------------------------------------------
<S> <C> <C> <C> <C>
BALANCE AT DECEMBER 31, 1996 $ (54,014) $(6,621,435) $(1,569,759) $ (904,768)
ISSUANCE OF COMMON STOCK 1,061,996
UNEARNED COMPENSATION RELATED TO
COMMON STOCK SUBSCRIBED 302,959 (88,667)
FOREIGN CURRENCY TRANSLATION ADJUSTMENT 1,476 1,476
NET LOSS (690,286) (690,286)
----------------------------------------------------------
BALANCE AT MARCH 31, 1997 $ (52,538) $(6,621,435) $(1,266,800) $ 70,037
ISSUANCE OF COMMON STOCK 96,976
FOREIGN CURRENCY TRANSLATION ADJUSTMENT (1,983) (1,983)
NET LOSS (279,187) (279,187)
BALANCE AT JUNE 30, 1997 $ (54,521) $(7,590,908) $(1,266,800) $ (604,443)
COMMON STOCK SUBSCRIBED 1,266,800 15,000
ISSUANCE OF COMMON STOCK 194,414
FOREIGN CURRENCY TRANSLATION ADJUSTMENT 716 716
NET LOSS (346,914) (346,914)
----------------------------------------------------------
BALANCE AT SEPTEMBER 30, 1997 $ (53,805) $(7,937,822) -- $ (741,227)
----------------------------------------------------------
----------------------------------------------------------
</TABLE>
-4B-
<PAGE>
AMERICAN ENTERTAINMENT GROUP, INC.
AND SUBSIDIARIES
A DEVELOPMENT STAGE COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
(UNAUDITED)
<TABLE>
CUMULATIVE SINCE
INCEPTION SEPT. 30, 1997 SEPT. 30, 1996
---------------- -------------- --------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
NET LOSS $(7,937,822) $(1,316,387) $(569,732)
ADJUSTMENTS TO RECONCILE NET LOSS TO
NET CASH USED BY OPERATING ACTIVITIES:
DEPRECIATION AND AMORTIZATION 35,602 6,319 6,498
AMORTIZATION OF UNEARNED COMPENSATION 13,900
INTEREST PORTION OF AMOUNT DUE FOR
FILM LIBRARY 88,927 19,754 29,631
COMMON STOCK ISSUED FOR SERVICES 3,075,833 769,389 720,075
FOREIGN CURRENCY TRANSLATION (53,805) (209) (1,456)
CHANGES IN:
TRADE ACCOUNTS RECEIVABLE & INVENTORY - - -
PREPAID EXPENSES & DEPOSITS (24,436) (15,994) (1,448)
ACCOUNTS PAYABLE AND OTHER 1,468,631 370,544 (445,902)
------------ ------------ ----------
NET CASH USED BY OPERATING ACTIVITIES (3,347,070) (166,584) (248,434)
------------ ------------ ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
AUDIO MASTERS PRODUCTIONS (86,459) (86,459)
PURCHASE OF INFOMERCIAL & OTHER FILM RIGHTS (120,000) - -
PURCHASE OF PROPERTY AND EQUIPMENT (26,830) - -
DECREASE IN OTHER ASSETS 957,106 - -
DEPOSIT - TEXAS PROCEEDINGS (159,223) (159,223)
------------ ------------ ----------
NET CASH PROVIDED BY INVESTING ACTIVITIES 564,594 (245,682) -
------------ ------------ ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
PROCEEDS FROM ISSUANCE OF COMMON STOCK 2,247,317 75,000 213,750
INCREASE IN SHORT-TERM NOTES PAYABLE 115,000 - 41,666
REPAYMENT OF LONG-TERM DEBT (126,294) - -
INCREASE IN DUE TO OFFICER 50,000 - -
PROCEEDS FROM CONVERTIBLE DEBENTURES 500,000 - -
------------ ------------ ----------
NET CASH PROVIDED BY FINANCING ACTIVITIES 2,786,023 75,000 255,416
------------ ------------ ----------
NET INCREASE (DECREASE) IN CASH 3,798 3,798 6,982
CASH, AT THE BEGINNING OF THE PERIOD - - 315
------------ ------------ ----------
CASH AT THE END OF THE PERIOD $ 3,798 $ 3,798 $ 7,297
------------ ------------ ----------
------------ ------------ ----------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
- 5 -
<PAGE>
AMERICAN ENTERTAINMENT GROUP, INC
A Development Stage Company
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1997
1. FINANCIAL STATEMENTS
In the opinion of the Company's management, the accompanying unaudited
consolidated financial statements contain all adjustments, which include
only normal recurring accruals, necessary to present fairly the Company's
financial position as at September 30, 1997, the results of operations,
changes in stockholders' equity and cash flows for the nine month periods
ended September 30, 1997 and 1996. Certain information and footnote
disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been
condensed or omitted pursuant to the rules and regulations of the
Securities and Exchange Commission. For further information, refer to the
consolidated financial statements and footnotes thereto included in the
Company's Annual Report on Form 10-KSB for the year ended December 31,
1996.
2. COMMON STOCK
Common shares issued during the nine month period ending September 30,
1997, include 876,144 shares issued for cash or equivalent consideration
in the amount of $329,625 and 1,133,391 shares issued in lieu of cash
payment and for various consulting services provided and valued at
$769,389.
At September 30, 1997, a total of approximately 2,663,000 options were
outstanding at option prices per share of $1.00 cents to $20.00.
At September 30, 1997, a total of 82,000 warrants were outstanding at
prices per share of $10.00 to $27.50.
During the period 50,000 warrants expired.
3. SUBSEQUENT EVENTS
RE: HOLLYWOOD SELECT, INC. (HSI) - In June and October, 1993, the
Company entered into agreements with HSI, respecting the purchase by the
Company of a 5,000-title public domain film library ("Library"). By the
terms of the agreement, $2,000,000 was paid for the Library, being
$1,000,000 in common stock of the Company and $1,000,000 by way of cash at
the rate of $200 per title delivered to the Company.
