<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 September 30, 1997.
or
( ) Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934, for the Transition Period from ________ to ________
Commission file number 1-9748
AMERICAN FILM TECHNOLOGIES, INC.
-----------------------------------------------------
(Exact name of registrant as specified its charter)
Delaware 23-2359277
- ------------------------------------------------------------------------------
(State or other juridiction of (IRS Employer Identification
incorporation or organization) Number)
4105 Sorrento Valley Blvd., San Diego, CA
-----------------------------------------
92121 (Address of principal executive offices)
Registrant's telephone number including area code: (619) 623-0830
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes X No
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
--- ---
As of September 30, 1997, there were 72,008,051 shares of common
stock outstanding.
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PART 1. FINANCIAL INFORMATION
American Film Technologies, Inc.
Condensed Consolidated Balance Sheets
<TABLE>
<CAPTION>
September 30,
1997 June 30,
Assets (unaudited) 1997
------------ ------------
<S> <C> <C>
Current Assets:
Cash $ 95,212 $ 159,730
Other current assets 184,044 122,787
------------ ------------
Total current assets 279,256 282,517
Equipment and software, at cost, net 129,325 350,754
Film library, net 71,220 187,500
------------ ------------
$ 479,801 $ 820,771
============ ============
Liabilities and stockholders' equity/(deficit):
Current Liabilities:
Notes payable: 0 405,307
Other loans 12,300 35,274
Accounts payable and accrued expenses 352,925 549,869
Accrued compensation 134,276 134,580
------------ ------------
Total current liabilities 499,501 1,125,030
Long-term notes payable 1,721,228 1,250,213
Stock options & subscriptions subject to repurchase 0 620,000
------------ ------------
Total liabilities 2,220,729 2,995,243
Stockholders' equity/(deficit):
Common stock, $.002 par value:
Authorized shares - 225,000,000: issued and outstanding shares
72,008,051 and 69,567,310 at September 30, 1997
and June 30, 1997 respectively 147,084 147,402
Capital in excess of par value 15,808,186 15,879,186
Deferred compensation (1,342,000) (1,342,000)
Accumulated deficit (17,313,800) (16,859,060)
------------ ------------
Total stockholders' equity/(deficit) (2,700,530) (2,174,472)
------------ ------------
($ 479,801) $ 820,771
============ ============
</TABLE>
See accompanying notes
1
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American Film Technologies, Inc.
Condensed Consolidated Statements of Operations
For the Three months ended September 30, 1997 and 1996
(Unaudited)
September 30, September 30,
1997 1996
------------ ------------
Revenues: $ 0 $ 0
------------ ------------
0 0
Expenses:
Compensation and benefits - administrative
and officers 70,702 99,600
Selling, general and administrative 243,581 216,764
Interest expense 752 30,974
Depreciation and amortization 139,705 139,707
------------ ------------
454,740 487,045
------------ ------------
Net loss (454,740) (487,045)
============ ============
Net loss per share (0.01) (0.01)
Shares used in per share computation 72,008,051 69,789,532
------------ ------------
See accompanying notes.
2
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American Film Technologies, Inc.
Condensed Consolidated Statements of Cash Flows
For the Three months ended September 30, 1997 and 1996
(Unaudited)
<TABLE>
<CAPTION>
September 30, September 30,
CASH FLOWS FROM OPERATION ACTIVITIES: 1997 1996
--------- ---------
<S> <C> <C>
Net (loss) ($454,740) ($487,045)
Adjustments to reconcile net (loss) to net cash
(used) by operating activities:
Depreciation and amortization 139,705 139,707
Amortization of Deferred compensation 60,000 60,000
Changes in assets and liabilities:
Other current assets (61,257) 49,910
Accounts payable and accrued expenses (196,944) (12,165)
Accrued compensation 0 (6,731)
--------- ---------
Net cash (used) by operating activities (556,647) (256,324)
Cash Flows From Financing Activities:
Principal payments on notes payable - other 405,307 (19,057)
Proceeds from sale of common stock -- 200,000
--------- ---------
Net cash provided by financing activities 405,307 180,943
Net increase/(decrease) in cash (64,518) (75,381)
Cash, beginning of period 159,730 338,669
--------- ---------
Cash, end of period $ 95,212 $ 263,288
Supplemental disclosures of cash flow information:
Cash paid during the period for interest $ 752 $ 4,708
Reduction of Long term debt written down against
Reorganization value in excess of identifiable assets $ 13,176
</TABLE>
See accompanying notes.
3
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AMERICAN FILM TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1997 (UNAUDITED)
1. Reorganization Under Chapter 11
H. J. Meyers Agreement
The Company agreed to grant a one-time demand and piggy back registration
right. For a period of two years from the effective date, (upon demand by at
least 25% of the new stockholders) the new stockholders can demand the Company
file a registration statement with the 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, 1996, 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, 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 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.
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 were 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.
4
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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. Reorganization value in
excess of identifiable assets is being amortized over twenty years.
Film Library
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.
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 September 30, 1997 and 1996, 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
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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. For a detailed discussion of the
bankruptcy proceedings, see Note 1 in the Notes To Condensed Consolidated
Financial Statements.
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.
Since emerging from bankruptcy, the Company has actively pursued new
product development and opportunities, as well as strategic alliances,
partners and other sources of financing. Related to those efforts, during the
quarter ended September 30, 1996 the Company issued 1,333,334 shares of its
Common Stock for an aggregate cash purchase price of $200,000. No shares were
issued during the quarter ended September 30, 1997.
6
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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.
On March 28, 1996, the Company entered into a letter of intent with
Meyers (the "Meyers Letter of Intent") under which Meyers confirmed its
interest in underwriting on a firm commitment basis a public offering of
shares of the Company's common stock. The Meyers Letter of Intent contemplates
the negotiation and execution of formal agreements relating to the proposed
offering and provides, among other things, that the Company will apply for
listing on the Nasdaq Small Cap Market and use its best reasonable efforts to
maintain such listing for not less than five years; that the Company, if
requested, obtain "key man" life insurance on the lives of designated
executive officers of the Company; and that the Company shall have entered
into a joint venture, business alliance or business combination with an owner
of content on terms acceptable to Meyers.
Results of Operations.
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 ending September 30, 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 September 30, 1997 the Company recorded net
interest expense of approximately $1,000 as compared to $31,000 for the period
ended September 30, 1996.
For the quarters ended September 30, 1997 and 1996 the Company
recorded compensation and benefits for its administration and officers of
approximately $70,702 and $99,600 respectively.
For the quarters ended September 30, 1997 and 1996, the Company
recorded selling, general and administrative expenses of approximately
$243,581 and $216,764 respectively.
7
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For the quarters ended September 30, 1997 and 1996, the Company
recorded depreciation and amortization expense of approximately $139,705 and
$139,707 respectively. Depreciation expense for the period ended September 30,
1996 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 quarters ended September 30, 1997 and 1996, the Company had a
net loss of approximately $454,740 and $487,045 respectively, or $0.01 cent
per share for each period.
Liquidity and Capital Resources.
