<PAGE>
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(X) Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934, for the Quarter Ended December 31, 1995
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 number 1-9748
------------------------------------------------------------------------
AMERICAN FILM TECHNOLOGIES, INC.
------------------------------------------------------------------------
(Exact name of registrant as specified its charter)
Delaware 23-2359277
------------------------------------------------------------------------
(State or other jurisdiction of (IRS Employer Identification
incorporation or organization) Number)
4105 Sorrento Valley Blvd., San Diego, CA 92121
------------------------------------------------------------------------
(Address of principal executive offices)
Registrant's telephone number including area code
(619) 623-0830
------------------------------------------------------------------------
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 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 No X
----- -----
As of May 30, 1996, there were 69,567,310 shares of common stock
outstanding.
<PAGE>
PART 1. FINANCIAL INFORMATION
American Film Technologies, Inc.
Condensed Consolidated Balance Sheets
<TABLE>
<CAPTION>
(Unaudited)
Successor Predecessor
Company Company
------------- -------------
December 31, June 30,
Assets 1995 1995
------------- -------------
<S> <C> <C>
Current Assets:
Cash $1,032,871 $ 10,584
Restricted cash 0 15,322
Accounts receivables 0 23,692
Other current assets 146,257 99,714
----------- -----------
Total current assets 1,179,128 149,312
Equipment and software, at cost, net 491,313 1,039,804
Film library, net 412,500 73,842
Reorganization value in excess of identifiable assets, net 6,249,893 0
----------- -----------
$ 8,332,834 $ 1,262,958
=========== ===========
Liabilities and stockholders' equity/(deficit):
Current Liabilities:
Notes payable:
Bank Loans - in default $ 0 $ 598,385
Other loans 91,060 119,300
Accounts payable and accrued expenses 862,846 1,488,332
Accrued compensation 297,827 501,095
----------- -----------
Total current liabilities 1,251,733 2,707,112
Liabilities subject to compromise 1,642,211
Long term notes payable 1,697,963 0
----------- -----------
Total liabilities 2,949,696 4,349,323
Stockholders' equity/(deficit):
Preferred stock, $.001 par value:
Authorized shares - 10,000,000 at December 31, 1995 and
June 30, 1995: issued and outstanding shares 0 at
December 31, 1995 and 695,250 at June 30, 1995 0 695
Common stock, $.002 par value:
Authorized shares - 90,000,000 at December 31, 1995 and
June 30, 1995: issued and outstanding shares 69,557,310
at December 31, 1995 and 30,410,802 at June 30, 1995 139,115 60,822
Capital in excess of par value 5,661,953 13,526,767
Accumulated deficit (417,930) (16,674,649)
----------- -----------
Total stockholders' equity/(deficit) 5,383,138 (3,086,365)
----------- -----------
$ 8,332,834 $ 1,262,958
=========== ===========
</TABLE>
See accompanying notes.
1
<PAGE>
American Film Technologies, Inc.
