U.S. SECURITIES & EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(x) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1997.
or
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________ to __________.
Commission File No. 0-22174
AMERICAN ENTERTAINMENT GROUP, INC.
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(Exact name of small business issuer as specified in its charter)
COLORADO 83-0277375
- ------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization Identification No.)
160 BEDFORD ROAD, SUITE 306, TORONTO, ONTARIO, CANADA M5R 2K9
- ----------------------------------------------------- -------
(Address of principal executive offices) Zip Code
Issuer's telephone number, including area code (416) 920-1919, or toll free
1-800-358-1919
Indicate by check mark whether the Issuer (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days. Yes x No
----- -----
The number of shares outstanding of Registrant's common stock, as of the latest
practicable date, July 25, 1997, was 4,401,160.
Total number of sequentially numbered pages in this document: 20
AMERICAN ENTERTAINMENT GROUP, INC.
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements Page No.
Condensed Consolidated Balance Sheets-
June 30, 1997 and December 31, 1996 1-2
Condensed Consolidated Statements of
Operations - Six Month periods Ended
June 30, 1997 and June 30, 1996 3
Condensed Consolidated Statement of Changes
in Stockholders' Equity- Six Months Ended
June 30, 1997 4 & 4B
Condensed Consolidated Statement of Cash Flows-
Six Months Ended June 30, 1997 and
June 30, 1996 5
Notes to Condensed Consolidated Financial Statements 6-12
Item 2. Management's Discussion and Analysis of Results of
Operations and Financial Condition 12-14
PART II. OTHER INFORMATION 14-19
Signatures 20
AMERICAN ENTERTAINMENT GROUP, INC.
AND SUBSIDIARIES
A Development Stage Company
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
ASSETS
JUNE 30, 1997 DECEMBER 31, 1996
(UNAUDITED) (AUDITED)
CURRENT ASSETS:
CASH $ - $ 802
DUE FROM THIRD PARTY 2,996,947 3,549,647
DEPOSIT - TEXAS PROCEEDINGS 159,223 -
PREPAID EXPENSES AND DEPOSITS 32,968 8,442
----------- -----------
TOTAL CURRENT ASSETS 3,189,138 3,558,891
----------- -----------
PROPERTY AND EQUIPMENT, AT COST
OFFICE FURNITURE AND EQUIPMENT 16,688 16,898
COMPUTER EQUIPMENT 9,854 9,854
----------- -----------
26,542 26,752
LESS ACCUMULATED DEPRECIATION 19,091 16,566
----------- -----------
NET PROPERTY AND EQUIPMENT 7,451 10,186
----------- -----------
OTHER ASSETS:
AUDIO MASTERS PRODUCTION 86,208 -
FILM LIBRARY OWNERSHIP 1,000,000 1,000,000
OTHER ASSETS 2,314 3,983
----------- -----------
TOTAL OTHER ASSETS 1,088,522 1,003,983
----------- -----------
$ 4,285,111 $ 4,573,060
----------- -----------
----------- -----------
SEE NOTES TO FINANCIAL STATEMENTS
-1-
AMERICAN ENTERTAINMENT GROUP, INC.
AND SUBSIDIARIES
A Development Stage Company
CONDENSED CONSOLIDATED BALANCE SHEETS (Continued)
(Unaudited)
LIABILITIES and STOCKHOLDERS' EQUITY
JUNE 30, 1997 DECEMBER 31, 1996
(UNAUDITED) (AUDITED)
Current Liabilities:
Note payable to a bank $ 2,996,947 $ 3,549,647
Current portion of long-term debt 810,156 790,402
Convertible Debentures Payable 400,000 --
Accounts payable 258,883 363,068
Accrued expenses 423,568 774,711
----------- -----------
Total current liabilities 4,889,554 5,477,828
----------- -----------
Stockholders' Equity:
Common stock, no par value:
authorized 700,000,000 shares;
issued 4,005,795 and 2,409,853 shares 8,240,986 6,882,014
Common stock to be issued 66,800 458,426
Foreign currency translation adjustment (54,521) (54,014)
Deficit accumulated during the
development stage (7,590,908) (6,621,435)
----------- -----------
662,357 664,991
Less: subscription receivable (1,266,800) (1,569,759)
----------- -----------
Total stockholders' equity (deficit) (604,443) (904,768)
$ 4,285,111 $ 4,573,060
----------- -----------
----------- -----------
See Notes to Financial Statements
-2-
AMERICAN ENTERTAINMENT GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
Six And Three Months Ended June 30, 1997 and 1996
(Unaudited)
Six Months Ended Three Months Ended
Cumulative ---------------------- ----------------------
Since June 30, June 30, June 30, June 30,
Inception 1997 1996 1997 1996
----------- --------- --------- --------- ---------
Sales $ 36,932 $ -- $ -- $ -- $ --
Cost of Sales 22,118 -- 7,698 -- 7,698
----------- --------- --------- --------- ---------
Gross Profit 14,814 -- (7,698) -- (7,698)
----------- --------- --------- --------- ---------
Operating Expenses:
General and administrative
expenses 6,751,170 950,573 615,696 270,164 299,798
Write-down of film library
ownership to market value 847,478 -- -- -- --
Interest 209,358 18,900 24,509 9,023 14,160
----------- --------- --------- --------- ---------
Total operating expenses $ 7,808,006 $ 969,473 $ 640,205 $ 279,187 $ 313,958
Operating loss (7,793,192) (969,473) (647,903) (279,187) (321,656)
Other income 235,269 -- 116,124 -- 116,124
----------- --------- --------- --------- ---------
Loss from continuing operations (7,557,923) (969,473) (531,779) (279,187) (205,532)
Discontinued Operations
Loss from discontinued operations (32,985) -- -- -- --
----------- --------- --------- --------- ---------
NET LOSS $(7,590,908) $(969,473) $(531,779) $(279,187) $(205,532)
----------- --------- --------- --------- ---------
----------- --------- --------- --------- ---------
LOSS PER SHARE:
Loss from continuing operations (6.07) (3.19) (3.30) (0.85) (1.20)
Loss from discontinued operations (0.03) -- -- -- --
----------- --------- --------- --------- ---------
NET LOSS (6.10) (3.19) (3.30) (0.85) (1.20)
----------- --------- --------- --------- ---------
Weighted average 1,244,410 3,040,663 1,619,820 3,285,242 1,765,375
----------- --------- --------- --------- ---------
----------- --------- --------- --------- ---------
See Notes to Financial Statements
-3-
AMERICAN ENTERTAINMENT GROUP, INC.