On October 27, 1997, the Company and HSI entered into an agreement
vitiating the agreements of June and October, 1993. Among other terms and
conditions, the Company and HSI agreed as follows:
6
<PAGE>
a) That the agreements of June and October 1993, are to be treated as
being null and void.
b) That HSI is not obligated to deliver any further motion picture or
television series titles save 250 titles for which the Company had
already paid but not yet received delivery. The Company shall retain
all titles prior delivered pursuant to the June and October 1993
agreements.
c) The Company is not obligated to pay HSI the sum of approximately
$800,000 on or before December 31, 1997.
d) That HSI and the Company incorporate a new company ("Newco") to be
owned 51% by the Company and 49% by HSI, and that Newco shall have
access to 14,000 titles owned by HSI.
e) That the Company shall loan Newco the sum of $1,000,000 upon the terms
and conditions as set out in the agreement.
Newco, the company contemplated pursuant to the agreement of October 27,
1997, has now been incorporated and is known as "Faces of Hollywood, Inc."
(a Nevada corporation).
RE: TEL.N.FORM INTERACTIVE COMMUNICATIONS CORPORATION ('TEL.N.FORM') - On
November 3, 1997, the Company entered into a definitive agreement to
acquire 52.5% of the issued and outstanding shares of Tel.n.Form from the
stockholders thereof for a purchase price of $1,050,000, payable in
preferred shares of the Company, valued at $10.00 per share. The preferred
shares will have the following characteristics.
a) The shares will be redeemable according to a schedule which is tied to
approval by the U.S. Bankruptcy Court having jurisdiction over the
Company. A total of one-half of the preferred shares are to be
redeemable upon approval of the Company's Chapter 11 Reorganization
Plan and the obtaining of adequate financing, if and when such events
occur.
b) The preferred shares are convertible into common shares at a price of
$2.50 per share for eighteen months after the date of closing.
c) The preferred shares will pay a cumulative dividend of 6% per annum,
and no dividends on common shares are to be paid until preferred share
dividends have been paid.
d) The preferred shares will be entitled to participate in the net
profits (as defined in the Agreement) of the Company at the rate of
0.000055% per share.
e) The preferred shares are callable by the Company for a period of four
years from date of issue at $12 per share.
7
<PAGE>
The closing of the transaction is still subject to continuing, appropriate
due diligence of the parties, the obtaining of a "fairness" opinion to
confirm the value of Tel.n.Form, the arrangement of suitable financing at
the closing, approval of the transaction by Tel.n.Form shareholders, and
appropriate regulatory compliance. The parties anticipate a closing of
the transaction and release from escrow on or about January 31, 1998.
Tel.n.Form comprises a group of companies in the business of using
automation and computer technology to replace repetitive manual business
in the automotive and hotel industries. Among these companies is
Credit.Link, a service provided to car dealers that generates lead
information obtained from the public and transmitted to such dealers
nationwide.
4. OTHER MATTERS
Subject to its filing under Chapter 11 of the U.S. Bankruptcy Code, the
accompanying financial information contemplates continuation of the Company
as a going concern. However, the Company has sustained substantial
operating losses in recent years. In addition, the Company has used
substantial amounts of working capital in its operations. Further, at
September 30, 1997, current liabilities exceed current assets by
$1,164,709. In this respect, as of October 27, 1997, liabilities have been
reduced by approximately $800,000 (see Subsequent Events).
THE EVENTS LEADING TO THE COMPANY'S FILING UNDER CHAPTER 11 ARE AS FOLLOWS:
On March 22, 1996, the Banque Nationale 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 receivables of The VIP Phone Club, Inc.
(VIP), a private Delaware corporation carrying on business in Maryland,
which was part of an affiliated group, which, in November, 1995 and in
January, 1996, had assigned its accounts receivables to AEL. Additionally,
the Company and AEL had granted a license to VIP to make available to VIP's
various on-going telephone affinity clubs' 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 that
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.
On April 8, 1997, the Company informed BNP that due to the conduct of BNP
respecting both the loan to VIP and BNP's Receiver appointed relative to
VIP in Maryland, the Company and AEL by operation of law had been released
respectively from said guarantee of the Company and the loan to AEL. In
response to this notice, BNP denied the Company's allegations, commenced an
action in the Ontario Courts against the Company and AEL for payment of the
outstanding loan balance, and filed a motion in the Courts of Ontario
asking that a Receiver be appointed over the property and assets of both
the Company and AEL. The Company believed that there was no basis for such
a Receiver to be appointed and opposed the motion. The matter was
adjourned on the
8
<PAGE>
consent of BNP, the Company, and AEL until May 21, 1997, and thereafter was
further adjourned until June 5, 1997. During the interim, the parties
agreed to allow Price Waterhouse Limited of Toronto, Ontario, to act as a
Monitor to perform a business review of the operations of the Company and
AEL. The Company believed, that given the facts and circumstances of the
matter, that BNP should not be entitled to have a Receiver appointed in
the Province of Ontario, Canada, over the Company's property and assets.
On June 5, 1997, the Ontario Court ordered the appointment of Price
Waterhouse Limited as Receiver, without security, "of all the present and
future undertaking, property and assets of whatsoever nature and kind and
wherever situate" (collectively known in the Court Order as the Property)
of the Company and AEL. While the Property of the Company and AEL were
under the control of the Receiver, the management of the Company remained
with its Board of Directors. In the meantime, the Company filed a Motion
to Intervene regarding the action instituted by BNP against VIP (including
the appointment of a receiver respecting VIP) in Baltimore County,
Maryland. BNP opposed such intervention by the Company and this aspect is
still pending.
