<PAGE>
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 for the fiscal year ended June 30, 1998
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 in its charter)
<TABLE>
<S> <C>
Delaware 23-2359277
------------------------------------------------------------ ---------------------------------------
State or other jurisdiction of incorporation or organization (I.R.S. Employer Identification Number)
</TABLE>
4105 Sorrento Valley Boulevard, San Diego, California 92121
-----------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code 212-572-6370
-----------------------------------------------------------------------------
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, - $.002 Par Value
- -------------------------------------------------------------------------------
(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
<PAGE>
State the aggregate market value of the voting stock held by non-affiliates of
the registrant. The aggregate market value shall be computed by reference to the
price at which the stock was sold, or the average bid and asked prices of such
stock, as of a specified date within 60 days prior to the date of filing. The
aggregate market value is approximately $2,309,102, based on 46,182,042 shares
of Common Stock held by nonaffiliates at the last trading price of $0.05 per
share as of February 5, 1999.
APPLICABLE ONLY TO REGISTRANTS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE
PRECEDING FIVE YEARS: Indicate by check mark whether the registrant has filed
all documents and reports required to be filed by Section 12, 13 or 15(d) of the
Securities Exchange Act of 1934 subsequent to the distribution of securities
under a plan confirmed by a court. YES NO X
--- ---
APPLICABLE ONLY TO CORPORATE REGISTRANTS: Indicate the number of shares
outstanding of each of the registrant's classes of common stock, as of the
latest practicable date: As of February 5, 1999 there were 85,036,100 shares of
Common Stock of the Registrant outstanding.
DOCUMENTS INCORPORATED BY REFERENCE: List hereunder the following documents if
incorporated by reference and the Part of the Form 10-K (e.g., Part 1, Part II,
etc.) into which the document is incorporated: (1) Any annual report to security
holders; (2) Any proxy or information statement; and (3) Any prospectus filed
pursuant to Rule 424(b) or (c) under the Securities Act of 1933. The listed
documents should be clearly described for identification purposes (e.g., annual
report to security holders for fiscal year ended December 24, 1980).
Not Applicable
- --------------
<PAGE>
PART I
The information contained herein should be read in conjunction with
American Film Technologies, Inc.'s consolidated financial statements and notes
thereto included in this Form 10-K. Except for the historical information
contained herein, the discussion in this Form 10-K contains certain forward
looking statements that involve risks and uncertainties, such as statements of
the Company's plans, objectives, expectations and intentions. The cautionary
statements made in this Form 10-K should be read as being applicable to all
related forward-looking statements wherever they appear in this Form 10-K. The
Company's results could differ materially from those discussed here. Factors
that could cause or contribute to such differences include, without
limitation, the "Risk Factors" set forth below.
RISK FACTORS
Any investment in AFT is speculative and involves a high degree of risk.
Prospective investors should carefully consider the following investment
considerations.
Start-Up operations: As a result of AFT's financial difficulties and
bankruptcy proceedings it has not engaged in ongoing operations for almost
five years. In addition to hiring qualified personnel, the expense and the
time required to recommence operations may be greater than anticipated.
History Operating Losses: In spite of the past profitability of AFT's
colorization. fee-for-service business, AFT has not entered into an agreement
to render such services for six years. It cannot state with any degree of
certainty whether it will be able to obtain contracts for fee for services
work and if so upon economically viable terms. In addition, AFT incurred a net
operating loss for each of the last two years prior to its filing for
bankruptcy.
Technological Obsolescence: AFT's business plan is to a great extent
driven by it being the low cost provider of colorization services. AFT also
believes its colorization process can produce more volume of product than any
other process of which it is aware. Developments in computer hardware and
software are very rapid, resulting in more sophisticated technology available
at lower cost. There is no assurance AFT's current technology will continue to
produce colorized product that is technically acceptable to broadcasters and
viewers or that if acceptable will be provided at competitive prices. If that
should occur AFT would have to upgrade its technology. There is no assurance
AFT will have the financial or technical resources to do so.
Patent Protection: AFT's success will be largely dependent upon its
technology and its ability to maintain patent protection on the technology it
develops. AFT has obtained patents for certain aspects of its colorized
software and will take steps to obtain other and future patents on all
patentable devices and processes which it has developed. There can be no
guarantee that patents will be granted in each or any instance. It is also
possible that patents granted to AFT may be successfully challenged or that
AFT's patents may infringe upon other patents which would cause additional
unexpected costs and delays. A former competitor of AFT has in the past,
unsuccessfully challenged AFT's patents. AFT also attempts to protect its
proprietary products and processes by relying upon trade
-1-
<PAGE>
secret laws and nondisclosure and confidentiality agreements with its employees
and certain persons who have been given access to its proprietary products and
processes. Despite this protection, no assurance can be given that others will
not independently develop a colorized process and compete with AFT.
Competition in Colorization: The lure of the entertainment industry,
technological advances in computers, software and related hardware, and the
decline in the cost of new equipment all have an effect on potential
competitors' decisions to enter the colorization industry. Many entertainment
companies are better established, have substantially greater financial
resources and larger research and development staffs and facilities than AFT.
Such companies may develop their own colorization process and facilities that
would compete for third party colorization work. Such companies may also prove
to be more successful in the production and distribution of colorized product.
In addition, it is possible that a competitor may colorize and seek to obtain
a copyright for a television or theatrical film product from the public domain
which it colorizes subsequent to AFT. In recent years, AFT has had only one
competitor. Towards the end of 1996 and the early months of 1997, this
competitor experienced significant financial difficulties and filed for
protection under Chapter 7 of the Bankruptcy Code. AFT has been advised that
our competitor's assets were purchased by a group including former officers
and directors of this competitor and one or more investors.
Need for Additional Financing:. The success of AFT's plan to commence the
building of a valuable colorized film and television library will require
substantial additional financing of no less than $4,000,000 in order for AFT
to upgrade its technology and recommence operations. There can be no assurance
that such financing would be available on acceptable terms, if at all. The
failure by AFT to secure such additional financing to fund the operations of
AFT could have a material adverse effect on AFT.
Motion Picture and Television Industry: The industry is highly
speculative and historically has involved a substantial degree of risk. The
success of a particular film, TV program or video cassette depends upon
unpredictable and changing factors, including the success of promotional
efforts, the availability of alternative forms of entertainment and leisure
time activities, general economic conditions, public acceptance and other
tangible and intangible factors, many of which are beyond AFT's control. There
can be no assurance that colorized motion pictures and television programs
will find acceptance among broadcasters or consumers. There is intense
competition to provide broadcast quality material for television, satellite
and cable and for the attention of the television movie-viewing audience.
There can be no assurances of future demand for colorized movies and
television series.
-2-
<PAGE>
Market Demand for Colorized Television and Theatrical Product: Although
the colorization of black and white theatrical and television programming has
been ongoing for a decade or more, it has only represented a minuscule
percentage of the total amount of programming produced during that time
period. The U.S. television market is currently supplied with network
programming, theatrical and television motion pictures, syndicated and other
forms of programming. In addition, virtually all of the distribution of
colorized theatrical and television programming has been handled by a small
group of major production companies. AFT cannot state with certainty that the
market will accept any increase in the amount of product available nor that
AFT will be able to distribute its product on economically feasible terms.
Market Demand for Colorization-Services: AFT historically generated
almost all its revenue from providing its colorization services to third party
owners of films and television shows. Since 1992, when AFT's major customer,
Turner Entertainment, decided to stop colorizing its library, there has been
very little demand for colorization. Although AFT intends to concentrate on
building its own colorized film library, it may require revenue from its
colorization services to sustain its operations. To the extent this
requirement develops, the lack of demand for colorization on a fee-for-service
basis could have a material adverse effect upon AFT's ability to continue in
business.
Retail Sales of Video Cassettes: The sale of AFT's home video cassettes
will depend upon the willingness of retailers to display and sell the
merchandise. Because of competition for shelf space, there is no assurance
this will occur.
Availability of Suitable Product: The success of AFT is contingent upon
finding and acquiring an economically feasible terms enough product for its
library or in joint ventures suitable for colorization. AFT cannot predict
with certainty that sufficient product will be available and if so whether
such product will be available at economically feasible terms.
Lack of Distribution Experience: AFT has no experience in the
distribution of film and television product, a highly competitive business.
The success of AFT will depend in great part on its ability to hire qualified
personnel to perform distribution, or in the alternative, to negotiate joint
venture or other favorable distribution agreements with established
distribution companies. There is no assurance AFT can accomplish this.
Regulations: In 1988, the United States Congress enacted legislation
addressing change and modification of motion pictures which included colorized
films. The legislation created the "National Film Preservation Board" which is
empowered to select 25 "classic" films per year. The alteration of these
films, including colorization, must carry a label stating that they have been
"altered and/or modified" without the participation of the principal director,
screenwriter and other creators of the original film. AFT does not believe
that this legislation has had any impact (positive or negative) on its
business. Members of the film making community continue to lobby for
additional governmental restrictions that could restrict colorization.
Therefore, there can be no guarantee that further legislation will not be
enacted in the United States or other countries which may have an adverse
impact on AFT's business.
-3-
<PAGE>
Creative Opposition: Most of the larger and better libraries in the
United States are owned by film production companies. Because of vocal
opposition from certain actors, writers, directors and other creative
personnel in the film community, several of the major studios have been
reluctant to colorize their libraries. There is no assurance this reluctance
will not continue. To the extent it limits supply of commercially viable
product, this creative opposition could have an adverse material effect upon
AFT's business.
Need to Locate and Retain Senior Management: The success of AFT will
largely be dependent upon it being able to locate and retain certain executive
officers of AFT, in particular operational, financial marketing and
distribution executives. Should AFT be unable to locate and retain such
executives in a timely manner or any of these key employees cease to be
affiliated with AFT for any reason before a qualified replacement could be
found, this could have a material adverse effect on AFT's business and
prospects. AFT has not obtained key man life insurance on the life of Mr.
Wetzler.
Price of Common Stock. Market for Common Stock: As a result of its
bankruptcy proceedings, the shares of the Company's $.002 par value common
stock (the "Common Stock") have been delisted from NASDAQ. Accordingly, there
has been no regular trading market of the common stock since such time. In
addition, due to AFT's financial difficulties it has not engaged in active
operations since October 1993. The current market price of the Common Stock
does not meet certain minimum per share prices designated by NASDAQ and state
"blue sky" regulations. Accordingly, unless the per share price increases
dramatically, the trading price of the shares may further restrict AFT's
ability to list the shares on NASDAQ and to publicly trade in certain states.
Future Sales/Dilution: The trading price of the Common Stock may also be
adversely affected by the significant overhang of securities issued by AFT.
Approximately 179,179,794 shares of Common Stock are outstanding or subject to
options or issuance upon conversion of the Company's debentures. Certain of
these shares are not freely tradeable and are subject to restrictions on the
reoffer or resale imposed by the Act and applicable state securities laws. The
issuance of additional shares upon the exercise of the Company's options and
the conversion of the Company's debentures could have a dilutive effect on the
ownership interest of existing shareholders.
Dividends Unlikely: AFT has not paid any dividends on its Common Stock to
date and does not intend to pay dividends in the near future. The payment of
dividends in the future will be contingent upon AFT's revenues and earnings,
if any, capital requirements and general financial condition. The payment of
any dividends will be within the discretion of AFT's then Board of Directors.
It is the present intention of the Board of Directors to retain all earnings,
if any, for use in AFT's business operations and, accordingly, the Board does
not anticipate declaring any dividends in the foreseeable future.
-4-
<PAGE>
Item 1. Business.
General
American Film Technologies, Inc.'s ("AFT" or the "Company") principal
business has been the production of color versions of motion pictures and
television programs originally produced in black and white. AFT was
incorporated in Delaware in 1985 and completed its first project in November
1987. AFT completed a public offering of its common stock in August 1987.
Since its organization, AFT has colorized over 200 motion pictures, 170
television programs and 90 animated cartoons. Through its filing for
protection under Chapter 11 of the Bankruptcy Code, AFT believes it had
accounted for approximately 70% of the global colorized production of black
and white films. During the year ended 1993, AFT completed COLORIMAGED
versions of 43 full length motion pictures, 7 episodes of a one-half hour
television series and 5 short cartoons, a theatrical animated short, an
animated half-hour special for television, a half-hour video introducing a new
board game and portions of the ink and paint and special effects work for the
Arnblin Entertainment full-length animated motion picture "We're Back. "
While most of AFT's colorization activities have been for customers on a
fee basis, AFT has also produced colorized films for its own library. The
Company owns the copyrights on eleven colorized films, including four Sherlock
Holmes films starring Basil Rathbone; "The Scarlett Pimpernel" starring Leslie
Howard, Merle Oberon and Raymond Massey; three Bela Lugosi horror films;
"Outpost in Morocco" starring George Raft; "Gung Ho" starring Robert Mitchum
and Randolph Scott; and "Eternally Yours" starring David Niven.
AFT's film products are based on AFT's proprietary technology for the
creation of color versions of motion picture and television programs
originally produced in black-and-white, called COLORIMAGED films, as well as
animation ink and paint and special effects. The AFT-owned COLORIMAGED films
may be licensed for television broadcast, cable television, and for sale in
home video markets.
AFT's colorization business continued to grow and prosper during the late
1980' s with the development of significant customers such as 20th Century
Fox, Republic Pictures and Turner Entertainment. By 1990, Turner accounted for
more than 75% of AFT's colorization business. In 1991, AFT's founding investor
and principal shareholder, George R. Jensen, decided to step down to pursue
other business opportunities. At the time, the Board determined it would be in
AFT's best interests to diversify its operations through entry into the
computer animation and ink and paint (the process of putting color into
animated film) which utilized similar technology.
In the early 1990's, AFT experienced a slowdown in its colorization
activities. In response, AFT increased its animation activities, which
required significant cash investments and resulted in a decrease in AFT's
available cash reserves. Ultimately, AFT was forced to file for protection
under Chapter 11 of the United States Bankruptcy Code in October 1993. AFT
emerged from bankruptcy in October 1995. Since that time, AFT has explored
means of product development and sought financial and strategic partners.
-5-
<PAGE>
History of AFT
Pre-Bankruptcy Events
In 1991, AFT engaged Joseph Taritero, formerly Chief Executive
Officer of Marvel Production ("Marvel") as its Chief Executive Officer. Mr.
Taritero's business plan was to raise additional capital to fund the purchase
and development of additional hardware and software for animation, to establish
an offshore animation studio for AFT so that it could operate competitively and
to enter into agreements for the production of animation products.
During 1991 and 1992, AFT incurred significant additional expenses in
acquiring the required equipment and technology for animation production. As a
result, it incurred significant losses on its animation operations. At the
same time, competitive factors and increasing reliance on fee colorization
business from Turner Entertainment led to reduced fees and narrowed profit
margins in colorization operations, the only area of AFT's business that had
positive cash flow. These problems were further exacerbated by concentrating
AFT's resources on computer animation and ink and paint. AFT was also doing
small projects such as music videos, animated shorts and interactive game
projects.
At the end of 1992, Turner Entertainment announced its intention to
terminate its film colorization program. AFT was faced with declining revenues
and had depleted its cash reserves through the cost of, and losses incurred in
connection with, its animation and ink and paint operations. In addition, it
had failed to capitalize on its market dominance by broadening its customer
base in the colorization business. Accordingly, its back orders dropped
significantly. As a result of the foregoing, by the end of 1992, AFT was faced
with the depletion of its remaining cash within a few months. In response to
this crisis, the Board terminated Mr. Taritero and appointed Arthur Hartel as
its President and Chief Executive Officer. Mr. Hartel had previously served as
the General Counsel and Secretary to the Company. Mr. Hartel's principal
objective was to locate additional capital for AFT.
Pre-Petition Investor. During early 1993, efforts were made to find a
major investor to inject new capital into AFT. An investor group led by
minister and broadcaster Pat Robertson entered into an agreement to purchase
control of AFT. In August 1993, the Robertson Group failed to close the
transaction.
On September 28, 1993, AFT entered into an agreement with Gerald M.
Wetzler pursuant to which Mr. Wetzler became the majority stockholder through
the purchase of equity interests in AFT.
-6-
<PAGE>
During the second half of fiscal 1993 and the first quarter of fiscal
year 1994, in order to lengthen the amount of time available for it to obtain
new business and to secure additional capital, AFT implemented a program of
cost reductions to go along with its program to extend the time period over
which its contractual film coloring would be produced. The principal areas in
which AFT reduced its costs were in the number of employees and in the amount
of its leased space. AFT's reduced film coloring schedule negatively impacted
AFT's earnings, principally due to its inability to cover such non-cash items
as depreciation; however, it extended AFT's available cash over a longer
period of time.
Mr. Wetzler's management team immediately commenced restructuring the
Company, suspending operations of the unprofitable animation and ink and paint
divisions.
Comerica. During the quarter ended September 30, 1992, AFT refinanced its
bank debt with a California bank, which later became Comerica Bank -
California ("Comerica"). The refinancing replaced approximately $1,008,000 of
existing bank debt and provided AFT additional available lines of credit of
$400,000 in short term financing and up to $450,000 to finance 70% of the cost
of new equipment.
Because of the operating losses in fiscal 1993, AFT was in violation of
covenants of its lending agreement with Comerica relating to tangible net
worth, fixed charges, working capital, debt ratio and current ratio. During
this period AFT and Comerica entered into three forbearance agreements, the
last of which expired on September 30, 1993.
As a result of AFT's financial difficulties, Comerica required AFT to
reduce the outstanding principal balance on this loan by approximately
$445,000, from $1,068,000 as of June 30, 1993, to approximately $623,000 on
October 8, 1993. On September 8, 1993, in order to obtain a forbearance
agreement until October 1, 1993, AFT granted the bank a security interest in
AFT's patents and copyrights as additional collateral. During early October
1993, Comerica refused to allow AFT to utilize certain funds which AFT had
believed would be available to it. As a result of the bank's actions, AFT did
not meet its obligations to third parties, including payroll for its Mexican
subsidiary. In October 1993, the employees of this subsidiary went on strike.
On October 8, 1993, Comerica advised AFT that it would file a motion in the
Superior Court of the State of California for the County of Los Angeles
seeking the appointment of a receiver for AFT and an order restricting its use
of cash. AFT filed for relief under the Bankruptcy Code on October 15, 1993.
AFT Bankruptcy
On October 15, 1993, AFT filed for relief under Chapter 11 of the United
States Bankruptcy Code. AFT has not generated any new film colorization or
animation service orders since the filing under Chapter 11.
-7-
<PAGE>
From the filing of the bankruptcy to October 1995, AFT was funded
principally from equity investments by its principal shareholder, Mr. Wetzler,
and certain other individuals. In addition, pursuant to a debtor in possession
secured lending arrangement, Mr. Wetzler and Mr. Robert Bernhard, in their
discretion, were authorized to make available to AFT up to an aggregate of
$150,000 (the "DIP Financing"). The maximum outstanding at any time under the
DIP Financing was $122,300 in July 1995.
