Exhibit 8.1
BDO Seidman, LLP
Accountants and Consultants
The Board of Directors
American Artists Film Corporation
1245 Fowler Street, N.W.
Atlanta, Georgia 30318
Gentlemen:
This letter is in response to your request for a determination of the
Federal income tax consequences of the proposed merger (the "Merger") of
American Artists Film Corporation ("American Artists"), a Georgia
corporation, with and into Setab Alpha, Inc. ("Setab Alpha" or "Surviving
Corporation"), a Missouri corporation, pursuant to the terms of the
Agreement and Plan of Merger dated as of May 1, 1996 (the "Merger
Agreement").
In connection with your request, we have examined the Amendment No. 1 To
Form S-4, Registration Statement, and the draft copy of the Merger
Agreement. In our examination, we have assumed the genuiness and
authenticity of these documents and have relied upon the representations
contained in the examined documents. In rendering our determination of the
Federal income tax consequences, we have considered the applicable
provisions of the Internal Revenue Code (the "Code"), Treasury Regulations,
pertinent judicial authorities, interpretive rulings of the Internal Revenue
Service and such other authorities we considered relevant.
Based upon and subject to the foregoing, it is our view that the Merger
should constitute a tax-free corporate reorganization under both Section
368(a)(1)(A) and Section 368(a)(1)(D) of the Code, and American Artists and
Setab Alpha should each be a party to the reorganization within the meaning
of Section 368(b) of the Code. As a tax-free reorganization, with respect
to the facts as set forth below, the Merger should have the following
principal Federal income tax consequences:
. No gain or loss will be recognized by holders of American
Artists Common Stock as a result of the exchange of such shares for shares
of Setab Alpha Class A and Class B Common Stock. Gain or loss will be
recognized on the receipt of cash, if any, in lieu of fractional shares.
. The tax basis of the shares of Setab Alpha received by each
shareholder of American Artists will equal the tax basis of American Artists
shares surrendered in the Merger.
. The holding period of the shares of Setab Alpha received by
each shareholder of American Artists will include the holding period of the
American Artists stock surrendered in the Merger.
. Setab Alpha will not recognize gain or loss upon the issuance
of its own stock as a result of the Merger.
. American Artists will not recognize gain or loss as a result
of the Merger, except to the extent the sum of its liabilities assumed plus
liabilities to which its property is subject exceeds the total basis of its
property transferred.
. The net operating losses (NOLs) of American Artists will
carryover to Setab Alpha. The utilization of the American Artists NOLs that
carryover to Setab Alpha will not be subject to the limitation under Section
382 of the Code.
. The Merger will be treated as a "reverse acquisition"
pursuant to Reg. Section 1.1502-75(d)(3), with respect to the filing of
consolidated Federal income tax returns. Hence, the present American
Artists consolidated group will be treated as remaining in existence (with
Setab Alpha as the parent corporation) and the American Artists NOLs will
not be limited by the "separate return limitation year" ("SRLY") rules.
The above conclusions are based upon our judgement and analysis of the
Federal income tax laws applied to the facts of the Merger described in the
Merger Agreement. Such conclusions are not binding upon the Internal
Revenue Service. Furthermore, the conclusions are specifically conditioned
upon the accuracy of certain representations and assumptions contained in
the Merger Agreement.
FACTS
The above described Federal income tax consequences were determined from our
understanding of the relevant facts obtained by examining the documents
described above. Based on that examination, our understanding of the Merger
is as follows:
American Artists is a Georgia corporation formed in July, 1991, and is
presently engaged directly and through its wholly-owned subsidiary (with
which it files a consolidated Federal income tax return) in the production
of television commercials, development and production of television specials
and related properties, and development of feature-length motion picture
screenplays and other media products for possible future production or
license. American Artists has common stock outstanding of approximately
9,407,837 shares held by approximately 199 holders of record.
Setab Alpha is a Missouri corporation formed in July, 1995, for the purpose
of engaging in a merger or other business combination with an unidentified
operating company. Setab Alpha has never engaged in any business activity,
except with respect to its organization and the Merger Agreement, and does
not intend to do so until after consummation of the Merger. At June 30,
1996, Setab Alpha had outstanding 20 shares of Class A Common Stock held by
2 shareholders.
Neither American Artists nor Setab Alpha have any current or accumulated
"earnings and profits." As of the tax year ended July 31, 1995, American
Artists has approximately $372,000 of NOLs.
