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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, 1999
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 for the transition period from to
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Commission file number 1-9748
American Film Technologies, Inc.
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(Exact name of Registrant as Specified in Its Charter)
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Delaware 23-2359277
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State or Other Jurisdiction of Incorporation or Organization (I.R.S. Employer Identification Number)
300 Park Avenue, 17th Floor, New York, NY 10022
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(Address of Principal Executive Offices) (Zip Code)
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(212) 572-6370
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(Registrant's Telephone Number, Including Area Code)
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, -$.002 Par Value
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(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
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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. [ ] State the aggregate market value of the voting and non-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
$6,233,192, based on 103,886,531 shares of Common Stock held by non-affiliates
at the last trading price of $0.06 per share as of September 30, 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
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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 September 30, 1999 there were 138,577,531 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.
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PART I
THE INFORMATION CONTAINED HEREIN SHOULD BE READ IN CONJUNCTION WITH
AMERICAN FILM TECHNOLOGIES, INC.'S ("AFT" OR THE "COMPANY") 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 six 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-services 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 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
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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 its
competitor's assets were purchased by a group including former officers and
directors of the 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.
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 or 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 that this requirement
develops, the lack of demand for colorization on a fee-for-services 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, on economically feasible terms, enough product for its
library or 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.
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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 (either 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 effect on AFT's business.
Creative Opposition: Most of the larger and better libraries in the United
States are owned by film production companies. Because of the 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 that this reluctance will not continue. To the
extent that it limits the supply of a 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.
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. At
this time, approximately 138,577,531 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 re-offer 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. While the company may
challenge the validity of certain options and conversion rights, there can be no
assurance that such a challenge will be successful.
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 any earnings for use
in AFT's business operations. Accordingly, the Board does not anticipate
declaring any dividends in the foreseeable future.
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ITEM 1. BUSINESS.
GENERAL
American Film Technologies, Inc.'s ("AFT" or the "Company") principal
business has been the production of color versions of motion pictures and
television programs originally produced in black and white. AFT was incorporated
in Delaware in 1985 and completed its first project in November 1987. AFT
completed a public offering of its common stock in August 1987. Since its
organization, AFT has colorized over 200 motion pictures, 170 television
programs and 90 animated cartoons. Through its filing for protection under
Chapter 11 of the Bankruptcy Code, AFT believes it had accounted for
approximately 70% of the global colorized production of black and white films.
During the year ended 1993, AFT completed COLORIMAGED versions of 43 full length
motion pictures, 7 episodes of a one-half hour television series and 5 short
cartoons, a theatrical animated short, an animated half-hour special for
television, a half-hour video introducing a new board game and portions of the
ink and paint and special effects work for the Amblin Entertainment full-length
animated motion picture "We're Back. "
While most of AFT's colorization activities have been for customers on a
fee-for-services basis, AFT has also produced colorized films for its own
library. The Company owns the copyrights of 11 colorized films, including 4
Sherlock Holmes films starring Basil Rathbone; "The Scarlett Pimpernel" starring
Leslie Howard, Merle Oberon and Raymond Massey; 3 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 ("Turner"). 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.
RECENT DEVELOPMENTS
On September 13, 1999, the Registrant held an annual meeting of
shareholders at which the entire slate of new directors were elected by a vote
of 37,106,326 for and 158,000 against.
The present directors of the Registrant are Fred S. Ruby, Porter Bibb,
Anthony K. Chan and John H. Hoagland. (See "Directors and Executive Officers of
the Registrant" below.)
On September 16, 1999, the newly constituted board of directors of the
Registrant met and elected Fred Rudy Chairman of the Board and Chief Executive
Officer. Martin & Taub, LLP was appointed counsel to the corporation. On
September 27, 1999, the newly constituted board voted to elect Fred Rudy the
President of the corporation. The board of directors terminated the employment
agreement of Gerald M. Wetzler, the Registrant's former Chairman, President and
Chief Executive Officer, "for cause" and formed a special committee to further
investigate Wetzler's
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conduct as an officer, director and employee of the Registrant as well as his
purchase and sale of the Registrant's securities and his acquisition of secured
notes from the Registrant, with a view towards exploring the Registrant's rights
and remedies against Wetzler. On September 15, 1999, the Registrant received a
notice from Wetzler, dated September 13, 1999, wherein he purported to resign as
an employee of the Registrant claiming that he is entitled to the payment of
$750,000 due to his "resignation" following a "change in control" of the
Registrant as defined in his employment agreement. All issues relating to Mr.
Wetzler's holdings in the Company as well as his employment agreement have been
settled pursuant to the terms of a settlement agreement dated December 30, 1999.
(See "Settlement Agreement"attached as an exhibit.)
On November 1, 1999, certain Senior Secured Convertible Notes
totaling $450,000.00 became due. The Company believes that of this amount, Mr.
Wetzler may be owed approximately $400,000.00, and another $50,000.00 may be
owed to another note holder. The Company has not paid these amounts and does not
have the capital at this time to pay such sums.
On or about November 3, 1999, Fred S. Rudy entered into a letter of
intent with Mr. Wetzler which sought to resolve all outstanding issues between
the Company and Mr. Wetzler, as contained in the pending litigation and with
respect to all notes, options and outstanding shares of common stock claimed to
be owned or controlled by Mr. Wetzler. This letter of intent also sought to
resolve all issues relating to Mr. Wetzler's employment contract with the
Company.
This letter of intent was executed subject to approval by the
Company's Board of Directors. At a Special Meeting of the Board of Directors
held on December 14, 1999, the terms of that agreement were unanimously rejected
on the grounds that they were not in the best interests of the Company. Mr.
Wetzler has moved in the pending action in the State of Delaware to enforce the
terms of the letter of intent and to declare a constructive trust with respect
to the Company's funds as a result of the failure to pay the sums alleged to be
due to Mr. Wetzler on November 1, 1999. A settlement agreement, dated December
30, 1999, was entered into between the Company and Mr. Wetzler. This agreement
was approved at a meeting of the Board of Directors by a unanimous vote.
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 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 announced its intention to terminate its film
colorization program. AFT was faced with declining revenues and had depleted its
cash reserves through the cost of, and losses incurred in connection with, its
animation and ink and paint operations. In addition, it had failed to capitalize
on its market dominance by broadening its customer base in the colorization
business. Accordingly, its back orders dropped significantly. As a result of the
foregoing, by the end of 1992, AFT was faced with the depletion of its remaining
cash within a few months. In response to this crisis, the Board terminated Mr.
Taritero and appointed Arthur Hartel as its President and Chief Executive
Officer. Mr. Hartel had previously served as the General Counsel and Secretary
to the Company. Mr. Hartel's principal objective was to locate additional
capital for AFT.
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Pre-Petition Investor. During early 1993, efforts were made to find a major
investor to inject new capital into AFT. An investor group led by minister and
broadcaster Pat Robertson (the "Robertson Group") entered into an agreement to
purchase control of AFT. In August 1993, the Robertson Group failed to close the
transaction.
On September 28, 1993, AFT entered into an agreement with Gerald M. Wetzler
pursuant to which Mr. Wetzler became the majority stockholder through the
purchase of equity interests in AFT.
During the second half of fiscal 1993 and the first quarter of fiscal year
1994, in order to lengthen the amount of time available for it to obtain new
business and to secure additional capital, AFT implemented a program of cost
reductions to go along with its program to extend the time period over which its
contractual film coloring would be produced. The principal areas in which AFT
reduced its costs were in the number of employees and in the amount of its
leased space. AFT's reduced film coloring schedule negatively impacted AFT's
earnings, principally due to its inability to cover such non-cash items as
depreciation; however, it extended AFT's available cash over a longer period of
time.