On July 24, 1997, the Company commenced litigation in the State Circuit
Court for Baltimore County, Maryland, against the Banque Nationale de Paris
(Canada) (BNP), The VIP Phone Club, Inc. (VIP), a private Delaware
corporation, and its affiliates, the Maryland VIP litigation receiver
Financial Conservators, Joel Katz the owner of VIP and its affiliated
entities, and certain of Mr. Katz's associates. The Company has asked the
Court for recision of the contractual relationship with BNP, including the
guarantee of the Company, or in the alternative, credit and interest for
amounts alleged to have been converted by BNP and its co-conspirators, and
for compensatory and punitive damages against the named defendants in the
amount of approximately $850 million and for such other remedies as the
Court may deem appropriate based upon fraud, conversion, breach of
fiduciary duty, conspiracy, damage to the Company's business undertakings,
and for violation of the Federal Racketeering Statues (RICO).
As a result of BNP's actions, BNP had interfered with the Company and its
subsidiaries' business affairs, making it impossible for the Company and
AEL to meet their obligations in a timely fashion. The Board of Directors
therefore determined that it was in the best interest of the Company to
seek protection under Chapter 11 of the U.S. Bankruptcy Code. The filing
was commenced in the U.S. Bankruptcy Court for the Northern District of
Maryland on July 24, 1997. The Company, as Debtor-in-Possession, has all
of the rights of a trustee, subject to the supervision and orders of the
Bankruptcy Court.
By Order dated July 31, 1997, the Ontario Court ordered the termination of
the Receivership respecting the Company and AEL, at the request of Price
Waterhouse Limited, the former Receiver appointed in Ontario on June 5,
1997, as aforesaid.
The Company is in the process of preparing a Plan of Reorganization and
is seeking additional working capital in order to fund such Plan.
Although there is no guarantee, management believes that actions presently
being taken can be effectively implemented and will allow the Company to
continue as a going concern.
9
<PAGE>
5. COMMITMENTS AND CONTINGENCIES
Based upon the Company's film library agreements, the Company has entered
into several transactions pertaining to development and commercial
exploitation. The Company has commenced the marketing and sale of its
product to both mass market and general retailers. The Company also plans
to sell videos of motion pictures derived from its film titles by means of
joint ventures with broadcasters and by Video-on-Demand
telephone-linked-transmission.
On February 4, 1995, the Company entered into an Agreement with MediaLinx
Interactive Inc. of Toronto, Canada for the purpose of delivery for test
purposes of the product of its library by telephone communication to
television sets (Video-on-Demand). MediaLinx Interactive Inc. of
(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.
RE: HOLLYWOOD SELECT, INC. (HSI) - In June and October, 1993, the
Company entered into agreements with HSI, respecting the purchase by the
Company of a 5,000-title public domain film library ('Library'). By the
terms of the agreement, $2,000,000 was paid for the Library, being
$1,000,000 in common stock of the Company and $1,000,000 by way of cash at
the rate of $200 per title delivered to the Company.
On October 27, 1997, the Company and HSI entered into an agreement
vitiating the agreements of June and October, 1993. Among other terms and
conditions, the Company and HSI agreed as follows:
a) That the agreements of June and October 1993, are to be treated as
being null and void.
b) That HSI is not obligated to deliver any further motion picture or
television series titles save 250 titles for which the Company had
already paid but not yet received delivery. The Company shall
retain all titles prior delivered pursuant to the June and October
1993 agreements.
c) The Company is not obligated to pay HSI the sum of approximately
$800,000 on or before December 31, 1997.
d) That HSI and the Company incorporate a new company ("Newco") to be
owned 51% by the Company and 49% by HSI, and that Newco shall have
access to 14,000 titles owned by HSI.
e) That the Company shall loan Newco the sum of $1,000,000 upon the terms
and conditions as set out in the agreement.
Newco, the company contemplated pursuant to the agreement of October 27,
1997, has now been incorporated and is known as "Faces of Hollywood, Inc."
(a Nevada corporation).
10
<PAGE>
RE: TEL.N.FORM INTERACTIVE COMMUNICATIONS CORPORATION ('TEL.N.FORM') - On
November 3, 1997, the Company entered into a definitive agreement to
acquire 52.5% of the issued and outstanding shares of Tel.n.Form from the
stockholders thereof for a purchase price of $1,050,000, payable in
preferred shares of the Company, valued at $10.00 per share. The preferred
shares will have the following characteristics.
a) The shares will be redeemable according to a schedule which is tied to
approval by the U.S. Bankruptcy Court having jurisdiction over the
Company. A total of one-half of the preferred shares are to be
redeemable upon approval of the Company's Chapter 11 Reorganization
Plan and the obtaining of adequate financing, if and when such events
occur.
b) The preferred shares are convertible into common shares at a price of
$2.50 per share for eighteen months after the date of closing.
c) The preferred shares will pay a cumulative dividend of 6% per annum,
and no dividends on common shares are to be paid until preferred share
dividends have been paid.
d) The preferred shares will be entitled to participate in the net
profits (as defined in the Agreement) of the Company at the rate of
0.000055% per share.
e) The preferred shares are callable by the Company for a period of four
years from date of issue at $12 per share.
The closing of the transaction is still subject to continuing, appropriate
due diligence of the parties, the obtaining of a "fairness" opinion to
confirm the value of Tel.n.Form, the arrangement of suitable financing at
the closing, approval of the transaction by Tel.n.Form shareholders, and
appropriate regulatory compliance. The parties anticipate a closing of
the transaction and release from escrow on or about January 31, 1998.
Tel.n.Form comprises a group of companies in the business of using
automation and computer technology to replace repetitive manual business
in the automotive and hotel industries. Among these companies is
Credit.Link, a service provided to car dealers that generates lead
information obtained from the public and transmitted to such dealers
nationwide.
