AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY 19,SEPTEMBER 10, 1996
Registration No. 333-4159
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------------
AMENDMENT NO. 12 TO
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
----------------------_________________________
SETAB ALPHA, INC.
(Exact Name of Registrant as Specified in its Charter)
MISSOURIMissouri 6770 43-1717111
(State or jurisdiction of (Primary Standard Industrial (I.R.S. employer
of incorporation or organization) Classification Code Number) identification number)
organization)
________________________
244 B GREENYARD DRIVE
BALLWIN, MISSOURIGreenyard Drive
Ballwin, Missouri 63011
(314) 394-6349
(Address, Including Zip Code, and Telephone Number, Including
Area Code, of Registrant's Principal Executive Offices)
DOUGLASDouglas J. BATESBates
244 B GREENYARD DRIVE
BALLWIN, MISSOURIGreenyard Drive
Ballwin, Missouri 63011
(314) 394-6349
(Name, Address, Including Zip Code, and Telephone Number,
Including Area Code, of Agent for Service)
----------------------________________________
Approximate date of commencement of proposed sale to public: AS SOON AS
PRACTICABLE AFTER THIS REGISTRATION STATEMENT BECOMES EFFECTIVE AND ALL OTHER
CONDITIONS TO CONSUMMATION OF THE TRANSACTIONS DESCRIBED IN THAT CERTAIN
AGREEMENT AND PLAN OF MERGER DATED AS OF MAYAs
soon as practicable after this Registration Statement becomes effective and all
other conditions to consummation of the transactions described in that certain
Agreement and Plan of Merger dated as of May 1, 1996 BETWEEN THE REGISTRANT AND
AMERICAN ARTISTS FILM CORPORATION HAVE BEEN SATISFIED OR WAIVED.between the Registrant and
American Artists Film Corporation have been satisfied or waived.
If the securities being registered on this form are being offered in
connection with the formation of a holding company and there is compliance
with General Instruction G, check the following box. [_]
----------------------/_/
_______________________
CALCULATION OF REGISTRATION FEE
===============================================================================================================================Title of each class of Amount to be Proposed maximum Proposed maximum Amount of Title of each class of to be offering price aggregate offering registration fee
securities
to be registered registered offering price aggregate offering Registration Fee
per Share price
_______________________________________________________________________________________________________________________________Price
______________________________________________________________________________________________________________
Class A Common Stock, $0.001 par value per share 11,90012,600 Shares $ - $895,023 $308.63(a)(b)
par value per share
Class B Common Stock, $0.001 6,249,679
par value per share 6,250,379 Shares $ -
============================================================================================================================
----------------------
(a) The number of shares being registered is based on (i) the
maximum number of shares of American Artists Film Corporation Common Stock which
may be outstanding when the Merger is consummated, determined on the basis of
the sum of (A) the number of shares of American Artists Film Corporation
Common Stock currently outstanding and (B) the number of such shares which
are subject to currently exercisable options or warrants, multiplied by (ii)
the conversion ratio to be applied in the merger described herein. Because
there is no market for the securities being registered or the securities to
be cancelled in the merger, the filing fee has been calculated in accordance
with Rule 457(f)(2) under the Securities Act of 1933.
(b) A filing fee of $301.23 was paid by the registrant with its
original filing on May 21, 1996 and the remainder was paid with the filing of
Amendment No. 1 on July 19, 1996.
The Registrant hereby amends this Registration Statement on such date or dates
as may be necessary to delay its effective date until the Registrant shall file
a further amendment which specifically states that this Registration Statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933.
(b) A filing fee of $301.23 was paid by1933 or until the registrant with its original
filingRegistration Statement shall become
effective on May 21, 1996.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES
AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE
A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT
SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE
SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A)such date as the Commission, acting pursuant to said Section 8(a),
MAY DETERMINE.
================================================================================
may determine.
AMERICAN ARTISTS FILM CORPORATION
1244 FOWLER STREET,Fowler Street, N.W.
ATLANTA, GEORGIAAtlanta, Georgia 30318
July __,__________, 1996
Dear Shareholder:
The Board of Directors cordially invites you to attend a special
meeting of the shareholders of American Artists Film Corporation ("American
Artists") to be held at ____________________ on August __,__________, 1996, at 10:00
a.m., local time.
At this important meeting, you will be asked to vote on a proposal to
approve and adopt an agreement and plan of merger dated as of May 1, 1996 (the
"Merger Agreement"), providing for the merger (the "Merger") of American
Artists with and into Setab Alpha, Inc., a Missouri corporation ("Setab
Alpha"). Approval of the Merger Agreement requires the affirmative vote of the
holders of a majority of the outstanding shares of American Artists
common stock.
In view of the importance of the action to be taken at this important
special meeting of shareholders, we urge you to carefully review the
accompanying notice of special meeting of shareholders and the Proxy
Statement/Prospectus, including the annexes thereto, which also include
information on American Artists and Setab Alpha. Whether or not you expect to
attend the special meeting, please complete, sign and date the enclosed proxy
and return it as promptly as possible.
Sincerely,
Steven D. Brown, Co-Chairman of the
Board and Chief Executive Officer
AMERICAN ARTISTS FILM CORPORATION
1244 FOWLER STREET,Fowler Street, N.W.
ATLANTA, GEORGIAAtlanta, Georgia 30318
--------------------
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD AUGUST ___,__________, 1996
To the Shareholders of
American Artists Film Corporation:
Notice is hereby given that a special meeting of the shareholders of
American Artists Film Corporation, a Georgia corporation ("American Artists"),
will be held on August ___,__________, 1996 at 10:00 a.m., Atlanta, Georgia Time, at
_______________ for the purpose of considering and voting on a proposal to
approve and adopt the Agreement and Plan of Merger dated as of May 1, 1996 (the
"Merger Agreement"), by and between American Artists and Setab Alpha, Inc,. a
Missouri corporation ("Setab Alpha"), pursuant to which (i) American Artists
will be merged with and into Setab Alpha with Setab Alpha as the surviving
corporation under the name "American Artists Film Corporation" and (ii) each
outstanding share (other than shares held in the treasury of American Artists,
if any, which will be cancelled) of American Artists common stock will be
converted into 0.5862 share of the surviving company's capital stock, of which
the first 100 shares issued to each American Artists Shareholder will
be issued as Class A Common Stock and the remainder as Class B Common Stock.
A copy of the Merger Agreement is attached as Annex A to the accompanying Proxy
Statement/Prospectus. The consummation of the Merger is subject to the
fulfillment or waiver of various conditions specified in the Merger Agreement.
The Board of Directors has fixed the close of business on
_____________, 1996 as the record date for the determination of holders of
American Artists Common Stock entitled to notice of, and to vote at, the
meeting and adjournment or postponements thereof. THE BOARD OF DIRECTORS
RECOMMENDS THE MERGER AGREEMENT TO THE SHAREHOLDERS OF AMERICAN ARTISTS AND
REQUESTS THAT THEY VOTE IN FAVOR OF ITS ADOPTION AND APPROVAL. The approval
and adoption of the Merger Agreement requires the affirmative vote of the
holders of a majority of the outstanding shares of American Artists Common
Stock entitled to vote at the meeting. The executive officers and directors
of American Artists have expressed an intention to vote in favor of the
foregoing proposal.
Shareholders are or may be entitled to assert dissenters' rights
under Article 13 of the Georgia Business Corporation Code (OCG (S)(S)14-
2-1301Section
14-2-1301 et. seq.), a copy of which is attached as Exhibit B to the
accompanying Proxy Statement/Prospectus.
WHETHER OR NOT YOU PLAN TO ATTEND THIS IMPORTANT MEETING, PLEASE
SIGN AND DATE THE ENCLOSED PROXY AND RETURN IT PROMPTLY IN THE ENCLOSED
ENVELOPE. IT IS IMPORTANT THAT YOUR SHARES BE REPRESENTED AT THE
MEETING.Whether or not you plan to attend this important meeting, please sign
and date the enclosed Proxy and return it promptly in the enclosed envelope.
It is important that your shares be represented at the meeting.
By order of the Board of Directors
J. Eric Van Atta
Vice President and Secretary
Atlanta, Georgia
July ___,__________, 1996
PROSPECTUS PROXY STATEMENT
SETAB ALPHA, INC. AMERICAN ARTISTS FILM CORPORATION
11,900 SHARES OF CLASS12,600 Shares of Class A COMMON STOCK FOR SPECIAL MEETING OF SHAREHOLDERS
6,250,379 SHARES OF CLASSCommon Stock For Special Meeting of
Shareholders
6,249,679 Shares of Class B COMMON STOCK TO BE HELD AUGUST __,Common Stock to be held
___________, 1996
This Proxy Statement/Prospectus is being furnished to the shareholders
of American Artists Film Corporation ("American Artists") in connection with
the solicitation of proxies by the Board of Directors of American Artists from
holders of issued and outstanding shares of common stock of American Artists,
parstated value $0.05 per share (the "American Artists Common Stock"), for use at
a Special Meeting of shareholders of American Artists to be held on August __,__________,
1996, at _________________, and at any and all adjournments or postponements
thereof (the "Special Meeting"). The Special Meeting has been called for the
purpose of voting on a proposed merger (the "Merger") of American Artists with
and into Setab Alpha, Inc., a Missouri corporation ("Setab Alpha"), with Setab
Alpha as the surviving corporation of the Merger (the "Surviving Corporation").
At the date on which this Proxy Statement/Prospectus is first mailed to
American Artists shareholders, Setab Alpha has an aggregate of 20 shares of its
Class A Common Stock, par value $0.001 per share (the "Class A Common Stock")
outstanding, no shares of its Class B Common Stock, par value $0.001 per share
(the "Class B Common Stock") outstanding, and no cash, assets or other capital
resources. If the Merger is consummated, each outstanding share of American
Artists Common Stock (except shares held by holders who have validly perfected
their dissenters' rights under applicable law and shares held in treasury) will
be converted into 0.5862 share of the capital stock of the Surviving
Corporation, of which the first 100 shares of such capital stock issued to each
shareholder will be issued as Class A Common Stock par value $.001 per share (the "Class A Common Stock")
and the remainder as Class
B Common Stock, par value $.001 per share (the
"Class B Common Stock"), rounded to the nearest whole share. Following the consummation
of the Merger, assuming no options or warrants to purchase American Artists
Common Stock are exercised between the date of this Proxy Statement/Prospectus
and the effective time of the Merger (the "Effective Time"), the pre-Merger
shareholders of American Artists (the "American Artists Shareholders") will
hold 88.7% of the outstanding Common Stock of the Surviving Corporation
(including all of the outstanding shares of Class B Common Stock), and the
pre-Merger shareholders of Setab Alpha (including those persons who purchase
Class A Common Stock in the Public Offering described below) will hold the
remaining 11.3% of the Common Stock of the Surviving Corporation. The
Surviving Corporation will be re-named American Artists Film Corporation.
Setab Alpha has filed a Registration Statement on Form S-4 (the
"Registration Statement") with the Securities and Exchange Commission (the
"Commission") pursuant to the Securities Act of 1933, as amended (the
"Securities Act"), covering the shares of Class A and Class B Common Stock to
be issued in connection with the Merger (including shares issuable in respect
of shares of American Artists Common Stock which may be issued
prior to the Merger upon the exercise of currently exercisable options and
warrants). This Proxy Statement also constitutes the Prospectus of Setab
Alpha, with respect to such shares of Class A and Class B Common Stock.
In _________ 1996, Setab Alpha commenced an all-or-none public
offering (the "Public Offering") of 700,000 shares of its Class A Common Stock.
Setab Alpha has filed a registration statement on Form SB-2 with the Commission
with respect to the Public Offering. The amount of proceeds expected to be
received by Setab Alpha from the sale of the shares of Class A Common Stock in
the Public Offering after payment of offering expenses, payment of loans and
consulting fees owed to shareholders and expenses relating to the Merger are
anticipated to be approximately $8,000. The consummation of the Merger is
conditioned on, among other things, the receipt by Setab Alpha of valid
subscriptions for the sale of the shares of Class A Common Stock offered in the
Public Offering from not less than 200 persons and consummation of the Public
Offering; however, such condition may be waived by American Artists. The
Special Meeting will not be delayed in the event that an insufficient numbers
of subscriptions have been received prior to the date of the Special Meeting.
If (i) valid subscriptions for all the shares offered in the Public Offering
are not received on or before December 31, 1996, or (ii) the Merger Agreement
is terminated prior to consummation of the Merger, the Public Offering will be
terminated.
All information contained herein with respect to American Artists and
its subsidiaries has been provided by American Artists and all information
contained herein with respect to Setab Alpha has been provided by Setab Alpha.
FOR A DISCUSSION OF CERTAIN FACTORS WHICH SHOULD BE CONSIDERED WHEN
EVALUATING THE TRANSACTIONS CONTEMPLATED BY THIS PROXY STATEMENT/PROSPECTUS,
SEE "RISK FACTORS," BEGINNING ON PAGE 10.
This Proxy Statement/Prospectus, the Letter to American Artists
Shareholders, the Notice of Meeting and the form of proxy for use at the
Special Meeting are being first mailed to American Artists Shareholders on or
about ___________, 1996.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS
THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROXY STATEMENT/PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
______________________
The date of this Proxy Statement/Prospectus is _____________, 1996.
AVAILABLE INFORMATION
Setab Alpha has filed with the Securities and Exchange Commission
(the "Commission") a registration statement on Form SB-2 (the "SB-2
Registration Statement"), with respect to 700,000 shares of Class A Common
Stock and a registration statement on Form S-4 (the "S-4 Registration
Statement") with respect to those shares of Class A and Class B Common Stock
to be issued in the Merger. Each such Registration Statement has been declared
effective by the Commission. Prior to the effectiveness of such Registration
Statements, Setab Alpha has not been subject to the periodic reporting
requirements of the Securities Exchange Act of 1934, as amended (the "Exchange
Act"). This Prospectus is part of the S-4 Registration Statement, but does not
contain all of the information set forth in the S-4 Registration Statement and
the exhibits filed therewith or incorporated by reference therein. For further
information with respect to Setab Alpha and the shares of Class A and Class B
Common Stock offered hereby, reference is hereby made to such S-4 Registration
Statement and to the financial statements and exhibits filed therewith.
Statements contained in this Prospectus regarding the contents of any contract
or other document referred to are not necessarily complete and, in each
instance, reference is made to the copy of such contract or the document filed
as an exhibit to the S-4 Registration Statement, each such statement being
qualified in all respects by such reference. The S-4 Registration Statement,
including the exhibits thereto, may be inspected and copied at the principal
office of the Commission at Room 1024, 450 Fifth Street, N.W., Washington, D.C.
20549 and at the regional offices of the Commission at Room 1400, 7 World Trade
Center, New York, New York 10048 and at Suite 1400, Northwestern Atrium Center,
500 West Madison Street, Chicago, Illinois 60661-2511. Copies of such material
can be obtained at prescribed rates from the Public Reference Section of the
Commission at 450 Fifth Street, N.W., Washington, D.C. 20549. Copies of the
S-4 Registration Statement also can be obtained through the Commission's World
Wide Web site at http://www.sec.gov/.
No person is authorized to give any information or to make any
representation with respect to this Proxy Statement/Prospectus other than
information and representations contained herein and, if given or made, such
information or representation must not be relied upon as having been authorized
by Setab Alpha, American Artists or any other person. This Proxy
Statement/Prospectus does not constitute an offer to sell, or a solicitation
of an offer to purchase, any securities, or a solicitation of a proxy, in any
jurisdiction which, or to or from any person to or from whom, it is unlawful
to make such an offer or solicitation. Neither the delivery of this Proxy
Statement/Prospectus nor any distribution of securities hereunder shall under
any circumstances be deemed to imply that there has been no change in the
assets, properties or affairs of Setab Alpha or American Artists since the date
hereof or that the information set forth herein is correct as of any time
subsequent to the date hereof.
REPORTS TO SECURITY HOLDERS
Setab Alpha intends to distribute to its shareholders annual reports
containing financial statements which have been certified by Setab Alpha's
independent accountants and may, in its discretion, distribute quarterly
reports containing unaudited financial information for each of the first three
quarters of each year.
2
TABLE OF CONTENTS
Page
----
AVAILABLE INFORMATION............................................... 2
REPORTS TO SECURITY HOLDERS......................................... 2
SUMMARY............................................................. 4
RISK FACTORS........................................................ 10
THE MERGER AGREEMENT................................................ 14
CAPITALIZATION OF SETAB ALPHA....................................... 20
SELECTED FINANCIAL INFORMATION...................................... 21
INFORMATION REGARDING SETAB ALPHA, INC.............................. 21
INFORMATION REGARDING AMERICAN ARTISTS.............................. 25
DESCRIPTION OF CAPITAL STOCK........................................ 41
CERTAIN PROVISIONS OF THE ARTICLES OF
INCORPORATION AND BYLAWS OF SETAB ALPHA........................... 48
RIGHTS OF DISSENTING SHAREHOLDERS................................... 50
SHARES ELIGIBLE FOR FUTURE SALE..................................... 51
LEGAL MATTERS....................................................... 52
EXPERTS............................................................. 52
INDEX TO FINANCIAL STATEMENTS....................................... F-1
AGREEMENT AND PLAN OF MERGER........................................ A-1
GEORGIA DISSENTERS' RIGHTS STATUTES.................................Page
AVAILABLE INFORMATION. . . . . . . . . . . . . . . . . . . . . . . . . . . 2
REPORTS TO SECURITY HOLDERS. . . . . . . . . . . . . . . . . . . . . . . . 2
SUMMARY. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
RISK FACTORS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
THE MERGER AGREEMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
CAPITALIZATION OF SETAB ALPHA. . . . . . . . . . . . . . . . . . . . . . . 20
SELECTED FINANCIAL INFORMATION . . . . . . . . . . . . . . . . . . . . . . 21
INFORMATION REGARDING SETAB ALPHA, INC . . . . . . . . . . . . . . . . . . 21
INFORMATION REGARDING AMERICAN ARTISTS . . . . . . . . . . . . . . . . . . 25
DESCRIPTION OF CAPITAL STOCK . . . . . . . . . . . . . . . . . . . . . . . 41
CERTAIN PROVISIONS OF THE ARTICLES OF
INCORPORATION AND BYLAWS OF SETAB ALPHA. . . . . . . . . . . . . . . . . 48
RIGHTS OF DISSENTING SHAREHOLDERS. . . . . . . . . . . . . . . . . . . . . 50
SHARES ELIGIBLE FOR FUTURE SALE. . . . . . . . . . . . . . . . . . . . . . 51
LEGAL MATTERS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52
EXPERTS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52
INDEX TO FINANCIAL STATEMENTS. . . . . . . . . . . . . . . . . . . . . . . F-1
AGREEMENT AND PLAN OF MERGER . . . . . . . . . . . . . . . . . . . . . . . A-1
GEORGIA DISSENTERS' RIGHTS STATUTES. . . . . . . . . . . . . . . . . . . . B-1
3
SUMMARY
The following is a summary of certain information contained elsewhere
in this Proxy Statement/Prospectus. Reference is made to, and this summary is
qualified in its entirety by, the more detailed information and financial
statements, including the notes thereto, appearing elsewhere in this Proxy
Statement/Prospectus and appendices or attachments hereto.
EXCEPT FOR THE HISTORICAL INFORMATION CONTAINED HEREIN, THE
DISCUSSION IN THIS PROXY STATEMENT/PROSPECTUS CONTAINS FORWARD-LOOKING
STATEMENTS WITH RESPECT TO SETAB ALPHA AND AMERICAN ARTISTS AND ITS
SUBSIDIARIES THAT INVOLVE RISKS AND UNCERTAINTIES. THE ACTUAL RESULTS OF
SETAB ALPHA AND AMERICAN ARTISTS COULD DIFFER MATERIALLY FROM THOSE
DISCUSSED HERE. FACTORS THAT COULD CAUSE OR CONTRIBUTE TO SUCH
DIFFERENCES INCLUDE, BUT ARE NOT LIMITED TO, THOSE DISCUSSED INExcept for the historical information contained herein, the
discussion in this Proxy Statement/Prospectus contains forward-looking
statements with respect to Setab Alpha and American Artists and its
subsidiaries that involve risks and uncertainties. The actual results of Setab
Alpha and American Artists could differ materially from those discussed here.
Factors that could cause or contribute to such differences include, but are not
limited to, those discussed in "RISK FACTORS," BEGINNING ON PAGEbeginning on page 10, AS WELL AS THOSE DISCUSSED ELSEWHERE IN
THIS PROXY STATEMENT/PROSPECTUS.as well
as those discussed elsewhere in this Proxy Statement/Prospectus.
AMERICAN ARTISTS
American Artists Film Corporation ("American Artists"), a Georgia
corporation, was formed in July 1991. American Artists and its subsidiaries
are engaged in the production of television commercials, the development and
production of television specials and related properties, and the development
of feature-length motion picture screenplays and other media products for
possible future production or license.
American Artists' executive office is located at 1245 Fowler Street,
N.W., Atlanta, Georgia, and its telephone number is (404) 876-7373.
SETAB ALPHA
Setab Alpha, Inc. ("Setab Alpha") was formed in July, 1995, under the
laws of the State of Missouri for the purpose of engaging in a merger or other
business combination with a then unidentified operating company. In May 1996,
Setab Alpha entered an Agreement and Plan of Merger (the "Merger Agreement")
with American Artists. Setab Alpha has no predecessors and has never engaged
in any business activity, other than with respect to organizational matters,
the Public Offering and the Merger Agreement. The Merger, if consummated, will
result in the transfer of control over Setab Alpha's affairs to the
shareholders of American Artists (the "American Artists Shareholders"), and the
business and management of American Artists will thereafter be the business and
management of the Surviving Corporation. See "INFORMATION REGARDING AMERICAN
ARTISTS - Business of American Artists" and "- Management."
Concurrent with the first mailing of this Proxy
Statement/Prospectus to the American Artists Shareholders, Setab Alpha
commenced an all-or-
noneall-or-none public offering (the "Public Offering") of 700,000
shares of its Class A common stock, par value $.001 per share (the "Class A
Common Stock"). The amount of proceeds expected to be received by Setab Alpha
from the sale of the shares of Class A Common Stock in the Public Offering
after payment of offering expenses, payment of loans and consulting fees owed
to shareholders and expenses relating to the Merger are anticipated to be
approximately $8,000. The consummation of the Merger is conditioned on, among
other things, the receipt by Setab Alpha of valid subscriptions for the sale
of the shares of Class A Common Stock offered in the Public Offering from not
less than 200 persons and the consummation of the Public Offering; however such
condition may be waived by American Artists. The Special Meeting will not be
delayed in the event that an insufficient numbers of subscriptions have been
received prior to the date of the Special Meeting. If (i) valid subscriptions
for all the shares offered in the Public Offering are not received on or before
December 31, 1996, or (ii) the Merger Agreement is terminated prior to
consummation of the Merger, the Public Offering will be terminated. See "THE
MERGER AGREEMENT -Conditions"- Conditions".
Setab Alpha's executive office is located at 244 B Greenyard Drive,
Ballwin, Missouri 63011, and its telephone number is (314) 394-6349.
4
THE MERGER AGREEMENT
Under the terms of the Merger Agreement, American Artists will merge
with and into Setab Alpha, with the Surviving Corporation to be re-named
American Artists Film Corporation. By reason of the Merger, the American
Artists Shareholders will become shareholders of the Surviving Corporation, the
separate existence of American Artists will cease, and the business and
management of American Artists will thereafter be the business and management
of the Surviving Corporation. See "INFORMATION REGARDING AMERICAN ARTISTS -Business-
Business of American Artists" and "- Management." Each of the 9,407,837
outstanding shares of American Artists Common Stock will become 0.5862 share
of the capital stock of the Surviving Corporation, of which the first 100
shares issued to each American Artists Shareholder will be issued as Class A
Common Stock and the remainder in Class B common stock, $0.001 par value per
share (the "Class B Common Stock"), and outstanding options and warrants to
purchase an aggregate of 3,815,328 shares of Common Stock of American Artists
will become options and warrants to purchase an aggregate of 2,236,545 shares
of Class B Common Stock, in each case assuming no options or warrants to
purchase American Artists Common Stock are exercised between the date of this
Proxy Statement/Prospectus and the Effective Time. Consummation of the Merger
is subject to certain conditions which may have been incorporated into the
Merger Agreement for the benefit of one or both of the parties. Each party is
entitled to waive any condition included for its benefit so that the Merger can
be consummated even if the condition has not been satisfied. See "THE MERGER
AGREEMENT - Conditions".
Following the consummation of the Merger, assuming no options or
warrants to purchase American Artists Common Stock are exercised between the
date of this Proxy Statement/Prospectus and the Effective Time, the American
Artists Shareholders will hold 88.7% of the outstanding capital stock of the
Surviving Corporation (including all of the outstanding shares of Class B
Common Stock), and the pre-Merger shareholders of Setab Alpha (including those
persons who purchase Class A Common Stock in the Public Offering described
below) will hold the remaining 11.3% of the capital stock of the Surviving
Corporation. Each share of Class B Common Stock is convertible at any time at
the election of the holder into one share of Class A Common Stock. The Class
A Common Stock and the Class B Common Stock are identical in all respects and
the holders thereof will have equal rights and privileges, except with respect
to the election of directors. With respect to the election of directors,
holders of Class B Common Stock voting as a separate class will be entitled to
elect a number of directors equal to the greater of (i) the number (rounded to
the nearest whole number) that bears to the total number of directors of the
Surviving Corporation the same ratio that the number of outstanding shares of
Class B Common Stock bears to the aggregate number of outstanding shares of
Class A and Class B Common Stock, or (ii) the smallest number of directors that
constitutes a majority of the Board of Directors. Holders of Class A Common
Stock voting as a separate class will be entitled to elect all of the other
members of the Board of Directors.
Pursuant to the Merger Agreement, for a period of 365 days after the
Effective Time, none of the shares of Class A or Class B Common Stock received
in the Merger, the shares of Class B Common Stock issued upon exercise of
outstanding options and warrants or shares of Class A Common Stock issued upon
conversion of Class B Common Stock issued in the Merger may be sold,
transferred or otherwise disposed of without the prior written consent of the
Company.
THE SPECIAL MEETING OF SHAREHOLDERS; VOTE REQUIRED
The Special Meeting of Shareholders of American Artists will be held
on August __,__________, 1996, commencing at 10:00 a.m., local time, at
____________________________, for the purpose of voting on a proposal to
approve and adopt the Merger Agreement. The Board of Directors of American
Artists has fixed the close of business on __________, 1996, as the record date
for the Special Meeting (the "Record Date"), and only holders of American
Artists Common Stock at the close of business on the Record Date will be
entitled to notice of, and to vote at, the Special Meeting or any adjournments
thereof.
The affirmative vote of the holders of a majority of the issued
and outstanding American Artists Common Stock entitled to vote at the Special
Meeting is required to adopt and approve the Merger Agreement and the
transactions contemplated thereby. The holders of a majority of the
outstanding shares of American Artists 5
Common Stock, present either in person
or by properly executed proxy, will constitute a quorum at the Special Meeting.
On the Record Date, there were 9,407,837 shares of American Artists Common
Stock outstanding (which number of shares does not include shares of American
Artists Common Stock issuable on the exercise of outstanding options prior to
the Effective Time), held by approximately 119126 holders of record.
As of April 30,July 31, 1996, the executive officers and directors of
American Artists beneficially owned, in the aggregate, approximately 7,700,223
shares of American Artists Common Stock, representing approximately 73.5% of
the issued and outstanding American Artists Common Stock. Each such person has
advised American Artists that he or she intends to vote in favor of the
Merger.
Any Proxy given pursuant to this solicitation may be revoked by (i)
filing with the Secretary of American Artists before the taking of the vote at
the Special Meeting, a written notice of revocation bearing a later date than
the date of the Proxy or any later dated Proxy relating to the same shares, or
(ii) attending the Special Meeting and voting in person.
SOLICITATION OF PROXY
The expenses of the solicitation for the Special Meeting, including
the cost of printing and distributing this Proxy Statement/Prospectus and form
of Proxy, will be borne by American Artists. In addition to solicitation by
mail, proxies may be solicited by directors, officers and employees of American
Artists in person or by telephone, telegram or other means of communication.
These persons will receive no additional compensation for solicitation of
proxies, but may be reimbursed for reasonable out-of-pocket expenses in
connection with such solicitation. Arrangement will also be made by American
Artists with custodians, nominees and fiduciaries for forwarding of proxy
solicitation materials to beneficial owners of shares held of record by such
custodians, nominees and fiduciaries, and American Artists will reimburse such
custodians, nominees and fiduciaries for reasonable expenses incurred
therewith.
RIGHTS OF DISSENTING SHAREHOLDERS
The consummation of the Merger is subject to the fulfillment or
waiver of, among others, a condition that no American Artists Shareholder
perfect any applicable statutory right to dissent from the Merger. However,
if such condition is waived by American Artists and the Merger is consummated,
American Artists Shareholders who fully comply with applicable statutory
provisions regarding the rights of dissenting shareholders will be entitled to
be paid the "fair value" of their shares in cash. In order to dissent from the
Merger, a shareholder must (i) deliver written notice of such shareholder's
intent to demand payment prior to the shareholder vote on the Merger and (ii)
not vote such shareholder's shares in favor of the Merger. If the Merger is
approved and consummated notwithstanding the condition to closing described
above, any American Artists Shareholder who has complied with the steps
described above may demand payment and deposit such shareholder's certificates
of American Artists Common Stock in accordance with the terms of a notice that
will be sent to such shareholder by American Artists no later than ten (10)
days following the consummation of the Merger. American Artists must offer to
pay the amount of what it estimates to be the fair market value of the
dissenting shareholder's stock to the shareholder, plus interest thereon,
within ten (10) days of the consummation of the Merger or the effective date
of the Merger, whichever is later (the "Offer Date"). If the dissenting
shareholder accepts the determination by American Artists of the fair value of
the shares, or if the dissenting shareholder fails to respond in a timely
fashion, American Artists must pay the shareholder such amount within sixty
(60) days of the Offer Date. Any shareholder who does not accept the estimate
of fair value by American Artists must demand payment based on such
shareholder's own estimate of fair value within thirty (30) days after the
offer by American Artists. American Artists must file an action in a court of
competent jurisdiction in Fulton County, Georgia within sixty (60) days after
receiving the payment demand to request a judicial determination of fair value
or, if it fails to file such action, pay each dissenting shareholder whose
demand has not yet been settled the amount demanded by such shareholder. See
"RIGHTS OF DISSENTING SHAREHOLDERS."
6
ACCOUNTING TREATMENT
The Merger will result in the issuance of a controlling interest
in the Surviving Corporation to the shareholders of American Artists. Because
of this, and because Setab Alpha has not had, and will not have had, any
material operations, the Merger will be accounted for as a recapitalization of
American Artists in which (i) American Artists is deemed to have (a) created
a second class of common stock, such that its authorized capital consists of
Class A and Class B Common Stock, each with a par value of $.001, and (b)
effected a recapitalization in which an aggregate of 11,90012,600 shares of Class A
Common Stock and 5,502,9745,502,277 of Class B Common Stock are exchanged for the
outstanding shares of its common stock (an exchange ratio of an aggregate of
.5862 Class A or Class B shares for each presently outstanding share), and (ii)
American Artists is deemed to have issued 700,020 shares of Class A Common
Stock (representing the number of shares of Setab Alpha's Common Stock to be
outstanding upon the completion of the Public Offering), in exchange for the
net assets of Setab Alpha, recorded at their historical cost. American Artists
will be the continuing entity for accounting and financial reporting purposes,
and accordingly the results of operations to be reported for periods prior to
the Merger will be those of American Artists. See "PRO FORMA FINANCIAL
STATEMENTS."
FEDERAL INCOME TAX CONSEQUENCES
Assuming the Merger is consummated in accordance with the terms of
the Merger Agreement, under applicable provisions of the Internal Revenue Code
of 1986, as amended (the "Code"), no gain or loss will be recognized for
Federal income tax purposes by American Artists, the shareholders of Setab
Alpha or the American Artists Shareholders who receive Class A and Class B
Common Stock in connection with the Merger. No ruling to that effect will be
requested from the Internal Revenue Service. Cash received by holders of
American Artists Common Stock exercising their dissenters' rights will be
treated as amounts distributed in redemption of their American Artists Common
Stock and will be taxable under the provisions of section 302 of the Code as
either ordinary income or capital gain or loss, depending upon the
circumstances of the individual shareholders.
THE PRECEDING DISCUSSION RELATES ONLY TO THE MATERIAL FEDERAL INCOME
TAX CONSEQUENCES OF THE MERGER TO THE SETAB ALPHA SHAREHOLDERS AND THE
AMERICAN ARTISTS SHAREHOLDERS. IT DOES NOT ADDRESS ALL ASPECTS OF
FEDERAL INCOME TAXATION THAT MAY BE RELEVANT TO PARTICULAR SHAREHOLDERS
AND MAY NOT BE APPLICABLE TO SHAREHOLDERS WHO ARE NOT CITIZENS OR
RESIDENTS OF THE UNITED STATES. THE DISCUSSION DOES NOT ADDRESS THE
EFFECT OF ANY APPLICABLE FOREIGN, STATE, LOCAL OR OTHER TAX LAWS.The preceding discussion relates only to the material Federal income
tax consequences of the Merger to the Setab Alpha shareholders and the American
Artists Shareholders. It does not address all aspects of Federal income
taxation that may be relevant to particular shareholders and may not be
applicable to shareholders who are not citizens or residents of the United
States. The discussion does not address the effect of any applicable foreign,
state, local or other tax laws. EACH SHAREHOLDER SHOULD CONSULT HIS OR HER OWN
TAX ADVISOR AS TO THE PARTICULAR TAX CONSEQUENCES TO HIM OR HER OF THE MERGER,
INCLUDING THE APPLICABILITY AND EFFECT OF FOREIGN, STATE, LOCAL AND OTHER TAX
LAWS.
MARKETS FOR CAPITAL STOCK; DIVIDENDS
The Class A Common Stock and Class B Common Stock are not traded on
an established public market. As of June 30, 1996, there were 20 shares of
Class A Common Stock outstanding, and two record holders of such shares. No
shares of Class B Common Stock had been issued as of such date. Setab Alpha
has not declared or paid any cash dividends on its Class A Common Stock or its
Class B Common Stock since its formation, and the Board of Directors intends
to retain all of its earnings, if any, for the development of the Surviving
Corporation's business. The declaration and payment of cash dividends in the
future will be at the discretion of the Surviving
Corporation's Board of Directors.
The capital stock of American Artists is not traded on an
established public trading market. As of July 12,31, 1996, there were 9,407,837
shares of American Artists Common Stock outstanding and 119126 record holders of
such shares. American Artists has not declared or paid any cash dividends on
its Common Stock since its formation, and the Board of Directors of American
Artists currently intends to retain all of its earnings, if any, for the
Surviving Corporation's business. The declaration and payment of cash
dividends following the consummation of the Merger will be at the discretion
of the Surviving Corporation's Board of Directors.
7
COMPARATIVE PER SHARE DATA
The following table sets forth for the periods indicated selected
historical per share data of Setab Alpha and American Artists and the
corresponding pro forma and pro forma equivalent per share amounts giving
effects to the Merger. The data presented is based upon the consolidated
financial statements and related notes of Setab Alpha and American Artists
included in this Proxy Statement/Prospectus and the pro forma financial
statements, including the notes thereto, appearing elsewhere herein. This
information should be read in conjunction with such historical and pro forma
financial statements and the notes related thereto. These data are not
necessarily indicative of the results of the future operations of the combined
organization or the actual results that would have occurred if the Merger had
been consummated prior to the periods indicated.
HISTORICAL PER SHARE DATA:
PERIOD ENDED
SETAB ALPHA APRILHistorical Per Share Data:
Setab Alpha Period Ended
April 30, 1996
--------------
Net income (loss) per share $ -
Book value per share $ -
Book valueat end of period (1) .02
Cash dividends per share at end of period (1) .02
Cash dividends per share -
NINE MONTHS ENDED YEAR ENDED
AMERICAN ARTISTS APRILAmerican Artists Nine Months Ended Year Ended
April 30, JULYJuly 31,
------------------ --------------
1996 1995 1995 1994
--------- ------- ----- -------
Pro forma net income (loss) per share (2) $(.14)$ (.14) $ .04 $ - $(.09)$ (.09)
Pro forma book value per share at end of period (2) .16 .16.14 .14
Pro forma cash dividends per share - - - -
-
8
NINE MONTHS YEAR ENDED
PRO FORMA PER SHARE DATA: ENDED APRILPro Forma Data Per Share: Nine Months Ended Year Ended
April 30, JULYJuly 31,
---------------- ------------
1996 1995 1995 1994
-------- ------ ----- -----
Pro forma net income (loss)
Per Setab Alpha
share (1) $(.05)$ (.05) $ .01 $ - $ .08
Per equivalent
American Artists
share (2) (.05) .01 - .08
Pro forma book value
Per Setab Alpha
share (1) .13 .14
Per equivalent
American Artists
share (2) .13 .14
Pro forma cash dividends
Per Setab Alpha
share - - -
- -
Per equivalent
American Artists
share - - -
- -
-
__________________
(1) Per share amounts for Setab Alpha are based upon 700,020 shares
outstanding, representing the number of shares Setab Alpha will have
outstanding upon the completion of the Public Offering. Book value
per share includes the effect of the receipt of the net proceeds of
the Public Offering.
(2) The consummation of the Merger Agreement will be accounted for as a
recapitalization of American Artists, in which (i) American Artists
will be deemed to have (a) created a second class of common stock,
such that its authorized capital consists of Class A and Class B
Common Stock, and (b) effected a recapitalization in which an
aggregate of 11,900 shares of Class A Common Stock and 5,502,974
__________________
(1) Per share amounts for Setab Alpha are based upon 700,020 shares outstanding, representing the
number of shares Setab Alpha will have outstanding upon the completion of the Public Offering.
Book value per share includes the effect of the receipt of the net proceeds of the Public Offering.
(2) The consummation of the Merger Agreement will be accounted for as a recapitalization of
American Artists, in which (i) American Artists will be deemed to have (a) created a second class
of common stock, such that its authorized capital consists of Class A and Class B Common Stock,
and (b) effected a recapitalization in which an aggregate of 12,600 shares of Class A Common Stock
and 5,502,277 of Class B Common Stock are exchanged for the outstanding shares of its common stock
(an exchange ratio of an aggregate of .5862 Class A or Class B shares for each presently
outstanding share), and (ii) American Artists is deemed to have issued shares of its Class A Common
Stock in exchange for the net assets of Setab Alpha recorded at their historical cost. Pro forma
net income (loss) per share reflected in American Artists' historical financial statements is
computed to reflect the effect of such a reverse stock split on American Artists' historical shares
outstanding. See Note 1 of Notes to American Artists' Consolidated Financial Statements.
