-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, L6Orvy0k/goqrR5rltNesZPCea2eqfDQNatsjkRdYnNAcOhmdRkLpuGUAI2CX194 KIhqtXm9fxUFqmK7Hi9EQw== 0000950144-99-002707.txt : 19990317 0000950144-99-002707.hdr.sgml : 19990317 ACCESSION NUMBER: 0000950144-99-002707 CONFORMED SUBMISSION TYPE: 10QSB PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990131 FILED AS OF DATE: 19990316 FILER: COMPANY DATA: COMPANY CONFORMED NAME: AMERICAN ARTISTS ENTERTAINMENT CORP CENTRAL INDEX KEY: 0001001593 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-ALLIED TO MOTION PICTURE PRODUCTION [7819] IRS NUMBER: 581950450 STATE OF INCORPORATION: MO FISCAL YEAR END: 0731 FILING VALUES: FORM TYPE: 10QSB SEC ACT: SEC FILE NUMBER: 000-20759 FILM NUMBER: 99566223 BUSINESS ADDRESS: STREET 1: 600 PEACHTREE DUNWOODY RD STREET 2: BLDG 600 STE 250 CITY: ATLANTA STATE: GA ZIP: 30328 BUSINESS PHONE: 4048767373 MAIL ADDRESS: STREET 1: 600 PEACHTREE DUNWOODY RD STREET 2: BLDG 600 SUITE 250 CITY: ATLANTA STATE: GA ZIP: 30328 FORMER COMPANY: FORMER CONFORMED NAME: AMERICAN ARTISTS FILM CORP/MO/ DATE OF NAME CHANGE: 19970305 10QSB 1 AMERICAN ARTISTS ENTERTAINMENT CORPORATION 1 - ------------------------------------------------------------------------------ U. S SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-QSB [X] QUARTERLY REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended January 31, 1999 ---------------- [ ] TRANSITION REPORT UNDER SECTION 13 OR 15(D) OF THE EXCHANGE ACT For the transition period from __________ to __________ Commission file number 000-20759 --------- AMERICAN ARTISTS ENTERTAINMENT CORPORATION (FORMERLY AMERICAN ARTISTS FILM CORPORATION) (Exact name of small business issuer as specified in its charter) MISSOURI 58-1950450 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 6600 PEACHTREE DUNWOODY ROAD BUILDING 600, SUITE 250 ATLANTA, GEORGIA 30328 (Address of principal executive offices) (770) 390-9180 Issuer's telephone number Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- State the number of shares outstanding of each of the issuer's classes of common equity: 3,319,745 shares of Class A Common Stock, $.001 par value per share, and 3,225,516 shares of Class B Common Stock, $.001 par value per share, were outstanding at March 9, 1999. Transitional Small Business Disclosure Format: Yes No X --- --- - ------------------------------------------------------------------------------- 2 AMERICAN ARTISTS ENTERTAINMENT CORPORATION FORM 10-QSB CONTENTS PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS Condensed Consolidated Financial Statements: Balance sheets at January 31, 1999 and July 31, 1998.................................................................. F-1/F-2 Statements of operations for the three months and six months ended January 31, 1999 and January 31, 1998.................................. F-3 Statements of cash flows for the six months ended January 31, 1999 and January 31, 1998....................................................... F-4 Notes to Condensed Consolidated Financial Statements................................................. .......... F-5/F-8 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF Operation............................................................. F-9/F-12 PART II - OTHER INFORMATION ITEM 2. CHANGES IN SECURITIES.................................................. F-13 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K...................................... F-13 SIGNATURES...................................................................... F-14
3 PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS AMERICAN ARTISTS ENTERTAINMENT CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
January 31, July 31, --------------- --------------- 1999 1998 --------------- --------------- ASSETS CASH $ 8,999 $ 35,568 ACCOUNTS RECEIVABLE 34,939 99,998 FILM COSTS, NET OF ACCUMULATED AMORTIZATION 1,396,187 1,230,231 PROPERTY AND EQUIPMENT, NET 20,152 28,221 ADVANCES TO OFFICERS 235,760 253,012 OTHER 11,000 -- ---------- ---------- $1,707,037 $1,647,030 ========== ==========
See accompanying notes to condensed consolidated financial statements. F-1 4 AMERICAN ARTISTS ENTERTAINMENT CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS - CONTINUED (UNAUDITED)
January 31, July 31, -------------- --------------- 1999 1998 -------------- --------------- LIABILITIES LINE OF CREDIT $ -- $ 52,549 ACCOUNTS PAYABLE 576,878 392,421 ACCRUED EXPENSES 70,690 72,026 ACCRUED ACCOUNTING AND LEGAL 150,003 161,816 DEFERRED REVENUES 39,347 -- COMMON STOCK ISSUABLE 5,000 45,313 NOTES PAYABLE 436,631 406,426 NOTES PAYABLE/RELATED PARTIES 851,764 620,500 ----------- ----------- TOTAL LIABILITIES 2,130,313 1,751,051 ----------- ----------- MINORITY INTERESTS 701,848 545,610 CONTINGENCIES CAPITAL DEFICIT PREFERRED STOCK, $.001 PAR - SHARES AUTHORIZED 10,000,000 NONE ISSUED -- -- COMMON STOCK, $.001 PAR: CLASS A - SHARES AUTHORIZED 20,000,000; ISSUED AND OUTSTANDING 3,309,745 AND 3,157,789 3,310 3,158 CLASS B - SHARES AUTHORIZED 20,000,000; ISSUED AND OUTSTANDING 3,225,516 AND 3,282,472 3,225 3,282 ADDITIONAL PAID-IN CAPITAL 3,997,151 3,916,933 ACCUMULATED DEFICIT (5,128,810) (4,573,004) ----------- ----------- TOTAL CAPITAL DEFICIT (1,125,124) (649,631) ----------- ----------- $ 1,707,037 $ 1,647,030 =========== ===========
