<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
(X) Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934, for the Quarter Ended March 31, 1998.
( ) Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934, for the Transition Period from to
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Commission file number 1-9748
AMERICAN FILM TECHNOLOGIES, INC.
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(Exact name of registrant as specified its charter)
Delaware 23-2359277
- -------------------------------------------------------------------------------
(State or other jurisdiction of (IRS Employer Identification
incorporation or organization) Number)
4105 Sorrento Valley Blvd., San Diego, CA 92121
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(Address of principal executive offices)
Registrant's telephone number including area code: (619) 623-0830
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
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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
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As of March 31, there were 73,700,576 shares of common stock outstanding.
<PAGE>
PART 1. FINANCIAL INFORMATION
American Film Technologies, Inc.
Condensed Consolidated Balance Sheets
<TABLE>
<CAPTION>
March 31, June 30,
1998 1997
------------ ------------
(unaudited)
<S> <C> <C>
Assets
Current Assets:
Cash $ 7,043 $ 159,730
Other current assets 111,965 122,787
------------ ------------
Total current assets 119,008 282,517
Equipment and software, at cost, net 315,377 350,754
Film library, net 75,000 187,500
------------ ------------
$ 509,385 $ 820,771
============ ============
Liabilities and stockholders' equity:
Current Liabilities:
Notes payable:
Current portion of long-term notes payable $ 405,307 $ 405,307
Other loans 35,274
Accounts payable and accrued expenses 414,760 549,869
Accrued compensation 135,649 134,580
------------ ------------
Total current liabilities 955,716 1,125,030
Long-term notes payable 1,646,919 1,250,213
Stock options & subscription subject to repurchase 620,000 620,000
------------ ------------
Total liabilities 3,222,635 2,995,243
Stockholders' equity (deficit):
Common stock, $.002 par value:
Authorized shares - 225,000,000 at March 31, 1998 and
June 30, 1997: issued and outstanding shares -
73,450,644 at March 31, 1998 and 73,700,644 at June 30, 1997 147,403 147,402
Capital in excess of par value 16,051,185 15,879,186
Deferred compensation (1,162,000) (1,342,000)
Accumulated deficit (17,749,838) (16,859,060)
------------ ------------
Total stockholders' equity (2,713,250) (2,174,472)
------------ ------------
$ 509,385 $ 820,771
============ ============
</TABLE>
See accompanying notes.
1
<PAGE>
American Film Technologies, Inc.
Condensed Consolidated Statements of Operations
(Unaudited)
<TABLE>
<CAPTION>
For the Three months ended March 31, For the Nine months ended March 31,
1998 and March 31, 1997 1998 and March 31, 1997
March 31, March 31, March 31, March 31,
1998 1997 1998 1997
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenues:
Distribution revenues $ 0 $ 0 $ 0 $ 0
------------ ------------ ------------ ------------
0 0 0 0
Expenses:
Compensation and benefits -
administrative and officers 72,204 98,382 226,011 298,800
General and administrative 104,393 286,858 510,218 722,696
Interest expense, net 3,319 31,759 6,672 93,507
Depreciation and amortization 49,565 139,707 147,877 419,121
Reorganization items:
Fresh start adjustments 0 0 0 0
Professional fees 0 0 0 0
U.S. Trustee fees 0 0 0 0
------------ ------------ ------------ ------------
229,481 556,706 890,778 1,534,124
------------ ------------ ------------ ------------
Net income/(loss) ($ 229,481) ($ 556,706) ($ 890,778) ($ 1,534,124)
============ ============ ============ ============
Net income/(loss) per share ($ 0.00) ($ 0.01) ($ 0.01) ($ 0.02)
============ ============ ============ ============
Shares used in per share computation 73,700,576 73,417,311 73,700,576 71,924,718
============ ============ ============ ============
</TABLE>
See accompanying notes.
2
<PAGE>
American Film Technologies, Inc.