In connection with the Plan, the Company completed a private
placement of $3.46 million. During the fiscal year ended June 30, 1996, the
Company entered into a stock option agreement with Gerald Wetzler, its
Chairman and CEO, whereby Mr. Wetzler purchased for a fee of $200,000 (which
was deemed fair value) an option to acquire the Company's common stock, or in
the alternative, preferred stock convertible into common stock.
During the quarter ended September 30, 1996, the Company issued
1,333,334 shares of its Common Stock for an aggregate cash purchase price of
$200,000. During the quarter ended September 30, 1997 the Company issued no
stock.
The Company believes that the funds received subsequent to the
quarter ended September 30, 1997 will be sufficient to last through February,
1998. The Company is in discussions with other potential investors regarding
the purchase of convertible debentures 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.
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 response to the
complaint is planned and the response should be issued on or before 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.
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 it reorganization value,
which approximates it 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.
9
<PAGE>
PART II : OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
The following exhibits are filed with this report:
4.1 Senior Secured Convertible Promissory
Note, dated as of October 14, 1997, issued
to Gerald M. Wetzler by the Company.
10.1 Senior Secured Note Purchase Agreement,
dated as of October 14, 1997, between
American Film Technologies, Inc., on the
one hand, and York Capital Management,
L.P., Neil Flanzraich, Gerald M. Wetzler,
Robert L. Frome, Robert Eide Family Trust,
and Howard M. Lorder Irrevocable Trust, on
the other hand.
10.2 Security Agreement, dated as of October
14, 1997, between American Film
Technologies, Inc., on the one hand, and
York Capital Management, L.P., Neil
Flanzraich, Gerald M. Wetzler, Robert L.
Frome, Robert Eide Family Trust, and
Howard M. Lorder Irrevocable Trust, on the
other hand.
(b) Reports on Form 8-K.
None.
<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: February 24, 1998 By: /s/ Gerald M. Wetzler,
-------------------- -------------------------
Gerald M. Wetzler,
Chairman, Chief Executive Officer and
Acting Chief Financial and Accounting
Officer
<PAGE>
EXHIBIT 4.1
THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER UNITED STATES
FEDERAL OR STATE SECURITIES LAWS, INCLUDING BUT NOT LIMITED TO THE SECURITIES
ACT OF 1933, AS AMENDED (THE "ACT") NOR APPROVED BY ANY FEDERAL OR STATE
REGULATORY AGENCY, INCLUDING BUT NOT LIMITED TO THE SECURITIES AND EXCHANGE
COMMISSION, AND MAY NOT BE OFFERED FOR SALE, SOLD OR OTHERWISE TRANSFERRED OR
ASSIGNED FOR VALUE, DIRECTLY OR INDIRECTLY, NOR MAY THE SECURITIES BE
TRANSFERRED ON THE BOOKS OF THE CORPORATION, WITHOUT REGISTRATION OF SUCH
SECURITIES UNDER ALL APPLICABLE UNITED STATES FEDERAL OR STATE SECURITIES
LAWS, INCLUDING BUT NOT LIMITED TO THE ACT, OR COMPLIANCE WITH AN APPLICABLE
EXEMPTION THEREFROM, SUCH COMPLIANCE, AT THE DISCRETION OF THE CORPORATION, TO
BE EVIDENCED BY AN OPINION OF SHAREHOLDER'S COUNSEL, IN FORM ACCEPTABLE TO THE
CORPORATION, THAT NO VIOLATION OF SUCH REGISTRATION OR QUALIFICATION
PROVISIONS WOULD RESULT FROM ANY PROPOSED TRANSFER OR ASSIGNMENT.
SENIOR SECURED CONVERTIBLE PROMISSORY NOTE
Dated as of October 14, 1997 $400,000.00
FOR VALUE RECEIVED, the undersigned ("Payor") promises to
pay to the order of Gerald M. Wetzler ("Payee"), at c/o American Film
Technologies, Inc., 300 Park Avenue, 17th Floor, New York, New York 10022, or
at such other address as the holder of this Note shall from time to time
designate, upon presentation of this Note, the principal sum of FOUR HUNDRED
THOUSAND DOLLARS AND NO CENTS ($400,000.00), on October 14, 1999 (the
"Maturity Date"). This Note shall not bear any interest.
This Note is made pursuant to that certain Senior Secured
Note Purchase Agreement (the "Agreement"), dated as of October 14, 1997, by
and among Payor and Payee and certain other Lenders thereunder. Capitalized
terms, which are used herein but not defined herein, shall have the meanings
ascribed to them in the Agreement.
This Note shall be subject to the rights of the following
existing and/or future creditors of Payor, each of which Payor hereby
acknowledges the existence of:
(i) holders of Unsecured Creditor Notes issued by
Payor to Class 7 creditors pursuant to Payor's Third Amended Chapter 11 Plan
of Reorganization dated August 21, 1995 (the "Plan Noteholders");
1
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(ii) all currently existing trade creditors of
Payor or any such creditor existing prior to the Maturity Date (collectively,
with the "Plan Noteholders," the "Senior Creditors").
Nothing contained herein shall prevent Payor from making any
payments owed to the Senior Creditors when due or any payment to be made to
the Senior Creditors upon the voluntary election of Payor; provided that no
voluntary prepayment of any obligations owed to the Senior Creditors shall be
made during the occurrence of an Event of Default under this Note.
Payor shall have the right to prepay all or any portion of
the principal sum hereof at any time without penalty; provided that Payor
provide Payee with a notice of any such prepayment (a "Prepayment Notice") by
personal delivery or first-class mail no later than five (5) business days
prior to such prepayment and that Payee has not delivered to Payor a notice of
conversion (a "Conversion Notice") with respect to any or all of such amount
to be prepaid by personal delivery or first-class mail no later than three (3)
business days after receipt of the Prepayment Notice. To the extent that Payee
elects only to convert into Common Stock a portion of the amount that Payor
elects to prepay pursuant to the Prepayment Notice, Payor shall be entitled to
prepay all remaining amounts not to be so converted into Common Stock by
Payee.
Payment of the Principal, whether prepaid or paid on the
Maturity Date, shall be payable in lawful money of the United States of
America.
This Note is secured by that certain Security Agreement (the
"Security Agreement"), of even date herewith, by and among Payor, as pledgor,
and Payee and the other Lenders, as pledgees, pursuant to which Payor has
secured its obligations to Payee under this Note by granting to Payee and the
other Lenders a first priority security interest in all of its assets owned as
of the date hereof, any proceeds received from the disposition thereof, and
any assets acquired with the proceeds received from the issuance of this Note
(and all proceeds thereof), which security interest is pari passu with the
security interests granted to the other Lenders.