6. OPERATIONS
The Company has commenced the marketing and sale of film library product to
both mass markets and general retailers. The Company also plans to sell
videos of motion pictures derived from its films by means of broadcast,
retail, and telephone-linked-transmission.
On February 4, 1995, the Company entered into an Agreement with MediaLinx
Interactive Inc. of Toronto, Canada for the purpose of delivery for test
purposes of the product of its library by telephone communication to
television sets (Video-on-Demand).
11
<PAGE>
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 Nationale 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 receivables of The VIP Phone Club, Inc.
(VIP), a private Delaware corporation carrying on business in Maryland,
which was part of an affiliated group, which, in November, 1995 and in
January, 1996, had assigned its accounts receivables to AEL. Additionally,
the Company and AEL had granted a license to VIP to make available to VIP's
various telephone affinity clubs' 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 that
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.
On April 8, 1997, the Company informed BNP that due to the conduct of BNP
respecting both the loan to VIP and BNP's Receiver appointed relative to
VIP in Maryland, the Company and AEL by operation of law had been released
respectively from said guarantee of the Company and the loan to AEL. In
response to this notice, BNP denied the Company's allegations, commenced an
action in the Ontario Courts against the Company and AEL for payment of the
outstanding loan balance, and filed a motion in the Courts of Ontario
asking that a Receiver be appointed over the property and assets of both
the Company and AEL. The Company believed that there was no basis for such
a Receiver to be appointed and opposed the motion. The matter was
adjourned on the consent of BNP, the Company, and AEL until May 21, 1997,
and thereafter was further adjourned until June 5, 1997. During the
interim, the parties agreed to allow Price Waterhouse Limited of Toronto,
Ontario, to act as a Monitor to perform a business review of the operations
of the Company and AEL. The Company believed, that given the facts and
circumstances of the matter, that BNP should not be entitled to have a
Receiver appointed in the Province of Ontario, Canada, over the Company's
property and assets.
On June 5, 1997, the Ontario Court ordered the appointment of Price
Waterhouse Limited as Receiver, without security, "of all the present and
future undertaking, property and assets of whatsoever nature and kind and
wherever situate" (collectively known in the Court Order as the Property)
of the Company and AEL. While the Property of the Company and AEL were
under the control of the Receiver, the management of the Company remained
with its Board of Directors. In the meantime, the Company filed a Motion
to Intervene regarding the action instituted by BNP against VIP (including
the appointment of a receiver respecting VIP) in Baltimore County,
Maryland. BNP opposed such intervention by the Company and this aspect is
still pending.
12
<PAGE>
On July 24, 1997, the Company commenced litigation in the State Circuit
Court for Baltimore County, Maryland, against the Banque Nationale de Paris
(Canada) (BNP), The VIP Phone Club, Inc. (VIP), a private Delaware
corporation, and its affiliates, the Maryland VIP litigation receiver
Financial Conservators, Joel Katz the owner of VIP and its affiliated
entities, and certain of Mr. Katz's associates. The Company has asked the
Court for recision of the contractual relationship with BNP, including the
guarantee of the Company, or in the alternative, credit and interest for
amounts alleged to have been converted by BNP and its co-conspirators,
and for compensatory and punitive damages against the named defendants in
the amount of approximately $850 million and for such other remedies as
the Court may deem appropriate based upon fraud, conversion, breach of
fiduciary duty, conspiracy, damage to the Company's business undertakings,
and for violation of the Federal Racketeering Statues (RICO).
As a result of BNP's actions, BNP had interfered with the Company and
its subsidiaries' business affairs, making it impossible for the Company
and AEL to meet their obligations in a timely fashion. The Board of
Directors therefore determined that it was in the best interest of the
Company to seek protection under Chapter 11 of the U.S. Bankruptcy Code.
The filing was commenced on July 24, 1997, in the U.S. Bankruptcy Court
for the Northern District of Maryland. The Company, as
Debtor-in-Possession, has all of the rights and powers of a trustee,
subject to the supervision and orders of the Bankruptcy Court.
By Order dated July 31, 1997, the Ontario Court ordered the termination of
the Receivership respecting the Company and AEL, at the request of Price
Waterhouse Limited, the former Receiver appointed in Ontario on June 5,
1997, as aforesaid.
RE: HOLLYWOOD SELECT, INC. (HSI) - In June and October, 1993, the
Company entered into agreements with HSI, respecting the purchase by the
Company of a 5,000-title public domain film library ('Library'). By the
terms of the agreement, $2,000,000 was paid for the Library, being
$1,000,000 in common stock of the Company and $1,000,000 by way of cash at
the rate of $200 per title delivered to the Company.
On October 27, 1997, the Company and HSI entered into an agreement
vitiating the agreements of June and October, 1993. Among other terms and
conditions, the Company and HSI agreed as follows:
a) That the agreements of June and October 1993, are to be treated as
being null and void.
b) That HSI is not obligated to deliver any further motion picture or
television series titles save 250 titles for which the Company had
already paid but not yet received delivery. The Company shall
retain all titles prior delivered pursuant to the June and October
1993 agreements.
c) The Company is not obligated to pay HSI the sum of approximately
$800,000 on or before December 31, 1997.
13
<PAGE>
d) That HSI and the Company incorporate a new company ("Newco") to be
owned 51% by the Company and 49% by HSI, and that Newco shall have
access to 14,000 titles owned by HSI.
e) That the Company shall loan Newco the sum of $1,000,000 upon the terms
and conditions as set out in the agreement.
Newco, the company contemplated pursuant to the agreement of October 27,
1997, has now been incorporated and is known as 'Faces of Hollywood, Inc.'
(a Nevada corporation).