Condensed Consolidated Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
Nine months Nine months
ended ended
March 31, March 31,
1998 1997
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<S> <C> <C>
CASH FLOWS FROM OPERATION ACTIVITIES:
Net income/(loss) ($ 890,778) ($1,534,124)
Adjustments to reconcile net income (loss) to net cash
(used) by operating activities:
Depreciation and amortization 147,877 419,121
Amortization of deferred compensation 180,000 180,000
Fresh start adjustments
Change in estimate to Liabilities subject to compromise
Changes in assets and liabilities:
Restricted cash 0 0
Other current assets 10,822 (75,575)
Accounts payable and accrued expenses (134,040) (89,405)
Adjustment to long-term notes payable
----------- -----------
Net cash (used) by operating activities (686,119) (1,099,983)
Cash Flows From Investing Activities:
-- --
----------- -----------
Net cash provided (used) by investing activities 0 0
Cash Flows From Financing Activities:
Principal payments on notes payable - bank 0 0
Principal payments on notes payable - other (35,274) (133,976)
Proceeds from notes payable - other 206,844
Proceeds from L/T notes payable 396,706 100,000
Issuance of common stock to settle accounts payable
Proceeds from common stock subscriptions
Proceeds from sale of common stock 172,000 580,000
Proceeds from option fee for stock option 200,000
Principal payment on L/T debt
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Net cash provided (used) by financing activities 533,432 952,868
Net increase (decrease) in cash (152,687) (147,115)
Cash, beginning of period 159,730 338,669
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Cash, end of period $ 7,043 $ 191,554
Supplemental disclosures of cash flow information:
Cash paid during the period for interest $ 63,889 $ 63,889
Reduction of long-term notes payable written down against
Reorganization value in excess of identifiable assets 13,176
</TABLE>
See accompanying notes.
3
<PAGE>
AMERICAN FILM TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1998 (UNAUDITED)
1. Reorganization Under Chapter 11
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.
2. Summary of Significant Accounting Policies
The Company's principal business is the production of color versions of motion
pictures and television programs originally produced in black-and-white. The
Company has produced colorized films for its own library and owns the copyrights
on eleven such films. These films are available for sale and or distribution.
Consolidation
The consolidated financial statements include the accounts of Midtech de Mexico,
S.A. de C.V., the Company's wholly-owned Mexican subsidiary. All intercompany
transactions have been eliminated in consolidation.
Depreciation and Amortization
Depreciation and amortization are provided over the estimated useful lives of
the underlying assets using primarily the straight line method over a five-year
period. Leasehold improvements are amortized over the life of the lease or the
estimated useful life of the assets.
Costs incurred in creating the Film Library include direct salaries and related
benefits of production personnel charged to specific coloring projects, an
allocation of overhead and costs of materials used in the coloring process.
Costs are charged to Film Library using the same system the Company maintains
for calculating cost of coloring films for customers. The Film Library is being
amortized using the straight line method over a three year period.
4
<PAGE>
AMERICAN FILM TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1998 (UNAUDITED)
Loss per Share
Loss per share has been calculated by dividing the net loss applicable to common
stock by the weighted average number of common stock outstanding for the periods
indicated. For the quarters ended March 31, 1998 and March 31, 1997, no exercise
of stock options was assumed because the exercise of such equivalents would be
anti-dilutive.
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.
5
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
This discussion should be read in conjunction with the consolidated
financial statements, related notes and management's discussion and analysis of
financial conditions and results of operations included in the Company's annual
report on Form 10-K for the year ended June 30, 1997.
Overview and Reorganization.
On October 15, 1993, the Company filed for protection under Chapter 11
of the Bankruptcy Code in the Bankruptcy Court for the District of Delaware. On
October 6, 1995, the Company's Plan of Reorganization (the "Plan") was approved
by the Bankruptcy Court and became effective October 17, 1995 (the "Effective
Date"). In connection with the Plan, the Company raised $3.46 million in new
capital in exchange for the issuance of common stock representing approximately
56% if its total outstanding common stock. The Company emerged from bankruptcy
under Fresh Start Reporting as promulgated by Statement of Position No. 90-7,
Financial Reporting by Entities in Reorganization under the Bankruptcy Code.