Management commenced a restructuring of the Company, suspending certain
operations of the 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 16, 1993, AFT filed for relief under Chapter 11 of the United
States Bankruptcy Code. AFT has not generated any new film colorization or
animation service orders since the filing under Chapter 11.
From the filing of the bankruptcy until 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 expense 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
and has vacated the space which it had leased in San
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Diego.
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 non-refundable 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 Company's plan of reorganization
(the "Plan"). (See "Plan of Reorganization" below.) 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. (See "Meyers Loan" 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 these approximately 10,000,000
shares of Common Stock 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.
Meyers Loan. On July 28, 1995, Meyers arranged for a $500,000 bridge loan
(the "Meyers Loan") to the Company bearing an interest of 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 the 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 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:
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<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
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.
-8-
<PAGE> 11
Since emerging from bankruptcy, the Company has actively pursued new
strategic alliances and partners.
SUBSEQUENT FINANCING
During fiscal 1999, 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 $49,000
in secured convertible notes were issued in a private placement. Between July 1,
1999 and July 8, 1999, no additional secured convertible notes were issued.
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.
Between October 1997 and April 1998, the Company issued a $264,000 principal
amount Senior Secured Convertible Debenture to accredited investors in a private
placement. In fiscal 1999, the investors converted these Debentures into
8,800,000 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 Relationships and Related Transactions" below.)
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 $404,965 was raised from Mr. Wetzler and other investors to fund
the Company's working capital requirements between late 1997 and 1999.
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
in1991, 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 7 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 beencompleted. 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
-9-
<PAGE> 12
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.
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 4 Sherlock
Holmes films, and others. As of June 30, 1997, AFT's library consisted of the
following 11 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
5 films (including "It's a Wonderful Life") it held in agreement with Republic
Pictures ("Republic") to Republic for $600,000. This price was in excess of the
carrying value of these films.
The 4 Sherlock Holmes films were distributed through Multimedia
Entertainment as part of a two program agreement. Each 3-hour program consisted
of 2 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.
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
-10-
<PAGE> 13
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 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" above.)
Mexican Subsidiary. The Company performed much of its colorization work
through its wholly-owned subsidiary, American Film Technologies de Mexico, S.A.,
a Mexican corporation. AFT loaned a significant amount of its colorization,
animation and ink and paint equipment to the subsidiary. Due to restraints on
the utilization of its cash imposed by Comerica Bank, the subsidiary missed its
payroll on October 8, 1993 and the subsidiary's employees began a work stoppage.
As a result of the strike, the Mexican employees filed a lien against AFT's
equipment located at the Mexico production facility. Since the equipment is
owned by AFT and the labor claim is against the subsidiary, AFT 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 that a Mexican production facility is
advantageous to the strategic plan of the Company. However, the Company has not
operated for six 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 whether such cost savings can be achieved in the future. Should
the Company resume operations at this time, it would consider re-establishing
operations in Mexico, which will require re-employment of selected former
employees of the Company's former subsidiary. Since the Mexican operation was
suspended in October 1993, most of the former employees have found other jobs.
The success of the Company will depend upon Midtech's ability to rehire certain
former employees. If Midtech is unable to do so, it will have to recruit and
train a new work force. That would delay the resumption of production and
increase the cost of production. As such, it could have a materially adverse
effect on the Company. Although the Company expects to benefit from the recent
devaluation of the peso, there is no assurance its future employees or vendors
will not demand increases in wages or prices to offset the effect of
devaluation.
INTELLECTUAL PROPERTY
The Company holds three United States patents pertaining to colorizing
monochrome images, which will expire
-11-
<PAGE> 14
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
largely be dependent upon its technology and its ability to maintain patent
protection on the technology it develops. (See "Risk Factors -- Patent
Protection" above).
EMPLOYEES
At present, the Company has no employees. 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. The Company
was required to make a payment in October 1998 and October 1999, each 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.
There has been a cash contribution of $250,000.00 as a result of the
purchase of stock by Rudy and various of his associates. These funds are being
used by AFT to operate the business of the Company and to pay certain expenses
of the Company.
The Company has settled the outstanding litigation between it and Gerald M.
Wetzler. (See "Recent Developments" above and "Legal Proceedings" below.)
ITEM 2. PROPERTIES.
AFT formerly leased approximately 8,400 square feet of office and
production space at 4105 Sorrento Valley Boulevard, San Diego, California. The
lease on this property was terminated in fiscal 1999, before the expiration date
on October 31, 2000. The Company knows of no action instituted by the landlord
in this regard.
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 City, New York located at 300 Park
Avenue, New York, New York 10022. The lease is renewable on a month to month
basis.
ITEM 3. LEGAL PROCEEDINGS.
On June 9, 1999, four stockholders of the Company filed suit in the
Newcastle County, Delaware Chancery Court against Mr. Gerald Wetzler as Chairman
and Chief Executive officer of the Company, and the Company as a nominal
defendant, seeking on various grounds to abrogate a stock option agreement and
secured convertible note previously granted and issued by the Company in 1997 to
Mr. Wetzler, as previously disclosed at that time, and to terminate Mr.
Wetzler's 1996 employment agreement with the Company. The action also sought,
among other things, to compel the Company to hold an annual meeting of
shareholders to elect directors as required by Delaware law. Mr. Wetzler
vigorously prosecuted his defense of this action and filed a motion for Summary
Judgment with the Court bas ed on terms of all the agreements in question which
require exclusive jurisdiction in the courts of California for all disputes
arising out of or relating to these agreements. The Court, by order dated July
6, 1999, denied a motion by Mr. Wetzler to dismiss the action on various grounds
and set and August 16, 1999 date for a hearing on all matters then outstanding
before the Court in the case, including the motion for Summary Judgment. The
Court also set September 1, 1999 as the date on which the annual meeting of
stockholders to elect directors was to be held and also set July 15, 1999 as the
record date for stockholders of record entitled to notice of and to vote at such
meeting. The
-12-
<PAGE> 15
annual meeting was held on September 13, 1999. (See "Recent Developments"
above.)
Pursuant to the terms of a settlement agreement dated December 30, 1999,
this litigation was settled. The mutual terms of the settlement agreement
provides for the payment of $1,140,000 on or before September 30, 2000, to
Gerald M. Wetzler for an option to purchase all or substantially all of his
holdings in the Company and for a further payment of $900,000 on or before
January 1, 2001. In consideration for the foregoing, Mr. Wetzler agreed to
extend the due date for the payment of all his Senior Secured Notes to January
1, 2001. At such time as the Company exercises the option to purchase Mr.
Wetzler's holdings, it intends to retire a significant portion of the shares or
option for shares which Mr. Wetzler holds. As further consideration for this
agreement, the Company agreed to ratify Mr. Wetzler's employment agreement and a
Senior Secured Note in the amount of $750,000 issued to Mr. Wetzler pursuant
thereto. In addition, the Company has paid the sum of $100,000 to the law firm
which represented Mr. Wetzler in this litigation and agreed to pay sums to prior
counsel for the Company. In the event that the option is exercised by the
Company, Mr. Wetzler will remain with approximately 9 million shares of the
Company's common stock.
Notwithstanding certain provisions in the settlement agreement, if a party
introduced by Mr. Wetzler makes an investment in the Company in an amount equal
to or greater than 4 million dollars, Mr. Wetzler will have the right to either
accept full payment of the option exercise payment or to reject the payment and
convert all of his Senior Secured Notes in accordance with the terms provided
therein. Mr. Wetzler's exercise of this right will be valid for a period of
twelve months following the closing of the investment. In accordance with their
fiduciary duties, the Board of Directors of the Company will have the right to
reject any such proposed investment.