Although AFT reduced its overhead and operating expenses significantly
since the filing of the Chapter 11 proceeding, the lack of capital and film
colorization contracts made it impossible for AFT to resume operations and to
generate sufficient revenues to cover its ongoing overhead and administrative
expenses. In order to preserve its resources, AFT reduced its overhead by
laying off substantially all of its employees and by reducing the amount of
space it leases in San Diego. In January 1995, AFT ceased its post-petition
operations.
1995 Financing Events
H.J. Meyers Private Placement. On May 3, 1995, the Company entered into
an option agreement with H.J. Meyers & Co., Inc. ("Meyers") pursuant to which
the Company granted Meyers a ninety-day option (beginning May 30, 1995) to
purchase up to 51% of the Company's common stock, or 35,182,508 shares, for
$3,000,000 (the "Meyers Placement"). Upon approval of the Meyers Placement by
the Bankruptcy Court on May 30, 1995, Meyers paid the Company a nonrefundable
fee of $150,000 for the Meyers option. The Agreement required Meyers to pay
the Company $3,000,000 on the effective date of the Plan. Through a subsequent
amendment to that agreement, Meyers agreed to use its best efforts to increase
the proceeds of the offering to $4,000,000 which would result in net proceeds
of $3,480,000 to the Company. In exchange for this possible increase, the
Company agreed to issue an additional 3,800,000 shares to Meyers and its
assignees. Meyers raised the money through a private placement of the Common
Stock to "accredited investors, " as that term is defined by the Securities
Act of 1933, as amended (the "Meyers Shareholders"). As of October 31, 1995,
the termination date for the sale, Meyers had sold subscriptions totaling
$3,460,200 for the purchase of the Company's stock. As of June 30, 1996, the
net proceeds to the Company totaled $3,460,200, including the conversion of a
$300,000 bridge loan described below. In consideration for, among other
things, funding the $150,000 price of the Meyers Placement, the Placement
Agent agreed to assign 14,345,854 shares of Common Stock to L&R Holdings, Inc.
and 10,545,854 shares of Common Stock to JCV Capital Corp.
The stockholders from the Meyers Placement also have a right to register
their stock in any offering of the Company's stock. The amount of stock these
shareholders may register and sell is subject to pro-rata reduction or
elimination at the sole discretion of the underwriter. However, the
non-affiliate Meyers Shareholders can sell their shares under Rule 144 without
any volume or manner of sale limitations on or after October 17, 1997. The
potential influx into the public marketplace of approximately 10,000,000
shares of Common Stock in October 1997 and the existence of the registration
rights could adversely impact the price of the Common Stock or the ability of
the Company to raise additional equity capital.
-8-
<PAGE>
Meyers Loan. On July 28, 1995, Meyers arranged for a $500,000 bridge
loan (the "Meyers Loan") to the Company bearing an interest of eight percent
(8%) per annum to fund certain obligations of the Company prior to the
effective date of the Plan. In addition to interest, the accredited investors
received common stock at the rate of one-half share for every dollar of bridge
loan. On the effective date of the Plan, $300,000 of the bridge loan was
converted into the Common Stock and the remaining $200,000 was repaid.
Proceeds from the Meyers Loan were utilized as follows: (1) $250,000 to the
outstanding principal balance due on the Comerica Bank loan; (2) $100,000 to
pay the remaining balance on the purchase agreement with the employees at the
Company's Mexican facility (See Properties below); and (3) $150,000 for the
Company's general administrative expenses.
Plan of Reorganization. In July 1995, AFT proposed a plan of
reorganization to raise sufficient new capital to recommence operations.
Pursuant to the proposed plan, AFT contemplated raising up to $4 million in
new equity, including the Meyers Placement, described above. On October 6,
1995, the Company's Plan of Reorganization (the "Plan") was approved by the
Bankruptcy Court and became effective October 17, 1995 (the "Effective Date").
In connection with the Plan, the Company raised approximately $3.4 million in
new equity capital.
Under the terms of the Plan, the following is a summary of the treatment
of each of the major classes of creditors and stockholders:
<TABLE>
<CAPTION>
Class of Estimated Distribution under the Plan Status
Claims Amount of
Claim
<S> <C> <C> <C>
Class 1 $86,000 Cash payment in full on effective date Unimpaired
Employee
Priority Claim
Class 2 $80,000 Cash payment on Distribution Date or, at Unimpaired
Priority Claim the Company's discretion, over six years
plus interest
Class 3 $623,000 Cash payment on the effective date plus Unimpaired
Comerica interest and reasonable legal fees
Claims
Class 4 $500,000 Cash payment plus interest on the effective Unimpaired
Secured date
Claims
Class 5 DIP $122,000 $110,000 cash payment plus accrued Impaired
Financing interest on effective date and remainder in
Claims one year note
Class 6 $6,000 Cash payment in full on effective date. Unimpaired
Convenience
Claims
Class 7 $1,650,000* Unsecured five year notes in full amount of Impaired
Unsecured allowed claim, with interest at 7 %
Claims
</TABLE>
-9-
<PAGE>
<TABLE>
<S> <C> <C> <C>
Class 8 N/A $10 cash on effective date. Unexercised Impaired
Preferred Series B and the Series C and D voting
Stock Interest convertible interest were canceled
Class 9 N/A Retained, subject to dilution Impaired
Common
Stock Interest
Class 10 N/A Canceled Impaired
Other Equity
Interests
</TABLE>
- ------------------
* Does not include the Class 7 claim of Joseph Taritero, which was compromised
pursuant to the terms of a prior stipulation and order and has been paid in full
by the Company.
In October 1995, AFT completed the Meyers Placement pursuant to which it
has received approximately $3.4 million of new capital in exchange for the
issuance of shares representing approximately 54% of its total outstanding
common stock, including funds received in exchange for the Meyers Loan.
Since emerging from bankruptcy, the Company has actively pursued new
strategic alliances and partners.
Subsequent Financing
During fiscal 1998, the Company's operations were financed almost
entirely by remaining working capital, proceeds from private placements of its
securities and purchases and option exercises by Gerald Wetzler. During this
period $855,965 in secured convertible notes were issued in a private
placement. Between July 1, 1998 and February 5, 1999 an additional $33,000 in
secured convertible notes were issued in a private placement.
In January 1997, the Company issued a $100,000 principal amount Senior
Secured Convertible Debenture to an accredited investor in a private
placement. In September 1997, the investor converted this Debenture into
1,100,000 shares of the Company's Common Stock pursuant to its terms.
In January 1997, May 1997 and June 1997, the Company raised an additional
$420,000 through the sale of director stock options to purchase 15,500,000
shares to Gerald Wetzler. These options plus an option purchased by Mr.
Wetzler for $200,000 in June 1996 to purchase 20,000,000 shares of Common
Stock were terminated by Mr. Wetzler in two separate transactions in September
1997. See "Certain Transactions.
-10-
<PAGE>
AFT received commitments from Mr. Wetzler and a group of investors, pursuant to
which such investors committed to provide up to $1,000,000 of new financing to
AFT through the purchase of two-year Senior Secured Convertible Notes bearing no
interest and convertible into Common Stock of the Company at a rate of three
cents ($.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 utilized to make the
principal and interest payments due on the Company's Bankruptcy Notes. An
additional $355,965 was raised from Mr. Wetzler and other investors to fund the
Company's working capital requirements in late 1997 and 1998.
Operations
Colorized Films. Historically, AFT has created color imaged films which
are color versions of motion pictures originally produced in black and white.
The first color version of a full length motion picture was completed by AFT
in late November 1987.
Prior to embarking on its attempt to enter into the animation business in
1991, AFT was operating profitably from its colorization operations. As
recently as its fiscal year ended June 30, 1990, it generated $3.1 million of
net income on revenues of $18.5 million. After a poor year in 1991 when
revenues dropped by almost 50% as compared to the prior year, AFT was again
profitable in fiscal 1992, generating $0.9 million of net income on revenues
of $14.1 million. During the year ended June 30, 1992, AFT completed color
versions of 40 full length motion pictures, 71 episodes of a one-half hour
television series and 25 short cartoons. During the year ended June 30, 1993,
AFT completed 43 full length motion pictures. For the six month period ended
December 31, 1993, AFT completed seven COLORIMAGED motion pictures.
Traditionally, Turner has been the most active studio in colorizing its
black and white library, principally the old MGM library. During fiscal 1993,
AFT's agreement with Turner amounted to approximately 65% of the work
completed in the year ended June 30, 1993. Turner announced its intention to
terminate its film colorization program at the end of 1992. Subsequently, it
has not ordered any new films colorized by AFT beyond those which have been
completed. AFT does not know when, if ever, Turner will resume its
colorization activities. However, AFT believes that other studios and media
companies, principally Universal, Columbia, Fox, Warner Brothers, and Viacom
all have significant black and white film and television libraries that have
not been colorized. AFT also believes that substantial foreign film and
television libraries exist which have not been colorized.
Under a typical contract, AFT could decline to colorize a particular film
if the elements (print or negative) of the film were not acceptable to AFT.
Each customer otherwise selected the films for which color versions are to be
made, has final approval on color selection, aesthetic approach, etc., and
owns all rights in the final product. AFT received partial payments of its
fees at various points in the production process.
-11-
<PAGE>
Film Library Prior to 1993, in addition to colorizing movies for other
owners, AFT created colorized films for its own library from movies in the
public domain. By doing this, AFT acquired a new 75 year copyright in the
colorized version of the motion picture. Among the films owned in whole or in
part were "It's a Wonderful Life, " "The Scarlet Pimpernel, " and four
Sherlock Holmes films, and others. As of June 30, 1997, AFT's library
consisted of the following eleven completed films:
"Terror By Night," "Dressed to Kill," "Woman in Green" and "Sherlock
Holmes and the Secret Weapon" starring Basil Rathbone;
"Outpost in Morocco" starring George Raft;
"Gung Ho" starring Randolph Scott and Robert Mitchum;
"Eternally Yours" starring David Niven and Loretta Young;
"The Scarlet Pimpernel" starring Leslie Howard, Merle Oberon and
Raymond Massey; and
"Black Dragons," "Scared To Death," and "White Zombie" starring
Bela Lugosi.
In the first quarter of fiscal 1993, AFT sold its joint venture interest
in five films (including "It's a Wonderful Life") it held in agreement with
Republic Pictures to Republic for $600,000. This price was in excess of the
carrying value of these films.
The four Sherlock Holmes films were distributed through Multimedia
Entertainment as part of a two program agreement. Each three-hour program
consisted of two Sherlock Holmes films. AFT's recognized revenues of $190,000
related to the showing of the first of these programs during fiscal 1989. In
fiscal 1990 AFT recognized $191,000 in revenues from broadcast of the second
film program.
AFT has received copyrights on the color versions of the films in its
library. Since June 1987, the Copyright Office of the Library of Congress has
been accepting registrations for copyright protection for a 75-year period
(amended in 1998 for an additional 20 years) on certain colorized versions of
black and white motion pictures.
The distribution business is highly competitive. The most important
factors are price, quality, dependability, audience appeal of the product and
marketing skills. There are numerous domestic and foreign competitors, many of
whom have resources substantially greater than AFT. These competitors include
major motion picture studios and other production and distribution companies
which distribute their own programs and films as well as those produced by
others.
The Company cannot state with any degree of certainty what revenues could
be derived at this time from the exploitation of its current library.
-12-
<PAGE>
Animation. During the years ended June 30, 1989 and 1990, AFT engaged in
a research and development project to produce a computer generated, paperless
animation process and ink and paint (the process of putting color in animated
films) which would be competitive with existing traditional and computer
animated systems with respect to both the perceived production values and
costs.
During fiscal 1992, AFT completed a short theatrical cartoon for
Twentieth Century Fox. AFT also animated a 30-minute prime time television
special, a Ronald McDonald's Storybook Theater presentation titled "The Magic
Paintbrush," for Marvel Production and CBS Television. AFT has also used its
high resolution computer and film based ink, paint and compositing technology
on the full-length animated feature film "We're Back" for Universal Pictures.
AFT's computer process colors traditional animation cells and outputs the
final product to 35mm film. "We're Back" was completed for Amblin
Entertainment during September 1993 to meet a theatrical release date of
November 1993.
Although AFT developed significant technology in this area, it was not
able to match its competitors' prices. Accordingly, AFT produced only few
significant projects and has incurred significant losses in producing certain
of those projects. AFT's business plan upon reorganization focuses on the core
colorization business. While AFT has proven animation technology, profit
margins in animation were minimal due to lower cost foreign animation
competition. In addition, technological advances in computer hardware and
software have surpassed AFT's technology. AFT also believes that substantial
resources would be required in order for it to compete effectively and to
attain full-scale production. See "History of AFT."
Mexican Subsidiary. The Company performed much of its colorization work
through its wholly-owned subsidiary, American Film Technologies de Mexico,
S.A., a Mexican corporation. AFT loaned a significant amount of its
colorization, animation and ink and paint equipment to the subsidiary. Due to
restraints on the utilization of its cash imposed by Comerica Bank, the
subsidiary missed its payroll on October 8, 1993 and the subsidiary's
employees began a work stoppage. As a result of the strike, the Mexican
employees filed a lien against AFT's equipment located at the Mexico
production facility. Since the equipment is owned by AFT and the labor claim
is against the subsidiary, AFT has challenged the validity of the lien, and in
August, 1994, a Mexican court ruled in favor of the workers, validating their
lien on the equipment. This equipment was subsequently repurchased by the
Company.
In December, 1994, the subsidiary negotiated a settlement of the strike.
The settlement called for a schedule of payments to its employees.
Subsequently, the subsidiary failed to make payments. In March, 1995, the
Mexican Labor Board allowed the employees to execute their lien and granted
them title to the equipment. Subsequently, AFT has organized a new Mexican
subsidiary, Midtech de Mexico, S.A. de C.V. ("Midtech"). Midtech negotiated a
purchase agreement with the owners of AFT's former equipment. The agreement
required a purchase price of $215,000, which has been paid.
Current management believes a Mexican production facility is advantageous
to the strategic plan of the Company. However, the Company has not operated
for four years, and although historically, the Company was able to achieve
significant cost savings through its Mexican operations as compared to the
U.S., it is uncertain as to whether such cost savings can be achieved in the
future. Should the Company resume operations at this time it would anticipate
reestablishing operations in Mexico, which will require reemployment of
selected former employees of the Company's former subsidiary. Since the
Mexican operation was suspended in October, 1993, most of the former employees
have found other jobs. The success of the Company will depend upon Midtech's
ability to rehire certain former employees. If Midtech is unable to do so, it
will have to
-13-
<PAGE>
recruit and train a new work force. That would delay the resumption of
production and increase the cost of production. As such, it could have a
materially adverse effect on the Company. Although the Company expects to
benefit from the recent devaluation of the peso, there is no assurance its
future employees or vendors will not demand increases in wages or prices to
offset the effect of devaluation.
Intellectual Property
The Company holds three United States patents pertaining to colorizing
monochrome images, which will expire in January 2008, March 2009 and July
2013. AFT also holds a patent pertaining to the animation process, which will
expire in October 2010. AFT's success will be largely dependent upon its
technology and its ability to maintain patent protection on the technology it
develops. See "Risk Factors -- Patent Protection.
Employees
At present, the Company has one full-time employee and uses certain
former employees on an as-needed basis. The Company will add employees as
necessary in phases as it commences design work on films, then production of
colorized films and, finally, distribution and exploitation of the colorized
films.
Subsequent Developments
The Company is continuing to experience cash flow difficulties. Mr.
Wetzler has continued to provide limited fund to meet minimum operating
expenses on a month to month basis. The Company was required to make a payment
in October 1998 of approximately $405,000 plus interest to unsecured creditors
in connection with its 1995 bankruptcy reorganization but has not made such
payment. No creditor has filed a complaint or objection or instituted any
legal action to date because of such failure. To the extent, outside financing
is not obtained in the immediate future and if Mr. Wetzler determines not to
continue funding the Company on a month to month basis the Company will be
liquidated. In such event the shareholders in all likelihood will receive
nothing in respect of their stock.
The Company entered into an agreement on November 4, 1998, whereby it
granted a three month exclusive option to an individual in the entertainment
industry to nominate a majority of the Board of Directors and to acquire 51%
of the stock of the Registrant for $4,000,000. Although the option period has
expired the Company and the individual are continuing discussions regarding a
material investment in the Company. No assurance can be given that the
transaction will be consummated.
-14-
<PAGE>
Item 2. Properties.
AFT's film colorization facility is located at 4105 Sorrento Valley
Boulevard, San Diego, California 92121. AFT has approximately 8,400 square
feet of leased office and production space in San Diego. This property is
currently leased for a period expiring October 31, 2000.
The Company formerly leased space in Tijuana, Mexico which lease expired
on June 30, 1998. There is still indebtedness to the landlord for unpaid rent.
No action in this regard has been instituted by the landlord.
AFT leases office space in New York, New York located at 300 Park Avenue,
New York, New York 10022. The lease is renewable on a yearly basis.
Item 3. Legal Proceedings.
There are currently no pending claims against the Company.
Item 4. Submission of Matters to a Vote of Security Holders.
The Company has not submitted any matters to a vote of its security
holders during the fourth quarter of the fiscal year covered by this report.
-15-
<PAGE>
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.
The Company's Common Stock trades on a limited basis on the "pink sheets"
under the symbol "AFTC. " Stock price ranges for each full quarterly period
during the two most recent fiscal years ended June 30, 1997 and June 30, 1998
are listed below:
Common Stock Price Ranges
Quarter
Ended High Low
------- ---- ---
09/96 $1.20 $0.18
12/96 $1.03 $0.30
03/97 $0.64 $0.21
06/97 $0.48 $0.20
09/97 $0.40 $0.15
12/97 $0.25 $0.03
03/98 $0.14 $0.05
06/98 $0.09 $0.04
- ---------
* The Company filed for protection under Chapter 11 of the Bankruptcy code on
October 16, 1993.
According to the records of the Company's transfer agent on February 5,
1999 the Company had 1,334 shareholders of record. On February 5, 1999, the
last trading price of the Common Stock was reported at $.05 per share.
The Company has not declared dividends on the Common Stock since it
became a public company. The Company does not intend to pay dividends in the
foreseeable future.
Item 6. Selected Financial Data.
The tables below set forth certain selected consolidated financial data
of the Company for each year of the five-year period ended June 30, 1998 and
should be read in conjunction with "MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS" and "RISK FACTORS," and with
the financial statements included elsewhere herein. All data for the period
ended June 30, 1997 is reported on a fresh start basis of accounting in
accordance with the Statement of Position (SOP) 90-7, "Financial Reporting by
Entities in Reorganization Under the Bankruptcy Code," issued in November 1990
by the Institute of Certified Public Accountants and includes activity from
October 17, 1995 (the Effective Date) to June 30, 1997. Under this concept,
all assets and liabilities are restated to reflect the reorganization value of
the reorganized entity, which approximates its fair value at the
-16-
<PAGE>
date of reorganization. In addition, the accumulated deficit of the Company was
eliminated and its capital structure was recast in conformity with the Plan. As
such, the accompanying financial data as of June 30, 1996, 1997 and 1998
represents that of a successor company which, in effect, is a new entity with
assets, liabilities and a capital structure having carrying values not
comparable with prior periods and with no beginning retained earnings or
deficit.