For a period of six months from the date hereof (the
"Restricted Period"), Payee may not sell or transfer this Note. Payee shall
have the right, at Payee's option, at any time (subject to Payor's right to
prepay all or any portion of this Note described elsewhere herein), to convert
all of any portion of the outstanding principal of this Note into such number
of fully paid and nonassessable shares of Common Stock (as converted, the
"Conversion Shares") as shall be provided herein; provided, however, that
during the Restricted Period Payee may not sell or transfer any of the
Conversion Shares. The holder of this Note may exercise such conversion right
by giving a Conversion Notice to Payor of the exercise of such right, in whole
or in part, and stating the name or names in which the stock certificate or
stock certificates for the shares of Common Stock are to be issued and the
address to which such certificates shall be delivered. The Conversion Notice
shall be accompanied by this Note. The number of shares of Common Stock that
shall be issuable upon conversion of this Note shall equal the amount of the
outstanding principal and accrued
2
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interest for which a Conversion Notice is given, divided by a conversion price
equal to Four Cents ($.03) per share (the "Conversion Price").
No fractional shares of Common Stock shall be issued upon
conversion of this Note. In lieu of any fractional shares to which the holder
would otherwise be entitled, Payor shall round up to the nearest whole share.
In the case of a dispute as to the calculation of the number of shares of
Common Stock into which this Note or any portion thereof shall be converted
(the "Conversion Rate") upon the receipt of a Conversion Notice, Payor's
calculation shall be deemed conclusive absent manifest error. In order to
convert this Note into full shares of Common Stock, the holder shall surrender
this Note, duly endorsed, by overnight courier to the office of Payor,
together with the Conversion Notice that it elects to convert the same, the
amount of principal and interest to be so converted, and a calculation of the
Conversion Rate (with an advance copy of the certificate(s) and the notice by
facsimile); provided, however, that Payor shall not be obligated to issue
certificates evidencing the shares of Common Stock issuable upon such
conversion unless either this Note is delivered to Payor as provided above, or
the holder notifies Payor that this Note has been lost, stolen or destroyed
and executes an agreement satisfactory to Payor to indemnify Payor from any
loss incurred by it in connection with this Note.
Payor shall issue and deliver to Payee promptly after
delivery to it of this Note, to such holder at the address of the holder on
the records of Payor, a certificate or certificates for the number of shares
of Common Stock to which it shall be entitled as aforesaid. The date on which
notice of conversion is given (the "Date of Conversion") shall be deemed to be
the date set forth in such notice of conversion provided that this Note to be
converted is received by Payor within five (5) business days thereafter and
the person or persons entitled to receive the shares of Common Stock issuable
upon such conversion shall be treated for all purposes as the record holder or
holders of such shares of Common Stock on such date. If this Note is not
received by Payor within five (5) business days after the Date of Conversion,
the notice of conversion shall become null and void.
Payor shall at all times reserve and keep available, free
from preemptive rights, unissued or treasury shares of Common Stock sufficient
to effect the conversion of this Note; and if at any time the number of
authorized but unissued shares of Common Stock shall not be sufficient to
effect the conversion of all then outstanding principal and accrued and unpaid
interest of this Note, Payor will take such corporate action as may be
necessary to increase its authorized but unissued shares of Common Stock to
such number of shares as shall be sufficient for such purposes.
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 this Note 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 this Note
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<PAGE>
is exercisable and to the Conversion Price, with the result that the holder's
proportionate share of Common Stock shall be maintained as before the
occurrence of such event without change in the aggregate conversion price
applicable in the event the holder elected to convert this Note in full
(except for any change in the aggregate conversion price exercise price
resulting from rounding-off of share quantities or prices).
In the event of any reclassification or change of
outstanding shares of Common Stock issuable upon conversion of this Note
(other than a change in par value, or from par value to no par value, or from
no par value to par value), or in case of a consolidation or merger of Payor
with or into another corporation (other than a merger or consolidation in
which Payor is the continuing corporation and which does not result in a
reclassification or change of outstanding shares of Common Stock of the class
issuable upon the conversion of this Note except where the security holders of
Payor are entitled to receive securities of another issuer), or in case of any
sale or conveyance to another corporation of the property of Payor as an
entirety or substantially as an entirety (any of such events hereinafter
referred to as a "Restructuring Event"), Payor shall provide Payee with thirty
(30) days prior written notice of the Restructuring Event. Payee shall have
the right to convert this Note into shares of Common Stock by delivering a
Conversion Notice to Payor no later than five (5) business days prior to the
Restructuring Event. In the event Payee fails to deliver the Conversion Notice
by such time, Payor shall remain obligated to make any remaining payments owed
under this Note and Payee shall retain the right to receive the kind and
amount of shares of stock and other securities and property of Payor
receivable upon such Restructuring Event by the holder of the number of shares
of Common Stock of Payor into which this Note might have been converted
immediately prior to such Restructuring Event (to the extent such
Restructuring Event does not involve the corporate dissolution or
disappearance of Payor), but Payee shall not, absent an express agreement to
the contrary with any successor corporation, have the right to receive the
kind and amount of shares of stock and other securities and property of any
such successor corporation receivable upon such Restructuring Event by the
holder of the number of shares of Common Stock of Payor into which this Note
might have been converted immediately prior to such Restructuring Event. Any
such interest shall provide for adjustments which shall be as nearly
equivalent as may be practicable to the adjustments provided for herein. The
foregoing provisions of this Note shall similarly apply to successive
reclassifications and changes of shares of Common Stock and to successive
consolidations, mergers, sales, or conveyances.
Each of the following shall be deemed an "Event of Default":
(a) If Payor fails to pay when due, all or any
portion of this Note, the other Obligations (as defined in the Security
Agreement) owing to Payee (whether for principal, interest, taxes,
reimbursement of Payee's expenses, or otherwise) or any other notes issued
pursuant to the Agreement and as to any of the foregoing, such failure
continues for five (5) calendar days after written notice from Payee to Payor;
(b) If Payor fails or neglects to perform, keep or
observe any other term, provision, condition, covenant, agreement, warranty or
representation contained in this Note, the Security Agreement, the Purchase
Agreement, the Registration Undertaking or any
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other present or future agreement related to the Secured Obligations between
Payor and Payee, and as to any of the foregoing, such failure continues for
thirty (30) calendar days after written notice from Payee to Payor;
(c) If Payor sells or transfers a material portion
of its existing assets outside of the ordinary course of its business without
applying the net proceeds from such sale to reduce the outstanding principal
balance due on this Note;
(d) If Payor commences any Insolvency Proceeding
(as defined below); or
(e) If any Insolvency Proceeding is commenced
against Payor and which is not dismissed within forty-five (45) days of the
date of filing.
As used herein, the term "Insolvency Proceeding"
means and includes any proceeding commenced by or against any person or entity
under any provision of the federal Bankruptcy Code, as amended, or under any
other bankruptcy or insolvency law, including, but not limited to, assignments
for the benefit of creditors, formal or informal moratoriums, compositions or
extensions generally with its creditors.
Upon the occurrence of an Event of Default, the whole
principal sum shall become immediately due at the option of the holder hereof.