See accompanying notes to condensed consolidated financial statements. F-2 5 AMERICAN ARTISTS ENTERTAINMENT CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
Three Months Ended January 31, Six Months Ended January 31, ------------------------------- ----------------------------- 1999 1998 1999 1998 ----------- ------------ ----------- ----------- REVENUES Commercial production $ 16,000 $ 401,461 $ 22,000 $ 1,907,038 Film revenues -- -- 25,000 -- ----------- ----------- ----------- ----------- 16,000 401,461 47,000 1,907,038 ----------- ----------- ----------- ----------- COSTS AND EXPENSES Cost of commercial production 6,989 299,171 11,279 1,338,139 Film cost amortization -- -- 23,035 -- Selling, general and administrative 211,203 434,505 499,239 795,520 ----------- ----------- ----------- ----------- 218,192 733,676 533,553 2,133,659 ----------- ----------- ----------- ----------- LOSS FROM OPERATIONS (202,192) (332,215) (486,553) (226,621) Interest expense (41,048) (9,054) (69,253) (17,561) ----------- ----------- ----------- ----------- NET LOSS $ (243,240) $ (341,269) $ (555,806) $ (244,182) =========== =========== =========== =========== NET LOSS PER SHARE - BASIC AND DILUTED $ (.04) $ (.05) $ (.09) $ (.04) =========== =========== =========== =========== WEIGHTED AVERAGE COMMON SHARES 6,488,594 6,415,261 6,472,761 6,409,200 =========== =========== =========== ===========
See accompanying notes to condensed consolidated financial statements. F-3 6 AMERICAN ARTISTS ENTERTAINMENT CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Six months ended January 31, ------------------------------- 1999 1998 ----------- ----------- OPERATING ACTIVITIES Net loss $ (555,806) $ (244,182) Adjustments to reconcile net loss to cash used in operating activities: Film costs amortization 23,035 -- Depreciation and amortization 8,069 28,456 Changes in assets and liabilities: Accounts receivable 65,059 372,213 Film costs additions (188,991) (71,446) Other assets 6,252 (28,248) Accounts payable 184,457 (110,797) Accrued expenses (8,149) (174,244) Deferred revenues 39,347 -- ----------- ----------- Cash used in operating activities (426,727) (228,248) INVESTING ACTIVITIES Capital expenditures -- (2,321) ----------- ----------- FINANCING ACTIVITIES Repayments under line of credit (52,549) -- Repayment of notes payable (12,295) (53,256) Borrowings under notes payable 273,764 75,000 Issuance of minority interests 156,238 100,343 Issuance of common stock 35,000 100,000 ----------- ----------- Cash provided by financing activities 400,158 222,087 NET DECREASE IN CASH (26,569) (8,482) ----------- ----------- CASH, beginning of period 35,568 31,379 ----------- ----------- CASH, end of period $ 8,999 $ 22,897 =========== ===========
See accompanying notes to condensed consolidated financial statements. F-4 7 AMERICAN ARTISTS ENTERTAINMENT CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) NOTE 1 - BASIS OF PRESENTATION The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-QSB and Item 310(b) of Regulation S-B. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. The financial statements are unaudited, but in the opinion of management, contain all adjustments, consisting of normal recurring accruals, necessary to present fairly the financial position, results of operations and cash flows for the periods presented. Results of operations and cash flows for the interim three month and six month periods are not necessarily indicative of what the results of operations and cash flows will be for an entire fiscal year. The accompanying condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company's Annual Report on Form 10-KSB for the year ended July 31, 1998. NOTE 2 - FIRST LIGHT ENTERTAINMENT CORPORATION ("FIRST LIGHT") Through the end of fiscal 1998 the Company conducted its contract commercial production operations through its First Light subsidiary. First Light suffered a significant decline in revenues during the fourth quarter of fiscal 1998, and as a result incurred an operating loss. In October 1998, the Company decided to temporarily cease First Light's operations while it evaluated the form and direction of its future contract commercial production operations. That study is ongoing and the Company has not yet determined whether it will renew these operations, and if so whether it will do so under the First Light name, through American Artists Films, or through another entity. Although the Company has temporarily ceased the operations of First Light, it continues to consolidate its accounts. The Company is presently deferring the payment of First Light's liabilities, which consist primarily of its accounts payable which amounted to $113,778 at