RE: TEL.N.FORM INTERACTIVE COMMUNICATIONS CORPORATION ('TEL.N.FORM') - On
November 3, 1997, the Company entered into a definitive agreement to
acquire 52.5% of the issued and outstanding shares of Tel.n.Form from the
stockholders thereof for a purchase price of $1,050,000, payable in
preferred shares of the Company, valued at $10.00 per share. The preferred
shares will have the following characteristics.
a) The shares will be redeemable according to a schedule which is tied to
approval by the U.S. Bankruptcy Court having jurisdiction over the
Company. A total of one-half of the preferred shares are to be
redeemable upon approval of the Company's Chapter 11 Reorganization
Plan and the obtaining of adequate financing, if and when such events
occur.
b) The preferred shares are convertible into common shares at a price of
$2.50 per share for eighteen months after the date of closing.
c) The preferred shares will pay a cumulative dividend of 6% per annum,
and no dividends on common shares are to be paid until preferred share
dividends have been paid.
d) The preferred shares will be entitled to participate in the net
profits (as defined in the Agreement) of the Company at the rate of
0.000055% per share.
e) The preferred shares are callable by the Company for a period of four
years from date of issue at $12 per share.
The closing of the transaction is still subject to continuing, appropriate
due diligence of the parties, the obtaining of a "fairness" opinion to
confirm the value of Tel.n.Form, the arrangement of suitable financing at
the closing, approval of the transaction by Tel.n.Form shareholders, and
appropriate regulatory compliance. The parties anticipate a closing of
the transaction and release from escrow on or about January 31, 1998.
Tel.n.Form comprises a group of companies in the business of using
automation and computer technology to replace repetitive manual business in
the automotive and hotel industries. Among these companies is Credit.Link,
a service provided to car dealers that generates lead information obtained
from the public and transmitted to such dealers nationwide.
14
<PAGE>
ITEM 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The Company is a development stage company and as such has not yet
commenced full operations. On July 24, 1997, filed for protection pursuant
to Chapter 11 in the U.S. Bankruptcy Court for the Northern Division of
Maryland. The Company has been granted Debtor-in-Possession status subject
to the supervision and orders of the Bankruptcy Court. Consolidated revenue
for the nine months ended September 30, 1997, was $ NIL. In the nine month
period ended September 30, 1996, the company had revenue of $201,803.
Subject and pursuant to the foregoing, the main thrust of the Company's
activities for the balance of the year will be to file a Plan of
Reorganization with the supervising court and continue its efforts in
sales of products derived from its film library agreement through various
means to both distributors and retailers. The Company also plans to sell
its product via joint ventures and licensing arrangements regarding general
broadcast, cable and satellite generated television stations. Additionally,
the Company's activities will focus upon various acquisitions and mergers.
Gross profit for the nine months ended September 30, 1997, and September
30, 1996 were $ NIL.
General and administrative expenses for nine months ended September 30,
1997, were $1,316,387, an increase of $552,550 or 72% from the nine month
period ended September 30, 1996.
The increase of $552,550 in general and administrative expenses for the
period ended September 30, 1997, over the period ended September 30, 1996,
is attributed mainly to the issuance of shares in lieu of cash payment to
various officers of the Company and for consulting services, as well as
approximately $58,000 in costs to arrange the Convertible Debentures.
Interest expense for the nine month periods ended September 30, 1997 and
1996, was $19,043 and $14,943 respectively.
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.
15
<PAGE>
IN THAT RESPECT THE COMPANY HAS RECENTLY ENTERED INTO TWO AGREEMENTS:
RE: HOLLYWOOD SELECT, INC. (HSI) - In June and October, 1993, the
Company entered into agreements with HSI, respecting the purchase by the
Company of a 5,000-title public domain film library ('Library'). By the
terms of the agreement, $2,000,000 was paid for the Library, being
$1,000,000 in common stock of the Company and $1,000,000 by way of cash at
the rate of $200 per title delivered to the Company.
On October 27, 1997, the Company and HSI entered into an agreement
vitiating the agreements of June and October, 1993. Among other terms and
conditions, the Company and HSI agreed as follows:
a) That the agreements of June and October 1993, are to be treated as
being null and void.
b) That HSI is not obligated to deliver any further motion picture or
television series titles save 250 titles for which the Company had
already paid but not yet received delivery. The Company shall retain
all titles prior delivered pursuant to the June and October 1993
agreements.
c) The Company is not obligated to pay HSI the sum of approximately
$800,000 on or before December 31, 1997.
d) That HSI and the Company incorporate a new company ("Newco") to be
owned 51% by the Company and 49% by HSI, and that Newco shall have
access to 14,000 titles owned by HSI.
e) That the Company shall loan Newco the sum of $1,000,000 upon the terms
and conditions as set out in the agreement.
Newco, the company contemplated pursuant to the agreement of October 27,
1997, has now been incorporated and is known as 'Faces of Hollywood, Inc.'
(a Nevada corporation).
RE: TEL.N.FORM INTERACTIVE COMMUNICATIONS CORPORATION ('TEL.N.FORM') - On
November 3, 1997, the Company entered into a definitive agreement to
acquire 52.5% of the issued and outstanding shares of Tel.n.Form from the
stockholders thereof for a purchase price of $1,050,000, payable in
preferred shares of the Company, valued at $10.00 per share. The preferred
shares will have the following characteristics.
a) The shares will be redeemable according to a schedule which is tied to
approval by the U.S. Bankruptcy Court having jurisdiction over
the Company. A total of one-half of the preferred shares are to
be redeemable upon approval of the Company's Chapter 11
Reorganization Plan and the obtaining of adequate financing, if
and when such events occur.
16
<PAGE>
b) The preferred shares are convertible into common shares at a price of
$2.50 per share for eighteen months after the date of closing.
c) The preferred shares will pay a cumulative dividend of 6% per annum,
and no dividends on common shares are to be paid until preferred share
dividends have been paid.
d) The preferred shares will be entitled to participate in the net
profits (as defined in the Agreement) of the Company at the rate of
0.000055% per share.
e) The preferred shares are callable by the Company for a period of four
years from date of issue at $12 per share.