Without limiting the foregoing, and in addition thereto,
Payor shall prepay the entire outstanding principal amount of this Note within
five (5) business days from the date that Payor raises proceeds in an amount
equal to or in excess of $5,000,000 through the offering by Payor of any
equity or debt securities to any third party or parties (an "Offering"),
whether such Offering is conducted through any underwriter or other
intermediary or directly by Payor; provided that Payor shall provide Payee
with a Prepayment Notice by personal delivery or first-class mail no later
than two (2) business days following the completion of such Offering and shall
not make such prepayment unless Payee has not delivered to Payor a Conversion
Notice with respect to any or all of such amount to be prepaid by personal
delivery or first-class mail no later than three (3) business days after
receipt of the Prepayment Notice. To the extent that Payee elects only to
convert into Common Stock a portion of the entire outstanding principal and
accrued interest of this Note that Payor is obligated to prepay as a result of
the Offering, Payor shall remain obligated to prepay all remaining amounts not
to be so converted into Common Stock by Payee.
In the event the holder brings suit to enforce its rights
under this Note, the prevailing party in such suit shall pay all costs and
expenses (including without limitation reasonable attorneys' fees) in
connection therewith.
No failure to exercise, and no delay in exercising, any
right, power or remedy hereunder or under any document delivered to the holder
hereof shall impair any right, power or remedy which the holder may have. The
rights and remedies of the holder hereof
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<PAGE>
are cumulative and not exclusive of any rights or remedies which the holder
would otherwise have. This Note and Payee's rights thereunder shall not be
transferable or assignable without the expressed written consent of the Payor.
No waiver or modification of any of the terms or provisions
of this Note shall be valid or binding unless set forth in a writing signed by
the holder of this Note and Payor and then only to the extent therein
specifically set forth.
If any one of the provisions of this Note shall be invalid,
illegal or unenforceable in any respect, the validity, legality and
enforceability of the remaining provisions contained herein shall not in any
way be affected or impaired thereby.
This Note and all transactions hereunder and/or evidenced
hereby shall be governed by, construed under and enforced in accordance with
the laws of the State of California. Payor hereby: (i) agrees that all actions
or proceedings relating directly or indirectly hereto shall be litigated in
courts located within the State of California, and that, at the option of the
holder, the exclusive venue therefor shall be Los Angeles County; (ii)
consents to the jurisdiction and venue of any such court and consents to the
service of process in any such action or proceeding by personal delivery, by
certified or registered mail directed to Payor at the address set forth below,
or by any other method permitted by law; and (iii) waives any and all rights
Payor may have to object to the jurisdiction of any such court, or to transfer
or change the venue of any such action or proceeding.
AMERICAN FILM TECHNOLOGIES, INC. a
Delaware corporation
By:____________________________________
Name: Eric Illowsky
Title: Secretary
300 Park Avenue, 17th Floor
New York, New York 10022
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EXHIBIT 10.1
SENIOR SECURED NOTE PURCHASE AGREEMENT
This SENIOR SECURED NOTE PURCHASE AGREEMENT ("Agreement") is
entered into as of this 14th day of October, 1997 between American Film
Technologies, Inc., 300 Park Avenue, 17th Floor, New York, New York 10022 (the
"Company") on the one hand, and the lenders who have executed the signature
page hereof (collectively, the "Lenders") on the other hand. The Notes with
respect to Wetzler shall be substantially in the form of Exhibit A-1 hereto
and made a part hereof and the Notes with respect to the other Lenders shall
be in the form of Exhibit A-2 attached hereto and made a part hereof.
W I T N E S S E T H:
WHEREAS, the Company is in need of additional capital to
continue to finance its operations and to continue its business; and
WHEREAS, Lenders are each willing to lend to the Company the
amounts set forth below their names on the signature page hereto and made a
part hereof and the Company is willing to borrow an aggregate amount of up to
One Million Dollars ($1,000,000) pursuant to two-year promissory notes secured
by all of the assets of the Company (the "Notes"), such Notes having a first
priority security interest in all of the assets of the Company (the
"Collateral") which security interest is pari passu with the security
interests granted to the holders of the other Notes. Said Notes shall bear no
interest and shall be convertible into the $.002 par value per share common
stock of the Company (the "Common Stock") at a rate of Three Cents ($.03) per
share (the "Note"); and
WHEREAS, the Company is willing to sell to the Lenders the
Notes pursuant to the terms thereof and such other terms and conditions as set
forth herein; and
WHEREAS, the Board of Directors of the Company has
authorized and approved of the sale of the Notes to the Lenders and with
respect to Mr. Wetzler as the Company's Chief Executive Officer and President,
in conformity with the provisions of Section 16(b)-3 of the Securities
Exchange Act of 1934, as amended, containing certain additional restrictions
on the sale or transfer of the Note and the ability of Mr. Wetzler to convert
his Note into Common Stock; and
NOW, THEREFORE, in consideration of the foregoing, the
mutual promises contained herein and other good and valuable consideration,
the receipt and sufficiency of which is hereby acknowledged, the Company and
the Lenders agree as follows:
1. Purchase and Sale of the Note. Upon satisfaction of the
conditions set forth in Sections 2 and 3 below, the Company shall sell to each
of the Lenders, and each of the Lenders shall purchase from the Company, a
Note in the principal amount set forth below such Lender's name on the
signature page hereof (the "Loan").
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2. Registration Undertaking. The Company agrees to grant the
Lenders "piggy-back" registration rights with respect to the shares of Common
Stock into which the Notes are convertible (the "Shares") in accordance with
the "Registration Undertaking" attached hereto and made a part hereof as
Exhibit "B".
3. Conditions Precedent, Delivery of the Note.
a. The obligations of the Company hereunder shall
be subject to and conditioned upon the satisfaction of all of the following
conditions:
(i) The execution and delivery of this
Agreement by the Lenders;
(ii) The completion, execution and
delivery by each of the Lenders to the
Company of the Lender's Questionnaire,
attached hereto as Exhibit "C";
(iii) Closing of the Loan and delivery of
the principal amount of the Notes to the
Company on or before 5:00 pm New York time
on October 31, 1997; and
(iv) All of the representations and
warranties of the Lenders contained herein
remain true and correct.
(b) The obligations of the Lenders hereunder shall be subject to and
conditioned upon the satisfaction of the following conditions: the execution
and delivery by the Company of this Agreement, the Security Agreement,
attached hereto as Exhibit "D", the Registration Undertaking and the Notes by
the Company; and
(c) Upon satisfaction of all of the conditions precedent set forth in
Section 3(a) and 3(b) above, the Company shall cause to be delivered to the
Lenders at the addresses set forth in Section 8(b) below the Notes each
containing a restrictive legend substantially similar to that set forth in
Section 7 below, the Registration Undertaking and a Security Agreement and
related documents to grant to the Lenders a first priority security interest
in the Collateral, which security interest is pari passu with the security
interests granted to the holders of the other Notes (the "Security Agreement").
4. Representations of the Company. The Company represents
and warrants that:
(a) the Company is duly incorporated and in good
standing in the State of Delaware;
(b) upon issuance, the Note will be (i) validly
issued, fully paid and nonassessable; and (ii) free of any liens or
encumbrances;
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(c) the Loan has been duly authorized and approved
by the Company;
(d) the consummation of the Loan as contemplated by
this Agreement does not violate the terms of the Company's Certificate of
Incorporation or By- Laws: and
(e) upon the execution of this Agreement, the
Security Agreement, and the filing with the appropriate governmental bodies of
such other security documents as may be necessary, the Lenders shall receive a
first priority security interest in the Collateral, which security interest is
pari passu with the security interests granted to the holders of the other
Notes.
