<PAGE>
PROSPECTUS
THE PRODUCERS ENTERTAINMENT GROUP LTD.
LOGO
2,000,000 UNITS
EACH UNIT CONSISTING OF FOUR SHARES OF COMMON STOCK
AND TWO REDEEMABLE WARRANTS
------
This Prospectus relates to an offering (the "Offering") of 2,000,000 units
(the "Units"), each Unit consisting of four shares of common stock, $.001 par
value per share (the "Common Stock"), and two redeemable common stock
purchase warrants ("Redeemable Warrants") of The Producers Entertainment
Group Ltd., a Delaware corporation ("TPEG" or the "Company"). The Units,
Common Stock and Redeemable Warrants will be separately tradeable commencing
upon the date of their issuance. Each Redeemable Warrant entitles the
registered holder thereof to purchase one share of Common Stock at a price of
$1.75, subject to adjustment, at any time from issuance through September 11,
2001 (the "Expiration Date"). The Redeemable Warrants are subject to
redemption by the Company commencing September 12, 1997, at a redemption
price of $0.05 per Redeemable Warrant on 30 days' prior written notice,
provided that (i) the average closing bid price (or last sales price) of the
Common Stock as reported on the National Association of Securities Dealers
Automated Quotation System (or on such exchange on which the Common Stock is
then traded), equals or exceeds 150% of the per share exercise price of the
Redeemable Warrants, subject to adjustment, for any 20 trading days within a
period of 30 consecutive trading days ending on the fifth trading day prior
to the date of notice of redemption and (ii) the Company shall have obtained
written consent from Joseph Stevens & Company, L.P. (the "Underwriter") to
redeem the Redeemable Warrants. See "Description of Securities."
As described below, an additional 500,000 Redeemable Warrants and the
500,000 shares of Common Stock issuable upon exercise of such Redeemable
Warrants are being registered in connection with this offering on behalf of
certain selling securityholders; however, such warrants and shares will be
offered by the selling securityholders on a delayed basis and not as part of
the underwritten Offering.
The Company's Common Stock is publicly traded on NASDAQ's SmallCap Market
("NASDAQ") under the symbol "TPEG" and on the Boston Stock Exchange under the
symbol "TPG." On September 10, 1996, the closing bid price for the Common
Stock on NASDAQ was $1.44. See "Market for Common Equity and Related
Shareholder Matters." Prior to the Offering, there has been no public market
for the Units or the Redeemable Warrants, and there can be no assurance that
markets for these securities will develop after the completion of the
Offering or, if developed, that such markets will be sustained. The initial
public offering price per Unit and the terms of the Redeemable Warrants were
determined by negotiation between the Company and the Underwriter. For
information regarding the factors considered in determining the initial
public offering price of the Units and the terms of the Redeemable Warrants,
see "Risk Factors" and "Underwriting." The Units and the Redeemable Warrants
have been approved for quotation on NASDAQ under the symbols "TPEGU" and
"TPEGW," respectively, and listed on the Boston Stock Exchange ("BSE") under
the symbols "TPG.U" and "TPG.WS," respectively. The Company and the
Underwriter may jointly determine, based upon market conditions, to delist
the Units upon the expiration of the 30 day period commencing on the date of
this Prospectus.
THE SECURITIES OFFERED HEREBY ARE SPECULATIVE SECURITIES,
INVOLVE A HIGH DEGREE OF RISK AND IMMEDIATE SUBSTANTIAL DILUTION.
SEE "RISK FACTORS" BEGINNING ON PAGE 8 AND "DILUTION."
------
THE 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 PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<PAGE>
<TABLE>
<CAPTION>
========================================================================================
Price Underwriting Proceeds to
to Public Discounts(1) Company(2)
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Unit ............................ $4.00 $.40 $3.60
- ----------------------------------------------------------------------------------------
Total (3) ........................... $8,000,000 $800,000 $7,200,000
========================================================================================
</TABLE>
(1) Does not reflect additional compensation to the Underwriter in the form
of a non-accountable expense allowance. In addition, see "Underwriting"
for information concerning indemnification and contribution arrangements,
and other compensation payable to the Underwriter.
(2) Before deducting estimated expenses of $565,000 payable by the Company,
including the Underwriter's non-accountable expense allowance.
(3) The Company has granted the Underwriter an option, exercisable within 45
days from the date of this Prospectus, to purchase up to 300,000
additional Units upon the same terms set forth above, solely to cover
over-allotments, if any. If such over-allotment option is exercised in
full, the total Price to Public, Underwriting Discounts and Proceeds to
the Company will be $9,200,000, $920,000 and $8,280,000, respectively.
See "Underwriting."
JOSEPH STEVENS & COMPANY, L.P.
September 12, 1996
<PAGE>
(continued from cover page)
The Units are being offered by the Underwriter, subject to prior sale,
when, as and if delivered to and accepted by the Underwriter, and subject to
the approval of certain legal matters by their counsel and subject to certain
other conditions. The Underwriter reserves the right to withdraw, cancel or
modify the Offering and to reject any order in whole or in part. It is
expected that delivery of the Units offered hereby will be made against
payment therefor at the offices of Joseph Stevens & Company, L.P., New York,
New York on or about September 17, 1996.
This Prospectus also relates to 500,000 redeemable warrants (the "Selling
Securityholder Warrants") which will be issued upon consummation of the
Offering to certain security holders (the "Selling Securityholders") upon the
automatic conversion of warrants (the "Bridge Warrants") issued to the
Selling Securityholders in a private financing in June, 1996 (the "Bridge
Financing"). The terms and conditions of the Selling Securityholder Warrants
are identical to those governing the Redeemable Warrants. From and after the
date of consummation of the Offering, the Selling Securityholders may offer
for resale at any time or from time to time pursuant to this Prospectus such
Selling Securityholders Warrants and/or the 500,000 shares of Common Stock
(the "Selling Securityholder Shares") issuable upon exercise of such Selling
Securityholder Warrants. Neither the Selling Securityholder Warrants nor the
Selling Securityholder Shares may be sold for a period of 18 months from the
effective date of the Registration Statement without the prior written
consent of the Underwriter. Furthermore, the Company has agreed to sell to
the Underwriter, for nominal consideration, Underwriter's Warrants to
purchase from the Company 200,000 Units. The Underwriter's Warrants are
initially exercisable at a price equal to 120% of the initial public offering
price per Unit and may be exercised at any time during the four year period
commencing on the first anniversary of the date of issuance. The Units
issuable upon exercise of the Underwriter's Warrants are identical to those
offered to the public provided that the Redeemable Warrants underlying the
Underwriter's Warrants are initially exercisable at a price equal to 165% of
the initial exercise price of the Redeemable Warrants underlying the Units
offered to the public.
Neither the Selling Securityholder Warrants, the Selling Securityholder
Shares nor the Underwriter's Warrants are being offered or sold pursuant to
the Offering. The Company will not receive any proceeds from the sale of the
Selling Securityholder Warrants, the Selling Securityholder Shares, the
Underwriter's Warrants or the securities underlying the Underwriter's
Warrants by the holders thereof, although the Company will receive proceeds
from the exercise, if any, of the Selling Securityholder Warrants, or the
Redeemable Warrants underlying the Underwriter's Warrants. See "Underwriting"
and "Selling Securityholders."
The Company intends to furnish to registered holders of Units, Redeemable
Warrants and Common Stock, annual reports containing financial statements
examined by an independent accounting firm and quarterly reports for the
first three quarters of each fiscal year containing interim unaudited
financial information.
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITER MAY OVERALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICES OF THE UNITS,
COMMON STOCK AND REDEEMABLE WARRANTS AT LEVELS ABOVE THAT WHICH MIGHT
OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON
NASDAQ, THE BOSTON STOCK EXCHANGE OR OTHERWISE. SUCH STABILIZING, IF
COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
TO CALIFORNIA RESIDENTS ONLY
The Units, each Unit consisting of Four Shares of Common Stock and Two
Redeemable Warrants of the Company may only be offered and sold to (i)
persons with a net worth, individually or jointly with his or her spouse, of
at least $250,000 (exclusive of home, home furnishings and automobiles) and
an annual income of at least $65,000 or (ii) persons with a net worth,
individually or jointly with his or her spouse, of at least $500,000
(exclusive of home, home furnishings and automobiles).
The Units offered hereby have been registered by a limited qualification
and cannot be offered for resale or resold in the State of California unless
registered for sale. Furthermore, the exemption afforded by Section 25104(h)
of the California Securities Law shall be withheld by the Commissioner of
Corporations and that the Company is not permitted to apply for the exemption
afforded by 25101(b) until after 90 days from the date the Securities
Exchange Commission declares the offering of the Units effective.
2
<PAGE>
TO NEW JERSEY RESIDENTS
The Units, each Unit consisting of Four Shares of Common Stock and Two
Redeemable Warrants of The Producers Entertainment Group Ltd., may only be
offered and sold to any person who comes within any of the following
categories, or whom the Company reasonably believes comes within any of the
following categories, at the time of the sale of the securities to that
person:
(1) Any bank as defined in section 3(a)(2) of the Act, or any savings and
loan association or other institution as defined in section 3(a)(5)(A) of the
Act whether acting in its individual or fiduciary capacity; any broker or
dealer registered pursuant to section 15 of the Securities Exchange Act of
1934; any insurance company as defined in section 2(13) of the Act; any
investment company registered under the Investment Company Act of 1940 or a
business development company as defined in section 2(a)(48) of that Act;
Small Business Investment Company licensed by the U.S. Small Business
Administration under section 301(c) or (d) of the Small Business Investment
Act of 1958; any plan established and maintained by a state, its political
subdivisions, or any agency or instrumentality of a state or its political
subdivisions for the benefit of its employees, if such plan has total assets
in excess of $5,000,000; employee benefit plan within the meaning of the
Employee Retirement Income Security Act of 1974 if the investment decision is
made by a plan fiduciary, as defined in section 3(21) of such Act, which is
either a bank, savings and loan association, insurance company, or registered
investment adviser, or if the employee benefit plan has total assets in
excess of $5,000,000 or, if a self-directed plan, with investment decisions
made solely by persons that are accredited investors;
(2) Any private business development company as defined in Section
202(a)(22) of the Investment Advisers Act of 1940;
(3) Any organization described in section 501(c)(3) of the Internal
Revenue Code, corporation, Massachusetts or similar business trust, or
partnership, not formed for the specific purpose of acquiring the securities
offered, with total assets in excess of $5,000,000;
(4) Any director, executive officer, or general partner of the issuer of
the securities being offered or sold, or any director, executive officer, or
general partner of a general partner of that issuer;
(5) Any natural person whose individual net worth, or joint net worth with
that person's spouse, at the time of his purchase exceeds $1,000,000;
(6) Any natural person who had an individual income in excess of $200,000
in each of the two most recent years or joint income with that person's
spouse in excess of $300,000 in each of those years and has a reasonable
expectation of reaching the same income level in the current year;
(7) Any trust, with total assets in excess of $5,000,000, not formed for
the specific purpose of acquiring the securities offered, whose purchase is
directed by a sophisticated person as described in Section 230.506(b)(2)(ii);
and
(8) Any entity in which all of the equity owners are accredited investors.
3
<PAGE>
PROSPECTUS SUMMARY
The following summary does not purport to be complete and is qualified in
its entirety by the more detailed information and financial data appearing
elsewhere in this Prospectus. An investment in the securities offered hereby
is highly speculative in nature, involves a high degree of risk and should
only be made by investors who can bear the economic risk of a potential loss
of their entire investment. Prospective purchasers should carefully consider
the information set forth under "Risk Factors" before purchasing such
securities. Unless otherwise indicated, all information contained in this
Prospectus (i) assumes no exercise of the Underwriter's over-allotment
option, (ii) excludes shares of Common Stock issuable upon exercise of the
common stock purchase warrants (the "Placement Agent Warrants"), issued to
the Underwriter in connection with the Bridge Financing, all of which have
been canceled prior to consummation of the Offering, (iii) excludes shares of
Common Stock issuable upon exercise of the Redeemable Warrants included in
the Units offered hereby, (iv) excludes shares of Common Stock issuable upon
exercise of the Selling Securityholder Warrants, (v) excludes securities
issuable upon exercise of the Underwriter's Warrants and (vi) gives effect to
a one-for-four reverse stock split of the Common Stock effected on June 3,
1996 (the "Reverse Stock Split").
THE COMPANY
The Producers Entertainment Group Ltd. (the "Company") is engaged in the
acquisition, development, production and distribution of dramatic, comedy,
documentary and instructional television series, movies and theatrical motion
pictures ("projects"). The Company's projects are distributed in the United
States and in international markets for exhibition on standard broadcast
television (network and syndication), basic cable and pay cable, video and
theatrical release. The Company is also engaged in the business of personal
management of performers and writers.
The Company's completed projects include Dave's World, a comedy series
that airs on the CBS television network, Lily Dale, a movie produced for the
Showtime cable network, Future Quest, a series that originally aired on the
Public Broadcasting System ("PBS"), and What's Love Got To Do With It, a
theatrical motion picture released by Disney's Touchstone Pictures in 1993.
The Company receives fees for providing producer and executive producer
services and is generally also entitled to a profit participation from the
projects.
To produce a project, the Company first acquires the rights to a story,
book or script ("property"). The Company then typically secures a financing
or production commitment for the project from third parties, such as
broadcast and cable networks, studios, distributors, and independent
investors, prior to expending substantial funds in the development process.
However, the Company does advance its own funds to meet the interim costs of
development and production, which amounts are generally repaid to the Company
pursuant to the production contracts.
The Company then "packages" the property, assembling the screenplay,
teleplay or outline of the program with the director and actors. Upon
approval of the third party that is financing or purchasing the project, the
Company commences pre-production, selecting locations, securing agreements
with performers, director and production staff, and procuring necessary sets,
props and other equipment. During the principal photography phase, the
project is produced on tape or film pursuant to a predetermined schedule and
budget. The film or tape is then transformed into a completed project during
the post-production phase, through editing, the addition of sound effects,
musical scoring and other technical processes.
Completed projects not purchased outright are distributed by independent
third parties who have the distribution rights in certain territories for a
specific period of time. The Company typically retains certain distribution
rights after such period expires. The Company may obtain advances against
domestic and international distribution revenues in order to finance
development and production. The Company intends to establish a separate
international distribution division for the distribution of its own and other
producers' projects.
4
<PAGE>
The Company manages the careers of 15 performers and writers, including
Julia Louis-Dreyfus (Seinfeld), George Newborn (Father of the Bride),
Rosaline Allen (Seaquest), and Michael Stoyanov (Blossom). The Company
intends to increase the staff of its personal management division in order to
attempt to expand its client roster. The Company was incorporated under the
laws of the state of Delaware on August 10, 1989. See "The Company."
THE OFFERING
Securities Offered By the
Company...................... 2,000,000 Units, each consisting of four
shares of Common Stock and two Redeemable
Warrants. The Common Stock and Redeemable
Warrants will be separately tradeable
immediately upon issuance. See "Description
of Securities -- Units." Each Redeemable
Warrant entitles the holder to purchase one
share of Common Stock for $1.75 per share,
subject to adjustment, exercisable from the
date of issuance through September 11, 2001.
The Company may redeem the Redeemable
Warrants commencing September 12, 1997, at a
redemption price of $0.05 per Redeemable
Warrant on thirty days' prior written
notice, provided that (i) the average
closing bid price (or last sales price) of
the Common Stock as reported on NASDAQ (or
on such exchange on which the Common Stock
is then traded) equals or exceeds 150% of
the per share exercise price of the
Redeemable Warrants, subject to adjustment,
for any 20 trading days within a period of
30 consecutive trading days ending on the
fifth trading day prior to the date on which
the notice of redemption is given and (ii)
the Company shall have obtained written
consent from the Underwriter to redeem the
Redeemable Warrants. See "Description of
Securities."
Securities offered by the
Selling Securityholders...... 500,000 Selling Securityholders Warrants,
which will be issued to the Selling
Securityholders upon the automatic
conversion of the Bridge Warrants, and an
aggregate of 500,000 shares of Common Stock
issuable upon exercise of the Selling
Securityholder Warrants. The Selling
Securityholder Warrants and the shares of
Common Stock being registered for the
account of the Selling Securityholders at
the Company's expense are not being
underwritten in the Offering, but may be
offered for resale at any time on or after
the date hereof by the Selling
Securityholders provided that for a period
of eighteen months from the date hereof,
prior consent is given by the Underwriter to
the Selling Securityholders. The Company
will not receive any proceeds from the sale
of these securities, although it will
receive proceeds from the exercise, if any,
of the Selling Securityholder Warrants. See
"Recent Bridge Financing," "Concurrent
Offering" and "Selling Securityholders."
Use of Proceeds................ Of the net proceeds of the Offering (i)
approximately $500,000 will be used to repay
the indebtedness incurred by the Company in
the Bridge Financing and (ii) approximately
$100,000 will be used to repay a short term
working capital loan. The balance of such
net proceeds will be utilized by the Company
for interim financing of production costs
during forthcoming 12 month period
(approximately $1,200,000), the
establishment and operation of the planned
international distribution division
(approximately $650,000), acquisitions by
the planned international distribution
division of products (approximately
$2,000,000), acquisition of rights for new
projects (approximately $150,000), payment
of annual cash dividends on its
5
<PAGE>
Series A 8 1/2 % Convertible Preferred Stock
(approximately $425,000), working capital
and general corporate purposes
(approximately $1,610,000). See "Use of
Proceeds."
Common Stock Outstanding
Before Offering.............. 3,399,652 shares (1)
After Offering................ 11,399,652 shares (1)
Redeemable Warrants
Outstanding After the
Offering..................... 4,500,000 Redeemable Warrants (2)
Risk Factors................... The securities offered hereby are highly
speculative and involve a high degree of
risk. Prospective investors should carefully
review and consider the factors set forth
under "Risk Factors" and "Dilution" as well
as other information contained herein,
before purchasing any of the Units.
NASDAQ SmallCap Symbols........ Units: TPEGU
Common Stock: TPEG
Redeemable Warrants: TPEGW
Boston Stock Exchange Symbols.. Units: TPG.U
Common Stock: TPG
Redeemable Warrants: TPG.WS
- ------
(1) Excludes (i) 489,417 shares of Common Stock issuable upon the exercise of
outstanding stock options at exercise prices ranging between $1.12 per
share and $13.00 per share, (ii) 250,000 shares of Common Stock issuable
upon the exercise of the Company's Class B Warrants at an exercise price
of $8.00 per share, (iii) up to 1,250,000 shares of Common Stock issuable
upon the conversion of the Company's Series A 8 1/2 % Convertible
Preferred Stock, $.001 par value (the "Series A Stock") on the basis of
1.25 shares of Common Stock for each outstanding share of Series A Stock,
(iv) 40,250 shares of Common Stock issuable upon the exercise of warrants
which were issued in connection with the Company's 1993 bridge financing
at an exercise price of $7.70 per share, (v) 150,000 shares of Common
stock issuable in connection with the option to purchase units (each unit
consisting of one share of Series A Stock and one Class B Warrant) at an
exercise price of $7.00 per unit, subject to adjustment, granted to the
underwriter with respect to the Company's public offering of such
securities in December 1994, (vi) 41,667 shares of Common Stock issuable
in connection with the option to purchase units (each unit consisting of
two shares of Common Stock) at an exercise price of $7.20 per unit
granted to the underwriter with respect to the Company's 1993 public
offering of securities, (vii) up to approximately 150,000 shares of
Common Stock issuable pursuant to options which may be granted under the
Company's Stock Option Plan, (viii) an aggregate of 187,500 shares of
Common Stock issuable upon the exercise of outstanding stock options
granted to an investment banking firm and its affiliate in connection
with an agreement in 1995 to render financial advisory services to the
Company at an exercise price of $4.00 per share and (ix) 57,500 shares of
Common Stock which may become issuable pursuant to the terms and
conditions of an agreement in principle with respect to the proposed
settlement of the action DSL Entertainment, Joint Venture, a California
Joint Venture v. DSL Productions, Inc. As of the date of this Prospectus,
it is uncertain whether the action referred to in (ix) above will become
the subject of a definitive settlement on the terms described therein.
See "Business -- Legal Proceedings.
(2) Includes 500,000 Selling Securityholder Warrants. See "Recent Bridge
Financing," "Concurrent Offering," and "Selling Securityholders."
6
<PAGE>
SUMMARY CONSOLIDATED FINANCIAL INFORMATION
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
The summary financial information set forth below is derived from the
financial statements of the Company appearing elsewhere in this Prospectus.
This information should be read in conjunction with such financial
statements, including the notes thereto, appearing elsewhere in this
Prospectus.