The closing of the transaction is still subject to continuing, appropriate
due diligence of the parties, the obtaining of a "fairness" opinion to
confirm the value of Tel.n.Form, the arrangement of suitable financing at
the closing, approval of the transaction by Tel.n.Form shareholders, and
appropriate regulatory compliance. The parties anticipate a closing of
the transaction and release from escrow on or about January 31, 1998.
Tel.n.Form comprises a group of companies in the business of using
automation and computer technology to replace repetitive manual business
in the automotive and hotel industries. Among these companies is
Credit.Link, a service provided to car dealers that generates lead
information obtained from the public and transmitted to such dealers
nationwide.
The major cost components associated with the Company's video sales
revenue (with the exception of its media cost), 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 balance of the 1997 fiscal year are estimated
to be approximately $250,000.
As at the date hereof, and subject to the foregoing, the Company has no
material commitments for capital expenditures in the next twelve months.
Such capital requirements for the Company shall relate to its Plan of
Reorganization and Business Plan.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 1997, cash balance was $3,798 compared to $7,297 cash
balance at September 30, 1996, and was subject to the Receivership Order in
Ontario (now terminated) as prior described.
The Company expects to require additional capital in order to fund its
Reorganization and Business Plans.
17
<PAGE>
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
A) 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,
Steve 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. The 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;
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.
The Defendants Sherman and Waxman have entered Answers by way of defense to
the Company's action and have counter-claimed as follows:
a. For the sum of $850,000 and Company stock options claimed by the
Defendant Sherman for the alleged breech of his employment agreement with
the Company.
b. For the sum of $850,000 and Company stock options claimed by the
Defendant Waxman for the alleged breech of his employment agreement with
the Company.
18
<PAGE>
c. Claims by the Defendants Sherman and Waxman respecting alleged
fraudulent inducement against the Company, Joel Wagman and John R.Y. Hugo
for damages to each of Sherman and Waxman in the sum of $850,000 and
punitive damages in the sum of $2,000,000, and claims by Sherman and Waxman
respecting non-competition agreements between the Defendants Sherman and
Waxman against the Company, Wagman and Hugo in the sum of $1,000,000 and
punitive damages in the sum of $1,000,000, or alternatively, damages for
unjust enrichment in the sum of $540,000 and $640,000 respectively.
d. Claims against Wagman, Hugo, Sam Paul, and Allan Chapman in the amount
of $3,000,000 and exemplary damages in the amount of $1,000,000 for
defamation, and claims by Sherman for conversion and for indemnification
respecting Sherman's fees, costs, expenses, including shares of stock
tendered in settlement of a prior action in an amount of excess of
$5,000,000.
Both the action and counter-claims are presently in the preliminary stages
of litigation. No substantial discovery has taken place to date.
B) On March 22, 1996, the Banque Nationale 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 receivables of The VIP Phone Club, Inc. (VIP),
a private Delaware corporation carrying on business in Maryland, which was
part of an affiliated group, which, in November, 1995 and in January, 1996,
had assigned its accounts receivables to AEL. Additionally, the Company and
AEL had granted a license to VIP to make available to VIP's various
telephone affinity clubs' 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 that 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.
On April 8, 1997, the Company informed BNP that due to the conduct of BNP
respecting both the loan to VIP and BNP's Receiver appointed relative to
VIP in Maryland, the Company and AEL by operation of law had been released
respectively from said guarantee of the Company and the loan to AEL. In
response to this notice, BNP denied the Company's allegations, commenced an
action in the Ontario Courts against the Company and AEL for payment of the
outstanding loan balance, and filed a motion in the Courts of Ontario asking
that a Receiver be appointed over the property and assets of both the
Company and AEL. The Company believed that there was no basis for such a
Receiver to be appointed and opposed the motion. The matter was adjourned
on the consent of BNP, the Company, and AEL until May 21, 1997, and
thereafter was further adjourned until June 5, 1997. During the interim,
the parties agreed to allow Price Waterhouse Limited of Toronto, Ontario to
act as a Monitor to perform a business review of the operations of the
Company and AEL. The Company believed, that given the facts and
circumstances of the matter, that BNP should not be entitled to have a
Receiver appointed in the Province of Ontario, Canada over the Company's
property and assets.
19
<PAGE>
On June 5, 1997, the Ontario Court ordered the appointment of Price
Waterhouse Limited as Receiver, without security, "of all the present and
future undertaking, property and assets of whatsoever nature and kind and
wherever situate" (collectively known in the Court Order as the Property)
of the Company and AEL. While the Property of the Company and AEL were
under the control of the Receiver, the management of the Company remained
with its Board of Directors. In the meantime, the Company filed a Motion
to Intervene regarding the action instituted by BNP against VIP (including
the appointment of a receiver respecting VIP) in Baltimore County,
Maryland. BNP opposed such intervention by the Company and this aspect is
still pending.
On July 24, 1997, the Company commenced litigation in the State Circuit
Court for Baltimore County, Maryland, against the Banque Nationale de Paris
(Canada) (BNP), The VIP Phone Club, Inc. (VIP), a private Delaware
corporation, and its affiliates, the Maryland VIP litigation receiver
Financial Conservators, Joel Katz the owner of VIP and its affiliated
entities, and certain of Mr. Katz's associates. The Company has asked the
Court for recision of the contractual relationship with BNP, including the
guarantee of the Company, or in the alternative, credit and interest for
amounts alleged to have been converted by BNP and its co-conspirators, and
for compensatory and punitive damages against the named defendants in the
amount of approximately $850 million and for such other remedies as the
Court may deem appropriate based upon fraud, conversion, breach of fiduciary
duty, conspiracy, damage to the Company's business undertakings, and for
violation of the Federal Racketeering Statues (RICO).