Under the terms of the Merger Agreement, American Artists will merge with
and into Setab Alpha, with Setab Alpha (Surviving Corporation) to be re-
named American Artists Film Corporation. By reason of the Merger, the
shareholders of American Artists will become shareholders of Surviving
Corporation, the separate existence of American Artists will cease, and the
business and management of American Artists will become the business and
management of Surviving Corporation. Also, the Merger will result in the
transfer of the control over Setab Alpha's affairs to the prior shareholders
of American Artists.
The Board of Directors of Setab Alpha believes the Merger is in the best
short-term and long-term interest of Setab Alpha and its shareholders. The
Setab Alpha Board believes the Merger will achieve their goal of entering
into a business combination with an operating company, create an opportunity
to enhance the shareholder value of Setab Alpha as a result of acquiring the
business, assets and properties of American Artists and result in the
acquisition of an experienced management team. American Artists Board of
Directors believes the Merger will allow for the acquisition of additional
capital and liquidity, provide additional incentives to attract and retain
key employees, and permit Surviving Corporation to meet the important
requirement for trading in the NASDAQ OTC Bulletin Board market.
Pursuant to the Merger Agreement, each of the 9,407,837 outstanding shares
of American Artists Common Stock will become 0.5862 shares of the capital
stock of Surviving Corporation and the separate existence of American
Artists shall cease. Surviving Corporation shall continue in existence to
be known as American Artists Film Corporation. The capital stock of
Surviving Corporation will consist of both Class A and Class B Common Stock.
Following the Merger the prior American Artists shareholders will hold 88.7%
of the outstanding capital stock of Surviving Corporation and the pre-Merger
shareholders of Setab Alpha will hold the remaining 11.3% of the Capital
Stock of Surviving Corporation. For a period of 365 days after the
Effective Time of the Merger, none of the shares of Class A or Class B
Common Stock received in the Merger, shares of the Class B Common Stock
issued upon exercise of outstanding options and warrants, or shares of the
Class A Common Stock issued upon conversion of the Class B Common Stock
issued in the Merger may be sold, transferred or otherwise disposed of
without the prior written consent of Surviving Corporation.
LAW AND ANALYSIS
Our determination that the Merger should qualify as a tax-free corporate
reorganization under both Section 368(a)(1)(A) and Section 368(a)(1)(D) of
the Code, resulting in the Federal income tax consequences described above,
is based on an analysis and application of the statutory requirements under
the Internal Revenue Code and the nonstatutory (judicial) requirements of a
tax-free reorganization.
For a merger of one corporation into another corporation to constitute a
tax-free corporate reorganization under Section 368(a)(1)(A) of the Code (a
type "A" reorganization), the statutory and all nonstatutory requirements
common to all types of corporate reorganizations must be satisfied. Under
Section 368(a)(a)(A), the sole statutory requirement under the Code is that
the Merger must be "statutory" meaning that the merger must be consummated
pursuant to the requirements and procedures of state law, which in this case
will be the Georgia Business Corporation Code and the Missouri General and
Business Corporation Law. The nonstatutory (judicial) requirements which
must be satisfied are (1) continuity of shareholder interest, (2) continuity
of business, and (3) business purpose.
The judicially created continuity of shareholder interest requirement
applies to all acquisitive reorganizations. The purpose for this
requirement, as it applies to this case, is to ensure that American Artists'
shareholders maintain a substantial part of their equity investment as a
result of their ownership of stock of Surviving Corporation following the
Merger. If the American Artists shareholders do not satisfy the continuity
of shareholder interest requirement, the Merger will not qualify as a tax-
free reorganization.
The continuity of shareholder interest requirement is met if the
shareholders of the acquired corporation (in this case, American Artists)
prior to the merger receive in the merger, and retain for some time after
the merger (generally, two years or more), stock of the acquiring
corporation (in this case, Surviving Corporation) having a value equal to at
least 50% of the aggregate value of the stock of the acquired corporation
prior to the merger (referred to as the "continuity amount"). This
requirement does not mean that each shareholder of the acquired corporation
must continue to own the stock of the acquiring corporation; rather, the
shareholders of the acquired corporation in the aggregate must satisfy this
50% continuity of interest requirement. In the event of an early
disposition of the "continuity amount" the parties to the merger must be
able to demonstrate that the early disposition was not pursuant to a plan or
arrangement in place at the time of the reorganization. The 50% requirement
is not imposed by case law; rather, it is the percentage the Internal
Revenue Service requires for advance ruling purposes.