On December 6, 1999, a Judgment was entered against the Company in the
amount of $45,724.46. The Company will attempt to negotiate a settlement
of this Judgment and to arrange for a reasonable payout.
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.
-13-
<PAGE> 16
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, 1998 and June 30, 1999
are listed below:
<TABLE>
<CAPTION>
Common Stock Price Range
- --------------------------
Quarter
<S> <C> <C>
Ended High Low
----- ---- ---
09/97 $1.20 $0.18
12/97 $1.03 $0.30
03/98 $0.64 $0.21
06/98 $0.48 $0.20
09/98 $0.40 $0.15
12/98 $0.25 $0.03
03/99 $0.14 $0.05
06/99 $0.09 $0.04
09/99 $0.08 $0.1/16
</TABLE>
- -----------
* 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 September 30,
1999 the Company had 1,320 shareholders of record. On September 30, 1999, the
last trading price of the Common Stock was reported at $.06 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, 1999 and should
be read in conjunction with "Managements's Discussion and Analysis of Financial
Condition and Results of Operations" below, "Risk Factors" above and 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 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, 1997, 1998 and 1999
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.
-14-
<PAGE> 17
Summary of Financial Information
(000's omitted except for per share numbers)
<TABLE>
<CAPTION>
Year Ended June 30,
----------------------------------------------------------------
Income Statement Data 1999 1998 1997 1996* 1995
---- ---- ---- ----- ----
(Successor) (Successor)(Predecessor)(Predecessor)(Predecessor)
<S> <C> <C> <C> <C> <C>
Revenues - - - - $22
Net Income (Loss) $(727) $(1,390) $(15,414) $(1,642) $(1,642)
Income (Loss) per share- basic $(0.01) $(0.02) $(0.21) $(0.06) $(0.06)
- diluted $(0.01) $(0.01) $(0.13) $(0.06) $(0.06)
</TABLE>
<TABLE>
<CAPTION>
June 30,
------------------------------------------------------------------
Balance Sheet Data 1999 1998 1997 1996 1995
---- ---- ---- ---- ----
(Successor) (Successor) (Predecessor) (Predecessor) (Predecessor)
<S> <C> <C> <C> <C> <C>
Total Assets $195 $327 $7,245 $7,245 $1,263
Long-Term Debt, net of current portion $49 $1,667 $1,634 $1,634 -
Total Liabilities $2,699 $2,728 $2,566 $2,566 $4,349
Stockholders' Equity (Deficit) $(2,054) $(2,400) $4,678 $4,678 $(3,086)
</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, 1998 and 1999
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, 1997, 1998 and 1999 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.
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, 1999 compared to June 30, 1998
The Company did not record any revenues during the period.
Total expenses during the fiscal year ended June 30, 1999 amounted to
$726,000. Total expenses during the fiscal year ended June 30, 1998 amounted to
$1,389,000.
Year Ended June 30, 1998 compared to June 30, 1997
The Company did not record any revenues during the 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.
-15-
<PAGE> 18
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 below.)
Financial Condition and Liquidity. During the fiscal years ended June 30,
1999 and 1998 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
debenture-holder 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 then 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.
AFT is continuing to experience cash flow difficulties. AFT was required to
make payments in October 1998 and October 1999, each 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. The
Rudy group invested $250,000.00 in or about September 1999. This amount is being
used to fund the operations of the Company and to pay certain of the Company's
expenses. This amount is not sufficient to pay off a significant portion of the
Company's debt. To the extent outside financing is not obtained in the immediate
future, the Company may be liquidated or the Company may seek further relief in
the previously instituted Bankruptcy proceeding. In the event of liquidation,
the shareholders in all likelihood will receive nothing with respect of their
stock.
-16-
<PAGE> 19
In addition, the Company needs funding sufficient to enable it to become
operational again. The amount of funding required is contingent on a number of
variables, such as the speed of the start up and the initial production capacity
required. The Company believes that the minimum amount of funding required
(including working capital) would be approximately $4,000,000.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
<TABLE>
<S> <C>
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
</TABLE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
-17-
<PAGE> 20
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The directors and executive officers of the Company are as follows:
<TABLE>
<CAPTION>
Name Age Position with Company
---- --- ---------------------
<S> <C> <C>
Fred S. Rudy 25 Chairman, Director,
Chief Executive Officer
Porter Bibb 62 Director
Anthony K. Chan 44 Director
John H. Hoagland 69 Director
</TABLE>
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
Relationships and Related Transactions" below.)
FRED S. RUDY, age twenty-five (25), is a Managing Director of Olympia
Partners, LLC, ("Olympia") a New York based private equity investment
partnership. Mr. Rudy specializes in early-stage equity investments and
corporate turnarounds for public and private companies. Prior to joining Olympia
in June 1998, Mr. Rudy was a Corporate Finance Consultant at Broad Capital
Associates, Inc. from 1993 to 1998. Mr. Rudy attended New York University and
currently resides in New York with his wife and two children. Mr. Rudy is the
beneficial owner of 5,000 shares of Common Stock.
PORTER BIBB, age sixty-two (62), who had served as a Director of the
Registrant previously from October 1996 through December 1996, has spent his
entire business career in the media and entertainment industry. He currently
serves as a Senior Advisor to Ladenburg, Thalmann & Co., an investment banking
company and subsidiary of New Valley Corp., a NYSE company. Prior to Ladenburg's
sale to New Valley, he was a Partner, Principal and Director of Corporate
Finance of the firm, which he joined in 1984. In 1998, he founded Technology
Partners, LLC, a company that specializes in new media, entertainment and
Internet technology. From 1972 to 1977, Mr. Bibb was Corporate Development
Director of The New York Times Company, where he was responsible for expanding
the company's involvement in new media and technology. Mr. Bibb served as a
Newsweek White House correspondent from 1989 to 1996 and is also a published
author, screenwriter and producer of numerous documentaries. Mr. Bibb has also
served as publisher for Rolling Stone Magazine from 1970 to 1971 and for US
Magazine from 1972 to 1977. Mr. Bibb received his B.A. from Yale University in
1959 and also studied at the London School of Economics and the Harvard Business
School. Mr. Bibb is the beneficial owner of 500,000 shares of Common Stock.
ANTHONY K. CHAN, age forty-four (44), has served as President, Chief
Executive Officer and a Director of American Champion Entertainment (NASDAQ:
ACEI) since February 1997. Prior to that, he was the Chief Executive Officer of
America's Best Karate, which was reorganized to become a wholly owned subsidiary
of ACEI. His diligent efforts led the company through an IPO in July 1997. He is
an international businessman, writer, martial artist, husband and father. He is
a published author and has been featured in magazines, newspapers, and
television. A four-time world champion, he was inducted into the Black Belt Hall
of Fame in 1981. Currently, Mr. Chan also serves as an executive producer,
co-creator and co-writer of the award-winning "Adventures with Kanga Roddy"
series for public television.
Mr. Chan received his MBA from the University of California at Berkeley at
the age of twenty-two (22). From 1985 to 1989, Mr. Chan managed $50 million of
investments in industrial production facilities in the People's
-18-
<PAGE> 21
Republic of China for the Eisenberg Company, an international investment and
trading enterprise. Prior to that, Mr. Chan was employed by Bank of America NT &
SA as an economic forecaster.
JOHN H. HOAGLAND, age sixty-nine (69), has served as Chairman of J-Net
Group, Inc., a Delaware company (the "Group"), since its founding (as J-Net
Broadcasters, Inc.) in 1992 and has served as its Chairman since that time. Mr.