9
RISK FACTORS
THE SHARES OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK. IT MUST BE
RECOGNIZED THAT RISKS, NOT NOW FORESEEN BY SETAB ALPHA, MIGHT BECOME
SIGNIFICANT IN THE FUTURE AND THAT RISKS WHICH ARE NOW FORESEEN MIGHT AFFECT
THE SURVIVING CORPORATION TO A GREATER EXTENT THAN IS NOW FORESEEN OR IN A
MANNER NOT NOW CONTEMPLATED.
RESTRICTIONS ON TRANSFER
Any transfer of shares of Class B Common Stock, other than to (i) the
transferor's spouse, issue, parents or siblings, or a trust for the benefit of
the transferor or any such persons, (ii) in the event of the transferor's death
or legal disability, the transferor's executor, administrator or personal
representative, (iii) any transferee receiving the shares as a gift, legacy or
inheritance, or as a distribution from a corporation, partnership, trust or
other entity in respect of the transferee's ownership interest therein, or (iv)
any person approved in advance by the Board of Directors of the Surviving
Corporation or its designee, will be deemed to constitute an election by the
holder of record thereof to convert such shares of Class B Common Stock into
an equal number of shares of Class A Common Stock. In determining whether to
grant such approval the Corporation will assess whether the proposed transfer
will contribute to maintaining cohesive and harmonious ownership of Class B
shares or is otherwise in the best interest of the Surviving Corporation. See
"DESCRIPTION OF CAPITAL STOCK" - Pursuant to the Merger Agreement, for a period
of 365 days after the effectiveness of the Merger (the "Restricted Period"),
none of the shares of Class A or Class B Common Stock received in the Merger,
issuable upon exercise of outstanding options and warrants or shares of Class
A Common Stock issued upon the conversion of shares of Class B Common Stock
issued in the Merger may be sold, transferred or otherwise disposed of without
the prior written consent of the Surviving Corporation.
POSSIBLE ILLIQUIDITY DUE TO LACK OF ACTIVE TRADING MARKET
Prior to the Public Offering there has been no public market for the
Class A Common Stock, and there can be no assurance that an active or liquid
trading market will develop. In addition, no trading market for the Class B
Common Stock will develop following the termination of the Restricted Period.
If a trading market in the Class A Common Stock does develop, it may not be
sustained. If the Class A Common Stock is not listed on an exchange and the
trading price is less than $5.00 per share, the Class A Common Stock could be
subject to Rule 15g-9 of the Exchange Act, which, among other things, requires
that broker-dealers satisfy special sales practice requirements, including
making individualized written suitability determinations and receiving a
purchaser's written consent prior to any transaction. Moreover, the Class A
Common Stock could be considered a "penny stock," which would require
additional disclosure in connection with trades in the Surviving Corporation's
securities, including the delivery of a disclosure schedule explaining the
nature and risks of the penny stock market. Such requirements could limit the
release of market prices of the Class A Common Stock and reduce news coverage
of the Surviving Corporation. Such events may reduce investors' interest in
the Class A Common Stock and materially and adversely affect the trading prices
for the Class A Common Stock and/or the Class B Common Stock and the ability
of holders of the Class B Common Stock or Class A Common Stock to sell such
shares in the secondary market.
POSSIBLE NEED TO REGISTER SHARES OF CLASS A COMMON STOCK UPON RESALE
The shares of Class A Common Stock received in the Merger or upon the
conversion of shares of Class B Common Stock issued in the Merger may not be
sold, transferred or otherwise disposed of for a period of 365 days after the
effectiveness of the Merger without the prior written consent of the Surviving
Corporation. Moreover, such shares of Class A Common Stock have not been
registered under the securities laws of any state in reliance on exemptions
therefrom. As a result, such shares of Class A Common Stock may not be sold,
10
transferred or otherwise disposed of at any time absent either registration
under such laws as enacted by the state in which the potential purchaser
resides or the availability of an applicable exemption therefrom. A majority
of state securities laws provide that sales by persons not affiliated with the
issuer are exempt from statutory registration requirements if an approved
securities manual contains certain information, including financial
information, regarding the issuer. In order for such information to be
included in such securities manual, the Surviving Corporation will be required
to submit detailed information to the publisher and pay a substantial fee.
Upon consummation of the Merger, the Surviving Corporation intends to seek
publication of the information necessary to make the securities manual
exemption available. The failure of such information to be contained in an
approved securities manual, or the absence of such an exemption in the state
in which the proposed purchaser resides, could restrict the ability of any
holder of the shares of Class A Common Stock to resell such shares at a time
or price at which he may wish to do so.
HISTORY OF AMERICAN ARTISTS OPERATING LOSSES
On a consolidated basis, American Artists and its subsidiaries
(collectively the "AAFC Group") have incurred net losses in each fiscal period
since American Artists' organization in 1991, including net losses of $7,793
and $466,567 in fiscal 1995 and 1994, respectively, and a net loss of $816,572
for the nine months ended April 30, 1996. As of April 30, 1996, AAFC Group has
an accumulated deficit of $1,665,486. Following the Merger, management of AAFC
Group anticipates that the Surviving Corporation, as the successor to the
business previously conducted by AAFC Group may continue to incur net losses
for at least several additional periods, and no assurance can be made as to
whether or when the Surviving Corporation, as the successor to the business of
AAFC Group, will achieve or sustain profitability. The Surviving Corporation's
ability to generate significant revenue and become profitable as the operator
of AAFC Group's business will be dependent in large part upon its ability to
acquire, create, develop and produce feature films and broadcast programming
which will appeal to a significant audience and achieve market acceptance.
NEED FOR ADDITIONAL FINANCING
To date, AAFC Group has met its capital requirements in part through
the sale of securities to persons reasonably believed by the AAFC Group to be
"accredited investors" as defined under Rule 501 of the Securities Act, and in
part through funding to produce motion pictures obtained from the sale of
revenues participations, or the pre-production sale of certain distribution
rights. The ability of AAFC Group to produce feature films and television
specials, and to negotiate favorable distribution terms for its products, has
been severely restricted by its need to depend on financing from the sale of
revenue participations, or the pre-production sale of certain distribution
rights. AAFC Group's current plans call for the production, during fiscal
1997, of "I.R.S., Death and Taxes", and production of a one-hour program on an
astronomy project and the possible production of an initial one-hour television
special on the subject of the millennium (see "INFORMATION REGARDING AMERICAN
ARTISTS - Business of American Artists"). Production costs for these motion
pictures are estimated to be $400,000, $330,000 and $30,000 to $100,0000,
respectively. Additionally, AAFC Group has operated at a loss, due principally
to the shortfall of the coverage of selling, general and administrative
expenses by commercial production profits (see "INFORMATION REGARDING AMERICAN
ARTISTS - Management's Discussion Analysis of Financial Condition and Results
of Operations"). Such shortfalls have also been financed through the sale of
securities. A continuation of such shortfalls, which is anticipated for at
least the fourth quarter of 1996, will create a continued need for such
financing. After the Merger, such management expects to meet external funding
needs through the private or public offering of debt or equity securities
issued by the Surviving Corporation and, with respect to the funding of motion
pictures, the sale of revenue participations and the pre-
productionpre-production sale of
certain distribution rights. However, there can be no assurance that such
funding will be available, or if available, that it will be available on
acceptable terms. The successful completion by the Surviving Corporation of
an additional sale of its securities may be made on terms which result in
substantial dilution of the voting and/or economic interest of purchasers of
Class A Common Stock or the Class B Common Stock. Shareholders of the
Surviving Corporation have no preemptive or other subscription rights to
participate in any subsequent external financing arrangements which may be made
by the Surviving Corporation. The inability of the Surviving Corporation to
satisfy the funding 11
requirements of the business to be acquired in the Merger
could prevent it from achieving its business objectives and would, therefore,
have a material adverse effect on the Surviving Corporation.
CONCENTRATION OF VOTING CONTROL
Four principal shareholders of American Artists, who will
beneficially own approximately 57.4% of the shares of Common Stock of the
Surviving Corporation outstanding after the Merger (including shares obtainable
upon the exercise of currently exercisable warrants and options), including
approximately 64.0%64.1% of the Class B Common Stock of the Surviving Corporation,
are parties to a voting agreement which obligates each such holder to vote his
or her shares of American Artists Common Stock (and will obligate them to so
vote their shares of Common Stock received in the Merger) as determined by the
vote of the holders of a majority of the shares held by the parties to the
voting agreement. Accordingly, such shareholders, acting in concert, will be
able to determine the vote on any matter submitted to a vote of the Surviving
Corporation's shareholders (with the exception of the election of directors),
including a merger, sale of assets or other form of business combination and
change of control involving the Surviving Corporation. In addition, the voting
rights applicable to the Class B Common Stock will enable such shareholders to
determine the composition of no less than a majority of the members of the
Board of Directors of the Surviving Corporation following the consummation of
the Merger, regardless of the number of shares of Class A Common Stock which
may be issued, as long as such shareholders continue to own a majority of the
outstanding shares of the Class B Common Stock.
DEPENDENCE ON KEY PERSONNEL
The success of AAFC Group's business depends to a significant extent
on the efforts and abilities of several senior management personnel and other
key employees, especially its creative personnel and technical directors. In
particular, such business is dependent upon the services of Steven D. Brown,
Rex Hauck and Vivian W. Jones. AAFC Group does not currently maintain, and has
no current plans to obtain, "key person" life insurance for any of its
employees. Moreover, AAFC Group does not currently have employment agreements
with Ms. Jones or Messrs. Brown or Hauck and has no current plans to enter any
such employment agreement. The loss of the services of any of such persons or
of any other key employees could have a material adverse effect on AAFC Group's
business, and (after the Merger) the operating results and financial condition
of the Surviving Corporation.
POTENTIAL FLUCTUATIONS IN OPERATING RESULTS
Management of AAFC Group expects to experience significant
fluctuations in the Surviving Corporation's future annual and quarterly
operating results that may be caused by numerous factors, many of which are
outside its control. Such factors include the timing of domestic and
international releases of feature films and broadcast programming, the
commercial success of such properties, the timing of the release of related
products into their respective markets, the demand for related products, the
timing and amount of costs incurred to distribute and promote the Surviving
Corporation's properties and related products, the introduction of new feature
films or programming by competitors, the timing of significant operating
expenses and capital expenditures, the level and profitability of its
commercial production assignments and general economic conditions. As a
result, such management believes that period to period comparisons of its
results of operations will not necessarily be meaningful and that its
historical operating results may not be reliable indicators of its future
performance. Due to all of the foregoing factors, it is likely that in some
future period, the Surviving Corporation's operating results will be below the
expectations of analysts and investors. In such event, the market value of the
Surviving Corporation's Common Stock would likely be materially and adversely
affected.
UNPREDICTABILITY OF COMMERCIAL SUCCESS
The Surviving Corporation, as the operator of AAFC Group's
business, expects to be significantly dependent upon the success of feature
films and television specials and other programming to be developed in the
future. The production and distribution of feature films and television
programming involve a substantial degree 12
of risk. Each project is an
individual artistic work and its commercial success is primarily determined by
the reactions of distributors and the general public, each of which is
unpredictable. Historically, many feature films produced do not generate a net
profit or a return on investments. Accordingly, there is a substantial degree
of risk that the production and exploitation of film by AAFC Group will not
allow a recovery of production costs by AAFC Group, which may result in the
holders of the Class A and Class B Common Stock possibly losing their entire
investment. The commercial success of such projects also depends upon the
quality and acceptance of competing programming, critical reviews, the
availability of alternative forms of entertainment and leisure time activities,
general economic conditions and other tangible and intangible factors, all of
which can change and cannot be predicted with certainty. There can be no
assurance that such projects will be successfully created, developed and
released, or that if they are released, they will generate significant revenues
for the Surviving Corporation. Significant delays in creative development and
production can be expected and there can be no assurance that the Surviving
Corporation will be able to produce and develop films, specials, television
programming and related products that will meet with commercial success.
POSSIBLE INABILITY TO RECOVER CAPITALIZED FILM COSTS
A substantial portion of the assets reflected in AAFC Group's Balance
Sheet at April 30, 1996, are capitalized film costs which include, among other
things, costs incurred to develop stories and acquire story rights for future
films and programs. Accordingly, the ability of the Surviving Corporation to
realize upon the value of such assets may be dependent upon its ability to
finance the production of those films and programs in the future or to license
others to produce them. Capitalized film costs are amortized based upon
management's estimate of total gross revenues to be earned by a film over its
life; although revenue estimates are reviewed periodically and revised when
appropriate, there can be no assurance that the estimated total gross revenues
will be realized.
COMPETITION
The market for the production of feature films and television
programming and commercials is extremely competitive. Following the Merger,
the Surviving Corporation's competitors will include a large number of
national, regional and local competitors, many of whom are well-established
with contacts and working relationships with recognized distributors,
advertising agencies and markets. In addition, the Surviving Corporation, as
the operator of AAFC Group's business, will compete in various portions of its
business with major movie studios, including Warner Brothers, Inc., Twentieth
Century Fox Film Corporation, Paramount Pictures, Universal City Studios, Inc.,
and a number of independent motion picture production companies. The Surviving
Corporation will also compete with these companies for the acquisition of
literary properties, production financing, the services of performing artists
and the services of other creative and technical personnel. The television
commercial production industry is highly fragmented. In addition, the market
for television commercials is extremely price competitive. Some AAFC Group's
competitors in the commercial industry are much larger and have greater
resources than AAFC Group. However, no one commercial production company or
group of companies dominates the industry. Management of AAFC Group expects
such competition in all areas of its business to continue and believes that
such competition may increase in the future. Management of AAFC Group believes
that most of its competitors have longer operating histories, greater name
recognition, larger customer bases and significantly greater financial,
technical, marketing and other resources than will the Surviving Corporation
following the Merger. There can be no assurance that the Surviving Corporation
will be able to compete successfully against its current or future competitors,
and such competition could materially adversely affect AAFC Group's business,
and the Surviving Corporation's operating results and financial condition.
DEPENDENCE ON AND POSSIBLE DIFFICULTY IN DEFENDING INTELLECTUAL PROPERTY RIGHTS
The Surviving Corporation's success and ability to compete will be
dependent in part upon its ability to obtain and maintain protection for AAFC
Group's current and the Surviving Corporation's future literary properties, to
defend its intellectual property rights and to operate without infringing the
proprietary rights of others. While AAFC Group relies, and the Surviving
Corporation will rely, on a combination of copyright and trademark to
establish and protect its intellectual property rights, the management of AAFC
Group believes that factors such as the technical and creative skills of its
personnel are more essential to its success and ability to compete. There can
be no assurance that any intellectual property rights of AAFC Group to be
acquired by the Surviving Corporation in the Merger will provide competitive
advantages or will not be challenged, invalidated or circumvented by
competitors. There can be no assurance that disputes will not arise concerning
the ownership of intellectual property. Furthermore, there can be no assurance
that intellectual properties will not become known or be independently
developed by competitors or that the Surviving Corporation will be able to
maintain the confidentiality 13
of information relating to its literary
properties. See "INFORMATION REGARDING AMERICAN ARTISTS -Business- Business of AAFC
Group - Arbitration, Litigation and Intellectual Property."
There has been substantial litigation in the entertainment
industry with respect to literary properties that are the subject of
conflicting copyrights, trademarks and other claims of ownership. If the
Surviving Corporation is required to defend against charges of infringement of
the intellectual property rights of third parties or to protect its own rights
against third parties, the Surviving Corporation may incur substantial expense
and divert significant effort of the Surviving Corporation's technical and
management personnel and could lose rights to develop or produce films or
television programming or be required to pay monetary damages or royalties to
license rights to third parties. Although intellectual property disputes are
often settled through licensing or similar arrangements, the costs associated
with such arrangements (including foregone revenues) may be substantial and
could include ongoing royalties. Furthermore, there can be no assurance that
the necessary licenses would be available to the Surviving Corporation on terms
deemed acceptable by the Surviving Corporation. Accordingly, an adverse
determination in a judicial or administrative proceeding or the failure to
obtain necessary licenses could prevent the Surviving Corporation from
producing certain of its future products which could have a material adverse
effect on its business, financial condition and results of operation. The
Company has not performed or commissioned the performance of any investigation
into whether its operations or planned operations may infringe on the property
rights of third parties. See "INFORMATION REGARDING AMERICAN ARTISTS -
Arbitration, Litigation and Intellectual Property."
ANTI-TAKEOVER EFFECTS OF ARTICLES OF INCORPORATION AND BYLAWS
The Surviving Corporation's Board of Directors will have authority
to issue up to 10,000,000 shares of Preferred Stock and to determine the price,
rights, preferences, privileges and restrictions thereof, including voting
rights, without any further vote or action by the Surviving Corporation's
shareholders. The voting and other rights of the holders of Common Stock will
be subject to, and may be adversely affected by, the rights of the holders of
any Preferred Stock that may be issued in the future. The issuance of
Preferred Stock, while providing desirable flexibility in connection with
obtaining necessary capital resources and other corporate purposes, could have
the effect of delaying, deferring or preventing a change in control of the
Surviving Corporation. The Surviving Corporation has no current arrangements
to issue any shares of Preferred Stock. See "DESCRIPTION OF CAPITAL STOCK."
In addition, the Surviving Corporation's Articles of Incorporation and Bylaws
will include certain provisions providing for a majority of the members of the
Board of Directors to be elected by the holders of the Surviving Corporation's
Class B Common Stock and restrictions on the ability of shareholders to call
special meetings of shareholders. See "CERTAIN PROVISIONS OF THE ARTICLES OF
INCORPORATION AND BYLAWS." The Surviving Corporation will also be subject to
the Missouri Takeover Bid Disclosure Act, which under certain circumstances may
prohibit a business combination between the Surviving Corporation and a
shareholder owning 20% or more of the outstanding voting power of the Surviving
Corporation. Such provisions could have the effect of delaying, deferring or
preventing a change in control of the Surviving Corporation.
CLAIM BY FORMER EMPLOYEE
A former employee of AAFC Group has filed suit against AAFC Group for
alleged damages arising in connection with the termination of his employment
and alleged unpaid compensation. See "INFORMATION REGARDING AAFC GROUP -
Arbitration, Litigation and Intellectual Property."
POSSIBLE DISPUTE OVER OWNERSHIP OF CERTAIN FILM PROPERTIES
An attorney for MovieAmerica Corporation has expressed certain
"concerns" that the four feature film properties transferred by Steven D. Brown
and Rex Hauck at the time of AAFC Group's organization in 1991 were or should
have been properties of MovieAmerica Corporation by reason of Mr. Brown's
duties while he was an employee of MovieAmerica Corporation. See "INFORMATION
REGARDING AAFC GROUP - Arbitration, Litigation and Intellectual Property."
POSSIBLE LIABILITY ANDIN ARBITRATION PROCEEDING
AAFC Group is currently involved in an arbitration dispute in Los
Angeles, California with Greystone Communications, Inc. concerning the scope
of their 1994 co-production agreement and allowable expenses thereunder. An
adverse ruling in the arbitration proceeding would have a material adverse
effect on the Company's results of operation and financial condition. See
"INFORMATION REGARDING AAFC GROUP - Arbitration, Litigation and Intellectual
Property". and "- Business of American Artists."
THE MERGER AGREEMENT
In May 1996 Setab Alpha entered the Merger Agreement with American
Artists. The following is a summary of certain provisions of the Merger
Agreement, a copy of which is attached as Annex A. This summary is qualified
in its entirety by reference to the Merger Agreement, which is incorporated
herein by this reference.
14
THE MERGER
The Merger Agreement provides that, subject to certain terms and
conditions, American Artists will merge into Setab Alpha at the Effective Time.
By reason of the Merger, the shareholders of American Artists will become
shareholders of the Surviving Corporation, a separate existence of American
Artists will cease, and the business and management of American Artists will
thereafter will be the business and management of the Surviving Corporation.
See "INFORMATION REGARDING AMERICAN ARTISTS - Business of American Artists" -"Management.-
"Management." The Merger Agreement has been approved, and is recommended to
the shareholders of American Artists, by the Board of Directors of American
Artists. The Board of Directors and shareholders of Setab Alpha have
unanimously approved the Merger Agreement. The Merger will become effective
upon the filing of duly executed certificates of merger with the Secretaries
of State of Missouri and Georgia. These filings are to be made immediately
following the consummation of the Merger which will occur on the fifth business
day after the conditions specified in the Merger Agreement have been satisfied
or waived.
Concurrent with the first mailing of this Proxy
Statement/Prospectus to the American Artists Shareholders, Setab Alpha
commenced an all-or-
noneall-or-none public offering (the "Public Offering") of 700,000
shares of its Class A common stock, par value $.001 per share (the "Class A
Common Stock"). The amount of proceeds expected to be received by Setab Alpha
from the sale of the shares of Class A Common Stock in the Public Offering
after payment of offering expenses, payment of loans and consulting fees owed
to shareholders and expenses relating to the Merger are anticipated to be
approximately $8,000. The consummation of the Merger is conditioned on, among
other things, the receipt by Setab Alpha of valid subscriptions for the sale
of the shares of Class A Common Stock offered in the Public Offering from not
less than 200 persons and the consummation of the Public Offering. Such
condition may be waived by American Artists. The Special Meeting will not be
delayed in the event that an insufficient numbers of subscriptions have been
received prior to the date of the Special Meeting. If (i) valid subscriptions
for all the shares offered in the Public Offering are not received on or before
December 31, 1996, or (ii) the Merger Agreement is terminated prior to
consummation of the Merger, the Public Offering will be terminated.
BACKGROUND INFORMATION; REASONS FOR THE MERGER
Setab Alpha was formed in July 1995 for the purpose of engaging in
a merger or other business combination with a then unidentified operating
company. In September 1995 Setab Alpha filed the SB-2 Registration Statement
with the Commission. During the first week of March, 1996, a representative
of American Artists contacted Alan G. Johnson, a principal shareholder of Setab
Alpha at the suggestion of BDO Seidman, LLP, which serves as independent
certified accountant for each of American Artists and Setab Alpha. As a result
of this unsolicited contact, Douglas J. Bates, President of Setab Alpha, met
with representatives of American Artists on March 26, 1996 to discuss the
possibility of a business combination between American Artists and Setab Alpha.
In April 1996, Douglas J. Bates, President of Setab Alpha, Eric Van Atta, Vice
President of American Artists and a representative of American Artists legal
counsel telephonically met to confirm each party's interest in pursuing a
merger of American Artists into Setab Alpha. During such telephonic meeting
and in several conversations telephonically held during late April, 1996, Mr.
Bates, on behalf of Setab Alpha and Mr. Van Atta on behalf of American Artists,
negotiated the detailed terms, provisions and conditions of the Merger
Agreement, including the Merger Consideration to be paid and the scope of the
representations and warranties contained therein. In May 1996 Setab Alpha
filed Amendment No. 1 to the SB-2 Registration Statement with the Commission,
providing information concerning American Artists and the terms of the Merger.
Setab Alpha. The Board of Directors of Setab Alpha believes that
a business combination with American Artists pursuant to the Merger Agreement,
is in the best short-term and long-term interest of Setab Alpha and its
shareholders. The Setab Alpha Board considered (i) the potential of the Merger
to achieve Setab Alpha's business objective of entering into a business
combination with an operating company, (ii) the opportunity to enhance the
value of Setab Alpha as a result of the business, assets and properties of
American Artists, (iii) the financial
return anticipated by Setab Alpha's management,increase in the value of the Class A
Common Stock resulting from an increase in net tangible book value per share
of approximately $0.06 per share, and (iv) the addition of American Artists'
seasoned management team.
15
American Artists. In arriving at a decision to authorize the
Merger Agreement and to recommend that the shareholders of American Artists
approve the Merger with Setab Alpha, the Board of Directors of American Artists
considered various factors, including (i) the possibility of access to
additional equity financing, (ii) the additional liquidity of the Surviving
Corporation's Common Stock as compared to the Common Stock of American Artists,
and (iii) the meaningful benefits which may be offered to key employees in the
form of incentive and other stock options in a public company. In the course
of seeking financing sources for the implementation of its business plan, the
management of American Artists has been advised by potential investment sources
and by its own independent financial advisor that the existence of a public
trading market for the common stock of the corporation would substantially
improve its appeal to equity investors. Although the proposed Merger does not
insure the development of a public market for the Common Stock of the Surviving
Corporation, it will provide the Surviving Corporation with more than 300
shareholders for its Class A Common Stock, thus allowing the Surviving
Corporation to meet one important requirement for trading in the Nasdaq
OTC Bulletin Board market.Small-Cap Market. Moreover, the shares of Common Stock of the Surviving
Corporation issued in the Merger will be registered under the Securities Act
of 1933 (the "1933 Act"), unlike the previously outstanding shares of American
Artists, which were issued pursuant to exemptions from registration under the
1933 Act.
Prior to entering the Merger Agreement with Setab Alpha, the
management of American Artists considered various other possibilities for
achieving its financing goals, including venture capital financing or a
registered public offering, and determined in consultation with its financial
advisor that the Merger was its preferred course of action.
THE BOARD OF DIRECTORS OF AMERICAN ARTISTS RECOMMEND THAT EACH
AMERICAN ARTISTS SHAREHOLDER VOTE FOR THE PROPOSAL TO APPROVE THE MERGER
AGREEMENT.
MERGER CONSIDERATION
In connection with the Merger, each of the 9,407,837 shares of
outstanding Common Stock of American Artists will be exchanged for 0.5862 share
of the capital stock of the Surviving Corporation, of which the first 100
shares issued to each American Artists Shareholder will be issued as Class A
Common Stock and the remainder as Class B Common Stock, and the outstanding
options and warrants to purchase an aggregate of 3,815,328 shares of Common
Stock of American Artists will become options and warrants to purchase an
aggregate of 2,236,545 shares of Class B Common Stock of the Surviving
Corporation, in each case assuming no options or warrants to purchase American
Artists Common Stock are exercised between the date of this Proxy
Statement/Prospectus and the Effective Time. No fractional shares of Class A
or Class B Common Stock will be issued in the Merger; rather the number of
shares to be issued to any single holder of American Artists Common Stock will
be rounded to the nearest whole share. The holders of the Class A and Class
B Common Stock will vote together as a single class on all matters submitted
to the shareholders of the Surviving Corporation, except that the holders of
the Class B Common Stock, voting as a class, shall be entitled to elect no
fewer than a majority of the members of the Board of Directors of the Surviving
Corporation. See "DESCRIPTION OF CAPITAL STOCK."
16
The following table sets forth the relative share ownership of
pre-
Mergerpre-Merger American Artists Shareholders and Setab Alpha shareholders in the
Surviving Corporation following the Merger, assuming that all of the shares
offered are sold in the Public Offering and that no options or warrants to
purchase American Artists Common Stock are exercised between the date of this
Proxy Statement/Prospectus and the Effective Time:
Number of Shares Held (%Held(%)
------------------------------------------------------------
Before Merger After Merger
------------------------ ------------------------
Pre-mergerPre-Merger Shareholders of Setab Alpha 700,020 Class A (100%) 700,020 Class A (98.3%(98.2%)
0 Class B ( - %)-%) 0 Class B ( - %)
------- --------%)
Total of all classes 700,020 (100%) 700,020 (11.3%)
======= =======
Pre-mergerPre-Merger Shareholders of
American Artists 0 Class A ( - %) 11,900-%) 12,600 Class A (1.7%( 1.8%)
American Artists
0 Class B ( - %) 5,502,974-%) 5,502,277 Class B (100%( 100%)
------- ---------
Total of all classes 0 ( - %) 5,514,874-%) 5,514,877 (88.7%)
======= =========
The following table sets forth the stockholders equity of the Company
and American Artists at April 30, 1996, on a historical basis, and the relative
interests of the Company and American Artists stockholders in the pro forma
stockholders' equity of the Company as if the Merger had been consummated on
April 30, 1996:
The Company American Artists
----------- ----------------
Historical stockholders' equity $12,456/
The Company American Artists
Historical stockholders' equity $12,456(1) $772,405
Relative interest in pro forma
stockholders' equity 80,779 634,082
_______________
(1)/ $895,023
Relative interest in pro forma
stockholders' equity 94,350 743,129
_______________
/(1)/ Includes the effect of the receipt of the net proceeds of the
Public Offering. See "THE MERGER AGREEMENT."
REPRESENTATIONS, WARRANTIES AND COVENANTS
The Merger Agreement contains various representations, warranties and
covenants of Setab Alpha and American Artists, all of which will survive the
Effective Time. Under the Merger Agreement, each of Setab Alpha and American
Artists has represented and warranted to the other as to (i) such party's
organization and authority to conduct its business, (ii) such party's
authorized capital stock and outstanding agreements calling for the issuance
of any such capital stock, (iii) the conformity of such party's financial
statements to generally accepted accounting principles, (iv) the absence of
certain changes in the business, governing documents or capitalization of such
party and (v) the noncontravention of the governing documents, material
obligations or governmental orders to which such party may be subject by such
party's execution, delivery and performance of the Merger Agreement.
Pursuant to the Merger Agreement, each of Setab Alpha and American
Artists has agreed that it will use its reasonable best efforts to consummate
and effect the Merger. Setab Alpha has also agreed to prepare and file a
registration statement with respect to the shares of Class A or Class B Common
Stock to be issued in the Merger. American Artists has agreed to indemnify
Setab Alpha and its directors, officers and agents with respect to certain
17
liabilities which may arise out of the information concerning American Artists
contained in this Prospectus and any registration statement which may be filed
in connection with the Merger. Setab Alpha has agreed to indemnify American
Artists and its directors, officers and agents with respect to certain
liabilities which may arise out of any other information contained in (or
omitted from) this Prospectus and any registration statement which may be filed
in connection with the Merger.
CONDITIONS
The obligations of Setab Alpha and American Artists to consummate
the Merger are subject to fulfillment or waiver of certain conditions, which
have been incorporated into the Merger Agreement for the benefit of one or both
of the parties. The conditions include: (i) approval of the Merger by
shareholders of American Artists, (ii) lack of any pending legal proceeding to
restrain or prevent the carrying out of the Merger, (iii) the continued truth
and accuracy of the representations and warranties in all material respects,
(iv) the due registration of the shares of Class B Common Stock to be issued
in the Merger or the availability of an exemption therefrom, and (v) the
receipt by Setab Alpha of valid subscriptions for all of the shares of Class
A Common Stock offered by this Prospectus from at least 200 persons and the
consummation of the Public Offering. A subscription will be deemed "valid" if
the Subscription Agreement tender has been fully completed, executed in
duplicate, without modification, and is accompanied by a check or money order,
payable to the Escrow Agent, in the proper amount. In addition, unless waived
by American Artists, the Merger is conditioned upon the failure of any
shareholder of American Artists to perfect any applicable statutory right to
dissent from the Merger. Each party is entitled to waive any conditions
included for its benefit so that the Merger can be consummated even if the
condition has not been satisfied. The parties may also, by mutual agreement,
amend conditions to consummation of the Merger Agreement. In determining
whether to waive or amend an unsatisfied condition, a party, acting through its
duly authorized representatives, will consider the degree to which a condition
is unsatisfied, the circumstances surrounding the non-satisfaction, and the
presumed cost or risk to the party for non-satisfaction of the condition as
compared to the presumed cost or risk of not consummating the Merger.
ACCOUNTING TREATMENT
The Merger will result in the issuance of a controlling interest
in the Surviving Corporation to the shareholders of American Artists. Because
of this, and because Setab Alpha has not had, and will not have had, any
material operations, the Merger will be accounted for as a recapitalization of
American Artists in which (i) American Artists is deemed to have (a) created
a second class of common stock, such that its authorized capital consists of
Class A and Class B Common Stock, each with a par value of $.001, and (b)
effected a recapitalization in which an aggregate of 11,90012,600 shares of Class A
Common Stock and 5,502,9745,502,277 of Class B Common Stock are exchanged for the
outstanding shares of its common stock (an exchange ratio of an aggregate of
.5862 Class A or Class B shares for each presently outstanding share), and (ii)
American Artists is deemed to have issued 700,020 shares of Class A Common
Stock (representing the number of shares of Setab Alpha's Common Stock to be
outstanding upon the completion of the Public Offering), in exchange for the
net assets of Setab Alpha, recorded at their historical cost. American Artists
will be the continuing entity for accounting and financial reporting purposes,
and accordingly the results of operations to be reported for periods prior to
the Merger will be those of American Artists. See "PRO FORMA FINANCIAL
STATEMENTS."
CERTAIN FEDERAL INCOME TAX CONSEQUENCES OF THE MERGER
Assuming the Merger is consummated in accordance with the terms of
the Merger Agreement, Setab Alpha and American Artists believe that:
1.have received an opinion from BDO
Seidman, LLP, to the effect that, if the Merger occurs in accordance with the
Merger Agreement, the Merger will constitute a re-organization within the
meaning of Section 368(a) of the Internal Revenue Code of 1986, as amended (the
"Code"). Such opinion is based on the Code, regulations and rules now in
effect or proposed there under, current administrative rulings and practice,
and judicial precedent, all of which are subject to change. Any such change,
which may or may not be retroactive, could alter the tax consequences discussed
herein. The opinion is also based on certain assumptions regarding the factual
circumstances that will exist at the Effective Time, including, without
limitation, certain representations made by Setab Alpha, American Artists and
certain shareholders of American Artists. If any of these factual assumptions
is inaccurate, the tax consequences of the Merger andcould differ from those
described herein. The discussion below assumes that the issuance ofAmerican Artists
shareholders hold their shares of American Artists' common stock as a capital
asset within the meaning of Section 1221 of the Code.
As a re-organization under Section 368(a) of the Code, no gain or
loss will be recognized by the American Artists shareholders with respect to
the Class A orand Class B Common Stock in connection therewith, as describedreceived in the Merger
Agreement, will constitute a tax-free reorganization under section
368(a)(1)(A) of the Code.
2. Except for the recognition of gain as required by section
302 of the Code with respect to the receipt by holders of Common
Stock of American Artists of cash in lieu of fractional shares, no
gain or
18
loss will be recognized for Federal income tax purposes by the
holders of American Artists Common Stock upon the exchange of such
stock solely for Class A or Class B Common Stock as a result of the
Merger. 3. The aggregate tax basis of
the Class A orand Class B Common Stock received by an American Artists
Shareholder pursuant toshareholder in the Merger will be equal to the same as the aggregate tax basis of the shares of
American Artists Common Stockcommon stock exchanged therefor, decreased by any
portiontherefor. For purposes of such tax basis allocated to fractional sharesdetermining
whether or not gain or loss on the subsequent disposition of Class A or Class
B Common Stock that are treated as redeemed by Setab Alpha.
4. Thereceived in the Merger is long term or short term, the holding
period of such shares of Class A or Class B Common Stock received by anthe
American Artists Shareholder as part of the
Mergershareholders will include the holding period of the shares of
American Artists Common Stockcommon stock exchanged therefor, provided that the American
Artists Common Stock is held as a capital asset on the date of the
consummation of the Merger.
Neither Setab Alpha nor American Artists has received an opinion of
legal counsel, or requested a ruling from the Internal Revenue Service
with respect to any Federal income tax consequences of the Merger.therefor.
In general, cash received by holders of American Artists Common Stock
exercising their dissenters' rights will be treated as amounts received from
the sale of their shares of American Artists Common Stock, and (provided that
such American Artists Common Stock is a capital asset in the hands of such
shareholders) each such shareholder will recognize capital gain or loss (short
or long term, as appropriate) measured by the difference between the sale price
of such American Artists Common Stock and such shareholder's tax basis in such
American Artists Common Stock.
THE PRECEDING DISCUSSION SUMMARIZES THE MATERIAL FEDERAL INCOME TAX
CONSEQUENCES OF THE MERGER TO AMERICAN ARTISTS SHAREHOLDERS. IT DOES NOT
ADDRESS ALL ASPECTS OF FEDERAL INCOME TAXATION THAT MAY BE RELEVANT TO
PARTICULAR SHAREHOLDERS AND MAY NOT BE APPLICABLE TO SHAREHOLDERS WHO ARE
NOT CITIZENS OR RESIDENTS OF THE UNITED STATES. THE DISCUSSION DOES NOT
ADDRESS THE EFFECT OF ANY APPLICABLE FOREIGN, STATE, LOCAL OR OTHER TAX
LAWS.The preceding discussion summarizes the material Federal income tax
consequences of the Merger to American Artists Shareholders. It does not
address all aspects of Federal income taxation that may be relevant to
particular shareholders and may not be applicable to shareholders who are not
citizens or residents of the United States. The discussion does not address
the effect of any applicable foreign, state, local or other tax laws. EACH
SHAREHOLDER SHOULD CONSULT HIS OR HER OWN TAX ADVISOR AS TO THE PARTICULAR TAX
CONSEQUENCES TO HIM OR HER OF THE MERGER, INCLUDING THE APPLICABILITY AND
EFFECT OF FOREIGN, STATE, LOCAL AND OTHER TAX LAWS.
19
CAPITALIZATION OF SETAB ALPHA
The following table sets forth the capitalization of Setab Alpha as
of April 30, 1996. This table should be read in conjunction with the financial
statements of Setab Alpha, "INFORMATION REGARDING SETAB ALPHA,
INC.--Management's Discussion and Analysis of Financial Condition and Plan of
Operations," "DESCRIPTION OF CAPITAL STOCK" and "PRO FORMA FINANCIAL
STATEMENTS" included elsewhere in this Joint Proxy Statement/Prospectus.
As of April 30, 1996
--------------------------------------------
Actual As Adjusted/(1)/Adjusted(1) Pro Forma/(2)/
-------- ----------------- ---------------Forma(2)
Notes payablePayable $3,791 $ 3,791 $ -- $ 91,297
======= ===========- $91,297
Long-term debt -- -- --
------- ------- ------------ - -
Minority interest -- --- - 50,000
======= ======= ===========
Stockholders'Stockholder's equity
Preferred stock, $.001 par value;
10,000,000 shares authorized,
none issued -- -- --- - -
Common Stock
Class A, $.001 par value;
20,000,000 shares authorized, 20,
700,02070,020 and 711,920712,600 shares
outstanding --- 700 712713
Class B, $.001 par value;
20,000,000 shares authorized,
0, 0 and 5,502,9745,502,277 shares
outstanding -- -- 5,503- - 5,502
Additional paid-in capital --- 19,300 2,496,750
Unamortized advertising credits - - (122,618)
Deficit (4,335) (7,549) (1,665,486)
------- ------- -----------
Total stockholders' equity (4,335) 12,456 837,479
------- ------- -----------714,861
Total capitalization $ ($( 544) $12,456 $ 978,776
------- ------- -----------$856,158
- --------------
/(1)/ As adjusted for Setab Alpha's receipt and application of the
net proceeds from the Public Offering, but not for the effects of the
consummation of the Merger Agreement.