Condensed Consolidated Statements of Operations
(Unaudited)
<TABLE>
<CAPTION>
For the Three months ended December 31, 1995 For the Six months ended December 31, 1995
and December 31, 1994 and December 31, 1994
Successor Predecessor Predecessor Successor Predecessor Predecessor
Company Company Company Company Company Company
------------ ----------- ----------- ------------ ----------- ------------
October 17, October 1, October 17, July 1,
1995 to 1995 to 1995 to 1995 to
December 31, October 16, December 31, December 31, October 16, December 31,
1995 1995 1994 1995 1995 1994
------------ ------------ ------------ ------------ ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
Revenues:
Distribution revenues $ 0 $ 0 $ 6,807 $ 0 $ 0 $ 13,613
------------ ------------ ------------ ------------ ----------- ------------
0 0 6,807 0 0 13,613
Expenses:
Compensation and benefits -
administrative and officers 37,133 229,670 30,422 37,133 263,829 54,002
General and administrative 253,213 20,280 239,696 253,213 97,108 443,575
Interest expense, net 14,137 6,353 18,976 14,137 33,132 34,247
Depreciation and amortization 113,447 0 231,850 113,447 238,273 463,700
Reorganization items:
Fresh start adjustments 0 (6,326,258) 0 0 (6,326,258) 0
Professional fees 0 16,500 145,433 0 65,430 176,568
U.S. Trustee fees 0 0 500 0 1,250 1,000
------------ ------------ ------------ ------------ ----------- ------------
417,930 (6,053,455) 666,877 417,930 (5,627,236) 1,173,092
------------ ------------ ------------ ------------ ----------- ------------
Net income/(loss) ($ 417,930) $ 6,053,455 ($ 660,070) ($ 417,930) $ 5,627,236 ($1,159,479)
============ ============ ============ ============ =========== ============
Net income/(loss) per share ($ 0.01) $ 0.19 ($ 0.02) ($ 0.01) $ 0.17 ($ 0.04)
============ ============ ============ ============ =========== ============
Shares used in per share computation 69,557,310 32,232,802 29,610,802 69,557,310 32,232,802 28,560,802
============ ============ ============ ============ =========== ============
</TABLE>
See accompanying notes.
2
<PAGE>
American Film Technologies, Inc.
Condensed Consolidated Statement of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
Successor Predecessor Predecessor
Company Company Company
------------ ----------- -------------
October 17, July 1,
1995 to 1995 to
December 31, October 16, December 31,
CASH FLOWS FROM OPERATION ACTIVITIES: 1995 1995 1994
------------ ----------- -------------
<S> <C> <C> <C>
Net income/(loss) ($ 417,930) $ 5,627,236 ($1,159,479)
Adjustments to reconcile net (loss) to net cash
(used) by operating activities:
Depreciation and amortization 113,447 238,273 463,700
Fresh start adjustments (6,326,258)
Change in estimate to Liabilities subject to compromise 150,273
Changes in assets and liabilities:
Restricted cash 0 15,322 51,400
Prepaids, deposits and other current assets (109,764) 86,913 (8,912)
Accounts payable and accrued expenses (1,039,757) 210,651 283,840
Adjustment to L/T Notes payable 55,729
Adjustment to Reorganization value in excess of
identifiable asset account (65,150)
---------- ---------- ----------
Not cash (used) by operating activities (1,463,425) (147,863) (219,178)
Cash Flows From Investing Activities:
-- -- --
---------- ---------- ----------
Net cash provided (used) by investing activities 0 0 0
Cash Flows From Financing Activities:
Principal payments on notes payable - bank (348,385) (250,000)
Principal payments on notes payable - other (332,503)
Proceeds from notes payable - other 101,263 503,000 27,000
Proceeds from common stock subscriptions 2,960,200
Proceeds from sale of common stock 170,000
---------- ---------- ----------
Net cash provided by financing activities (579,625) 3,213,200 197,000
Net (decrease) in cash (2,043,050) 3,065,337 (22,178)
Cash, beginning of period 3,075,921 10,584 25,980
---------- ---------- ----------
Cash, end of period $ 1,032,871 $ 3,075,921 $ 3,802
Supplemental disclosures of cash flow information:
Cash paid during the period for interest $ 143,200 0 0
</TABLE>
See accompanying notes
3
<PAGE>
AMERICAN FILM TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31,1995 (UNAUDITED)
1. Basis of Presentation
- ------------------------
The accompanying consolidated financial statements have been prepared in
conformity with principles of accounting applicable to a going concern. In the
opinion of management, all adjustments, consisting of normal recurring accruals,
considered necessary for a fair presentation have been included. The Company
believes that the consolidated financial statements for the period October 17,
1995 to December 31, 1995 include all necessary adjustments (which are of a
normal and recurring nature) and those adjustments required to adopt Fresh Start
Reporting as described below, which are considered necessary for a fair
presentation. For further information, refer to the consolidated financial
statements and footnotes thereto included in the Company's annual report on Form
10-K for the year ended June 30, 1995. Because of the adoption of Fresh Start
Reporting effective October 17, 1995, the Consolidated Statement of Operations
and Consolidated Statement of Cash Flows are not comparable with prior periods.