Hoagland has led the growth of the Group to its present position as a
well-established programming producer and technology resource for multimedia
publishing. Under Mr. Hoagland's direction, the Group has successfully
established the following divisions: (i) Ecology Cable Service, which provides
weekly environmental television programming to more than one-hundred (100) cable
operators throughout the United States serving nearly 11 million homes; (ii)
J-Net Consultants, which provides technical and management consulting to major
print and electronic publishers in the United States and Europe; and (iii)
RomNet, Inc., a leading technical support company serving the Internet and
CD-ROM industries. From 1983 to 1992 Mr. Hoagland served as Chairman of Monitor
Television, Inc., a major producer of daily television news, and as General
Manager of The Christian Science Monitor. He has served in numerous advisory
roles. In 1989, he was appointed to the U.S. State Department Special Task Force
on Telecommunications and Broadcasting in Eastern Europe. He has also served on
the Private Sector Television Committee of the U.S. Information Agency, the
Advisory Committee on International Communications of the U.S. State Department
and the Board of Directors of the International Media Fund. He received a B.A.
degree from Yale University in 1951 and served for 10 years as a US naval and
civilian officer in government service.
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 (the "SEC") and to furnish the
Company with copies of these reports.
The Company is informed that Mr. Wetzler is up to date with respect to all
his filings with the Securities and Exchange Commission. On October 11, 1999,
Mr. Wetzler filed a form 13D.
ITEM 11. EXECUTIVE COMPENSATION.
The following table sets forth the compensation of the officers of the
Company. For the fiscal year ended June 30, 1999, neither Mr. Wetzler nor any of
the other executive officers received compensation over $100,000. The present
CEO is operating without compensation.
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
Annual Compensation Long-Term Compensation
- -----------------------------------------------------------------------------------------------------------------
Securities
Name and Restricted Stock Underlying Options
Principal Position Year Salary Bonus($) Awards ($) /SARs(#)
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Gerald M. Wetzler 1999 -0- -0- -0- -0-
Chairman, Director, 1998 -0- -0- -0- -0-
Chief Executive
Officer 1997 -0- -0- -0- -0-
1996 -0- $125,000* -0- 10,000,000(1)
1995 -0- -0- -0- -0-
</TABLE>
- ---------------------
-19-
<PAGE> 22
* Upon confirmation of the Plan in October 1995, Mr. Wetzler received a bonus of
$125,000, in accordance with the terms of the Plan.
(1) See "Employment Contracts- Wetzler Employment Agreement" below.
In addition to the above, Mr. Wetzler purchased options in connection with
his providing working capital to the Company. (See "Certain Relationships and
Related Transactions" below.)
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 Relationships and Related Transactions" below.) No options were granted
Mr. Wetzler during the fiscal years ended June 30, 1998 or June 30, 1999.
According to information provided by Mr. Wetzler, during the fiscal year
ended June 30, 1999, Mr. Wetzler exercised options to purchase 5,100,000 shares
of Common Stock, $0.002 par value at a price of $0.01 per share.
On July 8, 1999, Mr. Wetzler exercised an option to purchase 20,000,000
shares of Common Stock, $.002 par value, by canceling $40,000 of his senior
secured notes and signing a $160,000 promissory note due November 6, 1999 with
interest at 10% per annum. The note is collateralized by 23,500,000 of his
shares of Common Stock, 2,200,000 of his brother's shares of Common Stock and
$30,000 of senior subordinated notes. The market price of the Company's common
shares on July 8, 1999 was $.04.
On December 30, 1999, the Board of Directors voted to grant 2,000,000
options to purchase shares of Common Stock of the Company at an option price of
$0.05 per share to the Company's counsel. The Company also voted to approve
similar options in the amount of 1,000,000 shares to each of the directors of
the Company.
-20-
<PAGE> 23
COMPENSATION OF DIRECTORS
The current officers and directors are serving without any compensation
from the Company.
EMPLOYMENT CONTRACTS
Wetzler Employment Agreement. Effective January 1, 1996, Mr. Wetzler and
the Company entered into an employment agreement (the "Employment Agreement" of
the "Agreement") wherein Mr. Wetzler was to serve as the Chief Executive Officer
of the Company. The following are the terms of the Employment Agreement:
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 was 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 was terminated because of a breach of the Employment
Agreement by the Company, Mr. Wetzler was 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 was terminated in connection with a
change in control of the Company, Mr. Wetzler was 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 occurred 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 was 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).
By approving the settlement agreement dated December 30, 1999, the Board of
Directors ratified the terms of this Employment Agreement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
As of September 30, 1999 the only class of voting securities issued and
outstanding was 138,577,531 shares of the Company's Common Stock.
The following sets forth information as of September 30, 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.
-21-
<PAGE> 24
<TABLE>
<CAPTION>
Name and Address of Amount and Nature of
beneficial owner(l) beneficial ownership Percent Class (2)
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Gerald M. Wetzler 29,191,000 (3) 21.07%
L&R Holdings, Inc. 11,415,854 8.24%
130 Shore Road
Port Washington, NY 11050
JCV Capital Corp. 10,380,854 7.49%
P.O. Box 22719
Rochester, NY 14692
Fred S. Rudy 5,000 (4) Less than 0.001%
Porter Bibb 500,000 0.36%
Anthony K. Chan 0 0
John H. Hoagland 0 0
Officers and Directors as a Group 505,000 0.36%
</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
September 30, 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) This sum includes approximately 20 million shares of Common Stock purchased
pursuant to the exercise of an option.
(4) Mr. Rudy is a principal of Olympia Partners, LLC, which acquired 5.5 million
shares of the Company on August 25, 1999. Mr. Rudy does not have primary voting
control of Olympia Partners, LLC.
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
-22-
<PAGE> 25
the Company may be purchased at an exercise price of $0.01 per share. From July
1, 1998 to July 8, 1999, Mr. Wetzler exercised his option and purchased
26,400,000 shares of Common Stock
These remaining options terminated 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 June1996 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 July 8, 1999, Mr. Wetzler provided $511,965 of new financing to AFT
through the purchase of two-year Senior Secured Convertible Notes bearing no
interest and convertible into Common Stock of the Company at a rate of three
cents ($.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,
1999 and 1998, 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, 1999, 1998 and 1997.
The Consolidated Financial Statement schedules of American Film
Technologies, Inc. are omitted since they are either not 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.
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.
-23-
<PAGE> 26
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.
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.
-24-
<PAGE> 27
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.
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
is incorporated by reference to Exhibit 10.20 to the Company's Annual
Report Form 10-K for the Fiscal Year ended June 30, 1998.
10.21 Stock Option Agreement with Eric Illowsky dated April, 1998 is
incorporated by reference to Exhibit 10.21 to the Company's Annual
Report Form 10-K for the Fiscal Year ended June 30, 1998.
10.22 Stock and Consulting Option Agreement with Michael Bruno dated
January, 1999 is incorporated by reference to Exhibit 10.22 to the
Company's Annual Report Form 10-K for the Fiscal Year ended June 30,
1998.
10.23 Promissory Note Agreement relating to exercise of September 12, 1997
options.
10.24 Settlement Agreement with Gerald M. Wetzler dated December 30, 1999.
27 Financial Data Schedule
d. Schedules filed herewith include:
-25-
<PAGE> 28
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.
-26-
<PAGE> 29
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>
Director, January 24, 2000
Chief Executive -----------------
/s/ Fred S. Rudy Officer
- ---------------------------
Fred S. Rudy
/s/ Porter Bibb Director January 24, 2000
- --------------------------- ----------------
Porter Bibb
/s/ Anthony K. Chan Director January 24, 2000
- --------------------------- ----------------
Anthony K. Chan
/s/ John H. Hoagland Director January 24, 2000
- --------------------------- ----------------
John H. Hoagland
</TABLE>
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>
Director, January 24, 2000
Chief Executive ----------------
/s/ Fred S. Rudy Officer
- ---------------------------
Fred S. Rudy
</TABLE>
-27-
<PAGE> 30
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
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
</TABLE>
F-1
<PAGE> 31
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, 1999 and June 30, 1998 and the related
consolidated statements of operations, stockholders' equity (deficit), and cash
flows for of the years 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, 1999 and June 30, 1998, and the consolidated results of its
operations and its cash flows for the years 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.