A Development Stage Company
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
June 30, 1997
Deficit
Foreign Accumulated
Common Stock Outstanding Common Currency During The Notes /
Stock to Be Unearned Translation Development Subscriptions
Shares Amounts Issued Compensation Adjustment Stage Receivable Total
---------------------------------------------------------------------------------------------------------
Balance at April 23,
1992 (Inception)
Issuance of common
stock 428,000 $ 150 -- -- -- $ -- $ (150) --
NET LOSS (89,500) (89,500)
----------------------------------------------------------------------------------------------------------
Balance at
December 31, 1992 428,000 $ 150 $ -- -- -- $ (89,500) $ (150) $ (89,500)
Issuance of common
stock 406,914 2,719,197 -- -- -- -- (12,745) 2,706,452
Common stock
issued in reverse
acquisition (Note B) 70,000 -- -- -- -- -- -- --
Common stock subscribed -- -- 62,066 -- -- -- (61,586) 500
NET LOSS -- -- -- -- -- (1,608,553) -- (1,608,553)
----------------------------------------------------------------------------------------------------------
Balance at
December 31, 1993 904,914 $2,719,347 $ 62,066 -- $ (40) $(1,698,053) $ (74,461) $ 1,006,859
Issuance of common
stock 145,118 696,094 (8,449) -- -- -- (56) 697,589
Common stock subscribed -- -- 70,000 -- -- -- (70,000) --
Unearned compensation
related to issuance
of stock for services -- -- -- (75,000) -- -- -- (75,000)
Amortization of
unearned compensation -- -- -- 33,333 -- -- -- 33,333
Foreign currency
translation adjustment -- -- -- -- (1,876) -- -- (1,876)
NET LOSS -- -- -- -- -- (1,342,562) -- (1,342,562)
----------------------------------------------------------------------------------------------------------
Balance at
December 31, 1994 1,050,032 $3,415,441 $ 123,637 $(41,667) $(1,916) $(3,040,635) $ (144,537) $ 310,323
Issuance of common
stock 412,953 1,487,848 -- -- -- -- -- 1,487,848
Common stock subscribed -- -- (123,637) -- -- -- (144,537) 20,900
Unearned compensation
related to issuance
of stock for services -- -- -- (13,900) -- (13,900) -- (13,900)
Amortization of
unearned compensation -- -- 41,667 -- -- -- 41,667
Foreign currency
translation adjustment -- -- -- (10,453) -- -- (10,453)
NET LOSS -- -- -- -- -- (1,841,473) -- (1,841,473)
----------------------------------------------------------------------------------------------------------
Balance at
December 31, 1995 1,462,985 $4,903,289 -- $(13,900) $(12,369) $(4,882,108) -- $ (5,088)
Issuance of common
stock 946,868 1,978,725 -- -- -- -- (1,200,000) 778,725
Unearned compensation
related to issuance
of stock for services -- -- -- 13,900 -- -- -- 13,900
Common stock subscribed -- -- 458,426 -- -- -- (369,759) 88,667
Foreign currency
translation adjustment -- -- -- (41,645) -- -- (41,645)
NET LOSS -- -- -- -- -- (1,739,327) -- (1,739,327)
----------------------------------------------------------------------------------------------------------
Balance at
December 31, 1996 2,409,853 $6,882,014 $ 458,426 $ -- $(54,014) $(6,621,435) $(1,569,759) $ (904,768)
-4-
AMERICAN ENTERTAINMENT GROUP, INC.
A Development Stage Company
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
June 30, 1997
Deficit
Foreign Accumulated
Common Stock Outstanding Common Currency During The Notes /
Stock to Be Unearned Translation Development Subscriptions
Shares Amounts Issued Compensation Adjustment Stage Receivable Total
---------------------------------------------------------------------------------------------------------
Balance at
December 31, 1996 2,409,853 $6,882,014 $ 458,426 $ -- $(54,014) $(6,621,435) $(1,569,759) $ (904,768)
Issuance of common
stock 802,011 1,061,996 1,061,996
Common stock subscribed (391,626) 302,959 (88,667)
Foreign currency
translation adjustment 1,476 1,476
NET LOSS (690,286) (690,286)
----------------------------------------------------------------------------------------------------------
Balance at March 31,
1997 3,211,864 $7,944,010 $ 66,800 $ -- $(52,538) $(7,311,721) $(1,266,800) $ (620,249)
Issuance of common
stock 793,931 296,976 296,976
Foreign currency
translation adjustment (1,983) (1,983)
NET LOSS (279,187) (279,187)
Balance at June 30, 1997 4,005,795 $8,240,986 $ 66,800 $ -- $(54,521) $(7,590,908) $(1,266,800) $ (604,443)
----------------------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------------
-4B-
AMERICAN ENTERTAINMENT GROUP, INC.
