-----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, GlnBjrYDG24OpqKBuzdrU9CuCvEuR1jrrebiqqszL2ycRwwgluVN/XpEEr3u2JxN pOI1J6riVJDYQcghPU3hkw== 0000950144-99-007161.txt : 19990615 0000950144-99-007161.hdr.sgml : 19990615 ACCESSION NUMBER: 0000950144-99-007161 CONFORMED SUBMISSION TYPE: 10QSB PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990430 FILED AS OF DATE: 19990608 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: 99641956 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 ARTIST 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 April 30, 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: 5,024,460 shares of Class A Common Stock, $.001 par value per share, and 3,030,801 shares of Class B Common Stock, $.001 par value per share, were outstanding at June 2, 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 April 30, 1999 and July 31, 1998......................................... F-1/F-2 Statements of operations for the three months and nine months ended April 30, 1999 and April 30, 1998 ........................................................................ F-3 Statements of cash flows for the nine months ended April 30, 1999 and April 30, 1998 ................................................................... F-4 Notes to Condensed Consolidated Financial Statements....................................... F-5/F-10 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF Operation......................................... F-11/F-15 PART II - OTHER INFORMATION - --------------------------- ITEM 2. CHANGES IN SECURITIES ............................................................................. F-15 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K................................................................... F-15 SIGNATURES.................................................................................................. F-16
3 PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS AMERICAN ARTISTS ENTERTAINMENT CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
April 30, July 31, ---------- ---------- 1999 1998 ---------- ---------- ASSETS CASH $ 16,721 $ 35,568 ACCOUNTS RECEIVABLE 17,851 99,998 FILM COSTS, NET OF ACCUMULATED AMORTIZATION 1,466,016 1,230,231 PROPERTY AND EQUIPMENT, NET 15,839 28,221 ADVANCES TO OFFICERS 180,913 253,012 OTHER 11,000 -- ---------- ---------- $1,708,340 $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)
April 30, July 31, ----------- ----------- 1999 1998 ----------- ----------- LIABILITIES LINE OF CREDIT $ -- $ 52,549 ACCOUNTS PAYABLE 494,181 392,421 ACCRUED EXPENSES 79,483 68,206 ACCRUED INTEREST 112,531 3,820 ACCRUED ACCOUNTING AND LEGAL 122,904 161,816 DEFERRED REVENUES 73,594 -- COMMON STOCK ISSUABLE -- 45,313 NOTES PAYABLE 347,591 406,426 NOTES PAYABLE/RELATED PARTIES 950,352 620,500 ----------- ----------- TOTAL LIABILITIES 2,180,636 1,751,051 ----------- ----------- MINORITY INTERESTS 740,474 545,610 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 4,944,702 AND 3,157,789 4,945 3,158 CLASS B - SHARES AUTHORIZED 20,000,000; ISSUED AND OUTSTANDING 3,110,559 AND 3,282,472 3,111 3,282 ADDITIONAL PAID-IN CAPITAL 4,593,681 3,916,933 DEFERRED STOCK COMPENSATION (184,616) -- ACCUMULATED DEFICIT (5,629,891) (4,573,004) ----------- ----------- TOTAL CAPITAL DEFICIT (1,212,770) (649,631) ----------- ----------- $ 1,708,340 $ 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 April 30, Nine Months Ended April 30, --------------------------------- --------------------------------- 1999 1998 1999 1998 ----------- ----------- ----------- ----------- REVENUES Commercial production $ 4,870 $ 406,577 $ 26,870 $ 2,313,615 Film revenues -- -- 25,000 -- ----------- ----------- ----------- ----------- 4,870 406,577 51,870 2,313,615 ----------- ----------- ----------- ----------- COSTS AND EXPENSES Cost of commercial production 3,184 376,338 14,463 1,714,477 Film cost amortization -- -- 23,035 -- Consulting expenses 253,434 33,801 253,434 116,571 Selling, general and administrative 212,864 454,785 712,103 1,167,535 ----------- ----------- ----------- ----------- 469,482 864,924 1,003,035 2,998,583 ----------- ----------- ----------- ----------- LOSS FROM OPERATIONS (464,612) (458,347) (951,165) (684,968) Interest expense (36,469) (12,758) (105,722) (30,319) ----------- ----------- ----------- ----------- NET LOSS $ (501,081) $ (471,105) $(1,056,887) $ (715,287) =========== =========== =========== =========== NET LOSS PER SHARE - BASIC AND DILUTED $ (.07) $ (.07) $ (.16) $ (.11) =========== =========== =========== =========== WEIGHTED AVERAGE COMMON SHARES 7,501,928 6,327,230 6,815,817 6,411,221 =========== =========== =========== ===========
