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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [FEE REQUIRED ] for the fiscal year ended June 30, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED for the transition period from .......
to ..............................
Commission file number 1-9748
American Film Technologies, Inc.
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(Exact name of registrant as specified in its charter)
Delaware 23-2359277
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(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
4105 Sorrento Valley Boulevard, San Diego, California 92121
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code 619-623-0830
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Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to section 12(g) of the Act:
Common Stock, $.002 Par Value
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(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes __X__ No ____
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K (S229.405 of this chapter) is not contained herein, and will
not be contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. [X]
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State the aggregate market value of the voting stock held by non-affiliates of
the registrant. The aggregate market value shall be computed by reference to the
price at which the stock was sold, or the average bid and asked prices of such
stock, as of a specified date within 60 days prior to the date of filing.
$6,903,732
APPLICABLE ONLY TO REGISTRANTS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING
THE PRECEDING FIVE YEARS: Indicate by check mark whether the registrant has
filed all documents and reports required to be filed by Section 12, 13 or 15(d)
of the Securities Exchange Act of 1934 subsequent to the distribution of
securities under a plan confirmed by a court. YES ___ NO __X__
APPLICABLE ONLY TO CORPORATE REGISTRANTS: Indicate the number of shares
outstanding of each of the registrant's classes of common stock, as of the
latest practicable date: 69,567,310
DOCUMENTS INCORPORATED BY REFERENCE: List hereunder the following documents if
incorporated by reference and the Part of the Form 10-K (e.g., Part I, Part II,
etc.) into which the document is incorporated: (1) Any annual report to security
holders; (2) Any proxy or information statement; and (3) Any prospectus filed
pursuant to Rule 424(b) or (c) under the Securities Act of 1933. The listed
documents should be clearly described for identification purposes (e.g., annual
report to security holders for fiscal year ended December 24, 1980). Not
Applicable
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PART I
Item 1. Business.
General
American Film Technologies, Inc.'s ("AFT" or the "Company") principal
business has been the production of color versions of motion pictures and
television programs originally produced in black and white. AFT was incorporated
in Delaware in 1985 and completed its first project in November 1987. AFT
completed a public offering of its common stock in August 1987. Since its
organization, AFT has colorized over 200 motion pictures, 170 television
programs and 90 animated cartoons. Through its filing for protection under
Chapter 11 of the Bankruptcy Code, AFT believes it had accounted for
approximately 70% of the global colorized production of black and white films.
During the year ended 1993, AFT completed COLORIMAGED versions of 43 full length
motion pictures, 7 episodes of a one-half hour television series and 5 short
cartoons, a theatrical animated short, an animated half-hour special for
television, a half-hour video introducing a new board game and portions of the
ink and paint and special effects work for the Amblin Entertainment full-length
animated motion picture "We're Back."
While most of AFT's colorization activities have been for customers on
a fee basis, AFT has also produced colorized films for its own library. The
Company owns the copyrights on eleven colorized films, including four Sherlock
Holmes films starring Basil Rathbone; "The Scarlett Pimpernel" starring Leslie
Howard, Merle Oberon and Raymond Massey; three Bela Lugosi horror films;
"Outpost in Morocco" starring George Raft; "Gung Ho" starring Randolph Scott;
and "Eternally Yours" starring David Niven.
AFT's film products are based on AFT's proprietary technology for the
creation of color versions of motion picture and television programs originally
produced in black-and-white, called COLORIMAGED films, as well as animation ink
and paint and special effects. The AFT-owned COLORIMAGED films may be licensed
for television broadcast, cable television, and for sale in home video markets.
AFT's colorization business continued to grow and prosper during the
late 1980's with the development of significant customers such as 20th Century
Fox, Republic Pictures and Turner Entertainment. By 1990, Turner accounted for
more than 75% of AFT's colorization business. In 1991, AFT's founding investor
and principal shareholder, George R. Jensen, decided to step down to pursue
other business opportunities. At the time, the Board determined it would be in
AFT's best interests to diversify its operations through entry into the computer
animation and ink and paint (the process of putting color into animated film)
which utilized similar technology.
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In the early 1990's, AFT experienced a slowdown in its colorization
activities. In response, AFT increased its animation activities, which required
significant cash investments and resulted in a decrease in AFT's available cash
reserves. Ultimately, AFT was forced to file for protection under Chapter 11 of
the United States Bankruptcy Code in October 1993. AFT emerged from bankruptcy
in October 1995. Since that time, AFT has embarked on product development and
sought financial and strategic partners.
History of AFT
Pre-Bankruptcy Events
In 1991, AFT engaged Joseph Taritero, formerly Chief Executive Officer
of Marvel Production ("Marvel") as its Chief Executive Officer. Mr. Taritero's
business plan was to raise additional capital to fund the purchase and
development of additional hardware and software for animation, to establish an
offshore animation studio for AFT so that it could operate competitively and to
enter into agreements for the production of animation products.
During 1991 and 1992, AFT incurred significant additional expenses in
acquiring the required equipment and technology for animation production. As a
result, it incurred significant losses on its animation operations. At the same
time, competitive factors and increasing reliance on fee colorization business
from Turner Entertainment led to reduced fees and narrowed profit margins in
colorization operations, the only area of AFT's business that had positive cash
flow. These problems were further exacerbated by concentrating AFT's resources
on computer animation and ink and paint. AFT was also doing small projects such
as music videos, animated shorts and interactive game projects.
At the end of 1992, Turner Entertainment announced its intention to
terminate its film colorization program. AFT was faced with declining revenues
and had depleted its cash reserves through the cost of, and losses incurred in
connection with, its animation and ink and paint operations. In addition, it had
failed to capitalize on its market dominance by broadening its customer base in
the colorization business. Accordingly, its back orders dropped significantly.
As a result of the foregoing, by the end of 1992, AFT was faced with the
depletion of its remaining cash within a few months. In response to this crisis,
the Board terminated Mr. Taritero and appointed Arthur Hartel as its President
and Chief Executive Officer. Mr. Hartel had previously served as the General
Counsel and Secretary to the Company. Mr. Hartel's principal objective was to
locate additional capital for AFT.
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Pre-Petition Investor. During early 1993, efforts were made to find a
major investor to inject new capital into AFT. An investor group led by minister
and broadcaster Pat Robertson entered into an agreement to purchase control of
AFT. In August 1993, the Robertson Group failed to close the transaction.
On September 28, 1993, AFT entered into an agreement with Gerald M.
Wetzler pursuant to which Mr. Wetzler became the majority stockholder through
the purchase of equity interests in AFT.
During the second half of fiscal 1993 and the first quarter of fiscal
year 1994, in order to lengthen the amount of time available for it to obtain
new business and to secure additional capital, AFT implemented a program of cost
reductions to go along with its program to extend the time period over which its
contractual film coloring would be produced. The principal areas in which AFT
reduced its costs were in the number of employees and in the amount of its
leased space. AFT's reduced film coloring schedule negatively impacted AFT's
earnings, principally due to its inability to cover such non-cash items as
depreciation; however, it extended AFT's available cash over a longer period of
time.
Mr. Wetzler's management team immediately commenced restructuring the
Company, suspending operations of the unprofitable animation and ink and paint
divisions. In October 1993, the employees of the Company's subsidiary's
principal production facility in Tijuana went on strike.
Comerica. During the quarter ended September 30, 1992, AFT refinanced
its bank debt with a California bank, which later became Comerica Bank -
California ("Comerica"). The refinancing replaced approximately $1,008,000 of
existing bank debt and provided AFT additional available lines of credit of
$400,000 in short term financing and up to $450,000 to finance 70% of the cost
of new equipment.
Because of the operating losses in fiscal 1993, AFT was in violation
of covenants of its lending agreement with Comerica relating to tangible net
worth, fixed charges, working capital, debt ratio and current ratio. During
this period AFT and Comerica entered into three forbearance agreements, the
last of which expired on September 30, 1993.
As a result of AFT's financial difficulties, Comerica required AFT to
reduce the outstanding principal balance on this loan by approximately $445,000,
from $1,068,000 as of June 30, 1993, to approximately $623,000 on October 8,
1993. On September 8, 1993 in order to obtain a forbearance agreement until
October 1, 1993, AFT granted the bank a security interest in AFT's patents and
copyrights as additional collateral. During early October 1993, Comerica refused
to allow AFT to utilize certain funds which AFT had believed would be available
to it. As a result of the bank's actions, AFT did not meet its obligations to
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third parties, including payroll for its Mexican subsidiary. On October 8, 1993,
Comerica advised AFT that it would file a motion in the Superior Court of the
State of California for the County of Los Angeles seeking the appointment of a
receiver for AFT and an order restricting its use of cash. AFT filed for relief
under the Bankruptcy Code on October 15, 1993.
AFT Bankruptcy
On October 15, 1993, AFT filed for relief under Chapter 11 of the
United States Bankruptcy Code. AFT has not generated any new film colorization
or animation service orders since the filing under Chapter 11.
From the filing of the bankruptcy to October 1995, AFT was funded
principally from equity investments by its principal shareholder, Mr. Wetzler,
and certain other individuals pursuant to a debtor in possession secured lending
arrangement pursuant to which Mr. Wetzler and Mr. Robert Bernhard, 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
$122,300 in July 1995.
Although AFT reduced its overhead and operating expenses significantly
since the filing of the Chapter 11 proceeding, the lack of capital and film
colorization contracts made it impossible for AFT to resume operations and to
generate sufficient revenues to cover its ongoing overhead and administrative
expenses. In order to preserve its resources, AFT reduced its overhead by laying
off substantially all of its employees and by reducing the amount of space it
leases in San Diego. In January 1995, AFT ceased its post-petition operations.
1995 Financing Events
H.J. Meyers Private Placement. On May 3, 1995, the Company entered into
an option agreement with H.J. Meyers & Co., Inc. ("Meyers") pursuant to which
the Company granted Meyers a ninety-day option (beginning May 30, 1995) to
purchase up to 51% of the Company's common stock, or 35,182,508 shares, for
$3,000,000 (the "Meyers Placement"). Upon approval of the Meyers Placement by
the Bankruptcy Court on May 30, 1995, Meyers paid the Company a nonrefundable
fee of $150,000 for the Meyers option. The Agreement required Meyers to pay the
Company $3,000,000 on the effective date of the Plan. Through a subsequent
amendment to that agreement, Meyers agreed to use its best efforts to increase
the proceeds of the offering to $4,000,000 which would result in net proceeds of
$3,480,000 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
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Act of 1933, as amended. As of October 31, 1995, the closing date for the sale,
Meyers sold subscriptions totalling $3,460,200 for the purchase of the Company's
stock. As of June 30, 1996, the net proceeds to the Company totaled $3,460,200,
including the conversion of a $300,000 bridge loan described below. In
consideration for, among other things, funding the $150,000 price of the Meyers
Placement, the Placement Agent, agreed to assign 14,345,854 shares of common
stock to L&R Holdings, Inc. and 10,545,854 shares of common stock to JCV Capital
Corp.
The Company also agreed to grant a one-time demand and piggy back
registration right in connection with the Meyers Placement. 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 file a registration
statement with the SEC covering the reoffer and resale of its shares. However,
if at any time prior to the exercise of the demand registration rights the
Company receives a letter of intent from an underwriter for a public equity
offering of at least $5,000,000 of the Company's securities, then the demand
registration right shall terminate. On March 28, 1995, the Company entered into
a letter of intent with H.J. 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 contemplated the negotiation and execution of formal agreements relating
to the proposed offering and provided, among other things, that the Company
would 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, will 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.
The new stockholders also have a right to register their stock in any
offering of the Company's stock. The amount of stock the new shareholders may
register and sell is subject to pro-rata reduction or elimination at the sole
discretion of the underwriter. The existence of these rights could adversely
impact the future price of the common stock or the ability of the Company to
raise additional equity capital.
Meyers Loan. On July 28, 1995, Meyers arranged for a $500,000 bridge
loan (the "Meyers Loan") to the Company bearing an interest of eight percent
(8%) per annum to fund certain obligations of the Company prior to the effective
date of the Plan. In addition to interest, the accredited investors received
common stock at the rate of one-half share for every dollar of bridge loan. On
the effective date of the Plan, $300,000 of the bridge loan was converted into
the Company's common stock and the remaining $200,000 was repaid. Proceeds from
the Meyers Loan were utilized as follows: (1) $250,000 to the outstanding
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principal balance due on the Comerica Bank loan; (2) $100,000 to pay the
remaining balance on the purchase agreement with the employees at the Company's
Mexican facility (See Properties, below); and (3) $150,000 for the Company's
general administrative expenses.
Plan of Reorganization. In July 1995, AFT proposed a plan of
reorganization to raise sufficient new capital to recommence operations.
Pursuant to the proposed plan, AFT contemplated raising up to $4 million in new
equity, including the Meyers Placement, described above. 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 approximately $3.4 million in
new equity capital.
Under the terms of the Plan, the following is a summary of the
treatment of each of the major classes of creditors and stockholders:
Estimated
Class of Amount of Distribution under the
Claims Claim Plan Status
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Class 1 $86,000 Cash payment in full on Unimpaired
Employee 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
Claims and reasonable legal fees
Class 4 $500,000 Cash payment plus interest Unimpaired
Secured on the effective date
Claims
Class 5 $122,000 $110,000 cash payment plus Impaired
DIP accrued interest on
Financing effective date and remainder
Claims in one year note
Class 6 $6,000 Cash payment in full on Unimpaired
Conven- effective date.
ience
Claims
Class 7 $1,650,000* Unsecured five year notes in Impaired
Unsecured full amount of allowed
Claims claim, with interest at 7%
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Class 8 N/A $10 cash on effective date. Impaired
Preferred Unexercised Series B and the
Stock Series C and D voting
Interest convertible interest will be
canceled
Class 9 N/A Retained, subject to Impaired
Common dilution
Stock
Interest
Class 10 N/A Cancelled Impaired
Other
Equity
Interests
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* 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
Item 3, Legal Proceedings.
In October 1995, AFT completed a private offering pursuant to which it
has received approximately $3.4 million of new capital in exchange for the
issuance of common stock representing approximately 54% of its total outstanding
common stock, including funds received in exchange for the Meyers Loan.
Since emerging from bankruptcy, the Company has actively pursued new
product development and opportunities, as well as strategic alliances and
partners.
In February 1996, the Company appointed Larry King to its Board of
Directors and engaged Mr. King as a consultant. In addition, the Company
appointed Steven Lefkowitz to the Company's Board of Directors in February 1996.
Subsequent Financing
In September 1996, the Company issued 1,333,334 shares of its Common
Stock for an aggregate cash purchase price of $200,000. The issuance of shares
was made in a private offering to accredited investors.
The Company is in discussions with other potential investors regarding
the purchase of equity securities or other investments in the Company; however,
there can be no assurance that any transaction can be negotiated or, if
negotiated, that such a transaction can be consummated.
Operations
Colorized Films. AFT creates color imaged films which are color
versions of motion pictures originally produced in black and white. The first
color version of a full length motion picture was completed by AFT in late
November 1987.
Prior to embarking on its attempt to enter into the animation business
in 1991, AFT was operating profitably from its colorization operations. As
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recently as its fiscal year ended June 30, 1990, it generated $3.1 million of
net income on revenues of $18.5 million. After a poor year in 1991 when revenues
dropped by almost 50% as compared to the prior year, AFT was again profitable in
fiscal 1992, generating $0.9 million of net income on revenues of $14.1 million.
During the year ended June 30, 1992, AFT completed color versions of 40 full
length motion pictures, 71 episodes of a one-half hour television series and 25
short cartoons. During the year ended June 30, 1993, AFT completed 43 full
length motion pictures. For the six month period ended December 31, 1993, AFT
completed seven COLORIMAGED motion pictures.
Traditionally, Turner has been the most active studio in colorizing its
black and white library, principally the old MGM library. During fiscal 1993,
AFT's agreement with Turner amounted to approximately 65% of the work completed
in the year ended June 30, 1993. Turner announced its intention to terminate its
film colorization program at the end of 1992. Subsequently, it has not ordered
any new films colorized by AFT beyond those which have been completed. AFT does
not know when, if ever, Turner will resume its colorization activities. However,
AFT believes that other studios and media companies, principally Universal,
Columbia, Fox, Warner Brothers, Viacom, Spelling Entertainment/Blockbuster and
Orion, all have significant black and white film and television libraries that
have not been colorized. AFT also believes that substantial foreign film and
television libraries exist which have not been colorized.
Under a typical contract, AFT may decline to colorize a particular film
if the elements (print or negative) of the film are not acceptable to AFT. Each
customer otherwise selects the films for which color versions are to be made,
has final approval on color selection, aesthetic approach, etc., and owns all
rights in the final product. AFT receives partial payments of its fees at
various points in the production process. Through June 30, 1995, approximately
$178,000 had been received in advance of delivery of two films in process, which
amount is treated as a Class 7 unsecured claim.
To AFT's knowledge, there is only one other company actively engaged in
the business of producing color versions of black and white films. CST
Entertainment, Inc. of Los Angeles, California has developed and is currently
producing colorized versions of black and white motion pictures and television
programming. CST has been in existence for a longer period of time than AFT. CST
has also developed a digital process for producing color versions of black and
white motion pictures.