AND SUBSIDIARIES
A Development Stage Company
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Six Months Ended June 30, 1997 and 1996
(Unaudited)
Cumulative Since June 30, 1997 June 30, 1996
Inception
Cash flows from operating activities:
Net Loss $(7,590,908) $(969,473) $(531,779)
Adjustments to reconcile net loss to
net cash used by operating activities:
Depreciation and amortization 33,477 4,194 4,354
Amorization of unearned compensation - - 13,900
Interest portion of amount due for
film library 88,972 19,754 19,754
Common stock issued for services 2,761,424 454,980 109,856
Foreign currency translation (54,521) 507 378
Changes in:
Prepaid expenses & deposits (32,968) (24,526) (19)
Accounts payable and other 1,518,686 759,193 93,720
----------- --------- ---------
Net cash used by operating activities (3,275,838) 244,629 (289,836)
----------- --------- ---------
Cash flows from investing activities:
Audio Masters Productions (86,208) (86,208) -
Purchase of Infomercial & other film rights (120,000) - -
Purchase of property and equipment (26,830) - -
Decrease in other assets 957,106 - -
Deposit - Texas proceedings (159,223) (159,223) -
----------- --------- ---------
Net cash provided by investing activities 564,845 (245,431) -
----------- --------- ---------
Cash flows from financing activities:
Proceeds from issuance of common stock 2,172,317 - -
Increase in short-term notes payable 115,000 - 213,750
Repayment of long-term debt (126,294) - 41,666
Increase in due to officer 50,000 - -
Proceeds from convertible debentures 500,000 - -
----------- --------- ---------
Net cash provided by financing activities 2,711,023 - 255,416
----------- --------- ---------
NET INCREASE (DECREASE) IN CASH - (802) (34,420)
Cash, at the beginning of the period - 802 315
----------- --------- ---------
Cash at the end of the period $ NIL $ NIL $ (34,105)
----------- --------- ---------
----------- --------- ---------
See Notes to Financial Statements
-5-
AMERICAN ENTERTAINMENT GROUP, INC
A Development Stage Company
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1997
1. FINANCIAL STATEMENTS
In the opinion of the Company's management, the accompanying unaudited
consolidated financial statements contain all adjustments, which include
only normal recurring accruals, necessary to present fairly the Company's
financial position as at June 30, 1997, the results of operations, changes
in stockholders' equity and cash flows for the six month periods ended
June 30, 1997 and 1996. Certain information and footnote disclosures
normally included in financial statements prepared in accordance with
generally accepted accounting principles have been condensed or omitted
pursuant to the rules and regulations of the Securities and Exchange
Commission. For further information, refer to the consolidated financial
statements and footnotes thereto included in the Company's Annual Report
on Form 10-KSB for the year ended December 31, 1996.
2. COMMON STOCK
Common shares issued during the six month period ending June 30, 1997,
include 409,478 shares issued for cash or equivalent consideration in the
amount of $269,625 and 727,526 shares issued in lieu of cash payment for
various consulting services provided and valued at $684,976.
At June 30, 1997, a total of approximately 2,663,000 options were
outstanding at option prices per share of $1.00 to $20.00.
At June 30, 1997, a total of 82,000 warrants were outstanding at prices
per share of $10.00 to $27.50.
During the period 50,000 warrants expired.
3. SUBSEQUENT EVENTS
RE: BANQUE NATIONALE DE PARIS (CANADA) (BNP), AMONGST OTHERS
On March 22, 1996, the Banque Nationale de Paris (Canada) provided
financing to American Entertainment Limited (AEL), a wholly-owned Canadian
subsidiary of the Company, of a $5,000,000 US revolving line of credit to
be used to finance the accounts receivables of The VIP Phone Club, Inc.
(VIP), a private Delaware corporation carrying on business in Maryland,
which was part of an affiliated group, which, in November,
-6-
1995 and in January, 1996, had assigned its accounts receivables to AEL.
Additionally, the Company and AEL had granted a license to VIP to make
available to VIP's various on-going telephone affinity clubs' subscribers
the titles contained in the Company's film library. In December, 1996,
the Company received a notification from BNP of a default in the loan
between VIP and BNP, of which AEL is the debtor and the Company one of the
guarantors. At that time, the Company acknowledged this default on the
part of VIP and agreed to cooperate with BNP in securing the collection of
the outstanding loan balance.
On April 8, 1997, the Company informed BNP that due to the conduct of BNP
respecting both the loan to VIP and BNP's Receiver appointed relative to
VIP in Maryland, the Company and AEL by operation of law had been released
respectively from said guarantee of the Company and the loan to AEL. In
response to this notice, BNP denied the Company's allegations, commenced
an action in the Ontario Courts against the Company and AEL for payment of
the outstanding loan balance, and filed a motion in the Courts of Ontario
asking that a Receiver be appointed over the property and assets of both
the Company and AEL. The Company believed that there was no basis for
such a Receiver to be appointed and opposed the motion. The matter was
adjourned on the consent of BNP, the Company, and AEL until May 21, 1997,
and thereafter was further adjourned until June 5, 1997. During the
interim, the parties agreed to allow Price Waterhouse Limited of Toronto,
Ontario to act as a Monitor to perform a business review of the operations
of the Company and AEL. The Company believed, that given the facts and
circumstances of the matter, that BNP should not be entitled to have a
Receiver appointed in the Province of Ontario, Canada over the Company's
property and assets.
On June 5, 1997, the Ontario Court ordered the appointment of Price
Waterhouse Limited as Receiver, without security, "of all the present and
future undertaking, property and assets of whatsoever nature and kind and
wherever situate" (collectively known in the Court Order as the Property)
of the Company and AEL. While the Property of the Company and AEL were
under the control of the Receiver, the management of the Company remained
with its Board of Directors. In the meantime, the Company filed a Motion
to Intervene regarding the action instituted by BNP against VIP (including
the appointment of a receiver respecting VIP) in Baltimore County,
Maryland. BNP opposed such intervention by the Company and this aspect is
still pending.
On July 24, 1997, the Company commenced litigation in the State Circuit
Court for Baltimore County, Maryland, against the Banque Nationale de
Paris (Canada) (BNP), The VIP Phone Club, Inc. (VIP), a private Delaware
corporation, and its affiliates, the Maryland VIP litigation receiver
Financial Conservators, Joel Katz the owner of VIP and its affiliated
entities, and certain of Mr. Katz's associates. The Company has asked the
Court for recision of the contractual relationship with BNP, including the
guarantee of the Company, or in the alternative, credit and interest for
amounts alleged to have been converted by BNP and its co-conspirators, and
for compensatory and punitive damages against the named defendants in the
amount of approximately $850 million and for such
-7-
other remedies as the Court may deem appropriate based upon fraud,
conversion, breach of fiduciary duty, conspiracy, damage to the Company's
business undertakings, and for violation of the Federal Racketeering
Statues (RICO).