<TABLE>
<CAPTION>
Year Ended June 30,
--------------------------
1995 1996
----------- -----------
<S> <C> <C>
Statement of Operations Data:
Revenues .............................................. $ 5,291 $ 5,367
(Loss) from operations ................................ (3,510) (1,740)
Net (loss) applicable to common shareholders .......... (3,826) (1,873)
Net (loss) per common share ........................... (1.52) (.63)
Average number of shares outstanding .................. 2,513,130 2,967,483
</TABLE>
<TABLE>
<CAPTION>
June 30,
-------------------------------------
Actual As Adjusted(1)
-------------------- --------------
1995 1996 1996
--------- ------- --------------
<S> <C> <C> <C>
Balance Sheet Data:
Total assets ................................. $4,385 2,107 $8,005
Short-term debt .............................. 0 600 0
Long-term debt ............................... 0 0 0
Total liabilities ............................ 1,796 1,033 433
Net shareholders' equity ..................... 2,558 1,074 7,571
</TABLE>
- ------
(1) As adjusted to reflect the sale of the Units offered by the Company
hereby and the application of the net proceeds therefrom. See "Use of
Proceeds." Upon repayment of the Bridge Notes, the Company will record a
loss of approximately $114,593 resulting from the extinguishment of the
Bridge Notes. This loss arises as a result of expensing approximately
$114,593 of the deferred financing costs and original issue discount on
the Bridge Notes. See "Bridge Financing."
7
<PAGE>
RISK FACTORS
The securities offered hereby are speculative in nature and involve a high
degree of risk. Each prospective investor should carefully consider, along
with the other matters discussed in this Prospectus, the following risk
factors inherent in, and affecting the business of, the Company before making
an investment decision.
In addition to the historical information contained herein, the discussion
in this Prospectus contains forward-looking statements with respect to the
Company and its operations that involve risks and uncertainties. The
Company's actual results could differ materially from those discussed herein.
Factors that could cause or contribute to such differences include, but are
not limited to, those discussed under this caption, "Management's Discussion
and Analysis of Financial Condition and Results Operations" ("MD&A"), and
elsewhere in this Prospectus.
FACTORS AFFECTING THE COMPANY'S LIQUIDITY AND CAPITAL RESOURCES
The Company's cash commitments for the forthcoming 12 months include
aggregate minimum base compensation of approximately $1,004,000 to its
existing officers and key independent contractors and minimum office rent of
approximately $230,000 and notes payable of $600,000 (aggregating
approximately $1,834,000). The Company also incurs overhead and other costs
such as salaries, related benefits, office expenses, professional fees and
similar expenses. For the Company's fiscal year ended June 30, 1996, general
and administrative expenses, which included compensation and rent, aggregated
$3,567,611. The Company also advances considerable funds on the production
and development of projects. Dividends on the Company's outstanding Series A
Stock aggregate $425,000 annually and, at the Company's option, may be paid
in shares of Common Stock or in cash. Assuming consummation of the Offering,
however, the Company has agreed that it will not pay such dividends on the
Series A Stock in shares of its Common Stock without the consent of the
Underwriter during the 18 month period following the effective date of this
Prospectus. The cash required to satisfy such Series A Stock dividend
requirements will not be available for business and working capital purposes.
Since the Company, as noted under "Use of Proceeds" and "Business," has hired
a new Chief Financial Officer and intends to hire support personnel,
establish a new international distribution division and expand the staff of
its personal management division, these working capital requirements will
increase significantly.
At June 30, 1996, the Company had cash and cash equivalents of $336,415
and accounts receivable of $222,200 (aggregating approximately $558,615). At
June 30, 1996, the Company also had accounts payable and accrued expenses
aggregating approximately $433,136. As of the date hereof, the Company has no
arrangements for external sources of financing such as bank lines of credit.
If the Company continues to report losses and expends additional funds on
development and production of projects in excess of its current resources and
future cash receipts, the Company will be required to reduce its expenses to
a level commensurate with revenues, raise additional capital and/or borrow
funds to sustain its operations. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Liquidity and Capital
Resources" and "Notes to Consolidated Financial Statements."
The Company believes that the estimated net proceeds to be received by it
from the Offering, together with funds derived from its operations, will be
sufficient to meet the Company's working capital requirements for a period of
at least 12 months following the consummation of this Offering. Thereafter,
if the Company is unable to generate sufficient working capital from its
operations to meet its then prevailing business requirements, it will be
required to seek additional debt or equity financing from external sources
and there can be no assurance that such financing, if any, will then be
available on terms acceptable to the Company. If such financing becomes
necessary and is not available, the Company's business would be materially
adversely affected.
ABILITY OF THE COMPANY TO CONTINUE AS A GOING CONCERN
As noted above and elsewhere in this Prospectus, the Company has incurred
recurring losses from operations and negative cash flows in recent fiscal
years. As a result of these losses and negative cash flows, the report of the
Company's independent auditors with respect to its Consolidated Financial
Statements for the fiscal year ended June 30, 1996 expresses substantial
doubt concerning the Company's ability to continue as a "going concern". See
the Independent Auditors Report and Notes to Consolidated Financial
Statements included as part of the Company's Consolidated Financial
Statements comprising a portion of this Prospectus. However, manage-
8
<PAGE>
ment believes that, assuming consummation of this Offering and the Company's
receipt of the net proceeds thereof, the Company will be able to continue as
a going concern, to meet its obligations as they come due and to operate its
business in the manner described in this Prospectus for the ensuing twelve
month period.
HISTORY OF OPERATING LOSSES; UNCERTAINTY OF FUTURE PROFITABILITY; ACCUMULATED
DEFICIT
For the fiscal years ended June 30, 1994, 1995 and 1996, the Company had
revenues of $10,782,850, $5,290,745 and $5,367,498, respectively, and
incurred net losses of $5,489,523, $3,593,252 and $1,447,666, (without giving
effect to the payment in 1995 and 1996 of dividends of $232,600 and $425,000,
respectively with respect to the Series A Stock which (except for $126,350
paid in cash in 1995) were paid by the Company by issuing shares of Common
Stock), respectively, including the impact of the Company's acquisition of
DSL Productions Inc. and its affiliates (collectively, "DSL Productions") in
May 1994 on a pooling of interests basis. As the Company increases its
operating expenses to establish an international distribution division and
increase the staff of the personal management division, operating losses are
expected to increase in the short-term future. There can be no assurance that
the Company will become profitable in future fiscal periods. As of June 30,
1996, the Company's operations have resulted in an accumulated deficit of
$13,182,710 As indicated in Note 2 of Notes to Consolidated Financial
Statements of the Company, such Financial Statements have been prepared on a
basis which contemplates the continuation of the Company as a going concern
including the realization of assets and liquidation of liabilities in the
ordinary course of business. See "Notes to Consolidated Financial
Statements."
Management currently anticipates that the Company will continue to incur
losses through at least the first and second quarters of the Company's
current fiscal year. The anticipated losses for such quarters reflect the
fact that the Company is unlikely to derive significant revenues from
domestic and foreign sales of new products currently under development until
the third quarter of the current fiscal year. Furthermore, there can be no
assurance concerning the amount of revenues which the Company will ultimately
derive from these products now under development, or additional products,
during the balance of its current fiscal year or subsequent fiscal periods.
TELEVISION AND FEATURE FILM INDUSTRY; INTENSE COMPETITION
The television industry is highly competitive and involves a substantial
degree of risk. The Company competes with many other television and motion
picture producers which are significantly larger and have financial resources
which are far greater than those available to the Company now or in the
foreseeable future. The television industry is subject to technological
developments, the effects of which management is unable to predict. The
television industry is also subject to governmental regulation by the Federal
Communications Commission (the "FCC"). The networks are currently limited by
the Financial Interest and Syndication Rules of the FCC in the amount of
programming they may produce and the rights which they may retain in
programs. These rules were recently relaxed in favor of the networks. The
relaxation in the Financial Interest and Syndication Rules could adversely
impact the Company as a result of potential increased competition from the
networks. The Company also expects to derive revenues from the feature film
industry. The feature film industry is also highly competitive and involves a
substantial degree of risk. The Company competes with major film studios and
other independent producers, most of which are significantly larger and have
financial resources which are far greater than those available to the Company
now or in the foreseeable future. The Company's success depends upon its
ability to produce programming for television and theatrical release which
will appeal to markets characterized by changing popular tastes. There is no
assurance that the Company will continue to acquire and develop products
which can be made into made-for-television movies, television series or
theatrical releases which will result in profits to the Company in light of
the competition confronting the Company.
LABOR RELATIONS
Many individuals associated with the Company's productions, including
actors, writers and directors, are members of guilds or unions which bargain
collectively with producers on an industry-wide basis from time to time. The
Company's operations are dependent on its compliance with the provisions of
collective bargaining agreements governing relationships with these guilds
and unions. Strikes or other work stoppages by members of these unions could
delay or disrupt the Company's activities but the extent to which the
existence of collective bargaining agreements may affect the Company in the
future is not currently determinable.
9
<PAGE>
LEGAL PROCEEDINGS
In December 1995, the Company's Board of Directors terminated the
employment of Ronald Lightstone and removed him as the Company's Chairman of
the Board. On January 4, 1996, the Company instituted legal proceedings
against Mr. Lightstone in the Los Angeles County Superior Court (the
"California Superior Court"), seeking, among other relief, compensatory
damages arising out of alleged breaches by Mr. Lightstone of his fiduciary
duties to the Company, rescission of the stock purchase agreement and related
documents executed in connection with Mr. Lightstone's purchase in November
1995 of 375,000 shares of the Company's Common Stock (and the cancellation of
such shares), declaratory relief with respect to the Company's rights and
duties and the terms of Mr. Lightstone's employment, and return of certain
payments made by the Company to Mr. Lightstone during the term of his
employment.
In January 1996, Mr. Lightstone filed a cross-complaint in the California
Superior Court against the Company and Irwin Meyer, the Company's President
and Chief Executive Officer, seeking damages in excess of $3,000,000 for
alleged breach of a written employment agreement. Mr. Lightstone contends,
among other matters, that the terms of his employment by the Company are
governed by a written agreement between him and the Company and that,
pursuant to such agreement, his employment was wrongfully terminated by the
Company. The Company has denied that a binding written employment agreement
was entered into with Mr. Lightstone, alleging instead that the agreement to
which Mr. Lightstone refers was never properly authorized and was expressly
rejected by the Company's Board of Directors. See "Management." The Company
believes that Mr. Lightstone's claims are without merit and intends to
vigorously defend the claims in the cross-complaint.
The Company has also agreed in principle to settle the lawsuit entitled
DSL Entertainment, Joint Venture, a California Joint Venture v. DSL
Productions, Inc. et al. pending in California Superior Court. In connection
with such settlement, the Company has agreed to pay to DSL Entertainment,
Joint Venture, a California Joint Venture ("DSLJV") $50,000 in equal monthly
installments of $5,000, to issue to Cypress Entertainment - 1, L.P.
("Cypress") 32,500 shares of its Common Stock and to grant to Cypress
warrants (having a term of two years) to purchase an additional 25,000 shares
of its Common Stock for an exercise price equal to the market price of the
Company's Common Stock on the day immediately preceding the date of issuance
of such warrants. The settlement of this action is subject to execution by
the parties of a definitive settlement agreement and related documentation
and, as of the date of this Prospectus, it is uncertain whether the
settlement of this litigation upon the terms described above will ultimately
be effected. See "Business -- Legal Proceedings."
BROAD DISCRETION IN APPLICATION OF PROCEEDS BY MANAGEMENT
A significant portion of the estimated net proceeds of this Offering has
been allocated to working capital and general corporate purposes. Management
will have broad discretion as to the application of such proceeds.
RELIANCE ON KEY PERSONNEL
The Company is substantially dependent upon the services of a limited
number of executives, including Irwin Meyer, Chief Executive Officer,
President and Chairman, the loss of whose services would have a material
adverse effect on the Company and its operations. Currently, the Company does
not have "key-person" life insurance with respect to any of its executives;
however, the Company has agreed to apply for "key-person" life insurance on
the life of Mr. Meyer in the amount of $1,000,000. The proceeds of such
policy will be payable solely to the Company. The Company has entered into
employment agreements with Mr. Meyer for his services as Chief Executive
Officer, and with Mountaingate Productions LLC for the services of Mr. Meyer
and others as producers and executive producers. The Company has also
extended the term of an employment agreement with a Senior Vice President.
See "Management -- Employment Agreements."
DILUTION
Purchasers of Units offered hereby will incur an immediate and substantial
dilution in the net tangible book value of the Common Stock. Dilution
represents the difference between the price of the Common Stock sold hereby
and the pro forma net tangible book value per share of the Company after the
Offering. Additional dilution to future net tangible book value per share may
occur upon the exercise of the Redeemable Warrants, the
10
<PAGE>
Selling Securityholders Warrants the Underwriter's Warrants and other options
and warrants (currently outstanding or subsequently granted) to purchase the
Company's Common Stock. The immediate dilution per share of Common Stock, to
purchasers of the Units offered hereby is $.33 per share or 33% per share
(assuming no value is attributable to the Redeemable Warrants included in the
Units). See "Dilution."
EFFECT OF OUTSTANDING OPTIONS, WARRANTS AND CONVERTIBLE STOCK
For the respective terms of the outstanding options and warrants granted
by the Company and the outstanding Series A Stock, the holders thereof are
given an opportunity to profit from a rise in the market price of the
Company's Common Stock. As of the date of this Prospectus, approximately
2,410,000 shares of Common Stock (or an additional 17.4% of the outstanding
Common Stock after consummation of the Offering and assuming the exercise of
such options and warrants and conversion of the Series A Stock) are issuable
upon the exercise of outstanding options and warrants granted by the Company
and conversion of the Company's outstanding Series A Stock at prices ranging
from $1.12 to $13.00 per share. Although these options and warrants and
shares of convertible stock are exercisable or convertible at prices which
significantly exceed the currently prevailing market prices of the Company's
Common Stock, their existence could potentially limit the scope of increases
in the market value of the Company's Common Stock which might otherwise be
realized. The terms on which the Company may obtain additional financing
during the respective terms of these outstanding stock options, warrants and
convertible stock may be adversely affected by their existence. The holders
of such stock options, warrants and convertible stock may exercise or convert
such securities, as the case may be, at times when the Company might be able
to obtain additional capital through one or more new offerings of securities
or other forms of financing on terms more favorable than those provided by
such stock options, warrants and convertible stock.
ANTITAKEOVER EFFECTS OF PROVISIONS OF THE CERTIFICATE OF INCORPORATION AND
DELAWARE LAW
The Company's Certificate of Incorporation authorizes the issuance of up
to 20,000,000 shares of "blank check" Preferred Stock. The Company has
1,000,000 shares of Series A Stock issued and outstanding and an additional
100,000 shares of Series A Stock reserved for issuance. The balance of
18,900,000 authorized shares of Preferred Stock are available for issuance.
The Board of Directors has the authority to issue the Preferred Stock in one
or more series and to fix the relative rights, preferences and privileges and
restrictions thereof, including dividend rights, dividend rates, conversion
rights, voting rights, terms of redemption, redemption prices, liquidation
preferences and the number of shares constituting any series of such
Preferred Stock or the designation of such series. The issuance of Preferred
Stock may have the effect of delaying, deferring or preventing a change in
control of the Company without further action by the stockholders of the
Company. The issuance of Preferred Stock with voting and conversion rights
may adversely affect the voting power of the holders of the Common Stock,
including the loss of voting control to others. See "Description of
Securities."
The Company is subject to Section 203 of the Delaware General Corporation
Law which, subject to certain exceptions, prohibits a Delaware corporation
from engaging in any business combination with any interested stockholder for
a period of three years following the date that such stockholder became an
interested stockholder. In general, Section 203 defines an interested
stockholder as any entity or person beneficially owning 15% or more of the
outstanding voting stock of the corporation and any entity or person
affiliated with or controlling or controlled by such entity or person. The
foregoing provisions could have the effect of discouraging others from making
tender offers for the Company's shares of Common Stock and, as a consequence,
they also may inhibit fluctuations in the market price of the Company's
shares that could result from actual or rumored takeover attempts. Such
provisions also may have the effect of preventing changes in the management
of the Company. See "Description of Securities."
ABSENCE OF DIVIDENDS; ANNUAL CASH DIVIDENDS ON SERIES A STOCK
The Company has never paid cash dividends on its Common Stock and no cash
dividends are expected to be paid on the Common Stock in the foreseeable
future. Holders of the Company's Series A Stock are entitled to annual
dividends of 8 1/2 % (aggregating $425,000 annually assuming no conversion),
payable quarterly in cash or, at the Company's option, in shares of Common
Stock. The Company has agreed that it will not pay such
11
<PAGE>
dividends on the Series A Stock in shares of its Common Stock without the
consent of the Underwriter during the 18 month period following the effective
date of this Prospectus. Approximately $425,000 or 6.4% of the net proceeds
of the Offering has been allocated for the payment of the annual cash
dividends on the Series A Stock. The Company anticipates that for the
foreseeable future all of its cash resources and earnings, if any, will be
retained for the operation and expansion of the Company's business, except to
the extent required to satisfy its obligations under the terms of the Series
A Stock.
Mr. Ben Lichtenberg, a director of the Company, individually owns 13,500
options, each option entitling Mr. Lichtenberg to purchase one unit
(consisting of one share of Series A Stock and one Class B Warrant to
purchase a share of Common Stock at an exercise price of $8.00) at an
exercise price of $7.00 per unit. In addition, 2,630 shares of Series A Stock
are held by the First Colonial Securities Group, Ltd. Profit Sharing Plan FBO
Ben Lichtenberg. No other director, officer or principal shareholder owns any
shares of Series A Stock.
REPAYMENT OF INDEBTEDNESS
Approximately 7.5% of the net proceeds of the Offering has been allocated
for the repayment of the Bridge Notes which were issued in the Bridge
Financing and are currently outstanding in the aggregate principal amount of
$500,000 and approximately $100,000 or 1.5% of the net proceeds of the
Offering has been allocated for the repayment of an outstanding working
capital loan.
LIMITATION OF DIRECTOR LIABILITY
The Company's Certificate of Incorporation provides that a director of the
Company will not be personally liable to the Company or its stockholders for
monetary damages for breach of the fiduciary duty of care as a director,
including breaches which constitute gross negligence, subject to certain
limitations imposed by the Delaware General Corporation Law. Thus, under
certain circumstances, neither the Company nor the stockholders will be able
to recover damages even if directors take actions which harm the Company. See
"Management -- Director Indemnification."
LACK OF EXPERIENCE OF UNDERWRITER
Joseph Stevens & Company, L.P., (the "Underwriter") commenced operations
in May 1994 and does not have extensive experience as an underwriter of
public offerings of securities. To date, the Underwriter has acted as the
managing underwriter for five public offerings. The Underwriter is a
relatively small firm and no assurance can be given that the Underwriter will
be able to participate as a market maker in the Units, Common Stock or
Redeemable Warrants, and no assurance can be given that any broker-dealer
will make a market in the Units, Common Stock or Redeemable Warrants. See
"Underwriting."
POSSIBLE DELISTING FROM NASDAQ AND/OR BSE AND RESULTING MARKET ILLIQUIDITY
The Company's Common Stock is quoted on NASDAQ and listed on the BSE and
it is anticipated that Units and Redeemable Warrants will be quoted initially
on NASDAQ and listed on the BSE. Continued inclusion of such securities on
NASDAQ will require, among other criteria, that (i) the Company maintain at
least $2,000,000 in total assets and $1,000,000 in capital and surplus, (ii)
the minimum bid price for the Common Stock be at least $1.00 per share, (iii)
the public float consists of at least 100,000 shares of Common Stock, valued
in the aggregate at more than $200,000, (iv) the Common Stock have at least
two active market makers and (v) the Common Stock be held by at least 300
holders. Continued inclusion on the BSE will require, among other criteria,
that (i) the Company maintain at least $1,000,000 in total assets, (ii) a
public float of 150,000 shares with market value equal to at least $500,000,
(iii) a minimum of at least 250 shareholders and (iv) total stockholders'
equity of $500,000. The Company recently effected the Reverse Stock Split for
the purpose, among others, of enabling the Common Stock to qualify for
continued listing on NASDAQ. If, however, the Company is unable to satisfy
such maintenance requirements in future periods, the Company's securities may
be delisted from NASDAQ and/or BSE. In such event, trading, if any, in the
Units, Common Stock and Redeemable Warrants would thereafter be conducted in
the over-the-counter market in the "pink sheets" or the NASD's "Electronic
Bulletin Board." Consequently, the liquidity of the Company's securities
could be materially impaired, not only in the number of securities that can
be bought and sold at a given price, but also through delays in the tim-
12
<PAGE>
ing of transactions and reduction in security analysts' and the media
coverage of the Company, which could result in lower prices for the Company's
securities than might otherwise prevail and could also result in larger
spreads between the bid and asked prices for the Company's securities.
In addition, if the Common Stock is delisted from trading on NASDAQ and
the BSE and the trading price of the Common Stock is less than $5.00 per
share, trading in the Common Stock would also be subject to the requirements
of Rule 15g-9 promulgated under the Securities Exchange Act of 1934, as
amended (the "Exchange Act"). Under that Rule, broker/dealers, who recommend
such low-priced securities to persons other than established customers and
accredited investors, must satisfy special sales practice requirements,
including a requirement that they make an individualized written suitability
determination for the purchaser and receive the purchaser's written consent
prior to the transaction. The Securities Enforcement Remedies and Penny Stock
Reform Act of 1990 also requires additional disclosure in connection with any
trades involving a stock defined as a penny stock (generally, according to
recent regulations adopted by the Securities and Exchange Commission, any
equity security not traded on an exchange or quoted on NASDAQ that has a
market price of less than $5.00 per share, subject to certain exceptions),
including the delivery, prior to any penny stock transaction, of a disclosure
schedule explaining the penny stock market and the risks associated
therewith. Such requirements could severely limit the market liquidity of the
Units, the Common Stock and the Redeemable Warrants and the ability of
purchasers in the Offering to sell their securities in the secondary market.