Except as expressly set forth above, the Company makes no
representations or warranties of any kind or nature to the Lenders.
5. Representations of Lenders. Each of the Lenders
represents and warrants in favor of the Company that:
(a) Lender is acquiring the Note and the Shares for
its own account, for investment purposes only, and not with a view to or for
the Loan, distribution or assignment thereof, in whole or in part;
(b) that the offer and Loan of the Note and the
Shares is intended to be exempt from registration under the Securities Act of
1933, as amended (the "Act"), and under the laws of any other jurisdiction;
that the Company does not intend and is under no obligation to so register the
Note or the Shares, except as expressly set forth in the Registration
Undertaking; that the Note and the Lender will not sell, assign, pledge or
otherwise transfer the Shares unless they are subsequently registered under
the Act or pursuant to an exemption therefrom; and that legends to the
foregoing effect will be placed on the Certificates evidencing the Notes and
the Shares;
(c) Lender has the financial ability to bear the
economic risk of its investment in the Company, including its possible loss,
has adequate means of providing for his current needs and personal
contingencies and has no need for liquidity with respect to its investment in
the Company;
(d) Lender has the knowledge and experience in
financial and business matters as to be capable of evaluating the merits and
risks of an investment in the Shares and has obtained, in its judgment,
sufficient information from the Company to evaluate the merits and risks of an
investment in the Note and the Shares;
(e) Lender is an "accredited investor" as such term
is defined in Rule 501(a) of Regulation D, promulgated under the Securities
Act of 1933, as amended;
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<PAGE>
(f) Lender has been provided an opportunity to
obtain information concerning the offering, the Company and all other
information to the extent the Company or its representatives possess such
information or can acquire it without unreasonable effort or expense;
(g) Lender has been given the opportunity to ask
questions of and receive answers from the representatives of the Company
concerning the Company, the Note and the Shares, the terms and conditions of
the Loan and other matters pertaining to this investment, and has been given
the opportunity to obtain additional information necessary to verify the
accuracy of the information provided in order for it to evaluate the merits
and risks of an investment in the Company to the extent the representatives
possess such information or can acquire it without unreasonable effort or
expense, and has not been furnished any offering literature or prospectus
except the SEC Documents, as hereinafter defined;
(h) Lender has determined that its investment in
the Company through its purchase of the Note is a suitable investment for it
and that at this time it can bear a complete loss of its investment;
(i) In making his decision to invest in the Company
through the purchase of the Note the Lender has relied solely upon independent
investigations made by it;
(j) Lender has reached the age of majority in the
state in which it resides and is a bona fide resident and domiciliary of the
state set forth on the signature page.
(k) Lender represents and acknowledges that it has
received, read and understood the following documents:
(i) The Company's Form 10-K Report for its
fiscal year ended June 30, 1996;
(ii) The Company's Form 10-Q Reports for
the fiscal quarters ended September 30,
1996, December 31, 1996, March 31,1997;
(iii) The Company's Notice of Meeting and
Proxy Solicitation Materials dated January
31, 1997 with respect to its Annual
Meeting of Shareholders held on February
26, 1997; and
(iv) The Company's draft Form 10-K Report
for its fiscal year ended June 30, 1997.
(Said documents included in (i), (ii), (iii) and (iv) above are hereinafter
collectively referred to as the "SEC Documents", attached hereto and made a
part hereof as Exhibit "E").
4
<PAGE>
(l) Lender is not subscribing as a result of or
subsequent to:
(i) any advertisement, article, notice or
other communication published in any
newspaper, magazine or similar media or
broadcast over television or radio; or
(ii) any seminar or meeting whose
attendees, including the Lender, had been
invited as result of, subsequent to or
pursuant to any of the foregoing.
(m) Any information which the Lender has heretofore
furnished to the Company with respect to its financial position and business
experience, including without limitation its Lender's Questionnaire, attached
hereto as Exhibit "C", is complete and correct as of the date of this
Agreement and if there should be any material change in such information at
any time prior to or after acceptance of the Loan, the Lender will immediately
furnish such revised or corrected information to the Company.
(n) Lender and/or Lender's investment advisors, if
any, have carefully read and reviewed this Agreement, Exhibit "C" hereto and
the SEC Documents and understand the risks of, and other considerations
relating to, a purchase of Loan, including, but not limited to, the risks set
forth under "Risk Factors" contained in item (iv) of the SEC Documents. In
connection therewith, Lender is aware of the fact that the Company emerged
from a Chapter 11 Bankruptcy proceeding in October 1995, has not engaged in
ongoing business operations in over four years and will need significant
financing in order to remain in business and significant additional financing
thereafter to implement its business plan.
(o) Lender will be the only person with a direct or
indirect interest in their Note and their Shares purchased pursuant to this
Agreement.
(p) Lender acknowledges, represents, agrees and is
aware that:
(i) no Federal or state agency has passed
upon the Loan or the Note or the Shares
issuable in connection therewith or made
any findings or determinations as to the
fairness of this investment;
(ii) there are substantial risks of loss
of investment incidental to the purchase
of the Note and the Shares;
(iii) the investment is an illiquid
investment;
(iv) the representations, warranties,
agreements, undertakings and
acknowledgments made by the Lender in this
Agreement are made with the intent that
they be relied upon by the Company and its
officers in determining his suitability as
a Lender of the Note and the Shares, and
shall survive the acceptance by the
Company of this subscription, In addition,
the
5
<PAGE>
Lender agrees to notify the Company
immediately of any change in any
representation, warranty or other
information relating to the undersigned
set forth herein;
(v) Lender has read and understood the SEC
Documents.
(q) Lender represents, warrants and agrees in favor
of the Company that Lender has determined to make this investment based on its
own investigation of the Company and its prospects, that neither the Company
nor any of its officers, directors, employees, agents, representatives or
attorneys have made any representations to Lender concerning the business or
prospects of the Company, that Lender has the business sophistication to
determine on its own whether or not to make this investment.
6. Indemnification. The Lenders understand the
meanings and legal consequences of the representations and warranties
contained in this Agreement and severally but not jointly agree to indemnify
and hold harmless the Company and its officers and directors from and against
any loss, damage, liability, claim and expense whatsoever, including but not
limited to any and all legal expenses, due to or arising out of a breach of
any representation or warranty by such Lender, whether contained in this
Agreement or the Lender's Questionnaire, or any failure by them to fulfill any
covenants or agreements set forth herein or therein or arising out of the Loan
or distribution by such Lender of the Note or any Shares in violation of the
Act or any applicable state securities laws. Notwithstanding any of the
representations, warranties, acknowledgments or agreements made herein by such
Lender, such Lender does not thereby or in any other manner waive any rights
granted to the Lender under Federal or state securities laws.