CUMMINGS & CARROLL, P.C.
Certified Public Accountants
Great Neck, New York
August 11, 1999
F-2
<PAGE> 32
AMERICAN FILM TECHNOLOGIES, INC.
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
June 30,
1999 1998
-------- --------
<S> <C> <C>
Current Assets
Cash $ 27,528 $ 23,336
Other current assets 4,320 9,612
------------ -------------
Total current assets 31,848 32,948
Equipment and software, net 163,338 257,046
Film library, net - 37,500
------------ -------------
Total Assets $ 195,186 $ 327,494
============ =============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current Liabilities
Notes payable
Current portion of notes payable $ 1,880,770 $ 478,191
Accounts payable and accrued expenses 769,347 582,826
------------ ------------
Total current liabilities 2,650,117 1,061,017
------------ ------------
Notes payable 49,000 1,666,579
Stockholders' Equity (Deficit)
Common stock, $.002 par value: authorized
shares-225,000,000; issued and outstanding shares;
92,902,770 and 76,736,100 at June 30, 1999
and 1998, respectively 185,806 153,473
Capital in excess of par value 17,147,782 16,797,115
Deferred compensation (862,000) (1,102,000)
Accumulated deficit (18,975,519) (18,248,690)
------------ ------------
Total stockholders' equity (deficit) (2,503,931) (2,400,102)
------------ ------------
Total Liabilities and Stockholders' Equity (Deficit) $ 195,186 $ 327,494
============ ============
</TABLE>
See accompanying notes.
F-3
<PAGE> 33
AMERICAN FILM TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
Successor
<TABLE>
<CAPTION>
Year ended Year ended Year ended
June 30, June 30, June 30,
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Distribution revenues $ - $ - $ -
Cost and expenses:
Depreciation and amortization
131,208 295,276 558,827
Compensation and benefits -
administrative and officers
256,182 295,276 8,001,943
Selling, general and administrative
248,342 742,998 1,022,453
Interest expense, net
91,097 104,805 141,138
Reorganization items:
Professional fees - - -
U.S. Trustee fees - - -
Write-off (recognition) of reorganization
value in excess of identifiable assets - - 5,689,475
------------- ----------- ------------
$ 726,829 $ 1,389,630 $ 15,413,836
------------- ----------- ------------
Net income (loss) $ (726,829) $(1,389,630) $(15,413,836)
============= =========== ============
Net income (loss) per share - basic $ (0.01) $ (0.02) $ (0.21)
Net income (loss) per share - diluted $ (0.01) $ (0.01) $ (0.13)
Shares used in the calculation of net
income (loss) per common share:
Basic 84,819,435 75,218,288 72,008,051
Diluted 154,549,478 145,811,457 121,788,548
</TABLE>
See accompanying notes
F-4
<PAGE> 34
AMERICAN FILM TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
Preferred Stock Common Stock
--------------- ------------
Shares Shares
Issued and Preferred Issued and
Outstanding Stock Outstanding Amount
----------- ----------- ----------- ------
<S> <C> <C> <C> <C>
Balance at June 30, 1996 - - 69,567,310 139,135
Net Loss - - - -
Issuance of stock - - 3,833,334 7,667
Exercise of stock options - - 300,000 600
Deferred compensation related to
issuance of stock options - - - -
Amortization of deferred compensation - - - -
Compensation expense related to
issuance of stock options - - - -
Convertible debt discount - - - -
---------- ---------- ----------- ----------
Balance at June 30, 1997 - - 73,700,644 147,402
Net Loss - - - -
Issuance of stock - - 2,066,666 4,133
Exercise of stock options - - 968,790 1,938
Amortization of deferred compensation - - - -
Purchase of stock option - - - -
---------- ---------- ----------- ----------
Balance at June 30, 1998 - - 76,736,100 153,473
Net loss - - - -
Issuance of stock - - 11,066,670 22,133
Exercise of stock options - - 5,100,000 10,200
Amortization of deferred compensation - - - -
Purchase of stock option - - - -
---------- ---------- ----------- ----------
Balance at June 30, 1999 $ $ $92,902,770 $185,806
========== ========== =========== ==========
</TABLE>
<TABLE>
<CAPTION>
Total
Capital Stockholders'
Excess of Deferred Accumulated Equity
Par Compensation Deficit (Deficit)
------------- ------------ ---------------- ---------
<S> <C> <C> <C> <C>
Balance at June 30, 1996 7,064,453 (1,080,000) (1,445,224) 4,678,364
Net Loss - - (15,413,836) (15,413,836)
Issuance of stock 567,333 - - 575,000
Exercise of stock options 34,400 - - 35,000
Deferred compensation related to
issuance of stock options 3,298,000 (3,298,000) - -
Amortization of deferred compensation - 3,036,000 - 3,036,000
Compensation expense related to
issuance of stock options 4,832,000 - - 4,832,000
Convertible debt discount 83,000 - - 83,000
----------- ----------- --------------- -------------
Balance at June 30, 1997 15,879,186 (1,342,000) (16,859,060) (2,174,472)
Net Loss - - (1,389,630) (1,389,630)
Issuance of stock 124,867 - - 129,000
Exercise of stock options 43,062 - - 45,000
Amortization of deferred compensation - 240,000 - 240,000
Purchase of stock option 750,000 - - 750,000
----------- ----------- --------------- -------------
Balance at June 30, 1998 16,797,115 (1,102,000) (18,248,690) (2,400,102)
Net loss - (726,829) (726,829)
Issuance of stock 309,867 - - 332,000
Exercise of stock options 40,800 - - 51,000
Amortization of deferred compensation - 240,000 - 240,000
Purchase of stock option - - - -
----------- ----------- --------------- -------------
Balance at June 30, 1999 $17,147,782 $862,000 $(18,975,519 $(2,503,931)
=========== =========== =============== =============
See accompanying notes
</TABLE>
AMERICAN FILM TECHNOLOGIES, INC.
F-5
<PAGE> 35
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year ended Year ended Year ended
June 30, June 30, June 30,
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income (loss) $ (726,829) $ (1,389,630) $(15,413,836)
Adjustments to reconcile net (loss) to net cash used
by operating activities:
Depreciation and amortization 131,208 246,551 558,8827
Amortization of deferred compensation 240,000 240,000 3,036,000
Amortization of debt discount - - 17,291
Write-off (recognition) of reorganization
value in excess of identifiable assets - - 5,689,475
Compensation Expense - - 4,832,000
Changes in assets and liabilities:
Accounts receivable - - -
Other current assets 5,292 110,332 (16,533)
Accounts payable and accrued expenses 186,521 32,957 69,398
Accrued compensation - (134,580) (85,478)
--------- --------- -----------
Net cash used in operating activities (163,808) (894,370) (1,312,856)
--------- --------- -----------
INVESTING ACTIVITIES
Purchase of equipment and software - - -
--------- ---------
Net cash used by investing activities - - -
FINANCING ACTIVITIES
Principal payments on long-term debt - (401,989) -
Proceeds from notes payable - other - - 103,917
Proceeds from common stock subscriptions - 100,000 -
Proceeds from exercise of stock options 51,000 - -
Proceeds from sale of common stock 68,000 74,000 610,000
Proceeds from sale of convertible debentures 49,000 855,965 -
--------- --------- -----------
Net cash provided (used) by financing activities 168,000 757,976 1,133,917
--------- --------- -----------
Net increase (decrease) in cash 4,192 (136,394) (178,939)
Cash at beginning of period 23,336 159,730 338,669
--------- --------- -----------
Cash at end of period $ 27,528 $ 23,336 $ 159,730
========= ========= ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for interest - $ 146,580 $ 50,246
========= ========= ===========
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND
FINANCING ACTIVITIES:
Issuance of common stock/warrants in connection
with debt $ - $ - $ 83,000
========= ========= ===========
</TABLE>
See accompanying notes.