Film Library. Prior to 1993, in addition to colorizing movies for other
owners, AFT created COLORIMAGED films for its own library from movies in the
public domain. By doing this, AFT acquired a new 75 year copyright in the
colorized version of the motion picture. Among the films owned in whole or in
part were "It's a Wonderful Life," "The Scarlet Pimpernel," and four
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Sherlock Holmes films, and others. As of June 30, 1996, AFT's library consisted
of the following eleven completed films:
"Terror By Night," "Dressed to Kill," "Woman in
green" and "Sherlock Holmes & the Secret Weapon"
starring Basil Rathbone; "Outpost in Morocco"
starring George Raft; "Gung Ho" starring Randolph
Scott; "Eternally Yours" starring David Niven; "The
Scarlet Pimpernel" starring Leslie Howard, Merle
Oberon and Raymond Massey; and "Black Dragons,"
"Scared To Death," and "White Zombie" starring Bela
Lugosi.
Previously, AFT has entered into agreements for the distribution of its
film library with various entities, most recently, Muller Media. AFT is
currently attempting to enter into new distribution arrangements for the
library, either with an appropriate distributor or, if appropriate, through a
strategic partner.
In the first quarter of fiscal 1993, AFT sold its joint venture
interest in five pictures (including "It's a Wonderful Life") it held in
agreement with Republic Pictures to Republic for $600,000. This price was in
excess of the carrying value of these films.
The four Sherlock Holmes films were distributed through Multimedia
Entertainment as part of a two program agreement. Each three-hour program
consisted of two Sherlock Holmes films. AFT's recognized revenues of $190,000
related to the showing of the first of these programs during fiscal 1989. In
fiscal 1990 AFT recognized $191,000 in revenues from broadcast of the second
film program.
AFT has received copyrights on the color versions of the films in its
library. Since June 1987, the Copyright Office of the Library of Congress has
been accepting registrations for copyright protection for a 75-year period on
certain colored versions of black and white motion pictures.
The distribution business is highly competitive. The most important
factors are price, quality, dependability, audience appeal of the product and
marketing skills. There are numerous domestic and foreign competitors, many of
whom have resources substantially greater than AFT. These competitors include
major motion picture studios and other production and distribution companies
which distribute their own programs and films as well as those produced by
others.
Animation. During the years ended June 30, 1989 and 1990, AFT engaged
in a research and development project to produce a computer generated, paperless
animation process and ink and paint (the process of putting color in animated
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films) which would be competitive with existing traditional and computer
animated systems with respect to both the perceived production values and costs.
During fiscal 1992, AFT completed a short theatrical cartoon for
Twentieth Century Fox. AFT also animated a 30-minute prime time television
special, a Ronald McDonald's Storybook Theater presentation titled "The Magic
Paintbrush," for Marvel Production and CBS Television. AFT has also used its
high resolution computer and film based ink, paint and compositing technology on
the full-length animated feature film "We're Back" for Universal Pictures. AFT's
computer process colors traditional animation cells and outputs the final
product to 35mm film. "We're Back" was completed for Amblin Entertainment during
September 1993 to meet a theatrical release date of November 1993.
Although AFT has developed significant technology in this area, it has
not been able to match its competitors' prices. Accordingly, AFT has produced
only few significant projects and has incurred significant losses in producing
certain of those projects. AFT's business plan upon reorganization focuses on
the core colorization business. While AFT has proven animation capabilities and
technology which may be utilized in the future, profit margins in animation are
reduced due to lower cost foreign animation competition. In addition,
technological advances in computer hardware and software have surpassed AFT's
technology. AFT also believes that substantial resources would be required in
order for it to compete effectively and to attain full-scale production. See
"Events Leading to Bankruptcy" above.
Mexican Subsidiary. The Company performed much of its colorization work
through its wholly-owned subsidiary, American Film Technologies de Mexico, S.A.,
a Mexican corporation. AFT loaned a significant amount of its colorization,
animation and ink and paint equipment to the subsidiary. Due to restraints on
the utilization of its cash imposed by Comerica Bank, the subsidiary missed its
payroll on October 8, 1993 and the subsidiary's employees began a work stoppage.
As a result of the strike, the Mexican employees filed a lien against AFT's
equipment located at the Mexico production facility. Since the equipment is
owned by AFT and the labor claim is against the subsidiary, AFT has challenged
the validity of the lien, and in August, 1994, a Mexican court ruled in favor of
the workers, validating their lien on the equipment. This equipment was
subsequently repurchased by the Company.
In December, 1994, the subsidiary negotiated a settlement of the
strike. The settlement called for a schedule of payments to its employees.
Subsequently, the subsidiary failed to make payments. In March, 1995, the
Mexican Labor Board allowed the employees to execute their lien and granted them
title to the equipment. Subsequently, AFT has organized a new Mexican
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subsidiary, Midtech de Mexico, S.A. ("Midtech"). It will seek to qualify
Midtech under the maquiladora program. Midtech negotiated a purchase agreement
with the owners of AFT's former equipment. The agreement requires a purchase
price of $215,000, which has been paid.
Current management believes a Mexican production facility is
advantageous to the strategic plan of the Company.
Success of the Company will depend upon the resumption of production in
Mexico. That will require reemployment of selected former employees of the
Company's former subsidiary. Since the Mexican operation was suspended in
October, 1993, most of the former employees have found other jobs. The success
of the Company will depend upon Midtech's ability to rehire certain former
employees. If Midtech is unable to do so, it will have to recruit and train a
new work force. That would delay the resumption of production and 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 recent devaluation of
the peso, there is no assurance its future employees or vendors will not demand
increases in wages or prices to offset the effect of devaluation.
Employees
At the present, the Company has three full-time employees and uses
certain former employees on an as-needed basis. The Company will add employees
as necessary in phases as it commences design work on films, then production of
colorized films and, finally, distribution and exploitation of the colorized
films.
Item 2. Properties.
AFT's COLORIMAGED film production, animation and ink and paint services
are currently located at 4105 Sorrento Valley Boulevard, San Diego, California
92121. AFT has approximately 8,400 square feet of leased office and production
space in San Diego. This property is currently leased for a four-year period
expiring October 31, 2000.
AFT's old Mexican subsidiary, AFT de Mexico, leased 15,800 square feet
in a facility located at Ave Corporativo #6J, Parque Industrial Int. Tijuana,
Mesa de Otay, Tijuana, B.C. 22390. AFT's new Mexican subsidiary, Midtech de
Mexico, has completed renegotiating a new lease pursuant to which it will lease
approximately 11,300 square feet at the same location for a three-year term
expiring June 30, 1998. This new lease incorporates repayment of unpaid rent
from a prior lease.
AFT recently leased office space in New York, New York located at 300
Park Avenue, New York, New York 10022. The lease has a term of one year,
commencing March 1, 1996, at a price of $2,160 per month.
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Item 3. Legal Proceedings.
Taritero Claim. In January, 1993, a suit was instituted against AFT by
Joseph M. Taritero 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 AFT executed a three year Employment
Agreement in December, 1991 and Mr. Taritero served as Chief Executive Officer
of AFT from that time until his resignation in November, 1992.
Mr. Taritero subsequently amended his complaint to add all individuals
who were AFT directors at the time Mr. Taritero resigned as a director.
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 claim. Mr.
Taritero also received a compensatory damages award of $892,000, and a punitive
damage award in the amount of $8,125,000 against the former directors and
officers of the Company.
AFT has settled 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.
Item 4. Submission of Matters to a Vote of Security Holders.
The Company has not submitted any matters to a vote of its security
holders during the fourth quarter of the fiscal year covered by this report.
-12-
<PAGE>
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters.
The Company's common stock, $.002 par value, trades on a limited basis
on the "pink sheets" under the symbol "AFTC." Stock price ranges for the past
five fiscal years are listed below:
Common Stock Price Ranges
Year High Low
---- ---- ---
1992 $4.75 $0.88
1993* $2.25 $0.50
1994 $0.60 $0.07
1995 $0.54 $0.04
1996 $0.60 $0.16
- ----------------
* The Company filed for protection under Chapter 11 of the Bankruptcy code on
October 16, 1993.
On September 24, 1996, the closing price of the Company's Common Stock
was $0.89 per share.
According to the records of the Company's transfer agent on August 28,
1996, the Company had 1,370 shareholders of record.
The Company has not declared dividends on its common stock since it
became a public company. The Company does not intend to pay dividends in the
foreseeable future.
In connection with the Company's Plan of Reorganization, 695,250 shares
of Voting Convertible Preferred Stock (the "Preferred Stock") held by Mr.
Wetzler were cancelled. The Preferred Stock was entitled to fifteen votes per
share on all matters generally voted on by the stockholders of the Company. The
Preferred Stock was convertible into common stock at varying prices ranging from
$8.00 per share to $180.00 per share. Mr. Wetzler relinquished his rights to the
Preferred Stock upon the effectiveness of the Plan.
Item 6. Selected Financial Data.
The tables below set forth certain selected consolidated financial data
of the Company for each year of the five-year period ended June 30, 1996 and
should be read in conjunction with "MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS," and with the financial
statements included elsewhere herein. All data for the period ended
-13-
<PAGE>
June 30, 1996 is reported on a fresh start basis of accounting in accordance
with the Statement of Position (SOP) 90-7, "Financial Reporting by Entities in
Reorganization Under the Bankruptcy Code," issued in November 1990 by the
Institute of Certified Public Accountants and includes activity from October 17,
1995 (the Effective Date) to June 30, 1996. Under this concept, all assets and
liabilities are restated to reflect the reorganization value of the reorganized
entity, which approximates its fair value at the date of reorganization. In
addition, the accumulated deficit of the Company was eliminated and its capital
structure was recast in conformity with the Plan. As such, the accompanying
financial data as of June 30, 1996 represents that of a successor company which,
in effect, is a new entity with assets, liabilities and a capital structure
having carrying values not comparable with prior periods and with no beginning
retained earnings or deficit.
Summary of Financial Information
(000's omitted except for per share numbers)
<TABLE>
<CAPTION>
Year Ended June 30,
------------------------------------------------------------------------------------------------
Income Statement Data 1996* 1995 1994 1993 1992
---- ---- ---- ---- ----
(Successor) (Predecessor) (Predecessor) (Predecessor) (Predecessor)
<S> <C> <C> <C> <C> <C>
Revenues -- $22 $2,369 $11,889 $14,089
Net Income (Loss) $(1,445) $(1,642) $(3,082) $(3,470) $902
Income (Loss) per share $ (0.02) $ (0.06) $(0.15) $(0.32) $0.08
</TABLE>
- -------------
*Includes the period from October 17, 1995 (the Effective Date) to June 30,
1996.
<TABLE>
<CAPTION>
June 30,
------------------------------------------------------------------------------------------------
Balance Sheet Data 1996 1995 1994 1993 1992
---- ---- ---- ---- ----
(Successor) (Predecessor) (Predecessor) (Predecessor) (Predecessor)
<S> <C> <C> <C> <C> <C>
Total Assets $7,245 $1,263 $2,111 $4,610 $7,565
Long-Term Debt, net of $1,634 -- -- -- $542
current portion
Total Liabilities $2,366 $4,349 $3,875 $3,932 $3,417
Stockholders' Equity
(Deficit) $4,879 $(3,086) $(1,765) $678 $4,148
</TABLE>
-14-
<PAGE>
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operation.
General
The operations of AFT for the fiscal years ended June 30, 1996
(Successor Company), 1995 (Predecessor Company) and 1994 (Predecessor Company)
were significantly affected by the reduction and, in fiscal year 1994, the
cessation of production operations of the Company. As a result, the financial
results of the Company for each of the three fiscal years addressed by this
report do not reflect the earnings capacity of the Company. The financial data
for the period ended June 30, 1996 reflects the adoption of Fresh Start
Accounting and includes the period from October 17, 1995 (the Effective Date) to
June 30, 1996. As such the financial data is considered that of a Successor
Company and is not comparable to prior periods.
In general, the Company's revenues from the production of COLORIMAGED
films is recognized only when a film is completed. However, the Company receives
payments from its customers prior to the completion of a project. During fiscal
1993, the Company's agreement with Turner was significant in that it amounted to
approximately 65% of the work completed in the year ended June 30, 1993. Turner
has not notified the Company that it will colorize additional films in the
foreseeable future.
The opinion of the Company's auditors, Ernst & Young, LLP, which
accompanies the Company's financial statements, contains an emphasis paragraph
as to the Company's ability to continue as a going concern.
Year ended June 30, 1996 (October 17, 1995 to June 30, 1996) compared
to June 30, 1995. AFT did not record any revenues for the period ended June 30,
1996 as compared to $22,000 recorded for the period ended June 30, 1995, which
were derived from distribution revenues.
The Company recorded no production costs for the period ended June 30,
1996 and June 30, 1995. The Company recorded depreciation and amortization
expenses of approximately $402,000 during the period ended June 30, 1996 and
$927,000 during the period ended June 30, 1995, reflecting the revaluation of
the assets due to the adoption of Fresh Start Reporting.
The Company recorded compensation and benefits for its administration
and officers of approximately $244,000 for the period ended June 30, 1996 as
compared to $103,000 for the period ended June 30, 1995. Selling, general and
administrative expenses increased to $730,000 during the period ended June 30,
1996 compared to $319,000 during the period ended June 30, 1995. The increases
are primarily due to the decreased level of activity in fiscal year 1995 when
all employees were laid off for six months and most financial activity ceased
during the same six months. Interest expense remained relatively constant at
approximately $70,000 in fiscal year 1996 as compared to $71,000 in fiscal year
1995.
-15-
<PAGE>
The Company recorded a net loss of approximately $1,445,000 during the
period ended June 30, 1996 or 2 cents per share, compared to a net loss of
approximately $1,642,000 during the period ended June 30, 1995, or 6 cents per
share. The reduction in net loss per share was due to an increase in the
outstanding shares used in this computation from 29,286,000 in fiscal year 1995
to 69,563,000 in fiscal year 1996.
Year ended June 30, 1995 compared to year ended June 30, 1994. AFT
recorded revenues of approximately $22,000 in the fiscal year into June 30,
1995, compared to approximately $2,369,000 in fiscal year 1994. All of the
Company's revenues in fiscal year 1995 were derived from distribution revenues,
which were decreased approximately $5,000 from distribution revenues of $27,515
in fiscal year 1994. The Company recorded no revenues from coloring fees or
animation revenues, compared to coloring fees of approximately $1,582,000 in
fiscal year 1994 and animation revenues of approximately $760,000 in 1994. This
drastic reduction reflects the decision of the Company to cease production
operations during fiscal year 1994.
The Company's costs and expenses during fiscal year 1995 also reflected
its significant reduction in production and administrative operations. The
Company recorded no production costs, exclusive of depreciation and
amortization, in fiscal year 1995, compared to production costs of approximately
$2,764,000 in fiscal year 1994. Similarly, the Company's depreciation and
amortization costs in fiscal year 1995 were approximately $927,000, compared to
approximately $1,292,000 in 1994, reflecting a reduction in equipment and other
amortizable assets.
The Company reduced its compensation and benefits for its
administration and officers to approximately $103,000 in fiscal year 1995,
compared to approximately $359,000 in fiscal year 1994. Selling, general and
administrative expenses were also reduced to $319,000 in fiscal year 1995 from
$694,000 in fiscal year 1994. Interest expense remained approximately constant
at approximately $71,000 in fiscal year 1995, compared to approximately $69,000
in fiscal year 1994, while reorganization fees also remained relatively
constant, at approximately $242,000 in fiscal year 1995 and approximately
$273,000 in fiscal year 1994.
The reduction in both income and expenses resulted in a net loss of
approximately $1,642,000 in fiscal year 1995 or 6 cents per share, compared to a
net loss of approximately $3,082,000 in 1994, or 15 cents per share. A reduction
in net loss per share was also impacted by an increase in outstanding shares
used in this computation to 29,286,000 in 1995 from 20,768,000 in 1994.
-16-
<PAGE>
Year ended June 30, 1994 compared to year ended June 30, 1993. The
operations of the Company for the fiscal year ended June 30, 1994 compared to
fiscal year ended June 30, 1993 were impacted by the Company's petition under
Chapter 11 of the Federal Bankruptcy Code in October, 1993, occurring in the
Company's 1994 fiscal year, and the decision early in the Company's 1994 fiscal
year to cease production operations. As a result of these events, the Company's
total revenues in the fiscal year 1994 were approximately $2,369,000, a
reduction of over $8.5 million from revenues of approximately $11,889,000 in
fiscal year 1993. All areas of the Company's operations were reduced
significantly, with coloring fees totaling approximately $1,582,000 in fiscal
year 1994, compared to approximately $8,948,000 in 1993, animation revenues of
approximately $760,000 in fiscal year 1994 compared to approximately $2,271,000
in fiscal year 1993; and distribution revenues of approximately $28,000 in
fiscal year 1994 compared to approximately $669,000 in fiscal year 1993.
At the same time, the Company's ongoing expenses were reduced
significantly, to approximately $5,451,000 in fiscal year 1994 compared to
approximately $15,359,000 in fiscal year 1993. Virtually all aspects of the
Company's costs and expenses were reduced, with production costs falling to
approximately $2,764,000 in fiscal year 1994 from $10,039,000 in fiscal year
1993, depreciation and amortization costs falling to $1,292,000 in fiscal year
1994 from $2,079,000 in fiscal year 1993, compensation and benefits for
administrative and officers falling to $359,000 in fiscal year 1994 from
$878,000 in fiscal year 1993; general administrative expenses falling to
$694,000 in fiscal year 1994 from $2,261,000 in fiscal year 1993. Interest
expense was also reduced, to approximately $69,000 in fiscal year 1994 from
$102,000 in fiscal year 1993. The Company recognized bankruptcy fees of $273,000
for professional fees and approximately $1,000 for U. S. Trustee fees, which
fees were not recorded in fiscal year 1993.