7. Legend. The Lenders agree that all Certificates
representing the Shares shall have endorsed thereon the following legends:
(A) "THE SECURITIES REPRESENTED HEREBY
HAVE NOT BEEN REGISTERED UNDER UNITED STATES FEDERAL OR STATE SECURITIES LAWS,
INCLUDING BUT NOT LIMITED TO THE SECURITIES ACT OF 1933, AS AMENDED (THE
"ACT") NOR APPROVED BY ANY FEDERAL OR STATE REGULATORY AGENCY, INCLUDING BUT
NOT LIMITED TO THE SECURITIES AND EXCHANGE COMMISSION, AND MAY NOT BE OFFERED
FOR SALE, SOLD OR OTHERWISE TRANSFERRED OR ASSIGNED FOR VALUE, DIRECTLY OR
INDIRECTLY, NOR MAY THE SECURITIES BE TRANSFERRED ON THE BOOKS OF THE
CORPORATION, WITHOUT REGISTRATION OF SUCH SECURITIES UNDER ALL APPLICABLE
UNITED STATES FEDERAL OR STATE SECURITIES LAWS, INCLUDING BUT NOT LIMITED TO
THE ACT, OR COMPLIANCE WITH AN APPLICABLE EXEMPTION THEREFROM, SUCH
COMPLIANCE, AT THE DISCRETION OF THE CORPORATION, TO BE EVIDENCED BY AN
OPINION OF SHAREHOLDER'S COUNSEL, IN FORM ACCEPTABLE TO THE CORPORATION, THAT
NO VIOLATION OF SUCH
6
<PAGE>
REGISTRATION OR QUALIFICATION PROVISIONS WOULD RESULT FROM
ANY PROPOSED TRANSFER OR ASSIGNMENT."; and
(B) such other legend as may be required
by the state securities laws applicable for each Lender.
8. MISCELLANEOUS.
(a) Finders Fees. The Company and the
Lenders acknowledge that neither have directly or indirectly, dealt with
anyone acting as a broker, finder or in a similar capacity, or has incurred
any obligation for any brokerage, finders' or similar fee or commission in
connection with this Agreement or any of the transactions contemplated hereby.
(b) Notices. All notices and other
communications required or permitted hereunder shall be in writing and shall
be deemed to have been given (i) upon delivery, if personally delivered, sent
by commercial over night courier (e.g. Federal Express or DHL), or telefaxed
with confirmation copy sent the same day by U.S. mail (postage prepaid); or
(ii) upon the expiration of the fifth (5th) business day after deposit, if
mailed by , registered or certified U.S. mail return receipt requested,
postage prepaid. All notices shall be addressed to each party at the following
address:
If to the Company:
American Film Technologies, Inc.
c/o Gerald M. Wetzler
Chief Executive Officer
300 Park Avenue
17th Floor
New York, New York 10022
With a copy to:
Barry L. Burten, Esq.
Jeffer, Mangels, Butler & Marmaro LLP
2121 Avenue of the Stars
10th Floor
Los Angeles, CA. 90067
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<PAGE>
If to Lenders:
Martin D. Shafiroff
c/o Lehman Brothers
3 World Financial Center
21st Floor
New York, New York 10285
Neil Flanzraich, Esq.
c/o Heller, Erhman, White & McAuliff
525 University Avenue
Palo Alto, California 94301-1900
York Capital Management, L.P.
350 Park Avenue, 25th Floor
New York, New York 10022
Attention: Daniel Schwartz
Gerald M. Wetzler
c/o American Film Technologies, Inc
300 Park Avenue, 17th Floor
New York, New York 10022
Robert L. Frome
c/o Olshan Grundman Frome & Rosenzweig LLP
505 Park Avenue
New York, New York 10022
Robert Eide Family Trust
c/o Aegis Capital Corporation
70 E. Sunrise Highway
Suite 415
Valley Stream, New York 11581-1264
Howard M. Lorber Irrevocable Trust
c/o Robert Eide, Trustee
70 E. Sunrise Highway
Valley Stream, New York 11581-1264
or to such other address as the addressee shall have furnished to the other
parties hereto in the manner prescribed by this section.
(c) Entire Agreement. This Agreement,
together with any related documents referred to in this Agreement, constitutes
the entire agreement among the parties with respect to the subject matter
hereof and supersedes all prior agreements and understandings between them or
any of them as to such subject matter. No amendment,
8
<PAGE>
change or modification of this Agreement be valid unless in writing and signed
by all of the parties hereto.
(d) Waiver, Amendment and Modification. No
breach of any provision hereof can be waived unless in writing. Waiver of any
one breach of any provision hereof shall not be deemed to be a waiver of any
other breach of the same or any other provision hereof. This Agreement may
only be amended or modified by an instrument in writing executed by each of
the parties hereto.
(e) Severability. In case any one or more
of the provisions contained in this Agreement shall for any reason be held to
be invalid, illegal or unenforceable in any respect, such invalidity,
illegality or unenforceability shall not affect any other provision of this
Agreement and such invalid, illegal and unenforceable provision shall be
reformed and construed so that it will be valid, legal and enforceable to the
maximum extent permitted by law.
(f) Counterparts. This Agreement may be
executed in two or more counterparts, each of which shall be deemed an
original, but all of which together shall constitute one and the same
instrument.
(g) Section Headings. The headings
contained in this Agreement are for reference purposes only and shall not in
any way affect the meaning or interpretation of this Agreement. Should there
be any conflict between any such heading and the section at the head of which
it appears, the section and not such heading shall control.
(h) Governing Law. This Agreement shall be
governed by and construed and enforced in accordance with the laws of the
State of California. The parties hereby consent to the exclusive jurisdiction
and venue of the Superior Courts for the State of California located in the
County of Los Angeles for the resolution of any disputes arising out of this
Agreement.
(i) Successors and Assigns. All of the
terms and provisions contained herein shall inure to the benefit of and shall
be binding upon the parties hereto and their respective heirs, legal or
personal representatives, successors and assigns.
(j) Further Assurances. Each of the
parties hereto shall execute and deliver any and all additional papers,
documents, and other assurances, and shall do any and all acts and things
reasonably necessary in connection with the performance of their obligations
hereunder and to carry out the intent of the parties hereto.
(k) Advice of Counsel. The parties hereto,
and each of them, represent and warrant that in executing this Agreement, they
have had an opportunity to read and understand this Agreement and to discuss
and review the Agreement and their legal rights and obligations with respect
thereto and the subject matter thereof with independently selected legal
counsel ("Counsel") and in negotiating and executing this Agreement have
relied solely upon their own judgment, belief and knowledge, and on the
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<PAGE>
advice and recommendations of Counsel concerning the nature, extent and
duration of their rights and claims.
(l) Construction. This Agreement shall not
be construed against the party preparing it. Accordingly, any uncertainty or
ambiguity shall not be interpreted against any one party and any rule of
construction that a document is to be construed against the drafting party
shall not be applicable.
(m) Counterparts. This Agreement may be
executed in Counterparts, each of which, when so executed and delivered, shall
be an original; however, such counterparts together shall constitute but one
and the same Agreement.
[Remainder of page intentionally left blank.]
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IN WITNESS WHEREOF, the parties have caused this
Agreement to be executed as of the day and year first set forth above.
AMERICAN FILM TECHNOLOGIES,
INC.