AMERICAN FILM TECHNOLOGIES, INC.
F-6
<PAGE> 36
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1999
1. REORGANIZATION UNDER CHAPTER 11
Bankruptcy Proceedings and Basis of Presentation
On October 16, 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 Plan. 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").
AMERICAN FILM TECHNOLOGIES, INC.
F-7
<PAGE> 37
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1999
Under the terms of the Plan, the following is a summary of treatment of each of
the major classes of creditors and stockholders:
<TABLE>
<CAPTION>
Estimated
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
Claims $ 6,000 Cash payment in full on effective date Unimpaired
Class 7 - $1,650,000 Unsecured five year notes in full amount Impaired
Unsecured 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 Canceled Impaired
Equity Interests
</TABLE>
F-8
<PAGE> 38
AMERICAN FILM TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1999
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> 39
AMERICAN FILM TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1999
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 pre-petition 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 pre-petition liabilities and will be paid out subject to the terms of the
Plan.
AMERICAN FILM TECHNOLOGIES, INC.
F-10
<PAGE> 40
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1999
The effect of the Plan on the Company's consolidated balance sheet at October
17, 1995 (the Effective Date) is as follows:
<TABLE>
<CAPTION>
H.J.Meyers
Prior to Private Fresh Start
Reorganization Placement Adjustment Balanced Sheet
-------------- --------- ---------- --------------
Assets
<S> <C> <C> <C> <C>
Current Assets:
Cash $ 115,731 $ 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 - - 6,347,264 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 $ 3,987,787 $ - $ 6,326,631 $10,314,418
=============== ============ ============ ============
</TABLE>
American Film Technologies, Inc.
F-11
<PAGE> 41
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> 42
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> 43
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:
<TABLE>
<CAPTION>
June 30,
1999 1998
------------------
<S> <C> <C>
Estimated fair market value $ 450,000 $ 450,000
Less: accumulated amortization 450,500 412,500
--------- ----------
$ 0 $ 37,500
========= ==========
</TABLE>
The related amortization of the Film Library for the year ended June 30,
1999 and June 30, 1998 was $37,500 and $150,000, respectively.
F-14
<PAGE> 44
American Film Technologies, Inc.
Notes to Consolidated Financial Statements
4. EQUIPMENT AND SOFTWARE
Equipment and software consists of the following:
<TABLE>
<CAPTION>
June 30,
1999 1998
------------------
<S> <C> <C>
Assets:
Equipment $426,241 $426,241
Software 20,000 20,000
Leasehold improvements 64,740 64,740
-------- --------
$510,981 $520,981
======== ========
Accumulated depreciation and
amortization:
Equipment 319,666 233,666
Software 15,000 11,000
Leasehold improvements 12,977 9,269
-------- --------
$163,338 $257,046
======== ========
</TABLE>
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, 1999, 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> 45
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, 1999 and 1998 consist
of the following:
<TABLE>
<CAPTION>
June 30,
1999 1998
-------------------
<S> <C> <C>
Trade and other claims $ 1,026,192 $ 1,026,192
Accrued compensation 84,413 84,413
Billings on uncompleted contracts 178,200 178,200
Senior secured convertible notes 640,965 855,965
----------- -----------
1,929,770 2,144,770
Less current portion of notes payable (1,880,770) (478,191)
----------- -----------
$ 49,000 $ 1,666,579
=========== ===========
</TABLE>
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,
1999 and 1998 are $186,299 and $96,082, respectively.
F-16
<PAGE> 46
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 $640,965 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, 1999 are:
2000 $ 1,880,770
2001 49,000
==============
$ 1,929,770
==============
8. OPERATING LEASES
There are no minimum annual rental commitments under noncancelable
operating leases. The Company is currently renting office space on a
month to month basis
Rent expense for the years ended June 30, 1999 and 1998 was $81,005 and
$206,857, respectively.
F-17
<PAGE> 47
American Film Technologies, Inc.
Notes to Consolidated Financial Statements
9. INCOME TAXES
At June 30, 1999, the Company had net operating loss carryforwards of
approximately $19,988,000 for federal income tax purposes and approximately
$10,926,000 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.
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> 48
American Film Technologies, Inc.
Notes to Consolidated Financial Statements
11. STOCKHOLDERS' EQUITY (DEFICIT)
Stock Options
In accordance with the terms of the Plan, all pre-petition stock options were
canceled. Subsequent to filing Chapter 11, the Board of Directors granted
options to purchase common stock totaling 20,081,210 shares as of June 30, 1999
and 431,481,210 shares as of June 30, 1998.
The following table summarizes stock option activity for the two years ended
June 30, 1999:
<TABLE>
<CAPTION>
Weighted -
Average
Number of Exercise
Shares Price
-----------------------
<S> <C> <C>
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
Granted 2,700,000 .01
Exercised 26,100,000) .01
------------- --------
Outstanding at June 30, 1999 20,081,210 .08
============= ========
</TABLE>
The following is a table that summarizes information concerning outstanding and
exercisable stock options at June 30, 1999:
<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 19,881,210 $0.08 1.50 16,881,210 $0.08
.21- .40 - - - - -
.41- .62 200,000 0.62 2.25 200,000 0.62
------- ---- ---- ------- ----
20,081,210 $0.08 1.56 17,081,210 $0.08
</TABLE>
F-19
<PAGE> 49
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
or 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
rderly 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> 50
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> 51
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.
F-22
<PAGE> 52
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, 1999, 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> 53
EXHIBIT INDEX
-------------
Exhibit
No. Description
- ----------- -----------
10.23 Promissory Note Agreement relating to exercise of September 12, 1997
options.
10.24 Settlement Agreement with Gerald M. Wetzler dated December 30, 1999.
27 Financial Data Schedule
<PAGE> 1
NON-RECOURSE NON-NEGOTIABLE PROMISSORY NOTE
$160,000.00 Date: July 8, 1999
FOR VALUE RECEIVED, Gerald M. Wetzler ("Debtor") promises to pay to
American Film Technologies, Inc., a Delaware corporation (the "Holder"), at
such place as may be designated in writing by the Holder, the principal sum of
One Hundred Sixty Thousand Dollars ($160,000.00) with interest at the rate of
ten percent (10%) per annum on the unpaid principal balance not later than 5:00
P.M., New York Time, November 7, 1999 (the "Due Date").
This Note may be prepaid, in whole or in part, without premium or penalty.
All payments, including but not limited to prepayments, if any, shall be
applied first to accrued interest, if any, and then, and only then, to the
remaining principal balance.
This Note is issued pursuant to a Stock Exercise Agreement, dated July 8,
1999, between the Debtor and the Holder (the "Agreement"; terms defined in the
Agreement shall have their defined meanings when capitalized and used in this
Note) and is entitled to the benefits thereof. In the event of the Debtor's
failure to pay the principal and accrued and unpaid interest on or before the
Due Date, then the sole remedy of the Holder shall be as provided in the
Agreement relating to the Collateral described therein and Debtor shall have
no further personal liability or obligation with respect to this Note which
shall be thereafter cancelled and be of no further force and effect as provided
in the Agreement. Presentment, demand, protest or notice of any kind (other
than notice as provided in the Agreement) are expressly waived.