As a result of BNP's actions, BNP had interfered with the Company and its
subsidiaries' business affairs, making it impossible for the Company and
AEL to meet their obligations in a timely fashion. The Board of Directors
therefore determined that it was in the best interest of the Company to seek
protection under Chapter 11 of the U.S. Bankruptcy Code. The filing was
commenced on July 24, 1997, in the U.S. Bankruptcy Court for the Northern
District of Maryland. The Company as Debtor-in-Possession, has all of the
rights as a trustee, subject to the supervision and orders of the Bankruptcy
Court.
By Order dated July 31, 1997, the Ontario Court ordered the termination of
the Receivership respecting the Company and AEL, at the request of Price
Waterhouse Limited, the former Receiver appointed in Ontario on June 5, 1997
as aforesaid.
C) 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.
20
<PAGE>
ITEM 2. CHANGE IN SECURITIES
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not Applicable
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Reports on Form 8-K
(i) That on February 26, 1997, the Company issued a Form 8-K, a Report dated
February 26, 1997 stating that the Company had appointed to its Board of
Directors three new directors to fill existing vacancies on the Board, as
permitted by the Company's by-laws. The names of the new directors are,
Albert Gnat, Brian A. Grosman, and Lloyd Orlow.
(ii) That on March 25, 1997, the Company issued a Form 8-K, a Report dated
March 25, 1997 whereby the Company sold a total of $500,000 of 7%
Convertible Debentures to two corporations, each residents of Canada.
The Debentures are convertible into the common stock of the Company
beginning 45 days after March 21, 1997, at the lesser of the market price
on closing, or 70% of market price on conversion date. On May 7, 1997,
notice was received to convert $60,000 into 60,172 shares of the Company.
(iii) That on May 1, 1997, the Company issued a Form 8K, a Report dated May 1,
1997, relating that on March 22, 1996, the Banque Nationale 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 accounts receivable of The VIP Phone Club, Inc. (VIP), a private
Delaware corporation, which was part of an affiliated group, which, in
November, 1995 and in January, 1996, had assigned its accounts receivables
to AEL. Additionally, the Company and AEL had granted a license to VIP to
make available to VIP's various telephone affinity clubs' 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 that 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.
21
<PAGE>
(iv) That on June 6, 1997, the Company issued a Form 8K, a Report dated June 6,
1997 relating as follows:
* That the Ontario Court ordered the appointment of the accounting firm of
Price Waterhouse Limited as Receiver, without security, "of all the
present and future undertaking, property and assets of whatsoever nature
and kind and wherever situate" (collectively known in the Court Order as
the Property) of the Company and AEL. While the Property of the Company
and AEL were under the control of the Receiver, the management of the
Company remained with the Board of Directors. In the meantime, the
Company filed a Motion to Intervene regarding the action instituted by BNP
against VIP (including the appointment of a receiver respecting VIP) in
Baltimore County, Maryland. Additionally, the Company plans to file for
litigation against BNP, VIP and its affiliates, the Maryland litigation
Receiver, and other appropriate parties asking for damages to the
Company's business undertaking and for such other remedies as its counsel
may advise.
* The Company has accepted the resignation of three directors; being, Albert
Gnat, Brian Grosman, and Jon D. Bridgman.
(v) That on July 24, 1997, the Company issued a Form 8K Report filed July 24,
1997, relating that the Company had commenced litigation on July 24, 1997
in the State Circuit Court for Baltimore County, Maryland against the
Banque Nationale de Paris (Canada) (BNP), VIP Phone Club, Inc. (VIP), a
private Delaware corporation, and its affiliates, the Maryland litigation
receiver in the VIP litigation, Joel Katz the owner of VIP and its
affiliated entities, and certain of Mr. Katz's associates. The Company
has asked the Court for recision of the contractual relationship with BNP,
including the guarantee of the Company, or in the alternative, credit and
interest for amounts alleged to have been converted by BNP and its
co-conspirators, and for compensatory and punitive damages against the
named defendants in the amount of approximately $850 million and for such
other remedies as the Court may deem appropriate based upon fraud,
conversion, breach of fiduciary duty, conspiracy, damage to the Company's
business undertakings, and for violation of the Federal Racketeering
Statues (RICO).
(vi) That on July 25, 1997 the Company issued a Form 8K, a Report filed July
25, 1997 relating that on July 24, 1997, the Company filed for protection
of Chapter 11 of the U.S. Bankruptcy Code and that the Board of Directors
of the Company took such step as a direct result of the actions of Banque
Nationale de Paris (Canada) (BNP), and The VIP Phone Club, Inc. (VIP), a
private Delaware corporation.
As a result of BNP's actions, BNP had interfered with the Company and its
subsidiaries' business affairs, making it impossible for the Company and
AEL to meet their obligations in a timely fashion. The Board of Directors
therefore determined that it was in the best interest of the Company to
seek protection under Chapter 11 of the U.S. Bankruptcy Code. The filing
was commenced in the U.S. Bankruptcy Court for the Northern District of
Maryland. The Company, as Debtor-in-Possession, has all of the rights
and powers of a trustee, subject to supervision and orders of the
Bankruptcy Court.
22
<PAGE>
Additionally, the Report stated that as of July 21, 1997, the Company has
sold a total of 200,000 common shares at prices ranging from US .10 cents
to US .20 cents per share, in cash, to two individuals, both of whom are
residents of Canada, pursuant to Regulation S.
(vii) That on August 4, 1997, the Company issued a Form 8K, a Report dated
August 4, 1997, relating that the Ontario Court by Order dated July 31,
1997, had terminated the Ontario Receivership at the request of Price
Waterhouse Limited, the former Receiver in Ontario appointed on June 5,
1997.