January 31, 1999 and March 9, 1999. First Light has no significant assets, with the exception of certain property and equipment, which the Company can continue to use in its operations. As a result of the Company's decision to temporarily cease First Light's operations, Ms. Vivian Jones, the president of First Light and a director and co-president of the Company, tendered her resignation in October 1998. NOTE 3 - NOTES PAYABLE The Company had the following notes payable activity for the six months ended January 31, 1999: (a) The Company was unable to renew its $225,000 line of credit with the bank at July 31, 1998. The principal of $225,000 remained outstanding at January 31, 1999. The Company, its guarantors and the bank are currently exploring various alternatives means to renew this line of credit. The Company made the quarterly interest payment due on this line of credit in October 1998. As of March 1999, the Company had not made the quarterly interest payment due January 1999 on this line of credit. (b) At January 31, 1999, the Company was in arrears the final two full quarterly installments, due May 1 and August 1, on its $11,126 secured installment note. (c) In September 1998 and January 1999, a shareholder extended loans to the Company in the amount of $42,500. These notes are secured, bear interest at the prime rate plus 1% and are due on demand but no later than September 1, 1999. The Company has pledged as security its interest in the ordinary LLC shares of False River, LLC to the extent that any principal and accrued interest remain unpaid at maturity under these note agreements. F-5 8 (d) As of March 1999, the Company was in arrears for payment of principal and interest in the amount of $9,000 in relation to its $41,750 unsecured installment note payable to bank. The Company had also not received an extension of the November 1998 maturity date on this unsecured installment note. NOTE 4 - NOTES PAYABLE/RELATED PARTIES The Company had the following notes payable/related parties activity for the six months ended January 31, 1999: (a) During the period from August 1998 to October 1998, a member of the board of directors extended loans to the Company amounting to $68,000, in the aggregate. These amounts are unsecured, bear interest at the prime rate plus 1% and are due on demand but no later than September 1, 1999. (b) In August 1998, an officer extended a loan to the Company in the amount of $26,264. This note is secured, bears interest at the prime rate plus 1% and is due on demand but no later than September 1, 1999. The Company has pledged as security its interest in the ordinary LLC shares of False River, LLC to the extent that any principal and accrued interest remain unpaid at maturity under this note agreement. (c) During the period from December 1998 to January 1999, a member of the board of directors extended loans to the Company amounting to $137,000, in the aggregate. These amounts are unsecured, bear interest at the prime rate plus 1% and are due on demand. NOTE 5 - FALSE RIVER, LLC During the period from August 1998 to January 1999, False River sold additional shares of its preferred distribution LLC shares for proceeds amounting to $156,238. An officer and certain members of the board of directors purchased $126,238 of these preferred distribution LLC share interests. NOTE 6 - STOCKHOLDERS' EQUITY (a) Changes in the Company's Class A and Class B common stock during the six months ended January 31, 1999 were as follows:
---------------------------------------------------------- Class A Class B Additional Shares Common Stock Common Stock Paid-in Capital ---------------------------------------------------------- Issuance of 25,000 shares of Class A common stock related to acquisition of Millennium LLC shares 25,000 25 -- $ 45,288 Issuance of 70,000 shares of Class A common stock related to sale of 1.4 private placement units 70,000 70 -- 34,930 Conversions of Class B shares to Class A shares 56,956 57 (57) -- -------------------------------------------------- 152 (57) $ 80,218 --------------------------------------------------------
(b) In October 1998, the Company commenced a private placement of units, at $25,000 per unit, comprised of 50,000 shares of the Company's Class A common stock. The units also includes a warrant to purchase 25,000 shares of Class A common stock at $1.30 per share, exercisable through December 2001. The Company received proceeds amounting to $40,000 from the sale of 1.6 units during the six months ended January 31, 1999. The shares related to a sale of .2 units were not issued as of January 31, 1999 and F-6 9 the liability related to the contractual obligation to issue these shares is presented as a component of liabilities in the condensed consolidated balance sheet at January 31, 1999. (c) In December 1998, the Company re-priced the exercise price of certain stock options that had been previously granted under its employee stock option plan. The Company re-priced these options as follows: 1) 