Further, the accompanying consolidated financial statements do not
reflect any adjustments relating to settlement of the claims of any class of
creditors that might be provided for in the Plan. Any adjustments relating to
such settlements will be recorded at such time as the Bankruptcy Court enters a
final order confirming the settlement of a disputed claim.
As discussed in Note 2 below, as of May 28, 1996, the Company had
received net proceeds of $3.46 million from the H.J. Meyers Private Placement,
including the conversion of a $300,000 bridge loan discussed below. Management
must raise additional funds to finance its ongoing operations. While management
believes it will be successful in its efforts, there are no assurances such
additional funds will be raised. No adjustments have been made to reflect the
possible future effects on the recoverability and classification of assets or
the amount and classification of liabilities that may result if the Company is
unable to continue as a going concern.
In March 1995, the FASB issued Statement No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of,
which requires impairment losses to be recorded on long-lived assets 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.
Statement No. 121 is effective for financial statements for fiscal years
beginning after December 15, 1995. The Company plans on adopting Statement No.
121 in the first quarter of fiscal year 1997. If the Company is unable to raise
additional funds, then its long-lived asset, Reorganization Value in Excess of
Identifiable Assets could be impaired.
4
<PAGE>
AMERICAN FILM TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31,1995 (UNAUDITED)
2. Reorganization and Recapitalization
- --------------------------------------
On October 15, 1993, American Film Technologies, Inc. (the "Company")
filed for protection from its creditors under Chapter 11 of the United States
Bankruptcy Code. The Chapter 11 filing was the result of continuing defaults
related to the Company's loans, recurring operating losses and cash flow
problems. Under Chapter 11, substantially all pre-petition liabilities of
debtors are subject to settlement under a plan of reorganization and were
classified on the consolidated balance sheet as "Prepetition liabilities subject
to compromise" as of June 30, 1995. The consummation of a plan of reorganization
is dependent upon the satisfaction of numerous conditions, including, among
other things, the acceptance by several classes of interests and confirmation by
the Bankruptcy Court.
On October 6, 1995, the Company's Plan of Reorganization (the "Plan") was
approved by the Bankruptcy Court and became effective October 17, 1995 (the
"Effective Date"). Under the terms of the Plan, the following is a summary of
the treatment of each of the major classes of creditors and stockholders:
<TABLE>
<CAPTION>
Class of Estimated Distribution under the Status
- -------- --------- ---------------------- ------
Claims Amount of Plan
- ------ --------- ----
Claim
-----
<S> <C> <C> <C>
Class 1 $86,000 Cash payment in full Unimpaired
Employee on Effective Date
Priority Claim
Class 2 $80,000 Cash payment on Distribution Unimpaired
Priority Date or, at the Company's
Claim discretion, over six years
plus interest
Class 3 $623,000 Cash payment on the Unimpaired
Comerica Effective Date plus interest
Claim and reasonable legal fees
Class 4 $500,000 Cash payment plus interest Unimpaired
Secured Claims on the Effective Date
Class 5 $122,000 $110,000 cash payment plus Impaired
DIP Financing interest on the Effective Date
Claims and remainder in one year note
Class 6 $6,000 Cash payment in full on Unimpaired
Convenience the Effective Date
Claims
</TABLE>
5
<PAGE>
AMERICAN FILM TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31,1995 (UNAUDITED)
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Class 7 $1,697,000* Unsecured five year notes Impaired
Unsecured in full amount of allowed claim,
Claims with interest at 7%
Class 8 N/A $ 10 cash on the Effective Date. Impaired
Preferred Unexercised Series B, C and D
Stock Interest voting convertible interest will
be canceled
Class 9 N/A Retained, subject to dilution Impaired
Common
Stock Interest
Class 10 N/A Canceled Impaired
Other Equity
Interests
</TABLE>
* Amount does not include the Class 7 claim of Joseph Taritero, which has been
compromised pursuant to the terms of a prior stipulation and order. See 5.