As a result of BNP's actions, BNP had interfered with the Company and its
subsidiaries' business affairs, making it impossible for the Company and
AEL to meet their obligations in a timely fashion. The Board of Directors
therefore determined that it was in the best interest of the Company to
seek protection under Chapter 11 of the U.S. Bankruptcy Code. The filing
was commenced on July 24, 1997, in the U.S. Bankruptcy Court for the
Northern District of Maryland. The Company, as Debtor-in-Possession, has
all of the rights and powers of a trustee subject to the supervision and
orders of the Bankruptcy Court.
By Order dated July 31, 1997, the Ontario Court ordered the termination of
the Receivership respecting the Company and AEL, at the request of Price
Waterhouse Limited, the former Receiver appointed in Ontario on June 5,
1997, as aforesaid.
RE: DEBENTURES
On March 21, 1997 the Company sold a total of $500,000 of 7% Convertible
Debentures, each Debenture certificate with a $10,000 face value, to two
corporations, each residents of Canada, pursuant to Regulation S. The
Debentures are convertible into the common stock of the Company beginning
45 days after March 21, 1997 at the lesser of (a) the market price on
Closing, or (b) 70% of the market price on the Conversion Date. The
market price is defined as the average closing bid price of the common
stock on the five trading days immediately preceding the Closing or
Conversion Date, as may be applicable. On May 7, 1997, notice was
received to convert $60,000 into 60,172 shares of the Company.
Subsequently, said notice was cancelled and on June 24, 1997 $100,000 was
converted into 309,978 shares of the Company.
4. OTHER MATTERS
Subject to its filing under Chapter 11 of the U.S. Bankruptcy Code, the
accompanying financial information contemplates continuation of the
Company as a going concern. However, the Company has sustained
substantial operating losses in recent years. In addition, the Company
has used substantial amounts of working capital in its operations.
Further, at June 30, 1997, current liabilities exceed current assets by
$1,700,416.
The events leading to the Company's filing under Chapter 11 are as
follows:
On March 22, 1996, the Banque Nationale de Paris (Canada) (BNP) provided
financing to American Entertainment Limited (AEL), a wholly-owned Canadian
subsidiary of the Company, of a $5,000,000 US revolving line of credit to
be used to finance the accounts receivables of The VIP Phone Club, Inc.
(VIP), a private Delaware corporation carrying on business in Maryland,
which was part of an affiliated group, which, in November, 1995 and in
January, 1996, had assigned its accounts receivables to AEL.
Additionally, the Company and AEL had granted a license to VIP to make
available to VIP's various on-going telephone affinity clubs' subscribers
the titles contained in the Company's film
-8-
library. In December, 1996, the Company received a notification from BNP
of a default in the loan between VIP and BNP, of which AEL is the debtor
and the Company one of the guarantors. At that time, the Company
acknowledged this default on the part of VIP and agreed to cooperate with
BNP in securing the collection of the outstanding loan balance.
On April 8, 1997, the Company informed BNP that due to the conduct of BNP
respecting both the loan to VIP and BNP's Receiver appointed relative to
VIP in Maryland, the Company and AEL by operation of law had been released
respectively from said guarantee of the Company and the loan to AEL. In
response to this notice, BNP denied the Company's allegations, commenced
an action in the Ontario Courts against the Company and AEL for payment of
the outstanding loan balance, and filed a motion in the Courts of Ontario
asking that a Receiver be appointed over the property and assets of both
the Company and AEL. The Company believed that there was no basis for
such a Receiver to be appointed and opposed the motion. The matter was
adjourned on the consent of BNP, the Company, and AEL until May 21, 1997,
and thereafter was further adjourned until June 5, 1997. During the
interim, the parties agreed to allow Price Waterhouse Limited of Toronto,
Ontario to act as a Monitor to perform a business review of the operations
of the Company and AEL. The Company believed, that given the facts and
circumstances of the matter, that BNP should not be entitled to have a
Receiver appointed in the Province of Ontario, Canada over the Company's
property and assets.
On June 5, 1997, the Ontario Court ordered the appointment of Price
Waterhouse Limited as Receiver, without security, "of all the present and
future undertaking, property and assets of whatsoever nature and kind and
wherever situate" (collectively known in the Court Order as the Property)
of the Company and AEL. While the Property of the Company and AEL were
under the control of the Receiver, the management of the Company remained
with its Board of Directors. In the meantime, the Company filed a Motion
to Intervene regarding the action instituted by BNP against VIP (including
the appointment of a receiver respecting VIP) in Baltimore County,
Maryland. BNP opposed such intervention by the Company and this aspect is
still pending.
On July 24, 1997, the Company commenced litigation in the State Circuit
Court for Baltimore County, Maryland, against the Banque Nationale de
Paris (Canada) (BNP), The VIP Phone Club, Inc. (VIP), a private Delaware
corporation, and its affiliates, the Maryland VIP litigation receiver
Financial Conservators, Joel Katz the owner of VIP and its affiliated
entities, and certain of Mr. Katz's associates. The Company has asked the
Court for recision of the contractual relationship with BNP, including the
guarantee of the Company, or in the alternative, credit and interest for
amounts alleged to have been converted by BNP and its co-conspirators, and
for compensatory and punitive damages against the named defendants in the
amount of approximately $850 million and for such other remedies as the
Court may deem appropriate based upon fraud, conversion, breach of
fiduciary duty, conspiracy, damage to the Company's business undertakings,
and for violation of the Federal Racketeering Statues (RICO).
-9-
As a result of BNP's actions, BNP had interfered with the Company and its
subsidiaries' business affairs, making it impossible for the Company and
AEL to meet their obligations in a timely fashion. The Board of Directors
therefore determined that it was in the best interest of the Company to
seek protection under Chapter 11 of the U.S. Bankruptcy Code. The filing
was commenced in the U.S. Bankruptcy Court for the Northern District of
Maryland on July 24, 1997. The Company, as Debtor-in-Possession, has all
of the rights of a trustee, subject to the supervision and orders of the
Bankruptcy Court.