52,345 stock options granted between November 21, 1995 and December 8, 1997 with exercise prices ranging from $1.45 to $3.75 were re-priced to an exercise price of $1.00, and 2) 272,844 stock options granted between November 21, 1995 and December 8, 1997 with exercise prices ranging from $1.45 to $3.75 were re-priced to an exercise price of $.50. Neither the Chief Executive Officer nor President of the Company had any stock options affected by this re-pricing. NOTE 7 - EARNINGS PER SHARE The Company adopted the requirements of Statement of Financial Accounting Standards No. 128, "Earnings Per Share," effective January 31, 1998, and restated the earnings per share amounts for prior periods. The restatement did not have any material affect on previously presented earnings per share amounts. Basic and diluted earnings per share are computed on the basis of net income or loss divided by the weighted average number of common shares (Class A and Class B) outstanding during the relevant period. Diluted earnings per share excludes the effects of stock options and warrants (and is therefore the same as basic earnings per share) as their effects would be anti-dilutive due to the net loss. There were 1,640,318 and 3,018,972 anti-dilutive common stock options and common stock warrants outstanding at January 31, 1999 and 1998, respectively. NOTE 8 - CONSULTING AGREEMENT In December 1998, the Company entered into a consulting agreement ("Programming Agreement") with an individual who possesses a number of years of experience in the television programming industry. The Programming Agreement calls for the consultant to assist the Company in the creation, development, packaging and production of certain television and feature film properties ("Properties"), including television series. As consideration for his services, the consultant will receive, in addition to certain "on screen" credits, thirty-three percent (33%) of all net profits, as defined (generally revenues after the recovery of all production and distribution costs), generated from Properties introduced to the Company under this Programming Agreement. The Programming Agreement generally will relate to properties identified by the consultant and exclude project ideas identified by the Company. NOTE 9 - RELATED PARTY TRANSACTIONS In December 1998, the Company extended the due dates of all of its notes issued in connection with certain advances to officers. The due dates were extended from December 1998 to December 1999. NOTE 10 - SUBSEQUENT EVENTS The Company completed the following transactions subsequent to January 31, 1999: (a) In February 1999, False River sold shares of its preferred distribution LLC shares for proceeds amounting to $38,626 to certain members of the board of directors. (b) Subsequent to January 31, 1999, the Company received $80,000 from the sale of 3.2 units in the private placement of the Company's Class A common stock. (See Note 6(b)). (c) In February 1999, the Company issued a member of the board of directors a warrant to purchase 100,000 shares of the Company's Class A common stock as additional consideration for his commitment to invest $50,000 in False River, LLC. The warrant is exercisable at $.20 per share, through January 2004. (d) In February 1999, an officer extended a loan to the Company in the amount of $11,000. This note is secured, bears interest at the prime rate plus 1% and is due on demand but no later than September 1, 1999. F-7 10 The Company has pledged as security its interest in the ordinary LLC shares of False River, LLC to the extent that any principal and accrued interest remain unpaid at maturity under this note agreement. (e) In February 1999, a member of the board of directors extended a loan to the Company in the amount of $10,000. This loan is unsecured, bears interest at the prime rate plus 1% and is due on demand, but no later than September 1, 1999. (f) In February 1999, the Company entered into two consulting agreements ("Consulting Agreements") with two entities for the performance of certain strategic financial planning services and consulting in the areas of filmed entertainment and LSVD operations. The Consulting Agreements call for these entities to provide these services over a period of six month in exchange for 1,200,000 shares of the Company's Class A common stock, in the aggregate. In March 1999, the Company filed a Form S-8 to register the issuance of these shares. (g) In February 1999, the Company legally effected a change in name from "American Artists Film Corporation" to "American Artists Entertainment Corporation." This name change had been previously approved by the shareholders of the Company in January 1998. F-8 11 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION RESULTS OF OPERATIONS SIX AND THREE MONTHS ENDED JANUARY 31, 1999 COMPARED TO THE SIX AND THREE MONTHS ENDED JANUARY 31, 1998 Revenues for the first six months of fiscal 1999 decreased as compared to revenues for the first six months of fiscal 1998, as a result