As a result of both reduced operations and expenses, the Company showed
a slightly lower loss of $3,082,000 in fiscal year 1994, or 15 cents per share,
from $3,470,000, or 32 cents per share, in fiscal year 1993. The reduction in
loss per share was impacted by the issuance of approximately 10 million shares
of common stock in fiscal year 1994.
Financial Condition and Liquidity. As of June 30, 1996, the Company had
$7,245,000 in total assets, compared to approximately $1,263,000 in total assets
at June 30, 1995. At the same time, the Company had total liabilities of
$2,366,000 at June 30, 1996, compared to $4,394,000 at June 30, 1995, resulting
in a total stockholders equity of $4,879,000 at June 30, 1996, compared to a
total stockholders deficit of $3,086,000 at June 30, 1995.
-17-
<PAGE>
On October 6, 1995, the Company's plan of reorganization, (the "Plan")
was approved by the bankruptcy court. The Plan became effective October 17,
1995. In connection with this Plan, the Company completed a private placement of
approximately $3.4 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 funds can be raised. As noted above, the Company
has entered into a Letter of Intent with Meyers for the purpose of raising
additional capital through a public offering.
On June 17, 1996, the Company also entered into an agreement with
Gerald Wetzler whereby Mr. Wetzler purchased, for a fee of $200,000 (which was
the deemed fair value), an option to acquire the Company's common stock, or in
the alternative, preferred stock convertible into common stock. The option gives
the right to purchase up to 20,000,000 shares of the Company's common stock at
an exercise price of $0.12 per share. If the Company does not, at the time of
exercise, have sufficient shares of common stock authorized to exercise the
option, Mr. Wetzler shall have the right to purchase 10,000,000 shares of the
Company's authorized but unissued convertible preferred stock at an exercise
price of $0.24 per share. The option expires on June 17, 1998.
As a result of the effectiveness of the Plan, as of the confirmation
date of the Plan, the Company engaged in "fresh start" accounting, which
reflects 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.
Item 8. Financial Statements and Supplementary Data.
Report of Independent Auditors.............................................F-1
Consolidated Balance Sheets................................................F-2
Consolidated Statements of Operations......................................F-3
Consolidated Statements of Stockholders' Equity (Deficit)..................F-4
Consolidated Statements of Cash Flows......................................F-5
Notes to Consolidated Financial Statements.................................F-6
-18-
<PAGE>
Item 9. Changes in and Disagreements With Accountants on
Accounting and Financial Disclosure.
None.
PART III
Item 10. Directors and Executive Officers of the Registrant.
The directors and executive officers of the Company are as follows:
Name Age Position with Company
---- --- ---------------------
Gerald M. Wetzler 57 Chairman, Director, Chief
Executive Officer
John Karl 41 Senior Vice President -
Finance, Treasurer
Edward Payne 49 Director
David Abraham 40 Director
Larry King 62 Director
Steven Lefkowitz 40 Director
GERALD M. WETZLER
Mr. Wetzler was elected Chairman of the Board of Directors of the
Company on October 26, 1993, following his purchase of the controlling interest
in the Company. Mr. Wetzler received a Juris Doctor degree from Columbia Law
School and a Master of Laws degree from Harvard Law School. He practiced law
with Cahill, Gordon & Reindel from 1962 to 1966. He worked in the corporate
finance department of Lehman Brothers for five years and served as General
Counsel for Beker Industries, Corp. , a New York Stock Exchange company. He has
been a private investor since 1975.
JOHN KARL
Mr. Karl, a Certified Public Accountant, joined the Company in May,
1989 and served as Controller until February 1993. From that date to November
1993, he was employed by Wilshire Technologies, Inc. Mr. Karl rejoined the
Company as its Principal Accounting Officer in November 1993 and became Vice
President - Finance and Treasurer on December 6, 1993. Prior to 1989, Mr. Karl
worked for four years for Ernst & Young.
-19-
<PAGE>
EDWARD A. PAYNE
Mr. Payne was elected a director of the Company in June 1995. He is
President of Edward Payne & Associates, a business strategy consulting firm
founded in 1987 serving domestic and international corporations. Prior to
forming Edward Payne & Associates, he was a Senior Partner with Management
Practice, Inc., a general management consulting firm. Previously, Mr. Payne had
been a partner in Woodside Associates, a venture capital/management consulting
firm and was a Senior Associate in Booz, Allen & Hamilton, an international
consulting firm.
DAVID ABRAHAM
Mr. Abraham became a Director of the Company in June 1995. Since 1986
he has been President of David Abraham & Company, a consulting firm providing
financial advisory services to media and communication companies. Prior to
forming David Abraham & Company, he was Vice President of operations and Finance
for Amsat Communications, a cable television multiple system operator.
LARRY KING
Mr. King was elected to the Company's Board of Directors in February
1996. 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. Among his many honors are Ace
Awards, a Peabody Award, and the Broadcaster of the Year from the International
Radio and Television Society.
STEVEN LEFKOWITZ
Mr. Lefkowitz was elected to the Company's Board of Directors in
February 1996. Mr. Lefkowitz is the founder and, for more than five years, has
been President of Wade Capital Corporation, a privately held investment firm
organized in 1990. Between 1985 and 1990, Mr. Lefkowitz was a member of the
Corporate Finance Department of Drexel, Burnham, Lambert Incorporated.
Compliance with Section 16(a) of the Exchange Act
Section 16(a) of the Securities Exchange Act of 1934 (the "Exchange
Act") requires the Company's officers and directors and the holders of more than
ten percent of the company's outstanding common stock to file reports of
ownership with the Securities and Exchange Commission and to furnish the Company
with copies of these reports. The Company believes that all such reports
required to be filed during or with respect to the fiscal year ended June 30,
1996 were made on a timely basis.
-20-
<PAGE>
Item 11. Executive Compensation.
The following table sets forth the compensation of the officers of the
Company.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Annual Compensation Long-term Compensation
- -----------------------------------------------------------------------------------------------------------------------------------
Awards
Name and Restricted Securities Payouts
Principal Other Annual Stock Underlying All Other
Position Year Salary ($) Bonus ($) Compensation ($) Award(s) ($) Options/SARs (#) LTIP Payouts ($) Compensation ($)
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Gerald M. 1996 -0- $125,000* -0- -0- $10,000,000 -0- -0-
Wetzler
Chairman,
Director,
Chief
Executive
Officer
1995 -0- -0- -0- -0- -0- -0- -0-
1994
John Karl 1996 $113,500 -0- -0- $20,500 -0- -0- -0-
Senior Vice
President,
Finance,
Treasurer
1995 -0- -0- -0- -0- -0- -0- -0-
1994 -0- -0- -0- -0- -0- -0- -0-
</TABLE>
- ---------------------
* Upon confirmation of the Plan in October 1995, Mr. Wetzler received a bonus of
$125,000, in accordance with the terms of the Reorganization Plan.
Stock Options
In accordance with the terms of the Plan, all prepetition stock options
were canceled. Subsequent to filing Chapter 11, the Board of Directors granted
options to purchase common stock totaling 15,700,000 shares as of June 30, 1996
and 2,450,000 shares as of June 30, 1995. The options contain an exercise price
per share in the range of $0.01 to $0.176. As of June 30, 1996 and 1995, vested
options total 5,200,000 and 2,450,000, respectively.
Included in the stock options at June 30, 1996 mentioned above are
options related to the employment agreement of Gerald Wetzler, the Company's
Chairman and CEO, which was entered into in January 1996. Under terms of the
employment agreement, in lieu of cash compensation, the Company granted an
option to purchase 10,000,000 shares of the Company's $0.002 par
-21-
<PAGE>
value common stock at an exercise price of $0.0628. The options become
exercisable on a cumulative basis each month at the rate of 1 2/3%. At June 30,
1996, 1,000,000 options were vested and exercisable. The options terminate on
January 1, 2006. Compensation expense of $120,000 was recognized in 1996 related
to these options.
On June 17, 1996, the Company also entered into an agreement with
Gerald Wetzler whereby Mr. Wetzler purchased, for a fee of $200,000 (which was
the deemed fair value), an option to acquire the Company's common stock, or in
the alternative, preferred stock convertible into common stock. The option gives
the right to purchase up to 20,000,000 shares of the Company's common stock at
an exercise price of $0.12 per share. If the Company does not, at the time of
exercise, have sufficient shares of common stock authorized to exercise the
option, Mr. Wetzler shall have the right to purchase 10,000,000 shares of the
Company's authorized but unissued convertible preferred stock at an exercise
price of $0.24 per share. The option expires on June 17, 1998.
Also included in the stock options at June 30, 1996 mentioned above are
options granted to Larry King, a member of the Board of Directors, pursuant to
an agreement dated February 9, 1996. Under the terms of the agreement, the
Company granted an option to purchase 2.0 million shares of the Company's $0.002
par value common stock at an exercise price of $0.01. The options vest and
become exercisable upon consummation of a financing arrangement within a
two-year period from the date of grant. At June 30, 1996, no options were vested
or exercisable. The options terminate on February 9, 1998. Upon consummation of
a financing arrangement in accordance with the terms of the agreement, the fair
value of the option at the grant date ($220,000) will be treated as a financing
cost.
The Company entered into agreements which became effective with the
approval of the Plan with two former employees whereby they will be issued
100,000 shares of common stock of the reorganized entity upon their return to
the Company, which had not occurred through June 30, 1996. If these employees do
not return to the Company, these options will lapse. These shares will vest in
25,000 share increments every six months commencing on the effective date. These
shares are not reflected as being issued in the consolidated balance sheet at
June 30, 1996.
The following table sets forth information with respect to stock
options granted to each of the executives named in the Summary Compensation
Table. The potential value of options granted depends entirely upon a long-term
increase in the market price of the Company's stock.
-22-
<PAGE>
OPTION/SAR GRANTS IN
LAST FISCAL YEAR
<TABLE>
<CAPTION>
Name Number of Percent of total Exercise or base Expiration Date
Securities options/SARs price ($/sh)
Underlying granted to
Option/SARs employees in fiscal
Granted (#) year
<S> <C> <C> <C> <C>
Gerald M. Wetzler 10,000,000 100% $0.0628 1/1/2006
</TABLE>
Stock Grants
As an inducement and compensation to certain key employees who were
first put on reduced work and compensation schedules and later put on
administrative leave, the Company agreed to issue common stock in lieu of these
key employees seeking other employment. The agreement, which became effective
with the approval of the Plan, called for an initial grant of 10,000 shares per
employee, plus an additional 2,000 shares per employee per week up to a maximum
of 36 weeks. These share vest immediately and will be issued only if the
employee is asked to return to the Company and does so. If the employee is not
asked to return to the Company, the shares will be subsequently issued to the
employee. As of June 30, 1996, 742,000 shares have been set aside, of which
164,000 of these shares were issued on the Effective Date of the Plan.
Compensation of Directors
During the pendency of the Company's bankruptcy proceedings, directors
of the Company were not separately compensated for service on the Board of
Directors. The Company has, prior to bankruptcy proceedings, and may in the
future, compensated directors for service on the Board of Directors, but has no
present plans to do so.
Upon the effectiveness of the Plan, AFT granted its outside directors,
Messrs. Payne and Abraham, options to purchase 50,000 shares of common stock at
$0.10 per share. The options vested immediately on grant and have a term of five
years.
In connection with his agreement to serve as a director of the Company,
Mr. King received options to purchase 1,000,000 shares of the Company's common
stock at an exercise price of $0.176 per share. The options have a term of ten
years from the date of issuance. One-third of the options vested on issuance,
and one-third of the options will vest on each of February 23, 1997 and February
23, 1998. In addition, all of the options will be exercisable if Mr. King dies
while a member of the Board of Directors, or if Mr. King delivers to the Company
at the time of his agreement to serve on the Board of Directors, a written
-23-
<PAGE>
agreement to serve no less than one year on the Board of Directors. On April 2,
1996, Mr. King delivered to the Company such an agreement. The number of options
granted and the exercise price of the options shall be adjusted to take into
account stock dividends, stock splits and other similar events.
The options are non-transferable.
Mr. King also has entered into an agreement with the Company entitling
him to purchase additional shares on the occurrence of certain events, and for
the right to register the sale of common stock of the Company held by him on
certain events and subject to certain limitations. See, "Certain Relationships
and Related Transactions," below.
Employment Contracts
Wetzler Employment Agreement. Effective January 1, 1996, the Company
entered into an employment agreement with Mr. Wetzler (the "Employment
Agreement") to serve as the Chief Executive Officer of the Company. The
Agreement provides for a term of five years, subject to termination as provided
in the Agreement, and provides that, as sole compensation under the Agreement,
Mr. Wetzler will receive an option to purchase 10,000,000 shares of the
Company's $.002 par value common stock, at an exercise price of twelve cents
less than the average trading price in the Company's common stock for the twenty
trading days prior to and including January 18, 1996, which has been calculated
as $.0628 per share, pursuant to the terms of a Stock Option Agreement
(described below). The Employment Agreement provides for no cash compensation,
but does entitle Mr. Wetzler to fringe benefits, including health insurance, on
terms which may be agreed to from time to time by the Company and Mr. Wetzler.
The Employment Agreement obligates the Company to indemnify Mr. Wetzler
from and against third party claims in accordance with the Company's Certificate
of Incorporation and By-Laws.
Mr. Wetzler is entitled to terminate the Employment Agreement on the
occurrence of certain events, including a breach by the Company or a change in
control of the Company, as defined in the Employment Agreement. If the
Employment Agreement is terminated because of a breach of the Employment
Agreement by the Company, Mr. Wetzler is entitled to receive, as liquidated
damages, a termination payment equal to $250,000, multiplied by the number of
years, including partial years, remaining on the original term of the Employment
Agreement. If the Employment Agreement is terminated in connection with a change
in control of the Company, Mr. Wetzler is entitled to receive an amount equal to
2.99 multiplied by the greater of (a) the average annual gross compensation
received by Mr. Wetzler from the Company from all sources during the five years
prior to and including the year in which the event giving rise to termination
occurs or (b) $250,000.
-24-
<PAGE>
Wetzler Stock Option Agreement. The Stock Option Agreement between Mr.
Wetzler and the Company, dated as of January 1, 1996 (the "Stock Option
Agreement"), provides for the grant of 10,000,000 shares of the Company's $.002
par value common stock at an exercise price of $.0628 per share, subject to
adjustment in accordance with the terms of the Stock Option Agreement. The
options granted pursuant to the Stock Option Agreement have a term ending on
January 1, 2006. One and two-thirds percent (12/3%) of the options granted vest
on January 31, 1996, with an additional one and two-thirds percent (12/3%)
vesting at the end of each calendar month throughout the fifth anniversary of
the term.
The exercise price of the options and the number of options are to be
adjusted for corporate events having an effect on the capitalization of the
Company. In addition, Mr. Wetzler may require the Company to redeem the options
on the occurrence of certain material events, including a reorganization,
reclassification or other similar capital transaction. The redemption price of
the options, in such an event, would be equal to the average of the daily
closing prices per share of common stock for the five consecutive business days
immediately preceding the event, multiplied by the number of shares of common
stock into which the option is exercisable at the time of redemption.
The Company has no other outstanding employment contracts with
any of the executive officers named in the table above.
Compensation Committee Interlocks and Insider Participation;
Board Compensation Committee Report on Executive Compensation
During the pendency of the Company's bankruptcy proceedings, because of
the extreme limitations on the Company's ability to pay compensation of any kind
to its executives, the Company did not maintain a compensation committee.
Item 12. Security Ownership of Certain Beneficial Owners and
Management.
As of June 30, 1996 the only class of voting securities issued and
outstanding was 69,567,310 shares of the Company's common stock.
The following sets forth information as of June 30, 1996, with respect
to the shares of the Company's common stock beneficially owned by (i) each
person who is known by the Company to beneficially own more than 5% of any class
of the Company's voting securities, (ii) the five highest paid officers
including the Chief Executive Officer, (iii) each director of the Company, and
(iv) all directors and officers as a group.
-25-
<PAGE>
Name and Address of Amount and Nature of Percent
beneficial owner beneficial ownership Class
------------------- -------------------- -------
Gerald M. Wetzler 33,656,333(1) 37.03%
(Chairman of the Board and
Chief Executive Officer)
JCV Capital Corp. 10,545,854 15.16%
P.O. Box 22719
Rochester, NY 14692
L&R Holdings, Inc. 13,145,854 18.90%
130 Shore Road
Port Washington, NY 11050
Larry King (Director) 1,000,000(2) 1.42%
John Karl 282,000(3) *
(Vice President-Finance)
Edward Payne (Director) 600,000(4) *
David Abraham (Director) 100,000(4)
Steven Lefkowitz (Director) 200,000(5) *
Officers and Directors as a 35,838,333 38.83%
Group
- ------------------------------
* Less than one percent.
(1) Includes 1,333,333 shares subject to currently exercisable options. Also
includes presently exercisable options to acquire 20,000,000 shares of
common stock. As of June 30, 1996, the Company had insufficient authorized
shares of common stock to effect the conversion of such option. See
"Executive Company Action--Stock Options" and "Certain Relationships and
Related Transactions."
(2) All shares subject to currently exercisable options.
(3) 200,000 shares subject to currently exercisable options.
(4) Includes 50,000 shares subject to currently exercisable options.
(5) Includes 100,000 shares subject to currently exercisable options.
-26-
<PAGE>
Item 13. Certain Relationships and Related Transactions.
Mr. King entered into a letter agreement and Transactional Stock Option
Agreement with the Company, each dated February 23, 1996, pursuant to which Mr.