/(2)/-------------------
(1) As adjusted for Setab Alpha's receipt and application of the net proceeds from the Public
Offering, but not for the effects of the consummation of the Merger Agreement.
(2) Pro forma for the effects of the consummation of the Merger Agreement, which will be
accounted for as a recapitalization of American Artists. See "PRO FORMA FINANCIAL STATEMENTS."
20
INFORMATION REGARDING SETAB ALPHA, INC.
SETAB ALPHA, INC.
SELECTED FINANCIAL INFORMATION
The following selected financial information for Setab Alpha is
derived from, and should be read in conjunction with, the historical financial
statements and notes thereto, of Setab Alpha and the pro forma financial
information regarding the Merger included elsewhere in this Proxy
Statement/Prospectus.
Period Commencing on July 5, 1995
(date of inception) through April 30, 1996
------------------------------------------
Statement of Operations Data:
Sales............................Sales. . . . . . . . . . . . . . . . . . . . . . . $ --
Operating Expenses...............Expenses . . . . . . . . . . . . . . . . 4,335
Net Loss.........................Loss . . . . . .. . . . . . . . . . . . . . .. $ (4,335)
As of April 30, 1996
--------------------
Actual As Adjusted/(1)/
------ ----------------Adjusted(1)
Balance Sheet Data:
Working Capital (deficit)......... . . . . . . . . . . . . $ (4,335) $ 12,456
Total Assets . . . . . . . . . . . . . . . . . . . -- 12,456
Long-term Debt...................Debt . . . . . . . . . . . . . . . . . . -- --
Shareholders' Equity (deficit)... (4,335) 12,456
. . . . . . . . . . (4,335) 12,456
________________
(1) As adjusted for Setab Alpha's receipt and application of the net proceeds of the Public Offering,
but not for the effects of the consummation of the Merger Agreement.
19
Management's Discussion and Analysis of
Financial Condition and Plan of Operations
Background
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND PLAN OF OPERATIONS
BACKGROUND
Setab Alpha was incorporated under the laws of the State of Missouri
on July 5, 1995, for the purpose of engaging in a merger or other business
combination with a then unidentified operating company. In May 1996 Setab
Alpha entered the Merger Agreement with American Artists. See "THE MERGER
AGREEMENT" and "INFORMATION REGARDING AMERICAN ARTISTS." Setab Alpha has no
predecessors and has never engaged in any business activity, other than with
respect to organizational matters, the Public Offering and the Merger
Agreement. Setab Alpha's current business plan is to consummate the Merger
Agreement. Such business combination will result in a change in control of
Setab Alpha.
Plan of OperationsPLAN OF OPERATIONS
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 the consummation of the Merger. Setab Alpha's current
business plan is to consummate the Merger Agreement. As of April 30, 1996,
Setab Alpha had recorded no revenues, but had incurred expenses of $4,335, all
of which were incurred in connection with its organization and the Merger. All
of Setab Alpha's cash expenditures to date have been advanced by Setab Alpha's
current shareholders.
Liquidity and Capital ResourcesLIQUIDITY AND CAPITAL RESOURCES
Since its organization, Setab Alpha has satisfied its cash
requirements solely through cash advances from its current shareholders. Setab
Alpha's sole uses of its cash have been filing fees, printing costs, postage
expenses and similar disbursements relating to the organization of Setab Alpha
and the Merger. At June 30, 1996, Setab Alpha had no cash, assets or other
capital resources.
Setab Alpha's current shareholders have agreed, in their discretion,
to make up to an aggregate of $10,000 advances to fund Setab Alpha's immediate
cash needs. The aggregate amount of any such advances bear interest at an
annual rate equal to the prime rate plus 2% (10.25% at June 30, 1996), and are
payable on the date on which a business combination involving Setab Alpha is
effected. At June 30, 1996, the aggregate amount of such advances (together
with accrued interest thereon) was $4,918.03.
Business of Setab Alpha
GeneralBUSINESS OF SETAB ALPHA
GENERAL
Setab Alpha, Inc. was incorporated under the laws of the State of
Missouri on July 5, 1995, for the purpose of engaging in a merger or other
business combination with a then unidentified operating company. Setab Alpha
is in the development stage and has no operating history. Setab Alpha has no
predecessors and has never engaged in any business activity, other than with
respect to organizational matters, the Public Offering and the Merger
Agreement. The Merger Agreement, if consummated, will result in a change of
control of Setab Alpha.
Analysis of MergerANALYSIS OF MERGER
The analysis of the potential business combination with American
Artists has been undertaken by or under the supervision of Setab Alpha's
management, no member of which is a professional business analyst. Management
of Setab Alpha (except for Mr. Van Atta, who has not participated in the
evaluation of the Merger on behalf of Setab Alpha) has no experience in the
type of business conducted by American Artists. Setab Alpha's limited funds
20
and lack of full-time management have made it impractical for the Setab Alpha
to conduct a complete and exhaustive investigation and analysis of the Merger.
Management decisions prior to the consummation of the Merger have been and will
be made without detailed feasibility studies, independent analysis, market
surveys and the like, which would be desirable and which might be obtained if
the Setab Alpha had more funds available to it.
Notwithstanding the fact that Setab Alpha may technically be the
acquiring entity, generally accepted accounting principles require that this
transaction be accounted for as if Setab Alpha had been acquired by American
Artists as the controlling entity of the resulting business. Therefore, a
write-up in the carrying value of the assets of either company will not be
permitted.
PropertyPROPERTY
Setab Alpha does not own or lease any real or personal property.
EmployeesEMPLOYEES
Setab Alpha has no employees. Setab Alpha's operations are conducted
by its officers and directors without compensation, on a part-time basis. To
effect its organization and the Public Offering, however, Setab Alpha has
entered into separate consulting agreements with its two shareholders. See
"MANAGEMENT OF SETAB ALPHA--Certain Transactions and Relationships."
LitigationLITIGATION
Setab Alpha is not a party to any litigation and, to Setab Alpha's
knowledge, no such proceedings are threatened.
Markets for Capital Stock; DividendsMARKETS FOR CAPITAL STOCK; DIVIDENDS
The Class A Common Stock and Class B Common Stock are not traded on
an established public market. As of June 30, 1996, there were 20 shares of
Class A Common Stock outstanding and 2 recordholders of such shares. No shares
of Class B Common Stock had been issued as of such date. Setab Alpha has not
declared or paid any cash dividends on its Class A Common Stock or its Class
B Common Stock since its formation, and the Board of Directors intends to
retain all of its earnings, if any, for the development of the Surviving
Corporation's business. The declaration of payment of cash dividends in the
future will be at the discretion of the Surviving Corporation's Board of
Directors.
Management of Setab Alpha
Directors and Executive OfficersMANAGEMENT OF SETAB ALPHA
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth certain information concerning Setab
Alpha's directors and executive officers:
Name Age Position
---- --- --------
Douglas J. Bates 38 Director, President and Chief
Executive Officer
J. Eric Van Atta* 32 Director and Vice President
* After the completion of the Merger, Mr. Van Atta will also serve as an
executive officer of the Surviving Corporation.
21
The executive directors and officers of Setab Alpha devote such time
and attention to the affairs of Setab Alpha as is reasonable and necessary.
As a result of Setab Alpha's currently limited activities, its executive
officers devote less than 10% of their time to the affairs of Setab Alpha. Set
forth below is a description of the background of the officers and directors
of Setab Alpha.
DOUGLASDouglas J. BATESBates has been a director and President and Chief
Executive Officer of Setab Alpha since its organization in July 1995. Since
1989, Mr. Bates has been associated with the law firm of Gallop, Johnson &
Neuman, L.C., St. Louis, Missouri.
J. ERIC VAN ATTAEric Van Atta has been a director and Vice President of Setab
Alpha since April 1996. He is Vice President and Secretary of American
Artists, by whom he has been employed since its organization in July 1991.
Prior to that time he was Vice President and Secretary of MovieAmerica
Corporation.
The Board of Directors of Setab Alpha will consist of such number
of directors as are determined from time to time by the Board of Directors,
which number will not be less than 3 nor more than 15 persons. All directors
who serve in such capacity for a one-year term or until their successors have
been elected and qualified, subject to earlier resignation, removal or death.
At the date of this Prospectus, there exists one vacancy on the Board of
Directors of the Setab Alpha. No action has been, or will be, taken by the
Setab Alpha to fill such vacancy until the Merger has been consummated. Setab
Alpha's officers serve at the discretion of the Board of Directors, subject to
any effective contractual arrangements. Following the consummation of the
Merger the Board of Directors and management of the Surviving Corporation will
consist of those persons who currently are serving in such positions with
American Artists. See "INFORMATION REGARDING AMERICAN ARTISTS--Management.ARTISTS-- Management."
In addition, the parties intend for the service of Mr. Bates to remain
available to the Surviving Corporation on a part time or consulting basis to
be determined through arms'-length negotiations following consummation of the
Merger.
DirectorMerger to assist the Surviving Company in (i) the identification, evaluation
and Executive Compensationacquisition of complementary businesses or properties, and (ii) the
establishment and maintenance of policies and procedures necessary to assure
compliance with laws applicable to registered companies.
DIRECTOR AND EXECUTIVE COMPENSATION
The compensation of Setab Alpha's directors and executive officers
is fixed by the Board of Directors. Consistent with Setab Alpha's present
policy, however, no director or executive officer of Setab Alpha receives
compensation for services rendered to Setab Alpha. Such persons are entitled
to be reimbursed for expenses incurred by them in pursuit of Setab Alpha's
business objectives. Moreover, Setab Alpha has entered into a consulting
agreement with its President under which Mr. Bates has been paid the sum of
$5,000 on the effective date of the SB-2 Registration Statement.
Certain Transactions and RelationshipsCERTAIN TRANSACTIONS AND RELATIONSHIPS
In July 1995, Setab Alpha was incorporated in the State of Missouri
with an authorized capital of 30,000,000 shares of Class A Common Stock at a
par value of $.001 per share. In connection with its organization, Setab Alpha
issued to Alan G. Johnson and to Douglas J. Bates 10 shares of Class A Common
Stock each, at a purchase price of $.01 per share.
At June 30, 1996, Setab Alpha was indebted to Messrs. Bates and
Johnson in the aggregate principal amount of $2,741.90 and $2,055.33,
respectively. Such amount was advanced to Setab Alpha for the purpose of
funding disbursements relating to the organization of Setab Alpha and the
Merger. The indebtedness of Setab Alpha to Messrs. Bates and Johnson is
unsecured, bears interest at an annual rate equal to the prime rate plus 2% and
is payable on the date a business combination is effected.
Pursuant to separate letters of engagement dated July 5, 1995, Setab
Alpha has agreed to pay to Alan G. Johnson and Douglas J. Bates the sum of
$5,000 each on the effective date of the SB-2 Registration Statement, as
consideration for services rendered by such persons in connection with the
formation and organization of Setab Alpha.
22
PRINCIPAL SHAREHOLDERS OF SETAB ALPHA
The following table sets forth certain information, assuming
completion of the Public Offering, with respect to the beneficial ownership of
Setab Alpha's Class A Common Stock as of June 30, 1996, with respect to each
person known by Setab Alpha to be the beneficial owner of more than five
percent of Setab Alpha's outstanding Class A Common Stock, by each director or
person selected to become a director, by each executive officer and by all
directors and officers of Setab Alpha as a group. Each person named has sole
voting and investment power with respect to the shares indicated, except as
otherwise stated in the notes to the table. At June 30, 1996, Setab Alpha had
two shareholders of record.
BENEFICIAL OWNERSHIP BENEFICIAL OWNERSHIP
PRIOR TO THE MERGER(A) AFTER THE MERGER
------------------------- -------------------------
NUMBER OF
NUMBER CLASSBeneficial Ownership Beneficial Ownership
Prior to the Merger(a) After the Merger
Number of
Number Class A PERCENT OF PERCENT OF
OF SHARES PERCENT SHARES CLASSPercent of Percent of
of Shares Percent Shares Class A ALL COMMON
----------- ------------ ---------- ------------- --------------All Common
Douglas J. Bates
244 B Greenwood Drive 125,010 17.9% 125,010 17.9% 2.0%
Ballwin, Missouri 63011
J. Eric Van Atta
__ __(b) __ __(b) 1.3%(b)
1245 Fowler Street, N.W. - -(b) - -(b) 1.3%(b)
Atlanta, Georgia 30318
Alan G. Johnson
325 Highway DD 125,010 17.9% 125,010 17.9% 2.0%
325 Highway DD
Defiance, Missouri 63341
All directors and officers
as a group
(2 persons).......................... .............. 125,010 17.9% 125,010 17.9% 125,010 17.9% 3.3%
--------------3.3%
_______________
(a) Assumes that the named shareholders will accept Setab Alpha's offer of certain shares reserved for
purchase by them in the Public Offering.
(b) Mr. Van Atta is the beneficial owner of 140,000 shares of the Common Stock of American Artists
(including 75,000 shares obtainable upon the exercise of vested options) which will be converted into shares of
Setab Alpha's Class A and Class B Common Stock upon the effectiveness of the Merger.
INFORMATION REGARDING AMERICAN ARTISTS
GENERAL
American Artists Film Corporation, a Georgia corporation, and its
subsidiaries ("AAFC Group") are engaged in the production of television
commercials, the development and production of television specials and related
properties, and the development of feature-length motion picture screenplays
and other media products for possible future production or license.
25
AAFC Group's headquarters is at 1245 Fowler Street, N.W., Atlanta,
Georgia 30318 and its telephone number is 404/876-7373.
In August 1993 AAFC Group acquired all of the outstanding capital
stock of First Light Entertainment Corporation ("First Light") from its founder
and sole shareholder Vivian Jones. In June 1994 AAFC Group subscribed for 49%
of the outstanding capital stock of Diversity Filmworks, Inc. ("Diversity"),
formerly First Light Diversity, Inc., which was organized and is 51%-owned by
Tyrone C. Johnson. See "INFORMATION REGARDING AMERICAN ARTISTS -- Certain
Related Transactions."
SELECTED FINANCIAL INFORMATION
STATEMENT OF OPERATIONS DATA:
NINE MONTHS ENDED
APRILStatement of Operations Data:
Nine Months Ended Year Ended
April 30, YEAR ENDED JULYJuly 31,
--------------------------- ---------------------------
1996 1995 1995 1994
----------- -------------- -------------- -----------
Revenues....................... $1,719,225 $3,409,871 $3,939,531 $2,034,420Revenues $ 941,916 $3,172,061 $3,701,721 $1,944,649
Revenues of Diversity(1) 777,309 237,810 237,810 89,771
Net income (loss).............. (816,543) (816,572) 222,065 (7,793) (466,567)
Pro forma net income (loss)
per share/(1)/................share(2) (.14) .04 --- (.09)
Pro forma weighted average
common shares and
equivalent shares
outstanding/(1)/..............outstanding(2) 5,819,763 5,284,857 5,280,653 4,973,116
BALANCE SHEET DATA:
Balance Sheet Data:
April 30, 1996
--------------------------- As of
Actual Pro Forma/(2)/Forma(3) July 31, 1995
---------- -------------- -------------
Film costs, net................net $ 502,474 $ 502,474 $ 415,721
Total assets................... 1,490,366 1,432,822 1,414,059assets 1,271,262 1,213,718 1,287,862
Stockholders' equity........... 895,023 837,479 790,894
---------- ---------- ----------
- ------------
(1) The consummation of the Merger Agreement will be accounted for
as a recapitalization of American Artists, in which (i) American Artists
will be deemed to have (a) created a second class of common stock, such
that its authorized capital consists of Class A and Class B Common Stock,
and (b) effected a recapitalization in which an aggregate of 11,900
shares of Class A Common Stock and 5,502,974 of Class B Common Stock are
exchanged for the outstanding shares of its common stock (an exchange
ratio of an aggregate of .5862 Class A or Class B shares for each
presently outstanding share), and (ii) American Artists is deemed to have
issued shares of its Class A Common Stock in exchange for the net assets
of Setab Alpha, recorded at their historical cost. Pro forma net income
(loss) per share is computed to reflect the effect of such a reverse
stock split on American Artists' historical shares outstanding.equity 772,405 714,861 668,276
__________
(1) American Artists' 49% ownership of Diversity is accounted for using the equity method of
accounting, as a result of which Diversity's revenues and expenses are not included in the consolidated amounts,
and instead American Artists' share of Diversity's net income or loss is presented as a separate single line item
on the consolidated statement of operations. See Note 1 of Notes to American Artists' Consolidated Financial Statements, and
Pro Forma Financial
Statements.
26
(2) The consummation of the Merger Agreement will be accounted for as a recapitalization of
American Artists, in which (i) American Artists will be deemed to have (a) created a second class of common
stock, such that its authorized capital consists of Class A and Class B Common Stock, and (b) effected a
recapitalization in which an aggregate of 12,600 shares of Class A Common Stock and 5,502,277 of Class B Common
Stock are exchanged for the outstanding shares of its common stock (an exchange ratio of an aggregate of .5862
Class A or Class B shares for each presently outstanding share), and (ii) American Artists is deemed to have
issued shares of its Class A Common Stock in exchange for the net assets of Setab Alpha, recorded at their
historical cost. Pro forma net income (loss) per share is computed to reflect the effect of such a reverse stock
split on American Artists' historical shares outstanding. See Note 1 of Notes to American Artists' Consolidated
Financial Statements, and Pro Forma Financial Statements.
(3) Pro forma for the effect of the consummation of the Merger Agreement. See Note (1) above
and Pro Forma Financial Statements.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATION
GENERAL
AAFC Group is engaged in two lines of business; the development and
production of television, cable and feature films, including documentaries, and
in the contract production of films, generally television commercials.
Revenues from the license or sale of films produced by American
Artists are generally recognized when the film is exhibited or is available for
distribution in the applicable market. In general, the majority of the revenue
to be derived from a film will be earned during the two to three years
following its initial release. Accordingly, film revenues will fluctuate
dependent on the timing of AAFC Group's production and release of films.
Additionally, in some instances the level of revenues generated by
a film in the periods immediately following its release may not be directly
related to the film's success. As described below, AAFC Group will often sell
certain distribution rights, in advance of production, for fixed amounts as a
means of financing production costs. In those instances, the film's success
might not affect revenues initially, but could generate revenues later as the
result of distribution in secondary markets or the sale of ancillary products.
AAFC Group capitalizes the costs incurred to develop, produce and
print films, as well as advertising and other costs that benefit future
periods. Capitalized film costs are amortized, using the individual film
forecast method, under which capitalized costs are amortized based on total
projected gross revenues.
Several factors can affect the relationship that amortized film costs
bears to film revenues. AAFC Group has in the past, and may in the future,
exchanged interest in the revenues from certain or all distribution for
contributions towards the costs of production. Capitalized costs, and the
related amortization, are reduced by such contributions, while revenues are
reduced for outside interests. Accordingly, the terms of the arrangements,
which can vary from film to film, in addition to the total costs of the film,
will affect the relationship of film costs to film revenues.
AAFC Group engages in the commercial production business through
its wholly-owned subsidiary, First Light, and through American Artists' 49%
ownership of Diversity (First Light and Diversity, together, being referred to
as the "Commercial Companies"). AAFC Group's commercial production services
are performed by the Commercials Companies under short-termshort- term (typically less
than two months) agreements. The Commercials Companies generally use fixed fee
agreements. Revenues and costs will therefore vary based on the number of
production assignments obtained and completed in any particular period, and the
profitability of the individual assignments. The number of production
assignments obtained in any particular period will be influenced by both the
overall level of commercial production activity in the markets in which the
Commercial Companies operate, and their success in competitive biddings, and
can therefore fluctuate significantly. Overall commercial production
activities influenced by, among other things, the general economic trends that
effect the advertising plans and expenditures of commercial and not-for-profit
industries and enterprises in the Commercial Companies' geographic markets.
Such general economic trends and conditions can neither be controlled, nor
predicted by AAFC Group. The Commercial Companies' success in competitive
biddings will depend on the potential customer's assessment, relative to other
bidders, of the production, talent and capabilities offered by AAFC Group and
the quoted fee.
The consolidated financial statements of American Artists included
elsewhere herein reflect the investment in Diversity accounted for using the
equity method of accounting, under which American Artists' interest in
Diversity's operating results is presented as a single, separate line item in
the consolidated statement of operations, and American Artists' net investment
in and advances to Diversity are presented as a single item in the consolidated
balance sheet. Revenues, as reflected in the consolidated statement of
operations, do not include the revenues of Diversity. Financial information
for Diversity is presented separately in Note 1 of Notes to American Artists'
Consolidated Financial Statements. However, in anticipation of the Merger, in
September, 1996, American Artists and the other stockholder of Diversity
entered into an agreement concerning the size and composition of Diversity's
board of directors. See "-Certain Related Transactions." As a result,
effective August 1, 1996, American Artists will consolidate the accounts of
Diversity in its consolidated financial statements, as a result of which the
consolidated financial statements for fiscal 1997 will lack comparability in
certain respects to those for the earlier periods.
RESULTS OF OPERATIONS
YEAR ENDED JULY 31, 1995 COMPARED TO YEAR ENDED JULY 31, 1994.
Revenues for the year ended July 31, 1995 ("fiscal 1995") increased
93.6%90.4% to $3,939,531$3,701,721 from $2,034,420$1,944,649 for the year ended July 31, 1994 ("fiscal
1994"). Revenues from both films and commercial production increased.
27
Film and related revenues for fiscal 1995 and 1994 were as follows:
1995 1994
-------- --------
Angels: The Mysterious
Messengers ("Angels I") $ 99,985 $373,951
Angels II: Beyond The
Light ("Angels II") 484,855 -
Book Royalties 297,491 -
-------- --------
$882,331 $373,951
======== ========
Film and related revenues in fiscal 1994 were comprised primarily
of the television license fee for Angels I, which was released in May 1994.
Angels II was released in October 1994, and revenues for fiscal 1995 include
the television license fee for Angels II, as well as foreign and domestic video
sales for both films. Film revenues in fiscal 1995 also included royalties
received from the publication and sale of "Angels: The Mysterious Messengers,"
which was based in part on the Angels I film and first published in September
1994. Revenues for the Angels I and Angels II films reflect the effects of
AAFC Group's agreement with Greystone Communications, Inc. ("Greystone"), the
NBC Television Network, Alfred Haber Distribution, Inc., Calling Card Company,
Inc., Time-Life Video and the individuals who purchased Revenue Participation
Joint Venture Investment Units. See "INFORMATION REGARDING AAFC GROUP -
Business of American Artists - Angels." As the result of those agreements, NBC
was entitled to certain showings of Angels I and Angels II in return for
certain fees as to which AAFC Group was entitled to 25% after the return to the
individual investors of $128,000, and AAFC Group was entitled to receive, net
of the revenues to the other parties, 29.5% of the foreign video sales and
17.0% of domestic video sales.
The amortization of film costs equaled 72.4% and 59.0% of film and
related revenues in fiscal 1995 and 1994, respectively. AAFC Group's film
costs, as a percentage of projected total revenues, were higher for Angels II
than for Angels I principally as the result of differences in the revenue and
cost sharing agreements between AAFC Group and other interests owners in the
films. For both the Angels I and Angels II films, AAFC Group and Greystone,
in general, shared equally the costs of producing the films; however, AAFC's
costs for the Angels I film was also reduced by the $128,000 invested by the
purchasers of the Revenue Participation Joint Venture Investment Units. See
"INFORMATION REGARDING AAFC GROUP - Business of American Artists -Angels." In
producing both Angels I and Angels II, a major objective of AAFC Group was to
establish itself in the industry; accordingly, in order to obtain production
capital, AAFC Group agreed to revenue sharing terms which may not be
representative of those it will be able to obtain on future projects.
CommercialFirst Light's commercial production revenues increased 84.1%79.5% in
fiscal 1995 from $1,660,469$1,590,698 to $3,057,200.$2,819,390. Additionally, Diversity, which is
accounted for on the equity method, generated commercial production revenues
of $237,810 in fiscal 1995, compared to $89,771 in fiscal 1994. AAFC Group
produced approximately sixty minutes of commercials in fiscal 1995 compared to
twenty-five minutes in fiscal 1994. AAFC Group began commercial production in
September, 1993, after the August 31, 1993 completion of its acquisition of
First Light Entertainment Corporation ("First Light"). CommercialSee Note 2 to Notes to
American Artists' Consolidated Financial Statements. Diversity commenced
operations in June, 1994. First Light's commercial production costs were 78.5%77.9%
and 90.6%91.1% of production revenues in fiscal 1995 and 1994, respectively. The
gross margin (revenues less production costs) from commercial production was
$658,535$622,674 and $156,829$139,055 in fiscal 1995 and 1994, respectively. Commercial
production costs, as a percentage of related revenues, declined in fiscal 1995
as the result of the elimination of cost inefficiencies and the improvement of
cost controls during and after First Light's first year of operations. Profit
margins for commercial production were not significantly affected by changes
in competitive conditions during fiscal 1994 and 1995. However, competitive
conditions in the commercial production industry, and the cost saving efforts
by advertisers, did produce a general lowering of the industry's margins
between 1991 and 1994, and such conditions, should they reoccur, could again
adversely affect First Light's profit margins.
Selling, general and administrative ("SG&A") expenses were $896,613$801,106
in fiscal 1995 and $765,357$745,939 in fiscal 1994. The majority of AAFC Group's SG&A
expenses are not directly revenue related, and therefore will not necessarily
vary proportionately with increases or decreases in revenues. SG&A expenses
were higher in fiscal 1995 as the result of the addition of research staff,
which increased salaries and related costs by approximately $98,000, and legal
fees of approximately $20,000 related to the arbitration with Greystone (SeeGreystone. See
"INFORMATION REGARDING AMERICAN ARTISTS - Business of AAFC Group - Angels")Angels."
The loss of $59,646 resulting from American Artists' investment in
Diversity results from the loss of that amount incurred by Diversity in its
first full year of operations.
Interest expense was essentially unchanged between fiscal 1995 and
fiscal 1994. Interest bearing debt was reduced in fiscal 1995; however,
approximately 53% of AAFC Group's debt bears interest at a variable rate, and
the effect of lower borrowings was offset by the effect of higher interest
rates.
The net loss for fiscal 1995 was $7,793, compared to a net loss of
$466,567 for fiscal 1994.
NINE MONTHS ENDED APRIL 30, 1996 COMPARED TO NINE MONTHS ENDED APRIL
30, 1995
Revenues for the first nine months of the year to end July 31, 1996
("fiscal 1996") were $1,719,225,$941,916, which represented a $1,690,646$2,230,145 or 49.6%70.3% decline
from revenues of $3,409,871$3,172,061 for the nine months ended April 30, 1995. 28
However,
revenues for Diversity, which is accounted for on the equity method and
therefore not included in consolidated revenues, increased 327% from $237,810
for the nine months ended April 30, 1995 to $777,309 for the first nine months
of fiscal 1996. A decline in American Artists' film revenues, from $713,176
for the nine months ended April 30, 1995 to $22,012 for the first nine months
of fiscal 1996, was the cause for $691,164 of the decline in revenues. As
previously discussed, the majority of the revenues from a film will be earned
during the two to three years following its initial release. The last film
released by American Artists, Angels II, was released in October 1994, and the
decline in revenues is consistent with the absence of more recently released
films.
RevenuesFirst Light's revenues from commercial production declined by
$999,482$1,538,981 or 37.1%62.6% from the nine months ended April 30, 1995 to the first nine
months of fiscal 1996, due to a decline in the volume of assignments obtained.
On a combined basis with Diversity, commercial production revenues declined by
37.1%. Commercial production revenue declined for the first nine months of
fiscal 1996 as a result of both an overall decline of commercial production
activity in the Commercial Companies' markets and a decline in their rate of
success in competitive bids. The increase experienced by Diversity resulted
from the fact that fiscal 1995 represented its first year of operations, and
therefore, during the interim 1995 period Diversity was still in its start-up
phase. Commercial production revenues are estimated to be $100,000 and $450,000$700,000 for the
monthsfourth quarter of Mayfiscal 1996. During the fourth quarter of fiscal 1995, the
commercial companies experienced an increase in both the number of requests for
production proposals they received, and June 1996, andtheir rate of success in competitive
bidding situations. On the basis of that experience, management believes that
these trends arethe decline in revenues experienced in the first nine months of fiscal 1996 was
not necessarily indicative of permanent developments, and believesbelieve that
commercial production revenues will increase during the balance of fiscal
1996 and into fiscal 1997.
Film cost amortization was $8,077 for the first nine months of fiscal
1996, compared to $516,339 for the nine months ended April 30, 1995. The
decline was due to the decline in film revenues. CommercialFirst Light's commercial
production costs, as a percentage of related revenues, were 79.4%80.0% for the nine
months ended April 30, 1996 as compared to 79.4%78.6% for the first nine months of
fiscal 1995. Resulting gross profits for commercial production were $350,070$184,113
and $554,600$525,803 for the nine months ended April 30, 1996 and 1995,
respectively.
Selling, general and administrative expenses increased $656,856$630,472
to $1,175,985$1,080,770 for the nine months ended January 31, 1996 from $519,129$450,298 for the
first nine months of fiscal 1995. An increase in marketing related expenses
of approximately $65,000 was a principal cause of the increase in SG&A
expenses. That increase resulted from increased marketing efforts being
undertaken by the Commercial Companies in an effort to reverse the decline in
their revenues. Also, contributing to the increase in SG&A were costs of
$90,000 incurred in pursuing financing for the production of "I.R.S., Death and
Taxes," and other projects and legal fees of $60,000 related to the Greystone
arbitration, and an overallarbitration. The remaining increase in most SG&A expenses reflect increases in
essentially all categories of SG&A expenses, resulting from the increase in
pre-production activity for "I.R.S., Death and Taxes" and the Millennium
related projects.
Interest expense declined from $10,243 in the first nine months of
fiscal 1995 to $4,592 for the comparable period in fiscal 1996 due to a decline
in outstanding debt.
American Artists recognized income of $70,742 from its investment in
Diversity for the nine months ended April 30, 1996, as compared to a loss of
$40,034 for the first nine months of fiscal 1995. Diversity generated positive
operating results in the fiscal 1996 interim period principally as a result of
the increase in its revenues.
As a result of the foregoing factors (principally the decline in film
revenues, the decline in commercial production revenues, and the increase in
SG&A expenses), AAFC Group incurred a net loss of $816,572 for the first nine
months of fiscal 1996, compared to net income of $222,065 for the nine months
ended April 30, 1995.
LIQUIDITY AND CAPITAL RESOURCES
AAFC Group's strategy is to finance its operating (i.e. selling,
general and administrative) expenses from the gross profits generated by its
commercial production operations while utilizing equity financing,
pre-production license revenues, and co-producer contributions to finance the
production of its films. Using this strategy, AAFC hopes to insulate itself
from the risks of significant operating losses and negative cash flows, while
retaining the potential for significant profits and positive cash flows from
highly successful films. The success of such a strategy is, however, dependent
on AAFC Group's ability to obtain sufficient, and sufficiently profitable,
commercial production contracts.
Operating cash flows were $17,692$19,958 in fiscal 1995, principally as the
result of a 178,432 shortfall in the coverage of SG&A expenses by commercial
production profits of $238,078.profits. The marginal operating cash flows were financed with the
proceeds from the issuance of shares of common stock. Operating cash flows
were a negative $425,746$430,930 in fiscal 1994, and also were financed from the
proceeds of equity offerings. For the nine months ended 29
April 30, 1996,
operating cash flows were a negative $887,885,$974,813, again due to a shortfall in the
coverage of SG&A expenses by commercial production profits.
Operating cash flows include as a cash outflow expenditures
capitalized to develop and produce motion pictures. Such expenditures were
$714,486 and $405,729 for fiscal 1995 and 1994, respectively, and $94,830 for
the nine months ended April 30, 1996. These amounts exclude development and
production costs financed by outside investors which approximated $347,000 and
$286,000 in fiscal 1995 and 1994, respectively. AAFC Group will continue to
depend on financing provided by outside investors, the pre-production sale of
distribution rights, or the proceeds from the sale of its equity securities,
to finance the production of motion pictures. Accordingly, the timing of the
production of motion pictures will depend on the availability of such
financing.
AAFC Group is currently planning to film "I.R.S., Death and Taxes,"
in fiscal 1997, and is currently offering interests in D&T,of up to $4,000,000 in
Death and Taxes Film Company, L.L.C. ("D&T"), a Georgia limited liability
company of which AAFC Group will be the manager, to obtain production
financing. If the full amount of the $4,000,000 sought is obtained, AAFC Group
believes that "I.R.S., Death and Taxes" could be produced with that financing.
In the event the offering raises the minimum of $2,000,000, it is anticipated
that the remaining production budget could be financed through one or both of
the proceeds from other equity offerings or fees from the pre-production sale
of certain distribution rights. The amounts raised from the sale of interest
in D&T will be used to reduce AAFC Group's investment in the production of the
film. Investors will be entitled to receive, from the revenue interests
retained by AAFC Group (as opposed to granted to other co-producers), all of
the revenue up to 110% of the amount invested, and thereafter 50% of the
revenue. The precise effect that the formation of D&T will have AAFC Group's
future result of operations and financial condition will depend on the amount
raised, and the costs and revenues from the film, and, therefore, cannot be
predicted at this time. There can be no assurance that D&TAAFC Group will be able
to complete the private placement of interests in D&T, or finance the proposed
film in an alternative way, nor that the film would provide a profit to AAFC
Group if produced.
AAFC Group has also been developing a concept for a related group
of television specials and other media preparations pertaining to the
forthcoming financing end of the second millennium of the modern era. In October 1994
AAFC Group organized Millennium Group, L.L.C. ("MG"), as a Georgia limited
liability company with itself as Manager, for the purpose of producing and
exploiting an initial one-hour television special on the subject of the
millennium. MG has financed certain research and development of the millennium
materials through a private placement of $50,000 of limited liability company
interests with three accredited investors. AAFC Group has presented its
"millennium" concept and certain treatments to several over-the-air and cable
television networks. Several networks have indicated interest in the
properties but AAFC Group is unable to state whether the interest will continue
or whether the parties will reach a mutually satisfactory agreement through
negotiation. AAFC Group's goal is also to derive related video and book
properties from any television program that might be produced. If MG is able
to obtain network or other funding for producing the program, which is
currently projected to have a production budget ranging from $30,000 to
$100,000, the investors are entitled to recover 100% of MG"s revenues from the
program until their initial investment has been returned, 50% thereafter until
an equal additional amount has been received, and 10% of any further revenues.
All other revenues would be paid to AAFC Group as management fees.
Accordingly, the timing of the production of this program, or the source of the
production financing cannot be predicted with certainty.
AAFC Group's negative operating cash flows, which include the
funding of Diversity's losses, see "INFORMATION REGARDING AAFC GROUP - First
Light Entertainment and Diversity Filmworks", ($59,646 and $1,644 in fiscal
1995 and 1994, respectively) have, as previously stated, generally been caused
by a shortfall in the coverage of SG&A by commercial production profits. Such
shortfalls in the coverage of SG&A by commercial production profits the will cause
AAFC Group's liquidity to be constrained until commercial production revenues,
and the resulting profits, increase. During the first nine months of fiscal
1996, AAFC Group again financed this shortfall principally by issuing equity
securities, and management anticipates the same will occur in the fourth
quarter of fiscal 1996. The use of equity or debt financing will continue to
be necessary until commercial production profits are sufficient to cover SG&A
expenses, except in periods when significant film revenues are realized and can
be devoted to such use. ThereIn July 1996, AAFC Group entered into an agreement
that provides it with a $75,000 line of credit. Borrowings under the line of
credit bear interest at the rate of 8.25% per annum, and are due November 14,
1996. Except for the capital available under this line of credit, there can
be no assurance that any such debt or equity financing will be available to
AAFC Group, or if available, that such financing would be available on terms
considered acceptable to AAFC Group. The inability to obtain such equity or
debt financing as needed could cause AAFC Group to have to reduce the scope of
its operations.
30
OTHER
In March 1995, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standard ("SFAS") No. 121, "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to be
Disposed of." AAFC Group will adopt SFAS No. 121 as of August 1, 1996 and its
implementation is not expected to have a material effect on AAFC Group's
consolidated financial statements.
In October 1995, the FASB issued SFAS No. 123, "Accounting for
Stock-Based Compensation." SFAS No. 123 is effective December 15, 1995, and
requires either the application of an option pricing model measurement for
stock compensation, or, if a company elects to continue to measure stock
compensation based on the difference between the market price of the company's
common stock and the exercise price of the employer stock option, disclosure
of what the effects of the application of option pricing model measurement
would have been. AAFC Group will initially apply SFAS No. 123 in fiscal 1996,
and will elect to disclose the effect that the application of option pricing
model measurement would have had for options granted from October 1, 1995. The
adoption of SFAS 123 will not impact AAFC Group's consolidated results of
operations, financial position, or cash flows.
BUSINESS OF AAFC GROUP
GENERAL
American Artists, a Georgia corporation, and its subsidiaries
("AAFC Group") are engaged in the production of television commercials, the
development and production of television specials and related properties, and
the development of feature-length motion picture screenplays and other media
products for possible future production or license.
AAFC Group's headquarters is at 1245 Fowler Street, N.W.,
Atlanta, Georgia 30318 and its telephone number is 404/876-7373.
In August 1993 AAFC Group acquired all of the outstanding capital
stock of First Light Entertainment Corporation ("First Light") from its founder
and sole shareholder Vivian Jones. In June 1994 AAFC Group subscribed for 49%
of the outstanding capital stock of Diversity Filmworks, Inc. ("Diversity"),
formerly First Light Diversity, Inc., which was organized and is 51%-owned by
Tyrone C. Johnson. See "INFORMATION REGARDING AMERICAN ARTISTS -- Certain
Related Transactions."
BUSINESS OF AMERICAN ARTISTS
Since its organization by Steven D. Brown and Rex Hauck in July
1991, American Artists' activities have consisted primarily of producing
network television specials, developing other television specials for possible
future production, developing various feature-film screenplays and treatments
for possible future production, and seeking to arrange financing for production
and exploitation of one or more of its feature-
filmfeature-film properties.