See accompanying notes to condensed consolidated financial statements. F-3 6 AMERICAN ARTISTS ENTERTAINMENT CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Nine Months Ended April 30, ------------------------------- 1999 1998 ----------- --------- OPERATING ACTIVITIES Net loss $(1,056,887) $(715,287) Adjustments to reconcile net loss to cash used in operating activities: Film costs amortization 23,035 -- Depreciation and amortization 10,750 41,446 Stock compensation 253,434 -- Loss on disposal of assets 1,632 -- Changes in assets and liabilities: Accounts receivable 82,147 253,118 Film costs additions (258,820) (122,326) Other assets 61,099 (33,139) Accounts payable 101,760 (1,814) Accrued expenses 81,077 (54,297) Deferred revenues 73,594 -- ----------- --------- Cash used in operating activities (627,179) (632,299) INVESTING ACTIVITIES Capital expenditures -- (2,321) ----------- --------- FINANCING ACTIVITIES Borrowings under line of credit, net (52,549) 67,686 Repayment of notes payable (51,335) (513,968) Borrowings under notes payable 322,352 647,500 Issuance of minority interests 194,864 325,343 Issuance of common stock 195,000 100,000 ----------- --------- Cash provided by financing activities 608,332 626,561 NET DECREASE IN CASH (18,847) (8,059) ----------- --------- CASH, beginning of period 35,568 31,379 ----------- --------- CASH, end of period $ 16,721 $ 23,320 =========== =========
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 nine 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. Certain amounts in the condensed consolidated balance sheets and statements of operations have been reclassified for comparative purposes. 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. 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 $108,931 at April 30, 1999 and $108,431 at June 2, 1999. 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. F-5 8 AMERICAN ARTISTS ENTERTAINMENT CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) NOTE 3 - NOTES PAYABLE Notes payable consisted of the following:
April 30, July 31, -------------------------------------- 1999 1998 -------------------------------------- Line of credit with a bank, guaranteed by certain members of the board of directors, interest at the prime rate (7.75% at April 30, 1999) plus 1% and due quarterly, principal due July 1998 $150,000 $225,000 Unsecured note payable to shareholder, interest at the prime rate (7.75% at April 30, 1999) plus 1%, due on demand 75,000 75,000 Unsecured note payable to shareholder, interest at the prime rate (7.75% at April 30, 1999) plus 1%, due December 1998 53,550 53,550 Secured note payable to shareholder, interest at prime rate (7.75% at April 30, 1999) plus 1%, due on demand, but no later than September 1999. 32,878 - Unsecured installment note payable to bank, interest at 8.75%, $3,000 due monthly in principal and interest, principal due November 1998 25,977 41,750 Secured installment note, collateralized by equipment and tradename of First Light, due with interest at 4.37% in quarterly installment of $5,593 through 10,186 11,126 August 1998 --------------------------- $347,591 $406,426 ===========================
(a) The Company was unable to renew its $225,000 line of credit with the bank at July 31, 1998. In December 1998, one of the guarantors paid the bank $75,000 in settlement of his principal portion of the line of credit. The Company has not executed a note agreement with this individual relative to this transaction. A balance of $150,000 remains outstanding as of April 30, 1999 and the Company is currently discussing various repayment options with the bank. The Company made the quarterly interest payment due on this line of credit in October 1998, however, has not made the quarterly interest payments due January 1999 and April 1999. (b) At April 30, 1999, the Company was in arrears for the final two full quarterly installments, due May 1 and August 1, on its secured installment note. (c) In September 1998 and January 1999, a shareholder extended loans to the Company in the amount of $42,500. The Company re-paid $9,622 of these loans in April 1999. 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 a portion of 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-6 9 AMERICAN ARTISTS ENTERTAINMENT CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (d) At April 30, 1999, the Company was in arrears for the payment of principal and interest in the amount of $9,000 in relation to its unsecured installment note payable to bank. This note had a maturity date of November 1998. NOTE 4 - NOTES PAYABLE/RELATED PARTIES Notes payable to related parties consisted of the following:
April 30, July 31, --------------------------------- 1999 1998 --------------------------------- Unsecured notes due to certain member of the board of directors, due on demand but no later than September 1999, interest at the prime rate (7.75% at April 30, 1999) plus 1% $ 438,500 $ 370,500 Unsecured notes due to certain members of the board of directors, due on demand, interest at the prime rate (7.75% at April 30, 1999) plus 1% 150,000 150,000 Unsecured notes due to certain member of the board of directors, due on demand, interest at the prime rate (7.75% at April 30, 1999) plus 1% 137,000 - Line of credit with member of the board of directors, interest at the prime rate (7.75% at April 30, 1999) plus 1%, due monthly, principal due April 1999 100,000 100,000 Unsecured note due to certain members of the board of directors, due on demand, but no later than September 1999, interest at the prime rate (7.75% at April 30, 1999) plus 1% 37,588 - Secured note due to certain officers, due on demand, but no later than September 1999, interest at the prime rate (7.75% at April 30, 1999) plus 1% 12,264 - Amount due to certain member of the board of directors 75,000 - --------------------------------- $ 950,352 $ 620,500 =================================
(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 a portion of 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. In March 1999, the officer converted $25,000 of this note into one unit of the Company's private placement. F-7 10 AMERICAN ARTISTS ENTERTAINMENT CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (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. (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. The Company has pledged as security a portion of 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 April 1999, a member of the board of directors extended a loan to the Company in the amount of $27,588. This loan is unsecured, bears interest at the prime rate plus 1% and is due on demand, but no later than September 1, 1999. NOTE 5 - FALSE RIVER, LLC During the period from August 1998 to February 1999, False River sold additional shares of its preferred distribution LLC shares for proceeds amounting to $194,864. An officer and certain members of the board of directors purchased $164,864 of these preferred distribution LLC share interests. NOTE 6 - CONSULTING AGREEMENTS 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 large screen video display operations. The Consulting Agreements called 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. The Company recognized deferred stock compensation, which is presented as a reduction of stockholders' equity, at the contract execution date based upon the market value of the shares at that date. The Company is amortizing the deferred compensation, which is adjusted monthly for changes in the market value of unearned shares, ratably over the six month life of the contract. F-8 11 AMERICAN ARTISTS ENTERTAINMENT CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) NOTE 7 - STOCKHOLDERS' EQUITY (a) Changes in the Company's Class A and Class B common stock during the nine months ended April 30, 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 1,200,000 shares of Class A common stock related to consulting agreements 1,200,000 1,200 - 436,850 Issuance of 390,000 shares of Class A common stock related to sale of 7.8 private placement units 390,000 390 - 194,610 Conversions of Class B shares to Class A shares 171,913 172 (172) - ------------------------------------------------- 1,787 (172) $ 676,748 =================================================
(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 $195,000 from the sale of 7.8 units during the nine months ended April 30, 1999. A member of the board of directors and an officer of the Company purchased two of these units, in the aggregate. (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 8 - 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 F-9 12 AMERICAN ARTISTS ENTERTAINMENT CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) share) as their effects would be anti-dilutive due to the net loss. There were 2,305,318 and 2,284,455 anti-dilutive common stock options and common stock warrants outstanding at April 30, 1999 and 1998, respectively. NOTE 9 - RELATED PARTY TRANSACTIONS The Company had the following other related party transactions during the nine months ended April 30, 1999: (a) 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. (b) 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. (c) In March 1999, a voting agreement (the "Agreement") that obligated for four significant shareholders to vote their shares as a block, according to the majority vote of the shares subject to the Agreement, was terminated the parties. The shareholders subject to this Agreement included a member of the board of directors and two officers of the Company. NOTE 10 - SUBSEQUENT EVENTS The Company completed the following transactions subsequent to April 30, 1999: (a) In May 1999, the Company received $16,000 from the sale of .6 units in the private placement of the Company's Class A common stock. The purchaser of this fractional unit was an officer of the Company. (b) In May 1999, an officer and a member of the board of directors of the Company extended loans to the Company amounting to $43,500, in the aggregate. These amounts are unsecured, bear interest at the prime rate plus 1% and are due on demand. F-10 13 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION RESULTS OF OPERATIONS NINE AND THREE MONTHS ENDED APRIL 30, 1999 