There can be no assurance that the Units, the Common Stock and the Redeemable
Warrants will not be delisted or treated as penny stock.
PRICING OF UNITS; LIMITED MARKETS FOR SECURITIES
The initial public offering price of the Units and the terms of the
Redeemable Warrants have been determined by negotiations between the Company
and the Underwriter. While such price reflects currently prevailing market
prices for the Company's Common Stock, it does not necessarily bear any
relationship to the Company's assets, book value, results of operations or
other established valuation criteria. See "Underwriting." There is no public
market for the Units or the Redeemable Warrants and there can be no assurance
that an active market for either such security will develop or be sustained.
In addition, while there currently is a public trading market for the
Company's publicly issued Common Stock on NASDAQ and the BSE, there can be no
assurance concerning the depth or liquidity of that market in future periods.
Furthermore, the market prices of the Units, the Common Stock and the
Redeemable Warrants may be highly volatile. The lack of an active public
trading market for such securities could have a substantial negative effect
on their value. Such volatility may be the result of a number of factors,
including without limitation, the financial performance of the Company,
general conditions of the securities markets, the number of publicly traded
securities and the securities markets' perception of the entertainment
industry in which the Company is engaged in business.
SHARES ELIGIBLE FOR FUTURE SALE
Of the 11,399,652 shares of Common Stock of the Company to be outstanding
upon completion of the Offering, approximately 10,500,442 shares of Common
Stock, including 8,000,000 shares underlying the Units offered hereby, will
be freely tradeable without restriction under the Securities Act except for
any shares of Common Stock purchased by an "affiliate" of the Company (as
that term is defined under the rules and regulations of the Securities Act),
which will be subject to the resale limitations of Rule 144 under the
Securities Act. Approximately 899,210 remaining outstanding shares of Common
Stock are "restricted" securities within the meaning of Rule 144 under the
Securities Act and only may be sold pursuant to the conditions of such rule,
including satisfaction of certain holding period requirements. The Company is
unable to predict the effect that sales made under Rule 144, or otherwise,
may have on the then prevailing market price of the Company's securities
although any future sales of substantial amounts of securities pursuant to
Rule 144 could adversely affect prevailing market prices. The holders of
options and warrants to acquire approximately 400,000 shares of Common Stock
(including 125,000 shares of Common Stock issuable upon conversion of shares
of Series A Stock which are, in turn, issuable upon exercise of certain of
such options) have certain registration rights under the Securities Act.
These securities include 100,000 units to acquire 150,000 shares of Common
Stock (upon conversion of shares of Series A Stock and exercise of Class B
Warrants included in such units) held by two investment banking firms, which
acted as underwriter for the Company's December 1994 offering of such units,
who have agreed to waive their registration rights with respect to such units
and underlying securities for a period of 18 months after the date of this
Prospectus.
13
<PAGE>
However, holders of options to purchase an aggregate of 233,750 shares of
Common Stock and holders of 500,000 restricted shares, including all officers
and directors of the Company have agreed that, without the consent of the
Underwriter they shall not, directly or indirectly, issue, offer to sell,
sell, grant an option for the sale of, assign, transfer, pledge, hypothecate
or otherwise encumber of dispose of (collectively, "Transfer") any securities
of the Company, including Common Stock or securities convertible into or
exchangeable for or evidencing any right to purchase or subscribe for any
shares of Common Stock, for a period ending upon the earlier of (i) 18 months
from the effective date of the Registration Statement, or (ii) two months
after the Underwriter and each broker-dealer controlled by any affiliate of
the Underwriter at the time the "lock-up" agreement was entered into, if any,
transfers all of the Underwriter's Warrants and all securities issuable upon
exercise of the Underwriter's Warrants.
In addition, without the consent of the Underwriter, the Company has
agreed not to sell or offer for sale any of its securities for a period of 18
months following the effective date of the Registration Statement, except
pursuant to outstanding options and warrants and pursuant to the Company's
existing option plans provided that no option to be granted during such 18
month period shall have an exercise price that is less than the fair market
value per share of Common Stock on the date of grant.
The Redeemable Warrants underlying the Units offered hereby and the shares
of Common Stock underlying such Redeemable Warrants, upon exercise thereof,
will be freely tradeable without restriction under the Securities Act, except
for any Redeemable Warrants or shares of Common Stock purchased by an
"affiliate" of the Company, which will be subject to the resale limitations
of Rule 144 under the Securities Act. In addition, 500,000 Selling
Securityholder Warrants and the shares of Common Stock underlying such
Selling Securityholder Warrants are being registered in the Concurrent
Offering. Holders of such Redeemable Warrants have agreed not to Transfer
such Redeemable Warrants, or the underlying shares of Common Stock, for a
period of 18 months from the effective date of the Registration Statement,
without the prior written consent of the Underwriter. See "Recent Bridge
Financing," "Concurrent Offering" and "Selling Securityholders."
No prediction can be made as to the effect, if any, that sales of the
Selling Securityholder Warrants and/or underlying Common Stock or the
availability of such securities for sale will have on the market prices
prevailing from time to time for the Units, the Redeemable Warrants and/or
the Common Stock. Nevertheless, the possibility that substantial amounts of
such securities may be sold in the public market may adversely affect
prevailing market prices for the Company's equity securities, and could
impair the Company's ability to raise capital in the future through its sale
of equity securities. See "Selling Securityholders."
UNDERWRITER'S POTENTIAL INFLUENCE IN THE MARKET
It is anticipated that a significant amount of the Units will be sold to
customers of the Underwriter. Although the Underwriter has advised the
Company that it intends to make a market in the Units, Common Stock and
Redeemable Warrants, it will have no legal obligation to do so. The prices
and the liquidity of the Units, Common Stock and Redeemable Warrants may be
significantly affected by the degree, if any, of the Underwriter's
participation in the market. Moreover, if the Underwriter sells the
securities issuable upon exercise of the Underwriter's Warrants, it may be
required under the Exchange Act, as amended, to temporarily suspend its
market-making activities. No assurance can be given that any market
activities of the Underwriter, if commenced, will continue for any minimum or
significant period of time, and the withdrawal of the Underwriter from market
making activities in any of such securities could materially adversely affect
the prevailing market prices therefor. See "Underwriting."
UNDERWRITER'S POTENTIAL INFLUENCE ON THE COMPANY
The Company has agreed that for five years from the effective date of the
Registration Statement, the Underwriter may designate one person for election
to the Company's Board of Directors and that the Company will reasonably
cooperate with the Underwriter in respect of such designation. The election
of such designee, if any, may enable the Underwriter to exert influence on
the Company. As of the date of this Prospectus, the Underwriter has not
designated any individual for election to the Company's Board of Directors.
See "Underwriting."
14
<PAGE>
POTENTIAL CONFLICT OF INTEREST
M.H. Meyerson & Company ("Meyerson") and First Colonial Securities Group,
Ltd. ("First Colonial"), an investment banking firm of which Mr. Lichtenberg,
a director of the Company since May 1996, is a Managing Director and a
stockholder, served as underwriters (the "1994 Underwriters") for the
Company's public offering of units consisting of the Series A Stock and the
Class B Warrants in December 1994. First Colonial is continuing, but is under
no obligation, to act as a market maker in the Company's securities for which
it receives no compensation from the Company.
The Company granted the 1994 Underwriters the right to nominate one person
for election to the Company's Board of Directors for a period of three years.
Such nominee may be a director, officer, partner, employee or affiliate of
the 1994 Underwriters. Mr. Lichtenberg was elected a member of the Company's
Board of Directors in May 1996 as a nominee of the 1994 Underwriters.
Although, in the opinion of the Company, Mr. Lichtenberg's affiliation with
First Colonial has had no impact on his services as a director to the
Company, conflicts may arise with respect to his obligations as a director of
the Company and his interests as a Managing Director of First Colonial, a
market maker and former underwriter of the Company's securities. See "Certain
Transactions."
EFFECT OF OUTSTANDING NOTES RECEIVABLE
In November 1995, the Company sold, subject to the vesting requirements
described below, 500,000 shares of its Common Stock, at a purchase price of
$2.00 per share, to Mountaingate Productions LLC, a California limited
liability company of which Alison Meyer and Patricia Meyer, the adult
daughters of Irwin Meyer, are the sole members ("Mountaingate"). Irwin Meyer
has no direct or indirect economic interest in any such securities and he
expressly disclaims beneficial ownership of the shares of Common Stock
purchased by Mountaingate.
The purchase price for these shares of Common Stock was paid by
Mountaingate by delivery of a promissory note (the "Note") to the Company.
The Note bears interest at the rate of 7% per annum, compounded semi-
annually. Twenty-five percent (25%) of the outstanding principal balance, and
accrued interest thereon, due under the Note are with recourse to the
purchaser and the remaining seventy-five percent (75%) of the amounts due
thereunder are without recourse against the purchaser. The entire amount of
principal and accrued interest under the Note is secured by a pledge to the
Company of the Common Stock purchased with the proceeds of such borrowing.
Twelve and one-half percent (12.5%) of the original principal amount of the
Note, together with interest thereon, is due and payable on April 1, 1997;
twelve and one-half percent (12.5%) of the original principal amount of the
Note, together with interest thereon, is due and payable on October 1, 1998;
and the balance of the principal of and interest on the Note is due and
payable on October 1, 2000.
In addition, in November 1995 the Company issued to Ronald Lightstone,
then its Chairman, and to Charles Weber, then its Chief Operating Officer,
375,000 shares of Common Stock and 25,000 shares of Common Stock,
respectively, on substantially the same terms as those described above. None
of the shares issued to Mr. Lightstone had vested as of the date the Company
terminated Mr. Lightstone's employment and such shares were therefore
forfeited to the Company at such time. See "-- Legal Proceedings" and
"Business -- Legal Proceedings."
There can be no assurance that Mountaingate or Mr. Weber will pay the
amounts due under their respective promissory notes. In the event that
Mountaingate or Mr. Weber fails to pay any amounts due under their respective
promissory notes, the Company will have recourse directly against
Mountaingate and Mr. Weber for only twenty-five (25%) of the outstanding
principal balance of their respective promissory notes and accrued interest
thereon. In addition, the Company will have full recourse against the
respective shares which have been pledged to secure the respective promissory
notes and such shares may be forfeited to the Company and cancelled. See
"Certain Transactions."
POTENTIAL ADVERSE EFFECT OF REDEMPTION OF REDEEMABLE WARRANTS
Commencing twelve months after the date of this Prospectus, and subject to
the consent of the Underwriter, the Company will have the right to redeem
all, but not less than all, of the Redeemable Warrants under certain
conditions. Redemption of the Redeemable Warrants could encourage holders to
exercise the Redeemable War-
15
<PAGE>
rants and pay the exercise price at a time when it may be disadvantageous for
the holders to do so, to sell the Redeemable Warrants at the current market
price when they might otherwise wish to hold the Redeemable Warrants, or to
accept the redemption price, which may be substantially less than the market
value of the Redeemable Warrants at the time of redemption. The holders of
the Redeemable Warrants will automatically forfeit their rights to purchase
the shares of Common Stock issuable upon exercise of such Redeemable Warrants
unless the Redeemable Warrants are exercised before they are redeemed. The
holders of Redeemable Warrants will not possess any rights as stockholders of
the Company unless and until such Redeemable Warrants are exercised. See
"Description of Securities -- Redeemable Warrants."
CURRENT PROSPECTUS REQUIREMENT AND STATE BLUE SKY REGISTRATION IN CONNECTION
WITH EXERCISE OF REDEEMABLE WARRANTS
Commencing upon issuance, the Redeemable Warrants constituting part of the
Units offered hereby will be separately tradeable. The Company will be able
to issue shares of its Common Stock upon exercise of the Redeemable Warrants
only if there is a then current prospectus relating to the Common Stock
issuable upon the exercise of the Redeemable Warrants under an effective
registration statement filed with the Securities and Exchange Commission (the
"Commission"), and only if such Common Stock is then qualified for sale or
exempt from qualification under applicable state securities laws of the
jurisdictions in which the various holders of Redeemable Warrants reside.
Although the Company has agreed to use its best efforts to meet such
requirements, there can be no assurance that the Company will be able to do
so. The failure of the Company to meet such requirements may deprive the
Redeemable Warrants of any value and cause the resale or other disposition of
Common Stock issued upon the exercise of the Redeemable Warrants to become
unlawful. See "Description of Securities -- Redeemable Warrants."
16
<PAGE>
THE COMPANY
The Producers Entertainment Group Ltd. (together with its subsidiaries,
the "Company") was organized under the laws of the state of Delaware on
August 10, 1989 as Ventura Motion Picture Group Ltd., a wholly owned
subsidiary of Ventura Entertainment Group Ltd. ("Ventura"). In 1991, the
Company changed its name to The Producers Entertainment Group Ltd. In July
1994, Ventura distributed substantially all of the Company's Common Stock
that it owned to Ventura's shareholders. As a result of that distribution, no
relationship currently exists between the Company and Ventura.
The Company completed its initial public offering of securities in
December 1989 and, in January 1990, commenced operations. In April 1993 and
in December 1994, the Company completed additional offerings of its equity
securities. In May 1994, the Company acquired all of the outstanding common
stock of DSL Productions, Inc. and its affiliates ("DSL") in exchange for
32,500 shares of Common Stock. The acquisition was treated as a pooling of
interests.
Unless the context indicates otherwise, the term "Company" includes The
Producers Entertainment Group Ltd. and all of its subsidiaries. The Company's
Common Stock is listed on the National Association of Securities Dealers,
Inc. Automated Quotation System and is traded on NASDAQ's SmallCap Market,
under the symbol "TPEG." The Company's Common Stock is also listed on the BSE
and traded under the symbol "TPG."
The Company's offices are located at 9150 Wilshire Boulevard, Suite 205,
Beverly Hills, California 90212. Its telephone number is (310) 285-0400.
RECENT BRIDGE FINANCING
On June 7, 1996 the Company consummated a bridge financing (the "Bridge
Financing"), pursuant to which it issued an aggregate of (i) $500,000
principal amount of promissory notes (the "Bridge Notes") which bear interest
at the rate of 10% per annum and are due and payable upon the earlier of (a)
the consummation of any financing of the Company from which the Company
receives gross proceeds of at least $1,000,000 or (b) one year from the date
of issuance, and (ii) 500,000 warrants (the "Bridge Warrants"), each Bridge
Warrant entitling the holder to purchase one share of Common Stock at an
exercise price of $1.12 (subject to adjustment upon the occurrence of certain
events) during the three-year period commencing one year from the date of
issuance. The net proceeds of the Bridge Financing were used by the Company
to complete film projects then in production, to commence the production and
development of new projects and to meet working capital and general corporate
requirements. The Company intends to use a portion of the proceeds of this
Offering to repay the entire principal amount of, and accrued interest on,
the Bridge Notes. See "Use of Proceeds."
Upon consummation of the Offering, each Bridge Warrant shall automatically
be converted into a Redeemable Warrant (referred to herein as the "Selling
Securityholder Warrants") having terms identical to those of the Redeemable
Warrants underlying the Units offered hereby. The Selling Securityholder
Warrants and the underlying shares of Common Stock issuable upon exercise of
the Selling Securityholder Warrants are included in the Registration
Statement of which this Prospectus is a part. See "Concurrent Offering."
CONCURRENT OFFERING
The Registration Statement of which this Prospectus is a part also
includes 500,000 Redeemable Warrants (the "Selling Securityholder Warrants")
and 500,000 shares of Common Stock (the "Selling Securityholder Shares")
underlying such Warrants, owned by certain selling securityholders (the
"Selling Securityholders"). The Selling Securityholder Warrants and the
Selling Securityholder Shares are not being offered or sold pursuant to the
Offering. Such Selling Securityholder Warrants and the Selling Securityholder
Shares may be sold in the open market, in privately negotiated transactions
or otherwise, directly by the Selling Securityholders. The Company will not
receive any proceeds from the sale of such Selling Securityholder Warrants or
Selling Securityholder Shares; however, the Company will receive proceeds
from the exercise, if any, of the Selling Securityholder Warrants. Expenses
of the Concurrent Offering, other than fees and expenses of counsel to the
Selling Securityholders and selling commissions, will be paid by the Company.
Neither the Selling Securityholder Warrants nor the Selling Securityholder
Shares may be sold for a period of 18 months from the date hereof without the
prior written consent of the Underwriter. Sales of such Selling
Securityholder Warrants or Selling Securityholder Shares by the Selling
Securityholders or the potential of such sales may have an adverse effect on
the market price of the securities offered hereby. See "Risk Factors."
17
<PAGE>
USE OF PROCEEDS
The net proceeds to be received by the Company from the sale of the Units
offered by the Company hereby after deducting underwriting discounts and
expenses of the Offering payable by the Company, are estimated to be
$6,635,000 ($7,719,000 if the Underwriter's over-allotment option is
exercised in full). The Company presently intends to devote the net proceeds
of the Offering to the following purposes:
<TABLE>
<CAPTION>
Application of Net Approximate Percentage of
Proceeds Amount Net Proceeds
------------------ --------------- ---------------
<S> <C> <C>
Repayment of bridge notes ........................................... $ 500,000(1) 7.5%
Repayment of working capital loan ................................... $ 100,000(2) 1.5%
Interim financing of estimated production
costs during forthcoming 12 month period ........................... $1,200,000(3) 18.1%
Establishment and operation of planned
international distribution division ................................ $ 650,000(4) 9.8%
Acquisition by planned international distribution division of
products from, and distribution advance payments to, unaffiliated
producers .......................................................... $2,000,000(4) 30.1%
Acquisition of rights for new projects .............................. $ 150,000 2.3%
Annual cash dividends on Series A Stock ............................. $ 425,000(5) 6.4%
Working capital and general corporate purposes ...................... $1,610,000 24.3%
--------------- ---------------
Total ............................................................... $6,635,000 100 %
=============== ===============
</TABLE>
- ------
(1) The Company's repayment of the Bridge Notes will include accrued interest
thereon of approximately $12,500. See "Recent Bridge Financing."
(2) This loan was incurred by the Company for working capital purposes in May
1996 and is due and payable, including accrued interest thereon of
approximately $2,500, upon the earlier of the consummation of this
offering or September 20, 1996. This loan is secured by the Company's
adjusted gross participation in the revenues deriving from the
distribution of a television series produced by the Company.
(3) As noted under "Business," while the Company generally does not risk its
own capital to finance productions, it advances its own funds on an
interim basis to finance productions. Such advances are generally
reimbursed to the Company pursuant to production or distribution
agreements with broadcast or cable networks, studios, distributors and
independent financing sources.
(4) These amounts represent management's estimates of the cost of operations
and the cost of acquisition of products (including distribution advances)
from other producers by the Company's planned international distribution
division during the first year of its operations.
(5) Represents annual dividends of 8 1/2 % of the outstanding $5,000,000 of
Series A Stock, payable quarterly. Pursuant to the provisions governing
the Series A Stock, the Company has the option to pay dividends thereon
in cash or in shares of its Common Stock. However, the Company has agreed
that, without the consent of the Underwriter, it will not pay such
dividends in shares of Common Stock for the dividend periods within the
18 month period following the date of this Prospectus.
Any additional net proceeds realized from the exercise of the
Underwriter's over-allotment option or the exercise of the Redeemable
Warrants included in the Units will be added to the Company's working
capital.
The allocation of proceeds described in the foregoing table is subject to
change by reason of certain contingencies, including the fact that the
Company might undertake a greater or lesser number of production projects
during the forthcoming year than is anticipated by management of the Company
as of this date or may acquire rights to properties and projects in addition
to those currently planned by management. In addition, during the first year
of operation of its new international distribution division, the Company may
not be able to acquire productions from unaffiliated producers in the
estimated aggregate dollar amount indicated in the foregoing table. Any such
changes in the allocation of proceeds would either be met out of the
Company's working capital or result in additions to its working capital. See
"Risk Factors -- Broad Discretion in Application of Proceeds by Management,"
"-- Repayment of Indebtedness" and "-- Absence of Dividends; Annual Cash
Dividends on Series A Stock."
18
<PAGE>
The Company believes that the estimated net proceeds to be received by it
from the Offering, together with funds derived from its operations, will be
sufficient to meet the Company's working capital requirements for a period of
at least 12 months following the consummation of this Offering. Thereafter,
if the Company is unable to generate sufficient working capital from its
operations to meet its then prevailing business requirements, it will be
required to seek additional debt or equity financing from external sources
and there can be no assurance that such financing, if any, will be available
on terms acceptable to the Company. As of the date hereof, the Company has no
arrangement for external sources of financing such as bank lines of credit.