of a significant decrease in the level commercial production revenues during the six months ended January 31, 1999. Commercial production revenues were $22,000 for the first six months of fiscal 1999, representing a decrease of $1,885,038 or 98.8% from commercial production revenues of $1,907,038 for the first six months of fiscal 1998. Commercial production revenues decreased by $385,461 to $16,000 for the three months ended January 31, 1999 from $401,461 for the three months ended January 31, 1998. The decrease in commercial production revenues reflected the suspension of commercial production activities in October 1998. Through the end of fiscal 1998 the Company conducted its contract commercial production operations through its First Light Entertainment Corporation ("First Light") subsidiary. First Light suffered a significant decline in revenues during the fourth quarter of fiscal 1998, and as a result incurred a significant operating loss. In October 1998, the Company decided to temporarily cease First Light's operations while it evaluated the form and direction of its future contract commercial production operations. That study is ongoing and the Company has not yet determined whether it will renew these operations, and if so whether it will do so under the First Light name, through American Artists Films, or through another entity. Commercial production costs, as a percentage of related revenues, were 51.3% for the six months ended January 31, 1999 as compared to 70.2% for the six months ended January 31, 1998. Commercial production costs, as a percentage of related revenues, were 43.7% for the three months ended January 31, 1999 as compared to 74.5% for the three months ended January 31, 1998. These decreases in commercial production costs, relative to revenues, in the first three and six months of fiscal 1999 were primarily the result of the completion of corporate/industrial video projects that yielded higher gross profit margins as compared to larger scale television commercial projects completed during similar periods in fiscal 1998. Gross profits for commercial production were $10,721 and $568,899 for the six months ended January 31, 1999 and 1998, respectively. Gross profits for commercial production were $9,011 and $102,290 for the three months ended January 31, 1999 and 1998, respectively. Film revenues were $25,000 for the first six months of fiscal 1999 as compared to no film revenues for the first six months of fiscal 1998. These revenues were related to the release of a small film project during the first quarter of fiscal 1999. There were no film revenues for the three months ended January 31, 1999 and 1998, respectively. There was film cost amortization of $23,035 during the six months ended January 31, 1999 that was related to the recognition of film revenues during the same period. The Company has entered into a development agreement related to one film project and has deferred film revenues amounting to $39,347 pending completion of the project. These deferred revenues are reflected as a liability on the condensed consolidated balance sheet at January 31, 1999. Selling, general and administrative ("SG&A") expenses decreased $296,281 to $499,239 for the six months ended January 31, 1999 from $795,520 for the six months ended January 31, 1998 and decreased $223,302 to $211,203 for the three months ended January 31, 1999 from $434,505 for the three months ended January 31, 1998. These decreases were primarily the result of a cessation of operations at First Light, the departure of several employees from the Company LSVD operations, the absence of several consulting agreements that were in effect during fiscal 1998, and a reduction in the level of capital formation activities, and related legal and travel costs. Interest expense increased to $69,253 for the first six months of fiscal 1999 from $17,561 for the first six months of fiscal 1998 and increased to $41,048 for the three months ended January 31, 1999 from $9,054 for the F-9 12 three months ended January 31, 1998. These increases were the result of an increase in outstanding debt during the first six months of fiscal 1999. As a result of the foregoing factors the Company incurred a net loss $555,806 for the first six months of fiscal 1999 as compared to a net loss of $224,182 for the first six months of fiscal 1998 and incurred a net loss of $243,240 for the three months ended January 31, 1999 as compared to a net loss of $341,269 for the three months ended January 31, 1998. LIQUIDITY AND CAPITAL RESOURCES The Company's strategic goal has been to finance its operating (i.e. selling, general and administrative) expenses from the gross profits generated by its television film, contract production operations and proposed LSVD operations, while utilizing equity financing, pre-production license revenues, and co-producer contributions to finance the production of feature films. Using this strategy, the Company seeks to reduce or eliminate the burden of significant