By Order dated July 31, 1997, the Ontario Court ordered the termination of
the Receivership respecting the Company and AEL, at the request of Price
Waterhouse Limited, the former Receiver appointed in Ontario on June 5,
1997, as aforesaid.
The Company is in the process of preparing a Plan of Reorganization and is
seeking additional working capital in order to fund such Plan. Although
there is no guarantee, management believes that actions presently being
taken can be effectively implemented and will allow the Company to
continue as a going concern.
5. COMMITMENTS AND CONTINGENCIES
Based upon the Company's film library, the Company has entered into
several agreements pertaining to its development and commercial
exploitation. The Company has commenced the marketing and sale of its
film library product to both mass market and general retailers. The
Company also plans to sell videos of motion pictures derived from its
films by means of joint ventures with broadcasters and by Video-on-Demand
telephone-linked-transmission.
On February 4, 1995, the Company entered into an Agreement with MediaLinx
Interactive Inc. of Toronto, Canada for the purpose of delivery for test
purposes of the product of its library by telephone communication to
television sets (Video-on-Demand). MediaLinx Interactive Inc. of
(MediaLinx) is a company established for the purpose of delivering to the
public goods and services by telephone transmission within Canada to
television sets (Video-on-Demand). The Company is a participant in such
test and will supply a limited amount of titles for such purpose.
RE: DEBENTURES
On March 21, 1997 the Company sold a total of $500,000 of 7% Convertible
Debentures, each Debenture certificate with a $10,000 face value, to two
corporations, each residents of Canada, pursuant to Regulation S. The
Debentures are convertible into the common stock of the Company
beginning 45 days after March 21, 1997 at the lesser of (a) the market
price on Closing, or (b) 70% of the market price on the Conversion Date.
The market price is defined as the average closing bid price of the
common stock on the five trading days immediately preceding the Closing
or Conversion Date, as may be applicable. On May 7, 1997, notice was
received to convert $60,000 into 60,172 shares of the Company.
Subsequently, said notice was cancelled and on June 24, 1997 $100,000
was converted into 309,978 shares of the Company.
-10-
6. OPERATIONS
Based upon the Company's film library, the Company has and will continue
to enter into agreements pertaining to its development and commercial
exploitation. The Company has commenced the marketing and sale of its
film library product to both mass market and general retailers. The
Company also plans to sell videos of motion pictures derived from its
films by means of joint ventures with broadcasters and by Video-on-Demand
telephone-linked-transmission.
On February 4, 1995, the Company entered into an Agreement with MediaLinx
Interactive Inc. of Toronto, Canada for the purpose of delivery for test
purposes of the product of its library by telephone communication to
television sets (Video-on-Demand). MediaLinx Interactive Inc. (MediaLinx)
is a company established for the purpose of delivering to the public goods
and services by telephone transmission within Canada to television sets
(Video-on-Demand). The Company is a participant in such test and will
supply a limited amount of titles for such purpose.
On March 22, 1996, the Banque Nationale de Paris (Canada) (BNP) provided
financing to American Entertainment Limited (AEL), a wholly-owned
Canadian subsidiary of the Company, of a $5,000,000 US revolving line of
credit to be used to finance the accounts receivables of The VIP Phone
Club, Inc. (VIP), a private Delaware corporation carrying on business in
Maryland, which was part of an affiliated group, which, in November, 1995
and in January, 1996, had assigned its accounts receivables to AEL.
Additionally, the Company and AEL had granted a license to VIP to make
available to VIP's various telephone affinity clubs' subscribers the
titles contained in the Company's film library. In December, 1996, the
Company received a notification from BNP of a default in the loan between
VIP and BNP, of which AEL is the debtor and the Company one of the
guarantors. At that time, the Company acknowledged this default on the
part of VIP and agreed to cooperate with BNP in securing the collection
of the outstanding loan balance.
On April 8, 1997, the Company informed BNP that due to the conduct of BNP
respecting both the loan to VIP and BNP's Receiver appointed relative to
VIP in Maryland, the Company and AEL by operation of law had been released
respectively from said guarantee of the Company and the loan to AEL. In
response to this notice, BNP denied the Company's allegations, commenced
an action in the Ontario Courts against the Company and AEL for payment of
the outstanding loan balance, and filed a motion in the Courts of Ontario
asking that a Receiver be appointed over the property and assets of both
the Company and AEL. The Company believed that there was no basis for
such a Receiver to be appointed and opposed the motion. The matter was
adjourned on the consent of BNP, the Company, and AEL until May 21, 1997,
and thereafter was further adjourned until June 5, 1997. During the
interim, the parties agreed to allow Price Waterhouse Limited of Toronto,
Ontario to act as a Monitor to perform a business review of the operations
of the Company and AEL. The Company believed, that given the facts and
circumstances of the matter, that BNP should not be entitled to have a
Receiver appointed in the Province of Ontario, Canada over the Company's
property and assets.
-11-
On June 5, 1997, the Ontario Court ordered the appointment of Price
Waterhouse Limited as Receiver, without security, "of all the present
and future undertaking, property and assets of whatsoever nature and
kind and wherever situate" (collectively known in the Court Order as the
Property) of the Company and AEL. While the Property of the Company and
AEL were under the control of the Receiver, the management of the
Company remained with its Board of Directors. In the meantime, the
Company filed a Motion to Intervene regarding the action instituted by
BNP against VIP (including the appointment of a receiver respecting VIP)
in Baltimore County, Maryland. BNP opposed such intervention by the
Company and this aspect is still pending.
On July 24, 1997, the Company commenced litigation in the State Circuit
Court for Baltimore County, Maryland, against the Banque Nationale de
Paris (Canada) (BNP), The VIP Phone Club, Inc. (VIP), a private Delaware
corporation, and its affiliates, the Maryland VIP litigation receiver
Financial Conservators, Joel Katz the owner of VIP and its affiliated
entities, and certain of Mr. Katz's associates. The Company has asked
the Court for recision of the contractual relationship with BNP,
including the guarantee of the Company, or in the alternative, credit
and interest for amounts alleged to have been converted by BNP and its
co-conspirators, and for compensatory and punitive damages against the
named defendants in the amount of approximately $850 million and for
such other remedies as the Court may deem appropriate based upon fraud,
conversion, breach of fiduciary duty, conspiracy, damage to the
Company's business undertakings, and for violation of the Federal
Racketeering Statues (RICO).