Angels. In 1994 AAFC Group produced with Greystone Communications,
Inc. ("Greystone"), two 2-hour prime time specials for the NBC television
network: "Angels: The Mysterious Messengers," hosted by Patty Duke, and
"Angels II: Beyond the Light," hosted by Stephanie Powers. NBC has aired the
first program twice and the second program one once. The network is entitled to
one additional broadcast of the second program prior to November 1996;
thereafter NBC has no further rights to the properties. In June 1996, AAFC
Group entered a three-year license agreement, authorizing Turner Original
Productions, Inc. ("Turner") to broadcast two Angels programs on TBS
Superstation for a total license fee of $100,000. Under the agreement, the
licensor bears any obligation for residuals and must refrain from licensing the
programs to any other broadcaster in the United States during the term of the
license.
31
AAFC Group also entered a 3-year agreement in July 1994 with Alfred
Haber Distribution, Inc. for foreign distribution of the Angels programs.
Under that agreement AAFC Group and Greystone receive 75% of any license fees,
less expenses, obtained from licensing the AngelAngels programs outside the United
States. License fees have now been received for television, cable and
satellite broadcast of the programs in more than 55 countries.
Under a May 1994 agreement, Calling Card Company, Inc. ("CCC")
marketed home videos of the Angels programs through advertising during the NBC
network broadcasting, providing royalties, which were shared by NBC, American
Artists and Greystone, of $223,000 through January 31, 1996. In addition, a
video edition of the first Angels program has been separately marketed by
Time-Life Video under an August 1994 agreement which granted Time-Life
exclusive home-video rights to the program in the United States and Canada for
a five-year term. The agreement provided for $100,000 in non-refundable
advance royalties and guaranteed minimum royalties of $10,000 per year for the
duration of the agreement after recoupment of the advanced royalties.
Royalties under the agreement are shared among NBC, American Artists, and
Greystone.
Another short treatment of the Angels theme was developed and
produced for CCC at a cost to AAFC Group of approximately $30,000. Payments
to AAFC Group are based on revenues generated by CCC through use of the
treatment as a sales aid. In fiscal 1996, AAFC Group determined that because
of the low current level of sales experienced by CCC, revenues due to AAFC
Group from CCC for this project is not expectedare likely to result in full recovery of costs.be insufficient to cover the
associated costs to AAFC Group.
AAFC Group also developed a book entitled Angels: The Mysterious
Messengers, edited for American Artists by Mr. Hauck and published by
Ballantine Books, Inc. The book has also been published in German, Italian,
French and Spanish edition. Advance royalties for the book amounted to
$250,000.
The agreement among American Artists, Greystone and NBC provided
for (i) the payment of license fees by NBC to American Artists and Greystone
and (ii) the payment to NBC of 50% of the royalties from videos sold during the
NBC broadcasts and 20% of the royalties from videos sold by Time-Life Videos.
Under an agreement dated May 1994, AAFC Group and Greystone agreed to divide
equally all revenues from the two television specials and certain derivative
properties. The scope of that agreement and the definition of allowable
expenses have become the subject of dispute between the parties and are the
subject of a pending arbitration proceeding in Los Angeles, California. See
"Arbitration, Litigation and Intellectual Property."
AAFC Group financed development of the initial Angels program
primarily through the private placement of $128,000 of its Revenue
Participating Joint Venture Investment Units with eight accredited investors.
The private placement was completed in February 1994. Investors receive 100%
of AAFC Group's revenues from the first television special and ancillary rights
until their initial investment has been returned, 50% thereafter until an equal
additional amount has been received, and 25% of any further revenues. The
investors also receive 5% of AAFC Group's revenues from the second television
special. Through April 1996, the investors had received $1.30 for each dollar
of their investment. Additional distributions may be made later depending on
future revenues of the Angels programs.
Other Television Projects. Since 1995 AAFC Group has been developing,
under Mr. Hauck's supervision, the concept for a related group of television
specials and other media properties pertaining to the forthcoming end of the
second millennium of the modern era. The development work has included
historical and scientific research, development of themes and preparation of
story treatments.
AAFC Group has presented its "millennium" concept and certain
treatments to several over-the-air and cable television networks. Several
networks have indicated interest in the properties but AAFC Group is unable to
state whether the interest will continue or whether the parties will reach a
mutually satisfactory agreement through negotiation. AAFC Group's goal is also
to derive related video and book properties from any television program that
might be produced.
32
In October 1994 AAFC Group organized Millennium Group, L.L.C.
("MG"), as a Georgia limited liability company with itself as Manager, for the
purpose of producing and exploiting an initial one-hour television special on
the subject of the millennium. MG has financed certain research and
development of the millennium materials through a private placement of $50,000
of limited liability company interests with three accredited investors. If MG
is able to obtain network or other funding for producing the program, the
investors are entitled to recover 100% of MG's revenues from the program until
their initial investment has been returned, 50% thereafter until an equal
additional amount has been received, and 10% of any further revenues. All
other revenues would be paid to AAFC Group as management fees.
In June 1996, AAFC Group entered an agreement with Turner Original
Productions, Inc. ("Turner") for pre-production development of a proposed
one-hour program on an astronomy project. After funding pre-production
development at a cost of $20,000, Turner has an option to fund the production
of the program (estimated budget to be an additional $330,000) by AAFC Group.
In that event, Turner would have exclusivelyexclusive rights to the program in the United
States while AAFC would retain a limited participation interest in any foreign
revenues.
Feature Films. In April 1996 AAFC Group organized Death and Taxes
Film Company, L.L.C. ("D&T"), as a Georgia limited liability company with
itself as Manager, for the purpose of producing a feature-length motion picture
based on a screenplay written by Mr. Hauck currently titled "I.R.S., Death and
Taxes." AAFC Group has begun its efforts to finance D&T's production and
distribution costs for the film through a private placement of up to $4,000,000
of limited liability company interests in an offering limited to "accredited
investors." After providing for costs associated with production of the film,
the investors would receive all available funds of D&T up to 110% of their
initial investment. Thereafter, all revenues would be divided equally between
AAFC Group (as license fees for the film property) and the investors.
If the full amount of the $4,000,000 sought is obtained, AAFC Group
believes that "I.R.S., Death and Taxes" could be produced with that financing.
In the event the offering raises the minimum of $2,000,000, it is anticipated
that the remaining production budget could be financed through one or both of
the proceeds from other equity offerings or fees from the pre-production sale
of certain distribution rights. There can be no assurance that D&T will be
able to complete the private placement or finance the proposed film in an
alternative way, nor that the film would provide a profit to AAFC Group if
produced.
AAFC Group also has several other film properties (screenplay or
treatment) in various stages of development, and holds an option to acquire one
film property. No commitments have been obtained for financing production of
any of those properties.
Under a February 1992 agreement, AAFC Group issued 250,000 shares
of its common stock to Icon International, Inc. ("Icon"), in exchange for
$500,000 in credits for certain media advertising. The availability of the
media credits expires December 31, 1996, but up to one-half of any credits not
used by that date may be returned to Icon in exchange for a portion of the
shares previously issued (calculated at the rate of $2.00 of unused media
credits for each share of stock). AAFC Group anticipates using the credits,
at least in part, for promoting its film and video properties.
FIRST LIGHT ENTERTAINMENT AND DIVERSITY FILMWORKS
First Light and Diversity (collectively, the "Commercials
Companies") produce television commercials on a contract basis for advertisers
and their agencies. They typically enter short-term agreements for the
production of the commercials, whose scripts or story outlines ("story boards")
are provided by the client. The Commercials Companies then typically arrange
all production aspects of the commercials, including casting, location
selection and contractual arrangements with the director and other production
personnel. The Commercials Companies have established relationships with tenused on a regular basis, the services of
approximately eight independent directors, some of whom work with themdirect only commercials
by the Commercials Companies. These directors are paid on an exclusive basis.a fixed fee basis
determined by mutual agreement during the commercial production budgeting
process, although other compensation arrangements may be used from time to
time, including director participation in the gross profits of commercials.
The Commercials Companies usually produce their commercials on a "firm bid" basis
as opposed to a "cost plus fixed fee or
cost-plus basis established through bids or negotiations following
analysisfee" basis. If a commercial produced within
the framework of "firm bid," the production company is responsible for costs
in excess of the script or story boards generatedbudget, unless approved by the client. 33
If the commercial is
filmed under "cost plus fixed fee" arrangement, the Commercials Companies
receive a predetermined fee for their work and approved production costs are
charged to the client as incurred. Despite the differences in the structure
of the two forms of bids, the risk of costs overage to the Commercials
Companies are not substantially greater for "firm bid" because the Commercials
Companies are also responsible for unapproved costs overages that exceed the
budget for a "cost plus fixed fee" bid. Production company personnel in tandem
with the advertising agency responsible for the commercial, must carefully
monitor costs throughout the filming process, whether a "firm bid" or "cost
plus fixed fee" arrangement is operating. The agreed upon bid might be altered
because the agency, client and director agree upon a new creative option or
because of unexpected occurrences such inclement weather or unavailability of
location. In most circumstances, the Commercials Companies bill the
advertising agency for 50% of the entire budget as stated in the bid, to be
paid in advance of, or on the first day of, principle photography. The
remainder of the bid price is generally paid in one or more installments by the
agency within 30 to 120 days after completion of principle photography.
In marketing their services the Commercials Companies emphasize the
talents of the directors with whom they work, their skills in cost control and
timely production, and the advantages of Atlanta as a production center. In
its work, Diversity especially emphasizes use of directors and other production
staff from diverse cultural and ethnic backgrounds. Although most of the
commercials produced by the Commercials Companies are filmed in Atlanta, they
are experienced at producing commercials throughout North America.
In fiscal 1995 the Commercials Companies produced 95 commercials for
net revenues of $3,057,000, compared to 60 commercials and $1,161,000 in fiscal
1994. Production volume declined in the first nine months of fiscal 1996 (to
47 commercials and $1,697,000), affected in part by a change in First Light's
marketing director early in the period. Based on the volume of story boards
presently being submitted to it for bids or cost estimates, management of AAFC
Group anticipates an improvement in revenue levels of the Commercials Companies
during the balance of fiscal 1996.
In addition, Diversity is also negotiating with potential
advertisers, investors and other parties for erecting at the Underground
Atlanta area in Atlanta, Georgia, a large screen video display for news and
advertising similar to the one at Times Square in New York. This project is
in the development stage and is subject to a variety of conditions, including
sufficient commitments by advertisers, the availability of financing, and
compliance with applicable regulatory requirements. There is no assurance that
the project can be brought to fruition or would be profitable for Diversity and
AAFC Group if completed.
EMPLOYEES
In its production activities AAFC Group relies primarily upon
independent third parties for production facilities and personnel. AAFC Group
currently has eleventen full-time employees. A portion of the salaries payable to
AAFC Group's employees is paid, from time to time, directly from the production
budgets of the projects on which the individuals are working. AAFC Group hires
additional personnel for projects on a contract basis as needed. Such
individuals are generally be paid directly from the budget of the projects on
which they are working. AAFC Group hires additional personnel for projects on
a contract basis as needed. Such individuals are generally paid directly from
the budget of the projects on which they are working. AAFC Group is a
Signatory of The Writers Guild of America and is subject to its industry-wide
collective bargaining agreement. AAFC Group is not a party to any other
collective bargaining agreement. However, it is possible that some of the AAFC
Group's business activities may be affected by the existence of collective
bargaining agreements since many of the performing artists and technical
personnel, such as cameramen and film editors that it employs from time to time
on specific projects are members of unions. The extent to which collective
bargaining agreements may affect AAFC Group is difficult to estimate and
strikes related to collective bargaining or other collective action by union
members could, in the future, delay or disrupt activities.
FACILITIES
AAFC Group leases as its headquarters a facility of approximately
8,000 square feet located at 1245 Fowler St., N.W., in Atlanta, Georgia. Rent
under the lease, which expires in November 1996, is $3,200 per month. AAFC
Group does not own sound stages and related production facilities (generally
referred to as a "studio") and, accordingly, does not have the fixed payroll,
general, administrative and other expenses resulting from ownership and
operation of a studio. Studio facilities are generally available for rental
as needed.
COMPETITION
The industries in which AAFC Group operates are extremely
competitive.competitive, including extreme price competition in the television commercial
industry. Many of the competitors are major corporations with substantially
greater resources than AAFC Group. Although the demand for low-cost quality
media products has expanded dramatically with the growth of cable, video and
foreign markets, the production of television specials and feature films
remains dominated by major studios and distributors. Some major distributors
such as Walt Disney, Turner Broadcasting and Fox Broadcasting have acquired or
developed their own production companies. In this environment AAFC Group
competes on the basis of the artistic creativity of its projects and its
commitment to low-cost quality production.
The production of television commercials is highly fragmented and
AAFC Group competes in that field with numerous national and regional
companies, no one of which has a major share. AAFC Group competes primarily
on the basis of the skills of its executive producers, directors and production
staff, and the advantages of Atlanta as a production center.
34
ARBITRATION, LITIGATION AND INTELLECTUAL PROPERTY
AAFC Group is currently involved in an arbitration dispute in Los
Angeles, California, with Greystone Communications, Inc. ("Greystone"), its
co-producer of the television specials "Angels: The Mysterious Messengers,"
and "Angels II: Beyond the Light," concerning relations under their main 1994
co-production agreement. Greystone's principal issues relate to certain costs
claimed by AAFC Group and to Greystone's contention that it is entitled to
participate in revenues from the book Angels: The Mysterious Messengers, while
AAFC Group claims that Greystone has withheld distributionreceived excess revenue distributions
based upon over-statement of its expenses. In December 1995, the arbitrator
issued an order excluding certain revenue.claims by Greystone. The remaining claims
of the parties have not been scheduled for hearing. While it is unable to
predict the results of the arbitration proceedings, management believes that
it is remote that any recovery by Greystone would exceed $100,000. No
provision has been recorded in the Company's financial statements. See Note
6 of Notes to AAFC Group's consolidated financial statements. See also
"Business of American Artists".
On or about May 1, 1995, Greystone Communications, Inc. (Greystone"),
AAFC Group's co-producer of the Angels television specials, commenced an
arbitration proceeding against AAFC Group before the American Arbitration
Association Commercial Arbitration Tribunal in Los Angeles, California,
concerning relations under their 1994 co-production agreement. Greystone's
principal issues relate to certain costs claimed by AAFC Group and to
Greystone's contention that it is entitled to participate in revenues from the
book Angels: The Mysterious Messengers. AAFC Group, in its counterclaim,
alleges that Greystone has received excess revenue distributions based upon
overstatement of its expenses. Greystone is seeking compensatory and punitive
damages, attorney's fees, costs and pre and post judgment interest. In
December 1995, the arbitrator issued an order excluding certain claims by
Greystone. The remaining claims of the parties have not been scheduled for
hearing. While it is unable to predict the results of the arbitration
proceedings, management believes that the possibility is remote that any
recovery by Greystone would exceed $100,000. No provision has been recorded
in the Company's financial statements. See Note 6 of Notes to AAFC Group's
consolidated financial statements. See also "Business and Artists."
On July 3, 1996, a former employee of AAFC Group filed suit against AAFC
Group and its Chief Executive Officer in the Superior Court of Pulton County,
Georgia, for alleged damages arising from circumstances relating to termination
of his employment and for alleged unpaid compensation. The plaintiff is
seeking actual damages in the amount of $1,014,500, punitive damages in the
amount of $500,000, legal fees and costs. Management of AAFC Group believes
that there is no liability to the former employee and intends to contest this
litigation vigorously.
A former employee of AAFC Group has filed suit against AAFC Group for
alleged claimed damages arising in connection with termination of his
employment and for alleged unpaid compensation. No lawsuit has yet been
filed by the claimant. Management of AAFC believes
that there is no liability to the former employee and intends to contest this
litigation vigorously any suit that he may initiate.vigorously.
There has been substantial litigation in the entertainment industry
with respect to any literary properties. AAFC Group has no formal procedure
for monitoring the possible infringement of its literary properties by others
or for confirming that its literary properties do not infringe the rights of
others, but AAFC Group addresses some specific issues as they are brought to
its attention from time to time. In 1992, AAFC Group received approximately
$350,000 in settlement of its claim that a certain motion picture then in
production infringed upon a literary property of AAFC Group.
In 1996, counsel for MovieAmerica Corporation expressed to AAFC
Group "concerns" that the four-feature film properties transferred by Messrs.
Brown and Hauck to AAFC Group at the time of its organization in 1991 were or
should have been properties of MovieAmerica Corporation by reason of Mr.
Brown's duties while he was an employee of MovieAmerica Corporation. See
"-Management." Messrs. Brown and Hauck have assured AAFC Group that
MovieAmerica Corporation has no ownership interest in the four literary
properties. No legal opinion on this issue has been sought by AAFC Group.
MARKETS FOR CAPITAL STOCK; DIVIDENDS
The capital stock of American Artists is not traded on an
established public trading market. As of July 12,31, 1996, there were 9,407,837
shares of American Artists Common Stock outstanding and 119126 recordholders of
such shares. American Artists has not declared or paid any cash dividends on
its common stock since its formation, and the Board of Directors of American
Artists currently intends to retain all of its earnings, if any, for the
Surviving Corporation's business. The declaration and payment of cash
dividends following the consummation of the Merger will be at the discretion
of the Surviving Corporation's Board of Directors.
35
MANAGEMENT
The officers, directors and director nominees of American Artists
are as follows:
NAME AGE POSITION
- -------------------------------- --- -----------------------------------------------------------
Name Age Position
Steven D. Brown 49 Director, Co-Chairman of the Board,
Chief Executive Officer
Rex Hauck 45 Director, Co-Chairman of the Board,
Co-President
Vivian W. Jones 43 Director, Co-President
Robert A. Martinez 33 Vice President - Finance, Treasurer
J. Eric Van Atta 32 Vice President, Secretary
John Boyd 59 Director
V. Robert Colton 66 Director
Malcolm C. Davenport, V 44 Director
Ron L. Loveless 53 Director
Glen C. Warren 65 Director
Dan W. Holloway 74 Director Nominee
Norman J. Hoskin 62 Director Nominee
STEVENSteven D. BROWN.Brown. Mr. Brown began his association with the motion
picture industry in 1976 by initiating and later producing the
critically-acclaimed motion picture "The Chosen," starring Rod Steiger,
Maximillian Schell and Robby Benson. Mr. Brown founded AAFC Group in July 1991
with Mr. Hauck and has served as Co-ChairmanCo- Chairman of the Board and Chief Executive
Officer since that time. Prior to founding AAFC Group he was President, Chief
Operating Officer and Treasurer of MovieAmerica Corporation, a motion picture
development company.
Mr. Brown, who holds a B.B.A. in accounting from the University of
Massachusetts and an M.B.A. in finance from Northeastern University, serves on
the Governor's Georgia Film and Videotape Advisory Board and served on the
Atlanta Film and Video Advisory Board.
REX HAUCK.Rex Hauck. Mr. Hauck founded AAFC Group in July 1991 with Mr. Brown.
He served as Executive Vice President from the inception of the AAFC Group
until July 1994, when he was elected to his current positions. Prior to 1991
he was Senior Vice President of MovieAmerica Corporation. Mr. Hauck has
received numerous awards since entering the film industry in 1981, including
Emmy Awards as writer for "Bull Rider" (1989) and producer for the children's
production "Bug Hollow" (1990). He has also received the New York Film
Festival Silver Award for "Pomme de Terre" (1986), the AFM Medallion and the
Drive-In Academy Award as writer/producer of "Destroyer" (1988) and the Star
Award as writer/director of "Bull Rider" (1989).
36
Mr. Hauck's other film credits include screenwriter, producer and
director of the NBC two-hour prime time specials "Angels: The Mysterious
Messengers," hosted by Patty Duke, and "Angels II: Beyond the Light," hosted
by Stephanie Powers; associate producer of "Kid Colter"; producer of "The
Denver Open"; editor of "This is This."
In addition to his prize-winning screenplay for "The Destroyer,"
starring Tony Perkins, Lyle Alzado and Deborah Foreman, Mr. Hauck has written
other screenplays, some of which have been optioned by unaffiliated companies
for possible feature film production. His book Angels: The Mysterious
Messengers was published by Ballantine Books, and he has written and directed
numerous commercials.
A member of the Directors Guild of America and the Writers Guild
of America, Mr. Hauck received a B.A. degree in sociology from the University
of Virginia and pursued studies toward a Master's degree in oceanology at
George Washington University.
VIVIANVivian W. JONES.Jones. Ms. Jones, who has been involved in the film
industry for 19 years, founded First Light Entertainment Corporation
(originally Current Corporation) ("First Light") in 1993 to purchase certain
assets of Jayan House, Ltd., a commercial production company, where she had
been employed as General Manager and Executive Producer since 1990. She has
been president of First Light since its founding and, after First Light's
acquisition by AAFC Group in 1993, co-president of AAFC Group as well. Ms.
Jones has won many awards in the commercial production industry including the
Clio Award. A graduate of Georgia State University with a degree in business
administration, she was named in 1990 one of Atlanta's Top Ten Businesswomen.
She is Co-Chair of the Governor's Georgia Film and Videotape Advisory Board and
was a founding member of the Mayor's Commission on the Atlanta Entertainment
Industry.
ROBERTRobert A. MARTINEZ.Martinez. Mr. Martinez joined AAFC Group in December
1995 after nine years as an accountant with BDO Seidman, LLP. He received his
B.S. degree in accounting from the University of Southern California and became
a certified public accountant in 1988.
J. ERIC VAN ATTA.Eric Van Atta. Prior to joining AAFC Group at its founding in
1991, Mr. Van Atta was associated with Messrs. Brown and Hauck as Vice
President and Secretary of MovieAmerica Corporation from 1989. He received his
A.B.A. degree from Middle Georgia College in 1985.
OTHER DIRECTORS.Other Directors. John Boyd, a private investor, was a physician
on the staff of Southwest Regional Medical Center from 1969 to January 1996 and
President of Boyd Medical Center in McComb, Mississippi, from 1965 to December
1995. V. Robert Colton, a private investor, has been a consultant and advisor
to various businesses in the United States and abroad for more than the past
five years. He serves as a director of Air Sensors, Inc., an auto emissions
technology company. Mr. Davenport has practiced law in West Point, Georgia,
since October 1993, originally as a sole practitioner and since 1996 as a
partner in the firm of Coulter & Davenport. Mr. Davenport previously practiced
law in Dalton, Georgia, as a sole practitioner from 1984 to 1991 and as a
partner in Ponder & Davenport, P.C., from 1991 to 1993. He is a director of
ITC Holding Company, a communications holding company, and Spintek Gaming
Technologies, Inc., a gaming equipment manufacturer and licensor. Ron L.
Loveless, a private investor and business consultant from 1986 to 1995 and
Senior Vice President-Marketing for Member Services, Inc., since October 1995,
was previously Senior Vice President and General Manager of Sam's Wholesale
Club, a division of Wal-Mart Stores, Inc. Dr. Glen C. Warren has served as
Chairman of the Board of River Oaks Hospital in Jackson, Mississippi, since
1988, President of Mississippi Diagnostic Imaging Center, Ltd., since 1986 and
a clinical professor of neurological surgery at the University of Mississippi
School of Medicine since 1972.
Dan W. Holloway and Norman J. Hoskin have agreed to serve as
members of AAFC's Board of Directors upon their election at a future meeting
of shareholders. Dr. Holloway is a physician in private practice in Las Vegas,
Nevada, affiliated with Desert Springs Hospital, where he is presently Chairman
of the Department of Family Practice. Mr. Hoskin has been Chairman of the
Board of Directors of Atlantic International Capital, Inc. since July 1994.
He was previously Chairman of Atlantic Capital Group, Ltd., a venture capital
advisory service, from 1986. Mr. Hoskin is a director of Aquacare Systems,
Inc., a producer of water purification equipment, Consolidated Technologies
Corp., a diversified manufacturing company, Concept Technologies Group, Inc.,
which 37
specializes in high-tech 3-D technology, Trans Global Services, Inc., a
telephone and internet communications company and Sequential Information
Systems, Inc., a high-tech aircraft equipment company,company.
CERTAIN RELATED TRANSACTIONS
Upon the founding of AAFC Group in July 1991, Messrs. Brown and
Hauck each acquired 2,380,000 shares of Common Stock of AAFC Group in exchange
for assigning to the corporation four feature film properties (screenplays or
treatments) valued by the Board of Directors at $238,000.
AAFC Group is currently seeking to obtain financing for
production of one of the film properties, entitled "I.R.S., Death and Taxes,"
through a limited liability company to which the property would be licensed.
See INFORMATION REGARDING AMERICAN ARTISTS - Business of American Artists. The
other properties, entitled "Blood Brothers," "Prometheus 2000," and "The
Watchman," are being held by AAFC Group for future exploitation. Mr. Van Atta
at the time of founding purchased 100,000 shares of Common Stock at an
aggregate price of $5,000 ($0.05 per share), paid by delivery of his
non-recourse promissory note, which he satisfied in full in December 1995.
Pursuant to an agreement dated August 31, 1993, and restructured
November 3, 1995, AAFC Group acquired all of the outstanding stock of Current
Corporation (later renamed First Light Entertainment Corporation) from Ms.
Jones in exchange for 750,000 shares of Common Stock of AAFC Group and an
option to purchase up to 1,500,000 additional shares on or before September 1,
2003, at a price of $0.50 per share. Ms. Jones' options become exercisable in
three annual increments of 500,000 shares each, the last of which will vest
September 1, 1996. Current Corporation, organized by Ms. Jones in August 1993,
had acquired certain assets of Jayan House, Ltd., a commercial production
business with which she had been employed, in exchange for its 4.37% note,
$100,000 principal amount, payable in 20 equal quarterly installments of
principal and interest commencing November 1993.
Since December 1993 Dr. Warren has purchased 147,060 shares of
Common Stock of AAFC Group at an aggregate price of $125,000 ($0.85 per share).
In connection with certain of these purchases, Dr. Warren also received
warrants for the purchase of 44,118 shares of Common Stock at a price, to be
determined by the related agreement, between $1.50 and $2.00. These warrants
are exercisable through June 1998. In November 1995 the AAFC Group granted Dr.
Warren an option under its 1995 Stock Option Plan to purchase 200,000 shares
of Common Stock of AAFC Group at $0.85 per share. The option expires in June
1998.
Effective July 1995 AAFC Group agreed with Dr. Warren and Mr. Boyd
to cancel February 1993 transactions in which the two individuals each
purchased, by delivery of their respective non-recourse promissory notes,
111,111 shares of Common Stock of AAFC Group at an aggregate price of $100,000
($0.90 per share).
In July 1994 AAFC Group issued shares of Common Stock of AAFC Group
to certain private investors to retire options previously purchased by, or
included in stock and option units purchased by those investors. Included
among those investors were certain directors of AAFC Group, who were issued
81,977 shares of AAFC Group Common Stock in exchange for an aggregate of
819,774 options exercisable at prices ranging from $1.25 to $2.25 per share.
The directors who were option holders were as follows:
NUMBER OF SHARES WEIGHTED AVERAGE SHARES ISSUED
OPTION HOLDERS SUBJECT TO OPTION OPTION EXERCISE PRICE IN EXCHANGENumber of Shares Weighted Average Shares Issued
Subject to Option Option Exercise Price In Exchange
John W. and Sandra L. Boyd 500,000 $1.45$ 1.45 50,000
Glen C. Warren 259,533 1.56 25,953
Ron L. Loveless 60,241 1.75 6,024
In July 1993, Dr. Glen Warren and Dr. John Boyd opened a $100,000
revolving bank line of credit with Deposit Guaranty National Bank for the
benefit of AAFC Group. In September 1994, the revolving line of credit was
replaced by a note which AAFC is repaying in monthly installments. At April
30, 1996, the principal balance was $46,100.
38
$38,584.
In May 1996, AAFC Group agreed with Dr. Glen Warren to issue to Dr.
Warren options for the purchase, at $1.00 per share, of 48,120 shares of Common
Stock of AAFC Group in return for, and at such time, as Dr. Warren arranged or
made available to AAFC Group, a $75,000, three month line of credit. The line
of credit was arranged in July 1996 (expires November 1996), at which time AAFC
issued the options to Dr. Warren.
Under an agreement dated May 16, 1995, as amended, AAFC Group has
retained Atlantic International Capital, Ltd. ("AIC"), of which Mr. Hoskins is
Chairman and a principal shareholder, to assist AAFC Group in its efforts to
secure $4,000,000 in a private placement of up to 25% of American Artists's
capital stock prior to Julya specified date, which has now been extended to October
31, 1996, or a later date,
if extended.1996. Upon successful completion of such a placement, AIC would be
entitled to 5% of the capital stock of American Artists, plus $380,000.up to $380,000
(10% of the first $3,000,000 placed, and 8% of the balance). AIC is also
entitled to up to $60,000 in non-accountable expenses (1.5% of $4,000,000).
Under this agreement, American Artists has paid AIC retainer fees of $35,750
and reimbursed $732 in expenses. American Artists will pay a monthly retainer
of $3,000 through July 31, 1996, and, upon completion of the private placement,
$5,000 per month thereafter for 12 months.months; subject to renewal from year to year
by agreement of the parties. Under the Agreement, AAFC Group broadly
indemnifies AIC from liability or claims arising out of its services, except
any liability or claim resulting from AIC's bad faith or negligence. Subject
to the parties rights to terminate the agreement upon 90 days' prior notice,
AIC also has certain rights to serve as American Artists's sole advisor in
connection with certain other corporate finance transactions.
On June 29, 1994, AAFC Group purchased a 49% interest in Diversity
Film Works, Inc., a newly incorporated corporation, consisting of 490 shares
of common stock, for a purchase price of $245. The owner of the other 51% is
Tyrone C. Johnson. In September, 1996, AAFC Group and Mr. Johnson entered into
a stockholder agreement pursuant to which the size of Diversity's board of
directors was set at five, of which three will be individuals designated by
AAFC Group.
In April 1996 Messrs. Brown, Hauck and Warren and Ms. Jones
entered an agreement under which they agreed to vote all their shares of stock
of AAFC Group as a block in accordance with the majority vote (by shares) among
themselves. By reason of their corporate offices, share ownership and voting
agreements they may be deemed "controlling persons" of AAFC Group.
From December 1993 to August 1995, AAFC Group made five loans
totalling $63,421 to Steven D. Brown, each of which was represented by an
unsecured promissory note due December 1998, with accumulated interest of 7%
per annum.
In December 1993 and May 1995, AAFC Group made two loans totalling
$50,000 to Vivian Jones, each of which was represented by an unsecured
promissory note due December 1998, with accumulated interest at 7% per annum.
AAFC Group also made an advance to Ms. Jones, without interest, in the amount
of $28,000, which amount is payable on demand.
MANAGEMENT COMPENSATION
The following table furnishes compensation information for the year
ended July 31, 1995,1996, for the Chief Executive Officer and the other most highly
compensated executive officers who during such year earned more than $100,000
in base salary for services rendered in all capacities. None of such named
executive officers received a grant of stock options (whether or not in tandem
with SARs) or freestanding SARs during Fiscal 1996. At July 31, 1996, none of
the named executive officers held stock options or SARs which have been granted
in connection with their service to American Artists in any capacity. It is
not expected that the compensation payable to such persons will change after
the Merger.
SUMMARY COMPENSATION TABLE
ANNUAL COMPENSATION
-----------------------------
OTHER
NAME AND ANNUAL
PRINCIPAL POSITION SALARY BONUS COMPENSATION
------------------ -------- ----- ------------Annual Compensation
______________________________________________
Other
Name and Other Annual
Principal Position Year Salary Bonus Compensation
Steven D. Brown $108,0001996 $104,040 -0- -0-
Co-Chairman of the Board
Executive Officer of
AAFC Group
Rex Hauck $108,0001996 $104,040 -0- -0-
Co-Chairman of the Board
of Directors and Co-President
of AAFC Group
Vivian W. Jones $108,0001996 $104,040 -0- -0-
Co-President and Director
of AAFC Group; President of
First Light
DIRECTOR COMPENSATION
Currently, members of the Board of Directors are not compensated
for their services as directors.
STOCK OPTION PLAN
On December 1, 1995, AAFC adopted its 1995 Stock Option Plan (the
"Stock Option Plan"). The purpose of the Stock Option Plan is to encourage
growngrowth in shareholder value by providing financial incentives to selected
members of its Board of Directors, employees, consultants and advisors who are
in positions to make significant contributions toward that success. The
aggregate number of shares of Common stock reserved for issuance under
39
the
Stock Option Plan is 2,500,000 shares. Options granted under the Stock Option
Plan may be either (i) options intended to qualify as "incentive stock options"
under Section 422 of the Internal Revenue Code of 1986, as amended (the
"Code"), or (ii) non-qualified stock options. The Stock Option Plan permits
the grant of stock appreciation rights in connection with the grant of stock
options. The Stock Option Plan is administered by the Compensation Committee
of the Board of Directors.Directors, presently consisting of Messrs. Brown and Hauck.
The Compensation Committee has the authority to determine exercise prices
applicable to the options, the eligible directors, employees, consultants and
advisers to whom options may be granted, the number of shares of AAFC's Common
Stock subject to each option, and the extent to which options may be
exercisable. The Compensation Committee is empowered to interpret the Stock
Option Plan and to prescribe, amend and rescind the rules and regulations
pertaining to the Stock Option Plan. No option is transferable by the optionee
other than by will or the laws of descent and distribution, and each option is
exercisable during the lifetime of the optionee only by such optionee.
Any incentive stock option that is granted under the Stock Option
Plan may not be granted at a price less than the fair market value of AAFC's
Common Stock on the date of grant (or less than 110% of fair market value in
the case of holders of 10% or more of the total combined voting power of all
classes of stock of AAFC). Non-qualifiedNon- qualified stock options may be granted at the
exercise price established by the Compensation Committee, which may not be less
than the fair market value of the Common Stock on the date of grant.
Each option granted under the Stock Option Plan is exercisable for
a period not to exceed ten years from the date of grant (or five years in the
case of a holder of more than 10% of the total combined power of all classes
of stock of AAFC) and shall lapse upon expiration of such period, or earlier
upon termination of the recipient's employment with AAFC, or as determined by
the Compensation Committee.
As of July 10, 1996, options to purchase 3,273,120 (pre-merger)
shares of Common Stock were outstanding under the Stock Option Plan and no
shares of Common Stock had been issued upon exercise of options granted under
the Stock Option Plan. Under the terms of the Merger Agreement, each
outstanding option will be exchanged for an option containing substantially
identical terms and conditions, except that each share subject to purchase upon
exercise shall be converted into 0.5862 share of Class B Common Stock, rounded
to the nearest whole share.
STOCK OWNERSHIP
The following table shows beneficial ownership of capital stock of
American Artists at April 30,July 31, 1996, and of the Surviving Corporation as if the
Merger had occurred on such date for the respective directors, director
nominees and 10% shareholders and for all officers and directors as a group:
Shares of Common Stock Shares of Class A Stock Shares of Class B
of American Artists Common Stock of the Common Stock of the
Beneficially Owned Surviving Corporation Surviving Corporation
Prior to the Beneficially Owned After Beneficially Owned After
Merger Completion of the Merger(2) Completion of the Merger(2)
Name(1) Number % Number % Number %
Steven D. Brown 2,143,000 22.8% 100 - 1,256,127 22.8%
Rex HauckHauck(3) 2,237,000 23.8% 100 - 1,311,229 23.8%
Vivian W. Jones 1,750,000(3)Jones(4) 1,750,000 16.8% 100(2)100 - 1,025,750(3)1,025,750 16.8%
John W. Boyd 584,000 6.2% 100 - 342,241 6.2%
Dr. Glen W. Warren 526,134 5.6% 100 - 308,320 5.6%
Ron L. Loveless 86,265 0.9% 100 - 50,469 0.9%
V. Robert Colton 10,000 0.1% 100 - 5,762 0.1%
Malcolm C. Davenport, V 223,824(4)V(5) 223,824 2.4% 100 - 131,106 2.4%
40
Norman J. Hoskin - - - - - -
Dr. Dan Holloway - - - - - -
All Officers and
Directors)Directors as a Group
(12 persons)(3)(4)(5) 7,700,223 73.5% 800 0.1% 4,512,972 73.6%
(1) The address for the officers, directors, and director nominees
is the corporate office of AAFC Group located at 1245 Fowler St., N.W.,
Atlanta, Georgia 30318.
(2) The percentages shown assume that (i) all of the shares
offered in the Public Offering are sold, and (ii) no options or warrants
to purchase American Artists Common Stock are exercised between the date
of this Proxy Statement/Prospectus and the Effective Time.
(3) Includes 1,000,000 shares of American Artists (586,200 shares
of Class B Common Stock of the Surviving Corporation) obtainable upon the
exercise of currently exercisable options.900 0.1% 4,512,972 73.6%
____________________________
(1) The address for the officers, directors, and director nominees is the corporate office of AAFC
Group located at 1245 Fowler St., N.W., Atlanta, Georgia 30318.
(2) The percentages shown assume that (i) all of the shares offered in the Public Offering are sold,
and (ii) no options or warrants to purchase American Artists Common Stock are exercised between the date of this
Proxy Statement/Prospectus and the Effective Time.
(3) Includes 20,000 shares of American Artists (11,724 shares of Class B Common Stock of the
Surviving Corporation) owned 10,000 shares each by Dylan and Laural Hauck, Mr. Hauck's children, as to which Mr.
Hauck disclaims beneficial ownership.
(4) Including 1,000,000 shares of American Artists (586,200 shares of Class B Common Stock of the
Surviving Corporation) obtainable upon the exercise of currently exercisable options. Also includes 25,000
shares of American Artists (14,655 shares of Class B Common Stock of the Surviving Corporation) owned by Robert
W. Jones, Ms. Jones' son, as to which Ms. Jones disclaims beneficial ownership, and 125,000 shares (73,275
shares of Class B Common Stock of the Surviving Corporation) transferred by Ms. Jones to her sister,
brother-in-law, nephew and niece, which shares continue to be subject of the voting agreement between Messers.
Brown, Hauck, Warren and Ms. Jones. See "Certain Related Transactions."
(5) Includes 110,000 shares acquired from Mr. Brown and 40,000 shares acquired from Mr. Hauck in June
1994, all at $0.75 per share by Mr. Davenport as trustee of a family trust.
DESCRIPTION OF CAPITAL STOCK
The aggregate number of shares of capital stock which Setab Alpha
has the authority to issue (and which the Surviving Corporation will have
authority to issue) under its Amended Articles of Incorporation is 50,000,000
shares, consisting of 20,000,000 shares of Class A Common Stock par value
$0.001 per share; 20,000,000 shares of Class B Common Stock par value $0.001
per share (the Class A Common Stock and the Class B Common Stock hereinafter
sometimes referred to collectively as the "Common Stock"); and 10,000,000
shares of preferred stock, par value $0.001 per share. As of April 30, 1996,
20 shares of Class A Common Stock were issued and outstanding, and no shares
of Class B Common Stock or preferred stock have been issued.