operating losses and negative cash flows, while retaining the potential for significant profits and positive cash flows from successful feature films. The success of such a strategy is, however, dependent on the Company's ability to control operating expenses, to obtain sufficient, and sufficiently profitable, commercial production contracts and television film projects, and to fully develop its LSVD operations. Operating cash flows were a negative $426,727 for the six months ended January 31, 1999 and were primarily the result of the net loss caused by the significant decline in the level of commercial production revenues and the related gross profit, therefrom. The negative operating cash flows were less than the net loss for the six months ended January 31, 1999 principally due to an increase in accounts payable amounting to $184,457. This negative cash flow was financed by the cash inflows from financing activities described below. The Company may experience negative operating cash flows in periods when television film and commercial production revenues fail to cover SG&A expenses. Cash flows may also be negative in periods of profitable operations if growth in the Company's level of operations causes costs to rise in advance of collections and the increase is not offset by increases in accounts payable or accrued expenses. Negative operating cash flows, from either cause, will constrain the Company's liquidity, and necessitate the use of debt or equity financing. Cash provided by financing activities amounted to $400,158 for the six months ended January 31, 1999. During the first six months of fiscal 1999, the Company raised $273,764 (partially offset by $12,295 in repayments) in borrowings under notes payable from a member of the board of directors, an officer and a shareholder. Additionally, $156,238, obtained from the issuance of minority interests in False River, LLC, was used fund additional film cost additions of $188,991 for the feature film project False River. The Company's consolidated financial statements have been prepared on the basis of the continuation of the Company as a going concern, which contemplates the realization of assets and the settlement of liabilities in the normal course of business. The consolidated financial statements do not reflect any adjustments which might be necessary if the Company were to be unable to continue as a going concern. Since its inception, the Company has experienced a history of operating losses and constrained cash flows, and has been unable to fully implement its business plan due to insufficient capital resources. In the first six months of fiscal 1999, the Company incurred a net loss of $555,806, and negative operating cash flows of $426,727, due to a lack of revenues in its contract commercial production operations and the expenses incurred in pursuing its film and LSVD projects. At January 31, 1999 the Company had a deficit in stockholders' equity of $1,125,124 and a significant working capital deficit. The Company was unable to meet certain debt service requirements both during fiscal 1998 and in the first six months of fiscal 1999. A significant portion of notes payable and notes payable to related parties, which amount to $1,288,395, is due on demand or matures in fiscal 1999, and the Company is in arrears on and has been unable to renew its $225,000 bank line of credit. Since January 31, 1999 the Company has obtained $21,000 through additional loans, principally from members of the board of directors, which for the most part have been used to fund operations. As a result, at March 9, 1999 the Company's total indebtedness under notes payable and notes payable to related parties, net of debt repayments, has increased to $1,307,221, of which a substantial portion is due on demand or matures in fiscal 1999. F-10 13 These conditions raise substantial doubt concerning the Company's ability to continue as a going concern. To continue in operations and pursue its business plan, the Company must over the short-term raise additional capital and reduce expenditures so as to be able to fund its operations and the payment of those items of indebtedness that cannot be restructured or deferred, and over the longer term must raise the capital necessary to complete a portion of its film and LSVD projects and generate profits and positive cash flows therefrom. Management has developed a plan to address these requirements. The elements of the short-term plan include the following: RAISE ADDITIONAL CAPITAL - Private placement offering. In October 1998, the Company commenced a $500,000 private placement offering of units comprised of the Company's Class A common stock and a common stock purchase warrant. The Company has raised $120,000 from the sale of 4.8 units through March 9, 1999. - Pursue other sources of capital. Subsequent to year end, the Company engaged several firms to assist it in its capital raising efforts. To date these firms have introduced the Company to a number of potential capital