Commitments and Contingencies. ------
- ------------------------------
H. J. Meyers Agreement
The Plan was financed primarily from a stock purchase agreement executed
with H.J. Meyers & Co ("Meyers"). On May 3, 1995, the Company executed an
agreement with Meyers pursuant to which Meyers purchased an exclusive 90 day
option (beginning May 30, 1995) to purchase up to 51% of the Company's common
stock for $3 million. Upon approval of the Bankruptcy Court, on May 30, 1995,
Meyers paid the Company a non refundable fee of $150,000 for the option. The
agreement required Meyers to pay the $3 million to the Company upon the
Effective Date of the Company's Plan. Through a subsequent amendment to that
agreement, Meyers agreed to use its best efforts to increase the proceeds of the
offering to $4 million which would result in net proceeds of $3.48 million to
the Company. In exchange for this possible increase, the Company agreed to issue
an additional 3,800,000 shares to Meyers and its assignees. Meyers raised the
money through a private placement of the Company's common stock to "accredited
investors," as that term is defined by the Securities Act of 1933. As of October
31, 1995, the closing date for the private placement, Meyers sold subscriptions
totaling $3.46 million for the purchase of the Company's stock.
The Company agreed to grant a one-time demand and piggy back registration
right. For a period of two years from the Effective Date, (upon demand by at
least 25% of the new stockholders) the new stockholders can demand the Company
6
<PAGE>
AMERICAN FILM TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31,1995 (UNAUDITED)
to file a registration statement with the SEC covering the reoffer and resale of
its shares (up to 38,982,508). Not withstanding the foregoing, if at any time
prior to exercise of the demand registration rights, the Company receives a
letter of intent from an underwriter for a public equity offering of at least $5
million of the Company's securities, then the demand registration right shall
terminate. On March 28, 1996, the Company entered into a letter of intent with
Meyers (the "Meyers Letter of Intent") under which Meyers confirmed its interest
in underwriting on a firm commitment basis a public offering of shares of the
Company's common stock. The Meyers Letter of Intent contemplates the negotiation
and execution of formal agreements relating to the proposed offering and
provides, among other things, that the Company will apply for listing on the
Nasdaq Small Cap Market and use its best reasonable efforts to maintain such
listing for not less than five years; that the Company, if requested, obtain
"key man" life insurance on the lives of designated officers of the Company and
that the Company shall have entered into a joint venture, business alliance or
business combination with an owner of content on terms acceptable to Meyers.
To enable the Company to fund certain obligations prior to the Effective
Date, on July 28, 1995, Meyers arranged a $500,000 bridge loan to the Company
with interest at 8% plus common stock at the rate of one half share for every
dollar of bridge loan. The loans are convertible into common stock at the same
rate as the private placement to the accredited investors. On the Effective
Date, $300,000 of the bridge loan was converted into the Company's common stock
and the remaining $200,000 was repaid. The $500,000 bridge loan is included in
Class 4 - Secured Claims mentioned above.
Fresh Start Accounting (Unaudited)
Upon emergence from its Chapter 11 proceedings, the Company adopted the
provisions of Statement of Position No. 90-7, Financial Reporting by Entities in
Reorganization Under the Bankruptcy Code" ("Fresh Start Reporting") as
promulgated by the American Institute of Certified Public Accountants in 1990.
Accordingly, all assets and liabilities have been restated to reflect their
reorganization value, which approximates their fair value at the Effective Date.
In addition, the accumulated deficit of the Company was eliminated and its
capital structure was recast in conformity with the Plan, and as such, the
Company has recorded the effects of the Plan and Fresh Start Reporting as of
October 16, 1995. The December 31, 1995 consolidated balance sheet is,
therefore, the balance sheet of a new reporting entity and is not comparable to
prior periods. Furthermore, the Consolidated Statement of Operations and
Consolidated Statement of Cash Flows for the period October 17, 1995 to December
31, 1995 are also not comparable with prior periods.