If such financing becomes necessary and is not available, the Company's
business would be materially adversely affected. See "Risk Factors."
Proceeds not immediately required for the purposes described above will be
invested by the Company principally in short-term bank certificates of
deposit, highly rated short-term debt securities, United States government
obligations, money market instruments or other high grade interest-bearing
investments having maturities of less than one year.
The Company will not receive any of the proceeds from the sale of the
Selling Securityholder Warrants or the Selling Securityholder Shares;
however, the Company will receive proceeds from the exercise, if any, of the
Selling Securityholder Warrants. See "Concurrent Offering."
19
<PAGE>
DILUTION
The following discussion and table attributes no value to the Redeemable
Warrants included in the Units and gives effect to the issuance of 94,442
shares of Common Stock in August 1996 in payment of the quarterly dividend on
the Series A Stock for the fiscal quarter ended June 30, 1996.
The net tangible book value of the Common Stock as of June 30, 1996 was
$1,073,701, and the net tangible book value per share as of June 30, 1996 was
approximately $.32. Net tangible book value represents the amount of the
Company's total tangible assets less total liabilities. Dilution per share
represents the difference between the attributed amount per share paid by
purchasers of shares of Common Stock included in the Units sold in the
Offering and the pro forma net tangible book value per share of Common Stock
immediately after completion of the Offering. After giving effect to the sale
in the Offering of 2,000,000 Units and the application of the estimated net
proceeds therefrom, the pro forma net tangible book value of the Company as
of June 30, 1996 would have been $7,594,108 and the pro forma net tangible
book value per share would have been approximately $.67. This represents an
immediate increase in net tangible book value of $.35 per share to existing
stockholders and an immediate dilution in net tangible book value of $.33 per
share or 33% per share to purchasers of Units in the Offering, as illustrated
in the following table:
<TABLE>
<S> <C> <C>
Initial public offering price per share ...................... $1.00
Net tangible book value per share before the Offering ....... $.32
Increase per share attributable to new investors ............ $.35
======
Pro forma net tangible book value per share after the Offering $ .67
Dilution per share to new investors ........................... $ .33
=======
</TABLE>
If the Underwriter's over-allotment option is exercised in full, the
increase in net tangible book value per share as of June 30, 1996
attributable to new investors would have been $.36, the pro forma net
tangible book value per share of Common Stock after the Offering would be
approximately $.68 and the dilution per share to new investors would be $.32
or 32%.
The foregoing information excludes (i) 489,417 shares of Common Stock
issuable upon the exercise of outstanding stock options at exercise prices
ranging between $1.l2 per share and $13.00 per share, (ii) 250,000 shares of
Common Stock issuable upon the exercise of the Company's Class B Warrants at
an exercise price of $8.00 per share, (iii) up to 1,250,000 shares of Common
Stock issuable upon the conversion of the Company's Series A Stock on the
basis of 1.25 shares of Common Stock for each outstanding share of Series A
Stock, (iv) 40,250 shares of Common Stock issuable upon the exercise of
warrants which were issued in connection with the Company's 1993 bridge
financing at an exercise price of $7.70 per share, (v) 150,000 shares of
Common Stock issuable in connection with the option to purchase units (each
unit consisting of one share of Series A Stock and one Class B Warrant) at an
exercise price of $7.00 per unit, subject to adjustment, granted to the
underwriter with respect to the Company's public offering of such securities
in December 1994, (vi) 41,667 shares of Common Stock issuable in connection
with the option to purchase units (each unit consisting of two shares of
Common Stock) at an exercise price of $7.20 per unit granted to the
underwriter with respect to the Company's 1993 public offering of securities,
(vii) up to approximately 150,000 shares of Common Stock issuable pursuant to
options which may be granted under the Company's Stock Option Plan, (viii) an
aggregate of 187,500 shares of Common Stock issuable upon the exercise of
outstanding stock options granted to an investment banking firm and its
affiliate in connection with an agreement in April 1995 to render financial
advisory services to the Company at an exercise price of $4.00 per share and
(ix) 57,500 shares of Common Stock which may become issuable pursuant to the
terms and conditions of an agreement in principle with respect to the
proposed settlement of the action DSL Entertainment, Joint Venture, a
California Joint Venture v. DSL Productions, Inc. As of the date of this
Prospectus, it is uncertain whether the action referred to in (ix) above will
become the subject of a definitive settlement on the terms described therein.
See "Business -- Legal Proceedings."
20
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company at June
30, 1996, actual and pro forma to give effect to the issuance and sale of the
Units offered by the Company hereby and the initial application by the
Company of the estimated net proceeds therefrom. See "Use of Proceeds" and
"Recent Bridge Financing."
<TABLE>
<CAPTION>
June 30, 1996
-------------------------------
Actual As Adjusted
-------------- --------------
<S> <C> <C>
Bridge Notes, net of $114,593 of deferred financing
costs and original issue discount ..................... $ 385,407 -0-
Other Short-term debt .................................. 100,000 -0-
Deferred offering costs ................................ (22,910) -0-
Shareholders' equity:
Preferred Stock, $.001 par value, 20,000,000 shares
authorized; 1,000,000 shares of Series A Stock
issued and outstanding ............................ 1,000 1,000
Common Stock, $.001 par value; 50,000,000 shares
authorized; 3,585,819 shares issued and outstanding
(including 280,609 shares held in treasury) actual;
and 11,585,819 shares issued and outstanding
(including 280,609 shares held in treasury) pro
forma (2) ......................................... 3,586 11,586
Additional paid-in capital ........................... 16,114,017 22,741,017
Accumulated deficit .................................. (13,182,710) (13,320,213)
Treasury stock 280,609 shares at cost ................ (1,010,192) (1,010,192)
Notes receivable related parties from sale of Common
Stock, net of imputed interest discount ........... (852,000) (852,000)
Net shareholders' equity ............................. 1,073,701 7,571,198
-------------- --------------
Total capitalization ................................. $ 1,536,198 $ 7,571,198
============== ==============
</TABLE>
- ------
(1) As adjusted to reflect the sale of the Units offered by the Company
hereby and the initial application of the net estimated proceeds
therefrom. See "Use of Proceeds." Upon repayment of the Bridge Notes, the
Company will record a loss of $114,593 resulting from the extinguishment
of the Bridge Notes. This loss arises as a result of expensing the
deferred financing costs and original issue discount on the Bridge Notes.
(2) Excludes (i) 489,417 shares of Common Stock issuable upon the exercise of
outstanding stock options at exercise prices ranging between $1.12 and
$13.00 per share, (ii) 250,000 shares of Common Stock issuable upon the
exercise of the Company's Class B Warrants at an exercise price of $8.00
per share, (iii) up to 1,250,000 shares of Common Stock issuable upon the
conversion of the Company's Series A Stock on the basis of 1.25 shares of
Common Stock for each outstanding share of Series A Stock, (iv) 40,250
shares of Common Stock issuable upon the exercise of warrants which were
issued in connection with the Company's 1993 bridge financing at an
exercise price of $7.70 per share, (v) 150,000 shares of Common Stock
issuable in connection with the option to purchase units (each unit
consisting of one share of Series A Stock and one Class B Warrant) at an
exercise price of $7.00 per unit, subject to adjustment, granted to the
underwriter with respect to the Company's public offering of securities
in December 1994, (vi) 41,667 shares of Common Stock issuable in
connection with the option to purchase units (each unit consisting of two
shares of Common Stock) at an exercise price of $7.20 per unit granted to
the underwriter with respect to the Company's 1993 public offering of
securities, (vii) up to approximately 150,000 shares of Common Stock
issuable pursuant to options which may be granted under the Company's
Stock Option Plan, (viii) an aggregate of 187,500 shares of Common Stock
issuable upon the exercise of outstanding stock options granted to an
investment banking firm and its affiliate in connection with an agreement
in April 1995 to render financial advisory services to the Company at an
exercise price of $4.00 per share, (ix) 57,500 shares of Common Stock
which may become issuable pursuant to the terms and conditions of the
current agreement in principle with respect to the proposed settlement of
the action DSL Entertainment, Joint Venture, a California Joint Venture
v. DSL Productions, Inc., and (x) 94,442 shares of Common Stock issued in
August 1996 in payment of dividends on the Series A Stock for the fiscal
quarter ended June 30, 1996. As of the date of this Prospectus, it is
uncertain whether the action referred to in (ix) above will become the
subject of a definitive settlement on the terms described therein. See
"Business -- Legal Proceedings."
21
<PAGE>
MARKET FOR COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
The Company's Common Stock is currently traded on NASDAQ under the symbol
"TPEG" and on the BSE under the symbol "TPG." The following table sets forth
the high and low bid prices on NASDAQ for the periods indicated, as reported
by NASDAQ. The quotations are inter-dealer prices without adjustment for
retail mark-ups, mark-downs or commissions, and do not necessarily represent
actual transactions. These prices may not necessarily be indicative of any
reliable market value.
<TABLE>
<CAPTION>
Common Stock
----------------------
High Low
Bid Bid
------- -------
<S> <C> <C>
Fiscal Year -- 1994:
Quarter Ended
September 30, 1993 ............................ 13.25 9.25
December 31, 1993 ............................. 15.50 12.50
March 31, 1994 ................................ 14.00 9.75
June 30, 1994 ................................. 13.75 9.75
Fiscal Year -- 1995:
Quarter Ended
September 30, 1994 ............................ 13.00 5.25
December 31, 1994 ............................. 8.00 2.75
March 31, 1995 ................................ 3.25 2.00
June 30, 1995 ................................. 3.25 1.50
Fiscal Year -- 1996:
Quarter Ended
September 30, 1995 ............................ 3.00 2.25
December 31, 1995 ............................. 3.00 1.50
March 31, 1996 ................................ 2.75 .88
June 30, 1996 ................................. 1.37 .87
</TABLE>
On September 10, 1996, the closing bid and asked prices of the Company's
Common Stock were $1.44 and $1.75, respectively. On such date, there were
3,399,652 shares of the Company's Common Stock outstanding held by 147
holders of record.
The Units and the Redeemable Warrants have been approved for quotation on
NASDAQ under the symbols "TPEGU" and "TPEGW," respectively, and for listing
on the BSE under the Symbols "TPG.U" and "TPG.WS," respectively. The Company
and the Underwriter may jointly determine, based upon market conditions, to
delist the Units upon the expiration of the 30 day period commencing on the
date of this Prospectus.
DIVIDEND POLICY
The Company has never paid a cash dividend on the Common Stock and
presently intends to retain any future earnings for investment and use in its
business operations. There can be no assurance that the Company's operations
will generate the revenues and cash flow required to declare cash dividends
on the Company's outstanding Common Stock in future fiscal periods or that
the Company will have legally available funds to pay dividends on such Common
Stock. Consequently, no cash dividends are expected to be paid in the
foreseeable future except to the extent required to satisfy the Company's
obligations with respect to its outstanding Series A Stock.
Pursuant to the terms of the Company's outstanding Series A Stock, which
it issued in a public offering consummated in December 1994, the Company, at
its option, may pay dividends on such stock in cash or in shares of its
Common Stock when, as and if declared by the Company's Board of Directors out
of funds legally available therefor. The Company has agreed that it will not
pay dividends on the Series A Stock in shares of its Common Stock without the
consent of the Underwriter for the dividend periods within the 18 month
period following the date of this Prospectus. See "Risk Factors -- Absence of
Dividends; Annual Cash Dividends on Series A Stock."
22
<PAGE>
SELECTED FINANCIAL DATA
The selected financial data for the years ended June 30, 1995 and 1996
have been derived from the audited financial statements of the Company. The
following table of Selected Financial Data gives effect to the Reverse Stock
Split and should be read in conjunction with "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and the audited
financial statements and notes thereto of the Company which are included
elsewhere herein.
<TABLE>
<CAPTION>
Year Ended June 30,
--------------------------------
1995 1996
------------- ---------------
<S> <C> <C>
Statement of Operations Data:
Revenues .................................. $ 5,290,745 $ 5,367,498
Amortization of film costs ................ 3,768,728 857,199
Costs of projects sold .................... -- 2,579,277
Write-off of projects in development ...... 335,233 103,404
General and administrative expense ........ 4,696,554 3,567,611
------------- ---------------
Operating (loss) .......................... (3,509,770) (1,739,993)
Total other income (expense) .............. (83,482) 292,327
------------- ---------------
Net (loss) ................................ (3,593,252) (1,447,666)
Dividend preferred stock .................. (232,600) (425,000)
------------- ---------------
Net (loss) applicable to common
shareholders ........................... $ 3,825,852 $(1,872,666)
Net (loss) per common share ............... $ (1.52) $ (0.63)
============= ===============
Average number of shares outstanding ...... 2,513,130 2,967,483
</TABLE>
<TABLE>
<CAPTION>
June 30,
-------------------------------
1995 1996
------------ -----------
<S> <C> <C>
Balance Sheet Data:
Cash and cash equivalents .......... $ 832,754 $ 336,415
Accounts and notes receivable ...... 763,675 482,200
Receivables from related parties ... 116,229 18,983
Film costs, net .................... 2,104,503 772,777
Right to receive revenue ........... 291,241 291,241
Fixed assets at cost, net .......... 76,439 50,242
Other assets ....................... 199,829 154,979
------------ -----------
Total assets .................... 4,384,670 2,106,837
============ ===========
Notes payable ...................... -- 600,000
Accounts payable and accrued
expenses ........................ 847,595 433,166
Deferred revenue ................... 598,708 --
------------ -----------
Total liabilities ............... 1,796,303 1,033,136
------------ -----------
Net shareholders' equity ........... $2,588,367 $1,073,701
============ ===========
</TABLE>
23
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
GENERAL
The following discussion and analysis should be read in conjunction with
the Company's consolidated Financial Statements and notes thereto appearing
elsewhere in this Prospectus.
The Company's revenues are principally derived from the production and
distribution of completed projects, producers fees and personal management
fees. The amount of revenues derived by the Company in any one period is
dependent on, among other factors, projects completed during any such period
and the distribution of completed projects. Revenues from producers and other
fees are primarily dependent on the number of projects being produced and the
agreements relating to such projects. Accordingly, year to year comparisons
of revenues representing distribution, producers and other fees are not
necessarily indicative of future revenues from these sources. Furthermore,
the Company's results of operations have fluctuated significantly from fiscal
period to fiscal period primarily by reason of the fact that the number of
its projects completed and number of its projects in production have
fluctuated from period to period. In addition, results of operations for
specific periods reflect revenues derived from one project which has
accounted for a substantial or even major percentage of the Company's total
revenues during such periods, whereas that is not the case in other periods.
Accordingly, the amount of revenues in any period reported upon hereon are
not necessarily indicative of revenues to be derived by the Company in future
periods.
Amounts received as license fees for projects in production are deferred
until the project becomes available for broadcast in accordance with the
terms of the licensing agreement and are recognized as revenues at such time.
Additional licensing and distribution fees are recognized as earned in
accordance with the terms of the related agreements. Revenues from the sale
of completed projects are recognized upon their sale.
Revenues from completed projects owned by the Company are recognized when
the project becomes contractually available for telecasting or exhibition by
the licensee. Amortization of film costs are charged to operations on an
individual-film basis in a ratio that the current year's revenues bears to
management's estimate of total gross revenue (current and future years) from
all sources. This is commonly referred to as the individual-film forecast
method.
The amount of general and administrative expenses to be incurred in the
future is dependent on the level of the Company's operations, including
projects in production, the level of operations of its personal management
division which the Company intends to expand and the level of operations of
its planned international distribution division. See "Use of Proceeds" and
"Business."
DSL was formed in January 1992. In May 1994, the Company acquired DSL in a
transaction accounted for as a pooling of interests. Accordingly, the
Company's historical financial statements have been retroactively restated to
include the accounts of DSL from its inception on January 2, 1992.
YEAR ENDED JUNE 30, 1996 COMPARED TO YEAR ENDED JUNE 30, 1995
Revenues for the fiscal year ended June 30, 1996 were $5,367,498, compared
to $5,290,745 for the fiscal year ended June 30, 1995. Revenues for the year
ended June 30, 1996 primarily consisted of revenues from the distribution of
completed projects, producer fees from currently airing television series,
personal management fees, and producers fees from the made-for-television
movie, Lily Dale. Included in revenues for the year ended June 30, 1996 is
approximately $2,764,277 related to completion of the made-for-television
movie Lily Dale. Revenues for the year ended June 30, 1995 primarily
consisted of distribution fees from completed projects, fees from the
television series Dave's World which is airing on CBS and personal management
fees. Included in revenues for the year ended June 30, 1995 is approximately
$3,650,343 related to the completion of the televison series Future Quest
which aired on PBS.
Amortization of film costs for fiscal 1996 and 1995 was $857,199 and
$3,768,728, respectively. Amortization of film costs in fiscal 1996 and 1995
included $112,000 and $729,000, respectively, related to revisions in
estimates of amounts to be received in the future from certain completed
projects. Costs related to revenues in fiscal 1996 consisted of $2,579,277.
Write-offs of projects in the development stage were $103,404 and $335,233
for the years ended June 30, 1996 and 1995, respectively.
24
<PAGE>
General and administrative expenses decreased to $3,567,611 in fiscal 1996
from $4,696,554 in fiscal 1995 or a decrease of $1,128,943. This decrease was
primarily attributable to the termination of certain unprofitable operations
of DSL, including related compensation and other expenses, somewhat offset by
legal fees incurred in connection with lawsuits with the former president and
owner of DSL.
During the fiscal year ended June 30, 1996, the Company agreed to settle
various litigation relating to DSL. The Company recorded $303,003 of income
relating to these settlement agreements for such year. One of such settlement
agreements has since been consummated upon terms described under "Business --
Legal Proceedings." During such year, the Company forgave the note receivable
and accrued interest (aggregate - $68,016) that was due from a company (owned
by Alison and Patricia Meyer, who are the adult children of Irwin Meyer, the
Chief Executive Officer of the Company) that formerly provided the Company
with the services of its present President and Chief Executive Officer and
others. See "Business -- Employment Agreements" and "Certain Transactions."
During the fiscal year ended June 30, 1996, the Company recorded
approximately $67,000 of interest income on notes receivable from related
parties that were received in connection with the sales of the Company's
Common Stock. Exclusive of this interest income, the decrease in interest
income was primarily due to a reduction in funds available for investment and
lower interest rates. Interest and financing expense for fiscal 1995
primarily consisted of interest paid on the Company's 7% subordinated notes
including $275,000 representing the market value of the shares of Common
Stock issued to the noteholders upon the repayment of the notes in December
1994.
YEAR ENDED JUNE 30, 1995 COMPARED TO YEAR ENDED JUNE 30, 1994
Revenues for the fiscal year ended June 30, 1995 were $5,290,745 compared
to $10,782,850 for the fiscal year ended June 30, 1994. Revenues for the year
ended June 30, 1995 primarily consisted of distribution fees from completed
projects (primarily Future Quest), fees from the television series Dave's
World which is airing on CBS and personal management fees. Revenues for the
year ended June 30, 1994 included $5,486,000 received from the
made-for-television movie Against the Wall, $4,365,104 of distribution fees
from completed projects, fees from Dave's World, and personal management
fees.
Amortization of film costs for fiscal 1995 and 1994 was $3,768,728 and
$4,316,300, respectively. Amortization of film costs in fiscal 1995 and 1994
included $729,000 and $1,000,000, respectively, related to revisions in
estimates of amounts to be received in the future from certain completed
projects. Costs related to revenues in fiscal 1994 consisted of amounts
expended on Against the Wall. Write-offs of projects in the development stage
were $335,233 and $233,903 for the years ended June 30, 1995 and 1994,
respectively.
General and administrative expenses decreased to $4,696,554 in fiscal 1995
from $5,621,365 in fiscal 1994 or a decrease of $924,811. This decrease was
primarily attributable to the termination of certain unprofitable operations
of DSL, and related reductions of compensation and other expenses as of
February 27, 1995. In connection with the restructuring of the Company's
management, the Company estimates that it will reduce its general and
administrative expenses from that which was anticipated by approximately
$195,000 for the year ending June 30, 1996.
Interest income for the fiscal year ended June 30, 1995 was $63,166
compared to $110,485 for the fiscal year ended June 30, 1994. The decrease in
interest income was primarily due to reduced funds available for investment
and lower interest rates. Interest and financing expense for fiscal 1995
includes interest on the Company's 7% subordinated notes including $275,000
representing the market value of the shares of Common Stock that were issued
to the noteholders upon the repayment of the notes.
The provision for note receivable of $270,000 for fiscal year June 30,
1995 relates to a loan made to the then president of DSL which was secured by
stock options previously granted to this individual. Since the market price
of the Company's Common Stock was substantially below the exercise price of
these options, the Company established an allowance for the entire amount of
this note. Reduction in "Deferred participations" of $427,260 represents
adjustments relating to the estimated amounts payable to a third party based
on certain revenues to be derived by the Company (a portion of which is
payable to such third party) from certain completed projects based on
projections of these revenues.