King agreed to assist the Company in connection with the Company's efforts to
find a suitable strategic alliance or financing partner. As consideration for
locating such an investor or partner, Mr. King was granted options to acquire
2,000,000 shares of the Company's common stock at an exercise price of $0.01 per
share. The options terminate on February 19, 1999, unless the options have
vested prior to that date, in which case the options will terminate on February
23, 2001. The options shall vest solely upon the consummation of a transaction
involving a financing or strategic alliance meeting certain parameters. The
number of options granted and the exercise price of the options shall be
adjusted to take into account stock dividends, stock splits and other similar
events.
Concurrently with the granting of the options described above, Mr. King
and the Company entered into a Registration Undertaking dated February 23, 1996,
under which the Company granted to Mr. King the demand and "piggyback"
registration rights. Under the Registration Undertaking, Mr. King may make a
single written request to the Company to effect a registration or qualification
to permit the public transfer of the shares obtained by Mr. King through
exercise of the above-described options. Mr. King may not request a registration
of fewer than 500,000 shares, and subject to certain conditions contained in the
Agreement, the right to request registration will be effective commencing August
9, 1997 and ending on the earlier to occur of (i) August 9, 2002, (ii) the date
when Mr. King may no longer acquire at least 500,000 shares of common stock
through the exercise of options, (iii) the registrable securities can be sold
without registration under Rule 144(k) promulgated under the Securities Act of
1933, or (iv) the options are otherwise registered as part of a separate
registration of options, which registration meeting specified qualifications.
Mr. King also has "piggy-back" registration rights, entitling him to require
that, subject to certain limitations, the option shares be included in a
registration of securities by the Company.
On June 17, 1996, the Company also entered into an agreement with
Gerald Wetzler whereby Mr. Wetzler purchased, for a fee of $200,000 (which was
the deemed fair value), an option to acquire the Company's common stock, or in
the alternative, preferred stock convertible into common stock. The option gives
the right to purchase up to 20,000,000 shares of the Company's common stock at
an exercise price of $0.12 per share. If the Company does not, at the time of
exercise, have sufficient shares of common stock authorized to exercise the
option, Mr. Wetzler shall have the right to purchase 10,000,000 shares of the
Company's authorized but unissued convertible preferred stock at an exercise
price of $0.24 per share. The option expires on June 17, 1998.
-27-
<PAGE>
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on
Form 8-K.
a. Consolidated Financial Statements filed herewith as required
under Item 8 of this Annual Report on Form 10-K includes
consolidated balance sheets at June 30, 1996 and 1995 and
consolidated statements of operations, consolidated statements
of cash flows, and consolidated statements of stockholders'
equity for each of the three years ended June 30, 1996.
The consolidated financial statement schedules of American
Film Technologies, Inc. are omitted since they are neither
required, not applicable, or the relevant information is
otherwise included.
b. On or about June 20, 1996, Registrant filed a Current Report
on Form 8-K reporting the acquisition by Gerald M. Wetzler of
options to acquire 20,000,000 Shares of Registrant's Common
Stock or, if such shares are not available, shares of
newly-issued preferred stock convertible into shares of Common
Stock.
c. The following exhibits are included in this report or
incorporated by reference:
3. Certificate of Incorporation and By-laws, as
amended, are incorporated herein by reference to
Exhibits 3(a) and 3(b) to the registration
statement on Form S-1 filed by the Company on
July 20, 1987, File No. 33-15941. Amendment to
the Certificate of Incorporation dated March 15,
1990 is incorporated by reference to the
registration statement S-1 filed July 27, 1990,
File No. 33-36108. Amendment to the Certificate
of Incorporation dated April 15, 1993 is
incorporated by reference to the Quarterly
Report on Form 10-Q for the Quarter ended March
31, 1993. Certificate of Designations of Voting
Convertible Preferred stock dated September 30,
1993 is incorporated by reference to Exhibit 2
to the Current Report on Form 8-K dated
September 28, 1993.
10.1 Employment Agreements with Mr. Hartel and Mr.
Glaser, dated February 16, 1993 are incorporated
by reference to Exhibit 10.1 to the Company's
-28-
<PAGE>
Annual Report on Form 10-K for the Fiscal Year
ended June 30, 1993.
10.2 Stock Purchase Agreement with Gerald M. Wetzler
dated September 28, 1993 is incorporated by
reference to Exhibit 1 to the Current Report on
Form 8-K dated September 28, 1993.
10.3 Option Agreement dated May 3, 1995 between the
Company and H.J. Meyers & Co., Inc. is
incorporated by reference to Exhibit 10.3 to the
Company's Annual Report Form 10-K for the Fiscal
Year ended June 30, 1995.
10.4 Amendment No. 1 to Option Agreement between the
Company and H.J. Meyers & Co., Inc., dated July
11, 1995 is incorporated by reference to Exhibit
10.4 to the Company's Annual Report Form 10-K
for the Fiscal Year ended June 30, 1995.
10.5 Selling Agency Agreement between the Company and
H.J. Meyers & Co., Inc., dated as of July 12, 1995
is incorporated by reference to Exhibit 10.5 to
the Company's Annual Report Form 10-K for the
Fiscal Year ended June 30, 1995.
10.6 Amendment No. 2 to Selling Agency Agreement
between the Company and H.J. Meyers & Co., Inc.,
dated October 5, 1995 is incorporated by refer-
ence to Exhibit 10.6 to the Company's Annual
Report Form 10-K for the Fiscal Year ended
June 30, 1995.
10.7 Consulting Agreement, dated December 20, 1995,
between Adasar Group, Inc. and the Company is
incorporated by reference to Exhibit 10.7 to the
Company's Annual Report Form 10-K for the Fiscal
Year ended June 30, 1995.
10.8 Employment Agreement dated as of January 1, 1996
between the Company and Gerald M. Wetzler is
incorporated by reference to Exhibit 10.8 to the
Company's Annual Report Form 10-K for the Fiscal
Year ended June 30, 1995.
10.9 Stock Option Agreement dated as of January 1, 1996
between the Company and Gerald M. Wetzler is
incorporated by reference to Exhibit 10.9 to the
Company's Annual Report Form 10-K for the Fiscal
Year ended June 30, 1995.
10.10 Stock Option Agreement dated as of February 23,
1996, between the Company and Larry King is
incorporated by reference to Exhibit 10.10 to
-29-
<PAGE>
the Company's Annual Report Form 10-K for the
Fiscal Year ended June 30, 1995.
10.11 Letter Agreement dated as of February 23, 1996,
between the Company and Larry King is incorporated
by reference to Exhibit 10.11 to the Company's
Annual Report Form 10-K for the Fiscal Year ended
June 30, 1995.
10.11 Transactional Stock Option Agreement, dated as of
February 23, 1996, between the Company and Larry
King is incorporated by reference to Exhibit 10.11
to the Company's Annual Report Form 10-K for the
Fiscal Year ended June 30,
1995.
10.12 Registration Undertaking dated as of February 23,
1996 between the Company and Larry King is
incorporated by reference to Exhibit 10.12 to the
Company's Annual Report Form 10-K for the Fiscal
Year ended June 30, 1995.
10.13 Letter of Intent dated March 28, 1996 between
the Company and H.J. Meyers & Co., Inc. is
incorporated by reference to Exhibit 10.13 to
the Company's Annual Report Form 10-K for the
Fiscal Year ended June 30, 1995.
10.14 Lease for San Diego Office is incorporated by
reference to Exhibit 10.14 to the Company's
Annual Report Form 10-K for the Fiscal Year
ended June 30, 1995.
10.15 Lease for New York Office is incorporated by
reference to Exhibit 10.15 to the Company's
Annual Report Form 10-K for the Fiscal Year
ended June 30, 1995.
10.16 Option Agreement between the Company and
Gerald M. Wetzler dated June 17, 1996.
21 Subsidiaries of Registrant.
d. Schedules filed herewith include:
All schedules for which provision is made in Regulation S-X of the
Commission are not required under the related instructions or are not applicable
and therefore have been omitted.
-30-
<PAGE>
American Film Technologies, Inc.
Index to
Consolidated Financial Statements
Years ended June 30, 1996, 1995 and 1994
Contents
Report of Independent Auditors..............................................F-1
Consolidated Balance Sheets.................................................F-2
Consolidated Statements of Operations.......................................F-3
Consolidated Statements of Stockholders' Equity (Deficit)...................F-4
Consolidated Statements of Cash Flows.......................................F-5
Notes to Consolidated Financial Statements..................................F-6
<PAGE>
Report of Independent Auditors
The Board of Directors and Stockholders
American Film Technologies, Inc.
We have audited the accompanying consolidated balance sheets of American Film
Technologies, Inc. as of June 30, 1996 (Successor) and June 30, 1995
(Predecessor), and the related consolidated statements of operations,
stockholders' equity (deficit), and cash flows for the period from October 17,
1995 through June 30, 1996 (Successor), the period from July 1, 1995 through
October 16, 1995 (Predecessor), and the years ended June 30, 1995 (Predecessor)
and June 30, 1994 (Predecessor). These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
American Film Technologies, Inc. at June 30, 1996 and 1995, and the consolidated
results of its operations and its cash flows for each of the periods in the
three-year period ended June 30, 1996, in conformity with generally accepted
accounting principles.
The accompanying consolidated financial statements have been prepared assuming
that American Film Technologies, Inc. will continue as a going concern. As more
fully described in Note 1, the Company filed a voluntary petition for
reorganization under Chapter 11 of the United States Bankruptcy Code on October
15, 1993. The filing was the result of continuing defaults related to the
Company's loans, recurring operating losses and insufficient cash flows. As also
described in Note 1, the Company's Plan of Reorganization was approved by the
Bankruptcy Court on October 6, 1995; however, the Company believes it must raise
additional funds to finance its ongoing operations. These conditions raise
substantial doubt about the Company's ability to continue as a going concern.
The consolidated financial statements do not include any adjustments to reflect
the possible future effects on the recoverability and classification of assets
or the amounts and classification of liabilities that may result from this
uncertainty.
/s/ Ernst & Young LLP
---------------------
Ernst & Young LLP
San Diego, California
July 31, 1996
F-1
<PAGE>
American Film Technologies, Inc.
Consolidated Balance Sheets
<TABLE>
<CAPTION>
June 30,
1996 1995
--------------------------------
Successor Predecessor
<S> <C> <C>
Assets
Current assets:
Cash $ 338,669 $ 10,584
Restricted cash - 15,322
Accounts receivable - 23,692
Other current assets 106,254 99,714
---------- ----------
Total current assets 444,923 149,312
Equipment and software, net 444,459 1,039,804
Film library, net 337,500 73,842
Reorganization value in excess of identifiable assets, net 6,017,772 -
---------- ----------
$7,244,654 $1,262,958
========== ==========
Liabilities and stockholders' equity (deficit)
Current liabilities:
Notes payable:
Bank loans - in default $ - $ 598,385
Other loans 31,357 119,300
Accounts payable and accrued expenses 480,471 1,488,332
Accrued compensation 220,058 501,095
---------- ----------
Total current liabilities 731,886 2,707,112
Liabilities subject to compromise - 1,642,211
Notes payable 1,634,404 -
---------- ----------
Total liabilities 2,366,290 4,349,323
Stockholders' equity (deficit):
Preferred stock, $.001 par value: Authorized shares - 10,000,000 at June 30,
1996 and 1995: issued and outstanding shares none and 695,250 at June 30,
1996 and 1995, respectively - 695
Common stock, $.002 par value: Authorized shares - 90,000,000
at June 30, 1996 and 1995: issued and outstanding shares
69,567,310 and 30,410,802 at June 30, 1996 and 1995,
respectively 139,135 60,822
Capital in excess of par value 7,264,453 13,526,767
Deferred compensation (1,080,000) -
Accumulated deficit (1,445,224) (16,674,649)
---------- ----------
Total stockholders' equity (deficit) 4,878,364 (3,086,365)
---------- ----------
$7,244,654 $1,262,958
========== ==========
</TABLE>
See accompanying notes.
F-2
<PAGE>
<TABLE>
<CAPTION>
American Film Technologies, Inc.
Consolidated Statements of Operations
Successor Predecessor
---------------------- ---------------------------------------------------------
October 17,1995 July 1, 1995 to Year Ended
to October 16, June 30,
June 30, 1996 1995 1995 1994
---------------------- -------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues:
Coloring fees $ - $ - $ - $ 1,582,100
Animation revenues - - 759,696
Distribution revenues - 22,343 27,515
---------------------- -------------------------------------------------------------
- - 22,343 2,369,311
Costs and expenses:
Production costs - excluding
depreciation and amortization - - - 2,763,700
Depreciation and amortization 402,273 238,273 927,400 1,291,640
Compensation and benefits -
administrative and officers 243,835 263,829 102,554 358,748
Selling, general and
administrative 729,530 97,108 319,281 693,658
Interest expense, net 69,586 33,132 70,789 69,241
Reorganization items:
Fresh Start adjustments - (6,326,258) - -
Professional fees - 65,430 242,143 272,789
U.S. Trustee fees - 1,250 1,750 1,250
---------------------- -------------------------------------------------------------
1,445,224 (5,627,236) 1,663,917 5,451,026
---------------------- -------------------------------------------------------------
Net income (loss) $ (1,445,224) $ 5,627,236 $ (1,641,574) $ (3,081,715)
====================== =============================================================
Net income (loss) per share $ (0.02) $ 0.17 $ (0.06) $ (0.15)
====================== =============================================================
Shares used in per share
computation 69,563,192 32,232,802 29,285,802 20,767,573
====================== =============================================================
See accompanying notes.
F-3
</TABLE>
<PAGE>
American Film Technologies, Inc.
Consolidated Statements of Stockholders' Equity (Deficit)
<TABLE>
<CAPTION>
Preferred Stock Common Stock
----------------------------------------------------------------
Shares Shares
Issued and Preferred Issued and
Outstanding Stock Outstanding Amount
--------------------------------------------------------------------
<S> <C> <C> <C> <C>
Predecessor:
Balance at June 30, 1993 - $ - 10,773,302 $ 21,547
Net loss - - - -
Issuance of preferred stock 1,000,000 1,000 - -
Conversion of all Series A preferred stock
into common stock (240,000) (240) 12,000,000 24,000
Conversion of 64,750 shares of Series B
preferred stock into common stock (64,750) (65) 3,237,500 6,475
------------------------------------------------------------------
----
Balance at June 30, 1994 695,250 695 26,010,802 52,022
Net loss - - - -
Issuance of common stock at .04 per share - - 1,000,000 2,000
Issuance of common stock at .09 per share - - 1,000,000 2,000
Issuance of common stock at .01 per share - - 2,000,000 4,000
Issuance of common stock at .05 per share - - 400,000 800
Option related to H. J. Meyers refinancing
plan - - - -
------------------------------------------------------------------
Balance at June 30, 1995 695,250 695 30,410,802 60,822
Net income - July 1, 1995 to October 16, 1995 - - - -
Private placement - - 38,982,508 77,965
Issuance of stock to employees - - 164,000 328
Recapitalization of Company due to Fresh
Start Reporting under Reorganization Plan (695,250) (695) - -
------------------------------------------------------------------
Successor:
Balance at October 16, 1995 - - 69,557,310 139,115
Net loss - October 17, 1995 to June 30,1996 - - - -
Issuance of stock to pay vendor - - 10,000 20
Receipt of additional subscription money - - - -
Receipt from stock option fee - - - -
Deferred compensation related to issuance
of stock option - - - -
Amortization of deferred compensation - - - -
------------------------------------------------------------------
Balance at June 30, 1996 - $ - 69,567,310 $ 139,135
==================================================================
</TABLE>
<PAGE>
RESTUBBED TABLE
<TABLE>
<CAPTION>
Total
Capital In Stockholde
Excess of Deferred Accumulated rs Equity
Par Compensation Deficit (Deficit)
----------------------------------------------------------------
<S> <C> <C> <C> <C>
Predecessor:
Balance at June 30, 1993 $ 12,607,737 $ - $ (11,951,360) $ 677,924
Net loss - - (3,081,715) (3,081,715)
Issuance of preferred stock - - - 1,000
Conversion of all Series A preferred stock
into common stock 96,240 - - 120,000
Conversion of 64,750 shares of Series B
preferred stock into common stock 511,590 - - 518,000
----------------------------------------------------------------
Balance at June 30, 1994 13,215,567 - (15,033,075) (1,764,791)
Net loss - - (1,641,574) (1,641,574)
Issuance of common stock at .04 per share 38,000 - - 40,000
Issuance of common stock at .09 per share 88,000 - - 90,000
Issuance of common stock at .01 per share 16,000 - - 20,000
Issuance of common stock at .05 per share 19,200 - - 20,000
Option related to H. J. Meyers refinancing
plan 150,000 - - 150,000
----------------------------------------------------------------
Balance at June 30, 1995 13,526,767 - (16,674,649) (3,086,365)
Net income - July 1, 1995 to October 16, 1995 - - 5,627,236 5,627,236
Private placement 3,181,907 - - 3,259,872
Issuance of stock to employees - - - 328
Recapitalization of Company due to Fresh (1,046,721)
Start Reporting under Reorganization Plan - 11,047,413 (3)
----------------------------------------------------------------
Successor:
Balance at October 16, 1995 5,661,953 - - 5,801,068
Net loss - October 17, 1995 to June 30,1996 - - (1,445,224) (1,445,224)
Issuance of stock to pay vendor 2,500 - - 2,520
Receipt of additional subscription money 200,000 - - 200,000
Receipt from stock option fee 200,000 - - 200,000
Deferred compensation related to issuance
of stock option 1,200,000 (1,200,000) - -
Amortization of deferred compensation - 120,000 - 120,000
================================================================
Balance at June 30, 1996 $ 7,264,453 $ (1,080,000) $ (1,445,224) $ 4,878,364
================================================================
</TABLE>
See accompanying notes.