As a result of BNP's actions, BNP had interfered with the Company and
its subsidiaries' business affairs, making it impossible for the Company
and AEL to meet their obligations in a timely fashion. The Board of
Directors therefore determined that it was in the best interest of the
Company to seek protection under Chapter 11 of the U.S. Bankruptcy Code.
The filing was commenced on July 24, 1997, in the U.S. Bankruptcy Court
for the Northern District of Maryland. The Company, as
Debtor-in-Possession, has all of the rights and powers of a trustee,
subject to the supervision and orders of the Bankruptcy Court.
By Order dated July 31, 1997, the Ontario Court ordered the termination
of the Receivership respecting the Company and AEL, at the request of
Price Waterhouse Limited, the former Receiver appointed in Ontario on
June 5, 1997, as aforesaid.
ITEM 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The Company is a development stage company and as such has not yet
commenced full operations and on July 24, 1997, filed for protection
pursuant to Chapter 11 in the U.S. Bankruptcy Court for the Eastern
Division of Maryland. The Company has been granted Debtor-in-Possession
status subject to the supervision and orders of the Bankruptcy Court.
Consolidated revenue for the six months ended June 30, 1997, was $ NIL.
In the six month period ended June 30, 1996, the company had revenue of
$ NIL.
-12-
Subject and pursuant to the foregoing, the main thrust of the Company's
activities for the balance of the year will be to file a Plan of
Reorganization with the supervising court and continue its efforts in
sales of products derived from its film libraries through various means
to both distributors and retailers. The Company also plans to sell its
product via joint ventures and licensing arrangements regarding general
broadcast, cable and satellite generated television stations.
Additionally, the Company's activities will focus upon various
acquisitions and mergers.
Gross profit for the six months ended June 30, 1997, and June 30, 1996
were $ NIL.
General and administrative expenses for six months ended June 30, 1997,
were $969,473, an increase of $655,515 or 148% from the six month period
ended June 30, 1996.
The increase of $655,515 in general and administrative expenses for the
period ended June 30, 1997, over the period ended June 30, 1996, is
attributed mainly to the issuance of shares in lieu of cash payment to
various officers of the Company and for consulting services, as well as
approximately $58,000 in costs to arrange the Convertible Debentures.
Interest expense for the six month periods ended June 30, 1997 and 1996,
was $18,900 and $14,160 respectively.
Since commencement, the Company has devoted the majority of its efforts
to researching and refining its marketing activities with a view to
developing comprehensive business and merchandising plans, that in
management's opinion, when fully implemented, will result in the
successful sale and distribution of the Company's goods and services to
the general public.
The Company has successfully acquired a film library consisting of 5,000
motion pictures, television series episodes and motion picture serial
chapters. The Company's ability to acquire further film libraries will
be dependent upon the availability of its financial resources to do and
the success of its Plan of Reorganization pursuant to its Chapter 11
filing, as aforesaid.
The major cost components associated with the Company's video sales
revenue (with the exception of its media cost), are variable in nature,
and the Company believes that sufficient revenues will be obtained in
order to meet both media costs and the Company's general overhead. The
Company's fixed costs for the balance of the 1997 fiscal year are
estimated to be approximately $1,500,000.
As at the date hereof, and subject to the foregoing, the Company has no
material commitments for capital expenditures in the next twelve months.
Such capital requirements for the Company shall relate to its Plan of
Reorganization and Business Plan.
-13-
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 1997, cash balance was $ NIL compared to $34,105 bank
indebtedness at June 30, 1996, and was subject to the Receivership Order
in Ontario (now terminated) as prior described.
The Company expects to require additional capital in order to fund its
Reogranization and Business Plans.
On March 21, 1997 the Company sold a total of $500,000 of 7% Convertible
Debentures, each Debenture certificate with a $10,000 face value, to two
corporations, each residents of Canada, pursuant to Regulation S. The
Debentures are convertible into the common stock of the Company
beginning 45 days after March 21, 1997 at the lesser of (a) the market
price on Closing, or (b) 70% of the market price on the Conversion Date.
The market price is defined as the average closing bid price of the
common stock on the five trading days immediately preceding the Closing
or Conversion Date, as may be applicable. On May 7, 1997, notice was
received to convert $60,000 into 60,172 shares of the Company.
Subsequently, said notice was cancelled and on June 24, 1997 $100,000
was converted into 309,978 shares of the Company.
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
A) On September 26, 1995, the Company filed a lawsuit in the US District
Court, Northern District of Texas, Dallas Division, against Securities
Transfer Corporation (the Company's stock transfer agent), Harve Sherman,
Steve Waxman, Chaos Corporation,
Max Sherman Trust, Richview Holdings Limited, and Janice Fox. Messrs.
Sherman and Waxman are former officers and directors of the Company, the
remaining parties, except for Securities Transfer Corporation, are related
persons and entities to Messrs. Sherman and Waxman.
The action requests the following relief:
a. That Defendant Securities Transfer Corporation be ordered to maintain
all restrictions and legends on the shares and share certificates of the
Company's shares controlled by the other Defendants, pending further
instructions from the Court;
b. That the Company's shares of Defendants Harve Sherman, Marcia Sherman,
Max Sherman Trust, Chaos Corporation, Richview Holdings, Ltd., Steven
Waxman and Janice Fox be ordered canceled and revoked.;
-14-
c. In the alternative, that the transactions by which Defendants
obtained the Company's shares be rescinded, with any consideration paid
by each returned to each by the Company;
d. The Defendants Harve Sherman, Marcia Sherman and Steven Waxman
disgorge to the Company all profits earned by them on the short-swing
transactions alleged in this matter;
e. That Defendants Harve Sherman, Marcia Sherman and Steven Waxman pay
all costs of suit and a reasonable attorney fee to the Company; and
f. That the Company recover all other relieve to which it may be
entitled at law or in equity.
This action is presently in the preliminary stages of litigation. No
substantial discovery has taken place to date.