sources, and on the basis of initial meetings the Company is cautiously optimistic that these efforts will provide the Company with new equity financing opportunities. - Borrowings from directors and stockholders. Subsequent to July 31, 1998, the Company obtained loans from certain members of the board of directors and certain stockholders. The Company will attempt to continue to make use, if available, of these borrowings on a short-term basis while it pursues other capital. REDUCE OPERATING EXPENSES AND NET LOSSES - Temporary cessation of contract commercial production operations. As previously discussed, in October 1998 the Company temporarily ceased its contract commercial production operations, which had suffered a decline in revenues and a net loss in the last quarter of fiscal 1998. The Company is evaluating the form and direction of its future contract commercial production operations. While such operations are suspended, the Company estimates that it will realize cost savings of approximately $30,000 per month. - Voluntary salary reductions. In March 1998 the Company requested that all employees voluntarily reduce their salary levels. All employees participated in this voluntary reduction. - Reduce staffing levels. The Company has reduced its staffing levels subsequent to July 31, 1998, principally through attrition, and has the ability to temporarily eliminate certain other positions, without suffering short-term revenue losses, if cash flow conditions require. Management will therefore continue to monitor and if necessary adjust staffing levels for certain projects to match cash flow availability. - Maximize short-term cash inflows from film projects. As previously discussed, the Company's False River film was screened as part of a special screening series in February 1999. Such screening marked the beginning of a process aimed at exposing the film to potential distributors. The Company also plans to submit False River for entry into several film festivals as part of its strategy to market this feature film project. The Company will, in negotiating with distributors, seek a license and/or sales agreement that maximizes the immediate or near-term cash payment it receives and offers the Company commitments for additional projects, in return for accepting a lesser than normal, or no, participation in the revenues or residual payments from the distribution of the film. A larger initial cash payment would allow the Company to both fund its operating expenses and finance the completion of certain other film projects, which then in turn could generate cash flows over the longer term. The elements of management's longer term plan include: - Revised approach to LSVD financing. Through fiscal 1998 the Company has been attempting to obtain traditional debt or equity financing for its proposed LSVD operations. Recently the Company modified its approach, and is now also seeking joint venture/strategic alliance partners among larger companies in related businesses. The Company believes that this approach may be more likely to attract the financing F-11 14 necessary to commence the proposed LSVD operation in Atlanta, which in turn would provide cash flows for operations and the pursuit of other LSVD and film projects. - Series programming relationship. The Company has increased its efforts to pursue relationships with cable television networks for the production of a series of programs, as a means of providing the Company with a more predictable backlog of projects and potential revenues. The Company is currently in negotiations for several specific series with one large cable network, and additionally has engaged as a consultant an individual from the cable network industry whose experience and relationships in that industry could, management believes, substantially improve the Company's ability to implement this strategy. There can be no assurance that any or all of the elements of the Company's short-term or longer term plans can or will be successfully implemented. Additionally, even if such initiatives are successful, they may not be sufficient to alleviate the Company's short term cash flow and liquidity problems, or in the long term generate revenues sufficient to sustain profitable operations. Should the Company fail to alleviate its short-term cash flow and liquidity problems, or over the longer term achieve profitable operations, the Company will have to either reduce the scope of its activities or cease its operations. YEAR 2000 The year 2000 issue relates to computer programs and systems that recognize dates using two digit year data rather than four digit year data. As a result, such programs and systems may fail or provide incorrect information for dates after December 31, 1999. If the year 2000 issue were to cause disruption to the Company's internal information technology systems or to the information technology systems of entities with whom the Company has commercial relationships, material adverse effects to the Company's operations