F-4
<PAGE>
American Film Technologies, Inc.
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Successor Predecessor
-------------------- -------------------------------------------------------
October 17, 1995 July 1, 1995 to Year Ended June 30,
to June 30, 1996 October 16, 1995 1995 1994
-------------------- -----------------------------------------------------------
<S> <C> <C> <C> <C.
Operating activities
Net income (loss) $ (1,445,224) $ 5,627,236 $ (1,641,574) $ (3,081,715)
Adjustments to reconcile net (loss) to
net cash used by operating
activities:
Depreciation and amortization 402,273 237,920 927,400 1,291,640
Amortization of deferred
compensation 120,000 - - -
Loss on disposal of assets in
Mexico - - 65,546 -
Fresh Start adjustments - (6,326,258) - -
Changes in assets and liabilities:
Restricted cash - 15,322 51,412 (66,734)
Accounts receivable - 23,692 (184) 509,622
Costs incurred on
uncompleted films - - - 456,275
Other current assets (69,761) 63,221 3,028 23,159
Accounts payable and accrued
expenses (988,064) (17,277) 652,576 (374,635)
Liabilities subject to
compromise - - 150,273 1,491,938
Deposits on uncompleted
films - - - (684,959)
Accrued compensation (509,318) 228,281 (333,173) (134,763)
----------------- -----------------------------------------------------------
Net cash used in operating activities (2,490,094) (147,863) (124,696) (570,172)
Investing activities
Purchase of equipment and software - - (215,000) (5,109)
Sale of furniture and fixtures - - - 2,506
----------------- -----------------------------------------------------------
Net cash used by investing activities - - (215,000) (2,603)
Financing activities
Principal payments on notes payable
- bank (348,385) (250,000) (25,000) (1,011,919)
Principal payments on notes payable
- equipment and other (431,232) - - -
Principal payments on long-term
debt (7,830) - - -
Proceeds from notes payable - bank - - - 567,261
Proceeds from notes payable - other 140,289 503,000 29,300 90,000
Proceeds from common stock
subscriptions 200,000 2,960,200 - -
Proceeds from sale of stock option 200,000 - - -
Proceeds from sale of preferred
stock - - - 1,000
Proceeds from conversion of
preferred stock into common stock - - - 638,000
Proceeds from sale of common stock - - 170,000 -
Proceeds from options on refinancing
plan - - 150,000 -
----------------- -----------------------------------------------------------
Net cash provided (used) by
financing activities (247,158) 3,213,200 324,300 284,342
----------------- -----------------------------------------------------------
Net increase (decrease) in cash (2,737,252) 3,065,337 (15,396) (288,433)
Cash at beginning of period 3,075,921 10,584 25,980 314,413
----------------- -----------------------------------------------------------
Cash at end of period $ 338,669 $ 3,075,921 $ 10,584 $ 25,980
================= ===========================================================
Supplemental disclosures of cash
flow information:
Cash paid during the period for
interest $ 158,319 $ - $ - $ 21,775
================= ===========================================================
Supplemental schedule of noncash
investing and financing
activities:
Issuance of common stock in
exchange for note payable $ - $ 300,000 $ - $ -
================= ===========================================================
Issuance of common stock to pay
vendor $ 2,520 $ - $ - $ -
================= ===========================================================
</TABLE>
See accompanying notes.
F-5
<PAGE>
American Film Technologies, Inc.
Notes to Consolidated Financial Statements
June 30, 1996
1. Reorganization Under Chapter 11
Bankruptcy Proceedings and Basis of Presentation
On October 15, 1993, 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. The filing of a Chapter 11 petition
operates as a stay of, among other actions, the commencement or continuation of
a judicial administrative or other action or proceeding against a debtor that
was or could have been initiated before the commencement of a Chapter 11 case or
the enforcement against the debtor or against the property of the estate or a
judgment obtained before the commencement of the case. Under Chapter 11,
substantially all prepetition liabilities of debtors are subject to settlement
under a plan of reorganization. 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
accompanying consolidated financial statements have been prepared in conformity
with principles of accounting applicable to a going concern. As discussed below
(see H. J. Meyers Agreement), the Company completed a private placement for
$3,460,200 and management intends to raise additional funds to finance its
future operations. While management believes it will be successful in its
efforts, there are no assurances whether sufficient financing or equity will be
available to fund the operations through June 30, 1997. 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.
Further, the accompanying consolidated financial statements do not reflect any
adjustments relating to settlement of the claims or any class of creditors that
are provided for in the Company's Plan of Reorganization. Any adjustments
relating to such settlements will be recorded at such time as the Bankruptcy
Court enters a final order relating to these settlements. See discussion under
"Fresh Start Accounting" below. The only effects of the bankruptcy proceedings
reflected in the accompanying financial statements as of June 30, 1995 and June
30, 1994 are that all accounts receivable which have been collected have been
deposited into a restricted escrow account and reflected as "Restricted Cash" on
the balance sheet, "Liabilities subject to compromise, which are impaired
F-6
<PAGE>
American Film Technologies, Inc.
Notes to Consolidated Financial Statements (continued)
1. Reorganization Under Chapter 11 (continued)
prepetition liabilities in accordance with the Plan and "Reorganization items"
(including professional fees) have been specifically identified on the
Consolidated Statement of Operations.
Plan of Reorganization
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
treatment of each of the major classes of creditors and stockholders:
<TABLE>
<CAPTION>
Estimated
Class of Claims Amount of
Claim Distribution under the Plan Status
- --------------------- ----------------- ----------------------------------------------- -----------------------
<S> <C> <C> <C>
Class 1 - $86,000 Cash payment in full on effective date. Unimpaired
Employee
Priority Claim
Class 2 - Priority $80,000 Cash payment on Distribution Date or, at Unimpaired
Claims the Company's discretion, over six years
plus interest
Class 3 - $623,000 Cash payment on the effective date plus Unimpaired
Comerica Claims interest and reasonable legal fees
Class 4 - Secured $500,000 Cash payment plus interest on the Unimpaired
Claims effective date
Class 5 - DIP $122,000 $110,000 cash payment plus accrued Impaired
Financing Claims interest on effective date and remainder in
one year note.
Class 6 - $6,000 Cash payment in full on effective date. Unimpaired
Convenience
Claims
</TABLE>
F-7
<PAGE>
American Film Technologies, Inc.
Notes to Consolidated Financial Statements (continued)
1. Reorganization Under Chapter 11 (continued)
<TABLE>
<CAPTION>
Estimated
Class of Claims Amount of
Claim Distribution under the Plan Status
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Class 7 - $1,650,000 Unsecured five year notes in full amount Impaired
Unsecured of allowed claim, with interest at 7%.
Claims
Class 8 - N/A $10 cash on effective date. Unexercised Impaired
Preferred Stock Series B and the Series C and D voting
Interest convertible preferred stock interest will be
canceled
Class 9 - N/A Retained, subject to dilution Impaired
Common Stock
Interest
Class 10 - Other N/A Cancelled Impaired
Equity Interests
</TABLE>
The above Class 7 Unsecured Claims does not include the Class 7 Claim of Joseph
Taritero which has been compromised pursuant to the provisions of a prior
Stipulation and Order (see Note 11).
A claim becomes impaired when the legal, contractual or equitable right of such
claim is altered, modified or changed by the proposed treatment under the Plan.
H. J. Meyers Agreement
On May 3, 1995, the Company executed an agreement with H. J. Meyers and Co.,
Inc. ("Meyers") pursuant to which Meyers purchased an exclusive 90 day option as
of May 30, 1995, to purchase common stock from the Company for $3,000,000 which
would provide Meyers up to 51% of the outstanding shares. Upon approval of the
agreement by 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
F-8
<PAGE>
American Film Technologies, Inc.
Notes to Consolidated Financial Statements (continued)
1. Reorganization Under Chapter 11 (continued)
pay the $3,000,000 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 $4,000,000 which would
result in net proceeds of $3,480,000 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. The net proceeds to the Company totaled $3,460,200,
including the conversion of the $300,000 bridge loan discussed below.
The Company agreed to grant a one-time demand and piggy back registration right.
For a period of two years from the Effective Date, the new stockholder can
demand (upon demand by at least 25% of the new stockholders) the Company file a
registration statement with the Securities and Exchange Commission (SEC)
covering the reoffer and resale of its shares (up to 38,982,508).
Notwithstanding the foregoing, if at any time prior to exercise of the demand
registration right the Company receives a Letter of Intent from an underwriter
for a public equity offering of at least $5,000,000 of the Company's securities,
then the demand registration right shall terminate. On March 28, 1995, the
Company entered into a letter of intent with H. J. 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, will 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.
The new stockholders also have a right to register their shares in any offering
of the Company stock (a "piggy-back"right). The amount of stock the new
stockholders may register and sell is subject to pro-rata reduction or
elimination at the sole discretion of the underwriter. The existence of these
rights could adversely impact the future price of the common stock or the
ability of the Company to raise additional equity capital.
F-9
<PAGE>
American Film Technologies, Inc.
Notes to Consolidated Financial Statements (continued)
Reorganization Under Chapter 11 (continued)
To enable the Company to fund certain obligations prior to the Effective Date of
the Plan, 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 Reporting
Under the provision of Statement of Position (SOP) 90-7, "Financial Reporting by
Entities in Reorganization under the Bankruptcy Code," issued in November 1990
by the American Institute of Certified Public Accountants, the Company has
prepared the accompanying consolidated pro forma balance sheet as of the
Effective Date, October 17, 1995 on the basis of "fresh start" reporting since
the reorganization value, as defined, was less than the total of all
post-petition liabilities and prepetition claims, and holders of voting shares
immediately before confirmation of the Plan received less than fifty percent of
the voting shares of the emerging entity. Under this concept, all assets and
liabilities are restated to reflect the reorganization value of the reorganized
entity, which approximates its fair value at the date of reorganization. In
addition, the accumulated deficit of the Company was eliminated and its capital
structure was recast in conformity with the Plan. As such, the accompanying
consolidated pro forma balance sheet as of October 17, 1995 represents that of a
successor company which, in effect, is a new entity with assets, liabilities and
a capital structure having carrying values not comparable with prior periods and
with no beginning retained earnings or deficit.
The Company estimated the fair value of the reorganized entity based on the
proceeds received from the private placement for 56% of its 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 fair value as estimated by management after
considering replacement cost or potential sales value. Long-term debt consists
of prepetition liabilities and will be paid out subject to the terms of the
Plan.
F-10
<PAGE>
American Film Technologies, Inc.
Notes to Consolidated Financial Statements (continued)
1. Reorganization Under Chapter 11 (continued)
The effect of the Plan on the Company's consolidated balance sheet at October
17, 1995 (the Effective Date) is as follows:
<TABLE>
<CAPTION>
(1)
H.J Meyers (2) Reorganized
Prior to Private Fresh Start Balance
Assets Reorganization Placement Adjustments Sheet
---------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Current assets:
Cash $ 115,721 $ 2,960,200 $ - $ 3,075,921
Restricted cash 2,960,200 (2,960,200) - -
Accounts receivable - - - -
Other current assets 36,493 - - 36,493
---------------------------------------------------------------------------------
Total current assets 3,112,414 - - 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 - 89,367 964,740
Reorganization value in excess of
identifiable assets - - 6,237,264 6,237,264
---------------------------------------------------------------------------------
Total assets $ 3,987,787 $ - $ 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 - - 1,642,234 1,642,234
Liabilities subject to compromise 1,642,211 - (1,642,211) -
Stockholders' equity (deficit):
Preferred stock 695 - (695) -
Common stock 60,822 78,293 - 139,115
Capital in excess of par value 13,526,767 3,181,907 (11,046,721) 5,661,953
Accumulated deficit (17,373,674) - 17,373,674 -
Subscription payable 2,960,200 (2,960,200) - -
---------------------------------------------------------------------------------
Total stockholders' equity(deficit) (825,190) 300,000 6,326,258 5,801,068
---------------------------------------------------------------------------------
$ 3,987,787 $ - $ 6,326,631 $ 10,314,418
=================================================================================
</TABLE>
F-11
<PAGE>
American Film Technologies, Inc.
Notes to Consolidated Financial Statements (continued)
1. Reorganization Under Chapter 11 (continued)
(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.
2. Summary of Significant Accounting Polices
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.
Consolidation
Through June 30, 1994, the consolidated financial statements include the
accounts of American Film Technologies de Mexico S.A. (AFT de Mexico) , the
Company's wholly-owned Mexican subsidiary. During fiscal 1995, AFT de Mexico was
dissolved and replaced by Midtech de Mexico, S.A. All intercompany transactions
have been eliminated in consolidation.
Revenue Recognition
The Company recognizes revenue from coloring films on the completed contract
method. It is the Company's experience that the production cycle for coloring a
film is less than ninety days. Financial position and results of operations do
not vary significantly from those which would result using the
percentage-of-completion method. If the production cycle exceeds 90 days, the
Company recognizes revenue using the percentage of completion method, as
measured by the percentage of costs incurred to total estimated costs. A feature
film is considered complete upon acceptance by the customer.
The Company recognizes revenue on its distribution business on the accrual
basis. Based on the ratings received, revenue projections received from the
distributors and experience, the Company estimates the revenue to be recognized
in each quarter.
F-12
<PAGE>
American Film Technologies, Inc.
Notes to Consolidated Financial Statements (continued)
2. Summary of Significant Accounting Polices (continued)
Depreciation and Amortization
Depreciation and amortization are provided over the estimated useful lives of
the underlying assets using primarily the straight line method over a five-year
period. The Film Library is being amortized using the straight line method over
a three year period. Leasehold improvements are amortized over the life of the
lease or the estimated useful life of the assets. Reorganization value in excess
of identifiable assets is being amortized over twenty years.
Production Costs - Excluding Depreciation and Amortization
Cost of sales includes direct salaries and related benefits of production
personnel and an allocation of overhead and materials costs used in the coloring
and animation processes.
Loss per Share
Loss per share has been calculated by dividing the net loss applicable to common
stock for the period by the weighted average number of common stock and common
stock equivalents outstanding for the periods indicated. For the years ended
June 30, 1996, 1995 and 1994, no exercise of stock equivalents was assumed
because such equivalents would be anti-dilutive.
Income Taxes
Income taxes have been provided for in accordance with Statement of Financial
Accounting Standards (SFAS) No. 109, "Accounting for Income Taxes". That
standard requires companies to account for deferred taxes using the asset and
liability method. Accordingly, deferred income taxes are provided to reflect
temporary differences between financial and tax reporting.
Stock Options
The Company has elected to follow Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" (APB 25) and related interpretations
in accounting for its employee stock options. Under APB 25, for those Company
employee stock options issued with an exercise price not less than the market
price of the underlying stock on the date of grant, no compensation expense is
recognized.
F-13
<PAGE>
American Film Technologies, Inc.
Notes to Consolidated Financial Statements (continued)
2. Summary of Significant Accounting Polices (continued)
Accounting Standard on Impairment of Long-Lived Assets
In March 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 121 "Accounting for Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed of", ("FAS 121") regarding the
impairment of long-lived assets, identifiable intangibles and goodwill related
to those assets. FAS 121 is effective for financial statements for fiscal years
beginning after December 31, 1995. The Company does not anticipate the adoption
of this standard will have a material effect on the Company's financial
position.
Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenue and expenses during the reporting period. Actual
results could differ from those estimates.
3. Film Library
The Company's film library, consists of 11 films held for distribution and or
sale, and are stated as follows:
June 30,
1996 1995
Successor Predecessor
---------------------------------------
Estimated fair value (Successor) $ 450,000 $ -
Cost (Predecessor) - 1,396,567
Less accumulated amortization 112,500 1,322,725
---------------------------------------
$ 337,500 $ 73,842
=======================================
The related amortization of the Film Library for the period ended June 30, 1996,
(October 17, 1996 to June 30, 1996), and years ended June 30, 1995 and 1994 was
$112,500, $74,000 and $74,000, respectively.
F-14
<PAGE>
American Film Technologies, Inc.
Notes to Consolidated Financial Statements (continued)
4. Equipment and Software
Equipment and software consists of the following:
June 30,
1996 1995
Successor Predecessor
-----------------------------------
Assets:
Equipment $ 430,000 $ 4,060,653
Software 20,000 821,449
Leasehold improvements 64,740 352,115
Furniture and fixtures - 57,161
-----------------------------------
$ 514,740 $ 5,291,378
-----------------------------------
Accumulated depreciation and amortization:
Equipment $ 64,500 $ 3,113,105
Software 3,000 799,787
Leasehold improvements 2,781 286,448
Furniture and fixtures - 52,234
-----------------------------------
70,281 4,251,574
-----------------------------------
$ 444,459 $ 1,039,804
===================================
Reorganization Value in Excess of Identifiable Assets
In accordance with Statement of Position (SOP) 90-7, upon the effective date,
$6,237,264 of the reorganization value of the Company was not attributable to
identifiable tangible or intangible assets and accordingly has been classified
as an intangible asset. While the estimated reorganization value of the Company
has been allocated to specific asset categories pursuant to Fresh Start
Reporting, the allocation may be 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. Reorganization value in excess of identifiable assets at
June 30, 1996 is as follows:
Reorganization value in excess of identifiable assets $ 6,237,264
Less accumulated amortization 219,492
-----------------
$ 6,017,772
=================
F-15
<PAGE>
American Film Technologies, Inc.