Summary of Financial Information
(000's omitted except for per share numbers)
<TABLE>
<CAPTION>
Year Ended June 30,
-------------------------------------------------------------
Income Statement Data 1998 1997 1996* 1995 1994
---- ---- ----- ---- ----
(Successor) (Successor)(Predecessor)(Predecessor)(Predecessor)
<S> <C> <C> <C> <C> <C>
Revenues - - - $ 22 $2,369
Net Income (Loss) $(1,390) $(15,414) $(1,445) $(1,642) $(3,082)
Income (Loss) per share - basic $(0.02) $(0.21) $(0.02) $(0.06) $(0.15)
- diluted $(0.01) $(0.13) $(0.02) $(0.06) $(0.15)
</TABLE>
<TABLE>
<CAPTION>
June 30,
-------------------------------------------------------------
Balance Sheet Data 1998 1997 1996 1995 1994
---- ---- ---- ---- ----
(Successor)(Successor)(Predecessor)(Predecessor)(Predecessor)
<S> <C> <C> <C> <C> <C>
Total Assets $327 $821 $7,245 $1,263 $2,111
Long-Term Debt, net of current portion $1,667 $1,870 $1,634 -- -
Total Liabilities $2,728 $2,995 $2,566 $4,349 $3,875
Stockholders' Equity (Deficit) $(2,400) $(2,174) $4,678 $(3,086) $(1,765)
</TABLE>
- ----------
* Includes the period from October 17, 1995 (the effective date) to June 30,
1996.
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operation.
General
The operations of AFT for the fiscal years ended June 30, 1997 and 1998
were significantly affected by the reduction and, in fiscal year 1994, the
cessation of production operations of the Company. As a result, the financial
results of the Company for each of the three fiscal years addressed by this
report do not reflect any earnings capacity of the Company. The financial data
for the periods ended June 30, 1996, 1997 and 1998 reflects the adoption of
Fresh Start Accounting and includes the period from October 17, 1995 (the
Effective Date) to June 30, 1996. As such the financial data is considered
that of a Successor Company and is not comparable to prior periods.
-17-
<PAGE>
The opinion of the Company's auditors, Cummings & Carroll, P.C., which
accompanies the Company's financial statements, contains an emphasis paragraph
as to the Company's ability to continue as a going concern.
Year Ended June 30, 1998 compared to June 30, 1997
The Company did not record any revenues during either period.
In 1997 the Company recorded an expense of $5,689,000 relating to the
write-off of its asset, "Reorganization Value in Excess of Identifiable
Assets". This write-off was required due to the uncertainty of its
recoverability.
Total expenses during the fiscal year ended June 30, 1998 amounted to
$1,389,000. Total expenses before the write-off of the reorganization value
and the non cash compensation expense during the fiscal year ended June 30,
1997 amount to $1,856,361. The Company recorded compensation and benefits for
its administration and officers of approximately $8,002,000 for the period
ended June 30, 1997. The increase in compensation in 1997 was primarily due to
the value of options granted to consultants for their services during the
fiscal year ended June 30, 1997 and to the increase in the number of options
granted to certain directors which have required that the Company record a
charge against operations in accordance with the requirements of APB 25. For
further information, see "Footnote 2 - Summary of Significant Accounting
Policies" and "Footnote 11 - Stockholders Equity (Deficit)" to the
Consolidated Financial Statements.
Year ended June 30, 1997 compared to June 30. 1996.
AFT did not record any revenues for the period ended June 30, 1997.
The Company recorded no production costs for the period ended June 30,
1997 and June 30, 1996. The Company recorded depreciation and amortization
expenses of approximately $242,000 during the period ended June 30, 1997 and
$558,000 during the period ended June 30, 1996.
The Company recorded compensation and benefits for its administration and
officers of approximately $295,000 for the period ended June 30, 1997 as
compared to $244,000 for the period ended June 30, 1996. Selling, general and
administrative expenses increased to $1,022,000 during the period ended June
30, 1997 compared to $730,000 during the period ended June 30, 1996. Interest
expense increased to $141,000 in fiscal year 1997 from $103,000 in fiscal year
1996.
-18-
<PAGE>
The Company recorded a net loss of approximately $15,414,000 during the
period ended June 30, 1997 compared to a net loss of approximately $1,445,000
during the period ended June 30, 1996. The increase in the net loss was
primarily due to the value of options granted and charged to operations in
accordance with APB 25 in the amount of $8,002,000 and a $5,689,000 write off
of its asset, "Reorganization Value in Excess of Identifiable Assets" due to
the uncertainty of its recoverability.
Financial Condition and Liquidity. During the fiscal years ended June 30,
1998 and 1997 the Company financed its activities principally through the sale
of its securities in private placements to accredited investors. In January
1997, the Company raised $100,000 through the issuance of the January 1997
Debenture. In September 1997, the January 1997 Debenture was converted by the
debentureholder into 1, 111, 111 shares of Common Stock in accordance with its
terms. In addition, in January 1997, May 1997 and June 1997, the Company in
three separate transactions raised an additional $420,000 through the sale of
Director stock options to purchase 15,500,000 shares to Gerald Wetzler. As of
June 30, 1997 the Company had current assets of approximately $283,000
available to finance its operations through the middle of September.
Subsequent to the end of fiscal 1997, the Company has continued to
finance its activities through the sale of its securities in private
placements to accredited investors and the exercise of previously granted
options. In August 1997, Mr. Wetzler exercised a portion of his 20,000,000
share option grant of June 1996 option for 250,000 shares of Common Stock, at
an exercise price of $0.12 per share or $30,000. On September 12, 1997, Mr.
Wetzler purchased two year options to purchase 30,000,000 shares of Common
Stock at one cent ($.01) per share for $130,000, in order to finance the
Company's activities during September and October of 1997. In connection with
this option purchase, Mr. Wetzler terminated the remaining 29,750,000 of his
outstanding June 1996 and January 1997 options, which options were purchased
by Mr. Wetzler for an aggregate purchase price of $400,000. In addition, in
order to facilitate additional financing for the Company, on September 19,
1997, Mr. Wetzler terminated the outstanding options to purchase 5,500,000
shares of Common Stock pursuant to the Company's May and June 1997 option
grants, which options were purchased by Mr. Wetzler for an aggregate purchase
price of $220,000.
On and 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 $710,000 of new financing to AFT through the purchase of two year
Senior Secured Convertible Notes bearing no interest and convertible into
Common Stock of the Company at a rate of three cents ($.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 October, 1997
principal and interest payments due on the Company's Bankruptcy Notes and to
fund the Company's working capital requirements. The Board of Directors has
authorized a sale of up to $2,000,000 of Senior Secured Convertible Notes.
-19-
<PAGE>
AFT is continuing to experience cash flow difficulties. Mr. Wetzler has
continued to provide limited funds on a loan basis to meet minimum operating
expenses on a month to month basis. AFT was required to make a payment in
October 1998 of approximately $405,000 plus interest to unsecured creditors in
connection with its 1995 bankruptcy reorganization but has not made such
payment. No creditor has filed a complaint or objection or instituted any legal
action to date because of such failure. To the extent, outside financing is not
obtained in the immediate future and if Mr. Wetzler determines not to continue
funding the Company on a month to month basis the Company will be liquidated. In
such event the shareholders in all likelihood will receive nothing in respect of
their stock.
In addition the company needs funding sufficient to enable it to become
operational again, although, the amount of funding required is contingent on a
number of variables such as the speed of the start up and initial production
capacity required; the Company believes that the minimum amount required
(including working capital) would be approximately $4,000,000.
Item 8. Financial Statements and Supplementary Data.
Report of Independent Auditors............................................. F-2
Consolidated Balance Sheets................................................ F-3
Consolidated Statements of Operations...................................... F-4
Consolidated Statements of Stockholders' Equity (Deficit).................. F-5
Consolidated Statements of Cash Flows...................................... F-6
Notes to Consolidated Financial Statements................................. F-7
Item 9. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure.
None.
-20-
<PAGE>
PART III
Item 10. Directors and Executive Officers of the Registrant.
The directors and executive officers of the Company are as follows:
Name Age Position with Company
---- --- ---------------------
Gerald M. Wetzler 60 Chairman, Director,
Chief Executive Officer
Eric Illowsky 40 Director, Secretary
The directors serve until the next annual meeting of shareholders and the
election and qualification of their successors. The officers are elected by
the directors and serve at the discretion of the Board of Directors. See
"Certain Transactions.
GERALD M. WETZLER
Mr. Wetzler was elected Chairman of the Board of Directors and Chief
Executive Officer of the Company on October 26, 1993, following his purchase
of the controlling interest in the Company. Prior to 1993, Mr. Wetzler had
been a private investor since 1975. Mr. Wetzler received a Juris Doctor degree
from Columbia Law School and a Master of Laws degree from Harvard Law School.
He practiced law with Cahill, Gordon & Reindel from 1962 to 1966. He worked in
the corporate finance department of Lehman Brothers for five years and served
as General Counsel for Beker Industries, Corp., a New York Stock Exchange
company.
ERIC ILLOWSKY
Mr. Illowsky was elected to the Company's Board of Directors in January
1997. Since August of 1994, he has been President of Cable Network Insights, a
cable television network development company. From April 1992 to July 1994,
Mr. Illowsky served as Vice President of the USA Network, a cable channel
operator. From September 1990 to April 1992, Mr. Illowsky served as Senior
Vice President of Programming and Development for the Sci-Fi Channel, a cable
company broadcasting science fiction films.
Compliance with Section 16(a) of the Exchange Act
Section 16(a) of the Securities Exchange Act of 1934 (the "Exchange Act")
requires the Company's officers and directors and the holders of more than ten
percent of the company's outstanding common stock to file reports of ownership
with the Securities and Exchange Commission ("SEC") and to furnish the Company
with copies of these reports. Based solely on a review of the forms it has
received and on written representations from certain reporting persons that no
such forms were required from them, the Company believes that, except as set
forth below, during the fiscal year ended June 30, 1997 all Section 16(a)
filing requirements applicable to its officers, directors and 10 % beneficial
owners were complied with by such persons.
-21-
<PAGE>
Mr. Wetzler and Mr. Illowsky filed Form 4's with respect to transactions
occurring in 1998 after the dates prescribed under Section 16(a). In addition,
certain filings of Form 4's are late and will be filed within the next few
weeks.
Item 11. Executive Compensation.
The following table sets forth the compensation of the officers of the
Company. For the fiscal year ended June 30, 1998, neither Mr. Wetzler nor any
of the other executive officers received compensation over $100,000.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Annual Compensation Long-Term Compensation
- ----------------------------------------------------------------------------------------------------------------------
Securities
Name and Restricted Stock Underlying Options
Principal Position Year Salary Bonus($) Awards ($) /SARs(#)
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Gerald M. Wetzler 1998 -0- -0- -0- -0-
Chairman, Director,
Chief Executive
Officer
1997 -0- -0- -0- -0-
1996 -0- $125,000* -0- 10,000,000(1)
1995 -0- -0- -0- -0-
</TABLE>
- ------------
* Upon confirmation of the Plan in October 1995, Mr. Wetzler received a bonus of
$125,000, in accordance with the terms of the Reorganization Plan.
(1) See Wetzler employment agreement.
-22-
<PAGE>
In addition to the above, Mr. Wetzler has purchased options in connection
with his providing working capital to the Company, See "Certain Transactions."
Options
During the fiscal year ended June 30, 1997, the Company granted the
following options to Mr. Wetzler:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------
Options
- -----------------------------------------------------------------------------------------------------------------------
Date of Grant Amount of Exercise Purchase
Underlying Shares Price Per Share Price of Option
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
June 1996 20,000,000 $.12 $200,000
- -----------------------------------------------------------------------------------------------------------------------
January 1997 10,000,000 $.07 $200,000
- -----------------------------------------------------------------------------------------------------------------------
May 1997 4,000,000 $.09 $160,000
- -----------------------------------------------------------------------------------------------------------------------
June 1997 1,500,000 $.09 $ 60,000
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
In addition, on September 12, 1997, Mr. Wetzler purchased 30,000,000
options for an aggregate purchase price of $130,000 in connection with his
providing working capital to the Company. Simultaneously with the purchase of
the September 1997 options, Mr. Wetzler agreed, to the extent that they had
not been exercised, to terminate the June 1996 options as well as the January
1997 options. As of the termination date, Mr. Wetzler had only exercised
250,000 of the 20,000,000 options granted to him in June of 1996. None of the
January 1997 options had been exercised. In addition, as of September 18,
1997, Mr. Wetzler terminated the May 1997 options as well as the June 1997
options, none of which had been exercised by Mr. Wetzler. For further
discussion of the above, see "Certain Transactions". No options were granted
Mr. Wetzler during the fiscal year ended June 30, 1998.
Compensation of Directors
During the pendency of the Company's bankruptcy proceedings, directors of
the Company were not separately compensated for service on the Board of
Directors. The current directors receive options to purchase 50,000 shares of
Common Stock of the Company upon joining the Board. In the fiscal year ended
June 30, 1998, Mr. Illowsky received an option grant of 200,000 shares, at an
exercise price of $.05 per share, in connection with his services as secretary
and a director.
-23-
<PAGE>
Employment Contracts
Wetzler Employment Agreement Effective January 1, 1996, the Company
entered into an employment agreement with Mr. Wetzler (the "Employment
Agreement") to serve as the Chief Executive Officer of the Company. The
Agreement provides for a term of five years, subject to termination as
provided in the Agreement, and provides that, as sole compensation under the
Agreement, Mr. Wetzler will receive an option to purchase 10,000,000 shares of
the Company's $.002 par value common stock, at an exercise price of twelve
cents less than the average trading price in the Company's common stock for
the twenty trading days prior to and including January 18, 1996, which has
been calculated as $.0628 per share, pursuant to the terms of a Stock Option
Agreement (described below). The Employment Agreement provides for no cash
compensation, but does entitle Mr. Wetzler to fringe benefits, including
health insurance, on terms which may be agreed to from time to time by the
Company and Mr. Wetzler.
The Employment Agreement obligates the Company to indemnify Mr. Wetzler
from and against third party claims in accordance with the Company's
Certificate of Incorporation and By-Laws.
Mr. Wetzler is entitled to terminate the Employment Agreement
on the occurrence of certain events, including a breach by the Company or a
change in control of the Company, as defined in the Employment Agreement. If the
Employment Agreement is terminated because of a breach of the Employment
Agreement by the Company, Mr. Wetzler is entitled to receive, as liquidated
damages, a termination payment equal to $250,000, multiplied by the number of
years, including partial years, remaining on the original term of the Employment
Agreement. If the Employment Agreement is terminated in connection with a change
in control of the Company, Mr. Wetzler is entitled to receive an amount equal to
2.99 multiplied by the greater of (a) the average annual gross compensation
received by Mr. Wetzler from the Company from all sources during the five years
prior to and including the year in which the event giving rise to termination
occurs or (b) $250,000. The board of directors in April 1998, amended Mr.
Wetzler's employment agreement to provide that Mr. Wetzler would receive a
$750,000 zero coupon senior secured note convertible at $.03 per share as full
compensation if the employment agreement should be terminated in connection with
a change of control. This amendment was approved by the entire Board of
Directors of the Company (three directors excluding Mr. Wetzler).
Compensation of Directors:
Mr. Illowsky received in fiscal 1998 an option to purchase 200,000 shares
of Company common stock at a price of $.05 per share in connection with his
services as Secretary and Director of the Company.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
As of February 5, 1999 the only class of voting securities issued and
outstanding was 85,036,100 shares of the Company's common stock.
-24-
<PAGE>
The following sets forth information as of February 5, 1999, with respect
to the shares of the Company's common stock beneficially owned by (i) each
person who is known by the Company to beneficially own more than 5 % of any
class of the Company's voting securities, (ii) the five highest paid officers
including the Chief Executive Officer, (iii) each director of the Company, and
(iv) all directors and officers as a group.
<TABLE>
<CAPTION>
Name and Address of Amount and Nature of
beneficial owner(l) beneficial ownership Percent Class (2)
- ------------------- -------------------- -----------------
<S> <C> <C>
Gerald M. Wetzler (Chairman of the Board and 40,024,334 (3) 36.72%
Chief Executive Officer)
JCV Capital Corp. 10,380,854 9.52%
P.O. Box 22719
Rochester, NY 14692
L&R Holdings, Inc. 12,145,854 11.14%
130 Shore Road
Port Washington, NY 11050
Eric Illowsky (Director) 300,000 (4) *
Officers and Directors as a Group 40,324,334 36.99%
Less than one percent.
</TABLE>
(1) Except as otherwise indicated and subject to applicable community
property and similar laws, the Company assumes that each named person has
the sole voting and investment power with respect to his or her shares
(other than shares subject to options).
(2) Percent of class is based on the number of shares outstanding as of
February 5, 1999. In addition, shares which a person had the right to
acquire within 60 days are also deemed outstanding in calculating the
percentage ownership of the person but not deemed outstanding as to any
other person. Does not include shares issuable upon exercise of any
warrants, options, or other convertible rights issued by the Company
which are not exercisable within 60 days from the date hereof. Ownership
of less than 1% is indicated by an asterisk.
(3) Does not include 3,666,666 shares subject to options which are not
exercisable within the next 60 days. Does not include 17,165,500 shares
issuable upon conversion of the Senior Secured Convertible Note, which
note was purchased by Mr. Wetzler in 1997 and 1998. Does not include
25,000,000 shares issuable upon conversion of a $750,000 senior secured
convertible note which would be received by Mr. Wetzler upon a change of
control of the Company and termination of his employment contract dated
January 1996. This senior secured convertible note is convertible at $.03
per share. Includes 27,733,334 shares subject to options which are
exercisable within the next 60 days. See "Certain Transactions."
(4) All shares subject to currently exercisable options.
Item 13. Certain Relationships and Related Transactions.
On September 12, 1997, Mr. Gerald Wetzler purchased options to acquire
30,000,000 shares of Common Stock of the Company for an aggregate purchase
price of $130,000. Pursuant to these options, shares of Common Stock of the
Company may be purchased at an exercise price of $0.01 per share.
-25-
<PAGE>
These options terminate on September 12, 1999. The Board of Directors
granted Mr. Wetzler these options in part to enable the Company to have
sufficient working capital to operate through October 1997 so that the Company
could either obtain additional financing or proceed with an orderly
liquidation. Simultaneously with the purchase of the foregoing options, Mr.