It is our understanding that in the Merger the shareholders of American
Artists will exchange 100% of their stock for stock of Surviving
Corporation. Additionally, it has been represented that American Artists
shareholders presently intend to retain the stock of Surviving Corporation
and do not have any present plan to dispose of the stock of Surviving
Corporation they receive in the Merger. Therefore, it appears that the
continuity of shareholder interest requirement will be satisfied.
The continuity of business requirement is satisfied if the acquiring
corporation continues the acquired corporation's historic business or uses a
significant portion of the acquired corporation's historic business assets
in a business. In the Merger, this requirement appears satisfied since
Surviving Corporation will continue the historic business of American
Artists, as described above.
The business purpose requirement dictates that a tax-free reorganization
must have a valid business purpose. This requirement appears to be
satisfied since the Merger is proposed in order for Setab Alpha to acquire
an operating company, enhance shareholder value, allow for the acquisition
of equity financing and acquire an experienced management team, as well as
to allow Surviving Corporation to meet the important requirement for trading
in the NASDAQ OTC Bulletin Board market.
Having determined that the Merger should qualify as a type "A"
reorganization, it is important to determine whether the Merger also may
qualify as a reorganization under Section 368(a)(1)(D) (a type "D"
reorganization) for only one reason. Section 357(c) of the Code provides
that in the case of a D reorganization, gain will be recognized to the
acquired corporation to the extent that the sum of the amount of the
liabilities assumed, plus the amount of the liabilities to which the
acquired corporation's property is subject, exceeds the total of the
adjusted basis of the property transferred. Since the shareholders of
American Artists will be in "control" of Surviving Corporation after the
Merger, "control" being defined for this purpose as the ownership of at
least 50% of the outstanding stock, the Merger also will qualify as a D
reorganization. Accordingly, to determine whether American Artists will
have gain under Section 357(c) of the Code, it is necessary to review and
verify the amount of assumed and "subject to" liabilities and the total
basis of the American Artists' properties to be transferred in the Merger.
Assuming the Consolidated Balance Sheet of American Artists, as included in
Amendment No. 1 To Form S-4, is reflective of the tax basis of the American
Artists' properties to be transferred in the Merger, no gain should be
recognized to American Artists upon the Merger under Section 357(c) of the
Code.
Moreover, since the shareholders of American Artists will receive stock of
Surviving Corporation having a value equal to more than 50% of the value of
the outstanding stock of Surviving Corporation after the Merger, for
purposes of the Treasury regulations pertaining to the filing of
consolidated tax returns the Merger will be considered a "reverse
acquisition." As a result, the consolidated group of which American Artists
was the parent corporation will be deemed to be the continuing group, even
though Surviving Corporation will become the actual parent. Accordingly,
the July 31 taxable year of the American Artists group will continue. Also,
the American Artists' NOLs, which will carryover to Surviving Corporation as
a result of the Merger qualifying as a tax-free reorganization, will be
available to offset future income of any other member of the group after the
Merger without being subject to the SRLY limitation rules which generally
apply to the NOLs of acquired corporations.
As stated above, the NOLs of an acquired corporation will carryover to the
acquiring corporation in an acquisition qualifying as a tax-free
reorganization. Currently, American Artists possesses approximately
$372,000 in NOLs. As a result of the Merger qualifying as a reorganization,
American Artists' NOLs will carry over and become NOLs of Surviving
Corporation. Although NOLs of an acquired entity carryover in a
reorganization, their future utilization may be subject to limitations under
Section 382 of the Code if there is an "ownership change." If the
shareholders of an acquired corporation after an acquisition (and any other
transaction which resulted in a change of stock ownership within the past
three years) hold less than 50% of the acquiring entity's stock after the
acquisition, an ownership change has occurred and the future use of the
acquired entity's NOLs may be limited pursuant to the rules under Section
382 of the Code. However, as a result of the Merger, American Artists
shareholders will hold 88.7% of the stock of Surviving Corporation.
Therefore, with respect to Merger, the NOL limitation rules under Section
382 will not apply to limit the future utilization of the American Artists'
NOLs.
Except as set forth above, we express no opinion as to the tax consequences,
whether Federal, state, local or foreign, to any party of the Merger or of
any transactions related to the Merger or contemplated by the Agreements.
This determination of the Federal income tax consequences is being furnished
only to you in connection with the Merger and solely for your benefit in
connection therewith and may not be used or relied upon for any other
purpose and may not be circulated, quoted or otherwise referred to for any
other purpose without our express written consent.
St. Louis, Missouri
September 5, 1996