AUTHORIZED AND OUTSTANDING COMMON STOCK
The Class A Common Stock and the Class B Common Stock are identical
in all respects and the holders thereof will have equal rights and privileges,
except with respect to the election of directors. The holders of outstanding
shares of Common Stock will be entitled to vote on the election of directors
as follows:
(A) With respect to the election of directors, holders of Class
B Common Stock voting as a separate class will be entitled to elect a number
of directors equal to the greater of: (i) the number (rounded to the nearest
whole number) that bears to the total number of directors of Setab Alpha the
same ratio that the number of outstanding shares of Class B Common Stock bears
to the aggregate number of outstanding shares of Class A and Class B Common
Stock, or (ii) the smallest number of directors that constitutes a majority
of the Board of Directors. Holders of Class A Common Stock voting as a
separate class shall be entitled to elect all of the other members of the Board
of Directors.
(B) The holders of Class A Common Stock as a separate class will
be entitled by majority vote to remove, with or without cause, any director
elected by the holders of Class A
41
Common Stock (or by directors elected by
them) and the holders of Class B Common Stock as a separate class will be
entitled by majority vote to remove, with or without cause, any director
elected by the holders of Class B Common Stock (or by directors elected by
them).
(C) Any vacancy in the office of a director elected by the
holders of Class A Common Stock may be filled by majority vote of such holders
voting as a separate class and any vacancy in the office of a director elected
by the holders of Class B Common Stock may be filled by majority vote of such
holders voting as a separate class or, in the absence of a shareholder vote,
in either case by majority vote of the remaining directors elected by holders
of the same class. Any vacancy created by increasing the number of directors
may be filled by majority vote of the holders of Class A Common Stock voting
as a separate class or of the holders of Class B Common Stock voting as a
separate class or, in the absence of a shareholder vote, in either case by
majority vote of the directors of such class, whichever is necessary in order
to insure that holders of Class B Common Stock (or directors elected by them)
shall have elected the same number of directors as they would be entitled to
elect at such time in an election of directors pursuant to sub-paragraph (A)
above, and that holders of Class A Common Stock (or directors elected by them)
shall have elected the other members of the Board of Directors. Any director
elected by the members of the Board of Directors to fill a vacancy shall serve
until the next annual meeting of shareholders and until his or her successor
has been elected and qualified.
Except as set forth above or otherwise in the Amended Articles of
Incorporation or Bylaws of Setab Alpha or otherwise required by law, the
holders of Class A and Class B Common Stock will vote together as a single
class on all matters submitted for vote of the shareholders, with each share
being entitled to one vote.
Notwithstanding the foregoing, Class A and Class B Common Stock
will be deemed to be in all respects a single class of Common Stock, and no
distinction whatsoever will exist between the voting rights or any other rights
and privileges of the holders of Class A and Class B Common Stock, if at any
time after December 31, 1996, the number of issued and outstanding shares of
Class B Common Stock constitutes less than 10% of the aggregate number of
issued and outstanding shares of Class A and Class B Common Stock. Moreover,
(i) at any time when no shares of Class B Common Stock are issued and
outstanding the holders of Class A Common Stock shall have exclusive voting
power on all matters, and (ii) at any time when no shares of Class A Common
Stock are outstanding the holders of Class B Common Stock shall have exclusive
voting power on all matters.
Each holder of record of Class B Common Stock may at any time or
from time to time, in such holder's sole discretion, elect to convert any whole
number of such holder's Class B Common Stock into fully paid and nonassessable
Class A Common Stock at the rate of one share of Class A Common Stock for each
share of Class B Common Stock converted. Any such conversion may be effected
by the holder surrendering the certificate or certificates evidencing the Class
B Common Stock to be converted, duly endorsed, at the office of any transfer
agent for the Class B Common Stock, together with a written notice (in form
satisfactory to Setab Alpha) that the holder elects to convert all or a
specified number of shares of Class B Common Stock and stating the name or
names in which such holder desires the certificate or certificates for such
shares of Class A Common Stock to be issued. Authorized shares of Class A
Common Stock, to the extent that such shares shall be subject to issuance or
reissuance upon conversion of the shares of issued and outstanding Class B
Common Stock as aforesaid, will be held in reserve by Setab Alpha, without the
necessity of any declaration by the Board of Directors, to be issued or
reissued only upon conversion of shares of issued and outstanding Class B
Common Stock. No Class B Common Stock may be issued unless the reserved shares
of Class A Common Stock are sufficient to satisfy the conversion privilege that
will then exist with respect to such Class B Common Stock when issued.
Any transfer of record of shares of Class B Common Stock other than
to a Qualified Transferee (as herein defined) will be conclusively deemed to
constitute an election by the holder of record thereof to convert the said
shares of Class B Common Stock into an equal number of shares of Class A Common
Stock. As used herein, "Qualified Transferee" means any one or more of (i) the
transferor's spouse, issue, parents or siblings, or a trust 42
for the benefit of
the transferor or any such persons, (ii) in the event of the transferor's death
or legal disability, the transferor's executor, administrator or personal
representative, (iii) any transferee receiving the shares as a gift, legacy or
inheritance, or as a distribution from a corporation, partnership, trust or
other entity in respect of the transferee's ownership interest therein, or (iv)
any other person approved in their sole discretion by the board of directors
or its designee upon written application submitted to the Secretary of Setab
Alpha at least five business days prior to the date of the transfer. Any
shares of Class B Common Stock transferred beneficially but not of record may
upon application by any record holder of Class B Common Stock be denied the
right to vote and receive payment of dividends until the shares have been
transferred of record.
All shares of capital stock of Setab Alpha currently issued and
outstanding are classified as shares of Class A Common Stock. Shares of Class
B Common Stock may be issued only (i) in connection with an acquisition
(whether by merger or otherwise) by Setab Alpha or any of its subsidiaries of
any other firm, corporation, business enterprise, or other business asset (ii)
pursuant to any employee benefit plan now in effect or hereafter adopted, (iii)
to effect a subdivision of such shares in the form of a stock split, stock
dividend or other distribution in respect of such shares, or (iv) otherwise
with the approval of the holders of a majority of the shares of Class B Common
Stock then outstanding.
Upon any stock dividend or other distribution in the form of Common
Stock of Setab Alpha, only Class A Common Stock will be distributed in respect
of Class A Common Stock and only Class B Common Stock may be distributed in
respect of Class B Common Stock. Whenever any such distribution is made, the
same number of shares shall be distributed in respect of each outstanding share
of Class A and Class B Common Stock. Setab Alpha will not combine or subdivide
shares of either of such classes without at the same time making a
proportionate combination or subdivision of shares of the other class.
Neither the holders of the Class A Common Stock, nor the holders
of the Class B Common Stock have preemptive or other subscription rights to
participate in any subsequent external financing arrangements which may be made
by the Company or to cumulate their respective votes in connection with the
election of directors.
PREFERRED STOCK
Setab Alpha has 10,000,000 shares of authorized but undesignated
preferred stock. The Board of Directors is authorized to provide for the
issuance of classes and series of preferred stock out of these undesignated
shares and to establish the voting powers, designations, preferences and
relative, participating, optional or other special rights and qualifications,
limitations or restrictions of any such class or series of preferred stock,
including the dividend rights, dividend rate, terms of redemption, redemption
price or prices, conversion rights and liquidation preferences of the shares
constituting any series, without any further vote or action by the shareholders
of Setab Alpha.
TRANSFER AGENT AND REGISTRAR
Setab Alpha has appointed Liberty Transfer, Inc.Co. as the transfer
agent and registrar of the Class A Common Stock and the Class B Common Stock.
COMPARATIVE RIGHTS OF SHAREHOLDERS
GENERAL
As a result of the Merger, holders of American Artists Common Stock
will become shareholders of the Surviving Corporation, and the rights of all
such former American Artists Shareholders will thereafter be governed by the
Missouri General and Business Corporation Law (the "Missouri Law") and the
Articles of Incorporation and Bylaws of the Surviving Corporation. The rights
of shareholders of American Artists are presently governed by
43
the Georgia
Business Corporation Code ("GBCC") and the Articles of Incorporation and Bylaws
of American Artists. The following summary sets forth the material differences
between the rights of American Artists Shareholders and Setab Alpha
shareholders.
RIGHTS OF SETAB ALPHA CLASS A AND CLASS B COMMON STOCK
The Articles of Incorporation of American Artists provide that the
Common Stock shall possess all rights and privileges as are afforded to capital
stock by applicable Georgia law, including but not limited to the payment of
dividends, the right to vote for the directors of American Artists, and the
right to receive the assets of American Artists upon liquidation, dissolution
or winding-up of the company. If the Merger is consummated, holders of
American Artists Common Stock will receive in exchange for their shares of
Class A and Class B Common Stock of the Surviving Corporation. The Amended and
Restated Articles of Incorporation of the Surviving Corporation provide that
the holders of Class B Common Stock voting as a separate class will be entitled
to elect a number of directors equal to the greater of (i) the number (rounded
to the nearest whole number) that bears to the total number of directors of the
Company the same ratio that the number of outstanding shares of Class B Common
Stock bears to the aggregate number of outstanding shares of Class A and Class
B Common Stock, or (ii) the smallest number of directors that constitutes a
majority of the Board of Directors. The holders of Class A and Class B Common
Stock will be entitled, voting respectively as a separate class, to remove,
with or without cause, any director elected by the holders of such class or to
fill any vacancy in the office of a director elected by the holders of the
respective class.
Pursuant to the Merger Agreement, none of the shares of Class A or
Class B Common Stock issued in connection with the Merger, or issued upon
exercise of currently outstanding options or warrants of American Artists, may
be sold, transferred or assigned, and no shares of Class A Common Stock issued
upon conversion of such Class B Common Stock may be sold, transferred or
assigned, in each case within 365 days after the Effective Time, unless such
sale, transfer or assignment has been approved in writing by the Surviving
Corporation upon the written application by the holder of such shares. The
Surviving Corporation may place a legend to this effect on the certificates
representing such shares.
Except as set forth above or otherwise in the Amended and Restated
Articles of Incorporation or Bylaws of the Surviving Corporation or otherwise
required by law, the holders of Class A and Class B Common Stock will vote
together as a single class on all matters submitted for vote of the
shareholders, with each share being entitled to one vote. If at any time no
shares of either the Class A or Class B Common Stock are issued and
outstanding, the holders of the issued and outstanding Class A or Class B
Common Stock shall have exclusive voting power on all matters.
Holders of Class B Common Stock may convert their Class B Common
Stock into Class A Common Stock at the rate of one share of Class A Common
Stock for each share of Class B Common Stock by following the procedures more
fully described above. Any transfer of Class B Common Stock other than to
certain designated transferees will be deemed to constitute an election by the
holder thereof to convert such Class B Common Stock into Class A Common Stock.
Shares of Class B Common Stock may be issued only in connection with an
acquisition of a business, an employee benefit plan, a subdivision of shares,
or otherwise with the approval of a majority of holders of Class B Common
Stock.
MERGERS, SHARE EXCHANGES AND SALES OF ASSETS
Under Georgia law, a plan of merger must be approved by the
affirmative vote of a majority of all of the voting shares of the corporation
and the affirmative vote of the holders of a majority of the shares of each
class of stock outstanding and entitled to vote thereon unless the GBCC, the
articles of incorporation or the bylaws provide otherwise. A plan of share
exchange must be similarly approved by the shareholders of the corporation
being acquired. The sale by a corporation of all or substantially all of its
assets must be approved by a majority of all the votes entitled to be cast on
the transaction. Additionally, Georgia law provides that with respect to a
merger 44
no vote of the shareholders of the surviving corporation is required,
unless its articles of incorporation otherwise provide (American Artists'
Articles of Incorporation do not so provide), to approve the merger if (i) the
articles of incorporation of the surviving corporation will not differ from its
articles before the merger, (ii) each shareholder of the surviving corporation
whose shares were outstanding immediately before the effective date of the
merger will hold the same number of shares, with identical designations,
preferences, limitations, and relative rights, immediately after the merger,
and (iii) the number and kind of shares outstanding immediately after the
merger, plus the number and kind of shares issuable as a result of the merger
and by the conversion of securities issued pursuant to the merger or the
exercise of rights and warranties issued pursuant to the merger, will not
exceed the total number and kind of shares of the surviving corporation
authorized by its articles of incorporation immediately before the merger. The
Articles of Incorporation and Bylaws of American Artists do not alter the
voting requirements described above.
Under Missouri law, the vote required to approve a plan of merger,
consolidation or sale of all or substantially all the assets of the corporation
is two-thirds of the outstanding shares entitled to vote at such meeting,
unless the articles of incorporation provide otherwise. Where the merger is
between one or more Missouri corporations and one or more foreign corporations,
the foregoing two-thirds vote is required only for the Missouri corporation.
The foreign corporation or corporations must comply with the applicable
provisions of the jurisdiction where they are incorporated.
ANTI-TAKEOVER AND FAIR PRICE LAWS
Georgia law contains certain "business combinations" provisions
which may have the effect of preventing, discouraging or delaying a change of
control of a Georgia corporation that elects to be subject to the business
combinations. Georgia corporations may adopt a provision in their bylaws
requiring that business combinations be approved by a special vote of the board
of directors and/or shareholders unless certain fair pricing criteria are met.
Georgia law also permits corporations to adopt a provision in their articles
of incorporation or bylaws requiring that business combinations with
"interested shareholders" be approved by a super-majority vote. Neither of the
foregoing provisions has been adopted in the Articles of Incorporation or
Bylaws of American Artists.
The Missouri Law provides that under certain circumstances, a
corporation may engage in a business combination with a shareholder owning 20%
or more of the outstanding voting power of the corporation provided such
business combination occurs at least five years after such interested
shareholder became such; provided further, that the consideration received by
shareholders in such transaction is at least equal to the greater of (i) the
highest per share price paid by the interested shareholder while an interested
shareholder during the five-
yearfive-year period prior to the announcement of the
business combination or (ii) the higher of the market price of the shares on
the announcement date or on the date of the interested shareholder's
acquisition of the stock.
DISSENTERS' RIGHTS
Georgia law grants shareholders the right to dissent and receive
payment of fair value of their shares in connection with (i) mergers and sales
by the corporation of all, or substantially all, of its assets for which
shareholder approval is required, (ii) share exchanges (where the corporation's
shares are being acquired) for which shareholder approval is required, (iii)
amendments to the articles of incorporation which materially and adversely
affect certain rights in respect of the dissenter's shares, and (iv) any
corporate action to the extent the articles, bylaws or any resolution of the
board of directors grant a right of dissent (American Artists' Articles of
Incorporations and Bylaws do not grant such rights). This right is not
available if the affected shares are listed on a national securities exchange
or held of record by more than 2,000 shareholders unless (a) the articles of
incorporation or a resolution of the board of directors approving the
transaction provide otherwise, or (b) in a plan of merger or share exchange,
the holders of such shares are required to accept anything other than share of
the surviving corporation or another publicly held corporation, except for
payments in lieu of fractional shares. The American Artists Articles of
Incorporation do not modify these limitations on dissenters' rights. For a
more
45
complete description of the rights of shareholders to dissent under
Georgia law, see "RIGHTS OF DISSENTING SHAREHOLDERS."
Similarly, Missouri law provides that a shareholder of a Missouri
corporation who complies with applicable statutory procedures is entitled to
receive fair value for his or her shares if the shareholder votes against
certain transactions, including without limitation, a merger or consolidation,
a disposition of all or substantially all of the corporation's assets, a share
exchange, an amendment to the articles of incorporation which materially and
adversely affects the rights of such shareholder, or any other action taken in
accordance with the articles of incorporation and bylaws which grant such
rights.
ACTIONS BY CONSENT OF SHAREHOLDERS WITHOUT MEETING
Under Georgia law, any action that may be taken at a shareholder's
meeting may be taken without a meeting if all of the shareholders entitled to
vote at such meeting consent in writing to such action, or, if so provided in
the articles of incorporation, by persons who would have the power to cast not
less than the minimum number of votes that would be necessary to authorize or
take the action at meeting. The Articles of Incorporation of American Artists
provides that an action may be taken by written consent of less than all of the
shareholders, provided that action by less than unanimous written consent may
not be taken with respect to any election of directors as to which shareholders
would be entitled to cumulative voting.
Missouri law provides that any action that may be taken at a
shareholder's meeting may be taken without a meeting if all of the shareholders
entitled to vote at such meeting consent in writing to such action.
INDEMNIFICATION AND PERSONAL LIABILITY OF DIRECTORS
As permitted by Georgia law, the Articles of Incorporation of
American Artists provide that a director of the corporation shall not be
personally liable to the corporation or its shareholders for monetary damages
for breach of the duty of care or other duty as a director, provided, however,
that a director will be liable for any appropriation, in violation of the
director's duties, of any business opportunity of the corporation, for acts or
omissions which involve intentional misconduct or a knowing violation of the
law, for any transaction from which the director derived an improper personal
benefit, or for any unlawful distribution for which the director voted or to
which the director assented. American Artists' Articles of Incorporation
provide that American Artists shall indemnify each director and officer of the
company against all expenses reasonably incurred by him or imposed on him in
connection with, or arising out of, any action, suit or proceeding in which he
may be involved by reason of his being or having been a director or officer of
American Artists, provided that such person acted in good faith and in the
manner he reasonably believed to be in or not opposed to the best interests of
the corporation and, in the case of any criminal proceeding, he had to
reasonable cause to believe his conduct was unlawful. Under Georgia law the
corporation may not indemnify a director in connection with a proceeding by or
in the right of the corporation in which the director was adjudged liable to
the corporation or in connection with any other proceeding in which he was
adjudged liable on the basis that personal benefit was improperly received by
him.
The Missouri Law does not contain a similar or corresponding
provision permitting Missouri corporations to limit the personal liability of
directors to the corporation. Missouri law does provide that a corporation may
indemnify a director or officer against liabilities and expenses if such
director or officer acted in good faith and in a manner in which he or she
reasonably believed to be in, or not opposed to, the best interests of the
corporation, and, in the case of a criminal action, if the director or officer
had no reason to believe his or her conduct was unlawful. In a proceeding
brought by or on behalf of the corporation, no indemnification shall be made
with respect to any claim as to which an officer or director has been adjudged
to have been reasonably and fairly entitled to indemnification of expenses.
Indemnification may be made by a corporation only if a determination has been
made, by majority vote of a quorum of the disinterested directors or by the
shareholders or by independent legal counsel, that the director or officer met
the required standard of conduct. A corporation may purchase liability
insurance on behalf of an officer or director whether or not the corporation
would otherwise have the power to indemnify such 46
a person. Moreover, the
Missouri law provides that the articles of incorporation or bylaws of a
corporation may authorize any further indemnity to an officer or director,
provided that no indemnity is given for conduct that is adjudged to be
knowingly fraudulent, deliberately dishonest, or willful misconduct. For
additional information see "CERTAIN PROVISIONS OF THE ARTICLES OF INCORPORATION
AND BYLAWS OF SETAB ALPHA--IndemnificationALPHA-- Indemnification of Directors and Officers."
Insofar as indemnification for liabilities arising under the
Securities Act may be permitted to directors, officers and controlling persons
pursuant to the foregoing provisions, or otherwise, Setab Alpha and American
Artists have been advised that in the opinion of the Commission such
indemnification is against public policy as expressed in the Securities Act and
is, therefore, unenforceable.
PREEMPTIVE RIGHTS
Georgia law does not provide for preemptive rights to acquire a
corporation's unissued stock; however, such right may be expressly granted to
the shareholders in a corporation's certificate or articles of incorporation.
The Articles of Incorporation of American Artists do not provide for preemptive
rights.
Missouri law allows the preemptive rights of shareholders to be
limited or denied to the extent provided in the articles of incorporation. The
Amended Articles of Incorporation of the Surviving Corporation provide that
holders of all classes of stock in the corporation shall not have preemptive
rights to acquire additional shares in the corporation.
CONTROL SHARE ACQUISITION PROVISIONS
Missouri has enacted a "control share acquisition" statute which
restricts voting rights of persons with respect to shares acquired by such
person which, when added to the shares already owned by the acquiring person,
would entitle such person to exercise certain degrees of voting power with
respect to the stock of the issuing corporation. These voting restrictions may
be lifted if (i) the retention of voting rights is approved by at least a
majority of shares entitled to vote, excluding interested shares and (ii)
certain disclosure requirements are met. A corporation's articles of
incorporation or bylaws may provide that the corporation will not be subject
to the control share acquisition statute. The Amended Articles of
Incorporation of the Surviving Corporation do not exempt Setab Alpha from
Missouri's control share acquisition statute.
Georgia law does not contain a statute comparable to Missouri's
control share acquisition statute discussed above.
TAKEOVER BID DISCLOSURE
Pursuant to the Missouri Takeover Bid Disclosure Act, Missouri
regulates takeover bids, which are defined as the acquisition of or offer to
acquire any equity security of a Missouri corporation if, after acquisition
thereof, the offeror would directly or indirectly be a beneficial owner of more
than five percent of any class of the issued and outstanding equity securities
of such target corporation. A "takeover bid" does not include an offer to
acquire such equity securities solely in exchange for other securities, or the
acquisition of such equity securities pursuant to such offer, for the sole
account of the offeror, in good faith and not to avoid the statutory takeover
bid regulation, and not involving any public offering within the meaning of the
Securities Act. An offeror must, prior to making a takeover bid, file with the
Commissioner of Securities and deliver to the target corporation certain
materials, including copies of all offering information, certain information
about the offeror, the source of financing for the offer, the number of shares
to be acquired and whether the offeror intends to sell the assets of the
corporation.
Georgia does not have a statute comparable to the Missouri Takeover
Bid Disclosure Act.
47
AMENDMENT OF ARTICLES OF INCORPORATION
Under Georgia law, the articles of incorporation may be amended
only by the affirmative vote of a majority of the votes entitled to be cast on
the amendment by each voting group entitled to vote on the amendment, unless
the articles of incorporation provided otherwise. The Articles of
Incorporation of American Artists do not alter the vote required to amend the
articles of incorporation.
Similarly, Missouri law provides that the articles of incorporation
may be amended by the affirmative vote of the holders of a majority of the
shares present and entitled to vote on the amendment, except with respect to
an amendment which would have the effect of opting the corporation out of the
control share acquisition statute, which amendment must be approved by a
two-thirds vote of the shares.
AMENDMENT OF BYLAWS
Georgia law provides that, unless a corporation's articles of
incorporation, applicable law or a particular bylaw approved by the
shareholders provides otherwise, either the corporation's directors or
shareholders may amend that corporation's bylaws. The Articles of
Incorporation and Bylaws of American Artists do not limit the ability of either
the directors or shareholders to amend such Bylaws.
Under Missouri law, the power to adopt, amend or repeal the bylaws
is reserved to the shareholders unless vested by the articles of incorporation
in the board of directors. The Amended Articles of Incorporation of the
Surviving Corporation provide that the board of directors may amend the Bylaws.
CERTAIN PROVISIONS OF THE ARTICLES OF
INCORPORATION AND BYLAWS OF SETAB ALPHA
Following the consummation of the Merger the Amended Articles of
Incorporation and Bylaws of Setab Alpha will be the Articles of Incorporation
and Bylaws of the Surviving Corporation. The Amended Articles of Incorporation
and Bylaws of Setab Alpha contain certain provisions regarding the rights and
privileges of shareholders, some of which may have the effect of discouraging
certain types of transactions that involve an actual or threatened change of
control of the Surviving Corporation, diminishing the opportunities for
shareholders to participate in tender offers, including tender offers at a
price above the then current market value of the Class A Common Stock or over
a shareholder's cost basis in the Class A Common Stock, and inhibiting
fluctuations in the market price of the Class A Common Stock that could result
from takeover attempts. These provisions of the Articles and Bylaws are
summarized below.
SIZE OF BOARD AND ELECTION OF DIRECTORS
The Articles provide that the Board of Directors will consist of
such number of directors as shall be determined from time to time by the Board
of Directors, which number will be not less than three nor more than 15
directors in the absence of any amendment to Setab Alpha's Amended Articles of
Incorporation. Under applicable law, any such amendment would require the
consent of the Board of Directors and the holders of a majority of the Common
Stock then outstanding. The Articles further provide that the Board may amend
the Bylaws by action taken in accordance with such Bylaws, except to the extent
that any matters under the Articles or applicable law are specifically reserved
to the shareholders.
48
SHAREHOLDER NOMINATIONS AND PROPOSALS
Setab Alpha's Bylaws provide advance notice requirements for
shareholder nominations and proposals at annual meetings of Setab Alpha.
Shareholders may nominate directors or submit other proposals only upon written
notice to Setab Alpha not less than 120 days nor more than 150 days prior to
the date of the notice to shareholders of the previous year's annual meeting.
A shareholder's notice also must contain certain additional information, as
specified in the Bylaws. The Board may reject any proposals that are not made
in accordance with the procedures set forth in the Bylaws or that are not
proper subjects of shareholder action in accordance with the provisions of
applicable law.
CALLING SHAREHOLDER MEETINGS; ACTION BY SHAREHOLDERS WITHOUT A MEETING
Matters to be acted upon by the shareholders at special meetings
are limited to those which are specified in the notice thereof. A special
meeting of shareholders may be called by the Board of Directors or the
President of Setab Alpha. As required by Missouri law, the Bylaws provide that
any action by written consent of shareholders in lieu of a meeting must be
signed by all of the holders of outstanding stock.
The foregoing provisions contained in the Articles and Bylaws are
designed, in part, to make it more difficult and time consuming to obtain
majority control of the Board of Directors or otherwise to bring a matter
before shareholders without the Board's consent, and therefore to reduce the
vulnerability of Setab Alpha to an unsolicited takeover proposal. These
provisions are designed to enable the Setab Alpha (and, following the Merger,
the Surviving Corporation) to develop its business in a manner which will
foster its long-term growth, without the threat of a takeover not deemed by the
Board to be in the best interests of Setab Alpha (or, following the Merger, the
Surviving Corporation) and its shareholders, and to reduce, to the extent
practicable, the potential disruption entailed by such a threat. However,
these provisions may have an adverse effect on the ability of shareholders to
influence the governance of the Surviving Corporation and the possibility of
shareholders receiving a premium above the market price for their securities
from a potential acquirer who is unfriendly to management.
INDEMNIFICATION OF DIRECTORS AND OFFICERS
Sections 351.355(1) and (2) of The General and Business Corporation
Law of the State of Missouri provide that a corporation may indemnify any
person who was or is a party or is threatened to be made a party to any
threatened, pending or completed action, suit or proceeding by reason of the
fact that he is or was a director, officer, employee or agent of the
corporation, or is or was serving at the request of the corporation as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise, against expenses (including attorneys'
fees), judgments, fines and amounts paid in settlement actually and reasonably
incurred by such person in connection with such action, suit or proceeding if
the person acted in good faith and in a manner the person reasonably believed
to be in or not opposed to the best interests of the corporation and, with
respect to any criminal action or proceeding, had no reasonable cause to
believe such person's conduct was unlawful, except that, in the case of an
action or suit by or in the right of the corporation, the corporation may not
indemnify such persons against judgments and fines and no person shall be
indemnified as to any claim, issue or matter as to which such person shall have
been adjudged to be liable for negligence or misconduct in the performance of
the person's duty to the corporation, unless and only to the extent that the
court in which the action or suit was brought determines upon application that
such person is fairly and reasonably entitled to indemnity for proper expenses.
Section 351.355(3) provides that, to the extent that a director, officer,
employee or agent of the corporation has been successful in the defense of any
such action, suit or proceeding or in defense of any claim, issue or matter
therein, the person shall be indemnified against expenses, including attorney's
fees, actually and reasonably incurred by such person in connection with such
action, suit or proceeding. Section 351.355(7) provides that a corporation may
provide additional indemnification to any person indemnifiable under subsection
(1) of (2), provided such additional indemnification is authorized by the
corporation's articles of incorporation or an amendment thereto or by a
shareholder-approved bylaw or agreement, and provided further that no person
shall thereby be indemnified against conduct which was finally adjudged to have
been knowingly fraudulent, deliberately dishonest 49
or willful misconduct or
which involves an accounting for profits pursuant to Section 16(b) of the
Exchange Act. Paragraph 9 of the Articles of Incorporation of Setab Alpha
permits Setab Alpha to enter into agreements with its directors, officers,
employees and agents to provide such indemnification as deemed appropriate.
Paragraph 9 also provides that Setab Alpha shall extend to its directors and
executive officers the indemnification specified in subsections (1) and (2) and
that it may extend to other officers, employees and agents such indemnification
and additional indemnification.
Setab Alpha has entered into an indemnification agreement with its
directors and executive officers. The form of indemnity agreement provides
that such person will be indemnified to the full extent permitted by applicable
law against all expenses (including attorneys' fees), judgments, fines,
penalties and amounts paid in settlement of any threatened, pending or
completed action, suit or proceeding, on account of his services as a director
and officer of Setab Alpha or any other company or enterprise in which he is
serving at the request of Setab Alpha, or as a guarantor of any debt of Setab
Alpha. To the extent the indemnification provided under the agreement exceeds
that permitted by applicable law, indemnification may be unenforceable or may
be limited to the extent it is found by a court of competent jurisdiction to
be contrary to public policy. The officers and directors of Setab Alpha also
have been indemnified with respect to certain matters relating to this
Prospectus and the Registration Statement of which this Prospectus is a part,
including certain liabilities arising under the Securities Act. See "THE
MERGER AGREEMENT--Representations, Warranties and Covenants." Insofar as
indemnification for liabilities arising under the Securities Act may be
permitted to directors, officers and controlling persons of Setab Alpha
pursuant to the foregoing indemnification provisions, or otherwise, Setab Alpha
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities
Act and is therefore unenforceable.
Setab Alpha may procure and maintain a policy of insurance under
which the directors and officers of Setab Alpha will be insured, subject to the
limits of the policy, against certain losses arising from claims made against
such directors and officers by reason of any acts or omissions covered under
such policy in their respective capacities as directors or officers.
RIGHTS OF DISSENTING SHAREHOLDERS
Pursuant to Section 14-2-1302 of the Georgia Business Corporations
Code ("GBCC"), any record shareholder of American Artists entitled to vote on
the Merger who objects to the Merger and who fully complies with Section
14-2-1301 et seq. of the GBCC will be entitled to demand and receive payment
in cash of an amount equal to the fair value of such shareholder's shares of
American Artists Common Stock if the Merger is consummated. A record
shareholder may exercise such dissenter's rights as to fewer than all the
shares registered in such shareholder's name only if such shareholder dissents
with respect to all shares beneficially owned by any one beneficial owner and
notifies American Artists in writing of the name and address of each person on
whose behalf such shareholder is asserting dissenter's rights. In determining
the amount to be received in connection with the exercise of statutory
dissenter's rights under the provisions referred to above, the fair value of
a dissenting shareholder's shares of American Artists Common Stock will equal
the value of such shares immediately prior to the Effective Time, excluding any
appreciation or depreciation in anticipation of the Merger.
Shareholders desiring to receive payment of the fair value of such
shares in accordance with the requirements of the GBCC (i) must deliver to
American Artists written notice of such shareholder's intent to demand payment
prior to the shareholder vote on the Merger and (ii) must not vote such
shareholder's shares in favor of the Merger. If the Merger Agreement is
approved, any shareholder desiring to dissent must additionally (I) demand
payment for the shares in writing and (II) deposit such shareholder's
certificates of American Artists Common Stock in accordance with the terms of
a notice that will be sent to such shareholder by American Artists no later
than 10 days following the consummation of the Merger. Written notices of
intent to dissent from the Merger must be sent to: J. Eric Van Atta,
Secretary, American Artists Film Corporation, 1245 Fowler Street, N.W.,
Atlanta, Georgia 50
30318. A VOTE AGAINST THE MERGER AGREEMENT ALONE WILL NOT
SATISFY THE REQUIREMENTS FOR SEPARATE WRITTEN NOTICE OF INTENT TO DISSENT,
SEPARATE WRITTEN DEMAND FOR PAYMENT OF FAIR VALUE FOR THE SHARES OF AMERICAN
ARTISTS COMMON STOCK AND THE DEPOSIT OF SUCH STOCK CERTIFICATES WITH AMERICAN
ARTISTS. RATHER, A DISSENTING SHAREHOLDER MUST SEPARATELY COMPLY WITH ALL OF
THOSE CONDITIONS.
Within 10 days of the later of the Effective Time or receipt of a
demand for payment by a shareholder who deposits stock certificates in
accordance with the dissenters' notice sent to those shareholders who notified
American Artists of their intent to dissent (as described in the preceding
paragraph) (the "Offer Date"), American Artists must offer to pay the amount
of what it estimates to be the fair market value of the dissenting
shareholder's stock to the shareholder, plus interest accrued thereon. Such
notice and offer must include: (a) the balance sheet of American Artists as of
the end of a fiscal year ending not more than 16 months before the date of
making an offer, an income statement for that period, a statement of changes
in shareholders' equity for that year, and the latest available interim
financial statements, if any; (b) a statement of American Artists' estimate of
the fair value of the shares; (c) an explanation of how the interest was
calculated; (d) a statement of the shareholder's right to demand payment of a
different amount under GBCC Section 14-2-1327; and (e) a copy of the
dissenter's rights provisions of the GBCC.
If the dissenting shareholder accepts American Artists's offer by
written notice within 30 days following such offer or if the dissenting
shareholder is deemed to have accepted the offer by failing to respond within
such time period, American Artists must pay the shareholder such amount within
60 days of the Offer Date. Upon payment of the agreed value, the dissenting
shareholder will cease to have any interest in such shareholder's shares of
American Artists Common Stock.
Any shareholder who does not accept the estimate of fair value by
American Artists must demand payment based on such shareholder's own estimate
of fair value within 30 days after the offer by American Artists. American
Artists must file an action in a court of competent jurisdiction in Fulton
County, Georgia within sixty (60) days after receiving the payment demand to
request a judicial determination of fair value or, if it fails to file such
action, pay each dissenting shareholder whose demand has not yet been settled
the amount demanded by such shareholder.
The foregoing does not purport to be a complete statement of the
provisions of the GBCC relating to statutory dissenters' rights and is
qualified in its entirety by reference to the Dissenters' Rights provisions of
the Georgia Business Corporations Code, which are reproduced in full in Annex
B to this Proxy Statement/Prospectus and which are incorporated herein by
reference.
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of the Public Offering and consummation of the
Merger, Setab Alpha will have outstanding 711,920712,600 shares of Class A Common
Stock and 5,502,9745,502,277 shares of Class B Common Stock, assuming no options or
warrants previously issued by American Artists to purchase American Artists
Common Stock are exercised between the date of this Proxy Statement/Prospectus
and the Effective Time. In addition, holders of outstanding options and
warrants will have the right to purchase an aggregate of 2,236,545 shares of
Class B Common Stock. Of such shares, 20 shares of Class A Common Stock are
"restricted" shares within the meaning of the Securities Act and may not be
sold in the absence of registration under the Securities Act or an exemption
therefrom, including the exemptive provisions of Rule 144 under the Securities
Act. The exemption from registration provided by Rule 144 will not be
available to the holders of such shares until July 1997. Pursuant to the
Merger Agreement, for a period of 365 days after the Effective Time, none of
the shares of Class A or Class B Common Stock received in the Merger, issued
upon exercise of outstanding options and warrants or of Class A Common Stock
issued upon conversion of Class B Common Stock issued in the Merger may be
sold, transferred or otherwise disposed of without the prior written consent
of Setab Alpha.
51
LEGAL MATTERS
Certain legal matters relating to the Merger are being passed upon
for Setab Alpha by Clark W. Holesinger, Attorney-at-Law.Gallop, Johnson & Neuman, L.C. Members of the firm of
Gallop, Johnson & Neuman, L.C., are the beneficial owners of all of the
currently issued and outstanding shares of Class A Common Stock. In addition,
Mr. Douglas J. Bates, a member of the firm, serves as President and a director
of the Company. Certain legal matters relating to the Merger are being
reviewed for American Artists by Troutman, Sanders LLP.
EXPERTS
The financial statements of Setab Alpha as of April 30, 1996 and
for the period ending April 30, 1996 included in the Prospectus and the
Registration Statement and the financial statements for American Artists Film
Corporation as of July 31, 1995 and 1994 and the periods then ended have been
so included in reliance on the reports of BDO Seidman, LLP, independent
certified public accountants, given on the authority of said Firm as experts
in accounting and auditing.
52
INDEX TO FINANCIAL STATEMENTS
Setab Alpha, Inc. Page
- ----------------- ----
Report of Independent Certified Public Accountants F-2
Balance sheet F-3
Statement of operations F-4
Statement of stockholders' deficit F-5
Statement of cash flows F-6
Summary of accounting policies F-7
Notes to financial statements F-8
American Artists Film Corporation
- ---------------------------------
Report of Independent Certified Public Accountants F-9
Consolidated balance sheets F-10
Consolidated statements of operations F-12
Consolidated statements of stockholders' equity F-13
Consolidated statements of cash flows F-14
Notes to consolidated financial statements F-15
Pro Forma Financial Statements
- ------------------------------
Introduction F-28
Pro forma consolidated balance sheet F-29
F-1
Report of Independent Certified Public Accountants
Board of Directors
Setab Alpha, Inc.
Ballwin, Missouri
We have audited the balance sheet of Setab Alpha, Inc. as of April 30, 1996,
and the related statements of operations, stockholders' deficit and cash flows
for the period from July 5, 1995 (date of inception) through April 30, 1996.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Setab Alpha, Inc. at April 30,
1996 and the results of its operations and its cash flows for the period from
July 5, 1995 (date of inception) through April 30, 1996 in conformity with
generally accepted accounting principles.
BDO SEIDMAN, LLP
St. Louis, Missouri
May 1, 1996
F-2
Setab Alpha, Inc.