Wetzler agreed, to the extent that they had not been exercised, to terminate
certain June, 1996 options to purchase 20,000,000 shares of Common Stock of
the Company at an exercise price of $0.12 per share, as well as certain
January, 1997 options to purchase 10,000,000 shares of Common Stock of the
Company at an exercise price of $0.07 per share. Such options were purchased
by Mr. Wetzler for an aggregate price of $400,000. As of the termination date,
Mr. Wetzler had only exercised 250,000 of the 20,000,000 options granted to
him in June of 1996.
In addition, as of September 18, 1997, Mr. Wetzler terminated certain
May, 1997 options to purchase 4,000,000 shares of Common Stock of the Company
at an exercise price of $0.09 per share, as well as certain June 1997 options
to purchase 1,500,000 shares of Common Stock of the Company at an exercise
price of $0.09 per share. Such options were purchased by Mr. Wetzler for an
aggregate price of $220,000.
As of February 5, 1999, Mr. Wetzler provided $521,965 of new financing to
AFT through the purchase of two-year Senior Secured Convertible Notes bearing
no interest and convertible into Common Stock of the Company at a rate of
three cents ($.03) per share. See "Business - Subsequent Developments."
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.
a. Consolidated Financial Statements filed herewith as required under Item 8
of this Annual Report on Form 10-K includes consolidated balance sheets at
June 30, 1998 and 1997 and consolidated statements of operations,
consolidated statements of cash flows, and consolidated statements of
stockholders' equity (deficit) for each of the three years ended June 30,
1998.
The consolidated financial statement schedules of American Film
Technologies, Inc. are omitted since they are neither required, not
applicable, or the relevant information is otherwise included.
b. None.
c. The following exhibits are included in this report or incorporated by
reference:
3.1 Certificate of Incorporation, as amended.
-26-
<PAGE>
3.2 Bylaws, as amended.
10.1 Option Agreement dated May 3, 1995 between the Company and H.J.
Meyers & Co., Inc. is incorporated by reference to Exhibit 10.3 to
the Company's Annual Report Form 10-K for the Fiscal Year ended June
30, 1995.
10.2 Amendment No. 1 to Option Agreement between the Company and H.J.
Meyers & Co., Inc., dated July 11, 1995 is incorporated by reference
to Exhibit 10.4 to the Company's Annual Report Form 10-K for the
Fiscal Year ended June 30, 1995.
10.3 Selling Agency Agreement between the Company and H.J. Meyers & Co.,
Inc., dated as of July 12, 1995 is incorporated by reference to
Exhibit 10. 5 to the Company's Annual Report Form 10-K for the Fiscal
Year ended June 30, 1995.
10.4 Amendment No. 2 to Selling Agency Agreement between the Company and
H.J. Meyers & Co., Inc., dated October 5, 1995 is incorporated by
reference to Exhibit 10.6 to the Company's Annual Report Form 10-K
for the Fiscal Year ended June 30, 1995.
10.5 Consulting Agreement, dated December 20, 1995, between Adasar Group,
Inc. and the Company is incorporated by reference to Exhibit 10.7 to
the Company's Annual Report Form 10-K for the Fiscal Year ended June
30, 1995.
10.6 Employment Agreement dated as of January 1, 1996 between the Company
and Gerald M. Wetzler is incorporated by reference to Exhibit 10.8 to
the Company's Annual Report Form 10-K for the Fiscal Year ended June
30, 1995.
10.7 Stock Option Agreement dated as of January 1, 1996 between the
Company and Gerald M. Wetzler is incorporated by reference to Exhibit
10.9 to the Company's Annual Report Form 10-K for the Fiscal Year
ended June 30, 1995.
10.8 Stock Option Agreement dated as of February 23, 1996, between the
Company and Larry King is incorporated by reference to Exhibit 10. 10
to the Company's Annual Report Form 10-K for the Fiscal Year ended
June 30, 1995.
10.9 Letter Agreement dated as of February 23, 1996, between the Company
and Larry King is incorporated by reference to Exhibit 10.11 to the
Company's Annual Report Form 10-K for the Fiscal Year ended June 30,
1995.
-27-
<PAGE>
10.10 Transactional Stock Option Agreement, dated as of February 23, 1996,
between the Company and Larry King is incorporated by reference to
Exhibit 10.11 to the Company's Annual Report Form 10-K for the
Fiscal Year ended June 30, 1995.
10-11 Registration Undertaking dated as of February 23, 1996 between the
Company and Larry King is incorporated by reference to Exhibit 10.
12 to the Company's Annual,Report Form 10-K for the Fiscal Year
ended June 30, 1995.
10.12 Letter of Intent dated March 28, 1996 between the Company and H.J.
Meyers & Co., Inc. is incorporated by reference to Exhibit 10. 13 to
the Company's Annual Report Form 10-K for the Fiscal Year ended June
30, 1995.
10.13 Lease for San Diego Office is incorporated by reference to Exhibit
10. 14 to the Company's Annual Report Form 10-K for the Fiscal Year
ended June 30, 1995.
10.14 Lease for New York Office is incorporated by reference to Exhibit
10. 15 to the Company's Annual Report Form 10-K for the Fiscal Year
ended June 30, 1997.
10.15 Consulting Agreement between the Company and Harvey Finkel dated
April 22, 1997 is incorporated by reference to Exhibit 10. 15 to the
Company's Annual Report Form 10-K for the Fiscal Year ended June 30,
1997.
10.16 Stock Option Agreement between the Company and Harvey Finkel dated
April 22, 1997 is incorporated by reference to Exhibit 10. 15 to the
Company's Annual Report Form 10-K for the Fiscal Year ended June 30,
1997.
10.17 Stock Option Agreement between the Company and Harvey Finkel dated
August 15, 1997 is incorporated by reference to Exhibit 10. 15 to
the Company's Annual Report Form 10-K for the Fiscal Year ended June
30, 1997.
10.18 Stock Option Agreement between the Company and Gerald M. Wetzler
dated June 17, 1996 is incorporated by reference to Exhibit 10. 15
to the Company's Annual Report Form 10-K for the Fiscal Year ended
June 30, 1997.
-28-
<PAGE>
10.19 Stock Option Agreement between the Company and Gerald M. Wetzler
dated September 12, 1997 is incorporated by reference to Exhibit 10.
15 to the Company's Annual Report Form 10-K for the Fiscal Year
ended June 30, 1997.
10.20 Amendment to Gerald M. Wetzler employment agreement dated April,
1998.
10.21 Stock option agreement with Eric Illowsky dated April, 1998.
10.22 Stock and consulting option agreement with Michael Bruno dated
January, 1999.
21 Subsidiaries of Registrant
27 Financial Data Schedule
d. Schedules filed herewith include:
All schedules for which provision is made in Regulation S-X of the Commission
are not required under the related instructions or are not applicable and
therefore have been omitted.
-29-
<PAGE>
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
<S> <C> <C>
By: /s/ Gerald M. Wetzler Director, February 10, 1999
- ------------------------------------------- Chief Executive ------------------------------------
Gerald M. Wetzler Officer, Acting
Chief Financial
and Accounting
Officer
By: /s/ Eric Illowsky Director and February 10, 1999
- ------------------------------------------- Secretary ------------------------------------
Eric Illowsky
</TABLE>
-30-
<PAGE>
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
American Film Technologies, Inc.
<TABLE>
<CAPTION>
Signature Title Date
<S> <C> <C>
By: /s/ Gerald M. Wetzler Director, February 10, 1999
- ------------------------------------------- Chief Executive ------------------------------------
Gerald M. Wetzler Officer, Acting
Chief Financial
and Accounting
Officer
</TABLE>
-31-
<PAGE>
INDEX TO FINANCIAL STATEMENTS
Report of Independent Auditors F-2
Consolidated Balance Sheets F-3
Consolidated Statements of Operations F-4
Consolidated Statements of Stockholders' Equity (Deficit) F-5
Consolidated Statements of Cash Flows F-6
Notes to Consolidated Financial Statements F-7
F-1
<PAGE>
Report of Independent Auditors
The Board of Directors and Stockholders
American Film Technologies, Inc.
We have audited the accompanying consolidated balance sheet of American Film
technologies, Inc. as of June 30, 1998 and the related consolidated statements
of operations, stockholders' equity (deficit), and cash flows for of the year
then ended. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of American Film Technologies,
Inc. at June 30, 1998, and the consolidated results of its operations and its
cash flows for the year then ended in conformity with generally accepted
accounting principles.
The accompanying consolidated financial statements have been prepared assuming
that American Film Technologies, Inc. will continue as a going concern. As more
fully described in Note 1, the Company filed a voluntary petition for
reorganization under Chapter 11 of the United States Bankruptcy Code on October
15, 1993. The filing was the result of continuing defaults related to the
Company's loans, recurring operating losses and insufficient cash flows. The
Company's Plan of Reorganization was approved by the Bankruptcy Court on October
6, 1996; however, the Company must raise additional funds to finance its ongoing
operations. These conditions raise substantial doubt about the Company's ability
to continue as a going concern. The consolidated financial statements do not
include any adjustments to reflect the possible future effects on the
recoverability and classification of assets or the amounts and classification of
liabilities that may result from this uncertainty.
The financial statements for the year ended June 30, 1997, were examined by
other accountants and they expressed an unqualified opinion on them in their
report dated September 19, 1997.
CUMMINGS & CARROLL, P.C.
Certified Public Accountants
Great Neck, New York
February 3, 1999
F-2
<PAGE>
AMERICAN FILM TECHNOLOGIES, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
ASSETS
------
June 30,
1998 1997
-------- ----------
<S> <C> <C>
Current Assets
Cash $ 23,336 $ 159,730
Other current assets 9,612 122,827
---------- ----------
Total current assets 32,948 282,517
Equipment and software, net 257,046 350,754
Film library, net 37,500 187,500
---------- ----------
Total Assets $ 327,494 $ 820,771
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
----------------------------------------------
Current Liabilities
Notes payable
Current portion of notes payable $ 478,191 $ 405,307
Other loans - 35,274
Accounts payable and accrued expenses 582,826 549,869
Accrued compensation - 134,580
---------- ----------
Total current liabilities 1,061,017 1,125,030
---------- ----------
Notes payable 1,666,579 1,250,213
Stock option subscriptions subject to repurchase - 620,000
Stockholders' Equity (Deficit)
Common stock, $.002 par value: authorized
shares-225,000,000; issued and oustanding shares;
76,736,100 and 73,700,644 at June 30, 1998
and 1997, respectively 153,473 147,402
Capital in excess of par value 16,797,115 15,879,186
Deferred compensation (1,102,000) (1,342,000)
Accumulated deficit (18,248,690) (16,859,060)
---------- ----------
Total stockholders' equity (deficit) (2,400,102) (2,174,472)
---------- ----------
Total Liabilities and Stockholders' Equity (Deficit) $ 327,494 $ 820,771
========== ==========
</TABLE>
See accompanying notes.
F-3
<PAGE>
AMERICAN FILM TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Successor Predecessor
Year ended Year ended October 17, July 1, 1995 to
June 30, June 30, 1995 to June 30, October 16,
1998 1997 1996 1995
---------- ---------- ---------------- ---------------
<S> <C> <C> <C> <C>
Distribution revenues $ - $ - $ - $ -
Cost and expenses:
Depreciation and amortization
246,551 558,827 402,273 238,273
Compensation and benefits - administrative
and officers
295,276 8,001,943 243,835 263,829
Selling, general and administrative
742,998 1,022,453 729,530 97,108
Interest expense, net
104,805 141,138 69,586 33,132
Reorganization items:
Professional fees
- - - 65,430
U.S. Trustee fees
- - - 1,250
Write-off (recognition) of reorganization
value in excess of identifiable assets
- 5,689,475 - (6,326,258)
------------- ------------- -------------- -----------
$ 1,389,630 $ 15,413,836 $ 1,445,224 $(5,627,236)
============= ============= -------------- -----------
Net income (loss) $ (1,389,630) $ (15,413,836) $ (1,445,224) $ 5,627,236
============= ============= ============== ===========
Net income (loss) per share - basic $ (0.02) $ (0.21) $ (0.02) $ 0.17
Net income (loss) per share - diluted $ (0.01) $ (0.13) $ (0.02) $ 0.17
Shares used in the calculation of net
income (loss) per common share:
Basic 75,218,288 72,008,051 69,563,192 32,232,802
Diluted 145,811,457 121,788,548 72,207,310 32,232,802
</TABLE>
See accompanying notes.
F-4
<PAGE>
AMERICAN FILM TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
Preferred Stock Common Stock
--------------- ------------
Shares Shares Capital in
Issued and Preferred Issued and Excess of
Outstanding Stock Outstanding Amount Par
----------- --------- ----------- ------ ----------
<S> <C> <C> <C> <C> <C>
Predecessor:
Balance at June 30, 1995 695,250 $ 695 30,410,802 $ 60,822 13,526,767
Net income - July 1, 1996 to October 16, 1996 - - - - -
Private placement - - 38,982,508 77,965 3,181,907
Issuance of stock to employees - - 164,000 328 -
Recapitalization of Company due to Fresh Start
Reporting under Reorganization Plan (695,250) (695) - (11,046,721)
-------- ------ ---------- -------- -----------
Successor:
Balance at October 16, 1995 - - 69,557,310 139,115 5,661,953
Net loss-October 17, 1997 to June 30, 1997 - - - - -
Issuance of stock to pay vendor - - 10,000 20 2,500
Receipt of additional subscription money - - - - 200,000
Deferred compensation related to issuance of
stock options - - - - 1,200,000
Amortization of deferred compensation - - - - -
-------- ------ ---------- -------- -----------
Balance at June 30, 1996 - - 69,567,310 139,135 7,064,453
Net loss - - - - -
Issuance of stock - - 3,833,334 7,667 567,333
Exercise of stock options - - 300,000 600 34,400
Deferred compensation related to issuance of
stock options - - - - 3,298,000
Amortization of deferred compensation - - - - -
Compensation expense related to issuance of
stock options - - - - 4,832,000
Convertible debt discount - - - - 83,000
-------- ------ ---------- -------- -----------
Balance at June 30, 1997 - - 73,700,644 147,402 15,879,186
Net loss - - - - -
Issuance of stock - - 2,066,666 4,133 124,867
Exercise of stock options - - 968,790 1,938 43,062
Amortization of deferred compensation - - - - -
Purchase of stock option - - - - 750,000
======== ====== ========== ======== ===========
Balance at June 30, 1998 - $ - 76,736,100 $153,473 $16,797,115
======== ====== ========== ======== ===========
</TABLE>
<PAGE>
[RESTUB]
<TABLE>
<CAPTION>
Total
Stockholders'
Deferred Accumulated Equity
Compensation Deficit (Deficit)
------------ ------- ---------
<S> <C> <C> <C>
Predecessor:
Balance at June 30, 1995 $ - $(16,674,649) $(3,086,365)
Net income - July 1, 1996 to October 16, 1996 - 5,627,236 5,627,236
Private placement - - 3,259,872
Issuance of stock to employees - - 328
Recapitalization of Company due to Fresh Start
Reporting under Reorganization Plan - 11,047,413 (3)
----------- ------------ -----------
Successor:
Balance at October 16, 1995 - - 5,801,068
Net loss-October 17, 1997 to June 30, 1997 - (1,445,224) (1,445,224)
Issuance of stock to pay vendor - - 2,520
Receipt of additional subscription money - - 200,000
Deferred compensation related to issuance of
stock options (1,200,000) - -
Amortization of deferred compensation 120,000 - 120,000
----------- ------------ -----------
Balance at June 30, 1996 (1,080,000) (1,445,224) 4,678,364
Net loss - (15,413,836) (15,413,836)
Issuance of stock - - 575,000
Exercise of stock options - - 35,000
Deferred compensation related to issuance of
stock options (3,298,000) - -
Amortization of deferred compensation 3,036,000 - 3,036,000
Compensation expense related to issuance of
stock options - - 4,832,000
Convertible debt discount - - 83,000
----------- ------------ -----------
Balance at June 30, 1997 (1,342,000) (16,859,060) (2,174,472)
Net loss - (1,389,630) (1,389,630)
Issuance of stock - - 129,000
Exercise of stock options - - 45,000
Amortization of deferred compensation 240,000 - 240,000
Purchase of stock option - - 750,000
============ ============ ===========
Balance at June 30, 1998 $ (1,102,000) $(18,248,690) $(2,400,102)
============ ============ ===========
</TABLE>
F-5
<PAGE>
AMERICAN FILM TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Successor Predecessor
----------------------------------------------- -------------
October 17, July 1,
Year ended Year ended 1995 to 1995 to
June 30, June 30, June 30, October 16,
1998 1997 1996 1995
---------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
Operating Activities
Net income (loss) $ (1,389,630) $(15,413,836) $(1,445,224) $5,627,236
Adjustments to reconcile net (loss) to net cash used
by operating activities:
Depreciation and amortization 246,551 558,827 402,273 237,920
Amortization of deferred compensation 240,000 3,036,000 120,000 -
Amortization of debt discount - 17,291 - -
Write-off (recognition) of reorganization
value in excess of identifiable assets - 5,689,475 - (6,326,258)
Compensation Expense - 4,832,000 - -
Changes in assets and liabilities:
Restricted cash - - - 15,322
Accounts receivable - - - 23,692
Other current assets 110,332 (16,533) (69,761) 63,221
Accounts payable and accrued expenses 32,957 69,398 (988,064) (17,277)
Liabilities subject to compromise - - - -
Accrued compensation (134,580) (85,478) (509,318) 228,281
------------ ------------ ----------- ----------
Net cash used in operating activities (894,370) (1,312,856) (2,490,094) (147,863)
------------ ------------ ----------- ----------
Investing Activities
Purchase of equipment and software - - - -
------------ ------------ ----------- ----------
Net cash used by investing activities - - - -
------------ ------------ ----------- ----------
Financing Activities
Principal payments on notes payable - bank - - (348,385) (250,000)
Principal payments on notes payable - equipment
and other - - (431,232) -
Principal payments on long-term debt (401,989) - (7,830) -
Proceeds from notes payable - other - 103,917 140,289 503,000
Proceeds from common stock subscriptions 100,000 - 200,000 2,960,200
Stock option subscriptions subject to repurchase
130,000 420,000 200,000 -
Proceeds from sale of common stock 74,000 610,000 - -
Proceeds from sale of convertible debentures 855,965 - - -
------------ ------------ ----------- ----------
Net cash provided (used) by financing activities 757,976 1,133,917 (247,158) 3,213,200
------------ ------------ ----------- ----------
Net increase (decrease) in cash (136,394) (178,939) (2,737,252) 3,065,337
Cash at beginning of period 159,730 338,669 3,075,921 10,584
------------ ------------ ----------- ----------
Cash at end of period $ 23,336 $ 159,730 $ 338,669 $3,075,921
============ ============ =========== ==========
Supplemental disclosures of cash flow information:
Cash paid during the period for interest $ 146,580 $ 50,246 $ 158,319 $ -
============ ============ =========== ==========
Supplemental schedule of noncash investing and
financing activities:
Issuance of common stock/warrants in connection
with debt $ - $ 83,000 $ - $ 300,000
============ ============ =========== ==========
Issuance of common stock to pay vendor $ - $ - $ 2,520 $ -
============ ============ =========== ==========
</TABLE>
F-6
<PAGE>
AMERICAN FILM TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1998
1. Reorganization Under Chapter 11
Bankruptcy Proceedings and Basis of Presentation
On October 15, 1993, the Company filed for protection from its creditors under
Chapter 11 of the United States Bankruptcy Code. The Chapter 11 filing was the
result of continuing defaults related to the Company's loans, recurring
operating losses and cash flow problems. The filing of a Chapter 11 petition
operates as a stay of, among other actions, the commencement or continuation of
a judicial administrative or other action or proceeding against a debtor that
was or could have been initiated before the commencement of a Chapter 11 case or
the enforcement against the debtor or against the property of the estate or a
judgment obtained before the commencement of the case. Under Chapter 11,
substantially all prepetition liabilities of debtors are subject to settlement
under a plan of reorganization. The consummation of a plan of reorganization is
dependent upon the satisfaction of numerous conditions, including, among other
things, the acceptance by several classes of interests and confirmation by the
Bankruptcy Court.