By: ______________________________________
Gerald M. Wetzler
Chief Executive Officer
LENDERS:
YORK CAPITAL MANAGEMENT, L.P.
By: __________________________________,
Name: Daniel Schwartz
Its: General Partner
$50,000
----------------------------------------
Neil Flanzraich
$50,000.00
------------------------------------------
Martin D. Shafiroff
$100,000.00
------------------------------------------
Gerald M. Wetzler
$400,000.00
------------------------------------------
Robert L. Frome
$36,000.00
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------------------------------------------
Robert Eide
$10,000.00
HOWARD M. LORBER IRREVOCABLE
TRUST
By:
---------------------------------------
Robert Eide, as Trustee
$64,000.00
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SCHEDULE 1
Lender Amount
- ------ ------
Gerald M. Wetlzer $ 400,000
York Capital Management, L.P. $ 50,000
Martin D. Shafiroff $ 100,000
Neil Flanzraich $ 50,000
Robert L. Frome $ 36,000
Robert Eide $ 10,000
Howard Lorber $ 64,000
--------
Total: $ 710,000
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Exhibit 10.2
SECURITY AGREEMENT
THIS SECURITY AGREEMENT (this "Agreement"), dated as of
October __, 1997, is entered into among AMERICAN FILM TECHNOLOGIES, INC., a
Delaware corporation, with offices at 300 Park Avenue, 17th Floor, New York,
New York 10022 (the "Debtor"), on the one hand, and the secured parties set
forth on the signature page hereof (collectively the"Secured Party" or
"Secured Parties"), on the other hand.
The parties agree as follows:
1. DEFINITIONS
In addition to the definitions set forth above, the
following terms as used in this Agreement shall have the following
definitions:
1.1 The term "the Code" means and refers to the
California Uniform Commercial Code, and any and all terms used in this
Agreement which are defined in the Code shall be construed and defined in
accordance with the meaning and definition ascribed to such terms under the
Code.
1.2 The term "Collateral" means and includes all of
the assets of the Company whether tangible or intangible, currently owned or
hereinafter acquired including but not limited to:
A. all patents, patent applications,
inventions and improvements owned
by Debtor and listed on Schedule
A attached hereto;
B. all copyrighted films owned by
Debtor and listed on Schedule B
attached hereto;
C. all cash, securities, deposits or
cash equivalents;
D. all accounts receivable;
E. all real estate, furniture,
fixtures and equipment;
F. all inventory, raw materials and
work in process; and
G. all proceeds of any of the
foregoing.
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1.3 The term "Event of Default" means the
occurrence of any one of the events set forth in Section 4 of this Agreement.
1.4 The term "Insolvency Proceeding" means and
includes any proceeding commenced by or against any person or entity under any
provision of the federal Bankruptcy Code, as amended, or under any other
bankruptcy or insolvency law, including, but not limited to, assignments for
the benefit of creditors, formal or informal moratoriums, compositions or
extensions generally with its creditors.
1.5 The term "Notes" means and refers to the Senior
Secured Convertible Promissory Notes in the original principal amounts as set
forth below the names of each of the Secured Parties on the signature page
hereof, executed by Debtor to the order of each of the Secured Parties (the
"Notes") and any amendments, modifications, substitutions or restatements of
the Notes.
1.6 The term "Obligations" means and refers to the
obligations evidenced by the Note and all Secured Party Expenses which Debtor
is required to pay or reimburse by this Agreement.
1.7 The term "Secured Party Expenses" means and
includes: costs, fees (including reasonable attorneys' fees) and expenses
incurred by Secured Party to correct any default or enforce any provision of
this Agreement or the Note, or in gaining possession of, maintaining,
handling, preserving, storing, shipping, selling, preparing for sale and/or
advertising to sell the Collateral, whether or not a sale is consummated.
2. CREATION OF SECURITY INTEREST
2.1 Debtor hereby grants to each of the Secured
Parties a continuing first priority security interest in all of the Collateral
in order to secure prompt repayment of any and all Obligations, which security
interest is pari passu with the security interests granted to the holders of
the other Notes.
2.2 Debtor shall execute and deliver to Secured
Party, concurrent with Debtor's execution of this Agreement, and at any time
or times hereafter at the request of Secured Party, all financing statements,
continuation financing statements, security agreements, assignments,
applications for title, notices, letters of authority and all other documents
that Secured Party may reasonably request, in form satisfactory to Secured
Party, to perfect and maintain perfected Secured Party's security interest in
the Collateral.
3. EVENTS OF DEFAULT
Any one or more of the following events shall
constitute an Event of Default by Debtor under this Agreement:
3.1 Any Event of Default by Debtor under any of the
Notes;
2
<PAGE>
3.2 If Debtor, within five (5) days following
written notice to Debtor, fails to cure any default in payment, when due and
payable or when declared due and payable, of all or any portion of the
Obligations owing to any Secured Party; or
3.3 If Debtor, within thirty (30) days following
written notice to Debtor, fails to cure any breach of any term, provision,
condition, covenant, agreement, warranty or representation contained in this
Agreement.
4. SECURED PARTY'S RIGHTS AND REMEDIES
4.1 Upon the occurrence of an Event of Default by
Debtor under this Agreement, any Secured Party who has been authorized by the
prior written agreement of no less than three (3) of the four (4) Secured
Parties (the "Agent") may, at its election, do any one or more of the
following, all of which are authorized by Debtor:
A. Declare all Obligations immediately due
and payable;
B. Endorse Debtor's name on all
applications, documents, papers and instruments necessary or desirable for
Debtor in its use of the Collateral;
C. Take any other action with respect to
the Collateral as Secured Party deems in its best interest;
D. Grant or issue any exclusive or
non-exclusive license under the Collateral;
E. Assign, pledge, convey, or otherwise
transfer title in or dispose or any of the Collateral to anyone; and
F. (i) Require Debtor to take such other
action as Agent may request to grant, perfect and protect the assignment to a
purchaser at a foreclosure proceeding of all right, title and interest in and
to the Collateral, and exercise Debtor's rights and remedies with respect to
such assigned Collateral, and (ii) without notice, except as specified below,
sell the Collateral or any part thereof in one or more parcels at a public or
private sale, at any of the Agent's offices or elsewhere for cash, on credit,
or for future delivery, and upon such other terms as Agent may deem
commercially reasonable. Agent shall not be obligated to make any sales of the
Collateral, regardless of any notice of sale having been given. Agent may
adjourn any public or private sale from time to time by announcement at the
time and place fixed therefor, and such sale may, without further notice, be
made at the time and place to which it was so adjourned. Agent may apply
proceeds of the Collateral against the Obligations in such order and manner as
Agent may elect.