25
<PAGE>
The amount of general and administrative expenses to be incurred in the
future is dependent on the level of the Company's operations including
projects in production. As noted under "Use of Proceeds" and "Business," the
Company plans to expand its personal management division and to form an
international distribution division as well hire support staff to manage the
financial aspects of the Company's operations and to maintain its books and
records. These developments are likely to result in a material increase in
the Company's general administration expenses during the forthcoming twelve
months.
LIQUIDITY AND CAPITAL RESOURCES
As of June 30, 1996, the Company had cash and cash equivalents of $336,415
and accounts receivable of $222,200 (aggregate -- $558,615). At such date,
the Company also had accounts payable and accrued expenses of $433,136 and
notes payable of $600,000 (aggregate -- $1,033,136).
The Company's cash commitments for the forthcoming twelve months ending
June 30, 1997 include estimated base compensation to its officers and key
independent contractors of approximately $1,004,000, office rent of
approximately $230,000 and notes payable of $600,000 (aggregate --
approximately $1,834,000). The lease for the Company's office has been
extended to September 30, 1997. The Company also incurs other costs such as
salaries, related benefits, office expenses, professional fees and similar
expenses. General and administrative expenses, including compensation to
officers and key independent contractors, aggregated approximately $3,567,611
for the year ended June 30, 1996.
The Company's cash receipts are principally derived from the exhibition
and distribution of its completed projects, producers fees and personal
management fees. The Company's cash receipts are affected by various factors
including the timing of the exhibition and distribution of its completed
projects and the number of projects produced for which the Company receives
producers fees. Therefore, the Company is unable to predict reliably the
level or timing of its future cash receipts.
For the year ended June 30, 1996, the Company's cash receipts were
primarily derived from producers fees from currently airing television
series, personal management fees, international distribution licensing
revenue and a production fee received from a made-for-television movie which
aired in June 1996. This movie was produced by the Company pursuant to an
agreement which provides for payments to the Company for production costs.
Cash received from the distribution of the Company's completed projects
aggregated approximately $416,000 for the year ended June 30, 1996. In March
1996, the Company borrowed $100,000 from related parties for working capital
purposes. This loan was subsequently repaid from the proceeds of a note
issued in May 1996 to an unrelated party. This Note bears interest at the
rate of 10% per annum, is secured by the Company's adjusted gross
participation in revenues to be derived by the Company with respect to the
distribution of the Dave's World television series and is due and payable
(together with accrued interest) on the earlier of August 31, 1996 or the
effective date of the Registration Statement pertaining to the Offering. See
"Use of Proceeds." The lender has also received from the Company $13,500 in
fees pursuant to a consultation agreement.
In June 1996, the Company consummated the Bridge Financing pursuant to
which the Company received net proceeds of approximately $362,000 and issued
the Bridge Notes in the aggregate principal amount of $500,000 and the Bridge
Warrants. The net proceeds of the Bridge Financing were used by the Company
to complete film projects then in production, to commence the production and
development of new projects and to meet working capital and general corporate
requirements. The Company intends to use a portion of the proceeds of this
Offering to repay the principal amount, together with accrued interest, of
the Bridge Notes. See "Recent Bridge Financing" and "Use of Proceeds."
The Company is obligated to pay dividends on the shares of Series A Stock
which were sold in its December 1994 public offering. Dividends on the Series
A Stock, which aggregate $425,000 annually, may be paid in shares of the
Company's Common Stock; however, the Company has agreed with the Underwriter
that the Company will not pay dividends on the Series A Stock in shares of
Common Stock during the 18-month period following the date of this Prospectus
without the consent of the Underwriter. During the year ended June 30, 1996,
the Company issued an aggregate of 213,627 shares of its Common Stock in
payment of dividends on the Series A Stock. In addition, the Company issued
94,442 shares of Common Stock in August 1996 in payment of dividends on the
Series A Stock for the fiscal quarter ended June 30, 1996.
26
<PAGE>
During the year ended June 30, 1996, the Company's cash receipts and cash
balance at June 30, 1995 were primarily used for the payment of general and
administrative expenses, including compensation to its officers and key
independent contractors.
The Company's operations have been financed in large part by the net
proceeds received from public offerings of its securities in 1993 and in 1994
which aggregated approximately $8,910,000. As of June 30, 1996, a substantial
majority of the Company's outstanding stock options and warrants were
exercisable at prices substantially above the then prevailing market price of
the Company's Common Stock and management does not anticipate that the
Company will derive significant additional capital from the exercise of its
outstanding options or warrants unless the market price of its Common Stock
increases significantly during the remaining terms of such options and
warrants as to which there can be no assurance.
For the year ended June 30, 1996, the Company incurred an operating loss
of $1,739,993 a net loss of $1,447,666 (without giving effect to dividends of
$425,000 with respect to the Series A Stock which were paid by the Company by
issuing shares of Common Stock) and used $1,030,924 of cash in its
operations. Included in the Company's net loss is $68,016 representing the
forgiveness of a note receivable from a related party. See "Certain
Transactions."
Management currently anticipates that the Company will continue to incur
losses from operations through at least the first and second quarters of the
Company's current fiscal year. If the Company continues to report losses and
expends additional funds on development and production of projects in excess
of its current resources and future cash receipts, the Company will be
required to reduce its expenses to a level commensurate with revenues, raise
additional capital and/or borrow funds to sustain its operations. As of the
date hereof, the Company has no arrangements for external sources of
financing such as bank lines of credit. See "Risk Factors -- Factors
Affecting the Company's Liquidity and Capital Resources," "-- History of
Operating Losses; Uncertainty of Future Profitability; Accumulated Deficit"
and " Ability of the Company to Continue as a Going Concern."
The Company believes that the estimated net proceeds to be received by it
from the Offering, together with funds derived from its operations, will be
sufficient to meet the Company's working capital requirements for a period of
at least 12 months following the consummation of this Offering. Thereafter,
if the Company is unable to generate sufficient working capital from its
operations to meet its then prevailing business requirements, it will be
required to seek additional debt or equity financing from external sources
and there can be no assurance that such financing, if any, will be available
on terms acceptable to the Company. If such financing becomes necessary and
is not available, the Company's business would be materially adversely
affected.
Furthermore, if external sources of financing are not available to the
Company and future cash revenues are not sufficient to meet the Company's
cash needs, the Company plans to reduce the compensation of its officers,
office staff and other personnel and the number of development projects that
it will fund. While management has effected significant reductions in its
general and administrative expenses during the past year, the Company has not
made any specific plans or entered into any agreements to reduce the level of
its expenditures in the event that such reductions become necessary in the
future.
For income tax reporting purposes, the Company uses an October 1 year-end.
At June 30, 1996, the Company had unutilized federal and state net operating
loss carryforwards of approximately $11,600,000 which expire through 2010.
Utilization of these net operating loss carryforwards may be limited in any
one year by, other factors. Upon consummation of the Offering, an "ownership
change" within the meaning of Section 382 of the Internal Revenue Code will
have occurred which, in turn, will significantly restrict the availability of
such net operating loss carryforwards by reason of the foregoing provision of
the Internal Revenue Code and rules and regulations thereunder.
INFLATION
Inflation has not had a material effect on the Company.
27
<PAGE>
BUSINESS
The Company is engaged in the acquisition, development, production and
distribution of dramatic, comedy, documentary and instructional television
series, movies and theatrical motion pictures ("projects"). The Company's
projects are distributed in the United States and in international markets
for exhibition on standard broadcast television (network and syndication),
basic cable and pay cable, video and theatrical release. The Company is also
engaged in the business of personal management of performers and writers.
The Company's completed projects include Dave's World, a comedy series
that airs on the CBS television network, Lily Dale, a movie produced for the
Showtime cable network, Future Quest, a series that originally aired on the
Public Broadcasting System ("PBS"), and What's Love Got To Do With It, a
theatrical motion picture released by Disney's Touchstone Pictures. The
Company receives fees for providing producer and executive producer services
and is generally also entitled to a profit participation from the projects.
The Company manages the careers of 15 performers and writers, including
Julia Louis-Dreyfus (Seinfeld), George Newborn (Father of the Bride),
Rosaline Allen (Seaquest), and Michael Stoyanov (Blossom). The Company
intends to increase the staff of its personal management division in order to
attempt to expand its client roster.
Acquisition of Properties. Properties are usually acquired by the Company
through options for a nominal fee against a more substantial purchase price.
Options enable the Company to develop the property during the option period
before committing to its acquisition. Having an option also enables the
Company to secure a financing or production commitment including payment of
the purchase price of the property before actually purchasing such property.
Option periods customarily run for a minimum of one year and contain
provisions that enable the Company to extend the option for additional
periods upon payment of an extension fee. Terms of options vary significantly
and are dependent upon, among other factors, the professional reputation and
standing of the author or other owner of the property, the level of revenues
or profits that the Company estimates may be derived from the exploitation of
the property and the estimated cost of further development and production of
the property. Various agreements relating to these projects provide for
payments to writers upon their production. Certain options also provide for
the optionee to participate in net profits.
Development and Packaging of Projects. Projects may be developed from true
stories or original fictional material in the form of outlines or first-draft
screenplays or teleplays. The Company is continuously engaged in acquiring
and developing new properties. It is the Company's practice to secure a
financing or production commitment for a project from third parties,
including broadcast and cable networks, studios, distributors and independent
financing sources, prior to expending substantial sums in the development
process. However, the Company does advance its own funds to meet the interim
costs of development and production for these projects which are then repaid
to the Company pursuant to the production contracts.
During the development phase of a project, a screenplay, teleplay or
outline of the program is written, tentative commitments are sought from
buyers or licensees, such as studios, networks, and independent financing
sources, and a proposed production schedule and budget are prepared. Often
these projects are created, acquired and developed (including specifically
selected talent such as directors and actors), so that they may be offered to
broadcast, financial and distribution entities as a more attractive project.
This process is known in the entertainment business as "packaging." The
Company believes that packaging a literary property enhances its ability and
opportunities to obtain favorable production, financing and distribution
commitments.
Production, Producer and Executive Producer Services. Production of a
project is divided into three phases: pre-production, principal photography
and post-production.
Upon receiving final approval from its buyer or financing source (such as
a television network or studio), the project is put into the pre-production
phase. During this phase, agreements with talent including performers, a
director and the production staff are completed. Locations are selected and
arrangements are made for sets, props, equipment and other production
requirements. The pre-production phase may continue for several weeks for a
made-for-television movie and up to several months for a theatrical motion
picture. After pre-production is completed, the production enters the
principal photography phase.
28
<PAGE>
During the principal photography phase, the project is produced on tape or
film. Actors perform on sets, in the studio and on location in accordance
with a pre-determined schedule and budget established by the producer.
Principal photography for a made-for-television movie is usually completed in
approximately three to four weeks while principal photography for a
theatrical motion picture could require several months. Upon completion of
principal photography, the project enters the post-production phase.
During the post production phase, the film shot during principal
photography is transformed into a completed project. The post-production
phase includes editing, addition of sound effects, musical scoring and
implementing other technical processes required to complete the project.
The Company provides producer and executive producer services in
connection with the production of its projects and is involved in all phases
of their production. The Company receives fees for these services and is
generally entitled to a percentage of future profits from these projects. The
Company received producers fees for producing the theatrical motion picture
What's Love Got to Do With It and executive producer fees for each of its
movies-for-television and for the television series Dave's World and Can't
Hurry Love. The Company was not responsible for any of the production costs
of these projects, but is entitled to participate in profits from each of
these projects.
Distribution of Completed Projects. Pursuant to its agreements with third
party financing sources, the Company may retain certain rights to distribute
its projects in international and domestic markets. The Company then
distributes the projects after a certain period of time has expired or after
the project has been exhibited or released on a specific number of occasions.
Completed projects are distributed by the Company or by independent third
parties who have the right to distribute these properties in domestic and
international markets for specific periods of time. These distribution
companies retain a percentage of the revenues received from the distribution
of the projects and are entitled to recover certain expenses relating to such
distribution. Where available, the Company obtains advances against domestic
and international licensing revenues. On certain occasions, these advances
may be used to finance development and production of these projects. See
"International Sales and Distribution."
Personal Management. The Company's personal management division currently
manages the careers of 15 performers and writers at various stages in their
careers. The compensation paid is based on the income generated by these
clients. Among the Company's client's are Julia Louis-Dreyfus (Seinfeld),
George Newborn (Father Of The Bride), Rosaline Allen (Seaquest), Michael
Stoyanov (Blossom), Nancy Allen, John Robert Hoffman, Douglas Sills and Linda
Kozlowski.
The Company's production and development capabilities may provide a source
of projects and opportunities for the actors and writers whose careers are
managed by the personal management division of the Company. The personal
management business complements the Company's production and development
capabilities by providing sources of talent for the "packaging" of projects,
an increasingly important aspect of the entertainment industry. Personal
managers often function as producers or executive producers with respect to
projects for which their clients have been engaged, realizing a greater
amount of revenue in the form of producer or executive producer fees, in lieu
of a management fee, as well as potentially obtaining a profit participation
in such projects.
The personal management business is a service business which is not
capital intensive; therefore, the revenues and profits derived from the
operation of the personal management business are usually significantly
greater than the costs of conducting such operations.
The Company intends to increase the staff of its personal management
division in order to allow its principal manager to concentrate on the
expansion of the number of higher income generating clients. The remaining
members of the staff of the division will attempt to build a larger base of
clients whose careers have not yet reached the highest levels of professional
achievement, but who have demonstrated the potential for such achievement.
MARKETS FOR COMPANY PRODUCTIONS
Movies-for-Television. There is a significant domestic and international
market for movies-for- television ("MFT"). The Company has produced five
movies-for-television since 1991. See "Completed Projects." The
29
<PAGE>
Company has been able, and believes it will continue to be able, to develop
and produce motion pictures for television at costs which do not exceed its
domestic license fees and any applicable international advances. These
license fees, whether paid to the Company by networks, cable or pay-TV
companies and international broadcasters, generally allow the licensee to
broadcast the movies-for-television a limited number of times. In certain
instances, all of the remaining rights to these MFTs belong to the Company.
Additional profits may be realized from domestic syndication and the
exploitation of the MFTs in basic cable, pay cable and video in domestic and
international markets. The Company intends actively to continue to produce
movies-for-television. The Company may also produce MFT's on a fee basis,
where the broadcaster bears all of the production risks and the Company
receives a production fee plus a percentage of profits.
Television Series. Television series represent a source of current and
future revenues for the Company. The Company has produced an aggregate of six
television series since 1991, including Dave's World, which has aired, and is
currently airing, on the CBS television network. See "Completed Projects - TV
Series" under this caption. The cost of a television series may be financed
(in whole or in part) from licensing fees and international distribution
advances. These fees are derived from domestic television networks and/or
foreign broadcasters in exchange for exclusive rights to broadcast or
distribute the series in specified markets for specified periods of time.
After the expiration of these rights, additional revenues may be derived from
relicensing these series in the same or other markets such as domestic
syndication and basic cable, pay cable and video in domestic and
international markets.
Theatrical Motion Pictures. There are very active domestic and
international markets for theatrical films. To date, the Company has produced
one film, What's Love Got To Do With It, which was released in June 1993 by
Disney's Touchstone Pictures. To the extent that the Company produces
theatrical motion pictures in the future, it will seek to have such
productions financed by major film studios, distributors, independent
financing sources or a combination thereof.
COMPLETED PROJECTS
The Company has produced programming in the following categories:
Movies-For-Television. From 1991 to the present, the Company has developed
and produced five movies-for-television consisting of The Price She Paid
(CBS), The Secret Passion of Robert Clayton (USA), When A Stranger
Calls . . . Back (Showtime), Against The Wall (HBO) and Lily Dale (Showtime).
The Company's first movie-for-television, The Price She Paid, starred Loni
Anderson and Anthony John Denison and was broadcast on the CBS television
network in March 1992 and April 1993. This movie was put into development by
CBS, which paid all development costs, and was packaged by Creative Artists
Agency, Inc. The Company has licensed this movie to World International
Network for broadcast outside North America and Canada under the title Plan
of Attack for 25 years.
During fiscal 1992, the Company produced a movie-for-television, The
Secret Passion of Robert Clayton, starring John Mahoney and Scott Valentine,
which aired on the USA Network and was produced in association with Wilshire
Court Productions, a Paramount Communications Company. The movie is owned by
Wilshire Court Productions. The Company received executive producer fees for
this movie and a continuing profit participation.
The Company's television movie, When A Stranger Calls . . . Back, staring
Charles Durning and Carol Kane was aired on Showtime on April 4, 1993. This
project is owned by MCA Television Entertainment. For its services as
executive producer, the Company received executive producer fees and a
continuing profit participation.
The Company produced the movie-for-television, Against The Wall, which
premiered on Home Box Office on March 26, 1994, staring Kyle MacLachlan and
Samuel Jackson, Jr. The project is owned by Home Box Office. The Company
received executive producer fees and a continuing profit participation.
In June 1996, the Company's television movie Lily Dale, written by
Pulitzer Prize and two time Academy Award winning author Horton Foote, aired
on Showtime. The movie starred Mary Stuart Masterson, Sam Shepard, Stockard
Channing, Jean Stapleton and Tim Guinee. The movie is owned by Showtime. The
Company received executive producer fees and a continuing profit
participation.
30
<PAGE>
TV Series. The Company has produced 74 episodes of the CBS comedy series,
Dave's World, which airs on the CBS television network. CBS has ordered 22
new episodes of this series for the 1996-1997 television season. The
production of the new episodes will commence in the summer of 1996. The
Company anticipates that in the event of the syndication of the series, it
will derive revenues from the syndication of this series in future fiscal
periods. The Company also produced 19 half-hour episodes of Can't Hurry Love
which began airing on CBS in September 1995. This series has not been
renewed.
Reality/Documentary Programming. The Company's reality/documentary
programming consists of six television series -- Hollywood Stuntmakers I and
II, Superstars of Action, FX Masters, Hollywood Babylon, Future Quest and
Mysterious Forces Beyond -- and A Day With, a one hour special.
Hollywood Stuntmakers I and II, a 26 half-hour episode television series
hosted by James Coburn for the Discovery Channel, features Hollywood's best
stuntmen and women in action. The series initially aired on The Learning
Channel.
Superstars of Action, a 26 half-hour episode television series hosted by
Robert Wagner, is a biography series that profiles various action stars
including Steve McQueen and Arnold Schwarzenegger. Superstars of Action is
produced for the German broadcaster Beta-Taurus and is licensed to The
Learning Channel.
FX Masters, a 13 half-hour episode television series hosted by Christopher
Reeve for The Learning Channel, takes a behind the scenes look at how special
effects and movie magic are made. FX Masters is currently licensed to the
Discovery Network.
Hollywood Babylon is a 26 half-hour episode television series hosted by
Tony Curtis. This series is based primarily on the original international
best selling book of the same name by Kenneth Anger. Hollywood Babylon
explores the hidden underside of Hollywood through live re-creations and
archival film footage and photographs. Hollywood Babylon is being distributed
worldwide by Pandora International.
Future Quest is a 22 half-hour episode television series hosted by actor
Jeff Goldblum. Experts in several science disciplines compare the futuristic
visions of pop culturists with the current breakthrough advances in science
and technology. The series continues to be licensed overseas. Future Quest
aired on the Public Broadcasting System ("PBS").
Mysterious Forces Beyond is a 26 half-hour episode television series which
explores psychic phenomenon. The investigative series employs its news
gathering resources to uncover the facts behind some of the world's most
confounding mysteries, including telekinesis, psychic healing and ghosts.
Mysterious Forces Beyond aired on The Learning Channel and has also been
pre-sold to Canadian broadcaster Western International Communication, where
the series was produced.
The Company also completed production of a one-hour reality special
entitled A Day With where famous entertainment personalities, including Tom
Hanks, were interviewed. A Day With aired on the Fox Broadcasting Network in
June 1996.
"How To" Instructional Programming. The Company has produced 65 episodes
of Laurie Cooks Light & Easy, a cooking show which aired on the Learning
Channel. Cookbook author Laurie Burrows Grad shows viewers how to prepare
light and easy meals. Laurie is joined in the kitchen by a series of chefs
and celebrity friends, including Wolfgang Puck, Jill St. John and Florence
Griffith Joyner. Laurie Cooks Light & Easy is licensed to The Learning
Channel and being distributed internationally by Unapix International. The
Company has also produced ten episodes of Home Green Home, an instructional
series concerning home gardening hosted by Keely Shaye Smith. Home Green Home
is licensed to PBS and is being distributed internationally by Unapix
International.
Management of the Company is currently seeking to generate additional
revenue sources from its "How To" Instructional Programming as well as
considering the potential expansion of its business through the development
of additional programming of this type. Since "How To" Instructional
Programming is often consumer-product related and lends itself to
interactive programming, the Company is currently evaluating the advisability
of establishing computer web sites, direct video sales, endorsed product
sales by the individual personalities (hosts) of each "How To" series and
tie-ins with corporations that manufacture or sell products in the specific
areas (for example, cooking and gardening) as potential sources of additional
revenue. There can be no assurance, however, that the Company will succeed in
expanding this area of its business, or that such expansion, if implemented,
will be profitable to the Company.