On October 6, 1995, The Company's Plan of Reorganization (the "Plan") was
approved by the Bankruptcy Court and became effective October 17, 1995. The
accompanying consolidated financial statements have been prepared in conformity
with principles of accounting applicable to a going concern. As discussed below
(see H.J. Meyers Agreement), the Company completed a private placement for
$3,460,200 and the Company must raise additional funds to finance its future
operations. While management believes it will be successful in its efforts,
there are no assurances whether sufficient financing or equity will be available
to fund the operations through June 30, 1999. No adjustments have been made to
reflect the possible future effects on the recoverability and classification of
assets or the amount and classification of liabilities that may result if the
Company is unable to continue as a going concern.
Further, the accompanying consolidated financial statements do not reflect any
adjustments relating to settlement of the claims or any class of creditors that
are provided for in the Company's Plan of Reorganization. Any adjustments
relating to such settlements will be recorded at such time as the Bankruptcy
Court enters a final order relating to these settlements. See discussion under
"Fresh Start Accounting" below. The only effects of the bankruptcy proceedings
reflected in the accompanying financial statements as of June 30, 1996 are
"Liabilities Subject to Compromise", which are impaired prepetition liabilities
in accordance with the Plan and "Reorganization items" (including professional
fees) have been specifically identified on the Consolidated Statement of
Operations.
Plan of Reorganization
On October 6, 1995, the Company's Plan of Reorganization (the "Plan") was
approved by the bankruptcy court and became effective October 17, 1995 (the
"Effective Date"). Under the terms of the Plan, the following is a summary of
treatment of each of the major classes of creditors and stockholders:
F-7
<PAGE>
<TABLE>
<CAPTION>
Estimated
Amount of
Class of Claim Claim Distribution under the Plan Status
- -------------- --------- --------------------------- ------
<S> <C> <C> <C>
Class 1 - $ 86,000 Cash payment in full on effective date Unimpaired
Employee
Priority Claim
Class 2 - $ 80,000 Cash payment on Distribution Date or, at Unimpaired
Priority Claims the Company's discretion, over six years
plus interest
Class 3 - $ 623,000 Cash payment on the effective date plus Unimpaired
Comerica Claims interest and reasonable legal fees
Class 4 - $ 500,000 Cash payment plus interest on the Unimpaired
Secured Claims effective date
Class 5 - DIP $ 122,000 $110,000 cash payment plus accrued Impaired
Financing Claims interest on effective date and remainder
in one year note
Class 6 - Convenience $ 6,000 Cash payment in full on effective date Unimpaired
Claims
Class 7 - Unsecured $1,650,000 Unsecured five year notes in full amount Impaired
Claims of allowed claim, with interest at 7%
Class 8 - Preferred N/A $10 cash on effective date. Unexercised Impaired
Stock Interest Series B and the Series C and D voting
convertible preferred stock interest
will be canceled
Class 9 - Common N/A Retained, subject to dilution Impaired
Stock Interest
Class 10 - Other N/A Cancelled Impaired
Equity Interests
</TABLE>
F-8
<PAGE>
AMERICAN FILM TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1998
The above Class 7 Unsecured Claims does not include the Class 7 Claim of Joseph
Taritero which has been compromised pursuant to the provisions of a prior
Stipulation and Order (see Note 10).
A claim becomes impaired when the legal, contractual or equitable right of such
claim is altered, modified or changed by the proposed treatment under the Plan.
H.J. Meyers Agreement
On May 3, 1995, the Company executed an agreement with H.J. Meyers and Co., Inc.
("Meyers") pursuant to which Meyers purchased an exclusive 90 day option as of
May 30, 1995, to purchase common stock from the Company for $3,000,000 which
would provide Meyers up to 51% of the outstanding shares. Upon approval of the
agreement by the Bankruptcy Court, on May 30, 1995, Meyers paid the Company a
non-refundable fee of $150,000 for the option. The agreement required Meyers to
pay the $3,000,000 to the Company upon the Effective Date of the Company's Plan.
Through a subsequent amendment to that agreement, Meyers agreed to use its best
efforts to increase the proceeds of the offering to $4,000,000 which would
result in net proceeds of $3,480,000 to the Company. In exchange for this
possible increase, the Company agreed to issue an additional 3,800,000 shares to
Meyers and its assignees. Meyers raised the money through a private placement of
the Company's common stock to "accredited investors", as that term is defined by
the Securities Act of 1933. The net proceeds to the Company totaled $3,460,200,
including the conversion of the $300,000 bridge loan discussed below.
The Company agreed to grant a one-time demand and piggyback registration right.
For a period of two years from the Effective Date, the new stockholder can
demand (upon demand by at least 25% of the new stockholders) the Company file a
registration statement with the Securities and Exchange Commission (SEC)
covering the reoffer and resale of its shares (up to 38,982,508).
Notwithstanding the foregoing, if at any time prior to exercise of the demand
registration right the Company receives a Letter of Intent from an underwriter
for a public equity offering of at least $5,000,000 of the Company's securities,
then the demand registration right shall terminate. On March 28, 1995, the
Company entered into a letter of intent with H.J. Meyers (the "Meyers Letter of
Intent") under which Meyers confirmed its interest in underwriting on a firm
commitment basis a public offering of shares of the Company's common stock. The
Meyers Letter of Intent contemplates the negotiation and execution of formal
agreements relating to the proposed offering and provides, among other things,
that the Company will apply for listing on the NASDAQ Small Cap Market and use
its best reasonable efforts to maintain such listing for not less than five
years; that the Company, if requested, will obtain "key man" life insurance on
the lives of designated officers of the Company and that the Company shall have
entered into a joint venture, business alliance or business combination with an
owner of content on terms acceptable to Meyers.
F-9
<PAGE>
AMERICAN FILM TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1998
The new stockholders also have a right to register their shares in any offerings
of the Company stock (a `piggyback" right). The amount of stock the new
stockholders may register and sell is subject to pro-rata reduction or
elimination at the sole discretion of the underwriter. The existence of these
rights could adversely impact the future price of the common stock or the
ability of the Company to raise additional equity capital.
To enable the Company to fund certain obligations prior to the Effective Date of
the Plan, on July 28, 1995, Meyers arranged a $500,000 bridge loan to the
Company with interest at 8% plus common stock at the rate of one half share for
every dollar of bridge loan. The loans are convertible into common stock at the
same rate as the private placement to the accredited investors. On the Effective
Date, $300,000 of the bridge loan was converted into the Company's common stock
and the remaining $200,000 was repaid.
The $500,000 bridge loan is included in Class 4 - Secured Claims mentioned
above.
Fresh Start Reporting
Under the provision of State of Position (SOP) 90-7, Financial Reporting by
Entities in Reorganization under the Bankruptcy Code, issued in November 1990 by
the American Institute of Certified Public Accountants, the Company has prepared
the accompanying consolidated pro forma balance sheet as of the Effective Date,
October 17, 1995 on the basis of "fresh start" reporting since the
reorganization value, as defined, was less than the total of all post-petition
liabilities and prepetition claims, and holders of voting shares immediately
before confirmation of the Plan received less than fifty percent of the voting
shares of the emerging entity. Under this concept, all assets and liabilities
are restated to reflect the reorganization value of the reorganized entity,
which approximates its fair value at the date of reorganization. In addition,
the accumulated deficit of the Company was eliminated and its capital structure
was recast in conformity with the Plan. As such, the accompanying consolidated
pro forma balance sheet as of October 17, 1995 represents that of a successor
company which, in effect, is a new entity with assets, liabilities and a capital
structure having carrying values not comparable with prior periods and with no
beginning retained earnings or deficit.
The Company estimated the fair value of the reorganized entity based on the
proceeds received from the private placement for 56% of its common stock which
was completed on the Effective Date. While the estimated reorganization value of
the Company has been primarily allocated to specific asset categories pursuant
to Fresh Start Reporting, the effects of such are subject to further refinement
or adjustment. Current assets have been recorded at their book value, which the
Company believes approximates fair value. Equipment, software and film library
have been recorded at their fair value as estimated by management after
considering replacement cost or potential sales value. Long-term debt consists
of prepetition liabilities and will be paid out subject to the terms of the
Plan.
The effect of the Plan on the Company's consolidated balance sheet at October
17, 1995 (the Effective Date) is as follows:
F-10
<PAGE>
AMERICAN FILM TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1998
<TABLE>
<CAPTION>
(1)
H.J. Meyers (2)
Prior to Private Fresh Start Reorganized
Reorganization Placement Adjustment Balance Sheet
-------------- ----------- ----------- -------------
<S> <C> <C> <C> <C>
Assets
Current Assets:
Cash $ 115,721 $ 2,960,200 $ - $ 3,075,921
Restricted cash 2,960,200 (2,960,200) - -
Accounts receivable - - - -
Other current assets 36,493 - - 36,493
------------ ----------- ----------- -----------
Total current assets 3,112,414 - - 3,112,414
Equipment and software, at cost, net 755,253 - (305,253) 450,000
Leasehold improvements, net 64,740 - - 64,740
Film library, net 55,380 - 394,620 450,000
------------ ----------- ----------- -----------
Property and equipment, net 875,383 - 89,367 964,740
Reorganization value in excess of
identifiable assets - - 6,237,264 6,237,264
------------ ----------- ----------- -----------
Total assets $ 3 ,987,787 $ - $ 6,326,631 $10,314,418
============ =========== =========== ===========
Liabilities and Stockholders' Equity
(Deficit)
Current Liabilities
Notes payable:
Bank loans - in default $ 348,385 $ - $ - $ 348,385
Other loans 622,300 (300,000) - 322,300
Accounts payable and accrued
expenses 1,470,705 - 350 1,471,055
Accrued compensation 729,376 - - 729,376
------------ ----------- ----------- -----------
Total current liabilities 3,170,766 (300,000) 350 2,871,116
Notes payable - - 1,642,234 1,642,234
Liabilities subject to compromise 1,642,211 - (1,642,211) -
Stockholders' Equity (deficit):
Preferred stock 695 - (695) -
Common stock 60,822 78,293 - 139,115
Capital in excess of par value 13,526,767 3,181,907 11,046,721 5,661,953
Accumulated deficit (17,373,674) - (17,373,674) -
Subscription payable 2,960,200 (2,960,200) - -
------------ ----------- ----------- -----------
Total stockholders' Equity (deficit) (825,190) 300,000 6,326,258 5,801,068
------------ ----------- ----------- -----------
Total Liabilities and Stockholders'
Equity (deficit) $ 3,987,787 $ - $ 6,326,631 $10,314,418
============ =========== =========== ===========
</TABLE>
F-11
<PAGE>
American Film Technologies, Inc.
Notes to Consolidated Financial Statements
(1) To record the effects of the H.J. Meyers Private Placement
Plan. Subsequent to October 17, 1995, the Company received an additional
$200,000 from subscriptions related to the Private Placement.
(2) To record assets, liabilities and capital at their fair
value pursuant to Fresh Start Reporting and eliminate any retained deficit.
2. Summary of Significant Accounting Polices
The Company
The Company's 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., the Company's wholly owned inactive Mexican subsidiary. All intercompany
transactions have been eliminated in consolidation.
Revenue Recognition
The Company recognizes revenue from coloring films on the completed contract
method. It is the Company's experience that the production cycle for coloring a
film is less than ninety days. Financial position and results of operations do
not vary significantly from those which would result using the
percentage-of-completion method. If the production cycle exceeds 90 days, the
Company recognizes revenue using the percentage of completion method, as
measured by the percentage of costs incurred to total estimated costs. A feature
film is considered complete upon acceptance by the customer.
The Company recognizes revenue on its distribution business on the accrual
basis. Based on the ratings received, revenue projections received from the
distributors and experience, the Company estimates the revenue to be recognized
in each quarter.
F-12
<PAGE>
American Film Technologies, Inc.
Notes to Consolidated Financial Statements
Depreciation and Amortization
Depreciation and amortization are provided over the estimated useful lives of
the underlying assets using primarily the straight-line method over a five-year
period. The Film Library is being amortized over a three-year period. Leasehold
improvements are amortized over the life of the lease or the estimated useful
life of the assets.
Production Costs - Excluding Depreciation and Amortization
Cost of sales includes direct salaries and related benefits of production
personnel and an allocation of overhead and materials costs used in the coloring
and animation processes.
Loss per Share
In 1997, the Financial Accounting Standards Board issued Statement of Financial
Accounting Standards ("SFAS") No. 128, "Earnings per Share". SFAS 128 replaced
the previously reported primary and fully diluted earnings per share with basic
and diluted earnings per share. Basic earnings per share are calculated
utilizing weighted average shares outstanding and exclude any dilutive effects
of options, warrants and convertible securities. Diluted earnings per share
include the effect of dilutive securities outstanding. All earnings per share
amounts for all period presented, where necessary, have been restated to conform
to the SFAS 128 requirements.
Stock Options
The Company has elected to follow Accounting Principles Board Opinion No. 25,
Accounting for Stock Issued to Employees (APB 25) and related interpretations in
accounting for its employee stock options. Under APB 25, for those Company
employee stock options issued with an exercise price not less than the market
price of the underlying stock on the date of grant, no compensation expense is
recognized.
Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenue and expenses during the reporting period.
Actual results could differ from those estimates.
F-13
<PAGE>
American Film Technologies, Inc.
Notes to Consolidated Financial Statements
New Accounting Pronouncement
In June 1997, the Financial Accounting Standards board issued Statement of
Financial Accounting Standards No. 131, "Disclosures about Segments of an
Enterprise and Related Information' ("SFAS 131"), which is effective for years
beginning after December 15, 1997. SFAS 131 establishes standards for the way
that public business enterprises report information about operating segments in
annual financial statements and requires that those enterprises report selected
information about operating segments in interim financial reports. It also
establishes standards for related disclosures about products and services,
geographic areas, and major customers. The Company will adopt the new
requirements retroactively in 1999.
3. Film Library
The Company's film library, consists of 11 films held for distribution and or
sale, and are stated as follows:
June 30,
1998 1997
--------- ---------
Estimated fair market value $ 450,000 $ 450,000
Less: accumulated amortization 412,500 262,500
--------- ---------
$ 37,500 $ 187,500
========= =========
The related amortization of the Film Library for the year ended June 30, 1998
and June 30, 1997 was $150,000 and $150,000, respectively.
F-14
<PAGE>
American Film Technologies, Inc.
Notes to Consolidated Financial Statements
4. Equipment and Software
Equipment and software consists of the following:
June 30,
1998 1997
--------- ---------
Assets:
Equipment $ 426,241 $ 426,241
Software 20,000 20,000
Leasehold improvements 64,740 64,740
--------- ---------
510,981 510,981
Accumulated depreciation and
amortization:
Equipment 233,666 147,666
Software 11,000 7,000
Leasehold improvements 9,269 5,561
--------- ---------
253,935 160,227
--------- ---------
$ 257,046 $ 350,754
========= =========
5. Reorganization Value in Excess of Identifiable Assets
In accordance with Statement of Position (SOP) 90-7, upon the Effective Date,
$6,326,258 of the reorganization value of the Company was not attributable to
identifiable tangible or intangible assets and accordingly has been classified
as an intangible asset. While the estimated reorganization value of the Company
has been allocated to specific asset categories pursuant to Fresh Start
Reporting, the allocation may be subject to further refinement, which will cause
this "reorganization value" account to be adjusted accordingly. Furthermore, any
adjustment relating to the settlement of a disputed prepetition claim by the
Bankruptcy court will also cause this "reorganization value" account to be
adjusted accordingly.
Since the Effective Date through June 30, 1998, the Company has not been able to
restart its operations. Due to the Company's financial position and uncertainty
in estimating future cash flows, at June 30, 1997, the Company wrote off the
reorganization value in excess of identifiable assets as recoverability of the
asset is uncertain.
F-15
<PAGE>
American Film Technologies, Inc.
Notes to Consolidated Financial Statements
6. Debtor in Possession Secured Financing
On May 22, 1994, the Company obtained from the Bankruptcy Court a final order
granting the motion for debtor-in-possession secured financing with certain
stockholders as the lenders which permitted the Company to borrow up to $150,000
with interest at 4% per annum. A total of $122,300 was borrowed, all of which
has been repaid in accordance with the Plan of Reorganization.
7. Notes Payable
At June 30, 1996, liabilities are reported in accordance with SOP 90-7, which
requires that the balance sheet of an entity in Chapter 11 distinguish
prepetition liabilities subject to compromise from those that are not (such as
fully secured liabilities that are expected not to be compromised) and
postpetition liabilities. Liabilities that may be affected by the Plan should be
reported at the amounts expected to be allowed, even if they may be settled for
lesser amounts. As of the Effective Date, liabilities subject to compromise were
reclassified to long-term notes payable in accordance with the repayment terms
of the Plan of Reorganization.
Principal categories of notes payable at June 30, 1998 and 1997 consist of the
following:
June 30,
1998 1997
---------- ----------
Trade and other claims $1,026,192 $1,346,487
Accrued compensation 84,413 96,542
Billings on uncompleted contracts 178,200 178,200
Notes payable to shareholder, net
of debt discount of $65,709 - 34,291
Senior secured convertible notes 855,965 -
---------- ----------
2,144,770 1,655,520
Less current portion of notes payable (478,191) (405,307)
---------- ----------
$1,666,579 $1,250,213
========== ==========
The amounts at June 30, 1996 have been converted to notes payable under the Plan
and bear interest at 7%. Accrued interest payable at June 30, 1998 and 1997 are
$96,082 and $114,179, respectively.
F-16
<PAGE>
American Film Technologies, Inc.
Notes to Consolidated Financial Statements
Included in notes payable above at June 30, 1997 is a $100,000 loan from a
shareholder. On February 3, 1997, the Company signed a two-year convertible note
payable secured by the Company's assets and bearing interest at 9% per annum.
