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The following is an excerpt from a 10-K SEC Filing, filed by AMERICAN FILM TECHNOLOGIES INC /DE/ on 1/25/2000.
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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


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.


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.




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 investigate Wetzler's


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.



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 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.


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




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
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

Class 4               $500,000                 Cash payment plus interest on the effective               Unimpaired
Secured                                        date

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
Stock Interest

Class 10              N/A                      Canceled                                                  Impaired
Other Equity

* 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 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


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


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.


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 Protection" above).


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.


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.)


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.


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


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.


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.


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