(A Development Stage Company)
Balance Sheet
April 30, 1996
Assets
Current
Cash $ 0.20
Deferred offering costs (Note 2) 10,000.00
------------
$ 10,000.20
============
Liabilities and Stockholders' Equity
Current
Accounts payable (Note 2) $ 10,500.00
Accrued interest 43.89
Note payable - related party (Note 2) 3,790.64
----------
Total Liabilities 14,334.53
----------
Stockholders' Deficit (Note 2)
Preferred stock, $0.001 par - shares authorized, 10,000,000;
issued and outstanding, 0 --
Common stock, $0.001 par:
Class A - shares authorized, 20,000,000;
issued and outstanding, 20 0.02
Class B - shares authorized, 20,000,000;
issued and outstanding, 0 --
Additional paid-in capital 0.18
Deficit accumulated during the development stage (4,334.53)
----------
Total Stockholders' Deficit (4,334.33)
----------
$ 10,000.20
==========
Assets
Current
Cash $ 0.20
Deferred offering costs (Note 2) 10,000.00
$ 10,000.20
Liabilities and Stockholders' Equity
Current
Accounts payable (Note 2) $ 10,500.00
Accrued interest 43.89
Note payable - related party (Note 2) 3,790.64
Total liabilities 14,334.53
Stockholders' deficit (Note 2)
Preferred stock, $0.001 par - shares authorized,
10,000,000; issued and outstanding, 0 --
Common stock, $0.001 par:
Class A - shares authorized, 20,000,000;
issued and outstanding, 20 0.02
Class B - shares authorized, 20,000,000;
issued and outstanding, 0 --
Additional paid-in capital 0.18
Deficit accumulated during the development stage (4,334.53)
Total stockholders' deficit (4,334.33)
$10,000.20
See accompanying summary of accounting policies and notes to
financial statements.
F-3
Setab Alpha, Inc.
(A Development Stage Company)
Statement of Operations
For the Period July 5, 1995 (date of inception)
through April 30, 1996
Revenues $ 0.00
Expenses 4,334.53
----------
Net loss $(4,334.53)
==========
Net loss per share $ (216.73)
==========
Weighted average net shares outstanding 20
==========
See accompanying summary of accounting policies and notes to financial
statements.
F-4
Setab Alpha, Inc.
(A Development Stage Company)
Statement of Stockholders' Deficit
For the Period July 5, 1995 (date of inception)
through April 30, 1996
Deficit
accumulated
Additional during the Total
Common Stock Additional during the Total
---------------- paid-in development stockholders'
Shares Amount capital stage deficit
------ ------ ---------- ----------- -------------
Issuance of
common stock
on July 5,
1995 (date
of inception)
for cash 20 $0.02 $0.18 $ 0.00 $ 0.20
Net loss 0 0.00 0.00 (4,334.53) (4,334.53)
-- ----- ----- ---------- ----------
Balance,
April 30,
1996 20 $0.02 $0.18 $(4,334.53) $(4,334.33)
== ===== ===== ========== ==========
See accompanying summary of accounting policies and notes to financial
statements.
F-5
Setab Alpha, Inc.
(A Development Stage Company)
Statement of Cash Flows
For the Period July 5, 1995 (date of inception)
through April 30, 1996
OPERATING ACTIVITIES
Net loss $(4,334.53)
Adjustments to reconcile net loss to net
cash used in operating activities:
Increase in accounts payable 500.00
Increase in accrued interest 43.89
----------
CASH USED IN OPERATING ACTIVITIES (3,790.64)
----------
FINANCING ACTIVITIES
Borrowings under note payable 3,790.64
Proceeds from issuance of common stock 0.20
----------
CASH PROVIDED BY FINANCING ACTIVITIES 3,790.84
----------
INCREASE IN CASH 0.20
CASH, beginning of period 0.00
----------
CASH,Operating activities
Net loss $(4,334.53)
Adjustments to reconcile net loss to net
cash used in
operating activities:
Increase in accounts payable 500.00
Increase in accrued interest 43.89
Cash used in operating activities (3,790.64)
Financing activities
Borrowings under note payable 3,790.64
Proceeds from issuance of common stock 0.20
Cash provided by financing activities 3,790.84
Increase in cash 0.20
Cash, beginning of period 0.00
Cash, end of period $ 0.20
==========
See accompanying summary of accounting policies and notes to financial
statements.
F-6
Setab Alpha, Inc.
(A Development Stage Company)
Summary of Accounting Policies
BUSINESSBusiness Setab Alpha, Inc. (the Company) was formed as
a Missouri corporation for the purpose of
engaging in a merger or other business
combination with an operating company.
Recently, the Company entered into an agreement
with a company engaged in the independent
production of feature films, television/cable
programming and commercials with respect to the
merger of such company with and into the
Company. The contemplated transaction will
result in the issuance of previously authorized
but unissued shares of Class A and Class B
common stock, respectively, and a change in
control of the Company. Since the planned
principal operations have not commenced, the
Company is considered to be a development stage
company, as defined in Statement of Financial
Accounting Standards No. 7.
ORGANIZATIONOrganization The Company was formed on July 5, 1995 under
the laws of the State of Missouri. The Company
has adopted a fiscal year ending on July 31.
CASH EQUIVALENTSCash Equivalents The Company considers all highly liquid
instruments with a maturity of three months
or less to be cash equivalents.
ORGANIZATION COSTSOrganization Costs Organization costs are expensed as incurred.
F-7
Setab Alpha, Inc.
(A Development Stage Company)
Notes to Financial Statements
1. PROPOSED PUBLIC
OFFERINGProposed Public Offering The Company intends to offer for
public sale 700,000 shares of its
common stock at an offering price of
$0.05 per share. Of such shares, the
Company has reserved 250,000 shares
for offer and sale to the two current
stockholders of the Company. All of
the proceeds from the proposed public
offering will be placed in an escrow
account pending completion of the
offering; accordingly, such offering
proceeds will not be available for
immediate use by the Company. If the
offering is not completed beforebefore'
December 31, 1996, all funds held in
escrow will be returned promptly to
the investors and the shares of
common stock issued by the Company
in connection with the proposed
public offering will be cancelled.
2. RELATED PARTY
TRANSACTIONSRelated Party Transactions In July 1995, the Company was
incorporated in the State of
Missouri with an authorized capital
of 30,000,000 shares of common stock
at a par value of $.001 per share.
In connection with its organization,
the Company issued to Alan G. Johnson
and to Douglas J. Bates 10 shares of
common stock each, at a purchase
price of $.01 per share. In May,
1996, the Company's Articles of
Incorporation were amended to
authorize 20,000,000 shares of Class
A common stock, 20,000,000 shares
of Class B common stock and
10,000,000 shares of Preferred
Stock, each having a par value of
$0.001 per share. All outstanding
shares of common stock were converted
into an equal number of shares of
Class A common stock.
At April 30, 1996, the Company was
indebted to Messrs. Bates and Johnson
in the aggregate principal amounts
of $1,735.31 and $2,055.33,
respectively. Such amounts were
advanced to the Company for the
purpose of funding disbursements
relating to the organization of the
Company. The indebtedness of the
Company to Messrs. Bates and Johnson
is unsecured, bears interest at an
annual rate equal to the prime rate
plus 2% and is payable on the date
a business combination is effected.
Pursuant to separate letters of
engagement dated July 5, 1995,
the Company has agreed to pay to Alan
G. Johnson and Douglas J. Bates the
sum of $5,000 each on the effective
date of the Registration Statement,
as consideration for services
rendered by such persons in
connection with the formation and
organization of the Company. These
amounts are reflected on the balance
sheets as deferred offering costs.
F-8
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTSReport of Independent Certified Public Accountants
Board of Directors
American Artists Film Corporation
Atlanta, Georgia
We have audited the accompanying consolidated balance sheets of American
Artists Film Corporation and Subsidiaries as of July 31, 1995 and 1994, and the
related consolidated statements of operations, stockholders' equity, and cash
flows for each of the years then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is
to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
American Artists Film Corporation and Subsidiaries as of July 31, 1995 and
1994, and the consolidated results of their operations and their cash flows for
each of the years then ended, in conformity with generally accepted accounting
principles.
BDO SEIDMAN, LLP
Atlanta, Georgia
November 3, 1995
F-9
American Artists Film Corporation
and Subsidiaries
Consolidated Balance Sheets
APRIL 30, July 31,
----------------------
1996 1995 1994
---------- ----------
(UNAUDITED)
-----------
ASSETS
CASH $ 161,388 $ 125,115 $ 154,670
ACCOUNTS RECEIVABLE 150,537 201,658 335,300
FILM COSTS, NET OF ACCUMULATED
AMORTIZATION (Note 1) 502,474 415,721 277,215
PROPERTY AND EQUIPMENT, NET (Notes 1, 2 and 3) 67,024 78,962 87,111
GOODWILL, NET OF ACCUMULATED AMORTIZATION
(Note 2) 166,358 195,714 234,857
DEFERRED OFFERING COSTS (Note 1) 105,000 105,000 -
ADVANCES TO OFFICERS (Note 1) 214,967 156,178 78,428
OTHER (Note 1) 122,618 135,711 122,618
---------- ---------- ----------
$1,490,366 $1,414,059 $1,290,199
========== ========== ==========
April 30, July 31,
1996 1995 1994
(unaudited)
Assets
Cash $ 71,542 $ 122,197 $ 149,486
Accounts receivable 105,494 186,793 274,448
Film costs, net of accumulated
amortization (Note 1) 502,474 415,721 277,215
Property and equipment, net
(Notes 1, 2 and 3) 67,024 78,962 87,111
Goodwill, net of accumulated
amortization (Note 2) 166,358 195,714 234,857
Deferred offering costs (Note 1) 105,000 105,000 -
Advances to officers (Note 1) 205,483 156,178 78,428
Other 47,887 27,297 2,912
$1,271,262 $1,287,862 $1,104,457
See accompanying summary of accounting policies and notes to financial
statements.
F-10
American Artists Film Corporation
and Subsidiaries
Consolidated Balance Sheets
APRIL 30, July 31,
1996 -----------------------
(unaudited) 1995 1994
---------- -----------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Accounts payable $ 301,098 $ 284,073 $ 351,110
Accrued expenses 152,948 110,140 49,460
Film revenue participations - 41,910 37,798
Deferred revenue - 56,303 -
Notes payable (Notes 2 and 3) 91,297 130,739 204,394
----------- ---------- ----------
TOTAL LIABILITIES 545,343 623,165 642,762
----------- ---------- ----------
MINORITY INTEREST (Note 1) 50,000 - -
CONTINGENCIES (Note 6)
STOCKHOLDERS' EQUITY (Note 4)
Preferred stock, 10,000,000 shares
authorized, none issued - - -
Common stock, par value $.05 per share,
30,000,000 shares authorized, 9,372,837,
8,368,220 and 8,092,720 issued and outstanding 468,642 418,411 404,636
Additional paid-in capital 2,091,867 1,221,397 1,083,922
Accumulated deficit (1,665,486) (848,914) (841,121)
----------- ---------- ----------
TOTAL STOCKHOLDERS' EQUITY 895,023 790,894 647,437
----------- ---------- ----------
$ 1,490,366 $1,414,059 $1,290,199
=========== ========== ==========
April 30, July 31,
1996 1995 1994
(unaudited)
Liabilities and Stockholders'
Equity
Liabilities
Accounts payable $ 240,168 $ 284,073 $ 295,541
Accrued expenses 117,392 106,561 41,905
Film revenue participations - 41,910 37,798
Deferred revenue - 56,303 -
Notes payable (Notes 2 and 3) 91,297 130,739 204,394
Total liabilities 448,857 619,586 579,638
Minority interest (Note 1) 50,000 - -
Contingencies (Note 6)
Stockholders' equity (Note 4)
Preferred stock, 10,000,000
shares authorized, none
issued - - -
Common stock, par value $.05
per share, 30,000,000 shares
authorized, 9,372,837,
8,368,220 and 8,092,720 issued
and outstanding 468,642 418,411 404,636
Additional paid-in capital 2,091,867 1,221,397 1,083,922
Unamortized advertising credits
(Note 1) (122,618) (122,618) (122,618)
Accumulated deficit (1,665,486) (848,914) (841,121)
Total stockholders' equity 772,405 6684,276 524,819
$1,271,262 $1,287,862 $1,104,457
See accompanying notes to consolidated financial statements.
F-11
American Artists Film Corporation
and Subsidiaries
Consolidated Statements of Operations
NINE MONTHS ENDED
APRIL 30, Year ended July 31,
------------------------- --------------------------------
1996 1995 1995 1994
----------- --------------------
(unaudited) (unaudited)
----------- -----------
REVENUES
Commercial production $1,697,213 $2,696,695 $3,057,200 $1,660,469
Film revenues (Note 1) 22,012 713,176 882,331 373,951
---------- ---------- ---------- ----------
1,719,225 3,409,871 3,939,531 2,034,420
---------- ---------- ---------- ----------
COSTS AND EXPENSES
Cost of commercial production 1,347,143 2,142,095 2,398,665 1,503,640
Film cost amortization 8,077 516,339 639,236 220,486
Selling, general and administrative 1,175,985 519,129 896,613 765,357
---------- ---------- ---------- ----------
2,531,205 3,177,563 3,934,514 2,489,483
---------- ---------- ---------- ----------
INCOME (loss) FROM OPERATIONS (811,980) 232,308 5,017 (455,063)
Interest expense 4,592 10,243 12,810 11,504
---------- ---------- ---------- ----------
NET INCOME (loss) $ (816,572) 222,065 $ (7,793) $ (466,567)
========== ========== ========== ==========
PRO FORMA NET INCOME (loss)
PER SHARE (Note 1) $(.14) $.04 $ - $(.09)
========== ========== ========== ==========
PRO FORMA WEIGHTED AVERAGE COMMON
SHARES AND EQUIVALENT SHARES
OUTSTANDINGNine months ended
April 30, Year ended July 31,
1996 1995 1995 1994
(unaudited) (unaudited)
Revenues
Commercial
production $ 919,904 $2,458,885 $2,819,390 $1,570,698
Film Revenue
(Note 1) 22,012 713,176 882,331 373,951
941,916 3,172,061 3,701,721 1,944,649
Costs and expenses
Cost of commercial
production 735,791 1,933,082 2,196,716 1,431,643
Film cost
amortization 8,077 516,339 639,236 220,486
Selling, general
and administrative 1,180,770 450,298 801,106 745,939
1,824,638 2,899,719 3,637,058 2,398,068
Income (loss from
Operations (882,722) 272,342 64,663 (453,419)
Interest expense (4,592) (10,243) (12,810) (11,504)
Equity in income
(loss) of Diversity
Filmworks, Inc.
(Note 1) 70,742 (40,034) (59,646) (1,644)
Net income (loss) $ (816,572) 222,065 $ (7,793) $(466,567)
Pro forma net
income (loss)
per share (Note 1) $ (.14) $ .04 $ - $ (.09)
Pro forma weighted
average common
shares and
equivalent shares
outstanding
(Note 1) 5,819,763 5,284,857 5,280,653 4,973,116
========== ========== ========== ==========
See accompanying notes to consolidated financial statements.
F-12
American Artists Film Corporation
and Subsidiaries
Consolidated Statements of Stockholders' Equity
Unamortized
Additional Advertising Total
Common Stock Paid-In Total
------------------- Paid-InPaid In Credits Accumulated Stockholders'Stockholders
Shares Amount Capital (Note 1) Deficit Equity
--------- -------- ----------- ------------ --------------
BALANCE,
Balance, July 31, 1993 6,754,480 $337,724 $ 275,834 $(122,618) $ (374,554) $239,004$116,386
Issuances of common
stock:
Cash 588,240 29,412 470,588 - - 500,000
Acquisition of First
Light (Note 2) 750,000 37,500 337,500 - - 375,000
Net lossLoss - - - - (466,567) (466,567)
--------- -------- ---------- ----------- ---------
BALANCE,Balance, July 31, 1994 8,092,720 404,636 1,083,922 (122,618) (841,121) 647,437524,819
Issuances of common
stock:
Cash 185,286 9,264 141,986 - - 151,250
Option conversion
(Note 8(b)) 90,214 4,511 (4,511) - - -
Net loss - - - - (7,793) (7,793)
--------- -------- ---------- ----------- ---------
BALANCE,Balance, July 31, 1995 8,368,220 418,411 1,221,397 (122,618) (848,914) 790,894668,276
Issuance of common
stock:
Cash (unaudited) 1,004,617 50,231 870,470 - - 920,701
Net loss (unaudited) - - - - (816,572) (816,572)
--------- -------- ---------- ----------- ---------
BALANCE,Balance, April 30, 1996
(unaudited) 9,372,837 $468,642 $2,091,867 $(122,618) $(1,665,486) $895,023
========= ======== ========== =========== =========
772,405
See accompanying notes to consolidated financial statements.
F-13
American Artists Film Corporation
and Subsidiaries
Consolidated Statements of Cash Flows
Nine months ended
April 30, Year ended July 31,
------------------------- ----------------------
1996 1995 1995 1994
(UNAUDITED) (unaudited)
----------- -----------
OPERATING ACTIVITIES
Net income (loss) $(816,572) $ 222,065 $ (7,793) $(466,567)
Adjustments to reconcile net
income (loss) to cash provided by
(used in) operating activities:
Film cost amortization 8,077 516,339 575,980 220,486
Depreciation and amortization 48,395 49,487 67,134 57,325
Changes in assets and liabilities
Accounts receivable 51,121 (17,939) 133,642 (253,071)
Film costs additions (94,830) (573,308) (714,486) (405,729)
Other assets (45,696) (473,156) (90,843) 30,796
Accounts payable 17,025 297,681 (67,037) 319,352
Accrued expenses 42,808 (29,322) 60,680 33,864
Film revenue participations (41,810) (37,798) 4,112 37,798
Deferred revenues (56,303) - 56,303 -
--------- --------- --------- ---------
Cash provided by (used in)
operating activities (887,885) (45,951) 17,962 (425,746)
INVESTING ACTIVITY
Capital expenditures (7,101) (14,204) (19,842) (5,293)
--------- --------- --------- ---------
FINANCING ACTIVITIES
Repayment of notes payable (39,442) (39,630) (73,655) 69,394
Issuances of common stock 920,701 101,250 151,250 500,000
Increase in deferred offering costs - - (105,000) -
Minority interest 50,000 - - -
--------- --------- --------- ---------
Cash provided by (used in)
financing activities 931,259 61,620 (27,405) 569,394
--------- --------- --------- ---------
NET INCREASE (DECREASE) IN CASH 36,273 1,465 (29,555) 138,355
CASH, beginning of period 125,115 154,670 154,670 16,315
--------- --------- --------- ---------
CASH, end of period $ 161,388 $ 156,135 $ 125,115 $ 154,670
========= ========= ========= =========
Nine months ended
April 30, Year ended July 31,
1996 1995 1995 1994
(unaudited) (unaudited)
Operating activities
Net income (loss) $(816,572) $222,065 $(7,793) $(466,567)
Adjustments to reconcile
net income (loss) to cash
provided by (used in)
operating activities:
Film cost amortization 8,077 516,339 575,980 220,486
Depreciation and
amortization 48,395 49,487 67,134 57,325
Equity in income (loss)
of Diversity Filmworks,
Inc. (Note 1) (70,742) 40,034 59,646 1,644
Changes in assets and
liabilities
Accounts receivable 81,229 40,614 87,655 (192,219)
Film costs additions (94,830) (573,308) (714,486) (405,729)
Other assets 847 (519,179) (161,781) 26,240
Accounts payable (43,905) 204,683 (11,468) 263,783
Accrued expenses 10,831 (25,812) 64,656 26,309
Film revenue participations (41,910) (37,798) 4,112 37,798
Deferred revenues (56,303) - 56,303 -
Cash provided by (used in)
operating activities (974,813) (82,875) 19,958 (430,930)
Investing activity
Capital expenditures (7,101) (14,204) (19,842) (5,293)
Financing activities
Repayment of notes payable (39,442) (39,630) (73,655) 69,394
Issuances of common stock 920,701 101,250 151,250 500,000
Increase in deferred
offering costs - - (105,000) -
Minority interest 50,000 - - -
Cash provided by (used in)
financing activities 931,259 61,620 (27,405) 569,394
Net increase (decrease)
in cash (50,655) (35,459) (27,289) 133,171
Cash, beginning of period 122,197 149,486 149,486 16,315
Cash, end of period $ 71,542 $114,027 $122,197 $149,486
See accompanying notes to consolidated financial statements.
F-14
American Artists Film Corporation
and Subsidiaries
Notes to Consolidated Financial Statements
(Information as to the Nine Months Ended
April 30, 1996 and 1995 is Unaudited)
1. SUMMARY OF SIGNIFICANT
NATURE OF BUSINESS
ACCOUNTING POLICIES
American Artists Film Corporation ("American Artists", and together with its
subsidiaries "AAFC Group"), directly and through its subsidiaries, engages in
the development, production and exploitation of made-for-television and feature
length motion pictures, and in the commercial contract productions of film
products, principally television commercials. The Company classifies its
operations in two business segments: (i) film development and production and
(ii) contract production. The Company's film development and production
operations involve the granting of credit to film exhibitors and distributors.
The Company's contract production operations involve the granting of credit to
advertising agencies that represent clients in various industries.
BASIS OF PRESENTATION
The consolidated financial statements include the accounts of American Artists
and First Light Entertainment Corporation ("First Light"), a 100 percent-owned
subsidiary. Also included in the consolidated financial statements are the
accounts of Diversity Filmworks, Inc. ("Diversity"), of which American Artists
owns 49 percent, andof Millennium Group, L.L.C. ("Millennium").
Diversity engages in contract production as a qualified minority contractor.
American Artists formed Diversity together with a qualified minority owner. American Artists has historically funded the
capital requirementsowner, and
officers of AAFC comprise one-half of Diversity's board of directors.
Diversity depends on AAFC and asFirst Light for operational capability and
necessary financing. As a result, thereofAAFC has had the ability to approve
Diversity's budgets and operating plans. Asplans, and could effectively block a result,merger,
asset disposition or other significant corporate action by Diversity through
the withdrawal of this support. Therefore, American Artists consolidates the
accounts of Diversity. Diversity has had a net deficit since inception.
Therefore, a minority interest has not been reflected in the consolidated
financial statements with respect to Diversity.
Millennium is a limited liability corporation in which the Company exercises
significant control through its capacity as manager, which position allows it
to direct the operations of Millennium, Millennium's purchase and sale of
assets, issuance of debt or equity securities, and Millennium's execution of
contracts and agreements, without the approval of the American Artists Film
Corporation and Subsidiaries Notes to Consolidated Financial Statements
(Information as to the Nine Months Ended April 30, 1996 and 1995 is Unaudited)
other stockholders. Millennium was formed to produce and distribute a sixty
minute video. American
F-15
Notes to Consolidated Financial Statements
(Information as to the Nine Month Ended
April 30, 1996 and 1995 is Unaudited) Artists will be entitled to (i) 50 percent of net
income after the minority stockholders have recovered their investment up to
a point where the minority stockholders have received a 200% return and (ii)
90% thereafter. As of April 30, 1996, Millennium's activities have been
limited to organization and pre-production story development. The minority
interest at April 30, 1996 relates to Millennium.
In accordance with Statement of Financial Accounting Standards No. 53
"Financial Reporting by Producers and Distributors of Motion Picture Films"
("SFAS No. 53"), AAFC Group presents an unclassified balance sheet.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
The financial statements as of April 30, 1996 and for the nine months ended
April 30, 1996 and 1995 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
nine month periods are not necessarily indicative of what the results of
operations or cash flows will be for an entire fiscal year. Certain amounts
in prior periods have been reclassified for comparative purposes.
INVESTMENT IN DIVERSITY FILMWORKS, INC.
American Artists owns 49% of the outstanding common stock of Diversity
Filmworks, Inc. ("Diversity"). Diversity was formed by American Artists and
a qualified minority owner to engage in contract production as a qualified
minority contractor. American Artists accounts for its investment in Diversity
using the equity method of accounting.
The following sets forth certain summarized financial information about
Diversity:
As of
April 30, July 31,
1996 1995 1994
Current assets $ 144,373 $ 17,783 $ 66,036
Due to American Artists 38,435 75,494 4,556
Other current liabilities 86,149 3,079 62,624
Total liabilities 124,584 78,573 67,180
Stockholder's equity (deficit) 19,789 (60,790) (1,144)
144,373 17,783 66,036
Nine Months ended Year ended
April 30, July 31,
1996 1995 1995 1994
Sales $777,309 $ 237,810 $237,810 $ 89,771
Costs of production and
selling, general and
administrative expenses 696,730 277,844 297,456 91,415
Net income (loss) $ 80,579 $(40,034) $(59,646) $ (1,644)
Diversity's net losses have been financed by American Artists, and,
accordingly, in fiscal 1994 and 1995 American Artists recorded 100% of
Diversity's losses. During the nine months ended April 30, 1996, American
Artists recorded 100% of Diversity's income to the extent of the previously
recorded losses.
American Artists' advances to and investment in Diversity, adjusted for the
Diversity income or losses included in American Artists' net income were
$2,912, $14,204 and $47,887 at July 31, 1994, 1995 and April 30, 1996
respectively, and are included in Other Assets.
FILM COSTS AND REVENUES
Costs incurred to develop stories, acquire story rights, produce and print
films, and advertising or distribution costs which benefit future markets, are
capitalized as film costs when incurred. All other advertising and
distribution costs are expected as incurred.
AAFC Group finances certain of its projects by granting revenue participations
to outside investors in exchange for investments in the production of the film.
Capitalized film costs are reduced by the financing provided under these
arrangements.
F-16
Notes to Consolidated Financial Statements
(Information as to the Nine Months Ended
April 30, 1996 and 1995 is Unaudited)
Capitalized film cost are amortized using the individual film forecast method
under which capitalized costs are amortized based on the relationship between
the gross revenue realized and the estimate of the total gross revenues to be
earned by the film over its life. Revenue estimates are reviewed periodically
and, when appropriate, are revised. Where unamortized film costs exceed a
revised estimate of total future gross revenues, film costs are written down
to net realizable value.
The components of capitalized film costs were as follows:
April 30, July 31,
April 30, -----------------------
1996 1995 1994
----------- -----------------------
Released $ 888,517 $ 888,517 $ 246,864
Accumulated
amortization (804,543) (796,466) (220,486)
--------- --------- ---------
83,974 92,051 26,378
In production 143,305 71,508 37,059
In development 275,195 252,162 213,778
--------- --------- ---------
$ 502,474 $ 415,721 $ 277,215
========= ========= =========
The above amounts do not include any value for four developed scripts
contributed to AAFC Group upon its formation in 1991 by its founding
stockholders in exchange for common stock. In accordance with generally
accepted accounting principles, the scripts were recorded at zero, which,
because no amounts had been expended for the development of scripts,
represented the cost basis of the contributing stockholders, and the par value
of the common shares issued, $238,000, was charged against additional paid-in
capital.
In general, the majority of the revenue to be derived from a film will be
earned during the two to three years following its release. On the basis of
American Artists' current production projections, which could change in the
future based on the availability of production funding, film demand and other
factors, 40% of the unamortized film costs will be amortized over the three
years that will end July 31, 1998, and F-17
Notes to Consolidated Financial Statements
(Information as to the Nine Months Ended
April 30, 1996 and 1995 is Unaudited)
60% will be amortized over the four year
period that will end July 31, 2000.
Film revenues are recognized, in accordance with SFAS No. 53, generally when
the film has been accepted by the licensee, where applicable, collection of
license American Artists Film Corporation and Subsidiaries fees is reasonably
assured, and the film is exhibited or is available for distribution in the
applicable market. Films are generally first exhibited in television markets,
and then are distributed on video tape. Revenues from the foreign exhibition
or sale of films are denominated in U.S. dollars. Minimum guaranteed amounts
from video license agreements, and from book royalties, are recognized when the
applicable license period begins and the film or book is available to the
distributor; amounts in excess of the minimum guarantee are recognized when
earned. Revenues are reduced for amounts payable on account of revenue
participations, which are accrued on the same basis as film costs are
amortized. The components of film revenues were as follows:
April 30, July 31,
----------------- ------------------
1996 1995 1995 1994
------- -------- -------- --------
Television $ - $364,739 $451,250 $359,320
Book royalties - 240,458 297,491 -
Foreign video 22,012 60,673 75,064 -
Domestic video - 47,306 58,526 14,631
------- -------- -------- --------
$22,012 $713,176 $882,331 $373,951
======= ======== ======== ========
COMMERCIAL PRODUCTION
AAFC Group produces film products, primarily television commercials, for
customers under fixed fee arrangements, which typically are less than two
months in duration. Revenues and costs attributable to these contracts are
recognized as the applicable contract is completed. Revenues and costs
applicable to contracts in progress are deferred, except that provision is made
for any anticipated losses on contracts in progress. The results of the
application of the completed contract method do not differ materially from
those which would result from the use of percentage-of-completion accounting.
F-18
American Artists Film Corporation
and Subsidiaries
Notes to Consolidated Financial Statements
(Information as to the Nine Months Ended
April 30, 1996 and 1995 in Unaudited)
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation is provided using the
straight-line method over the estimated life of the related asset. The
components of property and equipment are as follows:
Useful APRIL 30, July 31,
------------------
Lives 1996 1995 1994
------ --------- -------- --------
Office furniture
and fixtures 5-7 $ 87,658 $ 82,057 $ 68,176
Leasehold
improvements 4 37,080 35,580 35,580
Production
equipment 5-7
7,498 7,498 1,537
-------- -------- --------
132,236 125,135 105,293
Less accumulated
depreciation
and amortization 65,212 46,173 18,182
-------- -------- --------
$ 67,024 $ 78,962 $ 87,111
======== ======== ========
Useful April 30, July 31,
Lives 1996 1995 1994
Office furniture
and fixtures 5-7 $87,658 $82,057 $68,176
Leasehold
improvements 4 37,080 35,580 35,580
Production
equipment 5-7 7,498 7,498 1,537
132,236 125,135 105,293
Less accumulated
depreciation
and amortization 65,212 46,173 18,182
$67,024 $78,962 $87,111
ADVANCES TO OFFICERS
AAFC Group has, on certain occasions, made non-
interestnon-interest bearing cash advances
to certain officers. Management anticipates that these advances will be repaid
through their offset against future compensation. AAFC Group does not
recognize imputed interest income or offsetting compensation expense on the
advances.
DEFERRED OFFERING COSTS
Deferred offering costs are comprised principally of audit and other fees
incurred in connection with AAFC Group's proposed merger with Setab Alpha, Inc.
("Setab Alpha"). Such costs will be charged against F-19
Notes to Consolidated Financial
Statements (Information as to the Nine Months Ended
April 30, 1996 and 1995 is Unaudited)
stockholders' equity upon
the completion of the merger, or charged to expense if the merger is abandoned.
Other Assets
Other assets were as follows:
April 30, July 31,
------------------
1996 1995 1994
-------- ------------------
Advertising credits $122,618 $122,618 $122,618
Other - 13,093 -
-------- --------- --------
$122,618 $135,711 $122,618
======== ======== ========
TheUNAMORTIZED ADVERTISING CREDITS
In fiscal 1992 AAFC Group issued 250,000 shares of its common stock in exchange
for advertising credits that entitle AAFC Group to purchase media advertising
credits having an aggregate "standard cost" value of $500,000. The credits
were valued at an amountrecorded on the basis of $0.50 per share, based on the numberper share prices in
issuances of shares of common stock (250,000
shares) AAFC Group issued in exchange for cash during the credits.same period. The
unamortized advertising credits, previously classified as other assets, are now
presented as a reduction of stockholders' equity reflecting the acquisition
of the credit for common stock. The recoverability of the advertising credits
is assuredassessed based on the current market price for similar advertising and AAFC
Group's ability to utilize the credits. The credits may be used by the CompanyAAFC Group
through December 31, 1996.
Income TaxesINCOME TAXES
AAFC Group files a consolidated income tax return and provides for income taxes
under Statement of Financial Accounting Standards No. 109 "Accounting for
Income Taxes." Under that standard, deferred income taxes are provided on the
difference between the financial reporting and tax bases of assets and
liabilities.
F-20
Notes to Consolidated Financial Statements
(Information as to the Nine Months Ended
April 30, 1996 and 1995 is Unaudited)
Pro Forma Earnings Per SharePRO FORMA EARNINGS PER SHARE
As described elsewhere in this Prospectus, AAFC Group and Setab Alpha have
entered into an agreement ("The Merger Plan") whereby, upon completion of the
offering, Setab Alpha will acquire 100 percent of the outstanding common stock
of American Artists in exchange for the issuance of 11,90012,600 shares of Setab
Alpha Class A common stock and 5,502,9745,502,277 shares of Setab Alpha Class B common
stock. The Merger will be accounted for as a recapitalization of American
Artists, as a result of which American Artists will be deemed to have (i)
changed its capitalization to provide for two classes of Common Stock (Class
A and Class B), and (ii) effected a recapitalization in which an aggregate of
11,90012,600 shares of Class A Common Stock and 5,502,9745,502,277 shares of Class B Common
Stock are exchanged for the outstanding shares of its common stock (an exchange
ratio of an aggregate of .5862 Class A or Class B shares for each presently
outstanding share). Pro forma earnings (loss) per share, computed to reflect
the effect of such a recapitalization on the historical shares outstanding, is
presented in lieu of historical earning (loss) per share as the pro forma
presentation is considered to be more relevant.
Pro forma earnings per share are computed on the basis of the pro forma
weighted average common shares and dilutive common share equivalents
outstanding. Common stock equivalents consist of outstanding stock options.
Cash and Cash EquivalentsCASH AND CASH EQUIVALENTS
Cash and cash equivalents are generally comprised of demand deposits and time
deposits or highly liquid debt instruments with original maturities of three
months or less. The Company's cash balances do not involve any significant
concentrations of credit risk.
2. AcquisitionACQUISITION
On August 31, 1993, American Artists acquired 100 percent of the outstanding
common stock of First Light in exchange for the issuance of 750,000 shares of
its common stock and the assumption of First Light's liabilities, which
consisted primarily of a $100,000 note payable secured by First Light's
property, equipment and tradename. The acquisition was accounted for as a
purchase; accordingly, the purchase price, with the common stock issued
recorded at $.50 per F-21
Notes to Consolidated Financial Statements
(Information as to the Nine Months Ended
April 30, 1996 and 1995 is Unaudited)
share, representing a discount deemed appropriate for such
a block of shares, was allocated to First Light's tangible assets (comprised
principally of equipment, leasehold improvements, First Light's tradename, and
contracts in progress), with the remainder allocated to goodwill, as follows:
Contracts in progress $101,000
Furniture and fixtures 55,000
Leasehold improvements 35,000
Tradename 10,000
Goodwill 274,000
--------
$475,000
========
The goodwill is being amortized on a straight line basis over seven years.
Accumulated amortization was $107,642, $78,286 and $39,143 at April 30, 1996,
July 31, 1995 and 1994. AAFC Group annually assesses the recoverability of
unamortized goodwill by comparison to projections of undiscounted cash flowsflow
from First Light's operations over the remaining amortization period.
In connection with the acquisition, the president of First Light was granted
stock options for the purchase of 1.5 million shares of common stock, which
vest over three years and are exercisable at a price of $0.50 per share for ten
years.
First Light's results of operations are included in the Company's consolidated
financial statements from August 31, 1993. The consummation of the acquisition
of First Light as of August 1, 1993 would not have had a material effect on the
consolidated results of operations.
F-22
AMERICAN ARTISTS FILM CORPORATION
AND SUBSIDIARIES3. Notes to Consolidated Financial Statements
(Information as toPayable
Notes payable consisted of the Nine Months Endedfollowing:
April 30, 1996 and 1995 is Unaudited)
3. NOTES PAYABLE Notes payable consisted of the following:
APRIL 30, July 31,
--------- ---------------------
1996 1995 1994
--------- ---------------------
Unsecured installment note
payable to bank, interest
at 1% above the prime rate
(8.25% at April 30, 1996),
due in monthly installments
through March 1997 $ 38,584 $ 68,153 $ 98,045
Secured installment note,
collateralized by property,
equipment and tradename
of First Light, due with
interest at 4.37% per annum
in quarterly installments
through July 1998 52,713 62,586 86,349
Other - - 20,000
-------- -------- --------
$ 91,297 $130,739 $204,394
======== ======== ========
Aggregate maturities of notes payable at July 31, 1995 are as
follows:
Amount
------
1996 $ 52,705
1997 55,817
1998 22,217
--------
$130,739
========
F-23
AMERICAN ARTISTS FILM CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Information as to the Nine Months Ended April 30, 1996),
due in monthly installments
through March 1997 $ 38,584 $ 68,153 $ 98,045
Secured installment note,
collateralized by property,
equipment and tradename
of First Light, due with
interest at 4.37% per annum
in quarterly installments
through July 1998 52,713 62,586 86,349
Other - - 20,000
$ 91,297 $130,739 $204,394
Aggregate maturities of notes payable at July 31, 1995 are as follows:
Amount
1996 and 1995 is Unaudited)$ 52,705
1997 55,817
1998 22,217
$130,739
4. STOCKHOLDERS' EQUITYStockholders' Equity
(a) AAFC Group adopted a stock option plan in 1991 which, as revised, permits
the issuance of stock options for the purchase of up to 4 million shares of
American Artists' common stock. Stock options may be granted to officers,
directors, employees and consultants and may be either "incentive stock
options" (as defined in the Internal Revenue Code) or non-qualified stock
options. Stock options are generally granted at an exercise price equal to the
grant date fair value of American Artists' common stock, and vest at varying
rates over periods ranging from one to four years.
In December 1995, AAFC Group replaced its existing stock option plan with the
1995 stock option plan ("1995 Option Plan"). The 1995 Option Plan allows for
the issuance of up to 2.5 million options as either incentive stock options or
nonqualified stock options, and stock appreciation rights. The method used in
determining the grant price and vesting period is similar to the method used
under the previous stock option plan.