The note converts, at the option of the of the holder, into common stock of the
Company at a rate of $0.09 per share, a discount of $83,000 from the market
price of common stock on that date. The estimated value of this discounted
conversion term has been recorded to reduce the carrying value of the note and
as capital in excess of par. On September 28, 1997 the notes was converted to
common stock.
Included above are $855,965 of two year Senior Secured Convertible Notes bearing
no interest and convertible into common stock at a rate of $0.03 per share in
late 1999 and 2000.
Annual aggregate maturities of long-term debt for each of the three years
subsequent to June 30, 1998 are:
1999 478,191
2000 1,261,272
2001 405,307
==========
$2,144,770
==========
8. Operating Leases
The Company leases its facilities under the terms of three operating leases
expiring at various dates through June 2001. Annual future minimum rental
commitments under noncancelable operating leases as of June 30, 1998 are as
follows:
1999 $140,464
2000 63,504
2001 21,168
========
$225,136
========
Rent expense for the years ended June 30, 1998 and 1997 were $206,857 and
$139,146, respectively.
F-17
<PAGE>
American Film Technologies, Inc.
Notes to Consolidated Financial Statements
9. Income Taxes
At June 30, 1998, the Company had net operating loss carryforwards of
approximately $19,501,000 for federal income tax purposes and approximately
$10,439,000 for state income tax purposes. These carryforwards will begin
expiring in 1998 unless previously utilized. In addition, the Company has
federal research and development credits of approximately $136,000 which expire
in 2004 and 2008. The use of these carryforwards in any one year will be limited
as a result of changes in ownership, as defined by Section 382 and 383 of the
Internal Revenue Code, of the Company during fiscal 1993 and 1996.
As a result of these changes, the net operating losses incurred and tax credits
generated prior to the first date of change will be subject to an annual
limitation of approximately $6,500 and those generated prior to the second date
of change will be subject to an annual limitation of approximately $146,000. As
a result of these limitations, approximately $14,799,000 of federal and
$7,739,000 of state net operating losses, and $136,000 of credits will not be
utilized.
The significant components of the Company's deferred tax assets and liabilities
are as follows:
June 30,
1998 1997
---------- ----------
Depreciation $ - $ 45,000
Film library amortization 208,000 228,000
Reserves - 42,000
Net operating loss carryforwards 1,976,000 1,353,000
Other 151,000 111,000
---------- ----------
Total deferred tax assets 2,335,000 1,779,000
Valuation allowance for deferred
tax assets (2,335,000) (1,779,000)
---------- ----------
Net deferred tax asset $ - $ -
========== ==========
10. Lawsuit Settlement
In January 1993, a suit was instituted against the Company by Joseph M. Taritero
in the Superior Court of the State of California for the County of Los Angeles
alleging breach of contract and fraud and seeking damages of $892,000. The
Company has settled with Mr. Taritero for an amount totaling $275,000. In
accordance with the terms of the Plan, $125,000 was paid on the Effective Date,
$75,000 was paid in April 1996 and the remaining $75,000 was paid in October
1997.
F-18
<PAGE>
American Film Technologies, Inc.
Notes to Consolidated Financial Statements
11. Stockholders' Equity (Deficit)
Stock Options
In accordance with the terms of the Plan, all prepetition stock options were
canceled. Subsequent to filing Chapter 11, the Board of Directors granted
options to purchase common stock totaling 43,481,210 shares as of June 30, 1998
and 51,700,000 shares as of June 30, 1997.
The following table summarizes stock option activity for the two years ended
June 30, 1998:
Weighted -
Average
Number of Exercise
Shares Price
----------- ---------
Outstanding at June 30, 1996 35,700,000 $ .10
Granted 16,300,000 .11
Exercised (300,000) .12
---------- --------
Outstanding at June 30, 1997 51,700,000 .10
Granted 30,250,000 .01
Exercised (968,790) .05
Cancelled (37,500,000) .10
----------- --------
Outstanding at June 30, 1998 43,481,210 .04
=========== ========
The following is a table that summarizes information concerning outstanding and
exercisable stock options at June 30, 1998:
<TABLE>
<CAPTION>
Weighted
Weighted Average Weighted
Average Remaining Average
Range of Number Exercise Contractual Number Exercise
Exercise Outstanding Price Life Exercisable Price
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
.01- .20 43,281,210 $0.04 2.50 38,281,210 $0.04
.21- .40 - - - - -
.41- .62 200,000 0.62 3.25 200,000 0.62
-------------------------------------------------------------------------------------
43,481,210 $0.04 2.56 38,481,210 $0.04
</TABLE>
F-19
<PAGE>
American Film Technologies, Inc.
Notes to Consolidated Financial Statements
In January 1996, the Company granted options pursuant to an employment agreement
with Gerald Wetzler, the Company's President and CEO. Under terms of the
employment agreement, in lieu of cash compensation, the Company granted an
option to purchase 10,000,000 shares of the Company's $0.002 par value common
stock at an exercise price of $0.0628. The options become exercisable at the
rate of 1 and 2/3% per month. At June 30, 1998, 5,000,000 options were vested
and exercisable. The options terminate on January 1, 2001. Deferred compensation
for the estimated fair value of the options granted of $1,702,000 was recorded
during 1996 and 1997. Compensation expense of $240,000 per year is being
recognized in relation to these options.
Also included in 1996, Mr. Wetzler purchased, for a fee of $200,000, an option
to acquire the Company's common stock, or in the alternative, preferred stock
convertible into common stock, subject to approval of the shareholders, which
occurred in February 1997. The option gives the right to purchase up to
20,000,000 shares of the Company's common stock at an exercise price of $0.12
per share. In accordance with APB 25, the difference between the exercise price
and fair value of $4,600,000 was recorded as compensation. The option expires on
June 17, 1998. In 1997, the Company received proceeds of $30,000 related to the
exercise price of 250,000 options at $.13 per share by Mr. Wetzler.
On January 3, 1997, May 12, 1997 and June 5, 1997, Mr. Wetzler purchased, for
$200,000, $160,000 and $60,000 respectively, options to purchase up to
10,000,000, 4,000,000 and 1,500,000 shares of the Company's common stock at
exercise prices of $0.09, $0.13 and $0.13, respectively. The options vest over
six months and expire on January 3, 2000, May 12, 2001 and June 6, 2001,
respectively. In accordance with APB 25, the difference between the exercise
price and the fair value on the date of grant of $3,298,000 is recorded as
deferred compensation, which is then amortized over the vesting period.
On September 12, 1997, Mr. Gerald Wetzler purchased options to acquire
30,000,000 shares of Common Stock of the Company for an aggregate purchase price
of $130,000. Pursuant to these options, shares of Common Stock of the Company
may be repurchased at an exercise price of $0.01 per share. Such options are
currently exercisable by Mr. Wetzler provided that Mr. Wetzler does not sell or
transfer the shares of Common Stock issuable upon such exercise for a period of
six months from the date of grant. These options terminate on September 12,
1999. The Board of Directors granted Mr. Wetzler these options in part to enable
the Company to have sufficient working capital to operate through October 1997
so that the Company could either obtain additional financing or proceed with an
orderly liquidation. Simultaneously with the purchase of the foregoing options,
Mr. Wetzler agreed, to the extent that they had not been exercised, to terminate
certain June, 1996 options to purchase 20,000,000 share of Common Stock of the
Company at an exercise price of $.012 per share, as well as certain January,
1997 options to purchase 10,000,000 shares of Common Stock of the Company at an
exercise price of $0.07 per share. Such options were purchased by Mr. Wetzler
for an aggregate price of $400,000. As of the termination date, Mr. Wetzler had
only exercise 250,000 of the 20,000,000 options granted to him in June of 1996.
F-20
<PAGE>
American Film Technologies, Inc.
Notes to Consolidated Financial Statements
In addition, as of September 18, 1997, Mr. Wetzler terminated certain May, 1997
options to purchase 4,000,000 shares of Common Stock of the Company at an
exercise price of $0.09 per share, as well as certain June 1997 options to
purchase 1,500,000 shares of Common Stock of the Company at an exercise price of
$0.09 per share. Such options were purchased by Mr. Wetzler for an aggregate
price of $220,000.
On February 9, 1996, the Company granted an option to purchase 2,000,000 shares
of the Company's $0.002 par value common stock at an exercise price of $0.01 to
Larry King, a member of the Board of Directors. The options vest and become
exercisable upon consummation of a financing arrangement within a two-year
period from the date of grant. At June 30, 1997, no options were vested or
exercisable. The options terminated on February 9,1998.
Also in 1996, the Company granted an option to purchase 1.0 million shares of
common stock to Larry King at an exercise price of $0.18 per share. These
options are currently vested.
F-21
<PAGE>
American Film Technologies, Inc.
Notes to Consolidated Financial Statements
In accordance with APB 25, of the 800,000 options granted in 1997, the Company
recorded $161,000 of compensation expense. The options were granted at exercise
prices ranging from $0.05 per share to $0.62 per share (weighted-average
exercise price of $0.23 per share). In accordance with the terms of the related
option agreements, all options are fully vested at June 30, 1997 and are
exercisable for a period of two years.
Pro forma information regarding net loss and net loss per share is required by
Statement 123, and has been determined as if the Company has accounted for its
employee stock options and employee stock purchase plan shares under the fair
value method of that statement. The fair value of these options or employee
stock purchase rights was estimated at the date of grant using the Black-Scholes
option pricing model with the following weighted average assumptions for 1998
and 1997, respectively; risk-free interest rates of 6.0%; dividend yield of 0%;
volatility factors of the expected market price of the Company's common stock of
75% and a weighted average life of the options of 2.0 years.
The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options which have no vesting restrictions and are fully
transferable. In addition, option valuation models require. the input of highly
subjective assumptions including the expected stock price volatility. Because
the Company's employee stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options.
For purposes of pro forma disclosures, the estimated fair value of the options
is amortized to expense over their respective vesting periods. The effects of
applying Statement 123 for pro forma disclosure purposes are not likely to be
representative of the effects on pro forma net income in future years because
they do not take into consideration pro forma compensation expense related to
grants made prior to 1996. The Company's pro forma information follows:
June 30,
------------------------------
1998 1997
----------- -------------
Pro forma net income (loss) $(1,551,930) $(16,005,610)
Pro forma net income (loss)
per share $(0.02) $(0.22)
F-22
<PAGE>
American Film Technologies, Inc.
Notes to Consolidated Financial Statements
Post-Petition Employee Stock Grants
As inducement and compensation to certain key employees, (who were first put on
reduced work and compensation schedules and later put on administrative leave),
the Company agreed to issue common stock as compensation to discourage these key
employees from seeking other employment. The agreement which became effective
with the approval of the Plan, called for an initial grant of 10,000 shares per
employee, plus an additional 2,000 shares per employee per week up to a maximum
of 36 weeks. These shares vested immediately and will be issued only if the
employee is asked to return to the Company and does so. If the employee is not
asked to return to the Company, the shares will be subsequently issued to the
employee. As of June 30, 1998, 742,000 shares have been set aside, of which
164,000 of these shares were issued as of the Effective Date of the Plan.
F-23
<PAGE>
AMENDMENT TO EMPLOYMENT AGREEMENT
This Amendment to Employment Agreement is made and entered into
effective April 20, 1998 by and between American Film Technologies, a Delaware
corporation (the "Company'), and Gerald M. Wetzler. an individual
("Executive").
WHEREAS, the Company and Executive entered into an Employment Agreement
as of January 1, 1996 (the "Agreement"); and
WHEREAS, the Board of Directors and Executive have agreed to amend the
Agreement, specifically Section 14(c)(ii) to change the form of the payment to
be made to Executive if the Agreement is terminated pursuant to a change of
control of the Company as such change of control is defined therein,
NOW, THEREFORE, in consideration of the foregoing and the
mutual covenants and conditions set forth herein, the parties hereto agree as
follows:
1 - Section 14(c)(ii) of the Agreement is hereby deleted in its
entirety and in lieu thereof the following Section 14(c)(ii) is adopted
effective as of the effective date of this Amendment:
"(ii) In the event the Agreement is terminated pursuant to Section
12(e) the Company shall issue to Executive a non-interest bearing convertible
senior secured promissory note in the amount of $750,000 (the "Note") not later
than five (5) days after such termination The Note shall (i) be for a term of
two years from the date of termination of the Agreement, (ii) be convertible
into common stock of the Company at the conversion rate of $.03 per share and
(iii) contain all the same or similar terms and conditions as contained in the
Company's Senior Secured Convertible Promissory Notes issued to investors
pursuant to the resolutions of the Board of Directors approving the issuance of
up to $2,000,000 of such notes."
2. In all other respects, the Agreement and all other terms and
conditions thereof are hereby ratified and affirmed
IN WITNESS WHEREOF, this Amendment to Employment Agreement is
executed as of the day first above written
AMERICAN FILM TECHNOLOGIES, INC
By: ________________________________
Name: ______________________________
Title: _____________________________
____________________________________
GERALD M. WETZLER
<PAGE>
STOCK OPTION AGREEMENT
THIS STOCK OPTION AGREEMENT (this "Agreement") is entered
into, effective as of April 17, 1998 (the "Effective Date"), by and between
American Film Technologies, Inc., a Delaware corporation (the "Company"), and
Eric Illowsky (the "Holder").
RECITALS
WHEREAS, the Company has elected Holder to serve on its Board
of Directors and the Holder has concurrently herewith agreed to serve as a
Director of the Company; and
WHEREAS, as the sole and exclusive consideration to be paid to
the Holder for agreeing to be so served as a director of the Company, the
Company has agreed to grant the stock option provided for herein to the Holder.
NOW, THEREFORE, the Company and the Holder covenant and agree
as follows:
1. Grant of the Option. For good and valuable consideration,
the receipt of which is hereby acknowledged, the Company hereby grants to the
Holder a stock option (the "Option") to acquire from the Company, from time to
time on the terms and conditions set forth herein, all or any portion of an
aggregate of Two Hundred Fifty Thousand (250,000) shares of the Company's $.002
par value common stock (the "Common Stock"), at the price equal to the $.03 per
share (the "Exercise Price"). Each of the number of shares of Common Stock into
which the Common Stock is exercisable and the Exercise Price is subject to
adjustment as provided in Section 4 hereof. This Agreement supercedes and
renders null and void the Stock Option Agreement between the parties dated
January 23,1997.
2. Term of the Option. Subject to the provisions of Section 8
hereof, the Option will commence on the date hereof and will terminate on April
16, 2003 (the "Expiration Date").
3. Vesting; Exercise.
The Holder's right to exercise all or any portion of the
Option and receive the shares of Common Stock represented thereby shall become
exercisable immediately as of the date hereof.
4. Adjustments Upon Changes in Capitalization or Other
Significant Events. 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
<PAGE>
the Option such that the holders of outstanding Common Stock shall have had an
adjustment made, without payment therefor, in the number of shares of Common
Stock owned by them or shall have become entitled or required to have had an
adjustment made in the number of shares of Common Stock owned by them, without
payment therefor, there shall be a corresponding adjustment as to the number of
shares of Common Stock into which the Option is exercisable and to the Exercise
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 exercise price applicable in the event the Holder elected to exercise
the Option in full (except for any change in the aggregate exercise price
resulting from rounding-off of share quantities or prices).
5. Exercise of the Option. To exercise all or any portion of
the Option, the Holder must do the following:
(a) deliver to the Company a written notice, in the
form of Exhibit "A" attached hereto and made a part hereof, specifying the
number of shares of Common Stock for which the Option is being exercised;
(b) surrender the Agreement to the Company upon
complete exercise of the Option;
(c) tender payment, either in cash or by cashiers or
certified check of the aggregate exercise price for the shares of Common Stock
for which the Option is being exercised;
(d) pay, or make arrangements satisfactory to the
Board for payment to the Company of, all federal, state and local taxes, if any,
required to be withheld by the Company in connection with the exercise of the
Option or the relevant portion thereof; and
(e) execute and deliver to the Company any other
documents required from time to time by the Company in order to promote
compliance with the Securities Act of 1933, as amended (the "1933 Act"),
applicable state securities laws, or any other applicable law, rule or
regulation.
6. Delivery of Share Certificate. As soon as practicable after
the Option or any portion thereof has been duly exercised, the Company will
deliver to the Holder a certificate for the shares of Common Stock for which the
Option was exercised. Unless the Option has expired or been exercised in full,
the Company and the Holder agree that the Company may affix to this Agreement an
appropriate notation indicating the number of shares for which the Option was
exercised and return this Agreement to the Holder. If any law or regulation of
the Securities and Exchange Commission (the "SEC") or of any other federal or
state governmental body having jurisdiction shall require the Company or the
Holder to take any action prior to issuance to the Holder of the shares of
Common Stock specified in the written notice of exercise, or if any listing
agreement between the Company and any national securities exchange requires such
shares to be listed prior to issuance, the date for the delivery of such shares
shall be adjourned until the completion of such action and/or such listing.
7. Fractional Shares. In no event shall the Company be
required to issue fractional shares upon the exercise of any portion of the
Option.
8. Termination, Adjustments to Term and Exercisability of the
Option. Notwithstanding the provisions of Section 2 above, unless the Director
has served at least one year as a Director of the Company in which case the
provisions of this Section 8 shall not apply, the term of the Option shall
expire upon occurrence either of the following events:
(a) except as set forth in (b) below, upon the
expiration of thirty (30) days from the time that Holder ceases to serve as a
director of the Company; or
(b) in the event the Holder ceases to serve as a
director of the Company as a result of Holder's death, the expiration of one (1)
year from the date of Holder's death.
9. Nontransferability. The Option is not transferable other
than (a) by operation of law, (1))to one or more trusts of which the Holder is a
trustor, or (c) by will or the laws of descent and distribution. The Option may
be exercised during the lifetime of the Holder only by the Holder or his or her
court-appointed legal representative.
10. Warranties and Representations of the Holder. By executing
this Agreement, the Holder accepts the Option and represents and warrants to the
Company and covenants and agrees with the Company as follows:
(a) THE SECURITIES OFFERED BY THIS INSTRUMENT HAVE
NOT BEEN REGISTERED OR QUALIFIED UNDER THE SECURITIES ACT OF 1933, AS AMENDED,
OR THE SECURITIES LAWS OF ANY STATE, AND ANY SALE OF SUCH SECURITIES IS SUBJECT
TO COMPLIANCE WITH, OR THE AVAILABILITY OF EXEMPTIONS FROM COMPLIANCE WITH, THE
REGISTRATION AND QUALIFICATION REQUIREMENTS OF SUCH ACT AND ANY APPLICABLE STATE
SECURITIES LAWS. THIS INSTRUMENT DOES NOT CONSTITUTE AN OFFER OR SOLICITATION TO
ANY PERSON IN ANY JURISDICTION WHERE SUCH OFFER OR SOLICITATION MAY NOT LAWFULLY
BE MADE. TRANSFER OF THIS INSTRUMENT AND THE SECURITIES OFFERED HEREBY IS
RESTRICTED AS PROVIDED IN SECTIONS 9 AND 12 HEREOF.