31
<PAGE>
Theatrical Motion Pictures. The Company produced the theatrical film
What's Love Got To Do With It, for which each of its stars, Angela Bassett
and Laurence Fishburne, was nominated for an Academy Award. The film was
released by Disney's Touchstone Pictures in June 1993. Touchstone Pictures
owns the copyright for this film. The Company received executive producer
fees and has a continuing profit participation for its services as producer.
Although the Company does not, and does not currently intend to, invest
funds in the production of additional theatrical motion pictures, it
continues to develop and acquire rights to theatrical motion picture
projects. If the Company is successful in its attempts to develop these
theatrical motion picture projects, the Company anticipates that the studio,
independent finance source, distributor, or a combination of these sources,
would be responsible for the financing the production of such theatrical
projects. In such event, the Company would receive a fee for its production
services as well as a profit participation in the project.
PROJECTS IN DEVELOPMENT
The Company has projects in various stages of development on a continuing
basis. These projects consist of television series, movies-for-television and
theatrical motion pictures. The Company periodically evaluates the expected
use of its projects in development to determine if they will be further
developed or produced (either by itself or with others), sold or abandoned.
Decisions as to projects in development are made by management on a
case-by-case basis after considering all relevant factors.
The Company currently has agreements for the development of the following
movies-for-television projects with the following companies in various stages
of development:
A Son's Fight for Justice - ABC - teleplay being written.
Silent Cheer - ABC in association with Disney Television - teleplay being
written.
Tapestry - Fox Broadcasting - teleplay being written.
The Passion of Ayn Rand - Showtime - currently casting.
The Company has scripts, properties or projects under option which
management is now in the process of developing and renaming for submission to
networks, studios or financing sources for production for television release
or series or theatrical release. As of this date, however, there can be no
assurance that any of the specific projects identified above or any of the
scripts or other projects which the Company has under option will result in
completed projects, or if completed, that such projects will be profitable to
the Company.
INTERNATIONAL SALES AND DISTRIBUTION
From January 1991 to present, the Company entered into licensing
agreements with various international distributors relating to several of the
Company's productions including Hollywood Stuntmakers I and II, Superstars of
Action, Forces Beyond, Laurie Cooks Light & Easy, Future Quest, The Price She
Paid and Hollywood Babylon.
The Company currently intends to establish a separate international
distribution division or wholly-owned subsidiary to sell and distribute and
obtain distribution advances or guarantees for Company productions and for
productions acquired from other unaffiliated production entities. It is
management's view that the Company will benefit from the growth in
international markets for U.S. television programming, the contractual
arrangements with significant foreign broadcasters and the potential
additional revenues and profits the Company may derive from its own
international distribution operations as opposed to retaining third party
distributors. To accomplish its objectives in establishing an international
distribution division, it will be necessary for the Company to increase
significantly the number of completed projects (whether produced by the
Company or acquired from others) with respect to which it will have
international distribution rights. In certain instances, the Company may have
to advance funds to procure distribution rights from unaffiliated entities.
See "Use of Proceeds." For the foregoing reasons, there can be no assurance
that the operation of an international distribution business will be
successful or profitable for the Company.
32
<PAGE>
EMPLOYEES
The Company employs 16 persons on a full-time basis, including two
independent contractors. Of such persons, five are executives, four are
producers and the balance are clerical and administrative employees. The
Company believes that it has satisfactory relationships with its employees.
The Company recently hired a Chief Financial Officer and plans to add
support staff to manage the financial aspects of the Company's operations and
to maintain its books and records. The addition of its own financial
personnel will enable the Company to replace the outside service organization
currently retained by the Company to perform such functions at an annual cost
of approximately $100,000. The Company also plans to establish and staff a
international distribution division as well as to expand its personal
management division. It may also add personnel to the Company's production
staff. It is estimated by management that the staffing of these new or
expanded operations of the Company will require that it hire up to eight new
employees, two of whom will be at the executive level, during the forthcoming
12 month period. See "Use of Proceeds."
In connection with certain of its activities, such as development and
production of projects, the Company has and expects to continue to utilize
the services of independent third parties. The extent of the Company's
utilization of these services will be determined on a project-by-project
basis. The Company believes that such services are available from numerous
sources at competitive rates.
The Company is a party to collective bargaining agreements with the
Directors Guild of America, the Screen Actors Guild and the Writers Guild of
America, but it is not a party to any other collective bargaining agreement.
In connection with its production and other activities, the Company may
employ personnel, such as writers, directors and performing artists, who are
members of unions that are parties to collective bargaining agreements. It is
conceivable that some of the Company's future business activities will be
affected by the existence of collective bargaining agreements relating to
persons whom it may employ who are members of unions. Strikes or other work
stoppages by members of these unions could delay or disrupt the Company's
activities but the extent to which the existence of collective bargaining
agreements may affect the Company in the future is not currently
determinable. See "Risk Factors -- Labor Relations."
COMPETITION
The television and feature film industries are highly competitive and
involve a substantial degree of risk. Many companies compete to obtain the
literary properties, creative personnel, talent, production personnel and
financing which are essential to produce and market the Company's products.
See "Risk Factors -- Television and Feature Film Industry; Intense
Competition."
The Company's principal competitors are the major motion picture studios,
U.S. cable and television networks and numerous independent production
companies. Most of the Company's principal competitors have greater financial
resources than those currently, or in the foreseeable future likely to
become, available to the Company and are in a better position than the
Company to obtain literary properties, attract talent, produce projects and
effect broad market distribution of their completed projects. There can be no
assurance that the Company will be able to continue to initiate, develop and
complete projects which will result in the production of
movies-for-television, television series or mini-series or theatrical release
on a basis that will prove profitable to the Company in light of the intense
competition encountered by the Company in all significant phases of its
production and distribution activities.
The Company's ultimate success also depends, and will continue to depend,
upon its ability to produce programming for television and theatrical release
which has significant appeal in highly competitive entertainment markets
which are subject to such unpredictable factors as the preferences of the
viewing public. Preferences of the public change and a shift in demand could
cause the Company's current projects to lose their appeal. Television and
feature films also compete with many other forms of entertainment and leisure
time activities, certain of which include new areas of technology (i.e.,
video games and home videos), the impact of which cannot be predicted.
REGULATION OF MOTION PICTURE AND TELEVISION INDUSTRY
The Code and Ratings Administration of the Motion Picture Association of
America, an industry trade association, decides ratings for age group
suitability for domestic theatrical distribution of motion pictures. U.S.
33
<PAGE>
television stations and networks, as well as foreign governments, impose
restrictions on the content of television programming. To the extent that the
Company's projects do not comply with certain of these regulations, they may
be effectively prohibited from exhibition on applicable television stations,
networks and in foreign territories, or may be edited accordingly.
The television industry is subject to governmental regulation by the
Federal Communications Commission (the "FCC"). The networks are currently
limited by the Financial Interest and Syndication Rules of the FCC in the
amount of programming they may produce and the rights which they may retain
in programs. These rules were recently relaxed in favor of the networks. The
relaxation of the Financial Interest and Syndication Rules could adversely
impact the Company as a result of potential increased competition from the
networks.
PROPERTIES
The Company leases approximately 6,350 square feet located at 9150
Wilshire Boulevard, Beverly Hills, California for its corporate offices
pursuant to a lease which expires on September 30, 1997. The current annual
rent expense is approximately $230,000. The Company believes that its current
facilities are sufficient for its current needs and its needs for the
foreseeable future.
LEGAL PROCEEDINGS
In December 1995, the Company's Board of Directors terminated the
employment of Ronald Lightstone and removed him as the Company's Chairman of
the Board. On January 4, 1996, the Company instituted legal proceedings
against Mr. Lightstone in the Los Angeles County Superior Court (the
"California Superior Court"), seeking, among other relief, compensatory
damages arising out of alleged breaches by Mr. Lightstone of his fiduciary
duties to the Company, rescission of the stock purchase agreement and related
documents executed in connection with Mr. Lightstone's purchase in November
1995 of 375,000 shares of the Company's Common Stock (and the cancellation of
such shares), declaratory relief with respect to the Company's rights and
duties and the terms of Mr. Lightstone's employment, and return of certain
payments made by the Company to Mr. Lightstone during the term of his
employment.
In January 1996, Mr. Lightstone filed a cross-complaint in the California
Superior Court against the Company and Irwin Meyer, the Company's President
and Chief Executive Officer, seeking damages in excess of $3,000,000 for
alleged breach of a written employment agreement. Mr. Lightstone contends,
among other matters, that the terms of his employment by the Company are
governed by a written agreement between him and the Company and that,
pursuant to such agreement, his employment was wrongfully terminated by the
Company. The Company has denied that a binding written employment agreement
was entered into with Mr. Lightstone, alleging instead that the agreement to
which Mr. Lightstone refers was never properly authorized and was expressly
rejected by the Company's Board of Directors. The Company believes that Mr.
Lightstone's claims are without merit and intends to vigorously defend the
claims in the cross-complaint.
On June 28, 1996, the Company and its affiliates effected a settlement of
all disputes and pending litigation with Drew S. Levin, Joseph Cayre, DSL
Entertainment Group, Ltd. ("DSL") and Simply Style Productions, Inc.
(collectively, the "DSL Parties"). Pursuant to the terms of the settlement,
the Company received the sum of $308,000 (including $130,000 paid by DSL to
the Company in late January 1996), representing repayment of indebtedness
plus late payment charges. Upon receipt of such repayment, the Company caused
the cancellation of a $383,000 promissory note of Drew S. Levin currently
held by DSL Productions, Inc., a subsidiary of the Company, and released
shares of DSL which represented a 14.9% equity interest in DSL and which had
been pledged to the Company as security for the repayment of such
indebtedness. In connection with the settlement, Mr. Levin surrendered to the
Company for cancellation options to purchase 100,000 shares of Common Stock
of the Company which constituted the remaining portion of the options that
had been granted to him in 1994 (See "Management -- Executive Compensation").
In addition, under the settlement, Joseph Cayre retained ownership of 31,250
shares of the Company's Common Stock which were issued to Mr. Cayre in
connection with the acquisition of DSL Productions, Inc. by the Company in
May, 1994. As part of the settlement, however, Mr. Cayre relinquished his
right to a participation in revenues to be derived from certain TV series,
the value of which participation at the time of such settlement was carried
on the books of the Company at $280,000.
34
<PAGE>
Simultaneously with the foregoing settlement, the Company sold its 5%
equity interest in DSL for a payment in cash of $209,500.
The Company has also agreed in principle to settle the lawsuit entitled
DSL Entertainment, Joint Venture, a California Joint Venture v. DSL
Productions, Inc. et al. pending in California Superior Court. In connection
with such settlement, the Company has agreed to pay to DSL Entertainment,
Joint Venture, a California Joint Venture ("DSLJV") $50,000 in equal monthly
installments of $5,000, to issue to Cypress Entertainment - 1, L.P.
("Cypress") 32,500 shares of its Common Stock and to grant to Cypress
warrants (having a term of two years) to purchase an additional 25,000 shares
of its Common Stock for an exercise price equal to the market price of the
Company's Common Stock on the day immediately preceding the date of issuance
of such warrants. The settlement of this action is subject to execution by
the parties of a definitive settlement agreement and related documentation
and, as of the date of this Prospectus, it is uncertain whether the
settlement of this litigation upon the terms described above will ultimately
be effected.
The Company is not a party to any other material legal proceedings.
35
<PAGE>
MANAGEMENT
DIRECTORS, EXECUTIVE OFFICERS AND KEY EMPLOYEES
The directors and executive officers of the Company are as follows:
<TABLE>
<CAPTION>
Name Age Position(s) Held
---- --- ----------------
<S> <C> <C>
Irwin Meyer .................... 61 President, Chief Executive Officer, Chairman of
the Board and Director
Arthur Bernstein ............... 33 Senior Vice President and Director
Lenore Nelson .................. 46 Vice President -- Finance and Chief Financial
Officer
William Melamed, Jr. ........... 39 Senior Vice President TPEG Management, Inc.
Rhonda Bloom ................... 43 Vice President -- Development
Michael D. Dempsey(1)(2) ....... 53 Director
Michael Levy(2) ................ 55 Director
Ben Lichtenberg(1) ............. 41 Director
</TABLE>
(1) Audit Committee Member
(2) Compensation Committee Member
Directors are elected to an annual term that expires at the Company's
annual meeting of stockholders.
Irwin Meyer has served as a director of the Company since its inception in
1989. From August 1989 until February 1990, he served as President and Chief
Executive Officer of the Company. In February 1990, Mr. Meyer became
Co-Chairman of the Board of the Company and, in January 1991, became Chairman
of the Board, a position he held until June 1992. From 1988 to July 1994, Mr.
Meyer was a director of Ventura Entertainment Group Ltd., the Corporation's
former parent ("Ventura"), and from May 1988 to December 1990 he was
President of Ventura. Mr. Meyer was elected President and Chief Executive
Officer of the Company in February 1995 and has served as Chairman of the
Board since April 1996. Mr. Meyer was an Executive Producer of five of the
Company's made-for-television movies and the television series Hollywood
Babylon. Mr. Meyer was nominated for the Producer of the Year by the
Producers Guild of America in 1995. In 1977, he produced the musical Annie
for which he received the Antoinette Perry ("Tony") Award, the New York Drama
Critics Circle Award, the Drama Desk Award, the Outer Critics Circle Award
and the Cue Magazine Golden Apple Award. Mr. Meyer is a member of the Academy
of Motion Picture Arts and Sciences and the Academy of Television Arts and
Sciences. He holds a B.S. from New York University.
Arthur Bernstein has served as a director of the Company since March 1995,
served as Vice President -- Business and Legal Affairs of the Company from
September, 1991 to June 1992 and has served as Senior Vice President since
June 1992. From July 1989 to August 1991, Mr. Bernstein was Director of Legal
and Business Affairs for New World Entertainment Ltd. From 1987 to June 1989,
he was Assistant General Counsel of Four Star International, Inc. Mr.
Bernstein holds a Bachelor of Science degree in finance and marketing from
Philadelphia College of Textiles and Sciences and a Juris Doctor degree from
Temple University.
Lenore Nelson has served as the Company's Vice President -- Finance and
Chief Financial Officer since July, 1996. From 1994 until joining the
Company, Ms. Nelson served as Executive Vice President and Chief Financial
Officer of The Kushner-Locke Company, a publicly-traded diversified
entertainment company. From 1990 to 1994, she served as a Senior Vice
President of the Entertainment Industries Group of Imperial Bank, a
publicly-traded bank. Prior thereto, she was employed as a Vice President of
the Entertainment Industries Group of the Bank of California, a subsidiary of
Mitsubishi Bank of Japan, and held various financial and other positions with
companies in the entertainment industry. Ms. Nelson holds a Bachelor of
Science degree in film and broadcasting from Boston University and Masters
degree in business management from California State University Northridge.
William Melamed, Jr. has served as Senior Vice President of the Company's
talent management subsidiary, TPEG Management, Inc. since April 1994. From
July 1992 until April 1994 he served as Vice President of Krost/Chapin
Management, Inc., now known as TPEG Management, Inc. In 1987 Mr. Melamed
formed Bill Melamed Management, which managed the careers of actors and
writers. Mr. Melamed holds a Bachelor of Science degree in speech from
Northwestern University. After graduating from Northwestern University, Mr.
Melamed worked as a political consultant in fundraising and corporate public
affairs.
36
<PAGE>
Rhonda Bloom has served as Vice President--Development of the Company
since June 1995. From 1990 to 1995, Ms. Bloom was Vice President--Development
of the Larry Thompson Organization where she served as supervising producer
on the CBS telefilms Separated by Murder and Broken Promises: Taking Emily
Back. Prior to 1990, she served as Director of Development at David Blatt
Productions and, prior thereto, Pompian-Atamian Productions. She holds a
B.A. in film from Wesleyan University and an M.A. in film production from the
University of Southern California.
Michael Levy has served as a director of the Company since February 1995.
Mr. Levy began his career as a theatrical agent in 1964. He represented
numerous actors (Angelica Huston, Debra Winger, Sophia Loren and Peter
O'Toole) and directors (Milos Forman, Sidney Sheldon, Billy Wilder and Ingmar
Bergman) and has been responsible for packaging numerous major motion
pictures and television series. Mr. Levy left the agency business in 1981 to
become President and CEO of the CBS Theatrical Film Group, a division of CBS
Entertainment. In 1984, Mr. Levy formed his own production company, Michael
I. Levy Enterprises. Mr. Levy has produced a number of theatrical feature
films including Francis Ford Coppola's Gardens of Stone (Tri-Star),
Masquerade (MGM), Prelude to a Kiss (Twentieth Century Fox) and Eye for an
Eye (Paramount). Since 1993, Mr. Levy has also provided personal management
services to actors, writers and directors.
Ben Lichtenberg has served as a director of the Company since May 1996.
Mr. Lichtenberg is currently a Managing Director of First Colonial Securities
Group, an investment banking and brokerage firm headquartered in New Jersey.
Prior to joining First Colonial in 1992, Mr. Lichtenberg served in similar
capacities with other investment firms, including Butcher & Singer and Bryn
Mawr Investment Group. Prior thereto, he was employed as a certified public
accountant. Mr. Lichtenberg is a graduate of the Wharton School of the
University of Pennsylvania.
Michael D. Dempsey has served as a director of the Company since May 1996.
Mr. Dempsey is a senior partner of the law firm of Dempsey & Johnson, P.C.,
Los Angeles. Prior to his founding such firm, he was a partner at various
other firms, including Lillick, McHose & Charles (now merged into Pilsbury,
Madison & Sutro); Finley, Kumble, Wagner, Heine, Underberg, Manley, Myerson &
Casey; Myerson & Kuhn, and Shea & Gould. Mr. Dempsey has been a practicing
attorney for over 25 years. He graduated magna cum laude from San Fernando
Valley State College (now California State University -- Northridge) and
holds a Juris Doctor degree from the University of California Los Angeles
School of Law.
DIRECTOR INDEMNIFICATION
The Delaware Supreme Court has held that a director's duty of care to a
corporation and its stockholders requires the exercise of an informed
business judgment. Having become informed of all material information
reasonably available to them, directors must act with requisite care in the
discharge of their duties. The Delaware General Corporation Law permits a
corporation through its Certificate of Incorporation to indemnify its
directors from personal liability to the corporation or its stockholders for
monetary damages for breach of fiduciary duty of care as a director, with
certain exceptions. The exceptions include a breach of the director's duty of
loyalty, acts or omissions not in good faith or which involve intentional
misconduct or knowing violations of law, improper declarations of dividends,
and transactions from which the directors derived an improper personal
benefit. The Company's Certificate of Incorporation indemnifies its
directors, acting in such capacity, from monetary liability to the extent
permitted by this statutory provision. The limitation of liability provision
does not eliminate a stockholder's right to seek nonmonetary, equitable
remedies such as injunction or rescission to redress an action taken by
directors. However, as a practical matter, equitable remedies may not be
available in all situations and there may be instances in which no effective
remedy is available.
EMPLOYMENT AGREEMENTS
In October 1995, the Company entered into agreements with Irwin Meyer, for
his services as Chief Executive Officer of the Company, and with Mountaingate
Productions LLC ("Mountaingate") for the services of Mr. Meyer and others as
producers and/or executive producers and to perform other duties.
Mountaingate is a California limited liability company of which Alison Meyer
and Patricia Meyer, the adult daughters of Irwin Meyer, are the sole members.
The agreement with Mountaingate provides for annual compensation to
Mountaingate of $262,000 plus a $1,500 monthly automobile allowance and the
agreement with Mr. Meyer provides for annual
37
<PAGE>
compensation to Mr. Meyer of $50,000. The term of each such agreement expires
on June 30, 1998. The agreements are terminable by the Company in the event
of Mr. Meyer's death or disability. In such event, the Company shall pay
Mountaingate a guaranteed fee of $262,000 for one year. The Company may also
terminate these agreements for "cause" (as defined in the agreements).
Mountaingate and Mr. Meyer may terminate their respective agreements in the
event of a material breach thereof by the Company or for "good reason" (as
defined in the agreements). In such event, the Company shall be obligated to
pay all amounts due thereunder for the balance of their respective terms. In
the event that the Company materially breaches either agreement after a
"change in control" (as defined in the agreements), Mountaingate and Mr.
Meyer, respectively, shall be entitled to a lump sum payment equal to three
times their then current total annual compensation. In November 1995, the
Company also sold 500,000 shares of its Common Stock to Mountaingate. See
"Certain Transactions." Irwin Meyer has no direct or indirect economic
interest in such securities and he expressly disclaims beneficial ownership
of any shares of Common Stock owned by Mountaingate. See "Risk Factors --
Reliance on Key Personnel."