COMPARED TO THE NINE AND THREE MONTHS ENDED APRIL 30, 1998 Revenues for the first nine months of fiscal 1999 decreased as compared to revenues for the first nine months of fiscal 1998, as a result of a significant decrease in the level of commercial production revenues during the nine months ended April 30, 1999. Commercial production revenues were $26,870 for the first nine months of fiscal 1999, representing a decrease of $2,286,745 or 98.8% from commercial production revenues of $2,313,615 for the first nine months of fiscal 1998. Commercial production revenues decreased by $401,707 to $4,870 for the three months ended April 30, 1999 from $406,577 for the three months ended April 30, 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 53.8% for the nine months ended April 30, 1999 as compared to 74.1% for the nine months ended April 30, 1998. Commercial production costs, as a percentage of related revenues, were 65.4% for the three months ended April 30, 1999 as compared to 92.6% for the three months ended April 30, 1998. These decreases in commercial production costs, relative to revenues, in the first three and nine 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 $12,407 and $599,138 for the nine months ended April 30, 1999 and 1998, respectively. Gross profits for commercial production were $1,686 and $30,239 for the three months ended April 30, 1999 and 1998, respectively. Film revenues were $25,000 for the first nine months of fiscal 1999 as compared to no film revenues for the first nine 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 April 30, 1999 and 1998, respectively. Film cost amortization of $23,035 during the nine months ended April 30, 1999 related to the recognition of film revenues during the same period. The Company has entered into a development agreement, as amended, related to one film project and has deferred film revenues amounting to $60,345 pending completion of the project. These deferred revenues are reflected as a liability in the condensed consolidated balance sheet at April 30, 1999. Selling, general and administrative ("SG&A") expenses decreased $455,432, or 39.0%, to $712,103 for the nine months ended April 30, 1999 from $1,167,535 for the nine months ended April 30, 1998. These decreases were primarily the result of a cessation of operations at First Light($221,290), a reduction in the level of capital formation activities($108,487) and the departure of several employees from the Company's LSVD operations($59,024). Selling, general and administrative ("SG&A") expenses decreased $241,921, or 53.2%, to $212,864 for the three months ended April 30, 1999 from $454,785 for the three months ended April 30, 1998. These decreases were primarily the result of a cessation of operations at First Light($102,664), the departure of several employees from the Company's LSVD operations($35,793) and a reduction in the level of capital formation activities($27,114). F-11 14 Consulting expenses increased $136,863 to $253,434 for the nine months ended April 30, 1999 from $116,571 for the nine months ended April 30, 1998 and increased $219,633 to $253,434 for the three months ended April 30, 1999 from $33,801 for the three months ended April 30, 1998. These increases were primarily a result of two consulting agreements that were entered into during the third quarter of fiscal 1999. (See Note 6). Interest expense increased to $105,722 for the first nine months of fiscal 1999 from $30,319 for the first nine months of fiscal 1998 and increased to $36,469 for the three months ended April 30, 1999 from $12,758 for the three months ended April 30, 1998. These increases were the result of an increase in outstanding debt during the first nine months of fiscal 1999. As a result of the foregoing factors the Company incurred a net loss of $1,056,887 for the first nine months of fiscal 1999 as compared to a net loss of $715,287 for the first nine months of fiscal 1998 and incurred a net loss of $501,081 for the three months ended April 30, 1999 as compared to a net loss of $471,105 for the three months ended April 30, 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 $627,179 for the nine months ended April 30, 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. 