(b) The Holder acknowledges that no registration
statement under the1933 Act or under any state securities law has been filed and
that the Company has no obligation to file such a registration statement in the
future with respect to the Option or, any shares of Common Stock that may be
acquired upon exercise of the Option or any portion thereof.
<PAGE>
(c) The Holder warrants and represents that the
Option and any shares of Common Stock acquired upon exercise of the Option or
any portion thereof will be acquired and held by the Holder for the Holder's own
account, for investment purposes only, and not with a view towards the
distribution or public offering thereof or with any present intention of
reselling or distributing the same at any particular future time.
(d) The Holder agrees not to sell, transfer or
otherwise voluntarily dispose of any shares of Common Stock that may be acquired
upon exercise of the Option or any portion thereof unless (i) there is an
effective registration statement under the 1933 Act covering the proposed
disposition and compliance with governing state securities laws, (ii) the Holder
delivers to the Company, at the Holder's expense, a "no-action" letter or
similar interpretative opinion, satisfactory in form and substance to the
Company, from the staff of each appropriate securities agency, to the effect
that such shares may be disposed of by the Holder in the manner proposed, or
(iii) the Holder delivers to the Company, an opinion of counsel reasonably
satisfactory to the Company, to the effect that the proposed disposition is
exempt from registration under the 1933 Act and governing state securities laws
(e) The Holder acknowledges and consents to the
appearance of a restrictive legend, in substantially the following form:
NOTICE: RESTRICTIONS ON TRANSFER
The securities represented by this certificate have
not been registered under the Securities Act of 1933, or any state
securities laws, and may not be offered, sold, transferred, encumbered,
or otherwise disposed of except upon satisfaction of certain
conditions. Information concerning these restrictions may be obtained
from the corporation Any offer or disposition of these securities
without satisfaction of said conditions will be wrongful and will not
entitle the transferee to register ownership of the securities with the
corporation.
(f) The Holder agrees not to sell, transfer or
otherwise dispose of the Option, except as specifically permitted by this
Agreement and any applicable securities laws.
11. Warranties and Representations of the Company.
(a) The Company is a corporation duly organized,
validly existing and in good standing under the laws of the State of Delaware.
(b) The grant of the Option to the Holder has been
duly authorized by all requisite corporation action on the part of the Company
and the shares of Common Stock represented by the Option have been properly
reserved for issuance.
<PAGE>
(c) The number of shares of Common Stock represented
by the Option (when coupled with all shares currently outstanding and all shares
to be issued upon the exercise of all other currently outstanding options
granted by the Company which may be exercised absent an increase in the number
of authorized shares of common stock) does not exceed the number of shares of
Common Stock currently authorized for issuance by the Company's Certificate of
Incorporation (the "Certificate").
(d) No consents, approvals or permits are required
to be obtained from any third person, including, without limitation, any
securities commission, before the grant of the Option, nor do any conditions
precedent exist (other than those specifically identified herein) that would
impair the Company's ability to grant the Option hereunder.
(e) No consents, approvals, nor permits are required
to be obtained from any third person, other those which may be required under
applicable securities laws, before the issuance of Common Stock upon the
exercise of all or any portion of the Option.
12. Procedures Upon Permitted Transfer. Before any sale,
transfer or other disposition of any of the shares of Common Stock acquired upon
exercise of the Option, the Holder agrees to give written notice to the Company
of his or her intention to effect such disposition. The notice must describe the
circumstances of the proposed transfer in reasonable detail and must specify the
manner in which the requirements of Section 10(d) above will be satisfied in
connection with the proposed disposition. After (a) legal counsel to the Company
has determined in good faith that the requirements of Section 10(d) above will
be satisfied and (b) the Holder has executed such documentation as may be
necessary to effect the proposed disposition, the Company will, as soon as
practicable, transfer such shares in accordance with the terms of the notice.
Any stock certificate issued upon such transfer will bear a restrictive legend,
in the form set forth in Section 10(e) of this Agreement, unless in the opinion
of the Company's legal counsel such legend is not required. Compliance with the
foregoing procedures is in addition to compliance with any separate requirements
applicable to the Holder under the Certificate or otherwise.
13. Rights as Stockholder. The Option, in and of itself, does
not create rights in the Holder as a stockholder of the Company; provided that
upon any such exercise of the Option or any portion thereof that complies with
the requirements of this Agreement, the Holder shall immediately be vested with
all the rights afforded to other stockholders of the Company, regardless of when
the Company actually delivers certificates representing Common Stock to the
Holder.
14. Further Assurances. The Holder and the Company agree, from
time to time, to execute such additional documents as the other party hereto may
reasonably require to effectuate the purposes of this Agreement.
<PAGE>
15. Binding Effect. This Agreement shall be binding upon the
Holder, the Company, the Holder's heirs, successors and assigns, and any
corporation or other entity that succeeds to the rights and liabilities of the
Company.
16. Cost of Litigation. In any action at law or in equity or
any arbitration to enforce any of the provisions or rights under this Agreement,
the unsuccessful party to such litigation, as determined by the court or
arbitrator in a final judgment or decree, shall pay the successful party or
parties all costs, expenses and reasonable attorneys' fees incurred by the
successful party or parties (including without limitation costs, expenses and
fees on any appeals), and if the successful party recovers judgment in any such
action or proceeding, such costs, expenses and attorneys' fees shall be included
as part of the judgment.
17. Entire Agreement; Modifications. This Agreement
constitutes the entire agreement and understanding between the Company and the
Holder regarding the subject matter hereofl No modification of the Option or
this Agreement, or waiver of any provision of this Agreement, shall be valid
unless in writing and duly executed by the Company and the Holder. The failure
of any party to enforce any of that party's rights against the other party for
breach of any of the terms of this Agreement shall not be construed as a waiver
of such rights as to any continued or subsequent breach.
18. Governing Law. This Agreement shall be governed by and
interpreted under the law of the State of California applicable to agreements
wholly negotiated, executed and to be performed in that state.
19. Notices. Any notices that either party to this Agreement
is required or may desire to give to the other shall be given by sending the
same to the other at the address below, or at such other address as may be
designated in writing by any party in a notice to the other given in the manner
prescribed in this Section 19. All such notices shall be in writing and
delivered by telex, facsimile, personal delivery or if sent by mail, certified
or registered mail, return receipt requested deposited so addressed, postage
prepaid. If sent by mail notices shall be deemed delivered five (5) business
days after deposit in the mail. The addresses to which any such notices shall be
given are the following:
To Holder:
Mr. Eric Illowsky
President
Cable Network Insights
16 Cooper Drive
Ossining, New York 10562
Facsimile No. (914) 944-9124
Phone: (914) 944-4033
<PAGE>
To the Company:
Gerald M. Wetzler
c/o American Film Technologies, Inc.
300 Park Avenue, 17th Floor
New York, New York 10022
Facsimile No. (212) 572-6460
20. Severability. Whenever possible, each provision of this
Agreement shall be interpreted so as to be effective and valid under applicable
law. If any provision of this Agreement is prohibited or deemed invalid under
any applicable law, however, such provision shall be ineffective only to the
extent of such prohibition or invalidity, and neither the remainder of such
provision nor this Agreement shall be invalidated as a result.
21. Counterparts. This Agreement may be executed by the
parties in one or more counterparts, all of which taken together shall
constitute one instrument.
22. Jurisdiction. The parties hereto agree to submit to the
exclusive jurisdiction of the Superior Court of the State of California, County
of Los Angeles, any controversy, claim or dispute arising out of or relating to
this Agreement or the method and manner of performance thereof or the breach
thereof.
IN WITNESS WHEREOF, the parties have executed this Agreement
as of the day and year first above written.
z
"Company" American Film Technologies, Inc.
By: /s/ Gerald M. Wetzler
------------------------------------------
Gerald M. Wetzler
Chief Executive Officer
"Holder"
/s/ Eric Illowsky
------------------------------------------
Eric Illowsky
<PAGE>
June 5, 1998
Mr. Gerald Wetzler
CEO
American Film Technologies, Inc.
300 Park Avenue, 17th Floor
New York, New York 10022
Dear Gerry:
Pursuant to our Stock Option Agreement dated January 23, 1997, this notice
regards my address change. Please delete "3 Fawn Court, Suite 2, Deerfield
Complex" and insert "16 Cooper Drive", in section 19 ("Notices"). Also please
insert my "Facsimile No.
(914)-944-9124".
Thank you and Best regards,
Eric Illowsky
16 Cooper Drive
Ossining, NY 10562
Phone: 914-944-4033 or 914-941-2267 (hm)
Fax: 914-944-9124
cc: Barry Burten, Esq., Jeffery, Mangels, Butler & Marmaro LLP
2121 Avenue of the Stars, 10th Floor
Los Angeles, CA 90067
<PAGE>
STOCK OPTION AGREEMENT
THIS STOCK OPTION AGREEMENT (this "Agreement") is entered into, effective as of
January 7, 1999 (the "Effective Date"), by and between American Film
Technologies, Inc., a Delaware corporation (the "Company"), and Michael Bruno
(the "Holder").
RECITALS
WHEREAS, Holder has agreed to render consulting services to the Company pursuant
to the terms of that certain Consulting and Confidentiality Agreement dated
January 7, 1999 (the "Consulting Agreement"), and
WHEREAS, pursuant to the Agreement, the Company has agreed to grant the stock
option provided for herein to the Holder.
NOW, THEREFORE, the Company and the Holder covenant and agree as follows:
1. Grant of the Option . Subject to and conditioned upon the approval by the
Board of Directors of the Company of this Agreement and the grant of the
stock options contemplated hereby on or before January 30, 1999, for good
and valuable consideration, the receipt of which is hereby acknowledged,
the Company hereby grants to the Holder a stock option (the "Option") to
acquire from the Company, from time to time on the terms and conditions set
forth herein, all or any portion of an aggregate of Five Hundred Thousand
(500,000) shares of the Company's $.002 par value common stock (the "Common
Stock"), at the price equal to the $.05 per share (the "Exercise Price").
Each of the number of shares of Common Stock into which the Common Stock is
exercisable and the Exercise Price is subject to adjustment as provided in
Section 4 hereof.
2. Term of the Option. Subject to the provisions of Section 8 hereof, the
Option will commence on the date hereof and will terminate on June 16, 2001
(the "Expiration Date ").
3. Vesting: Exercise. The Holder's right to exercise all or any portion of the
Option and receive the shares of Common Stock represented thereby shall
become exercisable immediately as of the date hereof.
4. Adjustments Upon Changes in Capitalization or Other Significant Events. In
the event of any increase or decrease in the number of the issued shares of
Common Stock by reason of a stock dividend, stock split, reverse stock
split or consolidation or combination of shares and the like at any time or
from time to time throughout the term of the Option such that the holders
of outstanding Common Stock shall have had an adjustment made, without
payment therefor, in the number of shares of Common Stock owned by them or
shall have become entitled or required to have had an adjustment made in
the number of shares of Common Stock owned by them, without payment
therefor, there shall be a corresponding adjustment as to the number of
shares of Common Stock into which the Option is exercisable and to the
Exercise 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 exercise price applicable in the event the
Holder elected to exercise the Option in full (except for any change in the
aggregate exercise price resulting from rounding-off of share quantities or
prices).
<PAGE>
5. Exercise of the Option. To exercise all or any portion of the Option, the
Holder must do the following:
(a) deliver to the Company a written notice, in the form of Exhibit "A"
attached hereto and made a part hereof, specifying the number of
shares of Common Stock for which the Option is being exercised;
(b) surrender the Agreement to the Company upon complete exercise of the
Option; surrender the Agreement to the Company upon complete exercise
(c) tender payment, either in cash or by cashiers or certified check of
the aggregate exercise price for the shares of Common Stock for which
the Option is being exercised;
(d) pay, or make arrangements satisfactory to the Board for payment to the
Company of, all federal, state and local taxes, if any, required to be
withheld by the Company in connection with the exercise of the Option
or the relevant portion thereof; and
(e) execute and deliver to the Company any other documents required from
time to time by the Company in order to promote compliance with the
Securities Act of 1933, as amended (the " 1933 Act"), applicable state
securities laws, or any other applicable law, rule or regulation.
6. Delivery of Share Certificate. As soon as practicable after the Option or
any portion thereof has been duly exercised, the Company will deliver to
the Holder a certificate for the shares of Common Stock for which the
Option was exercised. Unless the Option has expired or been exercised in
full, the Company and the Holder agree that the Company may affix to this
Agreement an appropriate notation indicating the number of shares for which
the Option was exercised and return this Agreement to the Holder. If any
law or regulation of the Securities and Exchange Commission (the "SEC") or
of any other federal or state governmental body having jurisdiction shall
require the Company or the Holder to take any action prior to issuance to
the Holder of the shares of Common Stock specified in the written notice of
exercise, or if any listing agreement between the Company and any national
securities exchange requires such shares to be listed prior to issuance,
the date for the delivery of such shares shall be adjourned until the
completion of such action and/or such listing.
7. Fractional Shares. In no event shall the Company be required to issue
fractional shares upon the exercise of any portion of the Option.
8. Adjustments to Term and Exercisability of the Option by the Company. The
term of the Option shall expire upon occurrence of the following events:
(a) The expiration of thirty (30) days from the date of terminating the
Agreement solely as the result of Holder's material breach thereof; or
(b) In the event the Agreement terminates as a result of Holder's death,
the expiration of one (1) year from the date of Holder's death.
9. Nontransferability. The Option is not transferable other than (a) by
operation of law, (b) to one or more trusts of which the Holder is a
trustor, or (c) by will or the laws of descent and distribution. The Option
may be exercised during the lifetime of the Holder only by the Holder or
his or her court-appointed legal representative.
<PAGE>
10. Warranties and Representations of the Holder. By executing this Agreement,
the Holder accepts the Option and represents and warrants to the Company
and covenants and agrees with the Company as follows:
(a) THE SECURITIES OFFERED BY THIS INSTRUMENT HAVE NOT BEEN REGISTERED OR
QUALIFIED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR THE
SECURITIES LAWS OF ANY STATE, AND ANY SALE OF SUCH SECURITIES IS
SUBJECT TO COMPLIANCE WITH, OR THE AVAILABILITY OF EXEMPTIONS FROM
COMPLIANCE WITH, THE REGISTRATION AND QUALIFICATION REQUIREMENTS OF
SUCH ACT AND ANY APPLICABLE STATE SECURITIES LAWS. THIS INSTRUMENT
DOES NOT CONSTITUTE AN OFFER OR SOLICITATION TO ANY PERSON IN ANY
JURISDICTION WHERE SUCH OFFER OR SOLICITATION MAY NOT LAWFULLY BE
MADE. TRANSFER OF THIS INSTRUMENT AND THE SECURITIES OFFERED HEREBY IS
RESTRICTED AS PROVIDED IN SECTIONS 9 AND 12 HEREOF.
(b) The Holder acknowledges that no registration statement under the 1933
Act or under any state securities law has been filed and that the
Company has no obligation except as stated in Section 4 of the
Consulting Agreement to file such a registration statement in the
future with respect to the Option or, any shares of Common Stock that
may be acquired upon exercise of the Option or any portion thereof.
(c) The Holder warrants and represents that the Option and any shares of
Common Stock acquired upon exercise of the Option or any portion
thereof will be acquired and held by the Holder for the Holder's own
account, for investment purposes only, and not with a view towards the
distribution or public offering thereof or with any present intention
of reselling or distributing the same at any particular future time.
(d) The Holder agrees not to sell, transfer or otherwise voluntarily
dispose of any shares of Common Stock that may be acquired upon
exercise of the Option or any portion thereof unless (i) there is an
effective registration statement under the 1933 Act covering the
proposed disposition and compliance with governing state securities
laws, (ii) the Holder delivers to the Company, at the Holder's
expense, a "no-action" letter or similar interpretative opinion,
satisfactory in form and substance to the Company, from the staff of
each appropriate securities agency, to the effect that such shares may
be disposed of by the Holder in the manner proposed, or (iii) the
Holder delivers to the Company, an opinion of counsel reasonably
satisfactory to the Company, to the effect that the proposed
disposition is exempt from registration under the 1933 Act and
governing state securities laws.
(e) The Holder acknowledges and consents to the appearance of a
restrictive legend, in substantially the following form:
NOTICE: RESTRICTIONS ON TRANSFER
The securities represented by this certificate have not been
registered under the Securities Act of 1933, or any state securities
laws, and may not be offered, sold, transferred, encumbered, or
otherwise disposed of except upon satisfaction of certain conditions.
Information concerning these restrictions may be obtained from the
corporation. Any offer or disposition of these securities without
satisfaction of said conditions will be wrongful and will not entitle
the transferee to register ownership of the securities with the
corporation.
<PAGE>
(f) The Holder agrees not to sell, transfer or otherwise dispose of the
Option, except as specifically permitted by this Agreement and any
applicable securities laws.
11. Warranties and Representations of the Company.
(a) The Company is a corporation duly organized, validly existing and in
good standing under the laws of the State of Delaware.
(b) The grant of the Option to the Holder has been duly authorized by all
requisite corporation action on the part of the Company and the shares
of Common Stock represented by the Option have been properly reserved
for issuance.
(c) The number of shares of Common Stock represented by the Option (when
coupled with all shares currently outstanding and all shares to be
issued upon the exercise of all other currently outstanding options
granted by the Company which may be exercised absent an increase in
the number of authorized shares of common stock) does not exceed the
number of shares of Common Stock currently authorized for issuance by
the Company's Certificate of Incorporation, as amended (the
"Certificate").
(d) No consents, approvals or permits are required to be obtained from any
third person, including, without limitation, any securities
commission, before the grant of the Option, nor do any conditions
precedent exist (other than those specifically identified herein) that
would impair the Company's ability to grant the Option hereunder.
(e) No consents, approvals, nor permits are required to be obtained from
any third person, other those which may be required under applicable
securities laws, before the issuance of Common Stock upon the exercise
of all or any portion of the Option.
12. Procedures Upon Permitted Transfer. Before any sale, transfer or other
disposition of any of the shares of Common Stock acquired upon exercise of
the Option, the Holder agrees to give written notice to the Company of his
or her intention to effect such disposition. The notice must describe the
circumstances of the proposed transfer in reasonable detail and must
specify the manner in which the requirements of Section 10(d) above will be
satisfied in connection with the proposed disposition. After (a) legal
counsel to the Company has determined in good faith that the requirements
of Section 10(d) above will be satisfied and (b) the Holder has executed
such documentation as may be necessary to effect the proposed disposition,
the Company will, as soon as practicable, transfer such shares in
accordance with the terms of the notice. Any stock certificate issued upon
such transfer will bear a restrictive legend, in the form set forth in
Section 10(e) of this Agreement, unless in the opinion of the Company's
legal counsel such legend is not required. Compliance with the foregoing
procedures is in addition to compliance with any separate requirements
applicable to the Holder under the Certificate or otherwise.