Arthur Bernstein is employed as Senior Vice President of the Company
pursuant to an employment agreement, as amended, which expires on December
31, 1996. Mr. Bernstein's annual compensation is $105,000 plus a $750 monthly
automobile allowance. In connection with the amendment of his employment
agreement, Mr. Bernstein received a $12,000 bonus. The agreement is
terminable by the Company in the event of Mr. Bernstein's death or
disability. In such event, the Company is obligated to pay the aforesaid
compensation for one year. The Company may also terminate the employment
agreement for "cause" (as defined in this agreement). Mr. Bernstein may
terminate this agreement in the event of a material breach by the Company or
for "good reason" (as defined in this agreement). In such event, the Company
will be obligated to pay him all amounts due thereunder for the balance of
its term and all unvested stock options held by him shall vest. In the event
of a "change in control" (as defined in this agreement) of the Company, all
stock options issued to Mr. Bernstein shall vest and the Company shall, at
Mr. Bernstein's option, purchase shares of Common Stock owned by him at the
then market price and shall acquire all of his stock options for the
difference between the exercise price of such options and the greater of the
price at which the new controlling entity acquired its interest in the
Company or the then market price of the Common Stock.
In July 1996, the Company employed Lenore Nelson as its Vice President --
Finance and Chief Financial Officer. Ms. Nelson's compensation includes a
base salary of $150,000 plus incentives. In addition, (i) she was granted
options, effective August 15, 1996, to purchase 50,000 shares of Common Stock
at an exercise price equal to the fair market value of the Common Stock on
such date, 50% of which vested on such date and the remainder of which vest
on August 15, 1997, provided that Ms. Nelson is employed with the Company on
such latter date and (ii) commencing with the Company's fiscal year ending
June 30, 1997, in each year, if any, in which the Company achieves a net
profit of at least $1,000,000, she will be granted options to purchase 25,000
shares of Common Stock at an exercise price equal to the average market price
of the Common Stock during the month of June for the applicable year. Ms.
Nelson has agreed, on the same terms as those applicable to the other
officers of the Company, not to Transfer any such options, or any shares of
Common Stock issuable upon exercise of such options, for up to 18 months from
the effective date of the Registration Statement without the consent of the
Underwriter. See "Shares Eligible for Future Sale." All such options granted
or to be granted to Ms. Nelson prior to the end of such "lock-up" period are
or will be exercisable for a period of three years from the end of the
lock-up period. Ms. Nelson does not currently have a written employment
agreement with the Company; however, the Company has agreed that her
employment will not be terminated without at least 60 days' prior notice to
her.
BOARD COMMITTEES
The Board has recently formed a Compensation Committee whose purpose is to
review and approve compensation arrangements for top management and employee
compensation programs and to administer the Company's Stock Option Plan. The
Board also has formed an Audit Committee, whose purpose is to review and
evaluate the results and scope of the audit and other services provided by
the Company's independent auditors, as well as the Company's accounting
principles and system of internal accounting controls, and to review and
approve any transactions between the Company and its directors, officers or
significant stockholders. The members of the Compensation Committee are
Messrs. Dempsey and Levy and the members of the Audit Committee are Messrs.
Dempsey and Lichtenberg.
38
<PAGE>
COMPENSATION OF DIRECTORS
No fees are paid to members of the Board of Directors of the Company for
their services as directors. However, the independent directors of the
Company have been granted and currently hold options to purchase shares of
Common Stock at the following exercise prices:
<TABLE>
<CAPTION>
Options (No. Term of
Name of Director of Shares) Date(s) Granted Exercise Price(1) Options
------------------------- ------------- --------------- ----------------- ---------
<S> <C> <C> <C> <C>
Michael D. Dempsey ...... 6,250 May 29, 1996 $2.00 3 years
Michael Levy ............ 6,250 May 29, 1996 $2.00 3 years
12,500 March 1, 1995 $2.00 3 years
Ben Lichtenberg ......... 6,250 May 29, 1996 $2.00 3 years
</TABLE>
- ------
(1) The exercise price of each such option exceeded the market prices of the
Common Stock on date of grant.
It is the policy of the Company to reimburse directors for reasonable
travel and lodging expenses incurred in attending meetings of the Board of
Directors.
EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The following table sets forth information concerning the annual and
long-term compensation for services in all capacities to the Company for the
fiscal years ended June 30, 1996, 1995 and 1994, of those persons who were
(i) at June 30, 1996 the Chief Executive Officer and (ii) each other
executive officer of the Company whose annual compensation exceeded $100,000
(the "Named Officers") in such fiscal years:
<TABLE>
<CAPTION>
Long Term Compensation
Annual Compensation Awards Payouts
Name and Options All Other
Principal Position Year Salary ($) (# of Shares) Compensation ($)
---------------------- ------ ------------ ------------- ----------------
<S> <C> <C> <C> <C>
Irwin Meyer, 1996 312,000 -- 18,000 (4)
President and Chief 1995 281,000(1) (2) 13,500 (3)
Executive Officer 18,000 (4)
17,250 (5)
1994 260,000(1) -- 15,113 (3)
70,000 (5)
18,000 (4)
Arthur Bernstein 1996 109,040 -- 9,000 (4)
Senior Vice President 1995 108,587(6) 25,000 6,625 (4)
1994 101,058 -- 6,000 (4)
William Melamed, Jr. 1996 325,007(7) 12,500 12,000 (4)
Senior Vice President, 1995 129,878 -- 8,000 (4)
TPEG Management, Inc. 1994 153,818 -- --
</TABLE>
- ------
(1) Includes amounts paid to AliPat Productions Ltd. ("AliPat") or
Mountaingate Productions LLC which provided the Company with the
services of Mr. Meyer and others and amounts paid to Mr. Meyer in his
capacity as President and Chief Executive Officer of the Company.
(2) See "Certain Transactions."
(3) Represents participations in producer fees and net profits on projects
produced. These participations in producer fees and net profits on
projects produced have been discontinued.
(4) Automobile reimbursement.
(5) Advance against future compensation.
(6) Includes bonus payment of $12,000.
(7) Includes a base salary of $130,105 and commissions.
39
<PAGE>
OPTION/SAR GRANTS TABLE
The following table sets forth information concerning individual grants of
stock options to purchase the Company's Common Stock made to each Named
Officer during the fiscal year ended June 30, 1996.
<TABLE>
<CAPTION>
Number of Securities % of Total Options/SARs
Underlying Options/SARs Granted to Employees in Exercise or Base Price
Name Granted (#) Fiscal Year ($/Sh) Expiration Date
-------------------- ----------------------- ----------------------- ---------------------- ---------------
(a) (b) (c) (d) (e)
<S> <C> <C> <C> <C>
William Melamed, Jr. 12,500(1) 100% $1.12 --
</TABLE>
- ------
(1) Options granted to Mr. Melamed in May 1996 at an exercise of $1.12 per
share.
OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL
YEAR-END (JUNE 30, 1996) OPTION VALUES
No stock options were exercised by the Named Officers during fiscal 1996.
The following table sets forth certain information concerning the outstanding
options held by such Named Officers.
<TABLE>
<CAPTION>
Number of
Securities
Underlying Value of
Shares Unexercised Unexercised
Acquired Options at In-The-Money
On Value FY-End Options at
Name Exercise Realized($) # of Shares FY-End - $
-------------------- ---------- ----------- ------------- --------------- --------------
<S> <C> <C> <C> <C> <C>
Irwin Meyer (1) 0 0 0 Exercisable 0
0 Unexercisable 0
Arthur Bernstein 0 0 18,750 Exercisable 0
6,250 Unexercisable 0
William Melamed, Jr. 0 0 12,500 Exercisable 0
0 Unexercisable 0
</TABLE>
- ------
(1) Does not include options to purchase 75,000 shares of Common Stock
exercisable at $2.00 per share held by each of Alison Meyer and Patricia
Meyer, the adult daughters of Mr. Meyer. Mr. Meyer has no direct or
indirect economic interest in any such securities and he expressly
disclaims beneficial ownership of the options and underlying shares of
Common Stock held by Alison and Patricia Meyer.
40
<PAGE>
CERTAIN TRANSACTIONS
In February 1995, the Company and Harvey Bibicoff agreed to terminate Mr.
Bibicoff's employment as the Company's Chairman of the Board and Chief
Executive Officer and he resigned as an officer and director of the Company.
At such time, the Company entered into a consulting agreement with Bibicoff &
Associates, Inc., which is owned by Harvey Bibicoff, pursuant to which the
Company is entitled to receive consulting and advisory services from Mr.
Bibicoff. Compensation under this agreement, which expires on June 30, 1999,
consists of annual compensation of $80,000 and an annual bonus of not less
than 2% of all qualified offerings, as defined in the agreement, that he
arranges for the Company. To date, neither Mr. Bibicoff, nor Bibicoff &
Associates has arranged any offerings on behalf of the Company and such
persons will not receive any fees, bonuses or compensation in connection with
the Offering. In February 1996, the Company, Mr. Bibicoff and Bibicoff &
Associates agreed, among other matters, to terminate all of the approximately
214,500 options to purchase Common Stock then held by Mr. Bibicoff and
Bibicoff & Associates (which options were exercisable at prices ranging from
$5.00 to $13.00 per share) and to issue to Mr. Bibicoff new options to
purchase 100,000 shares of Common Stock at an exercise price of $2.00 per
share. Such new options expire on the third anniversary of the date of grant.
In November 1995, the Company sold, subject to the vesting requirements
described below, 500,000 shares of its Common Stock, at a purchase price of
$2.00 per share, to Mountaingate Productions, LLC, a California limited
liability company of which Alison Meyer and Patricia Meyer, the adult
daughters of Irwin Meyer, are the sole members ("Mountaingate"). Irwin Meyer
has no direct or indirect economic interest in any such securities and he
expressly disclaims beneficial ownership of the shares of Common Stock
purchased by Mountaingate.
The purchase price for these shares of Common Stock was paid by
Mountaingate by delivery of a promissory note (the "Note") to the Company.
The Note bears interest at the rate of 7% per annum, compounded semiannually.
Twenty five percent (25%) of the outstanding principal balance, and accrued
interest thereon, due under the Note are with recourse to the purchaser and
the remaining seventy five percent (75%) of the amounts due thereunder are
without recourse against the purchaser. The entire amount of principal and
accrued interest under the Note is secured by a pledge to the Company of the
Common Stock purchased with the proceeds of such borrowing. Twelve and
one-half percent (12.5%) of the original principal amount of the Note,
together with interest thereon, is due and payable on April 1, 1997; twelve
and one-half percent (12.5%) of the original principal amount of the Note,
together with interest thereon, is due and payable on October 1, 1998; and
the balance of the principal of and interest on the Note is due and payable
on October 1, 2000.
The shares of Common Stock acquired by Mountaingate are subject to
forfeiture to the Company (with a corresponding reduction in the Note) in the
event the employment of Mr. Meyer is terminated (other than termination as a
result of his death or disability or termination by the Company without
cause) prior to the applicable vesting date of such shares. Fifty percent
(50%) of the Common Stock purchased by Mountaingate vested on April 1, 1996,
25% vested on June 30, 1996, and 25% will vest on June 30, 1997.
Notwithstanding such vesting schedule, Mountaingate is entitled to vote all
of such shares of Common Stock.
In connection with the agreement between Mountaingate and the Company
pursuant to which Mountaingate provides the Company with the services of
Irwin Meyer and others, the agreement between the Company and AliPat
Productions Ltd. ("AliPat"), which formerly provided the Company with the
services of Mr. Meyer and others, was terminated and indebtedness of AliPat
to the Company in the amount of $68,016 was cancelled.
In addition, in November 1995 the Company issued to Ronald Lightstone,
then its Chairman, and to Charles Weber, then its Chief Operating Officer,
375,000 shares of Common Stock and 25,000 shares of Common Stock,
respectively, on substantially the same terms as those described above. None
of such shares issued to Mr. Lightstone had vested as of the date the Company
terminated Mr. Lightstone's employment and such shares were therefore
forfeited to the Company at such time. See "Business -- Legal Proceedings."
In connection with Mr. Weber's resignation from the Company in April 1996,
the Company waived the vesting and forfeiture provisions applicable to the
shares issued to Mr. Weber.
In May 1996, the Company issued to each of Alison Meyer and Patricia Meyer
options to purchase 75,000 shares of Common Stock at an exercise price of
$2.00 per share.
41
<PAGE>
Dempsey & Johnson, P.C., a law firm of which Michael Dempsey, a director
since May 1996, is a partner, currently provides legal services to the
Company and, since January 1, 1995, received fees for such services in the
amount of approximately $360,000.
First Colonial Securities Group, Ltd. ("First Colonial") an investment
banking firm of which Mr. Lichtenberg, a director since May 1996, is a
Managing Director and a stockholder, served as an underwriter in a public
offering of securities by the Company in December 1994. In such transaction,
First Colonial and its affiliates received compensation in the form of
underwriters' discounts and other fees totaling approximately $225,000 and
was granted a five year option to purchase up to 45,000 of the units sold in
such offering at a price of $7.00 per unit, $2.00 per unit above the initial
public offering price thereof. Such options have since been transferred by
First Colonial to certain employees of such firm, including Mr. Lichtenberg.
First Colonial is continuing, but is under no obligation, to act as a market
maker in the Company's securities for which it receives no compensation from
the Company.
The Company has agreed to file on one occasion, at the Company's expense,
and upon the request of M.H. Meyerson & Company, Inc. ("Meyerson") and First
Colonial, which acted as underwriters (the "1994 Underwriters") of the public
offering of units consisting of the Series A Stock and the Class B Warrants
in December 1994, a registration statement under the Securities Act to permit
the public sale of the 1994 Underwriters' Options and/or the underlying
securities. The Company has also agreed to provide "piggy-back" registration
rights to the holders of the 1994 Underwriters' Options. Both Meyerson and
First Colonial have agreed to waive their rights to have the Underwriters'
Options and underlying securities included in the Registration Statement
pursuant to which this Offering is being effected or to include any of such
securities in any registration statement filed by the Company within 18
months after the date hereof.
The Company also agreed to pay the 1994 Underwriters fees for services
rendered in the event that they originate a merger, acquisition, joint
venture or other transaction to which the Company is a party during the five
years following the closing of the December 1994 Offering. The amount of the
fee will range from 2% to 5% of the total consideration paid in any such
transaction. Neither Mr. Lichtenberg, a director of the Company, First
Colonial nor Meyerson will receive any fees or other compensation in
connection with this Offering.
The Company also granted the 1994 Underwriters the right to nominate one
person for the Company's Board of Directors for a period of three years. Such
nominee may be a director, officer, partner, employee or affiliate of the
underwriters. Mr. Lichtenberg, a Managing Director of First Colonial, was
elected a member of the Company's Board of Directors in May 1996, as a
nominee of the 1994 Underwriters.
Management believes that each of the transactions between the Company and
each officer and stockholder of the Company was made on terms no less
favorable to the Company than those that were available from unaffiliated
third parties. All future transactions, between the Company and its officers,
directors, principal stockholders and their affiliates including loan
transactions will be approved by a majority of the Board of Directors,
including a majority of the independent and disinterested outside directors
on the Board of Directors, and will be on terms no less favorable to the
Company than those that could be obtained from unaffiliated third parties.
42
<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth information as of September 10, 1996,
adjusted to reflect the sale of the shares of Common Stock underlying the
Units offered hereby, with respect to the beneficial ownership of Common
Stock by (i) each person known by the Company to be the beneficial owner of
five percent or more of the Company's Common Stock, (ii) each of the Named
Officers, (iii) each director, and (iv) all executive officers and directors
as a group:
<TABLE>
<CAPTION>
Percent of Percent of
Name and Address of Amount of Shares Class Before Class After
Beneficial Owner(1) Beneficially Owned(2)(3) Offering(3) Offering(3)
-------------------------------------------------- ------------------------ -------------- -------------
<S> <C> <C> <C>
Mountaingate Productions, LLC(4) ................. 650,000 18.3% 5.6%
12610 Promontory Rd.
Los Angeles, CA 90049
Irwin Meyer(5) ................................... 0 0 0
Arthur Bernstein(6) .............................. 18,750 * *
Michael Levy(7) .................................. 18,750 * *
Ben Lichtenberg(8) ............................... 30,091 * *
Michael Dempsey(9) ............................... 6,250 * *
William Melamed, Jr.(10) ......................... 12,500 * *
Officers and directors as a group (consisting of 6
persons)(11) .................................... 86,341 2.48% *
</TABLE>
- ------
* less than 1%
(1) The address of each of Messrs. Meyer, Levy, Melamed and Bernstein is
9150 Wilshire Boulevard, Beverly Hills, California 90212. The address of
Mr. Dempsey is 1925 Century Park East, Ste 2350, Los Angeles, California
90067 and the address of Mr. Lichtenberg is 401 N. Route 73, Marlton,
New Jersey 08053.
(2) See "Management -- Executive Compensation" and "Business -- Legal
Proceedings."
(3) Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission, and includes voting and investment
power with respect to shares. Shares of Common Stock subject to options
or warrants currently exercisable or exercisable within 60 days of the
applicable measurement date are deemed outstanding for computing the
percentage ownership of the person holding such options or warrants, but
are not deemed outstanding for purposes of computing the percentage
ownership of any other person.
(4) Includes (i) 500,000 shares of Common Stock purchased by Mountaingate
Productions, LLC, a California limited liability company
("Mountaingate"), in November, 1995 and (ii) currently exercisable
options to purchase an aggregate of 150,000 shares of Common Stock at an
exercise price of $2.00 per share held by Alison Meyer and Patricia
Meyer, the sole members of Mountaingate. Alison and Patricia Meyer are
the adult children of Irwin Meyer. Irwin Meyer has no direct or indirect
economic interest in any such securities and he expressly disclaims
beneficial ownership of the shares of Common Stock owned by Mountaingate
and the options held by Alison Meyer and Patricia Meyer.
(5) Does not include 500,000 shares of Common Stock owned by Mountaingate,
in which Mr. Meyer has no direct or indirect economic interest and in
which he disclaims any beneficial ownership.
(6) Consists of 18,750 shares of Common Stock which are issuable upon the
exercise of currently exercisable options at an exercise price of $2.00
per share.
(7) Consists of 18,750 shares of Common Stock which are issuable upon the
exercise of outstanding options at an exercise price of $2.00 per share.
(8) Includes (i) 303 shares of Common Stock, (ii) options to purchase 6,250
shares of Common Stock at an exercise price of $2.00 per share, all of
which are held by First Colonial Securities Profit Sharing Plan FBO Ben
Lichtenberg, (iii) 3,288 shares issuable upon conversion of shares of
the Company's Series A Stock held by such plan FBO Ben Lichtenberg and
(iv) 20,250 shares issuable upon exercise of underwriter's
43
<PAGE>
options held by Mr. Lichtenberg which were transferred to him by First
Colonial Securities Corp. following the public offering of such units by
the Company in December 1994. Each such underwriter's option entitles
the holder thereof to purchase one unit (consisting of one share of
Series A Stock and one Class B Warrant to purchase one-quarter of a
share of Common Stock at an exercise price of $8.00) at an exercise
price of $7.00 per unit.
(9) Consists of 6,250 shares of the Common Stock issuable upon the exercise
of outstanding options at an exercise price of $2.00 per share.
(10) Consists of 12,500 shares of Common Stock which are issuable upon the
exercise of outstanding options at an exercise price of $1.12 per share.
(11) Includes (i) 62,500 shares of Common Stock issuable upon the exercise of
outstanding options at exercise prices ranging from $1.12 to $2.00 per
share, (ii) 3,288 shares of Common Stock issuable upon conversion of
2,630 shares of the Company's Series A Stock and (iii) 20,250 shares
issuable upon exercise of underwriter's options held by Mr. Lichtenberg
which were transferred to him by First Colonial Securities Corp.
following the public offering of such units by the Company in December
1994, each of which entitles the holder thereof to purchase one unit
(consisting of one share of Series A Stock and one Class B Warrant) at
an exercise price of $7.00 per unit.
44
<PAGE>
SELLING SECURITYHOLDERS
An aggregate of 500,000 Redeemable Warrants which will be issued to
certain Selling Securityholders in exchange for the Bridge Warrants, together
with 500,000 shares of Common Stock issuable upon their exercise, are being
offered hereby, at the expense of the Company, for the account of such
Selling Securityholders. See "Recent Bridge Financing," "Concurrent Offering"
and "Shares Eligible for Future Sale." The Bridge Warrants were issued as
part of a private placement by the Company of Units consisting of $500,000
aggregate principal amount of 10% promissory notes and the Bridge Warrants
which was completed in June 1996. The $500,000 principal amount of Bridge
Notes, including accrued interest thereon, are to be repaid out of the
proceeds of this Offering. See "Use of Proceeds."
Sales of the Selling Securityholder Warrants and the underlying shares of
Common Stock may depress the price of the Units and the Common Stock or
Redeemable Warrants underlying the Units in any markets for such securities.
The following table sets forth information with respect to persons for
whom the Company is registering the Selling Securityholder Warrants and the
Selling Securityholder Shares for resale to the public in the Concurrent
Offering. Beneficial ownership of Redeemable Warrants and Common Stock by
such Selling Securityholders after the Offering will depend on the number of
securities sold by each Selling Securityholder in the Concurrent Offering.
None of the Selling Securityholders would own any securities, assuming that
each Selling Securityholder sold all securities offered hereby.