The Defendants Sherman and Waxman have entered Answers by way of defense
to the Company's action and have counter-claimed as follows:
a. For the sum of $850,000 and Company stock options claimed by the
Defendant Sherman for the alleged breech of his employment agreement
with the Company.
b. For the sum of $850,000 and Company stock options claimed by the
Defendant Waxman for the alleged breech of his employment agreement with
the Company.
c. Claims by the Defendants Sherman and Waxman respecting alleged
fraudulent inducement against the Company, Joel Wagman and John R.Y.
Hugo for damages to each of Sherman and Waxman in the sum of $850,000
and punitive damages in the sum of $2,000,000, and claims by Sherman and
Waxman respecting non-competition agreements between the Defendants
Sherman and Waxman aginst the Company, Wagman and Hugo in the sum of
$1,000,000 and punitive damages in the sum of $1,000,000, or alternatively,
damages for unjust enrichment in the sum of $540,000 and $640,000
respectively.
d. Claims against Wagman, Hugo, Sam Paul, and Allan Chapman in the
amount of $3,000,000 and exemplary damages in the amount of $1,000,000
for defamation, and claims by Sherman for conversion and for
indemnification respecting Sherman's fees, costs, expenses, including
shares of stock tendered in settlement of a prior action in an amount of
excess of $5,000,000.
Both the action and counter-claims are presently in the preliminary
stages of litigation. No susbstantial discovery has taken place to date.
B) On March 22, 1996, the Banque Nationale de Paris (Canada) (BNP) provided
financing to American Entertainment Limited (AEL), a wholly-owned
Canadian subsidiary of the Company, of a $5,000,000 US revolving line of
credit to be used to finance the accounts receivables of The VIP Phone
Club, Inc. (VIP), a private Delaware corporation carrying on business in
Maryland, which was part of an affiliated group, which, in November,
1995 and in January, 1996, had assigned its accounts receivables to AEL.
Additionally, the Company and AEL had granted a license to VIP to make
available to VIP's various telephone affinity clubs' subscribers the
titles contained in the Company's film library. In December, 1996, the
Company received a notification from BNP of a default in the loan
between VIP and BNP, of which AEL is the debtor and the Company one of
the guarantors. At that time, the Company acknowledged this default on
the part of VIP and agreed to cooperate with BNP in securing the
collection of the outstanding loan balance.
On April 8, 1997, the Company informed BNP that due to the conduct of BNP
respecting both the loan to VIP and BNP's Receiver appointed relative to
VIP in Maryland, the Company and AEL by operation of law had been released
respectively from said guarantee of the Company and the loan to AEL. In
response to this notice, BNP denied the Company's allegations, commenced
an action in the Ontario Courts against the Company and AEL for payment of
the outstanding loan balance, and filed a motion in the Courts of Ontario
asking that a Receiver be appointed over the property and assets of both
the Company and AEL. The Company believed that there was no basis for
such a Receiver to be appointed and opposed the motion. The matter was
adjourned on the consent of BNP, the Company, and AEL until May 21,
1997, and thereafter was further adjourned until June 5, 1997. During
the interim, the parties agreed to allow Price Waterhouse Limited of
Toronto, Ontario to act as a Monitor to perform a business review of the
operations of the Company and AEL. The Company
-15-
believed, that given the facts and circumstances of the matter, that BNP
should not be entitled to have a Receiver appointed in the Province of
Ontario, Canada over the Company's property and assets.
On June 5, 1997, the Ontario Court ordered the appointment of Price
Waterhouse Limited as Receiver, without security, "of all the present
and future undertaking, property and assets of whatsoever nature and
kind and wherever situate" (collectively known in the Court Order as the
Property) of the Company and AEL. While the Property of the Company and
AEL were under the control of the Receiver, the management of the
Company remained with its Board of Directors. In the meantime, the
Company filed a Motion to Intervene regarding the action instituted by
BNP against VIP (including the appointment of a receiver respecting VIP)
in Baltimore County, Maryland. BNP opposed such intervention by the
Company and this aspect is still pending.
On July 24, 1997, the Company commenced litigation in the State Circuit
Court for Baltimore County, Maryland, against the Banque Nationale de
Paris (Canada) (BNP), The VIP Phone Club, Inc. (VIP), a private Delaware
corporation, and its affiliates, the Maryland VIP litigation receiver
Financial Conservators, Joel Katz the owner of VIP and its affiliated
entities, and certain of Mr. Katz's associates. The Company has asked
the Court for recision of the contractual relationship with BNP,
including the guarantee of the Company, or in the alternative, credit
and interest for amounts alleged to have been converted by BNP and its
co-conspirators, and for compensatory and punitive damages against the
named defendants in the amount of approximately $850 million and for
such other remedies as the Court may deem appropriate based upon fraud,
conversion, breach of fiduciary duty, conspiracy, damage to the
Company's business undertakings, and for violation of the Federal
Racketeering Statues (RICO).
As a result of BNP's actions, BNP had interfered with the Company and
its subsidiaries' business affairs, making it impossible for the Company
and AEL to meet their obligations in a timely fashion. The Board of
Directors therefore determined that it was in the best interest of the
Company to seek protection under Chapter 11 of the U.S. Bankruptcy Code.
The filing was commenced on July 24, 1997, in the U.S. Bankruptcy Court
for the Northern District of Maryland. The Company as Debtor-in-
Possession, has all of the rights as a trustee, subject to the supervision
and orders of the Bankruptcy Court.
By Order dated July 31, 1997, the Ontario Court ordered the termination
of the Receivership respecting the Company and AEL, at the request of
Price Waterhouse Limited, the former Receiver appointed in Ontario on
June 5, 1997 as aforesaid.
C) On December 10, 1996, an action was commenced in the Province of Ontario,
Canada by Howard Scott as Plaintiff, a former Officer and Director of the
Company, against the Company and its Directors as Defendants claiming
$21,545 in expenses and $25,000 in salaries. The Company is defending
this action and takes the position that no monies whatsoever are due to
the Plaintiff. The proceedings are at an early stage and no discoveries
have taken place.