could result. The Company's internal computer programs and systems consist of programs and systems relating to virtually all segments of the Company's business, including customer database management, marketing, production budgeting and accounting, financial reporting, investor relations, proposal generation, cash management and other key information systems. These programs and systems are primarily comprised of: - Personal computers. These systems are used for all of the Company's computer programs and systems. - Telecommunications systems. These systems enable the Company to manage all its telecommunication services, including incoming/outgoing telephone calls and all connections to the internet. - Voicemail systems. These systems are used for receiving and storing messages to employees. - Ancillary services systems. These include such systems as heating, ventilation and air conditioning control systems and security systems. - Third party software programs. These programs are used throughout the Company in a number of business applications, including word processing, spreadsheets, budgeting, financial reporting, proposal generation, telecommunications management and internet access. The Company has not yet completed its reviews of these programs and systems, but does not expect that any remediation relating to such programs and systems that might be necessary following such reviews will cause the Company to incur material costs or present implementation challenges that cannot be addressed prior to the end of calendar 1999. The Company expects to complete its reviews of these programs and systems during fiscal 1999. The computer programs and operating systems used by entities with whom the Company has commercial relationships also pose potential problems relating to the year 2000 issue, which may affect the Company's operations in a variety of ways. These risks are more difficult to assess than those posed by internal programs and systems and the Company has not yet completed the process of formulating a plan for assessing them. The Company expects to complete the formulation of its plan for assessing the programs and systems of the entities with whom it has commercial relationships and the identification of the related risks and uncertainties by the end of fiscal 1999. Once such assessment and identification has been completed, the Company intends to resolve any material risks and uncertainties that are identified by: 1) communicating further with the relevant vendors and service providers, 2) working internally to identify alternative sourcing, and 3) formulating contingency plans to deal with such material risks and uncertainties. The Company expects the resolution of such material risks and uncertainties to be an ongoing process until all year 2000 problems are satisfactorily resolved. F-12 15 PART II - OTHER INFORMATION ITEM 2. CHANGES IN SECURITIES The Company commenced a private placement of its Class A common stock in October 1998. During the quarter ended January 31, 1999, the Company sold 1.2 units with proceeds amounting to $30,000. Each unit is comprised of 50,000 shares of Class A common stock at $.50 per share. The purchaser of a unit also receives in each unit, without additional consideration, a warrant to purchase up to 25,000 shares of Class A common stock at $1.30 per share, exercisable through December 2001. Purchasers of fractional units received a prorated warrant. The Class A common stock was sold by the Company, and on behalf of the Company by directors and executive officers of the Company without commission or additional compensation. All sales were for cash. The sales were made in reliance upon the exemption from registration contained in Regulation D of the Securities Act of 1933. All of the purchasers were "accredited investors" within the meaning of Regulation D. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits 27.1 Financial Data Schedule (b) Reports on Form 8-K There were no reports filed on Form 8-K for the quarter ended January 31, 1999. F-13 16 SIGNATURES In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. American Artists Entertainment Corporation By: /s/ Steven D. Brown March 16, 1999 ------------------------------------------------------ Steven D. Brown Chief Executive Officer By: /s/ Robert A. Martinez March 16, 1999 ----------------------------------------------------- Robert A. Martinez Vice President - Finance and Chief Financial Officer F-14 EX-27 2 FINANCIAL DATA SCHEDULE
5 THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE AMERICAN ARTISTS ENTERTAINMENT CORPORATION'S CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOR THE PERIOD ENDED JANUARY 31, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1 US DOLLARS 6-MOS JUL-31-1999 AUG-01-1998 JAN-31-1999 1 8,999 0 34,939 0 0 0 134,181 114,029 1,707,037 0 0 0 0 6,535 (1,131,659) 1,707,037 47,000 47,000 11,279 533,553 0 0 69,253 (555,806) 0 (555,806) 0 0 0 (555,806) (.09) (.09)
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