The Company estimated the fair value of the reorganized entity based on
the proceeds received from the private placement for approximately 56% of its
7
<PAGE>
AMERICAN FILM TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31,1995 (UNAUDITED)
common stock which was completed on the Effective Date. While the estimated
reorganization value of the Company has been primarily allocated to specific
asset categories pursuant to Fresh Start Reporting, the effects of such are
subject to further refinement or adjustment. Current assets have been recorded
at their book value, which the Company believes approximates fair value.
Equipment, software and film library have been recorded at their approximate
fair value. Long term debt consists of pre-petition liabilities and will be paid
out subject to the terms of the Plan.
The effect of the Plan on the Company's unaudited consolidated balance
sheet at October 17,1995 (the Effective Date) is as follows:
<TABLE>
<CAPTION>
(1) (2)
H.J Mayers Fresh Reorganized
Prior to Private Start Balance
Assets Reorganization Placement Adjustments Sheet
-------------- ------------ ----------- -------------
<S> <C> <C> <C> <C>
Current Assets:
Cash $ 115,721 $ 2,960,200 $ 0 $ 3,075,921
Restricted cash 2,960,200 (2,960,200) 0
Accounts receivables 0 0
Other current assets 36,493 36,493
------------ ------------ ------------ ------------
Total current assets 3,112,414 0 0 3,112,414
Equipment and software, at cost, net 755,253 (305,253) 450,000
Leasehold improvement, net 64,740 64,740
Film library, net 55,380 394,620 450,000
------------ ------------ ------------ ------------
Property and equipment, net 875,373 0 89,367 964,740
Reorganization value in excess of
identifiable assets 0 6,237,264 6,237,264
------------ ------------ ------------ ------------
Total assets $ 3,987,787 $ 0 $ 6,326,631 $ 10,314,418
============ ============ ============ ============
Liabilities and stockholders' equity/(deficit) Current
Liabilities:
Notes payable:
Bank Loans - in default $ 348,385 $ 348,385
Other loans 622,300 (300,000) 322,300
Accounts payable and accrued expenses 1,470,705 350 1,471,055
Accrued compensation 729,376 729,376
------------ ------------ ------------ ------------
Total current liabilities 3,170,766 (300,000) 350 2,871,116
Notes payable 0 1,642,234 1,642,234
Liabilities subject to compromise 1,642,211 (1,642,211) 0
Stockholders' equity/(deficit):
Preferred stock 695 (695) 0
Common stock 60,821 78,294 139,115
Capital in excess of par value 13,526,768 3,181,906 (11,046,721) 5,661,953
Accumulated deficit (17,373,674) 17,373,674 0
Subscription payable 2,960,200 (2,960,200) 0
------------ ------------ ------------ ------------
Total liabilities and stockholders' equity/(deficit) $ 3,987,787 $ 0 $ 6,326,631 $ 10,314,418
============ ============ ============ ============
</TABLE>
(1) To record the effects of the H. J. Meyers Private Placement Plan.
Subsequent to October 17, 1995, the Company received an additional
$200,000 from subscriptions related to the Private Placement.
(2) To record assets, liabilities and capital at their fair value pursuant to
Fresh Start Reporting and eliminate any retained deficit.
8
<PAGE>
AMERICAN FILM TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31,1995 (UNAUDITED)
3. Summary of Significant Accounting Policies
- ---------------------------------------------
The Company's principal business is the production of color versions of
motion pictures and television programs originally produced in black-and-white.
The Company has produced colorized films for its own library and owns the
copyrights on eleven such films. These films are available for sale and/or
distribution. Since the filing of its Chapter 11 Bankruptcy, the Company has
not generated any film colorization or animation production or new fee for
service orders.