-16-
Otherwise, no legal proceedings of a material nature to which the Company
is a party were pending during the reporting period, and the Company knows
of no other legal proceedings of a material nature pending or threatened
or judgments entered against any director or officer of the Company in his
capacity as such.
ITEM 2. CHANGE IN SECURITIES
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not Applicable
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Reports on Form 8-K
(i) That on February 26, 1997, the Company issued a Form 8-K, a Report dated
February 26, 1997 stating that the Company had appointed to its Board of
Directors three new directors to fill existing vacancies on the Board, as
permitted by the Company's by-laws. The names of the new directors are,
Albert Gnat, Brian A. Grosman, and Lloyd Orlow.
(ii) That on March 25, 1997, the Company issued a Form 8-K, a Report dated
March 25, 1997 whereby the Company sold a total of $500,000 of 7%
Convertible Debentures to two corporations, each residents of Canada.
The Debentures are convertible into the common stock of the Company
beginning 45 days after March 21, 1997, at the lesser of the market
price on closing, or 70% of market price on conversion date. On May 7,
1997, notice was received to convert $60,000 into 60,172 shares of the
Company.
(iii) That on May 1, 1997, the Company issued a Form 8K, a Report dated May 1,
1997, relating that on March 22, 1996, the Banque Nationale de Paris
(Canada) (BNP) provided financing to American Entertainment Limited (AEL),
a wholly-owned Canadian subsidiary of the Company, of a $5,000,000 US
revolving line of credit to be used to finance the accounts receivable and
contract accounts receivable of The VIP Phone
-17-
Club, Inc. (VIP), a private Delaware corporation, which was part of an
affiliated group, which, in November, 1995 and in January, 1996, had
assigned its accounts receivables to AEL. Additionally, the Company and
AEL had granted a license to VIP to make available to VIP's various
telephone affinity clubs' subscribers the titles contained in the
Company's film library. In December, 1996, the Company received a
notification from (BNP) of a default in the loan between VIP and BNP, of
which AEL is the debtor and the Company one of the guarantors. At that
time, the Company acknowledged this default on the part of VIP and
agreed to cooperate with BNP in securing the collection of the
outstanding loan balance.
(iv) That on June 6, 1997, the Company issued a Form 8K, a Report dated June 6,
1997 relating as follows:
* That the Ontario Court ordered the appointment of the accounting firm of
Price Waterhouse Limited as Receiver, without security, "of all the
present and future undertaking, property and assets of whatsoever nature
and kind and wherever situate" (collectively known in the Court Order as
the Property) of the Company and AEL. While the Property of the Company
and AEL were under the control of the Receiver, the management of the
Company remained with the Board of Directors. In the meantime, the
Company filed a Motion to Intervene regarding the action instituted by
BNP against VIP (including the appointment of a receiver respecting VIP)
in Baltimore County, Maryland. Additionally, the Company plans to file
for litigation against BNP, VIP and its affiliates, the Maryland
litigation Receiver, and other appropriate parties asking for damages to
the Company's business undertaking and for such other remedies as its
counsel may advise.
* The Company has accepted the resignation of three directors; being,
Albert Gnat, Brian Grosman, and Jon D. Bridgman.
(v) That on July 24, 1997, the Company issued a Form 8K Report filed July
24, 1997, relating that the Company had commenced litigation on July 24,
1997 in the State Circuit Court for Baltimore County, Maryland against
the Banque Nationale de Paris (Canada) (BNP), VIP Phone Club, Inc.
(VIP), a private Delaware corporation, and its affiliates, the Maryland
litigation receiver in the VIP litigation, Joel Katz the owner of VIP
and its affiliated entities, and certain of Mr. Katz's associates. The
Company has asked the Court for recision of the contractual relationship
with BNP, including the guarantee of the Company, or in the alternative,
credit and interest for amounts alleged to have been converted by BNP
and its co-conspirators, and for compensatory and punitive damages
against the named defendants in the amount of approximately $850 million
and for such other remedies as the Court may deem appropriate based upon
fraud, conversion, breach of fiduciary duty, conspiracy, damage to the
Company's business undertakings, and for violation of the Federal
Racketeering Statues (RICO).
-18-
(vi) That on July 25, 1997 the Company issued a Form 8K, a Report filed July
25, 1997 relating that on July 24, 1997, the Company filed for protection
of Chapter 11 of the U.S. Bankruptcy Code and that the Board of Directors
of the Company took such step as a direct result of the actions of Banque
Nationale de Paris (Canada) (BNP), and The VIP Phone Club, Inc. (VIP), a
private Delaware corporation.
As a result of BNP's actions, BNP had interfered with the Company and its
subsidiaries' business affairs, making it impossible for the Company and
AEL to meet their obligations in a timely fashion. The Board of Directors
therefore determined that it was in the best interest of the Company to
seek protection under Chapter 11 of the U.S. Bankruptcy Code. The filing
was commenced in the U.S. Bankruptcy Court for the Northern District of
Maryland. The Company, as Debtor-in-Possession, has all of the rights and
powers of a trustee, subject to supervision and orders of the Bankruptcy
Court.
Additionally, the Report stated that as of July 21, 1997, the Company has
sold a total of 200,000 common shares at prices ranging from US .10 to US
.20 per share, in cash, to two individuals, both of whom are residents of
Canada, pursuant to Regulation S.
(vi) That on August 4, 1997, the Company issued a Form 8K, a Report dated
August 4, 1997, relating that the Ontario Court by Order dated July 31,
1997, had terminated the Ontario Receivership at the request of Price
Waterhouse Limited, the former Receiver in Ontario appointed on June 5,
1997.
(b) EXHIBITS
No exhibits are filed as part of this report.
-19-
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Company has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
AMERICAN ENTERTAINMENT GROUP, INC.
(Company)
Date: August , 1997 /s/ JOEL WAGMAN
--------------------------------------
Joel Wagman
Chairman of the Board and
Chief Executive Officer
Date: August , 1997 /s/ SAMUEL C. PAUL
--------------------------------------
Samuel C. Paul
Treasurer and Chief Accounting Officer
- 20 -