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
Any investment in AFT is speculative and involves a high degree of risk.
Prospective investors should carefully consider the following investment
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
Competition in Colorization: The lure of the entertainment industry,
technological advances in computers, software and related hardware, and the
decline in the cost of new equipment all have an effect on potential
competitors' decisions to enter the colorization industry. Many entertainment
companies are better established, have substantially greater financial resources
and larger research and development staffs and facilities than AFT. Such
companies may develop their own colorization process and facilities that would
compete for third party colorization work. Such companies may also prove to be
more successful in the production and distribution of colorized product. In
addition, it is possible that a competitor may colorize and seek to obtain a
copyright for a television or theatrical film product from the public domain
which it colorizes subsequent to AFT. In recent years, AFT has had only one
competitor. Towards the end of 1996 and the early months of 1997, this
competitor experienced significant financial difficulties and filed for
protection under Chapter 7 of the Bankruptcy Code. AFT has been advised that 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
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.
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.
ITEM 1. BUSINESS.
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.
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
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
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
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.
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
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
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.
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
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:
Class of Estimated Distribution under the Plan Status
Claims Amount of
Class 1 $86,000 Cash payment in full on effective date Unimpaired
Class 2 $80,000 Cash payment on Distribution Date or, at Unimpaired
Priority Claim the Company's discretion, over six years
Class 3 $623,000 Cash payment on the effective date plus Unimpaired
Comerica interest and reasonable legal fees
Class 4 $500,000 Cash payment plus interest on the effective Unimpaired
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
Class 7 $1,650,000* Unsecured five year notes in full amount of Impaired
Unsecured allowed claim, with interest at 7 %
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
Class 10 N/A Canceled Impaired
* Does not include the Class 7 claim of Joseph Taritero, which was compromised
pursuant to the terms of a prior stipulation and order and has been paid in full
by the Company.
In October 1995, AFT completed the Meyers Placement pursuant to which it
has received approximately $3.4 million of new capital in exchange for the
issuance of shares representing approximately 54% of its total outstanding
Common Stock, including funds received in exchange for the Meyers Loan.
Since emerging from bankruptcy, the Company has actively pursued new
strategic alliances and partners.
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.
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
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
substantial foreign film and television libraries exist which have not been
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
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
animated films), which would be competitive with existing traditional and
computer animated systems with respect to both the perceived production values
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
The Company holds three United States patents pertaining to colorizing
monochrome images, which will expire
in January 2008, March 2009 and July 2013. AFT also holds a patent pertaining to
the animation process, which will expire in October 2010. AFT's success will
largely be dependent upon its technology and its ability to maintain patent
protection on the technology it develops. (See "Risk Factors -- Patent
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
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.)