Notes to Consolidated Financial Statements (continued)
6. Notes Payable - Bank
Throughout fiscal year 1995 and 1994, the Company was not in compliance with the
debt covenants. The Company requested the bank to continue to extend the loans
while it sought alternative financing. The Company and the bank entered into
forbearance agreements to amend the provisions of the bank agreement on July 15,
1993, August 16, 1993 and September 8, 1993 whereby the bank agreed to waive the
rights and remedies that resulted from the debt covenant violations. However,
the Company did not achieve all of the forbearance terms and was accordingly in
default. All the outstanding bank debt was repaid in accordance with the terms
of the Plan of Reorganization.
7. Debtor in Possession Secured Financing
On May 22, 1994, the Company obtained from the Bankruptcy Court a final order
granting the motion for debtor-in-possession secured financing with certain
stockholders as the lenders which permitted the Company to borrow up to $150,000
with interest at 4% per annum. A total of $122,300 was borrowed, of which
$110,000 was repaid in accordance with the Plan of Reorganization and the
remaining balance of $12,300 has been classified as current in the accompanying
consolidated financial statements.
8. Liabilities Subject to Compromise and Long Term Debt
At June 30, 1995, liabilities are reported in accordance with SOP 90-7, which
requires that the balance sheet of an entity in Chapter 11 distinguish
prepetition liabilities subject to compromise from those that are not (such as
fully secured liabilities that are expected not to be compromised) and
postpetition liabilities. Liabilities that may be affected by the Plan should be
reported at the amounts expected to be allowed, even if they may be settled for
lesser amounts. As of the effective date, Liabilities subject to compromise was
reclassified as Long-term notes payable in accordance with the repayment terms
of the Plan of Reorganization.
Principal categories of Long-term debt at June 30, 1996 and Liabilities subject
to compromise at June 30, 1995 consist of the following:
June 30,
1996 1995
-----------------------------------
Successor Predecessor
Trade and other claims $ 1,360,363 $ 1,320,079
Accrued compensation 95,841 143,932
Billings on uncompleted contracts 178,200 178,200
-----------------------------------
$ 1,634,404 $ 1,642,211
===================================
F-16
<PAGE>
American Film Technologies, Inc.
Notes to Consolidated Financial Statements (continued)
8. Liabilities Subject to Compromise and Long Term Debt (continued)
The amounts at June 30, 1996 have been converted to notes payable under the Plan
and bear interest at 7%. Accrued interest payable at June 30, 1996 is $82,532.
Annual aggregate maturities of long-term debt for each of the five years
subsequent to June 30, 1996 are:
Years ending June 30,
1997 $ -
1998 408,601
1999 408,601
2000 408,601
2001 408,601
--------------
$1,634,404
==============
9. Operating Leases
The Company leases its facilities under the terms of three operating leases
expiring at various dates through November 2001. Future minimum rental
commitments under noncancelable operating leases as of June 30, 1996 are as
follows:
1997 $ 174,592
1998 158,592
1999 63,504
2000 63,504
2001 21,168
Thereafter -
---------------
$ 481,360
===============
Rent expense for 1996 (October 17, 1995 to June 30, 1996 and July 1, 1995 to
October 16, 1995), 1995 and 1994 was $98,093, $31,927, $278,449 and $359,884,
respectively.
10. Income Taxes
At June 30, 1996, the Company had net operating loss carryforwards of
approximately $16,046,000 for federal income tax purposes and approximately
$9,422,000 for state income tax purposes. These carryforwards will begin
expiring in 1998 unless previously utilized. In addition, the Company has
federal research and development credits of approximately $136,000 which expire
in 2004 and 2008. The use of these carryforwards in any one year will be limited
as a result of changes in ownership, as defined by Section 382 and 383 of the
F-17
<PAGE>
American Film Technologies, Inc.
Notes to Consolidated Financial Statements (continued)
10. Income Taxes (continued)
Internal Revenue Code, of the Company during fiscal 1993 and 1995. As a result
of these changes, the net operating losses incurred and tax credits generated
prior to the first date of change will be subject to an annual limitation of
approximately $6,500 and those generated prior to the second date of change will
be subject to an annual limitation of approximately $146,000. As a result of
these limitations, roughly $14,585,000 of federal and $7,965,000 of state net
operating losses, and $136,000 of credits cannot be utilized.
As indicated in Note 1, additional shares were issued on the Effective Date of
the Plan. The Company believes this will cause another ownership change. As a
result of this second ownership change, net operating losses incurred between
the two ownership change dates will be limited to approximately $169,000 per
year.
The significant components of the Company's deferred tax assets and liabilities
are as follows:
June 30,
1996 1995
--------------------------------
Depreciation $ - $ 958,000
Film library amortization 250,000 279,000
Reserves 105,000 370,000
Net operating loss carryforwards 584,000 1,110,000
Other 202,000 206,000
--------------------------------
Total deferred tax assets 1,141,000 2,923,000
Valuation allowance for deferred tax assets (1,141,000) (2,923,000)
--------------------------------
Net deferred tax asset $ - $ -
================================
11. Lawsuit Settlement
In January 1993, a suit was instituted against the Company by Joseph M. Taritero
in the Superior Court of the State of California for the County of Los Angeles
alleging breach of contract and fraud and seeking damages of $892,000. The
Company has settled 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 twelve
months from the Effective Date.
F-18
<PAGE>
American Film Technologies, Inc.
Notes to Consolidated Financial Statements (continued)
12. Stockholders' Equity (Deficit)
Stock Options
In accordance with the terms of the Plan, all prepetition stock options were
canceled. Subsequent to filing Chapter 11, the Board of Directors granted
options to purchase common stock totaling 15,700,000 shares as of June 30, 1996
and 2,450,000 shares as of June 30, 1995. The options contain an exercise price
per share in the range of $0.01 to $0.176. As of June 30, 1996 and 1995, vested
options total 5,200,000 and 2,450,000, respectively.
Included in the stock options at June 30, 1996 mentioned above are options
related to the employment agreement of Gerald Wetzler, the Company's Chairman
and CEO, which was entered into in January 1996. Under terms of the employment
agreement, in lieu of cash compensation, the Company granted an option to
purchase 10,000,000 shares of the Company's $0.002 par value common stock at an
exercise price of $0.0628. The options become exercisable on a cumulative basis
each month at the rate of 1 2/3%. At June 30, 1996, 1,000,000 options were
vested and exercisable. The options terminate on January 1, 2006. Compensation
expense of $120,000 was recognized in 1996 related to these options.
On June 17, 1996, the Company also entered into an agreement with Gerald Wetzler
whereby Mr. Wetzler purchased, for a fee of $200,000 (which was the deemed fair
value), an option to acquire the Company's common stock, or in the alternative,
preferred stock convertible into common stock. The option gives the right to
purchase up to 20,000,000 shares of the Company's common stock at an exercise
price of $0.12 per share. If the Company does not, at the time of exercise, have
sufficient shares of common stock authorized to exercise the option, Mr. Wetzler
shall have the right to purchase 10,000,000 shares of the Company's authorized
but unissued convertible preferred stock at an exercise price of $0.24 per
share. The option expires on June 17, 1998.
Also included in the stock options at June 30, 1996 mentioned above are options
granted to Larry King, a member of the Board of Directors, pursuant to an
agreement dated February 9, 1996. Under the terms of the agreement, the Company
granted an option to purchase 2.0 million shares of the Company's $0.002 par
value common stock at an exercise price of $0.01. The options vest and become
exercisable upon consummation of a financing arrangement within a two year
period from the date of grant. At June 30, 1996, no options were vested or
exercisable. The options terminate on February 9,1998. Upon consummation of a
financing arrangement in accordance with the terms of the agreement, the fair
value of the option at the grant date ($220,000) will be treated as a financing
cost.
F-19
<PAGE>
American Film Technologies, Inc.
Notes to Consolidated Financial Statements (continued)
12. Stockholders' Equity (Deficit) (continued)
Post-Petition Employee Stock Grants
As inducement and compensation to certain key employees, (who were first put on
reduced work and compensation schedules and later put on administrative leave),
the Company agreed to issue common stock as compensation to discourage these key
employees from seeking other employment. The agreement which became effective
with the approval of the Plan, called for an initial grant of 10,000 shares per
employee, plus an additional 2,000 shares per employee per week up to a maximum
of 36 weeks. These shares vested immediately and will be issued only if the
employee is asked to return to the Company and does so. If the employee is not
asked to return to the Company, the shares will be subsequently issued to the
employee. As of June 30, 1996, 742,000 shares have been set aside, of which
164,000 of these shares were issued as of the Effective Date of the Plan.
F-20
<PAGE>
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
American Film Technologies, Inc.
Signature Title Date
By /s/ GERALD M. WETZLER Director September 20, 1996
Gerald M. Wetzler Chief Execu-
tive Officer
-31-
<PAGE>
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Signature Title Date
By /s/ GERALD M. WETZLER Director September 20, 1996
Gerald M. Wetzler Chief Execu-
tive Officer
By /s/ EDWARD PAYNE Director September 20, 1996
Edward Payne
By /s/ DAVID ABRAHAM Director September 24, 1996
David Abraham
By /s/ LARRY KING Director September 26, 1996
Larry King
By /s/ STEVEN LEFKOWITZ Director September 24, 1996
Steven Lefkowitz
By /s/ JOHN KARL Senior September 30, 1996
John Karl Vice President,
Finance and
Treasurer
-32-
<PAGE>
CERTIFICATE OF THE VOTING POWERS, DESIGNATIONS,
PREFERENCES, RIGHTS, QUALIFICATIONS, LIMITATIONS
AND RESTRICTIONS OF THE SERIES A CONVERTIBLE
PREFERRED STOCK
OF
AMERICAN FILM TECHNOLOGIES, INC.
-------------------
Pursuant to Section 151 of the
General Corporation Law of
the State of Delaware
--------------------
American Film Technologies, Inc., a corporation organized and
existing under the General Corporation Law of the State of Delaware (the
"Corporation"), hereby supplies notice that the Corporation has previously
designated four classes of Preferred Stock, all of which have been cancelled and
therefore do not affect the voting powers, designations, preferences, rights,
qualifications, limitations and restrictions of the Preferred Stock designated
below. The Corporation, in accordance with the provisions of Section 151 of the
General Corporation Law of the State of Delaware, does hereby certify that the
following resolution was duly adopted by the Board of Directors of the
Corporation on June 17, 1996:
RESOLVED that pursuant to the authority expressly vested in
the Board of Directors of the Corporation by Article Fourth of the Certificate
of Incorporation of the Corporation, the Board of Directors hereby designates
10,000,000 shares of the Preferred Stock to be Series A Convertible Preferred
Stock and fixes and determines the voting rights, designations, preferences,
qualifications, privileges, limitations, options and other rights of the
10,000,000 shares of Series A Convertible Preferred Stock, par value $.001 per
share (the "Series A Preferred Stock"), of the Corporation as follows:
1. Designation. Ten Million (10,000,000) authorized shares of
Preferred Stock, $.001 par value, none of which has been issued, shall be issued
as Series A Preferred Stock.
2. Dividends and Distribution. The holders of the Series A
Preferred Stock shall be entitled to receive dividends with the Common Stock of
the Corporation; provided, that the holders of the Series A Preferred Stock
shall be entitled to receive dividends equal to twice the dividends paid on
corresponding shares of Common Stock.
3. Liquidation and Dissolution. In the event of any
liquidation, dissolution or winding up of the affairs of the Corporation,
whether voluntary or involuntary, then out of the
<PAGE>
assets of the Corporation available for distribution to the stockholders, before
any distribution or payment to the holders of the Common Stock, or any other
class or series of the Corporation's capital stock, the holders of the Series A
Preferred Stock shall be entitled to be paid a liquidation payment of $0.24 per
share. Upon the completion of the distributions required by this Paragraph 3,
the holders of Common Stock shall be entitled, by reason of their ownership
thereof, to receive any remaining assets and funds of the Corporation available
for distribution in connection with any such liquidation, dissolution or winding
up of the Corporation.
If the assets of the Corporation available for distribution to
its stockholders shall be insufficient to permit payment in full to the holders
of the Preferred Stock of the preferential sums which all such holders are
entitled to receive, then all of the assets available for distribution to the
stockholders shall be distributed among and paid to the holders of the Series A
Preferred Stock ratably in proportion to the respective preferential amounts
that would be payable per share if such assets were sufficient to permit payment
in full. The consolidation or merger of the Corporation with or into any other
corporation or corporations or the sale or transfer of all or substantially all
of the assets of the Corporations, shall not be deemed a liquidation,
dissolution or winding up of the affairs of the Corporation within the meaning
of this Paragraph 3.
4. Voting Rights. The holders of the Series A Preferred Stock
shall have the right to vote, together with the holders of all the outstanding
shares of Common Stock ("Common Stock") and not by classes, except as otherwise
provided herein or as required by the Delaware General Corporation Law, on all
matters on which holders of Common Stock shall have the right to vote. The
holders of shares of the Series A Preferred Stock shall possess twice the voting
power they would possess if their shares of the Series A Preferred Stock were
converted into shares of Common Stock.
5. Conversion.
(a) Each share of Series A Preferred Stock shall be
automatically converted into shares of Common Stock at the rate of two (2)
shares of the Corporation's Common Stock for each share of Series A Preferred
Stock at such time as sufficient shares of Common Stock exist for such
conversion, whether by amendment of the Corporation's Certificate of
Incorporation, by redemption or repurchase of outstanding shares, or otherwise.
(b) In the event that the Corporation shall at any
time subdivide its outstanding shares of Common Stock into a greater number of
shares (whether by stock dividend, stock split or otherwise) before the
completion of the automatic conversion of all of the shares of Series A
Preferred Stock, the conversion rate in effect hereunder to such subdivision
shall be proportionately reduced, and conversely, in case the outstanding shares
of Common Stock of the Corporation shall be combined into a smaller number of
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shares, the conversion rate in effect immediately prior to such combination
shall be proportionately increased.
(c) If any capital reorganization or reclassification
of the capital stock of the Corporation, or consolidation or merger of the
Corporation with another corporation, or the sale of all or substantially all of
its assets to another corporation shall be affected before the completion of the
automatic conversion of all of the shares of Series A Preferred Stock, then as a
condition of such reorganization, reclassification, consolidation, merger or
sale, lawful, equitable and adequate provision shall be made whereby the holders
of the Series A Preferred Stock shall thereafter have the right, upon conversion
hereunder, to receive upon the basis and upon the terms and conditions specified
herein and in lieu of the Common Stock theretofore receivable upon such
conversion, such shares of stock, securities or assets as may be issued or
payable with respect to or in exchange for a number of outstanding shares with
respect to or in exchange for a number of shares of Common Stock therefore
receivable upon such conversion had such reorganization, reclassification,
consolidation, merger or sale not taken place, and in any such case appropriate
provision shall be made with respect to the rights and interests of the holders
of the Series A Preferred Stock to the end that the provisions hereof
(including, without limitation, provisions for adjustment of the conversion rate
and of the number of shares issuable upon conversion of the Series A Preferred
Stock) shall thereafter be applicable, as nearly as may be, in relation to any
shares of stock, securities or assets thereafter deliverable upon the exercise
hereof.
(d) The Corporation agrees that in the event that
there exist insufficient shares of Common Stock into which shares of the Series
A Preferred Stock can be converted, the Corporation will give absolute
precedence to converting the shares of the Series A Preferred Stock designated
in this Certificate when sufficient shares of Common Stock become available.
Under all circumstances where shares of Series A Preferred Stock designated in
this certificate remain unconverted, all shares of Common Stock which are
authorized and not outstanding shall immediately be exchanged for shares of
Series A Preferred Stock designated by this Certificate, with no other use of
such shares of Common Stock until every share of Series A Preferred Stock
designated by this Certificate has been exchanged. The Corporation agrees that
all shares of Common Stock which are received upon the conversion of the Series
A Preferred Stock shall be free and clear of all restrictions on sale or
transfer and free and clear of all preemptive rights. The Corporation agrees
that each share of Common Stock issued upon conversion of Series A Preferred
Stock shall, at the time of such issuance, be deemed to be validly issued and
outstanding, fully paid and non-assessable.
(e) In each case of an adjustment or readjustment of
the conversion rate, the Corporation will furnish each holder of Series A
Preferred Stock with a certificate showing such adjustment
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or readjustment and stating in detail the facts upon which such adjustment or
readjustment is based.
(f) Upon the conversion as provided in this Paragraph
5, a holder of Series A Preferred Stock shall surrender the certificate(s)
representing the shares being converted to the Corporation at its principal
office. The holder shall also provide the name(s) (with (address(es)) in which
the certificate(s) for shares of Common Stock issuable upon such conversion
shall be issued. The certificate(s) for shares of Series A Preferred Stock
surrendered for conversion shall be accompanied by proper assignment thereof to
the Corporation or in blank. The date of surrender of the certificate shall be
the "Conversion Date." As promptly as practicable after the Conversion Date, the
Corporation shall issue and shall deliver to the holder of the shares of Series
A Preferred Stock being converted certificate(s) as he may request for the
number of shares of Common Stock issuable upon the conversion of such shares of
Series A Preferred Stock in accordance with the provisions of this Paragraph
(5). Such conversion shall be deemed to have been effected as of the close of
business on the Conversion Date, and at such time the rights of the holder as
holder of the converted shares of Series A Preferred Stock shall cease and the
person(s) in whose name(s) any certificate(s) for shares of Common Stock shall
be issuable upon such conversion shall be deemed to have become the holder(s) of
record of the shares of Common Stock represented thereby.