4.2 Agent shall give notice of any action described
in Section 4.1 hereof as follows:
3
<PAGE>
A. Agent shall give Debtor and each holder
of a security interest in the Collateral who has filed with Agent a written
request for notice, a notice in writing of the occurrence of such Event of
Default and the action which Agent intends to take as a result thereof;
B. The notice shall be personally
delivered or mailed, postage prepaid, to Debtor as provided in Section 6 of
this Agreement, at least fifteen (15) calendar days before the date fixed for
the sale (if applicable), or at least fifteen (15) calendar days before the
date on or after which a private sale or other disposition of the Collateral
is to be made. Notice to persons other than Debtor claiming an interest in the
Collateral shall be sent to such addresses as they have furnished to Agent;
C. If Agent intends to make a public sale
of the Collateral, Agent shall also give notice of the time and place by
publishing a notice one time at least fifteen (15) calendar days before the
date of the sale in a newspaper of general circulation in the county in which
the sale is to be held.
4.3 Debtor shall pay all Agent Expenses incurred in
connection with Agent's enforcement and exercise of any of its rights and
remedies as herein provided.
4.4 Any deficiency which exists after disposition
of the Collateral as provided above will be paid by Debtor. Any excess will be
returned to Debtor by Agent.
4.5 Agent's rights and remedies under this
Agreement and all other agreements shall be cumulative. No exercise by Agent
of one right or remedy shall be deemed an election, and no waiver by Agent of
any default on Debtor's part shall be deemed a continuing waiver. No delay by
Agent shall constitute a waiver, election or acquiescence by it.
5. NOTICES
All notices or demands by any party relating to the
Note or this Agreement shall be in writing and either personally served or
sent by regular United States mail, postage prepaid, to Debtor or each of the
Secured Parties at their respective addresses set forth below. The parties
hereto may change the address at which they are to receive notices hereunder,
by notice in writing in the foregoing manner given to the other. All notices
or demands sent in accordance with this Section 5 shall be deemed received on
the earlier of the date of actual receipt or three (3) days after the deposit
thereof in the mail.
To the Secured Parties:
Martin D. Shafiroff
c/o Lehman Brothers
3 World Financial Center
21st Floor
New York, New York 10285
4
<PAGE>
Neil Flanzraich, Esq.
c/o Heller, Erhman, White & McAuliff
525 University Avenue
Palo Alto, California 94301-1900
York Capital Management, L.P.
c/o Daniel Schwartz
350 Park Avenue
25th Floor
New York, New York 10022
Gerald M. Wetzler
c/o American Film Technologies, Inc.
300 Park Avenue
17th Floor
New York, New York 10022
Robert L. Frome
c/o Olshan Grundman Frome & Rosenzweig LLP
505 Park Avenue
New York, New York 10022
Robert Eide Family Trust
c/o Aegis Capital Corporation
70 E. Sunrise Highway
Valley Stream, New York 11581-1264
Howard M. Lorber Irrevocable Trust
c/o Robert Eide, Trustee
70 E. Sunrise Highway
Suite 415
Valley Stream, New York 11581-1264
To the Debtor:
American Film Technologies, Inc.
c/o Gerald M. Wetzler
Chief Executive Officer
300 Park Avenue
17th Floor
New York, New York 10022
5
<PAGE>
With a copy to:
Barry L. Burten, Esq.
Jeffer, Mangels, Butler & Marmaro LLP
2121 Avenue of the Stars
10th Floor
Los Angeles, CA. 90067
or to such other address as the addressee shall have furnished to the other
parties hereto in the manner prescribed by this section.
7. CHOICE OF LAW
The validity of this Agreement, its construction,
interpretation and enforcement, and the rights of the parties hereunder and
concerning the Collateral, shall be determined under, governed by, and
construed in accordance with the laws of the State of California.
8. GENERAL PROVISIONS
8.1 Successors and Assigns. This Agreement shall
bind and inure to the benefit of the respective successors and assigns of each
of the parties; provided, however, that Debtor may not assign this Agreement
or any rights hereunder without each of the Secured Party's or the Agent's
prior written consent.
8.2 Headings. Section headings and section numbers
have been set forth herein for convenience only. Unless the contrary is
compelled by the context, everything contained in each section applies equally
to this entire Agreement.
8.3 Severability. Each provision of this Agreement
shall be severable from every other provision of this Agreement for the
purpose of determining the legal enforceability of any specific provision.
8.4 Amendment. This Agreement cannot be changed or
terminated orally. All prior agreements, understandings, representations,
warranties and negotiations, if any, are merged into this Agreement.
8.5 Representation by Counsel. The parties hereto,
and each of them, represent and warrant that in executing this Agreement, they
have had an opportunity to read and understand this Agreement and to discuss
and review the Agreement and their legal rights and obligations with respect
thereto and the subject matter thereof with independently selected legal
counsel ("Counsel") and in negotiating and executing this Agreement have
relied solely upon their own judgment, belief and knowledge, and on the advice
and recommendations of Counsel concerning the nature, extent and duration of
their rights and claims.
8.6 Construction, Interpretation. This Agreement
shall not be construed against the party preparing it. Accordingly, any
uncertainty or ambiguity shall not be interpreted against any one party and
any rule of construction that a document is to be construed against the
drafting party shall not be applicable.
6
<PAGE>
8.7 Counterparts. This Agreement may be executed in
Counterparts, each of which, when so executed and delivered, shall be an
original; however, such counterparts together shall constitute but one and the
same Agreement.
[Remainder of page intentionally left blank.]
7
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Security
Agreement as of the date first hereinabove written.
DEBTOR:
AMERICAN FILM TECHNOLOGIES,
INC., a California corporation
By:________________________________
Name:______________________________
Title:_____________________________
SECURED PARTIES:
YORK CAPITAL MANAGEMENT, L.P.
By:________________________________
Name: Daniel Schwartz
Its: General Partner
$50,000.00
-----------------------------------
Neil Flanzraich
$50,000.00
-----------------------------------
Martin D. Shafiroff
$100,000.00
----------------------------------
Gerald M. Wetzler
$400,000.00
----------------------------------
Robert L. Frome
$36,000
8
<PAGE>
----------------------------------
Robert Eide
$10,000
HOWARD M. LORBER IRREVOCABLE
TRUST
By:__________________________________
Robert Eide, as Trustee
$64,000
9
<PAGE>
Schedule A
Patents and Patent Applications
Patent No. 4,984,072
Patent No. 5,093,717
<PAGE>
Schedule B
Copyrighted Films
Terror By Night
Dressed to Kill
Woman in Green
Sherlock Holmes & the Secret Weapon
Outpost in Morocco
Gung Ho
Eternally Yours
The Scarlet Pimpernel
Black Dragons
Scared to Death
White Zombie
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000819028
<NAME> AMERICAN FILM TECHNOLOGIES, INC.
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-START> JUL-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 95,212
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 279,256
<PP&E> 129,325
<DEPRECIATION> (139,705)
<TOTAL-ASSETS> 268,876
<CURRENT-LIABILITIES> 499,501
<BONDS> 0
0
0
<COMMON> 147,084
<OTHER-SE> 15,808,186
<TOTAL-LIABILITY-AND-EQUITY> (2,700,530)
<SALES> 0
<TOTAL-REVENUES> 0
<CGS> 0
<TOTAL-COSTS> 454,740
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 752
<INCOME-PRETAX> 454,740
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 454,740
<EPS-PRIMARY> (0.01)
<EPS-DILUTED> (0.01)
</TABLE>