Consolidation
The consolidated financial statements include the accounts of Midtech de
Mexico S.A., the Company's wholly-owned Mexican subsidiary. Due to the lack of
film coloring activity, Midtech is not currently operational. All intercompany
transactions have been eliminated in consolidation.
Depreciation and Amortization
Depreciation and amortization are provided over the estimated useful
lives of the underlying assets using primarily accelerated methods over a five
year period. Reorganization value in excess of amounts allocable to identifiable
assets is being amortized over twenty years. Leasehold improvements are
amortized over the lesser of a three year period or the life of the lease.
Film Library
Due to Fresh Start Reporting, the carrying value for the film library was
revalued at October 16, 1995 to reflect its fair market value. Prior to
revaluation, costs incurred in creating the film library included direct
salaries and related benefits of production personnel charged to specific
coloring projects, and allocation of overhead and costs of materials used in the
coloring process. Costs were charged to the film library using the same system
the company maintained for calculating cost of coloring films for customers. The
film library is being amortized using the individual film forecast method under
which costs of released productions are amortized in the proportion that revenue
recognized for a period bears to estimated future revenues.
Loss per Share
Loss per share has been calculated by dividing the net loss applicable to
common stock for the periods by the weighted average number of common stock
outstanding for the periods indicated. For the quarter ended December 31, 1995,
no exercise of stock options was assumed because the exercise of such
equivalents would be anti-dilutive.
9
<PAGE>
AMERICAN FILM TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31,1995 (UNAUDITED)
4. Reorganization Value in Excess of Amounts Allocable to Identifiable Assets
- -----------------------------------------------------------------------------
Dec. 31, October 17,
1995 1995
---- ----
Valuation $6,302,413 $6,237,264
Less accumulated amortization 52,520 0
---------- ----------
$6,249,893 $6,237,264
Reorganization value in excess of amounts allocable to identifiable
assets reflects the amount of the reorganized Company which could not be
allocated to any specific assets. While the estimated reorganization value of
the Company has been preliminarily allocated to specific asset categories
pursuant to Fresh Start Reporting, the effects of such are subject to further
refinement, which will cause this "reorganization value" account to be adjusted
accordingly. Furthermore, any adjustment relating to the settlement of a
disputed prepetition claim by the Bankruptcy Court will also cause this
"reorganization value" account to be adjusted accordingly. The related
amortization for the period October 17, 1995 to December 31, 1995 was $52,520.
5. Commitments and Contingencies
- --------------------------------
Taritero Claim. The Company's former Chief Executive Officer, Joseph
Taritero, sued the Company and certain of its former directors and officers in
the Superior Court of the State of California for the County of Los Angeles
alleging breach of contract and fraud and seeking damages "in excess of
$686,000." Mr. Taritero and the Company had executed a three year Employment
Agreement in December 1991 and Mr. Taritero served as Chief Executive Officer of
the Company from that time until his resignation in November 1992.
The Company had no funds to defend the action and had not retained
counsel to do so, and in May 1995, a default judgment was entered against the
Company for compensatory damages of $892,000 on a breach of contract. In
accordance with the Stipulation and Order from the Bankruptcy Court, the Company
agreed to a full and final settlement with Mr. Taritero for an amount of
$275,000. In accordance with the terms of the Plan, $125,000 was paid on the
Effective Date, $75,000 was paid in April 1996 and the remaining $75,000 is to
be paid in October 1996. The Company and Mr. Taritero have executed mutual
general releases each in favor of the other. Mr. Taritero also received a
compensatory damage award of $892,000 and a punitive damage award of $8,125,000
solely against the former directors and officers of the Company for fraud.
10
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
- ------------------------------------------------------------------------
This discussion should be read in conjunction with the consolidated
financial statements, related notes and management's discussion and analysis of
financial conditions and results of operations included in the Company's annual
report on Form 10-K for the year ended June 30, 1995.
Overview and Reorganization.