Success of the Company will, among other things, depend upon the
resumption of production in Mexico. That will require reemployment of selected
former Mexican employees. Since the Mexican operation was suspended in October
1993, the Company believes most of the former employees have found other jobs.
If Midtech is unable to rehire certain former employees, it will have to recruit
and train a new work force. That would delay the resumption of production and
increase the cost of production. As such, it could have a materially adverse
effect on the Company. Although the Company expects to benefit from the
devaluation of the peso, there is no assurance of how long those expected
benefits will last.
On March 28, 1996, the Company entered into a letter of intent with
Meyers (the "Meyers Letter of Intent") under which Meyers confirmed its interest
in underwriting on a firm commitment basis a public offering of shares of the
Company's common stock. The Meyers Letter of Intent contemplates the negotiation
and execution of formal agreements relating to the proposed offering and
provides, among other things, that the Company will apply for listing on the
NASDAQ Small Cap Market and use its best reasonable efforts to maintain such
listing for not less than five years; that the Company, if requested, obtain
"key man" life insurance on the lives of designated executive officers of the
Company; and that the Company shall have entered into a joint venture, business
alliance or business combination with an owner of content on terms acceptable to
Meyers.
The Company is engaged in discussions with potential strategic partners
and investors in connection with their providing funding sufficient to enable
the Company to become operational again. There can be no assurance as to when,
if ever, the Company will be able to negotiate a transaction for funding or, if
negotiated, that such a transaction can be consummated.
6
<PAGE>
Results of Operations.
The financial results of the Company for each of the periods addressed
by this report do not reflect the earnings capacity of the Company. The
financial data for the period ended March 31, 1998 and for the period March 31,
1997 reflects the adoption of Fresh Start Accounting. As such, the financial
data is considered that of a Successor Company and is not comparable to prior
periods.
Since the filing under Chapter 11 in October, 1993, the Company has not
generated any income from film colorization, animation or fee for service
orders. For the quarter ended March 31, 1998 the Company recorded net interest
expense of approximately $3,319 as compared to $32,000 for the quarter March 31,
1997. For the nine month period ended March 31, 1998, the Company recorded net
interest expense of $6,672.
For the quarter ended March 31, 1998, the Company recorded compensation
and benefits for its administration and officers of approximately $72,000 as
compared to $98,000 the quarter ended March 31, 1997. For the nine month period
ended March 31, 1998 compensation and benefits for its administration and
officers totaled approximately $226,000 including $180,000 of amortization
expense related to the deferred compensation under Gerald Wetzler's compensation
agreement.
For the quarter ended March 31, 1998, the Company recorded selling,
general and administrative expenses of approximately $104,000 as compared to
$287,000 for the quarter ended March 31, 1997. For the nine month period ended
March 31, 1998, selling, general and administrative expenses totaled
approximately $510,000.
For the quarter ended March 31, 1998, the Company recorded depreciation
and amortization expense of approximately $49,500 as compared to $139,707 for
the quarter ended March 31, 1997. For the nine month period ended March 31,
1998, depreciation and amortization expense totaled approximately $148,000.
Depreciation and amortization expense for these periods is based on Fresh Start
Accounting, which among other things, includes a restatement of all assets and
liabilities to approximate their fair value as of the date of reorganization.
For the quarter ended March 31, 1998 the Company had a net loss of
approximately $229,500, or less than $0.01 per share, as compared to a net loss
of $556,706 or $0.01 per share for the quarter ended March 31, 1997.
7
<PAGE>
Liquidity and Capital Resources.