<PAGE>
13. Rights as Stockholder. The Option, in and of itself, does not create rights
in the Holder as a stockholder of the Company; provided that upon any such
exercise of the Option or any portion thereof that complies with the
requirements of this Agreement, the Holder shall immediately be vested with
all the rights afforded to other stockholders of the Company, regardless of
when the Company actually delivers certificates representing Common Stock
to the Holder.
14. Further Assurances. The Holder and the Company agree, from time to time, to
execute such additional documents as the other party hereto may reasonably
require to effectuate the purposes of this Agreement.
15. Binding Effect. This Agreement shall be binding upon the Holder, the
Company, the Holder's heirs, successors and assigns, and any corporation or
other entity that succeeds to the rights and liabilities of the Company.
16. Cost of Litigation. In any action at law or in equity or any arbitration to
enforce any of the provisions or rights under this Agreement, the
unsuccessful party to such litigation, as determined by the court or
arbitrator in a final judgment or decree, shall pay the successful party or
parties all costs, expenses and reasonable attorneys' fees incurred by the
successful party or parties (including without limitation costs, expenses
and fees on any appeals), and if the successful party recovers judgment in
any such action or proceeding, such costs, expenses and attorneys' fees
shall be included as part of the judgment.
17. Entire Agreement: Modifications. This Agreement constitutes the entire
agreement and understanding between the Company and the Holder regarding
the subject matter hereof. No modification of the Option or this Agreement,
or waiver of any provision of this Agreement, shall be valid unless in
writing and duly executed by the Company and the Holder. The failure of any
party to enforce any of that party's rights against the other party for
breach of any of the terms of this Agreement shall not be construed as a
waiver of such rights as to any continued or subsequent breach.
18. Governing Law. This Agreement shall be governed by and interpreted under
the law of the State of California applicable to agreements wholly
negotiated, executed and to be performed in that state.
<PAGE>
19. Notices. Any notices that either party to this Agreement is required or may
desire to give to the other shall be given by sending the same to the other
at the address below, or at such other address as may be designated in
writing by any party in a notice to the other given in the manner
prescribed in this Section 19. All such notices shall be in writing and
delivered by telex, facsimile, personal delivery or if sent by mail,
certified or registered mail, return receipt requested deposited so
addressed, postage prepaid. If sent by mail notices shall be deemed
delivered five (5) business days after deposit in the mail.
The addresses to which any such notices shall be given are the following:
To Holder:
Mr. Michael Bruno
Digital Video Art
307 Orchard City Drive, Suite 204
Campbell, California 95008
Facsimile No. (408) 378-8018
To the Company:
Gerald M. Wetzler
c/o American Film Technologies, Inc.
300 Park Avenue, 17th Floor
New York, New York 10022
Facsimile No. (212) 572-6460
20. Severability. Whenever possible, each provision of this Agreement shall be
interpreted so as to be effective and valid under applicable law. If any
provision of this Agreement is prohibited or deemed invalid under any
applicable law, however, such provision shall be ineffective only to the
extent of such prohibition or invalidity, and neither the remainder of such
provision nor this Agreement shall be invalidated as a result.
21. Counterparts. This Agreement may be executed by the parties in one or more
counterparts, all of which taken together shall constitute one instrument.
22. Jurisdiction. The parties hereto agree to submit to the exclusive
jurisdiction of the Superior Court of the State of California, County of
Santa Clara, any controversy, claim or dispute arising out of or relating
to this Agreement or the method and manner of performance thereof or the
breach thereof.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the day and
year first above written.
"Company'
American Film Technologies, Inc.
By:
/s/ Gerald M. Wetzler
- -----------------------------------
Gerald M. Wetzler
Chief Executive Officer
"Holder"
/s/ Michael Bruno
- ------------------------------------
Michael Bruno
<PAGE>
CONSULTING AND CONFIDENTIALITY AGREEMENT
This Agreement sets forth the terms and conditions by which Michael F. Bruno,
an individual with offices at 307 Orchard City Drive, Suite 204, Campbell, CA
("Consultant") shall provide consulting services to American Film
Technologies, a Delaware corporation, with principal offices at 300 Park
Avenue, 17th floor, New York, New York ("Company"). These services shall be
provided to the Company on a part-time, non-exclusive basis to advise and
assist it in technology-related matters.
1. Consulting Services: Consultant's services shall be rendered on an
as-needed basis as requested by the Company subject to the Consultant's
reasonable availability. Such duties and responsibilities shall be
subject to the direction and supervision of the Company's Chief Executive
Officer ("CEO") and/or the Board of Directors, and subject to the
Consultant's discretion and consent. Such duties shall be consistent
with:
(a) assisting and advising the Company in connection with the maintenance,
modification and enhancement of its proprietary colorization process,
including but not limited to the computer programming, hardware and
software relating thereto; and
(b) such additional services as may be necessary to assist the CEO and the
Board of Directors in the Company's financing activities and in
discussions with potential strategic or financial partners.
For the purposes of this Agreement, the services set forth in (a) and (b)
above shall hereinafter be referred to as the "Consulting Services".
Consultant may render these services from Consultant's existing offices, home
or such other place as Consultant deems appropriate. Notwithstanding the
forgoing, the parties hereto recognize that Consultant may be required from
time to time to travel outside of Campbell to the Company's offices and or
facilities in San Diego and Tijuana, or to other locations. In the event that
travel is required, the Company agrees to give Consultant such prior notice as
may be practicable and to schedule such travel at a mutually convenient time.
2. Term: The term of this Agreement shall commence upon Board Approval, as
hereinafter defined, and shall terminate upon the first to occur of the
following (a) written termination by the Company for any reason, with or
without cause; (b) June 16, 2001 (the "Expiration Date"); (c) upon one
year's prior written notice by Consultant; or (d) upon ten day's prior
written notice by Consultant at any time after the Company does not
satisfy its obligations in Section 4. Except for the Compensation and
Expenses set forth in Sections 3(b) and 4, below, and the "Options"
granted to Consultant pursuant to Section 3(a), below, the Company shall
have no further obligations to Consultant in the event that it or
Consultant elects to terminate Consultant's Consulting Services at any
time prior to June 16, 2001.
3. Compensation: In consideration for entering into this Agreement and
performing the Consulting Services, the Consultant and the Company agree
that the Consultant's sole compensation shall be:
(a) the grant of stock options to purchase Five Hundred Thousand (500,000)
shares of the Company's common stock, at $.05 per share pursuant to the
terms of the Stock Option Agreement, a form of which is attached hereto;
and
<PAGE>
(b) compensation at an hourly rate for every hour of actual Consulting
Services performed by the Consultant at a rate of One Hundred and
Twenty-Five Dollars ($125.00) per hour ( the "Consulting Fees").
Consultant agrees to invoice the Company monthly for any Consultant Fees,
and the Company agrees to pay such invoices within thirty (30) days.
4. Registration of Shares: The Company shall register all the shares of
common stock which are subject to the Stock Option grant in Section 3(a)
by September 30, 1999. For purposes of this Agreement, the term
"register," "registered," and "registration" refer to a registration
effected by preparing and filing a registration statement or similar
document in compliance with the Securities Act of 1933, as amended (the
"Act"), and the declaration or ordering of effectiveness of such
registration statement or document.
5. Expenses: Consultant shall be entitled to prompt reimbursement for all
reasonable out-of-pocket expenses incurred by Consultant in the
performance of Consultant's Consulting Services hereunder upon submission
of appropriate voucher, receipts or other reasonable substantiation
thereof, including but not limited to travel, hotel, entertainment,
telephone, postage, photocopying and other expenses.
6. Independent Contractor: Consultant shall, at all times, render the
Consulting Services pursuant to this Agreement as an independent
contractor and not as an employee, agent or servant of the Company, nor
shall Consultant be deemed, by reason of this Agreement or the services
performed hereto, to be an employee of the Company for purposes of
withholding, employee payroll taxes, contributions, pensions, or
otherwise.
7. No Benefits: Except as expressly set forth herein, Consultant shall not,
as a result of Consultant Services to be rendered by him pursuant to this
Agreement, be eligible to receive and/or participate in any of the
employee benefits available to employees of the Company including,
without limitation, health or life insurance or benefits, vacation pay,
severance pay or bonus pools.
8. Confidentiality and Proprietary Information: Consultant agrees that:
(a) Consultant shall not at any time (during or after the term of this
Agreement) disclose or use, except in pursuit of the business of the
Company with the Company's permission, any Proprietary Information of the
Company acquired during the term of this Agreement. For purposes of this
Agreement the phrase "Proprietary Information" means all information
which is known or intended to be known only by Consultant, employees or
directors of the Company, and which is any document, record or other
information of the Company or others in a confidential relationship with
the Company which relates to specific business matters including the
Company's colorization process and any intended or contemplated
enhancements, modifications or upgrades thereto, such as patents, patent
applications, technical data, product development, software, equipment
modifications, capacities, trademarks copyrights, trade secrets, secret
processes, proprietary know-how, business strategies, information of the
Company's business, costs, pricing, personnel, suppliers, marketing plans
or identity of suppliers or customers or accounting procedures of the
Company. Consultant agrees not to remove from the premises of the Company
except in the pursuit of business of the Company any Proprietary
Information of the Company. Consultant recognizes that all such
Proprietary Information, whether developed by Consultant or by someone
else for the Company are the exclusive property of the Company; and
<PAGE>
(b) The sale or unauthorized use or disclosure of any Proprietary Information
by any means whatsoever and any time before, during or after Consultant's
services to the Company hereunder shall constitute unfair competition.
Consultant agrees that Consultant shall not engage in unfair competition
either during the time that Consultant is engaged as an independent
contractor by the Company, or at any time thereafter.
(c) "Proprietary Information" used in this Section does not include
information which: (1) was known to Consultant prior to the disclosure by
the Company and not subject to a prior confidential relationship between
the parties; (2) is or becomes legally known and available to the public
prior to or subsequent to disclosure by Company; (3) was acquired by
Consultant from a third party who was lawfully in possession of the
information and under no obligation to maintain its confidentiality; or
(4) was independently developed by Consultant without utilizing
Proprietary Information.
9. Ownership: Consultant hereby acknowledges that all of the Proprietary
Information and materials are and shall continue to be the exclusive
proprietary property of the Company, whether or not prepared in whole or
in part by Consultant and whether or not disclosed to or entrusted to the
custody of Consultant. Consultant further hereby acknowledges that all
Proprietary Information and materials (to which Consultant has had access
or which Consultant has learned during Consultant's consulting), have
been disclosed to Consultant solely by virtue of Consultant's consulting
with the Company and solely for the purpose of assisting Consultant in
performing Consultant's duties for the Company.
10. Nondisclosure and Nonuse. Consultant hereby agrees that Consultant will
not, either during the course of his consulting with Company, or at any
time thereafter, disclose any Proprietary Information or materials of
Company, in whole or in part, to any person or entity, for an reason or
purpose whatsoever, unless Company shall have given its written consent
to disclosure. Consultant further agrees that Consultant shall not,
either during the course of Consultant's consulting with Company or at
any time thereafter use Proprietary Information: (a) in any manner other
than for and in the course of Consultant's furtherance of Company; (b)
for Consultant's own purposes; or (3) for the benefit of any person or
entity except Company; whether such use consists of the duplication,
removal, oral use or disclosure or the transfer of any unauthorized use
in whatever manner, unless Company shall have given its proper written
consent to such use.
11. New Developments. Consultant further agrees that during the course of
Consultant's Consulting Services, Consultant will promptly disclose to
Company any and all improvements, inventions, developments, discoveries,
innovations, systems, techniques, ideas, processes, programs and other
things which may be of assistance to Company, whether or not patentable
or copyrightable, arising during the term of this Agreement out of any
development, services or products made or conceived by Consultant in
pursuit of the business of the Company, alone or with others who are
employed by Company or other independent contractors engaged by the
Company (collectively referred to hereinunder as the "New Developments").
Consultant further agrees that all such New Developments shall be and
remain the sole and exclusive property of Company and that Consultant
shall, upon request of Company, and without further compensation, do all
lawful things reasonably necessary to ensure Company's ownership of such
New Developments including without limitation the execution of any
necessary documents assigning and transferring to Company and its assigns
all of Consultant's rights, title and interest in and to such New
Developments, and the rendering of assistance in execution of all
necessary documents required to enable Company to file and obtain patents
or copyright in the United States and foreign countries on any of such
New Developments.
<PAGE>
12. Surrender of Material Upon Termination of Agreement:. Consultant hereby
agrees that, upon termination of this Agreement, for whatever reason and
whether voluntary or involuntary, or at any time at the request of
Company, Consultant will immediately surrender to Company all of the
property and other things of value in Consultant's possession, or in the
possession of any other person or entity under Consultant's control,
including without limitation all personal notes, drawings, manuals,
documents, photographs, or the like, and copies thereof, relating to any
Proprietary Information or materials or New Developments, or relating to
the business of the Company.
13. Solicitations of Employment: Upon termination of this Agreement,
Consultant hereby agrees not to induce or attempt to induce any person
who, at the time of termination of Consultant's employment, was an
officer, director, Consultant, principal or agent of Company, or any of
its affiliated companies to leave his or her employment, agency,
directorship or office with Company.
14. Board Approval: The Consultant's and the Company's obligations hereunder
are subject to and conditioned upon the Company's Board of Directors
approving, on or before January 31, 1999, this Agreement, and authorizing
the grant of the Options and the issuance of the shares of the Company's
common stock in connection with the exercise thereof (the "Board
Approval").
15. Non-Exclusive Agreement, Consultant's Obligations to Digital Video Art,
Inc. (DVA): The parties to this Agreement agree that Consultant's
Consulting Services rendered hereby shall be of a non-exclusive nature
and nothing contained herein shall prohibit Consultant from engaging in
any other business enterprise nor shall require Consultant to render more
than twenty (20) hours of service to the Company during any thirty (30)
day period. In addition to the foregoing, the parties hereto acknowledge
and agree that the Consulting Services which Consultant renders to the
Company may not violate the satisfaction of Consultant's existing
obligations and responsibilities to DVA or any of its subsidiary or
affiliated entities. The Company further acknowledges and agrees that in
the event it seeks to implement modifications or upgrades to its existing
patents, software, equipment or other New Developments, Consultant may
upon prior notice to the Company render such services through DVA.
16. Noncompetition. Except as prior or existing engagements and further work
with respect thereto by Consultant or DVA, during the term of this
Agreement, Consultant will not, directly or indirectly, either as an
employee, employer, consultant, agent, principal, partner, stockholder,
corporate officer, director or in any other individual or representative
capacity, engage or participate in any business that is in competition in
an manner whatsoever with the business of the Company as currently
contemplated, which is colorization, enhancement or restoration of
television or theatrical movies or other programming.
17. Remedies. Without acknowledging the amount, nature or extent of possible
damages in the event of a breach, prior to the actual occurrence of such
breach, Consultant hereby acknowledges and agrees that the services
rendered by Consultant to Company, and the information disclosed to
Consultant during and by virtue of Consultant's consulting, are of a
special, unique and extraordinary character, and the breach of any
provision of the Agreement will cause the Company irreparable injury and
damage, and consequently Company shall be entitled, in addition to all
other remedies available to it, to injunctive and equitable relief to
prevent a breach of this Agreement, or any part of it, and to secure the
enforcement of this Agreement.
<PAGE>
18. Modification of Agreement: It is agreed that this Agreement may be
modified only by an express agreement between Consultant and CEO of
Company, and that any such modification must be in writing and signed by
both parties.
19. Severability. In the event that any one or more of the provisions
contained in this Agreement or in any other instrument referred to
herein, shall, for any reason, be held to be invalid, illegal or
unenforceable in any respect, then to the maximum extent permitted by
law, such invalidity, illegality or unenforceability shall not affect any
other provision of this Agreement or any other such instrument. If any
covenant should be deemed invalid, illegal or unenforceable because its
scope is considered excessive, such covenant shall be modified so that
the scope of the covenant is reduced only to the minimum extent necessary
to render the modified covenant valid, legal and enforceable. The parties
agree that there is separate consideration for each provision of this
Agreement and that all of the provisions of this Agreement are severable.
20. Entire Agreement: This Agreement is intended to set forth the entire
agreement regarding Consultant's position as an independent contractor
with the Company and cannot be changed or terminated orally. This
Agreement supersedes all prior negotiations or agreements, whether oral
or written regarding the terms and conditions of Consultant's position as
an independent contractor with the Company (including but in no way
limited to compensation and duration).
21. No Waiver: No waiver by any party hereto of a breach of any provision of
this Agreement shall constitute a waiver of any preceding or succeeding
breach of the same or any other provision hereof.
22. Governing Law: This Agreement shall be governed by, and construed and
enforced in accordance with, the laws of the State of California, without
regard to the conflicts of laws principles thereof with respect to
contracts wholly-negotiated and to be preformed in the State of
California.
23. Non-Assignability by Consultant: This Agreement, and Consultant's rights
and obligations hereunder, may not be assigned by Consultant except as
expressly set forth herein. The Company may assign its rights, together
with its obligations hereunder, to any affiliate, provided that the
obligations of the Company hereunder shall be binding on its successors
or assigns.
<PAGE>
CAUTION: THIS AGREEMENT AFFECTS YOUR RIGHTS TO INNOVATIONS YOU MAKE DURING THE
TERM OF YOUR CONSULTING SERVICES, AND RESTRICTS YOUR RIGHT TO DISCLOSE OR USE
THE COMPANY'S PROPRIETARY INFORMATION DURING OR SUBSEQUENT TO THE TERM OF YOUR
CONSULTING SERVICES. CONSULTANT HAS READ THIS AGREEMENT CAREFULLY AND
UNDERSTANDS ITS TERMS AND HAS RECEIVED A COPY OF WRITTEN NOTIFICATION TO
CONSULTANT CONTAINING CALIFORNIIA LABOR CODE SECTION 2870.
/s/ Michael Bruno
- --------------------------------------
(Consultant)
1/7/99
- ----------------
(date)
/s/ Gerald M. Wetzler
- ---------------------------------------
(American Film Technologies, Inc.)
Chairman and CEO
- -----------------
(title)
1/7/99
- -----------------
(date)
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> Year
<FISCAL-YEAR-END> Jun-30-1998
<PERIOD-START> Jul-1-1997
<PERIOD-END> Jun-30-1998
<CASH> 23,366
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 32,948
<PP&E> 510,981
<DEPRECIATION> 253,935
<TOTAL-ASSETS> 327,494
<CURRENT-LIABILITIES> 1,061,017
<BONDS> 0
0
0
<COMMON> 153,473
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 327,494
<SALES> 0
<TOTAL-REVENUES> 0
<CGS> 0
<TOTAL-COSTS> 1,389,630
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 104,805
<INCOME-PRETAX> (1,389,630)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,389,630)
<EPS-PRIMARY> (0.02)
<EPS-DILUTED> (0.01)
</TABLE>