- ----------------------------
On October 15, 1993, the Company filed for protection under Chapter 11
of the Bankruptcy Code in the Bankruptcy Court for the District of Delaware. On
October 6, 1995, the Company's Plan of Reorganization (the "Plan") was approved
by the Bankruptcy Court and became effective October 17, 1995 (the "Effective
Date"). In connection with the Plan, the Company has raised $3.46 million in new
capital in exchange for the issuance of common stock representing approximately
56% if its total outstanding common stock. The Company has emerged from
bankruptcy under Fresh Start Reporting as promulgated by Statement of Position
No. 90-7, Financial Reporting by Entities in Reorganization under the Bankruptcy
Code. For a detailed discussion of the bankruptcy proceedings, see Note 11 in
the Notes To Condensed Consolidated Financial Statements.
From the filing of the bankruptcy to October 1995, AFT was funded
principally from the conversion of all of its Series A Preferred Stock and
64,750 shares of its Series B Preferred Stock into 15,237,500 shares of Common
Stock. The conversion generated $638,000 in additional capital. In addition, Mr.
Gerald Wetzler, AFT's principal shareholder during the bankruptcy period, and
Mr. Robert Bernhard, pursuant to a debtor in possession secured lending
arrangement, in their discretion, could make available to AFT up to an aggregate
of $150,000 (the "DIP Financing""). The maximum outstanding at any time under
the DIP Financing was $122,000 in July 1995.
The Company's production facility in Tijuana, Mexico initially closed
down in October 1993 due to a strike of its employees. It currently remains
closed because the Company has not resumed operations. In June 1995, the
Company's new subsidiary, Midtech de Mexico, renegotiated the lease of its
production facility in Tijuana. Current management believes a Mexican production
facility is advantageous to the strategic plan of the Company.
Success of the Company will, among other things, depend upon the
resumption of production in Mexico. That will require reemployment of selected
former Mexican employees. Since the Mexican operation was suspended in October
1993, the Company believes most of the former employees have found other jobs.
If Midtech is unable to rehire certain former employees, it will have to recruit
and train a new work force. That would delay the resumption of production and
11
<PAGE>
increase the cost of production. As such, it could have a materially adverse
effect on the Company. Although the Company expects to benefit from the
devaluation of the peso, there is no assurance of how long those expected
benefits will last.
Since emerging from bankruptcy, the Company has actively pursued new
product development and opportunities, as well as strategic alliances and
partners. Related to those efforts, the Company has engaged the ADASAR Group,
Inc. ("Adasar"). Adasar, through its principal, Dennis Levine, has sought new
product opportunities and strategic alliances on behalf of the Company.
On March 28, 1996, the Company entered into a letter of intent with
Meyers (the "Meyers Letter of Intent") under which Meyers confirmed its interest
in underwriting on a firm commitment basis a public offering of shares of the
Company's common stock. The Meyers Letter of Intent contemplates the negotiation
and execution of formal agreements relating to the proposed offering and
provides, among other things, that the Company will apply for listing on the
Nasdaq Small Cap Market and use its best reasonable efforts to maintain such
listing for not less than five years; that the Company, if requested, obtain
"key man" life insurance on the lives of designated executive officers of the
Company; and that the Company shall have entered into a joint venture, business
alliance or business combination with an owner of content on terms acceptable to
Meyers.
Results of Operations.
- ----------------------
Since the filing under Chapter 11 in October, 1993, the Company has not
generated any income from film colorization, animation or fee for service
orders. During the period October 17, 1995 to December 31, 1995, the Company
generated interest income of approximately $15,000, which has been netted
against interest expense. Because of the adoption of Fresh Start Reporting
effective October 17, 1995, comparisons with prior periods are not comparable.
During the period October 17, 1995 to December 31, 1995, the Company
incurred expenses of approximately $418,000.
During the period October 17, 1995 to December 31, 1995, the Company had
a net loss of approximately $418,000, or $0.01 cent per share. The net income of
approximately $5.6 million, or $0.17 cents per share for the period October 1,
1995 to October 16, 1995 is due to the elimination of retained earnings in order
to adopt Fresh Start Reporting as promulgated by Statement of Position No. 90-7,
Financial Reporting by Entities in Reorganization Under the Bankruptcy Code.