(viii) That on September 5, 1997, the Company issued a Form 8K, a Report dated
September 5, 1997, relating to a preliminary agreement dated August 29,
1997, between the Company and Tel.n.Form Interactive Communications
Corporation (Tel.n.Form), whereby the Company would acquire 100% of the
issued and outstanding shares of Tel.n.Form in exchange for 200,000
common shares of the Company valued at $10.00 per share.
(ix) That on September 30, 1997, the Company issued a Form 8K, a Report dated
September 30, 1997, relating that the preliminary agreement dated
August 29, 1997, between the Company and Tel.n.Form Interactive
Communications Corporation (Tel.n.Form) had been amended.
As amended the Company would be required to pay the purchase price in
200,000 shares of its preferred stock at $10.00 per share. The
preferred stock would have several characteristics. First it would be
redeemable as to 110,000 shares upon obtaining approval of the Company's
Chapter 11 Plan of Reorganization and contemporaneously with the
advance of $1,100,000 as bridge financing pending completion of
satisfactory financing in the sum of $5,000,000. Secondly, as to the
remaining 90,000 shares of preferred stock, it would be convertible into
common shares at the option of the holder thereof at $2.50 per share for
a period of 18 months from the date of the closing of the $5,000,000
financing, would pay cumulative dividends of 6% per annum before any
distributions were made to common shareholders, would have a preferred
share of such net profits (as defined) in addition to cumulative
dividends, and would be callable by the Company, in whole or in part, at
any time for a period of four years at a price of $12.00 per share.
The closing of the transaction is subject to the execution of a
definitive agreement between the parties, appropriate due diligence of
the parties, the obtaining of a "fairness" opinion to confirm the value
of Tel.n.Form, the arrangement of suitable financing at the closing,
approval of the transaction by Tel.n.Form shareholders, and appropriate
regulatory compliance.
(x) That on November 7, 1997, the Company issued a Form 8K dated November 7,
1997 relating:
a) On November 3, 1997, the Company entered into a definitive Agreement
dated September 30, 1997 with Tel.n.Form Interactive Communications
Corporation (Tel.n.Form) whereby the Company would acquire 52.5% of the
issued and outstanding shares of Tel.n.Form in consideration of a
purchase price of $1,050,000, payable in preferred shares of the Company,
valued at $10.00 per share.
23
<PAGE>
The preferred shares will have the following characteristics. First the
shares will be redeemable according to a schedule which is tied to
approval by the U.S. Bankruptcy Court having jurisdiction over the
Company. A total of one-half of the preferred shares are to be
redeemable upon approval of the Company "Chapter 11 Reorganization Plan
and the obtaining of adequate financing, if and when such events occur.
Second, the preferred shares are convertible into common shares at a
price of $2.50 per share for eighteen months after the date of closing.
Third, the preferred shares will pay a cumulative dividend of 6% per
annum, and no dividends on common shares are to be paid until preferred
share dividends have been paid. Fourth, preferred shares will be
entitled to participate in the net profits (as defined in the Agreement)
of the Company at the rate of 0.000055% per share. Finally, the
preferred shares are callable by the Company for a period of four years
from date of issued at $12 per share. The closing of the transaction is
subject to continuing, appropriate due diligence of the parties, the
obtaining of a "fairness" opinion to confirm the value of Tel.n.Form,
the arrangement of suitable financing at the closing, approval of the
transaction by Tel.n.Form shareholders, and appropriate regulatory
compliance. The parties anticipate a closing of the transaction and
release from escrow on or about January 31, 1998.
Tel.n.Form comprises a group of companies in the business of using
automation and computer technology to replace repetitive manual business
in the automotive and hotel industries. Among these companies is
Credit.Link, a service provided to car dealers that generates lead
information obtained from the public and transmitted to such dealers
nationwide.
b) On October 27, 1997, the Company entered into a definitive Agreement
with Hollywood Select, Inc. (HSI) to modify and supersede the Company's
prior relationship with HSI. The Company had previously entered into
agreements in 1993 with HSI regarding the acquisition of the Company's
film library, which is its principal asset. This new Agreement, which
replaces all previous agreements, provides for the Company and HSI to set
up a new corporation (Newco), which would be owned by both parties, with
the Company owning 51% thereof. Newco would have access to a total of
approximately 14,000 public domain film titles from HSI. In addition,
the Company would contribute the sum of $1,000,000US as a loan to Newco.
The final terms of the loan remain to be determined, but will at least be
at a rate equal to the Company's cost of borrowing and will be payable
out of the net profit before income taxes and before any other
distributions to Newco shareholders. Newco will reserve a total of $200
per title acquired by Newco, to be paid to HSI once the Newco loan has
been repaid to the Company. HSI has also to deliver to the Company,
without further cost, an additional 250 titles for the Company's account
in satisfaction of its remaining obligation under the prior referred to
1993 agreements. As a part of the Agreement, the Company and HSI will
contribute their efforts to develop of business plan for Newco, which is
expected to be completed by December 1, 1997.
The closing of the transaction is subject to approval of the Company's
Chapter 11 Reorganization Plan and the obtaining of adequate financing,
if and when such events occur. If these events do not occur, then HSI
will have the right to purchase control of Newco for a nominal sum.
24
<PAGE>
(b) EXHIBITS
No exhibits are filed as part of this report.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Company has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
AMERICAN ENTERTAINMENT GROUP, INC.
(Company)
Date: NOVEMBER 11, 1997 /s/ JOEL WAGMAN
----------------- ---------------------------------------
Joel Wagman
Chairman of the Board and
Chief Executive Officer
Date: NOVEMBER 11, 1997 /s/ SAMUEL C. PAUL
----------------- ---------------------------------------
Samuel C. Paul
Treasurer and Chief Accounting Officer
25
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