Stock options outstanding and vested as of April 30, 1996 are as follows:
Exercise Options Options Exercisable
Price Outstanding Vested Through
----- ----------- ------ -------
$ .05Exercise Options Options Exercisable
Price Outstanding Vested Through
$.05 140,000 100,000 2004
.50 1,500,000 1,000,000 2003
.85 1,269,250 175,000 2005
1.00 44,120 - 1998
1.50 319,750 - 2005
F-24
AMERICAN ARTISTS FILM CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Information as to the Nine Months Ended
April 30, 1996 and 1995 is Unaudited)
(b) During fiscal 1995 and the nine months ended April 30, 1996, American
Artists undertook certain private placements of units comprised of shares of
common stock and common stock purchase warrants. During fiscal 1995 American
Artists issued, for $.85 per unit, two units with each unit comprised of 29,412
shares of common stock and 14,706 common stock purchase warrants. During the
nine months ended April 30, 1996, AAFC issued 15.7 additional such units, as
well as 21.1 units, for $25,000 per unit, comprised of 25,000 shares of common
stock and 12,500 common stock purchase warrants. Subsequent to April 30, 1996
AAFC received additional proceeds of $35,000 for the issuance of 1.4 additional
such units. The resulting changes in outstanding warrants during the years
ended July 31, 1994 and 1995 and the nine months ended April 30, 1996 are as
follows:
Shares
------
Outstanding, August 1, 1993 -
Issued -
Exercised -
Forfeited -
-------
Outstanding, July 31, 1994 -
Issued 29,412
Exercised -
Forfeited -
-------
Outstanding, July 31, 1995 29,412
Issued 495,296
Exercised -
Forfeited -
-------
Outstanding, April 30, 1996 524,708
=======
F-25
AMERICAN ARTISTS FILM CORPORATION
AND SUBSIDIARIES
Noted to Consolidated Financial Statements
(Information as to the Nine Months EndedShares
Outstanding, August 1, 1993 -
Issued -
Exercised -
Forfeited -
Outstanding, July 31, 1994 -
Issued 29,412
Exercised -
Forfeited -
Outstanding, July 31, 1995 29,412
Issued 495,296
Exercised -
Forfeited -
Outstanding, July 31, 1996 524,708
Warrants outstanding at April 30, 1996 and 1995 is Unaudited)
Warrants outstanding at April 30, 1996 are as follows:
Exercise Warrants Exercisable
Price Outstanding Through
----- ----------- -------
$1.50-$2.00 524,708 June 1998
are as follows:
Exercise Warrants Exercisable
Price Outstanding Through
$1.50-$2.00 524,708 June 1988
5. INCOME TAXESIncome Taxes
Deferred tax assets result from the following temporary differences between
book and tax bases of assets:
July 31
----------------------
1995 1994
---- ----
Deferred tax assets:
Net operating loss carry-
forward $ 304,752 $ 292,839
Valuation allowance (304,752) (292,839)
--------- ---------July 31
1995 1994
Deferred tax assets:
Net operating loss
carry-forward $ 304,752 $ 292,839
Valuation allowance (304,752) (292,839)
$ - $ - -
========== ==========
AAFC Group has net operating loss carryforwards for federal tax purposes
amounting to approximately $770,000 at July 31, 1995. These net operating loss
carryforwards expire through fiscal year 2010. As a result of such net
operating loss carryforwards and the related valuation allowance, AAFC Group
has not provided a provision for income taxes for the years ended July 31, 1995
and 1994.
6. CONTINGENCIESContingencies
American Artists is currently involved in an arbitration with one of its
co-producers concerning the accounting for the costs incurred and revenues
received by each company relating to two co-produced feature films. The
probable outcome of the arbitration is not presently determinable, and
accordingly no provision has been recorded in the accompanying financial
statements. Management believes that it is reasonably possible that the
arbitration may result in a finding against the Company ranging up to $100,000.
F-26
AMERICAN ARTISTS FILM CORPORATION
AND SUBSIDIARIES
Notes to7. Segment Information
Financial information by business segment is as follows:
Development
and Film Contract
Production Production Consolidated
Financial Statements
(Information as to the Nine Months Ended
April 30, 19961995
Revenues $ 882,331 $2,819,390 $3,701,721
Income (loss)
from operations 26,770 37,893 64,663
Identifiable assets 9,098 265,578 274,676
Capital
expenditures 10,895 8,947 19,842
Depreciation and
1995 is Unaudited)
7. SEGMENT INFORMATION Financial information by business segment is as follows:
Development
and Film Contract
Production Production Consolidated
---------- ---------- ------------
1995
----
Revenues $882,331 $3,057,200 $3,939,531
Income (loss) from
operations 26,770 (21,753) 5,017
Identifiable assets 9,098 265,578 274,676
Capital expenditures 10,895 8,947 19,842
Depreciation and
amortization 578,312 64,802 643,114
1994
----
Revenues $373,951 $1,660,469 $2,034,420
Income (loss) from
operations (91,811) (363,252) (455,063)
Identifiable assets 536 321,432 321,968
Capital expenditures 626 104,667 105,293
Depreciation and
amortization 220,486 57,235 277,721
8. SUPPLEMENTAL CASH
FLOW INFORMATIONamortization 578,312 64,802 643,114
1994
Revenues $373,951 $1,570,698 $1,944,649
Income (loss)
from
operations (91,811) (361,608) (453,419)
Identifiable
assets 536 321,432 321,968
Capital
expenditures 626 104,667 105,293
Depreciation and
amortization 220,486 57,235 277,721
8. Supplemental Cash Flow Information
1995 1994
---- ----
Cash paid for interest $10,009 $ 6,462
Cash paid for income taxes 2,498 -
(a) The Company acquired First Light, as described in Note 2, in a non-cash
transaction.
(b) In September 1994, the American Artists converted stock options, which
would have allowed for the purchase of 902,140 shares of common stock at prices
ranging from $1.25 to $2.25, into 90,214 shares of common stock. The
transaction was accounted for as an exchange of equity instruments, with no
gain or loss recognized.
F-27
AMERICAN ARTISTS FILM CORPORATION
AND SUBSIDIARIESAmerican Artists Film Corporation
and Subsidiaries
Pro Forma Financial Statements
(Unaudited)
INTRODUCTIONIntroduction
As discussed elsewhere in the Prospectus, the Company and AAFC Group have
entered into an agreement ("the
Merger(the "Merger Plan") whereby, upon the completion of
the offering, the Company will acquire 100 percent of the outstanding common
stock of American Artists in exchange for the issuance of 11,90012,600 shares of the
Company's Class A common stock and 5,502,9745,502,277 shares of the Company's Class B
common stock (the "Merger"). The consummation of the Merger is conditioned
upon, among other things, Setab Alpha's prior completion of its Public
Offering, with not fewer than 200 stockholders, and the approval of the
shareholders of American Artists.
The accompanying unaudited pro forma consolidated balance sheet is presented
to illustrate the effect of the proposed Merger on the Company's financial
position and assumes that the Merger, and the prerequisite Public Offering,
were completed on April 30, 1996. The Merger will result in the issuance of
a controlling interest in the Company to the stockholders of American Artists.
Because of this, and because the Company has not had, and will not have had,
any material operations, the Merger will be accounted for as a recapitalization
of American Artists in which (i) American Artists is deemed to have (a) created
a second class of common stock, such that its authorized capital consists of
Class A and Class B common stock, each with a par value of $.001, and (b)
exchanged for the outstanding shares of its common stock, an aggregate of
11,90012,600 shares of Class A Common Stock and 5,502,9745,502,277 shares of Class B Common
Stock, and (ii) issued 700,020 shares of Class A common stock, (representing
the number of shares of its Company's Common Stock to be outstanding upon the
completion of the Public Offering) in exchange for the net assets of the
Company, recorded at their historical cost.
AAFC Group will be the continuing entity for accounting and financial reporting
purposes, and accordingly the results of operations to be reported for periods
prior to the Merger will be those of AAFC Group. The Company has had no
material operations, and as a result the pro forma results of operations would
not differ materially from AAFC Group's historical results of operations.
Accordingly, pro forma statements of operations are not presented.
The following unaudited pro forma information may not be indication of future
financial position. The unaudited pro forma information should be read in
conjunction with the historical financial statements of the Company and AAFC
Group presented elsewhere herein.
F-28
SETAB ALPHA/AMERICAN ARTISTS FILM CORPORATIONSetab Alpha/American Artists Film Corporation
Pro Forma Consolidated Balance Sheet
(Unaudited)
American
Artists Film
Corporation Setab Alpha
April 30, April 30, Pro forma
1996 1996 Adjustments Pro forma
---------- ----------- ----------- ---------
ASSETSAssets
Cash $ 161,38871,542 $ - $ 35,000 [A] $ 208,844118,998
12,456 [C]
Accounts receivable 150,537105,494 - 150,537105,494
Film assets, net of
accumulated amortization 502,474 - 502,474
Property and equipment, net 67,024 - 67,024
Goodwill, net of accumulated
amortization 166,358 - 166,358
Deferred offering cost 105,000 $10,00010,000 (115,000) [E] -
Advances to officers 214,967205,483 - 214,967205,483
Other 122,61847,887 - 122,618
---------- ------- --------- ----------
$1,490,36647,887
$1,271,262 $10,000 $ (67,544) $1,432,822
========== ======= ========= ==========
F-29
SETAB ALPHA/AMERICAN ARTISTS FILM CORPORATION
Pro Forma Consolidated Balance Sheet
(Unaudited)
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
$1,213,718
Liabilities and Stockholders'
Equity
Liabilities
Accounts payable $ 301,098 $10,500240,168 $ (10,500) [C]10,500 $ 301,098(10,500)[C] $ 240,168
Accrued expenses 152,948117,392 44 (44) [C] 152,948117,392
Film revenue participation - - -
Deferred revenue - - -
Notes payable 91,297 3,791 (3,791) [C] 91,297
----------- ------- -------------- -----------
Total liabilities 545,343448,857 14,335 (14,355) 545,343
----------- ------- -------------- -----------
MINORITY INTEREST448,857
Minority interest 50,000 50,000
Stockholders' equity
Preferred stock - - -
American Artists common
stock 468,642 - 1,750 [A] -
(470,392) [B]
Class A common stock 1213 [B] 712713
- - 700 [D]
Class B common stock - 5,5035,502 [B] 5,5035,502
Additional paid-in capital 2,091,867 - 33,250 [A] 2,496,750
464,877 [B]
(5,000) [C]
26,756 [D]
(115,000) [E]
Unamortized advertising
credits (122,618) - - (122,618)
Deficit (1,665,486) - - (1,665,486)
Net Assets of Setab Alpha - (4,335) 31,791 [C] -
(27,456) [D]
--------------
Total stockholders' equity 895,023772,405 (4,335) (53,209) 837,479
------------ ------- -------------- ------------714,861
$ 1,490,3661,271,262 $10,000 (67,544) $ 1,432,822
=========== ======= ============== ===========1,213,718
F-30
SETAB ALPHA/AMERICAN ARTISTS FILM CORPORATION
Pro Forma Consolidated Balance Sheet
(Unaudited)
1. BASIS OF PRESENTATIONBasis of Presentation
Reference is made to the "Introduction" at page F-26.
2. PRO FORMA ADJUSTMENTSPro Forma Adjustments
Adjustments to the pro forma consolidated balance sheet are as follows:
(A) To reflect American Artists' receipt, subsequent
to April 30, 1996 of $35,000 from the issuance
of 35,000 shares of common stock.
(B) To reflect American Artists' deemed
recapitalization in which it exchanged the shares
of its outstanding common stock for an aggregate
of 11,90012,600 shares of Class A Common Stock and
5,502,9745,502,277 shares of Class B Common Stock.
(C) To reflect Setab Alpha's receipt and application
of the net proceeds of the Public Offering of
700,000 shares of Class A Common Stock at $0.05
per share.
(D) To record the Merger, accounted for as the
issuance by American Artists of 700,020 shares
of Class A common stock (representing the number
of shares of Setab Alpha common stock to be
outstanding upon the completion of the offering)
for the net assets of Setab Alpha.
(E) To charge deferred offering costs against the
proceeds of the offering and the Merger.
F-31
ANNEX A
AGREEMENT AND PLAN OF MERGER
This Agreement and Plan of Merger (the "Agreement") is made and entered
into as of this 1st day of May 1996 by and between AMERICAN ARTISTS FILM
CORPORATION ("Film"), a corporation organized under the laws of the State of
Georgia, and SETAB ALPHA, INC. ("Setab"), a corporation organized under the
laws of the State of Missouri (Film and Setab being hereinafter sometimes
referred to collectively as the "Constituent Corporations").
W I T N E S S E T H :
- - - - - - - - - -
WHEREAS, Film is a corporation organized under the laws of the State of
Georgia with its principal office therein located at 1245 Fowler Street, City
of Atlanta, County of Fulton, State of Georgia;
WHEREAS, Setab is a corporation organized under the laws of the State of
Missouri with its principal office therein located at 244B Greenyard Drive,
City of Ballwin, County of St. Louis, State of Missouri;
WHEREAS, the Boards of Directors of each of the Constituent Corporations
have determined that it is advisable and for the benefit of each of the
Constituent Corporations and their respective shareholders that Film be merged
with and into Setab on the terms and subject to the conditions hereinafter set
forth, and by resolutions duly adopted have adopted the terms and conditions
of this Agreement and directed that the proposed merger (the "Merger") be
submitted to the shareholders of Film and Setab with the recommendation that
such shareholders approve of the terms and conditions hereinafter set forth;
WHEREAS, the laws of the States of Georgia and Missouri permit a merger
of the Constituent Corporations; and
WHEREAS, it is intended that the Merger shall qualify as a reorganization
within the meaning of Section 368(a) of the Internal Revenue Code of 1986, as
amended (the "Code");
NOW, THEREFORE, for and in consideration of the premises and of the mutual
agreements, promises and covenants contained herein, the parties hereto, for
good and valuable consideration, warrant, represent, covenant and agree as
follows:
ARTICLE I
MERGER
------
1.1 Merger. Subject to the conditions hereinafter set forth and in
accordance with the Georgia Business Corporation Code (the "Georgia Code") and
the Missouri General and Business Corporation Law (the "Missouri Law"), at the
Effective Time (as hereinafter defined), Film shall be merged with and into
Setab, and the separate existence of Film shall thereupon cease. Setab
(hereinafter with respect to the period following the Effective Time sometimes
referred to as the "Surviving Corporation") shall continue in existence and the
merger shall in all respects have the effect provided for in Sections 14-2-1106
and 14-2-1107 of the Georgia Code and Sections 351.450 and 315.458 of the
Missouri Law.
1.2 Effect. Without limiting the foregoing, at and after the Effective
Time, the Surviving Corporation shall possess all the rights, privileges,
powers and franchises, of a public as well as of a private nature, and be
subject to all the restrictions, disabilities and duties of each of the
Constituent Corporations, and all property, real, personal and mixed, and all
debts due to either of the Constituent Corporations on whatever account, as
well as for
A-1
stock subscriptions and all other things in action or belonging to
each of the Constituent Corporations, shall be vested in the Surviving
Corporation; and all property, rights, privileges, powers and franchises, and
all and every other interest shall be thereafter as effectively the property
of the Surviving Corporation as they were of the Constituent Corporations; and
the title to any real estate vested by deed or otherwise in either of the
Constituent Corporations shall not revert or be in any way impaired; but all
rights of creditors and all liens upon any property of either of the
Constituent Corporations shall be preserved unimpaired; and all debts,
liabilities and duties of the Constituent Corporations shall thenceforth
attached to the Surviving Corporation, and may be enforced against it to the
same extent as if said debts and liabilities had been incurred by it.
1.3 Articles; Bylaws. At the Effective Time, (i) the Articles of
Incorporation of Setab as in effect immediately prior to the Effective Time
shall be the Articles of Incorporation of the Surviving Corporation, and (ii)
the Bylaws of Setab as in effect immediately prior to the Effective Time shall
be the Bylaws of the Surviving Corporation.
1.4 Directors; Officers. The directors and officers of Film at the
Effective Time shall, from and after the Effective time, be the sole directors
and officers of the Surviving Corporation until their successors have been duly
elected or appointed and qualified or until their earlier death, resignation
or removal in accordance with the Surviving Corporation's Articles of
Incorporation and Bylaws.
1.5 Closing.
-------
(a) The completion of the merger transaction (the "Closing") will take
place at the offices of Troutman Sanders LLP, NationsBank Plaza, Suite 5200,
600 Peachtree Street, NE, Atlanta, Georgia at 10:00 a.m. on the fifth business
day after the conditions set forth in Articles VI and VII shall have been
fulfilled or waived in accordance with this Agreement (the "Closing Date"),
unless another date, time or place is agreed in writing by the parties hereto.
(b) At the Closing, the parties shall (i) provide to each other proof of
the satisfaction or waiver of each of the conditions set forth in Articles VI
and VII, respectively, (ii) execute and acknowledge Articles of Merger, and
(iii) immediately cause the Merger to be consummated by filing the Articles of
Merger with the Secretary of State of the State of Georgia and the Secretary
of State of the State of Missouri in accordance with the provisions of the
Georgia Code and the Missouri Law. The Merger shall be effective at the time
of the last to occur of such filings of the Articles of Merger or such later
time as may be provided therein (the "Effective Time").
1.6 Further Action. Prior to and from and after the Effective Time, the
Constituent Corporations and the proper officers of each of them shall take all
such commercially reasonable actions as shall be necessary or appropriate in
order to carry out the purposes of this Agreement and effectuate the Merger in
accordance with the terms hereof. If at any time the Surviving Corporation
shall consider or be advised that any further assignments or assurances in law
or any other actions are necessary, appropriate or desirable to vest in said
corporation according to the terms hereof the title to any property or rights
of Film, the last acting officers of Film, or the corresponding officers of the
Surviving Corporation, shall and will execute and make all such proper
assignments and assurances and take all action necessary and proper to vest
title in such property or rights in the Surviving Corporation, and otherwise
to carry out the purposes of this Agreement.
ARTICLE II
TERMS OF MERGER
---------------
2.1 At the Effective Time, by virtue of the Merger and without any other
or further action by the parties:
(a) Each share of Common Stock of Film issued and outstanding
immediately prior to the Effective Time shall, by virtue of the merger and
without any action on the part of the holder thereof, thereupon be converted
into 0.5862 share of the capital stock of the Surviving Corporation, of which
the first 100 shares issued to each Film shareholder shall be issued as Class
A Common Stock and the remainder as Class B Common Stock,
A-2
subject to the
provisions of Section 2.3 below; provided, however, that no fractional shares
shall be issued and the aggregate number of shares of Class B Common Stock to
be issued to each shareholder of record by reason of such conversion shall be
rounded to the nearest whole number (the "Merger Consideration"). The shares
of Class A and Class B Common Stock of the Surviving Corporation required for
such purpose shall be drawn from authorized but unissued shares of Class A and
Class B Common Stock, respectively, of the Surviving Corporation.
(b) Each share of Class A Common Stock of Setab issued and
outstanding immediately prior to the Effective Time shall, by virtue of the
merger and without any action on the part of the holder thereof, thereupon be
and remain one share of Class A Common Stock of the Surviving Corporation,
subject to the provisions of Section 2.4 below.
(c) Each share of the capital stock of Film held in the Treasury of
Film shall be canceled and retired and no payment shall be made in respect
thereof.
2.2 After the Effective Time:
(a) Each holder of an outstanding certificate or certificates which
immediately prior thereto represented shares of Common Stock of Film will, upon
surrender of such certificate or certificates, be entitled to certificates
representing the number of shares of Class A and Class B Common Stock of the
Surviving Corporation into which the aggregate number of shares of Common Stock
of Film previously represented by the surrendered certificate or certificates
shall have been converted pursuant to Section 2.1 of this Agreement.
(b) Each holder of an outstanding certificate or certificates which
immediately prior thereto represented shares of Class A Common Stock of Setab
will, upon surrender of such certificate or certificates, be entitled to a
certificate or certificates representing the number of shares of Class A Common
Stock of the Surviving Corporation into which the aggregate number of shares
of Class A Common Stock of Setab previously represented by the surrendered
certificate or certificates shall have been converted pursuant to Section 2.1
of this Agreement.
2.3 Notwithstanding any provision of this Agreement to the contrary,
shares of Common Stock of Film which are issued and outstanding immediately
prior to the Effective Time and which are held by shareholders who have timely
filed with Film a written objection to the merger (the "Dissenting Film
Shares") shall not be converted into or represent a right to receive shares of
Class A and Class B Common Stock of the Surviving Corporation pursuant to
Section 2.1 hereof, but the holder thereof shall be entitled only to such
rights as are granted by Article 13 of the Georgia Code. Each holder of
Dissenting Shares who becomes entitled to payment for such shares pursuant to
the foregoing Article of the Georgia Code shall receive payment therefor from
the Surviving Corporation in accordance with the Georgia Code. If any holder
shall have failed to perfect, or shall have effectively withdrawn or lost, his
or her right to appraisal and payment for his or her shares under the said
Article of the Georgia Code, each such share shall be converted into and
represent the right to receive shares pursuant to Section 2.1 hereof, upon
surrender to the Surviving Corporation of the certificate representing such
share.
2.4 Notwithstanding any provision of this Agreement to the contrary,
shares of Class A Common Stock of Setab which are issued and outstanding
immediately prior to the Effective Time and which are held by shareholders who
have timely filed with Setab a written objection to the merger (the "Dissenting
Setab Shares") shall not be and remain one share of Class A Common Stock of the
Surviving Corporation pursuant to Section 2.1 hereof, but the holder thereof
shall be entitled only to such rights as are granted by Section 351.455 of the
Missouri Law. Each holder of Dissenting Setab Shares who becomes entitled to
payment for such shares pursuant to the foregoing Section of the Missouri Law
shall receive payment therefore from the Surviving Corporation in accordance
with the Missouri Law. If any holder shall have failed to perfect, or shall
have effectively withdrawn or lost, his or her right to appraisal and payment
for his or her shares under the said Section of the Missouri Law, each such
share shall be and remain one share of Class A Common Stock of the Surviving
Corporation pursuant to Section 2.1 hereof, upon surrender to the Surviving
Corporation of the certificate representing such share.
2.5 Subject to Section 2.6 hereof, each option or warrant issued and
outstanding immediately prior to the Effective Time with respect to the
purchase of Common Stock of Film shall upon completion of the Merger be
exchanged for an option or warrant containing substantially the same terms and
conditions except that each share A-3
of Common Stock of Film subject to purchase
upon exercise thereof shall be replaced by 0.5862 share of Class B Common Stock
of the Surviving Corporation; provided, however, that the aggregate number of
shares of Class B Common Stock subject to purchase upon exercise thereof shall
be rounded to the nearest whole number and no fractional share shall be issued
upon any exercise thereof.
2.6 None of the shares of Class A or Class B Common Stock issued by
reason of conversion of shares of Common Stock of Film in the Merger, shares
of Class B Common Stock issued upon exercise of options or warrants outstanding
at the Effective Time, or share of Class A Common Stock issued upon conversion
of Class B Common Stock issued in connection with the Merger, may be sold,
transferred or assigned by the holder thereof within 365 days after the
Effective Time, unless and until such sale, transfer or assignment shall have
been specifically approved in writing by the Surviving Corporation upon written
application by the holder. The application shall describe the proposed sale,
transfer or assignment in such detail as the Surviving Corporation may request,
and the Surviving Corporation may approve or disapprove any such application
in its sole discretion. Certificates issued by the Surviving Corporation in
respect of outstanding shares of Class A or Class B Common Stock, Class A
Common Stock issued upon conversion of outstanding Class B Common Stock, or
Class B Common Stock issued upon exercise of outstanding options or warrants
may contain a legend, in such detail as the Surviving Corporation may deem
appropriate, referring to this provision.
ARTICLE III
ADDITIONAL AGREEMENTS
---------------------
3.1 Upon reasonable notice, the parties will each (i) afford to the
officers, employees, accountants, counsel and other representatives of the
other, access, during normal business hours to all its properties, books,
contracts, commitments and records, and (ii) furnish promptly to the other all
information in its possession concerning its business properties and personnel
as the inquiring party may reasonable request. The parties agree that they
will not, and will cause their representatives not to, use any information
obtained pursuant to this Section for any purpose unrelated to the consummation
of the transactions contemplated by this Agreement.
3.2 The parties will each use their reasonable best efforts to consummate
and effect the Merger (including (i) furnishing all information reasonably
required in connection with approvals of or filings with the Securities and
Exchange Commission or any other governmental entity, and (ii) causing the
conditions set forth in Article VI and VII, respectively, to be satisfied) and
will promptly cooperate with and furnish information to each other in
connection with any such requirements imposed upon either of them or any of
their subsidiaries in connection with the Merger.
3.3 Setab shall pay all of its own costs and expenses incident to the
negotiation and preparation of this Agreement and the consummation of the
transactions contemplated hereby, including the fees, expenses and
disbursements of its counsel and advisors; provided, however, that such costs
and expenses of Setab shall not exceed $35,000. Setab shall not incur or
otherwise become obligated to pay any such costs and expenses in excess of
$35,000 prior to the consummation of the Merger without the prior written
consent of Film.
3.4 Each of the parties represents as to itself, its subsidiaries and its
affiliates, that no agent, broker, investment banker, financial advisor or
other firm or person is or will be entitled to any broker's or finder's fee or
any other commission or similar fee in connection with any of the transactions
contemplated by this Agreement, and the parties each agree to indemnify and
hold the other harmless from and against any fees, commissions or expenses
asserted by any person on the basis of any act or statement alleged to have
been made by such party or its subsidiaries or affiliates.
3.5 Film hereby acknowledges that Setab has filed with the Securities and
Exchange Commission a Registration Statement on Form SB-2 with respect to an
offering of its Class A Common Stock and intends to file a Registration
Statement on Form S-4 with respect to the shares of Class A and Class B Common
Stock to be issued pursuant to the Merger (collectively, the "Registration
Statements"). Film shall furnish Setab with all information concerning Film
as may be required for inclusion in the Registration Statements and shall
cooperate with Setab in the preparation of the Registration Statements in a
timely fashion and use its best efforts to have each of the
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Registration
Statements declared effective by the Securities and Exchange Commission as
promptly as possible. Setab will prepare and file in consultation with Film
such amendments to the Registration Statement on Form SB-2 and such supplements
to the Prospectus included therein as shall be necessary to cause such
Registration Statement to become effective and remain effective (and to cause
the Prospectus included therein to remain current) until the related offering
has been completed, in each case in accordance with applicable law. Setab will
prepare and file (in consultation with Film) the above-referenced Registration
Statement on Form S-4 as promptly as practicable, subject to the right of Film
to request that such filing be delayed as and to the extent Film shall deem
appropriate in order to facilitate the orderly and efficient preparation
thereof and processing and review thereof by the Securities and Exchange
Commission. Setab will thereafter prepare and file (in consultation with Film)
such amendments to such Registration Statement on Form S-4 and such supplements
to the Prospectus included therein as shall be necessary to cause such
Registration Statement to become effective and remain effective (and to cause
the Prospectus included therein to remain current) for the period required in
order to consummate the Merger, as set forth herein, in accordance with
applicable law. Setab shall use its best efforts to assure that each
Registration Statement includes all information required to be included therein
by applicable law, and that each Registration Statement shall not contain any
untrue statement of a material fact or any omission to state any material fact
required to be stated therein or necessary to make the statements therein not
misleading.
Film represents and warrants that the written description of Film headed
"AAFC GROUP" delivered by Film to Setab for inclusion in Amendment No. 2 to its
Registration Statement No. 33-97196C on Form SB-2, as amended (the
"Registration Statement"), filed with the Securities and Exchange Commission
is true and correct in all material respects at the date of this Agreement.
If at any time prior to the Effective Time any information pertaining to Film
contained in or omitted from the Registration Statements make such statements
contained in the Registration Statements false or misleading, Film shall
promptly so inform Setab and provide Setab with the information necessary to
make statements contained therein not false and misleading. As soon as is
reasonably practicable, Film shall prepare and mail to its shareholders an
information or proxy statement which shall include all information required
under applicable law to be furnished to Film's shareholders in connection with
the Merger and transactions contemplated hereby.
Film agrees to indemnify and hold harmless Setab, its officers and
directors, agents and counsel against any and all loss, liability, claim,
damage and expense whatsoever as and when incurred arising out of, based upon
or in connection with any untrue statement or alleged untrue statement of a
material fact contained in the Registration Statements or any omission or
alleged omissions to state a material fact required to be stated therein or
necessary to make the statements therein not misleading, but only with respect
to statements or omissions, if any, made in reliance upon and in conformity
with written information furnished to Setab with respect to Film by or on
behalf of Film expressly for inclusion therein. Setab agrees to indemnify and
hold harmless Film, its officers and directors, agents and counsel against any
and all loss, liability, claim, damage and expense whatsoever as and when
incurred arising out of, based upon or in connection with any untrue statement
or alleged untrue statement of a material fact contained in either of the
Registration Statements or any omission or alleged omission to state a material
fact required to be stated therein or necessary to make the statements therein
not misleading except for any untrue statement or alleged untrue statement or
omission or alleged omission which is based upon written information furnished
to Setab with respect to Film by or on behalf of Film expressly for inclusion
therein.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF FILM
--------------------------------------
Film represents, warrants and covenants to Setab as follows:
4.1 Film is a corporation duly organized, validly existing, and in good
standing under the laws of the State of Georgia, and is not required to be
qualified as a foreign corporation under the laws of any other jurisdiction.
Film has full power and lawful authority to carry on its business as now
conducted and to own and operate its assets, properties and business.
4.2 The authorized capital stock of Film consists of (i) 30,000,000
shares of Common Stock, per value $0.05 per share, of which 9,407,837 shares
are validly issued and outstanding, fully paid and non-assessable and
A-5
3,797,828
shares are subject to purchase upon exercise of options and warrants as
described in Exhibit A to this Agreement, and (ii) 10,000,000 shares of
preferred stock, none of which is issued and outstanding. Except as stated
above, there are no outstanding subscriptions, warrants, options, calls,
commitments or agreements to which Film is a party or by which it is bound
calling for the issuance of any class of Film's capital stock.
4.3 Film has heretofore delivered to Setab (i) the consolidated financial
statements of Film and its consolidated subsidiaries as at July 31, 1995 and
for the two fiscal years then ended, certified by BDO Seidman, LLP, and (ii)
the unaudited consolidated financial statements of Film and its consolidated
subsidiaries as at April 30, 1996, and for the nine months then ended. Such
financial statements are hereinafter collectively referred to as the "Film
Financial Statements." Each of the balance sheets included in the Film
Financial Statements was prepared in conformity with generally accepted
accounting principles, and presents fairly the financial condition of each of
Film and its consolidated subsidiaries as of the date thereof. Each of the
statements of operations included in the Film Financial Statements presents
fairly the results of the operations of Film and its consolidated subsidiaries
for the period covered thereby in conformity with generally accepted accounting
principles applied on a consistent basis.
4.4 From January 31, 1996, to the date of this Agreement there has not
been, and from the date of this Agreement to the Effective Time there will not
be with respect to Film and its consolidated subsidiaries:
(i) Any material adverse change except changes in the ordinary
course of business;
(ii) Any declaration, setting aside or payment of any dividend or any
other distribution on or in respect of its capital stock or any direct or
indirect redemption, retirement, purchase or other acquisition of any of such
stock or any issuance of any shares of such stock, or of any options, warrants
or other rights with respect thereof, except issuance of Common Stock upon
exercise of outstanding options or warrants or otherwise for fair value; or
(iii)Any change in its Articles of Incorporation or By-laws.
4.5 The execution and delivery of this Agreement and the consummation of
the transactions contemplated hereby will not:
(i) Result in the breach of any of the terms or conditions of, or
constitute a default under, the Articles of Incorporation or By-
lawsBy-laws of Film
or of any mortgage, note, bond, indenture, agreement, license or other
instrument or obligation to which Film is now a party or by which it or any of
its properties or assets may be bound or affected; or
(ii) Violate any order, writ, injunction or decree or any court,
administrative agency or governmental body.
4.6 The Board of Directors of Film has duly approved this Agreement and
the transactions contemplated herein, subject to the requisite approval by the
holders of Film Common Stock, and has authorized the execution and delivery by
Film of this Agreement.
4.7 All representations, warranties and covenants made by Film in this
Agreement are true and correct when made and, except as Film shall otherwise
advise Setab in writing prior thereto, shall be true and correct in all
material respects at the Closing with the same effect as if they had been made
at and as of the Closing.
ARTICLE V
REPRESENTATIONS AND WARRANTIES OF SETAB
---------------------------------------
Setab represents, warrants and covenants to Film as follows:
5.1 Setab is a corporation duly organized, validly existing, and in good
standing under the laws of the State of Missouri, and is not required to be
qualified as a foreign corporation under the laws of any other A-6
jurisdiction.
Setab is not engaged in the active conduct of any business. Copies of Setab's
Articles of Incorporation and By-laws are attached hereto as Exhibits B and C,
respectively,respectively.
5.2 The authorized capital stock of Setab consists of (i) 20,000,000
shares of Class A Common Stock, per value $0.01 per share, of which 20 shares
are validly issued and outstanding, fully paid and non-
assessable,non-assessable, (ii)
20,000,000 shares of Class B Common Stock, per value $0.001 per share, none of
which is issued and outstanding, and (iii) 10,000,000 shares of preferred
stock, none of which is issued and outstanding. There are no outstanding
subscriptions, warrants, options, calls, commitments or agreements to which
Setab is a party or by which it is bound calling for the issuance of any class
of Setab's capital stock; provided, however, that Setab proposes to sell up to
700,000 additional shares of its Class A Common Stock, per value $0.001 per
share in a public offering (the "Offering") as described in the Registration
Statement.
5.3 Setab has heretofore delivered to Film its financial statements as
of April 30, 1996, and for the period from its incorporation to such date,
certified by BDO Seidman, LLP. Such financial statements are hereinafter
collectively referred to as the "Setab Financial Statements." The balance
sheet included in the Setab Financial Statements was prepared in conformity
with generally accepted accounting principles, and presents fairly the
financial condition of each of Setab as of the date thereof. The statement of
operations included in the Setab Financial Statements presents fairly the
results of the operations of Setab for the period covered thereby in conformity
with generally accepted accounting principles applied on a consistent basis.
5.4 From April 30, 1996, to the date of this Agreement there has not
been, and from the date of this Agreement to the Effective Time there will not
be with respect to Setab:
(i) Any material adverse change;
(ii) Any declaration, setting aside or payment of any dividend or any
other distribution on or in respect of its capital stock or any direct or
indirect redemption, retirement, purchase or other acquisition of any of such
stock or any issuance of any shares of such stock, or of any options, warrants
or other rights with respect thereof; or except issuance of Common Stock upon
exercise of outstanding options or warrants or otherwise for fair value; or
(iii)Any change in its Articles of Incorporation or By-laws.
5.5 The execution and delivery of this Agreement and the consummation of
the transactions contemplated hereby will not:
(i) Result in the breach of any of the terms or conditions of, or
constitute a default under, the Articles of Incorporation or By-
lawsBy-laws of Setab
or of any mortgage, note, bond, indenture, agreement, license or other
instrument or obligation to which Film is now a party or by which it or any of
its properties or assets may be bound or affected; or
(ii) Violate any order, writ, injunction or decree or any court,
administrative agency or governmental body.
5.6 The Board of Directors and the shareholders of Setab have each duly
approved this Agreement and the transactions contemplated herein, and have
authorized the execution and delivery by Film of this Agreement and the
consummation of the transactions contemplated herein.
5.7 The Registration Statement does not, and the Registration Statement
when it becomes effective will not, contain any untrue statement or omit any
material statement necessary in order to make any statement therein not
misleading. Until the Closing Setab will advise Film promptly in writing of
any change material to Setab in any of the matters therein described.
A-7
5.8 All representations, warranties and covenants made by Setab in this
Agreement are true and correct when made and, except as Setab shall otherwise
advise Film in writing prior thereto, shall be true and correct in all material
respects at the Closing with the same effect as if they had been made at and
as of the Closing.
ARTICLE VI
CONDITIONS PRECEDENT TO SETAB'S OBLIGATIONS
-------------------------------------------
The obligations of Setab under this Agreement are, at the option of Setab,
subject to satisfaction of the following conditions at or before the Closing
Date:
6.1 The Merger shall have obtained the requisite approval of holders of
capital stock of Film.
6.2 All representations and warranties of Film contained in this
Agreement shall be true and accurate in all material respects as of the date
when made and shall be deemed to be made again at and as of the effective date
of the Merger and shall then be true and accurate in all material respects.
6.3 Film shall have performed and complied with all covenants, agreements
and conditions required by this Agreement to be performed or complied with by
it prior to or at the Closing.
6.4 No action, suit or proceeding shall have been instituted before a
court or governmental body, or instituted or threatened by any governmental
agency or body, to restrain or prevent the carrying out of the transactions
contemplated hereby.
6.5 Setab shall have received a certificate executed by the President and
Secretary of Film certifying, as of the Closing Date, that all representations
and warranties of Film contained in this Agreement are, as of the Closing Date,
true and accurate in all respects, and that Film has performed and complied
with all covenants, agreements and conditions required by this Agreement to be
performed or complied with by it prior to or at the effective date of the
merger.
ARTICLE VII
CONDITIONS PRECEDENT TO FILM'S OBLIGATIONS
------------------------------------------
The obligations of Film under this Agreement are, at the option of Film,
subject to satisfaction of the following conditions at or before the Closing
Date:
7.1 The Merger shall have obtained the requisite approval of holders
of capital stock of Film.
7.2 All representations and warranties of Setab contained in this
Agreement shall be true and accurate in all material respects as of the date
when made and shall be deemed to be made again at and as of the effective date
of the Merger and shall then be true and accurate in all material respects.
7.3 Setab shall have performed and complied with all covenants,
agreements and conditions required by this Agreement to be performed or
complied with by it prior to or at the Closing.
7.4 No action, suit or proceeding shall have been instituted before a
court or governmental body, or instituted or threatened by any governmental
agency or body, to restrain or prevent the carrying out of the transactions
contemplated hereby.
7.5 Film shall have received a certificate executed by the President
of Setab, dated the Closing Date, certifying that all representations and
warranties of Setab contained in this Agreement are, as of such date, true and
accurate in all respects and that Setab has performed and complied with all
covenants, agreements and conditions required by this Agreement to be performed
or complied with by it prior to or at the effective date of the merger.
A-8
7.6 The Registration Statement shall have become effective, Setab shall
have received acceptable subscriptions for the sale of 700,000 shares of its
Class A Common Stock pursuant to the Offering at a net price to Setab of not
less than $0.05 per share from not fewer than 200 subscribers.
7.7 The offer and sale of the shares of Class A and Class B Common
Stock of the Surviving Corporation to be exchanged in the Merger for shares of
Common Stock of Film shall, in the opinion of counsel for Film, have been duly
registered under all applicable federal and state securities laws or be exempt
from registration thereunder.
7.8 None of the shareholders of Film shall have effectively dissented
to the Merger under Article 13 of the Georgia Code, unless such dissent shall
have theretofore been withdrawn.
ARTICLE VIII
SURVIVAL
--------
8.1 All representations, warranties, covenants and agreements made in
this Agreement or in any certificate or document delivered pursuant hereto,
shall survive the execution and delivery hereof and the effective date of the
Merger.
ARTICLE IX
TERMINATION
-----------
This Agreement may be terminated and the Merger abandoned at any time
before or after approval thereof by the shareholders of Film notwithstanding
favorable action on the merger by the shareholders of Film, but not later than
its Effective Time by:
9.1 Film and Setab, by mutual consent.
9.2 Either Film or Setab after December 31, 1996, if the merger has not
become effective by that date.
9.3 Film, if any of the conditions provided in Article VII of this
Agreement have not been met at or before the Closing and have not been waived.