No delay by omission of the Holder to exercise any right or power arising
from any default shall impair any such right or power or be considered to be
a waiver of any such default or any acquiescence therein, nor shall this Note
in case of default on the part of the undersigned impair any right or power
resulting therefrom.
This Note is entered into in accordance with the laws of the State of
Delaware.
/s/ Gerald M. Wetzler
----------------------
Gerald M. Wetzler
<PAGE> 1
SETTLEMENT AGREEMENT
AGREEMENT made and entered into the 30th day of December, 1999,
by and between the undersigned parties.
WHEREAS, Fred S. Rudy ("Rudy"), A. J. Nassar ("Nassar"), Joseph J.
Jillson ("Jillson") and J. Michael Nixon ("Nixon"), individually and on behalf
of American Film Technologies, Inc. ("AFTC" or "the Company"), commenced an
action in the Court of Chancery of the State of Delaware against Gerald M.
Wetzler ("Wetzler"), Leslie Trager ("Trager"), Thomas Hennigan ("Hennigan") and
Jeffrey Yapp ("Yapp"), and also naming AFTC as a nominal defendant ("Delaware
Action"); and
WHEREAS, among other things, the plaintiffs in the Delaware Action
alleged that Wetzler breached his fiduciary duties to the Company and its
shareholders and committed fraud and waste; and
WHEREAS, Wetzler denies all of the allegations in the Delaware Action;
and
WHEREAS, all matters in the Delaware Action have previously been
settled against all defendants except as to defendant Wetzler; and
WHEREAS, Wetzler has asserted a claim for indemnification related to
legal fees incurred by him in connection with his defense of the Delaware
Action; and
WHEREAS, Wetzler filed a Counterclaim against Rudy and a Cross-claim
against AFTC; and
WHEREAS, in addition to the foregoing, Wetzler has asserted that he
has further claims relating to alleged defamation allegedly committed by certain
parties, including, but not limited to, the plaintiffs in this action, Seth
Fireman, Olympia Partners, LLC, counsel for AFTC, Malcolm S. Taub and the firm
of Martin & Taub, LLP, and Dennis Levine and other shareholders of AFTC; and
WHEREAS, the parties hereto wish to resolve all issues pertaining to
the foregoing litigation and all other claims existing between the parties;
<PAGE> 2
NOW, THEREFORE, IT IS AGREED AS FOLLOWS:
1. All parties to the Delaware Action will exchange General
Releases in the form annexed hereto as Exhibit A. In addition, General Releases
will be exchanged between L&R Holding, Inc., Malcolm S. Taub, Martin & Taub,
LLP, Seth Fireman, Dennis Levine, Olympia Partners, LLC, and Wetzler, and
between AFTC and Wetzler's counsel, pertaining to any claims which the parties
may have against each other, including, but not limited to, any claims of breach
of professional duty, breach of fiduciary duty, fraud, waste, or defamation
arising out of statements made to the press by AFTC or the plaintiffs in the
Delaware Action or anyone acting on their behalf or in conjunction with them.
Delivery of such releases shall be conditioned upon the execution of this
Agreement.
2. Simultaneously with the exchange of the foregoing General
Releases, Wetzler's Cross-claim shall be resolved in accordance with Paragraph
8, and all other claims in the Delaware Action shall be dismissed, with
prejudice.
3. Subject to the terms and conditions of the Settlement
Agreement, the current Board of Directors of AFTC will simultaneously confirm as
valid and binding all prior agreements between Wetzler and AFTC, and will
execute any necessary documents to effectuate same.
4. (a) In connection with the foregoing, Wetzler represents
that the following constitute all of his present holdings and/or contractual
relationships with AFTC:
<TABLE>
<CAPTION>
Shares
------
<S> <C>
10,000,000 options from Employment Agreement
exercisable @ $0.0628 per share 10,000,000 (indirect)
$522,000(1) of Senior Notes and related Purchase and
Security Agreements (includes $30,000 of Notes
securing option exercise payment) convertible @ $0.03
per share 17,400,000 (indirect)
$750,000 Senior Note and related Purchase and
Security Agreements issued upon change in control
convertible at @ $0.03 per share 25,000,000 (indirect)
</TABLE>
- ------------------
(1) $40,000.00 of the $522,000.00 was used to exercise the option
discussed in Paragraph 6.
<PAGE> 3
26,620,000 shares (includes 20,000,000 shares issued
on recent option exercise and securing related
$160,000 Promissory Note), certificates in the
possession of Lee Mermelstein, Esquire, and Option
Exercise Agreement relating to purchase of 20,000,000
shares
<TABLE>
<S> <C>
26,620,000 (direct)
Wetzler Schwab Account Approximately 2,700,000 (direct)
Total 81,720,000
</TABLE>
(b) The Company affirms the validity of the foregoing
obligations, including, but not limited to, all First Priority Senior Secured
Convertible Notes listed above (the "Senior Notes") and Employment Agreement
between Wetzler and the Company, dated January 1996, and the amendments thereto.
5. Wetzler agrees to extend the payment date of his Senior Note due
as of November 1, 1999 and any other Senior Note which may be due or come due
until January 1, 2001 (the "Final Payment Date"). Notwithstanding the foregoing,
all payments due pursuant to such Senior Notes shall immediately become due and
payable in the event AFTC files a Chapter 7, Chapter 11 or other bankruptcy
proceedings, or such proceedings are instituted against AFTC by creditors of the
Company. If an involuntary bankruptcy is dismissed, this Settlement Agreement
shall remain in full force and effect. The Company shall give Wetzler not less
than fourteen (14) business days prior written notice of any intended filing by
the Company of a Chapter 7 or Chapter 11 bankruptcy proceeding.
6. In consideration for the foregoing agreement by Wetzler to extend
the due date of the foregoing obligations and Notes, AFTC will agree to extend
the payment date of Wetzler's $160,000.00 Promissory Note, now due November 7,
1999, in connection with the exercise of his option for 20,000,000 shares, to a
date which is one (1) month beyond the Final Payment Date, and Wetzler agrees
not to pay the $160,000.00 during such period in order to retain such 20,000,000
shares which were used as partial security for said Note. In addition to the
foregoing, Wetzler agrees not to sell or otherwise encumber or hypothecate the
above-mentioned 20,000,000 shares.
7. (a) In further consideration for the promises of Wetzler
contained herein, AFTC agrees to pay to him on September 30, 2000, the sum of
One Million One Hundred Forty Thousand Dollars ($1,140,000.00). Upon the payment
of the foregoing sum, AFTC or a party designated by it shall have the right to
purchase Wetzler's entire holdings in AFTC, as set forth above ("Option"),
excluding only the sum of approximately 9,000,000 shares. If the foregoing
payment is not made to Wetzler when due, Wetzler's Senior Notes and above
payments will become immediately due and payable without further notice.