12
<PAGE>
Liquidity and Capital Resources.
- --------------------------------
On October 6, 1995, the Company's Plan of Reorganization (the "Plan") was
approved by the bankruptcy court. The Plan became effective on October 17, 1995.
In connection with this Plan, the Company completed a private placement of $3.46
million, and management of the Company has expressed its intention to raise
additional funds to finance ongoing operations. The funds raised in the private
placement, as well as the additional funds to be raised by management, are
essential for the Company to continue operations, and no assurance can be made
that such additional funds can be raised. As noted above, the Company has
entered into a Letter of Intent with H. J. Meyers & Co., Inc. for the purpose of
raising additional capital through a public offering.
PART II: OTHER INFORMATION
--------------------------
Item 1. Legal Proceedings
- -------------------------
Taritero Claim. The Company's former Chief Executive Officer, Joseph
Taritero, sued the Company and certain of its former directors and officers in
the Superior Court of the State of California for the County of Los Angeles
alleging breach of contract and fraud and seeking damages "in excess of
$686,000." Mr. Taritero and the Company had executed a three year Employment
Agreement in December 1991 and Mr. Taritero served as Chief Executive Officer of
the Company from that time until his resignation in November 1992.
The Company had no funds to defend the action and had not retained
counsel to do so, and in May 1995, a default judgment was entered against the
Company for compensatory damages of $892,000 on a breach of contract. In
accordance with the Stipulation and Order from the Bankruptcy Court, the Company
agreed to a full and final settlement with Mr. Taritero for an amount totaling
$275,000. In accordance with the terms of the Plan, $125,000 was paid on the
Effective Date, $75,000 was paid in April 1996 and the remaining $75,000 is to
be paid in October 1996. The Company and Mr. Taritero have executed mutual
general releases each in favor of the other. Mr. Taritero also received a
compensatory damage award of $892,000 and a punitive damage award of $8,125,000
solely against the former directors and officers of the Company for fraud.
Item 2. Changes In Securities
- -----------------------------
As a result of the Plan, all Series B, C and D preferred stock not
previously converted into common stock was canceled.
13
<PAGE>
Item 3. Defaults Upon Senior Securities
- ---------------------------------------
None during the period. As a result of the Plan, Comerica Bank's secured
claim was repaid in November 1995. The amount of $582,193 paid to Comerica
included principal, accrued interest and reasonable legal fees.
Item 4. Submission of Matters to a Vote of Security Holders
- -----------------------------------------------------------
None.
Item 5. Other Information
- -------------------------
As a result of the Plan, as of the Effective Date of the Plan, the
Company will adopt "fresh start" accounting, which will reflect the payment or
discharge of certain debts in accordance with the Plan. "Fresh start accounting"
allows a reorganized entity to reflect its reorganization value, which
approximates its fair value at the date of reorganization. In addition, the
accumulated deficit of the Company is eliminated and its capital structure is
recast in conformity with the Plan.
In February 1996, the Company elected Larry King and Steven Lefkowitz to
its Board of Directors. Mr. King is the host of CNN's "Larry King Live" and
Mutual Radio's "Larry King Show" and is a columnist for USA Today. Mr. Lefkowitz
----------
is founder and President of Wade Capital Corporation, founded in 1990.
Item 6. Exhibits and Reports on Form 8-K
- ----------------------------------------
None.
14
<PAGE>
Signatures
In accordance with the requirements 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 FILM TECHNOLOGIES, INC.
Date: June 17, 1996 By: /s/ Gerald M. Wetzler
------------- ----------------------
Gerald M. Wetzler,
Chairman, Chief Executive Officer
Date: June 17, 1996 By: /s/ John J. Karl
------------- ----------------
John J. Karl,
Principal Accounting Officer
15
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