On or after October 10, 1997, AFT received commitments from a
new group of Lenders, including Gerald Wetzler, the Company's Chairman of the
Board and Chief Executive Officer, pursuant to which such investors committed to
provide at least $710,000, up to an aggregate amount of $1,000,000 of new
financing to AFT through the purchase of two-year Senior Secured Convertible
Notes bearing no interest and convertible to Common Stock of the Company at a
rate of three cents ($.03) per share (the "October 1997 Financing"). The initial
phase of the funding of this offering aggregating to $500,000 was completed on
October 14, 1997. The proceeds of the October 1997 Financing were principally
utilized to make the principal and interest payments due on the Company's
Bankruptcy Notes and to fund the Company's working capital requirements.
Since April 1, 1998 the Company has sold another $91,000 in senior
secured debentures. Of this amount, $51,000 was purchased by Mr. Wetzler. The
Company expects the current funding to be sufficient to June, 1998.
The Company is engaged in discussions with potential strategic partners
and investors in connection with their providing funding sufficient to enable
the Company to become operational again. There can be no assurance as to when,
if ever, the Company will be able to negotiate a transaction for funding or, if
negotiated, that such a transaction can be consummated.
PART II : OTHER INFORMATION
Item 1. Legal Proceedings
Subsequent to the end of the first quarter, in December, 1997,
plaintiff, Robert Frankel, the owner of approximately 0.1% of the outstanding
stock of American Film Technologies, Inc. ("AFT"), brought an action in the
Monroe County Supreme Court of the State of New York against AFT and its then
current Board of Directors. The plaintiff alleges that the board of AFT
improperly allowed the Chairman and CEO, Gerald Wetzler, to purchase options and
to receive convertible notes as security for loans made to AFT. The complaint
seeks to have Mr. Wetzler's options and convertible notes voided, an accounting
of all transactions between Gerald Wetzler and AFT and other damages in an
unspecified amount. AFT and the Board have retained the law firm of Philips,
Lytle, Hitchcock, Blaine & Huber LLP, Rochester, New York, to defend their
interests in the action and intend to aggressively seek the dismissal of the
claim. AFT does not believe the claim is viable as it fails to state a claim
pursuant to New York or Delaware law. A motion to dismiss was filed on February
28, 1998.
8
<PAGE>
Item 2. Changes In Securities
Sale of Unregistered Securities - In September 1996, the Company issued
1,333,334 shares of its Common Stock (the "Shares") in a private placement to
two investors for an aggregate purchase price of $200,000. The Shares were
issued without the benefit of an effective registration statement under the
Securities Act of 1933, as amended (the "Act") in reliance upon the private
placement exemptions under Section 4(2) of the Act. During the quarter ended
December 31, 1996, the Company issued in a private placement an additional
2,500,000 shares of Common Stock to two investors for an aggregate purchase
price of $375,000. These sales were also consummated without the benefit of an
effective registration statement under the Act based upon the private placement
exemptions issued under Section 4(2) of the Act.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 5. Other Information
As a result of the Plan, as of the Effective Date of the Plan, the
Company adopted "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 6. Exhibits and Reports on Form 8-K
None
9
<PAGE>
Signatures
In accordance with the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
AMERICAN FILM TECHNOLOGIES, INC.
Date: May 22, 1998 By: /s/ Gerald M. Wetzler
----------------------------
Gerald M. Wetzler
Chairman, Chief Executive Officer
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000819028
<NAME> AMERICAN FILM TECHNOLOGIES, INC.
<S> <C>
<MULTIPLIER> 1
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-START> JUL-01-1997
<PERIOD-END> MAR-31-1998
<CASH> 7,043
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 119,008
<PP&E> 510,981
<DEPRECIATION> 216,908
<TOTAL-ASSETS> 509,385
<CURRENT-LIABILITIES> 955,716
<BONDS> 0
0
0
<COMMON> 147,403
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 509,385
<SALES> 0
<TOTAL-REVENUES> 0
<CGS> 0
<TOTAL-COSTS> 890,778
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 6,672
<INCOME-PRETAX> 890,778
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
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<NET-INCOME> (890,778)
<EPS-PRIMARY> (0.01)
<EPS-DILUTED> (0.01)
</TABLE>