<PAGE> 4
Assuming the aforementioned payment occurs in accordance with the terms of this
Paragraph, the exercise of the Option and payment therefore shall be consummated
no later than the Final Payment Date. The purchase price for the exercise of the
foregoing Option shall be the payment of an additional Nine Hundred Thousand
Dollars ($900,000.00) (the "Option Exercise Payment"), which shall be paid by
AFTC at any time prior to the Final Payment Date. If the Option Exercise Payment
is not paid to Wetzler by the Final Payment Date, Wetzler's Senior Notes will
become immediately due and payable. At such time as Wetzler is paid the total
sum of Two Million Forty Thousand Dollars ($2,040,000.00) as set forth above and
the payments required by Paragraph 8 below are made, he shall assign to AFTC, or
its designee, all of his right, title and interest in and to all of the assets,
securities, Senior Notes or any other interest which he may have in AFTC, as set
forth in Paragraph 4(a), other than the approximately 9,000,000 shares described
above ("Retained Shares"). Upon the occurrence of the foregoing, Wetzler shall
relinquish all of his other rights held in and to AFTC, including, but not
limited to, any rights which Wetzler may have pursuant to the terms of any
employment agreement or stock option agreement entered into with AFTC, and such
agreements shall be deemed to be terminated, and AFTC shall be released of any
claims by Wetzler against it for any obligation under such agreements, except
for any valid requests for advancement or indemnification for fees and expenses
incurred in proceedings commenced after the execution of this Agreement. In the
event that Wetzler and his brother, Leonard Wetzler, have posted shares as
collateral for the $160,000.00 Promissory Note, those Retained Shares shall be
delivered to Wetzler and his brother free and clear of lien. However, the
20,000,000 share of stock which were posted as further collateral for said Note
shall be transferred to AFTC or its designee. In the event of the sale of all,
or substantially all, of the assets of AFTC or the merger of AFTC into or with
another corporation, prior to the Final Payment Date, in order for AFTC to
retain the Option, all sums due to Wetzler pursuant to this Agreement shall
become immediately due and payable and must be paid. The payment dates in this
Paragraph may be extended with the consent of Wetzler.
(b) Notwithstanding Subsection 7(a), if a party introduced by
Wetzler makes an investment in AFTC in an amount equal to or greater than Four
Million Dollars ($4,000,000.00), Wetzler shall have the right to either accept
full payment of the Option Exercise Payment or to reject said payment and
convert all of his Senior Notes in accordance with the terms provided therein.
Wetzler's exercise of such right shall be valid for a period of twelve (12)
months following the closing of the investment. In accordance with their
fiduciary duties, the Board of Directors of AFTC shall have the right to reject
any such proposed investment.
8. As further consideration for the agreements set forth herein, on
December 30, 1999, the law firm of Blank Rome Comisky & McCauley LLP ("Blank
Rome") shall be paid the sum of One Hundred Thousand Dollars ($100,000.00),
representing indemnification by partial payment of legal fees and expenses
incurred by Wetzler in connection with the defense of the Delaware Action. The
payment to Blank Rome shall be made by wire transfer to the following:
Bank: Commerce Bank of New Jersey
ABA# 031201360
Account Name: CBPA
Account Number: 28208000
Memo: FCO BRMC LLP
Acct #360443766
<PAGE> 5
In addition, AFTC shall enter into a stipulated judgment with Wetzler, providing
him with a judgment on his Cross-claim for indemnification in the amount of
$140,000.00, to which the aforementioned payment of $100,000.00 shall be
credited and the remaining forty thousand dollars ($40,000.00) of which Wetzler
will forego payment by the Company until September 30, 2000. If the remaining
$40,000.00 is not paid by September 30, 2000, the stipulated judgment shall be
filed and recorded without objection by AFTC. Further, the Company shall pay the
firm of Jacobson, Mermelstein & Squire LLP the sum of $35,000 in respect of
partial payment of their fees for legal services to the Company on or before
June 30, 2000.
9. At such time as any payments are made to Wetzler pursuant
to the Agreement, AFTC may (immediately preceding or after such payments) issue
senior secured debt that is pari passu to Wetzler's senior secured debt, in such
amount as is equal to and no greater than the amount of such payments to Wetzler
and Wetzler will execute such documents as are reasonably necessary to ensure
that such additional debt is pari passu with Wetzler's Senior Notes set forth in
paragraph 4(a) above. AFTC may not issue any senior debt except as provided
herein. Provided further, however, that in exchange for an investment in AFTC of
Two Million Dollars ($2,000,000.00) or more, AFTC may issue senior secured debt
that is para passu to Wetzler's Senior Notes, in such amount as is equal to and
no greater than the amount of the investment.
10. It is understood and agreed that each of the parties will
execute such documents and do all things necessary to effectuate the reasonable
intent of this Agreement. This shall include, but shall not be limited to, the
execution and delivery of endorsed stock certificates, stock powers and/or other
agreements and estoppel certificates to investors of the Company, confirming
that Wetzler consents to the pari passu nature of further investments in AFTC as
set forth in Paragraph 9.
11. Immediately following the execution of this Agreement, AFTC
will issue a press release approved by Wetzler. Such release shall be delivered
to Bloomberg and all other members of the media who generally receive
information from the Company, including, but not limited to, The New York Times,
the New York Observer, and the L.A. Times. In the event the substance of the
press release is not published in The New York Times, the New York Observer and
the L.A. Times, the Company must pay Wetzler the sum of $30,000.00, so that he
can personally pay for the publication of the press release in any or all such
newspapers.
12. All notices or demands by any party relating to this
Agreement shall be in writing and either personally served or sent by regular
United States mail, postage prepaid, at the addresses set forth below or at such
other addresses as a party may designate in writing. All notices or demands sent
in accordance with this paragraph shall be deemed received on the earlier of the
date actually received or seven (7) days after the deposit thereof in the mail.
If to American Film Technologies, Inc.: American Film Technologies, Inc.
300 Park Avenue, 17th Floor
New York, New York 10022
<PAGE> 6
With a copy to: Malcolm S. Taub, Esq.
Martin & Taub, LLP
1350 Avenue of the Americas
New York, New York 10019
If to Gerald M. Wetzler: Gerald M. Wetzler
32-04 171st Street
Flushing, New York 11358
With a copy to: Blank Rome Comisky
& McCauley LLP
Attn: John L. Reed, Esquire
1201 Market Street, Suite 2100
Wilmington, DE 19801
Cahill Gordon & Reindel
Attn: Floyd Abrams, Esquire
80 Pine Street
New York, New York 10005
13. The validity of this Agreement, its construction,
interpretation and enforcement and the right of the parties hereunder and
concerning the matters set forth herein shall be governed by and construed in
accordance with the law of the State of Delaware. All disputes at law relating
to the Agreement shall be submitted to the exclusive jurisdiction of the
Superior Court of the State of Delaware, and all disputes where equitable claims
are made shall be submitted to the exclusive jurisdiction of the Court of
Chancery of the State of Delaware.
14. This Agreement will bind and inure to the benefit of the
respective successors and assigns of each of the parties
15. This Agreement cannot be changed, terminated or amended
orally. All prior agreements, understandings, representations warranties and
negotiations, if any, are merged into this Agreement.
16. This Agreement may be executed in counterparts, each of
which, when so executed and delivered, shall be an original; however, such
counterparts together shall constitute but one and the same Agreement.
<PAGE> 7
IN WITNESS WHEREOF, the parties have executed this Agreement as of the date
first above written.
AMERICAN FILM TECHNOLOGIES, INC.
By:
------------------------------------
Fred S. Rudy
Chairman and Chief Executive Officer,
with approval and consent of AFTC's
Board of Directors
------------------------------------
Gerald M. Wetzler
------------------------------------
A.J. Nassar
------------------------------------
Joseph J. Jillson
------------------------------------
J. Michael Nixon
F-26
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-START> JUL-01-1998
<PERIOD-END> JUN-30-1999
<CASH> 27,528
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 31,848
<PP&E> 510,981
<DEPRECIATION> 347,643
<TOTAL-ASSETS> 195,186
<CURRENT-LIABILITIES> 2,650,117
<BONDS> 0
0
0
<COMMON> 185,806
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 195,186
<SALES> 0
<TOTAL-REVENUES> 0
<CGS> 0
<TOTAL-COSTS> 726,829
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 91,097
<INCOME-PRETAX> (726,829)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (726,829)
<EPS-BASIC> (0.01)
<EPS-DILUTED> (0.01)
</TABLE>