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 $608,332 for the nine months ended April 30, 1999. During the first nine months of fiscal 1999, the Company raised $322,352 (partially offset by $51,335 in repayments) in borrowings under notes payable from members of the board of directors, officers and a shareholder. Additionally, the Company raised $194,864 from the issuance of minority interests in False River, LLC to fund film cost additions to 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 nine months of fiscal 1999, the Company incurred a net loss of $1,056,887, and negative operating cash flows of $627,179, due to a lack of revenues in its contract commercial production operations and the expenses incurred in pursuing its film and LSVD projects. At April 30, 1999 the Company had a deficit in stockholders' equity of $1,212,770 and a significant working capital deficit. The Company was unable to meet certain debt service requirements both during fiscal 1998 and in the first nine months of fiscal 1999. A significant portion of notes payable and notes payable to related parties, which amount to $1,297,943, 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 April 30, 1999, the Company has F-12 15 obtained $43,500 through additional loans, from an officer and member of the board of directors, which for the most part have been used to fund operations. As a result, at June 2, 1999 the Company's total indebtedness under notes payable and notes payable to related parties, net of debt repayments, has increased to $1,332,943, of which a substantial portion is due on demand or matures in fiscal 1999. 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 $211,000 from the sale of 8.4 units through June 2, 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 the Company is continuing to seek new financing opportunities through these firms. - 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 has submitted False River for entry into several select film festivals, however, it has been unsuccessful in its attempt to gain entry into any of these film festivals. Management plans to continue to apply for entry into certain select film festivals and also plans to supplement its strategy for obtaining distribution by making direct contact with a number of potential distributors. 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 F-13 16 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. Presently, the Company plans to continue this approach to the distribution of False River for an additional six months, and anticipates that the entire six month period may be required to obtain distribution. If these efforts are unsuccessful the Company will examine other approaches to recovering its investment in False River. 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 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. Based upon its efforts under this new approach, the Company has entered into a preliminary discussion of terms for funding of the construction and operation of the initial LSVD operation in Atlanta, Georgia. There can be no assurance that management will be able to negotiate an agreement upon terms acceptable to the Company. - 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 continuing its discussions for several specific series with one large cable network and is in the preliminary stages of presenting series topics to this cable network. - Vice President - Sales and Marketing. The Company recently hired an individual to oversee all of its sales and marketing functions and to be responsible for developing new client opportunities for all of the Company's business segments. This individual has over ten years of sales and marketing experience and most recently held positions with Chancellor Marketing Group and CBS Broadcasting Corporation. Management anticipates that this individual will improve upon the Company's revenue producing opportunities on a near-term basis. 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: F-14 17 o Personal computers. These systems are used for all of the Company's computer programs and systems. o Telecommunications systems. These systems enable the Company to manage all its telecommunication services, including incoming/outgoing telephone calls and all connections to the Internet. o Voicemail systems. These systems are used for receiving and storing messages to employees. o Ancillary services systems. These include such systems as heating, ventilation and air conditioning control systems and security systems. o 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. 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 April 30, 1999, the Company sold 6.2 units with proceeds amounting to $155,000. 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 The following report was filed by the Company on Form 8-K during the quarter ended April 30, 1999: (a) Form 8-K filed on March 8, 1999 F-15 18 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 June 2, 1999 ---------------------------------- Steven D. Brown Chief Executive Officer By: /s/ Robert A. Martinez June 2, 1999 --------------------------------- Robert A. Martinez Vice President - Finance and Chief Financial Officer F-16 EX-27.1 2 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE COMPANY'S CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOR THE PERIOD ENDED APRIL 30, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1 US DOLLARS 9-MOS JUL-31-1999 AUG-01-1998 APR-30-1999 1 16,721 0 17,851 0 0 0 134,181 118,342 1,708,340 0 0 0 0 8,056 (1,220,826) 1,708,340 51,870 51,870 37,498 1,003,035 0 0 105,722 (1,056,887) 0 (1,056,887) 0 0 0 (1,056,887) (.16) (.16)
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