(h) The period for exercise of any rights of
conversion as set forth above shall be extended by the duration of any voluntary
or involuntary proceeding under any Federal or state bankruptcy, insolvency or
similar laws in which the Company or creditors of the Company may seek relief or
enforcement of their rights.
6. No Redemption Rights. No holder of any shares of the Series
A Preferred Stock shall be subject to redemption of the Series A Preferred
Stock.
7. No Preemptive Rights. No holder of any shares of the Series
A Preferred Stock shall have any preemptive right to purchase or subscribe to
any issue of the same or any other stock of the Corporation.
8. Restriction on Issuance of Senior Stock. As long as any
shares of Series A Preferred Stock remain outstanding, the Corporation shall
not, without the vote or written consent of holders of at least a majority of
the then outstanding shares of the Preferred Stock, authorize or issue, or
obligate itself to issue, any class of equity security which is senior or equal
in ranking to the Series A Preferred Stock.
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The Corporation shall not amend, alter or repeal any of the
provisions of its Certificate of Incorporation or bylaws so as to affect
adversely the powers, preferences, qualifications, limitations or rights of the
holders of the Series A Preferred Stock.
AMERICAN FILM TECHNOLOGIES, INC.
By _____________________________
CHAIRMAN OF THE BOARD OF
DIRECTORS
ATTEST:
By _________________________
SECRETARY
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===============================================================================
THE SECURITIES OFFERED BY THIS INSTRUMENT HAVE NOT BEEN REGISTERED OR QUALIFIED
UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR THE SECURITIES LAWS OF ANY
STATE, AND ANY SALE OF SUCH SECURITIES IS SUBJECT TO COMPLIANCE WITH, OR THE
AVAILABILITY OF EXEMPTIONS FROM COMPLIANCE WITH, THE REGISTRATION AND
QUALIFICATION REQUIREMENTS OF SUCH ACT AND ANY APPLICABLE STATE SECURITIES LAWS.
THIS INSTRUMENT DOES NOT CONSTITUTE AN OFFER OR SOLICITATION TO ANY PERSON IN
ANY JURISDICTION WHERE SUCH OFFER OR SOLICITATION MAY NOT LAWFULLY BE MADE.
TRANSFER OF THIS INSTRUMENT AND THE SECURITIES OFFERED HEREBY IS RESTRICTED AS
PROVIDED IN SECTIONS 11, 12 AND 14 BELOW.
===============================================================================
STOCK OPTION AGREEMENT
THIS STOCK OPTION AGREEMENT (the "Agreement") is entered into,
effective as of June 17, 1996 (the "Effective Date"), by and between American
Film Technologies, Inc., a Delaware corporation (the "Company"), and Gerald M.
Wetzler (the "Holder").
R E C I T A L S
WHEREAS, the Company wishes to obtain additional financing to
fund its operations through the sale of equity securities and the Holder desires
to invest in the Company; and
WHEREAS, the Company has agreed to sell to the Holder for Two
Hundred Thousand Dollars ($200,000) an Option to purchase either (i) 10,000,000
shares of the Company's Class A Convertible Preferred Stock (the "Preferred
Stock") at an exercise price of Twenty Four Cents ($.24) per share or (ii) after
the occurrence of the Conversion Events, hereinafter defined, Twenty Million
(20,000,000) shares of the Company's, $.002 par value per share common stock
(the "Common Stock") at an exercise price of Twelve Cents ($.12) per share;
WHEREAS, the Company and the Holder have agreed that the
Preferred Stock shall carry a liquidation preference of Twenty Four Cents ($.24)
per share and will have four votes per share on all matters which come before
the shareholders;
WHEREAS, all issued and outstanding shares of Preferred Stock
will automatically convert into Common Stock upon shareholder approval of an
increase in the authorized Common Stock to no less than 125,000,000 shares
(prior to the effect of any reverse stock split) and the filing of an Amendment
to the Company's Certificate of Incorporation with respect to the aforementioned
increase in number of authorized shares of Common Stock (the "Conversion
Events");
<PAGE>
NOW, THEREFORE, the Company and the Holder covenant and agree
as follows:
1. Grant of the Option. For the sum of Two Hundred Thousand
Dollars ($200,000)(the "Option Price"), the receipt of which is hereby
acknowledged, the Company hereby grants to the Holder the Option to acquire from
the Company, from time to time on the terms and conditions set forth herein, all
or any portion of an aggregate of either (a) Ten Million (10,000,000) shares of
Preferred Stock or (b) after the occurrence of the Conversion Events into Twenty
Million (20,000,000) shares of Common Stock (the Preferred Stock or the Common
Stock, as the case may be, hereinafter referred to as the "Option Shares").
2. Exercise Price. The exercise price of the Option Shares
shall be Twenty Four Cents ($.24) per share for the Preferred Stock and after
the occurrence of the Conversion Events Twelve Cents ($.12) per share for the
Common Stock (the "Exercise Price"). Each of the number of Option Shares into
which the Option Shares is exercisable and the Exercise Price of the Option
Shares is subject to adjustment as provided in Section 5 hereof.
3. Term of the Option. Subject to the provisions of Section 11
hereof, the Option will have a two year term (the "Option Term") commencing on
the date hereof and terminating as of 5:00 p.m. (New York time) on June 17, 1998
(the "Expiration Date").
4. Vesting; Exercise. Subject to the provisions of Section 11
hereof, during the Option Term the Holder shall have the right to exercise all
or any portion of the Option and receive the Option Shares represented thereby.
5. Adjustments Upon Changes in Capitalization or Other
Significant Events.
(a) In the event of any increase or decrease in the
number of the issued shares of Common Stock by reason of a stock dividend, stock
split, reverse stock split or consolidation or combination of shares and the
like at any time or from time to time throughout the term of the Option such
that the holders of outstanding Common Stock shall have had an adjustment made,
without payment therefor, in the number of shares of Common Stock owned by them
or shall have become entitled or required to have had an adjustment made in the
number of shares of Common Stock owned by them, without payment therefor, there
shall be a corresponding adjustment as to the number of shares of Common Stock
into which the Preferred Stock is convertible or upon the occurrence of the
Conversion Events, the Option is exercisable and to the Exercise Price, with the
result that the Holder's proportionate share of Common Stock which the Option
may convert into shall be maintained as before the occurrence of such event
without change in the aggregate exercise price applicable in the event the
Holder elected to exercise the Option in full (except
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<PAGE>
for any change in the aggregate exercise price resulting from rounding-off of
share quantities or prices).
(b) In the event the Company (or any other
corporation, the securities of which are receivable at the time upon exercise of
the Option) shall effect a plan of reorganization, recapitalization,
reclassification or other like capital transaction or shall merge or consolidate
with or into another corporation or shall convey all or substantially all of its
assets to another corporation (collectively, any such event being referred to as
a "Material Alteration Event") at any time or from time to time throughout the
term of the Option, then in each such case the Holder, upon any exercise of the
Option at any time after the consummation of such a Material Alteration Event
shall be entitled to receive (in lieu of the securities or other property to
which the Holder would have been entitled to receive upon exercise prior to such
consummation) the securities or other property to which the Holder would have
been entitled to have received upon consummation of the Material Alteration
Event without adjustment to the aggregate exercise price applicable in the event
the Holder elected to exercise the Option in full (except for any change in the
aggregate exercise price resulting from rounding-off of share quantities or
prices), and all subject to further adjustment as provided in Section 5(a)
hereof; provided that prior to consummating any Material Alteration Event, the
Company shall have complied with its obligations in Section 6 hereof.
6. Obligation to Redeem Option.
(a) In the event that the Company intends to
consummate a Material Alteration Event at any time during the term of the
Option, in addition to any rights granted to the holder by Section 5(b) hereof,
it shall provide the Holder with written notice thereof no less than thirty (30)
days prior to the consummation thereof. The Holder shall thereafter have the
right, exercisable at any time prior to the third (3rd) business day immediately
preceding the consummation of the Material Alteration Event, to obligate the
Company to redeem the Option in its entirety (but not only a portion thereof) at
a price equivalent to (a) the average of the daily closing prices per share of
Common Stock for the five (5) consecutive business days immediately preceding
the Material Alteration Event on the principal national securities exchange on
which the Common Stock is listed or admitted to trading or, if not so listed or
admitted, on the National Market System, as reported by NASDAQ, or if not
admitted to trading thereon, the average of the closing bid and listed prices in
the over-the-counter market as reported by NASDAQ less (b) the Exercise Price at
such time (as adjusted in accordance with Section 5 hereof), such resulting
amount multiplied by the aggregate number of shares of Common Stock into which
the Option is exercisable (or would be exercisable upon the occurrence of the
Conversion Events) at the time of such redemption.
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<PAGE>
(b) In the event that the Holder elects to have the
Option redeemed, it shall surrender the Option along with its notice of the
election to redeem the Option pursuant to 6(a) above. The Company shall pay to
Holder the payment calculated in Section 6(a) hereof, which payment shall be
made within five (5) days after the consummation of the Material Alteration
Event.
(c) If the Company fails to notify the Holder of the
intended consummation of a Material Alteration Event, the Holder's right to
obligate the Company to redeem the Option shall remain in full force and effect
until the earlier of (i) the tenth (10th) business day following the giving of
proper notice by the Company to the Holder as to the Material Alteration Event
or (ii) the expiration of the Option, in either case at the same price as would
have been applicable to such redemption if such notice had been duly delivered.
(d) If the Holder elects to have the Option redeemed
and if the Material Alteration Event is not consummated the Holder's redemption
of the Option shall be nullified, the Option shall be promptly returned to the
Holder and the Holder will continue to have all rights with respect to the
Option as set forth in this Agreement.
(e) If, as a result of any Material Alteration Event,
the Company ceases to exist, the Company shall have caused any successor
corporation thereto to assume the Option and the obligations under this
Agreement, and such successor corporation shall be bound by the provisions
hereunder, including, without limitation, this Section 6.
7. Exercise of the Option. To exercise all or any portion of
the Option, the Holder must do the following:
(a) deliver to the Company a written notice, in the
form of the attached Exhibit A, specifying the number of shares of Preferred
Stock or Common Stock for which the Option is being exercised;
(b) surrender the Agreement to the Company upon
complete exercise of the Option;
(c) tender payment, either in cash or in such other
manner as the Board of Directors of the Company (the "Board"), in its sole
discretion, shall approve, of the aggregate Exercise Price for the Option Shares
for which the Option is being exercised;
(d) pay, or make arrangements satisfactory to the
Board for payment to the Company of, all federal, state and local taxes, if any,
required to be withheld by the Company in connection with the exercise of the
Option or the relevant portion thereof; and
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<PAGE>
(e) execute and deliver to the Company any other
documents required from time to time by the Company in order to promote
compliance with the Securities Act of 1933, as amended (the "1933 Act"),
applicable state securities laws, or any other applicable law, rule or
regulation.
8. Delivery of Share Certificate. As soon as practicable after
the Option or any portion thereof has been duly exercised, the Company will
deliver to the Holder a certificate representing the Option Share for which the
Option was exercised. Unless the Option has expired or been exercised in full,
the Company and the Holder agree that the Company may affix to this Agreement an
appropriate notation indicating the number and kind of Option Shares for which
the Option was exercised and return this Agreement to the Holder. If any law or
regulation of the Securities and Exchange Commission (the "SEC") or of any other
federal or state governmental body having jurisdiction shall require the Company
or the Holder to take any action prior to issuance to the Holder of the Option
Shares specified in the written notice of exercise, or if any listing agreement
between the Company and any national securities exchange requires such shares to
be listed prior to issuance, the date for the delivery of such shares shall be
adjourned until the completion of such action and/or such listing.
9. Fractional Shares. In no event shall the Company be
required to issue fractional shares upon the exercise of any portion of the
Option.
10. Shareholders Approval. The Company agrees to recommend to
its shareholders an increase in the amount of its authorized share of Common
Stock to no less than 125,000,000 shares (before any reverse stock split) at its
1995 Annual Meeting of Shareholders (the "Annual Meeting"). The Company further
agrees to take such steps as may be necessary, including but not limited to the
filing of applicable proxy materials with the SEC and the mailing of such proxy
materials to its shareholders, in order to hold the Annual Meeting on or before
August 31, 1996. In the event the Company obtains the approval of the
shareholders for the increase in its authorized shares of Common Stock at the
Annual Meeting, it agrees to take such steps as may be necessary to consummate
all additional Conversion Events as soon thereafter as possible.
11. Piggy-back Registration Rights; Indemnification.
(a) After the occurrence of the Conversion Events,
subject to Section 11(i) below, and so long as Holder holds or has the right to
acquire any Option Share, in the event the Company decides to file a
registration statement ("Registration Statement") under the 1933 Act on SEC
Forms S-1 or S-3 or any other applicable form that covers the offer and sale by
the Company or any holders of Common Stock any of the Company's securities for
money (a "Company Registration"), the
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<PAGE>
Company shall give written notice (a "Registration Notice") thereof to the
Holder. If the Company receives a written request to include in the Company
Registration all or a portion of the Holder's shares within thirty (30) days
after a Registration Notice is given, the Company shall include such shares in
the Company Registration. If the Company Registration is to cover an
underwritten offering, such shares shall be included in the underwriting on the
same terms and conditions as the securities otherwise being sold through the
underwriters.
(b) If in the good faith judgment of the managing
underwriter of an offering related to a Company Registration, to include any or
all of the shares requested to be registered by the Holder would interfere with
the successful marketing of the Company's securities or any other holder's
securities, if such Company Registration of such holder's securities is pursuant
to a demand registration right, then the amount of shares to be included in such
public offering shall be reduced to the amount allowed by the managing
underwriter in its good faith judgment. If such reduction occurs it shall be on
a pro rata basis with all other selling stockholders in such Company
registration.
(c) The Company may decline to file a Registration
Statement after giving a Registration Notice, or withdraw a Registration
Statement after filing and after a Registration Notice, but prior to the
effectiveness thereof; provided (i) that the Company shall promptly notify the
Holder, in writing, of any such action; and (ii) that the Company shall bear all
expenses incurred by the Holder in connection with such withdrawn Registration
Statement.
(d) All expenses incident to the Company's
performance of or compliance with this Agreement including, without limitation
(i) all registration and filing fees, all fees and expenses associated with
filings required to be made with the NASD, as may be required by rules and
regulations of the NASD (other than fees required in excess of fees which would
otherwise pertain in the event that the Holder is a member of the NASD), fees
and expenses of compliance with securities or blue sky laws (including fees and
disbursements of counsel in connection with blue sky qualifications for the
Holder's shares), rating agency fees, printing expenses (including expenses of
printing certificates for the Holder's shares in a form eligible for deposit
with the Depository Trust Company and of printing prospectuses if the printing
of prospectuses is reasonably requested by the holders of a Majority Amount),
messenger and delivery expenses, (ii) internal expenses (including, without
limitation, all salaries and expenses of their officers and employees performing
legal or accounting duties), securities acts liability insurance (if the Company
elects to obtain such insurance), (iii) fees and expenses of counsel for the
Company and its independent certified public accountants (including the expenses
of any special audit or "cold comfort" letters required by or incident to such
performance), (iv) fees and expenses of
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<PAGE>
any special experts retained by the Company in connection with such
registration, and (v) fees and expenses of other persons retained by the
Company, (all such expenses being herein called "Registration Expenses"), will
be borne by the Company, provided that in no event shall Registration Expenses
include (A) any underwriting discounts or commissions attributable to the sale
of the Holder's shares, (B) any fees and expenses of counsel for the Holder if
such counsel is different than counsel for the Company or any accountant or
other professional engaged by the Holder, or (C) any direct out-of-pocket
expenses of the Holder.
In the event that following effectiveness of a
Company Registration, pursuant to which the Holder is a selling stockholder, it
becomes necessary for the Company to prepare and file a supplemental prospectus
or amended prospectus in order to maintain the effectiveness of such
registration statement during the period referred to in Section 9(e)(ii) hereof,
the Company shall pay all printing costs associated with the printing of such
supplemental or amended prospectus to be distributed in connection with sales of
securities pursuant thereto.
(e) If and whenever the Company elects to file a
Registration Statement and is hereby required in connection therewith to
register the Holder's shares, the Company will:
(i) Use its best efforts to effect such
registration to permit the sale of such shares in accordance with the intended
plan of distribution thereof, and pursuant thereto the Company will take the
actions set forth below as expeditiously as possible; provided, however, that in
all cases the Holder shall use its best efforts to cooperate with and assist the
Company in such registration.
(ii) Prepare and file with the SEC as soon
as practicable a Registration Statement with respect to such shares and use its
best efforts to cause such Registration Statement to become effective and remain
effective until the shares covered by such Registration Statement have been
sold;
(iii) Prepare and file with the SEC such
amendments and post-effective amendments to the Registration Statement, and such
supplements to the prospectus, as may be requested by the Holder or any
underwriter or as may be required by the rules, regulations or instructions
applicable to the registration form used by the Company or by the 1933 Act or
rules and regulations thereunder to keep the Registration Statement effective
until all shares covered by such Registration Statement are sold in accordance
with the intended plan of distribution set forth in such Registration Statement
or supplement to the prospectus.