9.4 Setab, if any of the conditions provided in Article VI of this
Agreement have not been met at or before the Closing and have not been waived.
In the event of termination by either Setab or Film as provided above,
written notice shall forthwith be
given to the other party.
ARTICLE X
NOTICES
-------
All notices, requests, demands and other communications required or
permitted to be given hereunder shall be in writing and shall be deemed to have
been duly given if delivered personally, or delivered by recognized courier
service as follows:
10.1 If to Film:
1245 Fowler Street, N.W.
Atlanta, Georgia 30318
Attention: Mr. Steven D. Brown, Chief Executive Officer
A-9
Copy to:
Carl I. Gable, P.C.
Troutman Sanders LLP
NationsBank Plaza, Suite 5200
600 Peachtree Street, N.E.
Atlanta, Georgia 30308-2216
10.2 If to Setab:
244-B Greenyard Drive
Ballwin, Missouri 63011
Attention: Mr. Douglas J. Bates, President
or such other address as hereafter shall be furnished in writing by either of
the parties hereto to the other party hereto.
ARTICLE XI
GENERAL
-------
11.1 The article and section headings contained herein are for reference
purposes only and shall not in any way affect the meaning or interpretation of
this Agreement.
11.2 This Agreement sets forth the entire agreement and understanding of
the parties and supersedes all prior agreements, arrangements and
understandings between the parties.
11.3 No representation, promise, inducement or statement of intention has
been made by any party hereto which is not embodied in this Agreement or the
written statements, deeds, certificates, schedules or other documents delivered
pursuant hereto or in connection with the transaction contemplated hereby, and
no party hereto shall be bound by or liable for any alleged representation,
promise, inducement or statement of intention not so set forth.
11.4 All the terms, covenants, representations, warranties and conditions
of this Agreement shall be binding upon, and inure to the benefit of and be
enforceable by, the parties hereto and their respective successors
and assigns.
11.5 This Agreement may be amended, modified, superseded or cancelled, and
any of the terms, covenants, representations, warranties or conditions hereof
may be waived, only by a written instrument executed
by all of the parties hereto or, in the case of a waiver, by the party or
parties waiving compliance. The failure of any party at any time or times to
require performance of any provision hereof shall in no manner affect the right
at a later time to enforce the same. No waiver by any party of any condition,
or of the breach of any term, covenant, representation or warranty contained
in this Agreement, whether by conduct or otherwise, in any one or more
instances shall be deemed to be or construed as a further or continuing waiver
of any such condition or breach or a waiver of any other condition or of the
breach of any other term, covenant, representation or warranty in this
Agreement.
11.6 Setab and Film may by written notice to the other and without the
consent of any other person, firm or corporation: (i) extend the time for
performance of any of the obligations or other acts of the other party; (ii)
waive any inaccuracies in the representations and warranties of the other party
contained in this Agreement or in any statement (including financial
statements), deed, certificates, schedules or other document delivered pursuant
hereto or in connection with the transactions contemplated hereby; and (iii)
waive compliance with any of the covenants of the other party contained in this
Agreement and waive performance of any of the obligations of the other party.
A-10
11.7 This Agreement may be executed simultaneously in two or more
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
IN WITNESS WHEREOF, the parties have each caused this Agreement to be
executed and their respective corporate seals to be affixed by their duly
authorized officers, as of the date hereinabove first written.
AMERICAN ARTISTS FILM CORPORATION
By:
------------------------------
Co-Chairman of the Board
[CORPORATE SEAL]
Attest:
- ----------------------------------
Secretary
SETAB ALPHA, INC.
By:
------------------------------
President
[CORPORATE SEAL]
- ----------------------------------
Secretary
A-11
ANNEX B
GEORGIA DISSENTERS' RIGHTS STATUTESGeorgia Dissenters' Rights Statutes
14-2-1301. DEFINITIONS.Definitions.
As used in this article, the term:
(1)I. "Beneficial shareholder" means the person who is a
beneficial owner of shares held in a voting trust or by a nominee
as the record shareholder.
(2)II. "Corporate action" means the transaction or other action
by the corporation that creates dissenters' rights under Code
Section 14-2-1302.
(3)III. "Corporation" means the issuer of shares held by a
dissenter before the corporate action, or the surviving or
acquiring corporation by merger or share exchange of that issuer.
(4)IV. "Dissenter" means a shareholder who is entitled to
dissent from corporate action under Code Section 14-2-1302 and who
exercises that right when and in the manner required by Code
Sections 14-2-1320 through 14-2-1327.
(5)V. "Fair value," with respect to a dissenter's shares, means
the value of the shares immediately before the effectuation of the
corporate action to which the dissenter objects, excluding any
appreciation or depreciation in anticipation of the corporate
action.
(6)VI. "Interest" means interest from the effective date of the
corporate action until the date of payment, at a rate that is fair
and equitable under all the circumstances.
(7)VII. "Record shareholder" means the person in whose name
shares are registered in the records of a corporation or the
beneficial owner of shares to the extent of the rights granted by
a nominee certificate on file with a corporation.
(8)VIII. "Shareholder" means the record shareholder or the
beneficial shareholder. (Code 1981, (S)Section 14-2-1301, enacted by
Ga. L. 1988, p. 1070, l; Ga. L. 1993, p. 1231, (S)Section 6.)
14-2-1302. RIGHT TO DISSENT.
(a)Right to dissent.
A. A record shareholder of the corporation is entitled to
dissent from, and obtain payment of the fair value of his shares in
the event of, any of the following corporate actions:
(1)1. Consummation of a plan of merger to which the
corporation is a party;
(A)a. If approval of the shareholders of the
corporation is required for the merger by Code Section
14-2-1103 or the articles of incorporation and the
shareholder is entitled to vote on the merger; or
(B)b. If the corporation is a subsidiary that is
merger with its parent under Code Section 14-2-1104;
B-1
(2)2. Consummation of a plan of share exchange to which
the corporation is a party as the corporation whose shares
will be acquired, if the shareholder is entitled to vote on
the plan;
(3)3. Consummation of a sale or exchange of all or
substantially all of the property of the corporation if a
shareholder vote is required on the sale or exchange pursuant
to Code Section 14-2-1202, but not including a sale pursuant
to court order or a sale for cash pursuant to a plan by which
all or substantially all of the net proceeds of the sale will
be distributed to the shareholders within one year after the
date of sale;
(4)4. An amendment of the articles of incorporation that
materially and adversely affects rights in respect of a
dissenter's shares because it:
(A)a. Alters or abolishes a preferential right of the
shares;
(B)b. Creates, alters, or abolishes a right in
respect of redemption, including a provision respecting
a sinking fund for the redemption or repurchase, of the
shares;
(C)c. Alters or abolishes a preemptive right of the
holder of the shares to acquire shares or other
securities;
(D)d. Excludes or limits the right of the shares to
vote on any matter, or to cumulate votes, other than a
limitation by dilution through issuance of shares or
other securities with similar voting rights;
(E)e. Reduces the number of shares owned by the
shareholder to a fraction of a share if the fractional
share so created is to be acquired for cash under Code
Section 14-2-604; or
(F)f. Cancels, redeems, or repurchases all or part of
the shares of the class; or
(5)5. Any corporate action taken pursuant to a shareholder
vote to the extent that Article 9 of this chapter, the
articles of incorporation, bylaws, or a resolution of the
board of directors provides that voting or nonvoting
shareholders are entitled to dissent and obtain payment for
their shares.
(b)B. A shareholder entitled to dissent and obtain payment for
his shares under this article may not challenge the corporate
action creating his entitlement unless the corporate action fails
to comply with procedural requirements of this chapter or the
articles of incorporation or bylaws of the corporation or the vote
required to obtain approval of the corporate action was obtained by
fraudulent and deceptive means, regardless of whether the
shareholder has exercised dissenter's rights.
(c)C. Notwithstanding any other provision of this article,
there shall be no right of dissent in favor of the holder of shares
of any class or series which, at the record date fixed to determine
the shareholders entitled to receive notice of and to vote at a
meeting at which a plan of merger or share exchange or a sale or
exchange of property or an amendment of the articles of
incorporation is to be acted on, were either listed on a national
securities exchange or held of record by more than 2,000
shareholders, unless:
(1)1. In the case of a plan of merger or share exchange,
the holders of shares of the class or series are required
under the plan of merger or share exchange to accept for their
shares anything except shares of the surviving corporation or
another publicly held corporation which at the effective date
of the merger or share exchange are either listed on a
national securities exchange or held of record by more than
2,000 shareholders, except for scrip or cash payments in lieu
of fractional shares; or
B-2
(2)2. The articles of incorporation or a resolution of the
board of directors approving the transaction provides
otherwise. (Code 1981, (S)Section 14-2-1302, enacted by Ga. L. 1988,
p. 1070, (S)Section 1; Ga. L. 1989, p. 946, (S)Section 58.)
14-2-1303. DISSENT BY NOMINEES AND BENEFICIAL OWNERS.Dissent by nominees and beneficial owners.
A record shareholder may assert dissenters' rights as to fewer
than all the shares registered in his name only if he dissents with
respect to all shares beneficially owned by any one beneficial
shareholder and notifies the corporation in writing of the name and
address of each person on whose behalf he asserts dissenters'
rights. The rights of a partial dissenter under this Code section
are determined as if the shares as to which he dissents and his
other shares were registered in the names of different
shareholders. (Code 1981, (S)Section 14-2-1303, enacted by Ga. L. 1988, p.
1070, (S)Section 1.)
14-2-1320. NOTICE OF DISSENTERS' RIGHTS.Notice of dissenters' rights.
(a) If proposed corporate action creating dissenters' rights
under Code Section 14-2-1302 is submitted to a vote at a
shareholders' meeting, the meeting notice must state that
shareholders are or may be entitled to assert dissenters' rights
under this article and be accompanied by a copy of this article.
(b) If corporate action creating dissenters' rights under
Code Section 14-2-1302 is taken without a vote of shareholders, the
corporation shall notify in writing all shareholders entitled to
assert dissenters' rights that the action was taken and send them
the dissenters' notice described in Code Section 14-2-1322 no later
than ten days after the corporate action was taken. (Code 1981,
(S)Section 14-2-1320, enacted by Ga. L. 1988, p. 1070, (S)Section 1; Ga. L. 1993, p.
1231, (S)Section 17.)
14-2-1321. NOTICE OF INTENT TO DEMAND PAYMENT.Notice of intent to demand payment.
(a) If proposed corporate action creating dissenters' rights
under Code Section 14-2-1302 is submitted to a vote at a
shareholders' meeting, a record shareholder who wishes to assert
dissenters' rights:
(1) Must deliver to the corporation before the vote is
taken written notice of his intent to demand payment for his
shares if the proposed action is effectuated; and
(2) Must not vote his shares in favor of the proposed
action.
(b) A record shareholder who does not satisfy the
requirements of subsection (a) of this Code section is not entitled
to payment for his shares under this article. (Code 1981, (S) 14-2-1321,Section 14-2-
1321, enacted by Ga. L. 1988, p. 1070, (S)Section 1.)
14-2-1322. DISSENTERS' NOTICE.Dissenters' notice.
(a) If proposed corporate action creating dissenters' rights
under Code Section 14-2-1302 is authorized at a shareholders'
meeting, the corporation shall deliver a written dissenters' notice
to all shareholders who satisfied the requirements of Code Section
14-2-1321.
(b) The dissenters' notice must be sent no later than ten
days after the corporate action was taken and must:
B-3
(1) State where the payment demand must be sent and
where and when certificates for certified shares must be
deposited;
(2) Inform holders of uncertificated shares to what
extent transfer of the shares will be restricted after the
payment demand is received;
(3) Set a date by which the corporation must receive the
payment demand, which date may not be fewer than 30 nor more
than 60 days after the date the notice required in subsection
(a) of this Code section is delivered; and
(4) Be accompanied by a copy of this article. (Code
1981, (S)Section 14-2-1322, enacted by Ga. L. 1988, p. 1070, (S)Section 1.)
14-2-1323. DUTY TO DEMAND PAYMENT.Duty to demand payment.
(a) A record shareholder sent a dissenters' notice described
in Code Section 14-2-1322 must demand payment and deposit his
certificates in accordance with the terms of the notice.
(b) A record shareholder who demands payment and deposits his
shares under subsection (a) of this Code Section retains all other
right of a shareholder until these rights are cancelled or modified
by the taking of the proposed corporate action.
(c) A record shareholder who does not demand payment or
deposit his share certificates where required, each by the date set
in the dissenters' notice, is not entitled to payment for his
shares under this article. (Code 1981, (S)Section 14-2-1323, enacted by Ga.
L. 1988, p. 1070, (S)Section 1.)
14-2-1324. SHARE RESTRICTIONS.Share restrictions.
(a) The corporation may restrict the transfer of
uncertificated shares from the date the demand for their payment is
received until the proposed corporate action is taken or the
restrictions released under Code Section 14-2-1326.
(b) The person for whom dissenters' rights are asserted as to
uncertificated shares retains all other rights of a shareholder
until these rights are cancelled or modified by the taking of the
proposed corporate action. (Code 1981, (S)Section 14-2-1324, enacted by Ga.
L. 1988, p. 1070, (S)Section 1.)
14-2-1325. OFFER OF PAYMENT.Offer of payment.
(a) Except as provided in code Section 14-2-1327, within ten
days of the later of the date the proposed corporate action is
taken or receipt of a payment demand, the corporation shall by
notice to each dissenter who complied with Code Section 14-2-1323
offer to pay to such dissenter the amount the corporation estimates
to be the fair market value of his or her shares, plus accrued
interest.
(b) The offer of payment must be accompanied by:
(1) The corporation's balance sheet as of the end of a
fiscal year ending not more than 16 months before the date of
payment, an income statement for that year, a statement of
changes in shareholders' equity for that year, and the latest
available interim financial statements, if any:
B-4
(2) A statement of the corporation's estimate of the
fair value of the shares;
(3) An explanation of how the interest was calculated;
(4) A statement of the dissenter's right to demand
payment under Code Section 14-2-1327; and
(5) A copy of this article.
(c) If the shareholder accepts the corporation's offer by
written notice to the corporation within 30 days after the
corporation's offer or is deemed to have accepted such offer by
failure to respond within such 30 days, payment for his or her
shares shall e made within 60 days after the making of the offer or
the taking of the proposed corporate action, whichever is later.
(Code 1981, (S)Section 14-2-1325, enacted by Ga. L. 1988, p. 1070, (S)Section 1; Ga.
L. 1989, p. 946, (S)Section 59; Ga. L. 1993, p. 1231, (S)Section 18.)
14-2-1326. FAILURE TO TAKE ACTION.Failure to take action.
(a) If the corporation does not take the proposed action
within 60 days after the date set for demanding payment and
depositing share certificates, the corporation shall return the
deposited certificates and release the transfer restrictions
imposed on uncertificated shares.
(b) If, after returning deposited certificates and releasing
transfer restrictions, the corporation takes the proposed action,
it must send a new dissenters' notice under Code Section 14-2-1322
and repeat the payment demand procedure. (Code 1981, (S)Section 14-2-1326,
enacted by Ga. L. 1988, p. 1070, (S)Section 1; Ga. L. 1990, p. 257, (S)Section 20.)
14-2-1327. PROCEDURES IF SHAREHOLDER DISSATISFIED WITH PAYMENT OR OFFER.Procedures if shareholder dissatisfied with payment or
offer.
(a) A dissenter may notify the corporation in writing of his
own estimate of the fair value of his shares and amount of interest
due, and demand payment of his estimate of the fair value of his
shares and interest due, if:
(1) The dissenter believes that the amount offered under
Code Section 14-2-1325 is less than the fair value of his
shares or that the interest due is incorrectly calculated; or
(2) The corporation, having failed to take the proposed
action, does not return the deposited certificates or release
the transfer restrictions imposed on uncertificated shares
within 60 days after the day set for demanding payment.
(b) A dissenter waives his or her right to demand payment
under this Code section and is deemed to have accepted the
corporation's offer unless he or she notifies the corporation of
his or her demand in writing under subsection (a) of this Code
section within 30 days after the corporation offered payment for
his or her shares, as provided in Code Section 14-2-1325.
(c) If the corporation does not offer payment within the time
set forth in subsection (a) of Code Section 14-2-1325:
(1) The shareholder may demand the information required
under subsection (b) of Code Section 14-2-1325, and the
corporation shall provide the information to the shareholder
within ten days after receipt of a written demand for the
information; and
B-5
(2) The shareholder may at any time, subject to the
limitations period of Code Section 14-2-1332, notify the
corporation of his own estimate of the fair value of his
shares and the amount of interest due and demand payment of
his estimate of the fair value of his shares and interest due.
(Code 1981, (S)Section 14-2-1327, enacted by Ga. L. 1988, p. 1070, (S)Section
1;
Ga. L. 1989, p. 946, (S)Section 60; Ga. L. 1990, p. 257, (S)Section 21; Ga. L.
1993, p. 1231, (S)Section 19.)
14-2-1330. COURT ACTION.Court action.
(a) If a demand for payment under Code Section 14-2-1327
remains unsettled, the corporation shall commence a proceeding
within 60 days after receiving the payment demand and petition the
court to determine the fair value of the shares and accrued
interest. If the corporation does not commence the proceeding
within the 60 day period, it shall pay each dissenter whose demand
remains unsettled the amount demanded.
(b) The corporation will commence the proceeding, which shall
be a non-jury equitable valuation proceeding, in the superior court
of the county where a corporation's registered office is located.
If the surviving corporation is a foreign corporation without a
registered office in this state, it shall commence the proceeding
in the county in this state where the registered office of the
domestic corporation merged with or whose shares were acquired by
the foreign corporation was located.
(c) The corporation will make all dissenters, whether or not
residents of this state, whose demands remain unsettled parties to
the proceeding, which shall have the effect of an action quasi in
rem against their shares. The corporation shall serve a copy of
the petition in the proceeding upon each dissenting shareholder who
is a resident of this state in the manner provided by law for the
service of a summons and complaint, and upon each nonresident
dissenting shareholder either by registered or certified mail or by
publication, or in any other manner permitted by law.
(d) The jurisdiction of the court in which the proceeding is
commenced under subsection (b) of this Code section is plenary and
exclusive. The court may appoint one or more persons as appraisers
to receive evidence and recommend decision on the question of fair
value. The appraisers have the powers described in the order
appointing them or in any amendment to it. Except as otherwise
provided in this chapter, Chapter 11 of Title 9, known as the
"Georgia Civil Practice Act," applies to any proceeding with
respect to dissenters' rights under this chapter.
(e) Each dissenter made a party to the proceeding is entitled
to judgment for the amount which the court finds to be the fair
value of his shares, plus interest to the date of judgment. (Code
1981, (S) 14-2-
1330,Section 14-2-1330, enacted by Ga. L. 1988, p. 1070, (S)Section 1; Ga. L.
1989, p. 946; (S)Section 61; Ga. L. 1993, p. 1231, (S)Section 20.)
14-2-1331. COURT COSTS AND COUNSEL FEES.Court costs and counsel fees.
(a) The court in an appraisal proceeding commenced under Code
Section 14-2-1330 will determine all costs of the proceeding,
including the reasonable compensation and expenses of appraisers
appointed by the court, but not including fees and expenses of
attorneys and experts for the respective parties. The court shall
assess the costs against the corporation, except that the court may
assess the costs against all or some of the dissenters, in amounts
the court finds equitable, to the extent the court finds the
dissenters acted arbitrarily, vexatiously, or not in good faith in
demanding payment under code Section 14-2-1327.
(b) The court may also assess the fees and expenses of
attorneys and experts for the respective parties, in amounts the
court finds equitable;
B-6
(1) Against the corporation and in favor of any or all
dissenters if the courts find the corporation did not
substantially comply with the requirements of Code Sections
14-2-1320 through 14-
2-1327;14-2-1327; or
(2) Against either the corporation or a dissenter, in
favor of any other party, if the court finds that the party
against whom the fees and expenses are assessed acted
arbitrarily, vexatiously, or not in good faith with respect to
the rights provided by this article.
(c) If the court finds that the services of attorneys for any
dissenter were of substantial benefit to other dissenters similarly
situated, and that the fees for those services should not be
assessed against the corporation, the court may award to these
attorneys reasonable fees to be paid out of the amounts awarded to
the dissenters who were benefitted. (Code 1981, (S)Section 14-2-1331,
enacted by Ga. L. 1988, p. 1070, (S)Section 1.)
14-2-1332. LIMITATION OF ACTIONS.Limitation of actions.
No action by any dissenter to enforce dissenters' rights will
be brought more than three years after the corporate action was
taken, regardless of whether notice of the corporate action and of
the right to dissent was given by the corporation in compliance
with the provisions of Code Section 14-2-1320 and Code Section 14-2-1322.14-
2-1322. (Code 1981, (S) 14-2-
1332,Section 14-2-1332, enacted by Ga. L. 1988, p. 1070,
(S)Section 1.)
B-7
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEMItem 20. INDEMNIFICATION OF DIRECTORS AND OFFICERSIndemnification of Directors and Officers
Sections 351.355(1) and (2) of The General and Business Corporation
Law of the State of Missouri provide that a corporation may indemnify any
person who was or is a party or is threatened to be made a party to any
threatened, pending or completed action, suit or proceeding by reason of the
fact that he is or was a director, officer, employee or agent of the
corporation, or is or was serving at the request of the corporation as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise, against expenses (including attorneys'
fees), judgments, fines and amounts paid in settlement actually and reasonably
incurred by such person in connection with such action, suit or proceeding if
the person acted in good faith and in a manner the person reasonably believed
to be in or not opposed to the best interests of the corporation and, with
respect to any criminal action or proceeding, had no reasonable cause to
believe such person's conduct was unlawful, except that, in the case of an
action or suit by or in the right of the corporation, the corporation may not
indemnify such persons against judgments and fines and no person shall be
indemnified as to any claim, issue or matter as to which such person shall have
been adjudged to be liable for negligence or misconduct in the performance of
the person's duty to the corporation, unless and only to the extent that the
court in which the action or suit was brought determines upon application that
such person is fairly and reasonably entitled to indemnity for proper expenses.
Section 351.355(3) provides that, to the extent that a director, officer,
employee or agent of the corporation has been successful in the defense of any
such action, suit or proceeding or in defense of any claim, issue or matter
therein, the person shall be indemnified against expenses, including attorney's
fees, actually and reasonably incurred by such person in connection with such
action, suit or proceeding. Section 351.355(7) provides that a corporation may
provide additional indemnification to any person indemnifiable under subsection
(1) of (2), provided such additional indemnification is authorized by the
corporation's articles of incorporation or an amendment thereto or by a
shareholder-approved bylaw or agreement, and provided further that no person
shall thereby be indemnified against conduct which was finally adjudged to have
been knowingly fraudulent, deliberately dishonest or willful misconduct or
which involves an accounting for profits pursuant to Section 16(b) of the
Exchange Act. Paragraph 9 of the Articles of Incorporation of Setab Alpha
permits Setab Alpha to enter into agreements with its directors, officers,
employees and agents to provide such indemnification as deemed appropriate.
Paragraph 9 also provides that Setab Alpha shall extend to its directors and
executive officers the indemnification specified in subsections (1) and (2) and
that it may extend to other officers, employees and agents such indemnification
and additional indemnification.
Setab Alpha has entered into an indemnification agreement with its
directors and executive officers. The form of indemnity agreement provides
that such person will be indemnified to the full extent permitted by applicable
law against all expenses (including attorneys' fees), judgments, fines,
penalties and amounts paid in settlement of any threatened, pending or
completed action, suit or proceeding, on account of his services as a director
and officer of Setab Alpha or any other company or enterprise in which he is
serving at the request of Setab Alpha, or as a guarantor of any debt of Setab
Alpha. To the extent the indemnification provided under the agreement exceeds
that permitted by applicable law, indemnification may be unenforceable or may
be limited to the extent it is found by a court of competent jurisdiction to
be contrary to public policy.
Setab Alpha (and, following the Merger, the Surviving Corporation)
may procure and maintain a policy of insurance under which the directors and
officers of Setab Alpha (or the Surviving Corporation) will be insured, subject
to the limits of the policy, against certain losses arising from claims made
against such directors and officers by reason of any acts or omissions covered
under such policy in their respective capacities as directors or officers.
II-1
ITEMItem 21. EXHIBITSExhibits
2.1 Agreement and Plan of Merger dated as of May 1, 1996 with
American Artists Film Corporation
3.1 Articles of Incorporation of the Registrant
3.2 Amended and Restated Bylaws of the Registrant
3.3 Amendment to Articles of Incorporation of the Registrant
adopted May 1, 1996
3.4 Articles of Incorporation of American Artists
3.5 Bylaws of American Artists
4.1 Form of Subscription Agreement
4.2 Escrow Agreement with Allegiant Bank
5.1 Opinion of Clark W. Holesinger, Attorney-at-LawGallop, Johnson & Neuman, L.C.
8.1 Opinion of BDO Seidman, LLP
10.1 Form of Indemnification Agreement
10.2 Consulting Agreement with Douglas J. Bates
10.3 Consulting Agreement with Alan G. Johnson
10.4 Promissory Note with Douglas J. Bates
10.5 Promissory Note with Alan G. Johnson
10.6 Common Stock Investment Agreement, dated February 24, 1992,
and the Agreement dated February 24, 1992, between American
Artists and Icon International, Inc., as extended by letter
dated August 21, 1995
10.7 Asset Purchase Agreement, dated August 1, 1993, between
Current Corporation and First Light Entertainment
Corporation
10.8 Lease Agreement, dated August 5, 1993, between Kee Joint
Venture and Current Corporation, as renewed June 15, 1995
between Kee Joint Venture and First Light Entertainment
Corporation
10.9 Share Purchase Agreement, dated August 31, 1993, and
Amendment Agreement, dated November 3, 1995, between
American Artists and Vivian Walker Jones, with respect to
shares of First Light Entertainment Corporation
10.10 Agreement, dated April ___, 1994, between NBC Entertainment
and Greystone Communications, Inc., as supplemented by
letter agreement dated April 7, 1994, regarding Angels I.
10.11 License Agreement, dated April 13, 1994, between Calling
Card Company, Inc. and American Artists, as supplemented
by letter agreement dated July 28, 1994.
10.12 Letter Agreement, dated May 13, 1994, between Calling Card
Company, Inc. and American Artists.
10.13 Joint Venture Agreement, dated May 20, 1994, between
Greystone Communications, Inc. and American Artists.
10.14 Subscription Agreement, dated June 29, 1994, between
American Artists and First Light Diversity, Inc.
10.15 Agreement, dated July 26, 1994, between NBC Entertainment
and Greystone Communications, Inc., as supplemented by
agreement dated July 26, 1994, regarding Angels II.
10.16 Distribution Agreement, dated July 26, 1994, as revised
October 10, 1994, between Alfred Haber Distribution, Inc.
and American Artists
10.17 Agreement, dated August 3, 1994, between American Artists
and Ballantine Books
10.18 License Agreement, dated as of August 8, 1994, between
Time-
LifeTime-Life Video and American Artists
10.19 Promissory Note, dated September 13, 1994, made by John W.
Boyd and Glen C. Warren, to be paid to the order of Deposit
Guaranty National Bank
10.20 Financial Consulting Agreement, dated May 6, 1995, between
Atlantic International Capital, Ltd. and American Artists,
as amended by letter agreement dated May 1, 1996
10.21 American Artists 1995 Stock Option Plan, approved December
1, 1995
10.22 Voting Agreement, dated april 29, 1996, among Rex Hauck,
Steve Brown, Dr. Glen Warren, and Vivian Jones
10.23 License Agreement, dated as of April 30, 1996, between
American Artists and Turner Original Productions, Inc.,
regarding Angels I and Angels II
10.24 Development Agreement, dated June 14, 1996, between
American Artists and Turner Original Productions, Inc.
II-2
10.25 Articles of Incorporation of Millennium Group, L.L.C.
10.26 Operating Agreement of Millennium Group, L.L.C.
10.27 Articles of Organization of Death and Taxes Film Company,
L.L.C.
10.28 Form of Operating Agreement of Death and Taxes Film
Company, L.L.C.
10.29 Articles of Incorporation of First Light Entertainment
Corporation
10.30 Bylaws of First Light Entertainment Corporation
10.31 Articles of Incorporation of Diversity Film Works, Inc.
10.32 Bylaws of Diversity Film Works, Inc.
10.33 Unsecured Promissory Note dated July 17, 1996,issued to
Deposit Guaranty National Bank
10.34 Agreement with Liberty Transfer Co.
10.35 Voting Agreement between American Artists Film Corporation
and Tyrone C. Johnson
23.1 Consent of BDO Seidman, LLP
23.2 Consent of Clark W. Holesinger, Attorney-at-LawGallop, Johnson & Neuman, L.C.
(included in Exhibit 5.1)
ITEM27.1 Setab Alpha Financial Data Schedule
27.2 American Artists Financial Data Schedule
Item 22. UNDERTAKINGSUndertakings
(a) Insofar as indemnification for liabilities arising under the
Securities Act of 1933 (the "Act") may be permitted to directors, officers and
controlling persons of the small business issuer pursuant to the foregoing
provisions, or otherwise, the small business issuer has been advised that in
the opinion of the Securities and Exchange Commission such indemnification is
against public policy as expressed in the Act and is, therefore, unenforceable.
In the event that a claim for indemnification against such liabilities (other
than the payment by the small business issuer of expenses incurred or paid by
a director, officer or controlling person of the small business issuer in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the small business issuer will, unless in the opinion of its
counsel the matter has been settled by controlling precedent, submit to a court
of appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Act and will be governed by the final
adjudication of such issue.
(b) The undersigned registrant hereby undertakes to respond to
requests for information that is incorporated by reference into the prospectus
pursuant to Item 4, 10(b), 11, or 13 of this form, within one business day of
receipt of such request, and to send the incorporated documents by first class
mail or other equally prompt means. This includes information contained in
documents filed subsequent to the effective date of the registration statement
through the date of responding to the request.
(c) The undersigned registrant hereby undertakes to supply by means
of a post-effective amendment all information concerning a transaction, and the
company being acquired involved therein, that was not the subject of and
included in the registration statement when it became effective.
(d) The undersigned registrant hereby undertakes as follows: that
prior to any public reoffering of the securities registered hereunder through
use of a prospectus which is a part of this registration statement, by any
person or party who is deemed to be an underwriter within the meaning of Rule
145(c), the issuer undertakes that such reoffering prospectus will contain the
information called for by the applicable registration form with respect to
reofferings by persons who may be deemed underwriters, in addition to the
information called for by the other items of the applicable form.
(e) The registrant undertakes that every prospectus: (i) that is
filed pursuant to paragraph (d) immediately preceding, or (ii) that purports
to meet the requirements of Section 10(a)(3) of the Act and is used in
connection with an offering of securities subject to Rule 145, will be filed
as a part of an amendment to the registration statement and will not be used
until such amendment is effective, and that, for purposes of determining any
liability under the Securities Act of 1933, each such post-effective amendment
shall be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
II-3
SIGNATURES
Pursuant to the requirements of the Securities Act, the registrant
has duly caused this Amendment No. 12 to Registration Statement to be signed on
its behalf by the undersigned thereunto duly authorized, in the County of St.
Louis, State of Missouri, on the 1710th day of July,September, 1996.
SETAB ALPHA, INC.
By: /s/ Douglas J. Bates
-------------------------------------
Douglas J. Bates
President and Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated:
Signature Title Date
--------- ----- ----
/s/ Douglas J. Bates President, Chief Executive Officer July 17,September 10, 1996
- -------------------- and Director
Douglas J. Bates and Director
(principal executive and financial
officer)
/s/ J. Eric Van Atta Vice President and Director July 17,September 10, 1996
- --------------------
J. Eric Van Atta
II-4
EXHIBIT INDEX
Exhibit
Number DESCRIPTION PAGE
-------------- ----------- ----Description Page
2.1* Agreement and Plan of Merger dated as of May 1, 1996
with American Artists Film Corporation..............................Corporation . . . . . . . . .
3.1* Articles of Incorporation of the Registrant....................Registrant . . . . . .
3.2* Amended and Restated Bylaws of the Registrant..................Registrant . . . . .
3.3* Amendment to Articles of Incorporation of the Registrant
adopted May 1, 1996............................................1996 . . . . . . . . . . . . . . . . . .
3.4* Articles of Incorporation of American Artists..................Artists . . . . .
3.5* Bylaws of American Artists.....................................Artists. . . . . . . . . . . . . . .
4.1* Form of Subscription Agreement.................................Agreement. . . . . . . . . . . . .
4.2* Escrow Agreement with Allegiant Bank...........................
5.1**Bank. . . . . . . . . .
5.1 Opinion of Clark W. Holesinger, Attorney-at-Law................Gallop, Johnson & Neuman, L.C. . . . . . . .
8.1 Opinion of BDO Seidman. . . . . . . . . . . . . . . . .
10.1* Form of Indemnification Agreement..............................Agreement . . . . . . . . . . .
10.2* Consulting Agreement with Douglas J. Bates.....................Bates. . . . . . .
10.3* Consulting Agreement with Alan G. Johnson......................Johnson . . . . . . .
10.4* Promissory Note with Douglas J. Bates..........................Bates . . . . . . . . .
10.5* Promissory Note with Alan G. Johnson...........................Johnson. . . . . . . . . .
10.6* Common Stock Investment Agreement, dated February 24,
1992, and the Agreement dated February 24, 1992, between
American Artists and Icon International, Inc.,
as extended by letter dated August 21, 1995....................1995 . . . . . . .
10.7* Asset Purchase Agreement, dated August 1, 1993, between
Current Corporation and First Light Entertainment
Corporation..Corporation. . . . . . . . . . . . . . . . . . . . . . . .
10.8* Lease Agreement, dated August 5, 1993, between
Kee Joint Venture and Current Corporation, as renewed
June 15, 1995 between Kee Joint Venture and First Light
Entertainment Corporation....................................................Corporation. . . . . . . . . . . . . . . . .
10.9* Share Purchase Agreement, dated August 31, 1993, and
Amendment Agreement, dated November 3, 1995, between
American Artists and Vivian Walker Jones, with respect
to shares of First Light Entertainment Corporation......................................Corporation. . . . .
10.10* Agreement, dated April ___, 1994, between NBC
Entertainment and Greystone Communications, Inc., as
supplemented by letter agreement dated April 7, 1994,
regarding Angels I..............I . . . . . . . . . . . . . . . . . . . . .
10.11* License Agreement, dated April 13, 1994, between Calling
Card Company, Inc. and American Artists, as supplemented
by letter agreement dated July 28, 1994..................................1994. . . . . . . . . . .
10.12* Letter Agreement, dated May 13, 1994, between Calling
Card Company, Inc. and American Artists.............................Artists. . . . . . . . . . .
10.13* Joint Venture Agreement, dated May 20, 1994, between
Greystone Communications, Inc. and American Artists......................Artists . . . . .
10.14* Subscription Agreement, dated June 29, 1994, between
American Artists and First Light Diversity, Inc.........................Inc. . . . . . . .
10.15* Agreement, dated July 26, 1994, between NBC
Entertainment and Greystone Communications, Inc., as
supplemented by agreement dated July 26, 1994, regarding
Angels II.......................II. . . . . . . . . . . . . . . . . . . . . . . . . . .
10.16* Distribution Agreement, dated July 26, 1994, as revised
October 10, 1994, between Alfred Haber Distribution, Inc.
and American Artists........................................................Artists. . . . . . . . . . . . . . . . . . . . . .
10.17* Agreement, dated August 3, 1994, between American
Artists and Ballantine Books...............................................Books. . . . . . . . . . . . . . . . . .
10.18* License Agreement, dated as of August 8, 1994, between
Time-
LifeTime-Life Video and American Artists................................
E-1
Artists. . . . . . . . . . . . . .
10.19* Promissory Note, dated September 13, 1994, made by John
W. Boyd and Glen C. Warren, to be paid to the order of Deposit
Guaranty National Bank..................................................Bank . . . . . . . . . . . . . . . . . . . . .
10.20* Financial Consulting Agreement, dated May 6, 1995,
between Atlantic International Capital, Ltd. and American
Artists, as amended by letter agreement dated May 1, 1996...............1996. . . .
10.21* American Artists 1995 Stock Option Plan, approved
December 1, 1995...........................................................1995. . . . . . . . . . . . . . . . . . . . . . . . .
10.22* Voting Agreement, dated april 29, 1996, among Rex Hauck,
Steve Brown, Dr. Glen Warren, and Vivian Jones.......................Jones . . . . . . . . . .
10.23* License Agreement, dated as of April 30, 1996, between
American Artists and Turner Original Productions, Inc.,
regarding Angels I and Angels II.........................................II. . . . . . . . . . . . . . . . . .
10.24* Development Agreement, dated June 14, 1996, between
American Artists and Turner Original Productions, Inc...................Inc. . . . . . .
10.25* Articles of Incorporation of Millennium Group, L.L.C...........L.L.C. . . . . . . .
10.26* Operating Agreement of Millennium Group, L.L.C.................L.L.C. . . . . . . . . . .
10.27* Articles of Organization of Death and Taxes Film Company, L.L.C..........................................................L.L.C. .
10.28* Form of Operating Agreement of Death and Taxes Film
Company, L.L.C..........................................................L.L.C.. . . . . . . . . . . . . . . . . . . . . . . . . .
10.29* Articles of Incorporation of First Light Entertainment Corporation....................................................Corporation.
10.30* Bylaws of First Light Entertainment Corporation................Corporation . . . . . . . . . .
10.31* Articles of Incorporation of Diversity Film Works, Inc.........Inc.. . . . . .
10.32* Bylaws of Diversity Film Works, Inc............................Inc.. . . . . . . . . . . . . . .
10.33* Unsecured Promissory Note dated July 17, 1996 issued to
Deposit Guaranty National Bank . . . . . . . . . . . . . . . . . .
10.34* Agreement with Liberty Transfer Co. . . . . . . . . . . . . . . . .
10.35 Voting Agreement between American Artists Film Corporation
and Tyrone C. Johnson
23.1 Consent of BDO Seidman, LLP....................................
23.2*LLP . . . . . . . . . . . . . . . . . . . .
23.2 Consent of Clark W. Holesinger, Attorney-at-LawGallop, Johnson & Neuman, L.C.
(included in Exhibit 5.1)......................................
- ---------------------- . . . . . . . . . . . . . . . . . . . . .
27.1** Setab Alpha Financial Data Schedule . . . . . . . . . . . . . . . .
27.2 American Artists Financial Data Schedule. . . . . . . . . . . . . .
* Incorporated by reference to the Registrant's Registration Statement on
Form SB-2 (File No. 33-97196C)
** Previously filed
E-2filed.