(iv) With respect to the following, promptly
notify the Holder and the managing underwriter, if any, and (if requested by any
such person) confirm such notice in writing:
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A. when any prospectus or any
supplement or post-effective amendment has been filed, and, with respect to the
Registration Statement or any post-effective amendment, when the same has become
effective;
B. of any request by the SEC for
amendments or supplements to the Registration Statement or the prospectus or for
additional information;
C. of the issuance by the SEC of any
stop order suspending the effectiveness of the Registration Statement or the
initiation of any proceedings for that purpose;
D. of the receipt by the Company of
any notification with respect to the suspension of the qualification of the
shares for sale in any jurisdiction or the initiation or threatening of any
proceeding for such purpose; and
E. of the existence of any fact
which results in the Registration Statement, any prospectus or any document
incorporated therein by reference containing a misstatement.
(v) Make every reasonable effort to obtain
the withdrawal of any order suspending the effectiveness of the Registration
Statement at the earliest possible time.
(vi) If requested by the managing
underwriter, if any, immediately incorporate in a supplement or post-effective
amendment such information as the managing underwriter agrees should be included
therein relating to the sale of the shares including, without limitation,
information with respect to the number of shares being sold to any underwriters,
the purchase price being paid therefor by such underwriters and with respect to
any other terms of the underwritten offering of the shares to be sold in such
offering; and make all required filings of such supplement or post-effective
amendment as soon as notified of the matters to be incorporated in such
supplement or post-effective amendment.
(vii) Furnish to the Holder and the managing
underwriter, if any, without charge, at least one signed copy of the
Registration Statement and any post-effective amendments thereto, including
financial statements and schedules, all documents incorporated therein by
reference and all exhibits (including those incorporated by reference).
(viii) Deliver to the Holder and any
underwriters, without charge, as many copies of each prospectus (and each
preliminary prospectus) as such persons may reasonably request (the Company
hereby consenting to the use of each such prospectus (or preliminary prospectus)
by the Holder and any underwriters in connection with the offering and sale of
the shares covered by such prospectus (or preliminary prospectus)).
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(ix) Prior to any public offering of shares,
register or qualify or cooperate with any underwriters and their respective
counsel in connection with the registration or qualification of such shares for
offer and sale under the securities or blue sky laws of such jurisdictions and
do anything else necessary or advisable to enable the disposition of the shares
covered by the Registration Statement in such jurisdictions; provided, however,
that the Company shall not be required to qualify generally to do business in
any jurisdiction where it is not then so qualified or to take any action which
would subject it to general service of process in any such jurisdiction where it
is not then so subject.
(x) Cooperate with the managing underwriter,
if any, to facilitate the timely preparation and delivery of certificates that
do not bear any restrictive legends and that represent the shares to be sold and
cause such shares to be in such denominations and registered in such names as
the managing underwriter may request at least three business days prior to any
sale of shares to the underwriters.
(xi) Use its best efforts to cause the
shares covered by the Registration Statement to be registered with or approved
by such other governmental agencies or authorities as may be necessary to enable
the seller or sellers thereof or the underwriters, if any, to consummate the
disposition of such shares.
(xii) If the Registration Statement or any
prospectus contains a misstatement, prepare a supplement or post-effective
amendment to the Registration Statement or the related prospectus or any
document incorporated therein by reference or file any other required document
so that, as thereafter delivered to the purchasers of the shares, the prospectus
will not contain a misstatement.
(xiii) Enter into such agreements (including
an underwriting agreement) and do anything else necessary or advisable in order
to expedite or facilitate the disposition of such shares and:
A. make such representations and
warranties to the underwriters, if any, in form, substance and scope as are
customarily made by issuers to underwriters in primary underwritten offerings;
B. obtain opinions of counsel to the
Company and updates thereof (which counsel and opinions (in form, scope and
substance) shall be reasonably satisfactory to the managing underwriter, if any)
addressed to the underwriter, if any, covering the matters customarily covered
in opinions delivered to underwriters in primary underwritten offerings and such
other matters as may be reasonably requested by such underwriters;
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C. obtain "cold comfort" letters and
updates thereof from the Company's independent certified public accountants
addressed to the underwriters, if any; such letters shall be in customary form
and covering matters of the type customarily covered in "cold comfort" letters
by underwriters in connection with primary underwritten offerings; and
D. deliver such documents and
certificates as may be requested by the managing underwriter, if any, to
evidence compliance with clause (A) above and with any customary conditions
contained in the underwriting agreement or other agreement entered into by the
Company.
(f) The Company agrees to indemnify and hold
harmless the Holder from and against all claims arising out of or based upon any
misstatement or alleged misstatement, except insofar as such misstatement or
alleged misstatement was based upon information furnished in writing to the
Company by the Holder for use in the document containing such misstatement or
alleged misstatement.
(g) If any action or proceeding (including
any governmental investigation or inquiry) shall be brought or asserted against
the Holder in respect of which indemnity may be sought from the Company, the
Holder shall promptly notify the Company in writing, and the Company shall
assume the defense thereof, including the employment of counsel satisfactory to
the Holder and the payment of all expenses.
The Holder shall have the right to employ separate
counsel in any such action and to participate in the defense thereof, but the
fees and expenses of such separate counsel shall be the expense of the Holder
unless (i) the Company has agreed to pay such fees and expenses, (ii) the
Company has failed to assume the defense of such action or proceeding or has
failed to employ counsel satisfactory to the Holder in any such action or
proceeding or (iii) the named parties to any such action or proceeding
(including any impleaded parties) include both the Holder and the Company, and
the Holder shall have been advised by counsel that there may be one or more
legal defenses available to the Holder that are different from or additional to
those available to the Company.
If the Holder notifies the Company in writing that
it elects to employ separate counsel at the Company's expense as permitted by
the provisions of the preceding paragraph, the Company shall not have the right
to assume the defense of such action or proceeding on behalf of the Holder. The
foregoing notwithstanding, the Company shall not be liable for the reasonable
fees and expenses of more than one separate firm of attorneys at any time for
the Holder in connection with any one such action or proceeding or separate but
substantially similar or related actions or proceedings in the same jurisdiction
arising out of the same general allegations or circumstances.
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(h) The Holder agrees to indemnify and hold
harmless the Company, its directors, officers, employees, agents and attorneys
and each person, if any, who controls the Company within the meaning of either
Section 15 of the 1933 Act or Section 20 of the Securities Exchange Act of 1934,
as amended (the "1934 Act") to the same extent as the foregoing indemnity from
the Company to the Holder, with respect to information relating to the Holder
furnished in writing by the Holder for use in any Registration Statement,
prospectus or preliminary prospectus.
In case any action or proceeding shall be brought
against the Company or its directors or officers or any such controlling person,
in respect of which indemnity may be sought against the Holder, the Company or
its directors or officers or such controlling person shall have the rights and
duties given to the Holder by Sections 10(f) and 10(g) above.
(i) Holder's rights hereunder shall
terminate at such time as Holder may within any three-month period sell in the
public marketplace all of the Option Shares owned by Holder pursuant to Rule 144
promulgated under the 1933 Act or any successor rule or regulation.
12. Nontransferability. The Option is not transferable other
than (a) by operation of law, (b) to one or more trusts of which the Holder is a
trustor, or (c) by will or the laws of descent and distribution. The Option may
be exercised during the lifetime of the Holder only by the Holder or his
court-appointed legal representative.
13. Warranties and Representations of the Holder. By executing
this Agreement, the Holder accepts the Option and represents and warrants to the
Company and covenants and agrees with the Company as follows:
(i) The Holder acknowledges that no registration
statement under the 1933 Act or under any state securities law has been filed
and that the Company has no obligation to file such a registration statement in
the future with respect to the Option or any Option Shares that may be acquired
upon exercise of the Option or any portion thereof, except as otherwise provided
by Section 10 hereof.
(j) The Holder warrants and represents that the
Option and any Option Shares acquired upon exercise of the Option or any portion
thereof will be acquired and held by the Holder for the Holder's own account,
for investment purposes only, and not with a view towards the distribution or
public offering thereof or with any present intention of reselling or
distributing the same at any particular future time.
(k) The Holder agrees not to sell, transfer or
otherwise voluntarily dispose of any Option Shares that may be
-11-
<PAGE>
acquired upon exercise of the Option or any portion thereof unless (i) there is
an effective registration statement under the 1933 Act covering the proposed
disposition and compliance with governing state securities laws, (ii) the Holder
delivers to the Company, at the Holder's expense, a "no-action" letter or
similar interpretative opinion, satisfactory in form and substance to the
Company, from the staff of each appropriate securities agency, to the effect
that such shares may be disposed of by the Holder in the manner proposed, or
(iii) the Holder delivers to the Company, or legal counsel designated by the
Holder and reasonably satisfactory to the Company, to the effect that the
proposed disposition is exempt from registration under the 1933 Act and
governing state securities laws.
(l) The Holder acknowledges and consents to the
appearance of a restrictive legend, in substantially the following form:
NOTICE: RESTRICTIONS ON TRANSFER
The securities represented by this
certificate have not been registered under the
Securities Act of 1933, or any state securities laws,
and may not be offered, sold, transferred,
encumbered, or otherwise disposed of except upon
satisfaction of certain conditions. Information
concerning these restrictions may be obtained from
the corporation. Any offer or disposition of these
securities without satisfaction of said conditions
will be wrongful and will not entitle the transferee
to register ownership of the securities with the
corporation.
(m) The Holder agrees not to sell, transfer or
otherwise dispose of the Option, except as specifically permitted by this
Agreement and any applicable securities laws.
14. Warranties and Representations of the Company.
(n) The Company is a corporation duly organized,
validly existing and in good standing under the laws of the State of Delaware.
(o) The grant of the Option to the Holder has been
duly authorized by all requisite corporation action on the part of the Company
and the Preferred Stock and upon the occurrence of the Conversion Events the
shares of Common Stock represented by the Option will have been properly
reserved for issuance.
(p) The number of shares of Preferred Stock and upon
the occurrence of the Conversion Events the shares of Common Stock represented
by the Option (when coupled with all shares of Preferred Stock or Common Stock
currently outstanding and all
-12-
<PAGE>
Option Shares to be issued upon the exercise of all other currently outstanding
options granted by the Company) does not exceed the number of shares of
Preferred Stock or Common Stock, as the case may be, currently authorized for
issuance by the Company's Certificate of Incorporation, as amended (the
"Certificate").
(q) No consents, approvals or permits are required to
be obtained from any third person, including, without limitation, any securities
commission, before the grant of the Option, nor do any conditions precedent
exist (other than those specifically identified herein) that would impair the
Company's ability to grant the Option hereunder or issue the Option Shares upon
the exercise of all or any portion of the Option.
(r) No Registration Statement involving the Preferred
Stock or Common Stock is currently on file with the SEC.
15. Procedures Upon Permitted Transfer. Before any sale,
transfer or other disposition of any of Option Shares acquired upon exercise of
the Option, the Holder agrees to give written notice to the Company of his or
her intention to effect such disposition. The notice must describe the
circumstances of the proposed transfer in reasonable detail and must specify the
manner in which the requirements of Section 12(c) above will be satisfied in
connection with the proposed disposition. After (a) legal counsel to the Company
has determined in good faith that the requirements of Section 12(c) above will
be satisfied and (b) the Holder has executed such documentation as may be
necessary to effect the proposed disposition, the Company will, as soon as
practicable, transfer such shares in accordance with the terms of the notice.
Any stock certificate issued upon such transfer will bear a restrictive legend,
in the form set forth in Section 12(d) of this Agreement, unless in the opinion
of the Company's legal counsel such legend is not required. Compliance with the
foregoing procedures is in addition to compliance with any separate requirements
applicable to the Holder under the Certificate or otherwise.
16. Rights as Stockholder. The Option, in and of itself, does
not create rights in the Holder as a stockholder of the Company; provided that
upon any such exercise of the Option or any portion thereof that complies with
the requirements of this Agreement, the Holder shall immediately be vested with
all the rights afforded to other stockholders of the Company, regardless of when
the Company actually delivers certificates representing Option Shares to the
Holder.
17. Further Assurances. The Holder and the Company agree, from
time to time, to execute such additional documents as the other party hereto may
reasonably require to effectuate the purposes of this Agreement.
-13-
<PAGE>
18. Binding Effect. This Agreement shall be binding upon the
Holder, the Company, the Holder's heirs, successors and assigns, and any
corporation or other entity that succeeds to the rights and liabilities of the
Company.
19. Cost of Litigation. In any action at law or in equity or
any arbitration to enforce any of the provisions or rights under this Agreement,
the unsuccessful party to such litigation, as determined by the court or
arbitrator in a final judgment or decree, shall pay the successful party or
parties all costs, expenses and reasonable attorneys' fees incurred by the
successful party or parties (including without limitation costs, expenses and
fees on any appeals), and if the successful party recovers judgment in any such
action or proceeding, such costs, expenses and attorneys' fees shall be included
as part of the judgment.
20. Entire Agreement; Modifications. This Agreement
constitutes the entire agreement and understanding between the Company and the
Holder regarding the subject matter hereof. No modification of the Option or
this Agreement, or waiver of any provision of this Agreement, shall be valid
unless in writing and duly executed by the Company and the Holder. The failure
of any party to enforce any of that party's rights against the other party for
breach of any of the terms of this Agreement shall not be construed as a waiver
of such rights as to any continued or subsequent breach.
21. Governing Law. This Agreement shall be governed by and
interpreted under the law of the State of California applicable to agreements
wholly negotiated, executed and to be performed in that state.
21. Notices. Any notices that either party to this Agreement
is required or may desire to give to the other shall be given by sending the
same to the other at the address below, or at such other address as may be
designated in writing by any party in a notice to the other given in the manner
prescribed in this Section 21. All such notices shall be sufficiently given when
deposited so addressed, postage prepaid, in the United States mail. The
addresses to which any such notices shall be given are the following:
To Holder:
Gerald M. Wetzler
c/o American Film Technologies, Inc.
300 Park Avenue, 17th Floor
New York, New York 10022
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<PAGE>
With copy to:
Lee Mermelstein, Esq.
Jacobson & Mermelstein
52 Vanderbuilt Avenue
New York, New York 10017
To the Company:
4105 Sorrento Valley Boulevard
San Diego, California 92121
Attention: Chief Financial Officer
With copy to:
Barry L. Burten, Esq.
Jeffer, Mangels, Butler & Marmaro LLP
2121 Avenue of the Stars, 10th Floor
Los Angeles, California 90067
22. Severability. Whenever possible, each provision of this
Agreement shall be interpreted so as to be effective and valid under applicable
law. If any provision of this Agreement is prohibited or deemed invalid under
any applicable law, however, such provision shall be ineffective only to the
extent of such prohibition or invalidity, and neither the remainder of such
provision nor this Agreement shall be invalidated as a result.
23. Counterparts. This Agreement may be executed by the
parties in one or more counterparts, all of which taken together shall
constitute one instrument.
24. Jurisdiction. The parties hereto agree to submit to the
exclusive jurisdiction of the Superior Court of the State of California, County
of Los Angeles, any controversy, claim or dispute arising out of or relating to
this Agreement or the method and manner of performance thereof or the breach
thereof.
IN WITNESS WHEREOF, the parties have executed this Agreement
as of the day and year first above written.
"Company" American Film Technologies, Inc.
By:__________________________
John Karl
Its: Chief Financial Officer
"Holder" _____________________________
Gerald M. Wetzler
-15-
<PAGE>
EXHIBIT A
Form of Exercise of Option
To: American Film Technologies, Inc.
4105 Sorrento Valley Boulevard
San Diego, California 92121
The undersigned holds an option (the "Option") represented by
a Stock Option Agreement (the "Agreement") effective as of June 17, 1996. The
undersigned hereby exercises [the Option] [a portion of the Option] and elects
to purchase ____________ shares of {Common Stock}{Preferred Stock} (as defined
in the Agreement) of American Film Technologies, Inc. pursuant to the Option.
This notice is accompanied by full payment of the Exercise Price for the shares
pursuant to Section 4 of the Agreement computed as follows:
__________ shares of Preferred Stock x $.24 per share = $________
__________ shares of Common Stock x $.12 per share = $________
The undersigned acknowledges that no registration statement
under the Securities Act of 1933, as amended, or under any state securities law
has been filed and that the Company has no obligation to file such a
registration statement in the future with respect to the Shares, except as
provided in Section 9 of the Agreement. The undersigned warrants and represents
that the undersigned is acquiring and will hold the shares for the undersigned's
own account, for investment purposes only, and not with a view towards the
distribution or public offering of the shares or with any present intention of
reselling or distributing the shares at any particular future time. The
undersigned consents to the appearance of a restrictive legend, in the form
required by Section 12(d) of the Agreement, on the certificate for the shares.
The undersigned agrees not to sell, transfer or otherwise dispose of the shares
except as specifically permitted by the Agreement or any applicable securities
law expressly permitting such a disposition.
Date: ______________ __, ____.
_________________________________________
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000819028
<NAME> AMERICAN FILM TECHNOLOGIES, INC
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JUN-30-1996
<PERIOD-START> OCT-17-1995
<PERIOD-END> JUN-30-1996
<CASH> 338,669
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 444,923
<PP&E> 514,740
<DEPRECIATION> (70,281)
<TOTAL-ASSETS> 7,244,654
<CURRENT-LIABILITIES> 731,886
<BONDS> 0
0
0
<COMMON> 139,135
<OTHER-SE> 4,739,229
<TOTAL-LIABILITY-AND-EQUITY> 7,244,654
<SALES> 0
<TOTAL-REVENUES> 0
<CGS> 0
<TOTAL-COSTS> 1,445,224
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 69,586
<INCOME-PRETAX> (1,445,224)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,445,224)
<EPS-PRIMARY> (0.02)
<EPS-DILUTED> (0.02)
</TABLE>