<TABLE>
<CAPTION>
Beneficial Ownership After the Offering and
Prior to Sales in the Concurrent Offering (1)
-----------------------------------------------------
Redeemable Warrants Common Stock
------------------------- -------------------------
Selling Securityholder Number Percentage Number Percentage
---------------------- --------- ------------ --------- -------------
<S> <C> <C> <C> <C>
Kal Zeff ................................................ 50,000 1.1% 50,000 *
Barry A. Saunders ....................................... 50,000 1.1% 50,000 *
Harlan I. Cohen ......................................... 45,000 1.0% 45,000 *
Katty N. Cohen .......................................... 5,000 * 5,000 *
Stephen J. Nicholas, M.D. ............................... 50,000 1.1% 50,000 *
Bernard and Miriam Pismeny (JTWROS) ..................... 50,000 1.1% 50,000 *
Nathaniel Silon, Revocable Trust ........................ 50,000 1.1% 50,000 *
Daniel and Dianne Minc (JTWROS) ......................... 50,000 1.1% 50,000 *
Dean H. Roller .......................................... 50,000 1.1% 50,000 *
Daniel A. Marino ........................................ 50,000 1.1% 50,000 *
Silver Limited .......................................... 50,000 1.1% 50,000 *
---------
Total ................................................... 500,000 11.1% 500,000 4.20
========= ============ ========= ============
</TABLE>
- ------
* Less than 1%
(1) Assuming no purchase by any Selling Securityholder of any Units, Common
Stock or Redeemable Warrants included in the Offering.
There are no material relationships between any of the Selling
Securityholders and the Company or any of its predecessors of affiliates. The
Securities offered by the Selling Securityholders are not being underwritten
by the Underwriter. The Selling Securityholders may sell the Selling
Securityholder Warrants and/or the Selling Securityholder Shares at any time
on or after the date hereof, provided that during the 18 month period
commencing on the date of this Prospectus prior consent is given by the
Underwriter. In addition, the Selling Securityholders have agreed that,
during the period ending on the second anniversary of the date of this
Prospectus, the Selling Securityholders will not sell such securities other
than through the Underwriter, and that the Selling Securityholders shall
compensate the Underwriter in accordance with its customary compensation
practices. Subject to these restrictions, sales of the Selling Securityholder
Warrants and/or the Selling Securityholder Shares may be effected from time
to time in transactions (which may include block transactions) in the over-
the-counter market, in negotiated transactions, or a combination of such
methods of sale, at fixed prices that may be changed, at market prices
prevailing at the time of sale, or at negotiated prices. The Selling
Securityholders may effect such transactions by selling the Selling
Securityholder Warrants and/or the Selling Security-
45
<PAGE>
holder Shares directly to purchasers or through broker-dealers that may act
as agents or principals. Such broker-dealers may receive compensation in the
form of discounts, concessions or commissions from the Selling
Securityholders and/or the purchasers of the Selling Securityholder Warrants
and/or the Selling Securityholder Shares for whom such broker-dealers may act
as agents or to whom they sell as principals, or both (which compensation as
to a particular broker-dealer might be in excess of customary commissions).
The Selling Securityholders and any broker-dealers that act in connection
with the sale of the Selling Securityholder Warrants and/or the Selling
Securityholder Shares as principals may be deemed to be "underwriters" within
the meaning of Section 2(11) of the Securities Act and any commission
received by them and any profit on the resale of such securities as
principals might be deemed to be underwriting discounts and commissions under
the Securities Act. The Selling Securityholders may agree to indemnify any
agent, dealer or broker-dealer that participates in transactions involving
sales of such securities against certain liabilities, including liabilities
arising under the Securities Act. The Company will not receive any proceeds
from the sales of the Selling Securityholder Warrants and/or the Selling
Securityholder Shares by the Selling Securityholders, although the Company
will receive proceeds from the exercise of the Selling Securityholder
Warrants. Sales of the Selling Securityholder Warrants and/or the Selling
Securityholder Shares by the Selling Securityholders, or even the potential
of such sales, would likely have an adverse effect on the market price of the
Units, the Redeemable Warrants and Common Stock.
At the time a particular offer of Selling Securityholder Warrants and/or
the Selling Securityholder Shares is made, except as herein contemplated, by
or on behalf of the Selling Securityholder, to the extent required, a
Prospectus will be distributed which will set forth the number of Selling
Securityholder Warrants and/or the Selling Securityholder Shares being
offered and the terms of the offering, including the name or names of any
underwriters, dealers or agents, if any, the purchase price paid by any
underwriter for shares purchased from the Selling Securityholder and any
discounts, commissions or concessions allowed or reallowed or paid to
dealers.
Under the Exchange Act, and the regulations thereunder, any person engaged
in a distribution of the securities of the Company offered by this Prospectus
may not simultaneously engage in market-making activities with respect to
such securities of the Company during the applicable "cooling-off" period
(two or nine days) prior to the commencement of such distribution. In
addition, and without limiting the foregoing, the Selling Securityholders
will be subject to applicable provisions of the Exchange Act and the rules
and regulations thereunder, including, without limitation, Rules 10b-6 and
10b-7, in connection with transactions in such securities, which provisions
may limit the timing of purchases and sales of such securities by the Selling
Securityholders.
46
<PAGE>
DESCRIPTION OF SECURITIES
The authorized capital stock of the Company consists of 50,000,000 shares
of Common Stock, $.001 par value, and 20,000,000 shares of Preferred Stock,
$.001 par value.
UNITS
Upon consummation of the Offering, 2,000,000 Units will be outstanding
(2,300,000 Units if the Underwriter's over-allotment option is exercised in
full). Each Unit consists of four shares of Common Stock and two Redeemable
Warrants. The securities included in each Unit will be separately tradeable
immediately upon issuance. The Company and the Underwriter may jointly
determine, based upon market conditions, to delist the Units upon the
expiration of the 30 day period commencing on the date of this Prospectus.
COMMON STOCK
As of September 10, 1996, there were 3,399,652 shares of Common Stock that
were held by 147 stockholders of record. There will be approximately
11,399,652 shares of Common Stock outstanding (or 12,599,652 shares if the
Underwriter's over-allotment option is exercised in full) after giving effect
to the sale of the Common Stock included in the Units.
The holders of Common Stock are entitled to one vote per share on all
matters to be voted upon by the stockholders. Subject to preferences that may
be applicable to any outstanding Preferred Stock, the holders of Common Stock
are entitled to receive ratably such dividends, if any, as may be declared
from time to time by the Board of Directors out of funds legally available
therefor. See "Dividend Policy." In the event of the liquidation, dissolution
or winding up of the Company, the holders of Common Stock are entitled to
share ratably in all assets remaining after payment of liabilities, subject
to prior distribution rights of Preferred Stock, if any, then outstanding.
The Common Stock has no preemptive or conversion rights or other subscription
rights. There are no redemption or sinking funds provisions applicable to the
Common Stock. All outstanding shares of Common Stock are fully paid and
nonassessable, and the shares of Common Stock to be issued upon completion of
the Offering will be fully paid and nonassessable.
PREFERRED STOCK
The Company's authorized capital stock includes 20,000,000 shares of
Preferred Stock $.001 par value per share. As of the date of this Prospectus,
the Company has no shares of Preferred Stock outstanding except for 1,000,000
shares of Series A 8 1/2 % Convertible Preferred Stock (the "Series A Stock")
described below. The Board of Directors has the authority, without
shareholder approval, to issue the Preferred Stock in one or more series and
to fix the relative rights and preferences thereof. The terms of such
Preferred Stock could include the right to vote, separately or with any other
series of Preferred Stock, on any proposed amendment to the Company's
Certificate of Incorporation or any other proposed corporate action,
including business combinations and other transactions. Such rights could
adversely affect the voting power of the holders of Common Stock. The Board
of Directors does not currently contemplate the issuance of any shares of
Preferred Stock. In addition, the ability of the Company to issue the
authorized but unissued shares of Preferred Stock could be utilized to impede
potential take-overs of the Company. See "Risk Factors -- Antitakeover
Effects of Provisions of the Certificate of Incorporation and Delaware Law."
SERIES A STOCK
As of the date hereof, 1,000,000 shares of Series A Stock are issued and
outstanding. Each share of Series A Stock is convertible at any time into
1.25 shares of the Company's Common Stock. Holders of the Series A Stock are
entitled to annual dividends of 8 1/2 % payable in cash or Common Stock of
the Company, at the Company's option based on the market price of the Common
Stock on the date of declaration of the dividend. See "Dividends" under this
caption. The holders of the Series A Stock are entitled to receive $5.00 per
share (plus accrued dividends) upon the liquidation, dissolution or winding
up of the Company, prior to any distributions to the holder of Common Stock.
The Series A Stock is nonvoting.
47
<PAGE>
DIVIDENDS
The Company has never paid a cash dividend on the Common Stock and
presently intends to retain any future earnings for investment and use in its
business operations. Furthermore, there can be no assurance that the
Company's operations will generate the revenues and cash flow required to
declare a cash dividend or that the Company will have legally available funds
to pay dividends on such Common Stock. Consequently, no cash dividends are
expected to be paid in the foreseeable future except to the extent required
to satisfy the Company's obligations with respect to its outstanding Series A
Stock.
Pursuant to the terms of the Company's outstanding Series A Stock which it
issued in a public offering consummated in December 1994, the Company, at its
option, may pay dividends on such stock in cash or in shares of its Common
Stock. The Company has agreed that it will not pay dividends on the Series A
Stock in shares of its Common Stock without the consent of the Underwriter
during the 18 month period commencing on the effective date of this
Prospectus. See "Risk Factors."
WARRANTS
As of the date of this Prospectus, the Company has outstanding warrants to
purchase an aggregate of 315,250 (assuming the issuance of 25,000 warrants in
settlement of certain litigation) shares of Common Stock. The warrants
include Class B Warrants to purchase 250,000 shares of the Company's Common
Stock at $8.00 per share which were issued as part of the units consisting of
1,000,000 Shares of the Company's Series A Stock and 250,000 Class B Warrants
offered and sold by the Company in December 1994.
The Class B Warrants contain provisions that protect the holders thereof
against dilution by adjustment of the exercise price in certain events, such
as stock dividends, stock splits, mergers, and other unusual events (other
than employee benefit and stock option plans for employees or consultants to
the Company).
Holders of warrants do not possess any rights as a stockholder of the
Company unless and until they exercise the warrants.
REDEEMABLE WARRANTS
The Redeemable Warrants will be issued pursuant to a warrant agreement
(the "Redeemable Warrant Agreement") between the Company and OTR Stock
Transfer Company (the "Warrant Agreement"), and will be evidenced by warrant
certificates in registered form. The following summary is qualified in its
entirety by the text of the Warrant Agreement, a copy of which has been filed
as an exhibit to the Registration Statement.
Each Redeemable Warrant entitles the registered holder thereof to purchase
one share of Common Stock at a price of $1.75 per share, subject to
adjustment, commencing on the date of issuance. The Redeemable Warrants
expire at 5:00 p.m. on September 11, 2001, (the "Expiration Date").
Commencing September 12, 1997, the Redeemable Warrants are subject to
redemption by the Company at a redemption price of $.05 per Redeemable
Warrant on 30 days' prior written notice, provided that either (i) the
average closing bid price (or last sales price) of the Common Stock, as
reported on NASDAQ (or on such exchange on which the Common Stock is then
traded), equals or exceeds 150% of the exercise price per share, subject to
adjustment, for any 20 trading days within a period of 30 consecutive trading
days ending on the fifth trading day prior to the date of notice or
redemption and (ii) the Company shall have obtained written consent from the
Underwriter to redeem the Redeemable Warrants. The holder of a Redeemable
Warrant will lose his right to purchase if such right is not exercised prior
to redemption by the Company on the date for redemption specified in the
Company's notice of redemption or any later date specified in a subsequent
notice. Notice of redemption by the Company shall be given by first class
mail to the holders of the Redeemable Warrants at their addresses set forth
in the Company's records.
The exercise price of the Redeemable Warrants and the number and kind of
shares of Common Stock or other securities and property to be obtained upon
exercise of the Redeemable Warrants are subject to adjustment in certain
circumstances including a stock split of, or stock division, combination or
recapitalization of, the Common Stock. Additionally, an adjustment would be
made upon the consolidation of the Company with or the
48
<PAGE>
merger of the Company with or into another corporation (other than a
consolidation or merger which does not result in any reclassification or
change of the outstanding Common Stock) so as to enable Redeemable Warrant
holders to purchase the kind and number of shares of stock or other
securities or property (including cash) receivable in such event by a holder
of the number of shares of Common Stock that might otherwise have been
purchased upon exercise of such Redeemable Warrant. No adjustment for cash
dividends, if any, will be made upon exercise of the Redeemable Warrants.
The exercise price of the Redeemable Warrants bears no relation to any
objective criteria of value and should not be regarded as an indication of
the future market price of the securities offered hereby. The Redeemable
Warrants do not confer upon the holder any voting or any other rights of a
stockholder of the Company. Upon notice to the Redeemable Warrant holders,
the Company has the right to reduce the exercise price or extend the
expiration date of the Redeemable Warrants.
The Redeemable Warrants may be exercised upon surrender of the Redeemable
Warrant certificate on or prior to the expiration date (or earlier redemption
date) of such Redeemable Warrant at the offices of the Warrant Agent, with
the form of "Election to Purchase" on the reverse side of the Redeemable
Warrant certificate completed and executed as indicated, accompanied by
payment of the full exercise price (by cashier's or certified check payable
to the order of the Warrant Agent) for the number of Redeemable Warrants
being exercised. The Redeemable Warrants will become void and of no value
upon the Expiration Date. If a market for the Redeemable Warrants develops,
the holder may sell the Redeemable Warrants instead of exercising them. There
can be no assurance, however, that a market for the Redeemable Warrants will
develop or continue. If a prospectus covering the shares of Common Stock
issuable upon the exercise or Redeemable Warrants is not kept effective and
current or if such shares are not qualified for sale in certain states,
holders of Redeemable Warrants desiring to exercise the Redeemable Warrants
will have no choice but either to sell such Redeemable Warrants or let them
expire. See "Risk Factors -- Potential Adverse Effect of Redemption of
Redeemable Warrants."
The Warrant Agreement provides that it may be amended at any time with the
written consent of registered holders representing at least 66 2/3 % of the
Redeemable Warrants then outstanding.
UNDERWRITER'S WARRANTS
Pursuant to the terms of the Underwriting Agreement between the Company
and the Underwriter, the Underwriter will receive 200,000 Underwriter's
Warrants for nominal consideration. See "Underwriting."
TRANSFER AGENT, REGISTRAR AND WARRANT AGENT
The Transfer Agent and Registrar for the Units, Common Stock and
Redeemable Warrants is Oxford Transfer & Registrar, Portland, Oregon. The
address of the Transfer Agent is 317 S.W. Alder, Suite 1120, Portland, Oregon
97204. OTR will also act as Warrant Agent for the Redeemable Warrants.
SHARES ELIGIBLE FOR FUTURE SALE
Of the 11,399,652 shares of Common Stock to be outstanding upon completion
of the Offering, approximately 10,500,442 shares of Common Stock, including
the 8,000,000 shares underlying the Units offered hereby, will be freely
tradeable without restriction under the Securities Act except for any shares
of Common Stock purchased by an "affiliate" of the Company (as that term is
defined under the rules and regulations of the Securities Act), which will be
subject to the resale limitations of Rule 144 under the Securities Act. The
remaining 899,210 shares of Common Stock outstanding are "restricted"
securities within the meaning of Rule 144 under the Securities Act and may be
sold pursuant to the conditions of such rule, including satisfaction of
certain holding period requirements. However, holders of options to purchase
an aggregate of 233,750 shares of Common Stock and holders of 500,000
restricted shares, including all officers and directors of the Company have
agreed not to directly or indirectly, issue, offer to sell, sell, grant an
option for the sale of, assign, transfer, pledge, hypothecate or otherwise
encumber or dispose of (collectively, "Transfer") any securities issued by
the Company without the prior written consent of the Underwriter for a period
of ending upon the earlier of (i) eighteen months from the date of this
Prospectus, or (ii) two months after the Underwriter and each broker-dealer
con-
49
<PAGE>
trolled by any affiliate of the Underwriter at the time the "lock-up"
agreement was entered into, if any, transfers all of the Underwriter's
Warrants and all securities issuable upon exercise of the Underwriter's
Warrants. An appropriate legend shall be marked on the face of the
certificates representing such securities.
The Redeemable Warrants underlying the Units offered hereby and the shares
of Common Stock underlying such Redeemable Warrants, upon exercise thereof,
will be freely tradeable without restriction under the Securities Act, except
for any Redeemable Warrants or shares of Common Stock purchased by an
"affiliate" of the Company, which will be subject to the resale limitations
of Rule 144 under the Securities Act. In addition, 500,000 Redeemable
Warrants and the shares of Common Stock underlying such Redeemable Warrants
are being registered in the Concurrent Offering. Holders of such Redeemable
Warrants have agreed not to Transfer such Redeemable Warrants, or the
underlying shares of Common Stock, for a period of 18 months from the date of
this Prospectus, without the prior written consent of the Underwriter and the
Company. An appropriate legend shall be marked on the face of the
certificates representing such securities.
In addition, without the consent of the Underwriter, the Company has
agreed not to sell or offer for sale any of its securities for a period of 18
months following the effective date of this Prospectus, except pursuant to
outstanding options and warrants and pursuant to the Company's existing
option plans provided that no option so granted shall have an exercise price
that is less than the fair market value per share of Common Stock on the date
of grant.
In general, under Rule 144 as currently in effect, a person (or persons
whose shares are required to be aggregated), including any affiliate of the
Company, who beneficially owns "restricted shares" for a period of at least
two years is entitled to sell within any three-month period, shares equal in
number to the greater of (i) 1% of the then-outstanding shares of the
Company's Common Stock or (ii) the average weekly trading volume of the
Company's Common Stock during the four calendar weeks preceding the filing of
the required notice of sale with the Securities and Exchange Commission. The
seller also must comply with the notice and manner of sale requirements of
Rule 144, and there must be current public information available about the
Company. In addition, any person (or persons whose shares are aggregated) who
is not, at the time of the sale, nor during the preceding three months, an
affiliate of the Company, and who has beneficially owned restricted shares
for at least three years, can sell such shares under Rule 144 without regard
to notice, manner of sale, public information or the volume limitations
described above.
No predictions can be made concerning the effect, if any, that future
sales of shares or the availability of shares for sale will have on the
market price prevailing from time to time. Nevertheless, sales of substantial
amounts of the Company's Common Stock in the public market could adversely
affect the then prevailing market price of the Common Stock.
50
<PAGE>
UNDERWRITING
Joseph Stevens & Company, L.P. (the "Underwriter") has entered into an
Underwriting Agreement with the Company pursuant to which, and subject to the
terms and conditions thereof, it has agreed to purchase from the Company, and
the Company has agreed to sell to the Underwriter on a firm commitment basis
all of the Units offered by the Company hereby.
The Underwriter has advised the Company that the Underwriter initially
proposes to offer the Units to the public at the public offering price set
forth on the cover page of this Prospectus and that the Underwriter may allow
to certain dealers concessions not in excess of $.10 per Unit, of which
amount a sum not in excess of $.05 per Unit may in turn be reallowed by such
dealers to other dealers. After the commencement of this Offering, the public
offering price, the concessions and the reallowances may be changed. The
Underwriter has informed the Company that the Underwriter does not expect
sales to discretionary accounts by the Underwriter to exceed five percent of
the securities offered by the Company hereby.
The Company has agreed to indemnify the Underwriter against certain
liabilities, including liabilities under the Securities Act. The company has
agreed to pay to the Underwriter a non-accountable expense allowance equal to
three percent (3%) of the gross proceeds derived from the sale of the Units
underwritten, $25,000 of which has been paid to date.
Upon the exercise of any Redeemable Warrants more than one year after the
date of this Prospectus, which exercise was solicited by the Underwriter, and
to the extent not inconsistent with the guidelines of the NASD and the Rules
and Regulations of the Commission, the Company has agreed to pay the
Underwriter a commission which shall not exceed five percent of the aggregate
exercise price of such Redeemable Warrants, payable upon exercise. The
Underwriter may act as the Company's exclusive agent with respect to the
solicitation of Redeemable Warrants, if any. However, no compensation will be
paid to the Underwriter in connection with the exercise of the Redeemable
Warrants if (a) the market price of the Common Stock is lower than the
exercise price, (b) the Redeemable Warrants were held in a discretionary
account, or (c) the Redeemable Warrants are exercised in an unsolicited
transaction. The Underwriter will not be entitled to any warrant solicitation
fee unless the Underwriter provides bona fide services in connection with any
warrant solicitation, and the investor designates, in writing, that the
Underwriter is entitled to such fee. Unless granted an exemption by the
Commission from Rule 10b-6 under the Securities Exchange Act of 1934, as
amended, the Underwriter will be prohibited from engaging in any
market-making activities with regard to the Company's securities for the
period from nine business days (or other such applicable periods as Rule
10b-6 may provide) prior to any solicitation of the exercise of the
Redeemable Warrants until the later of the termination of such solicitation
activity or the termination (by waiver or otherwise) of any right the
Underwriter may have to receive a fee. As a result, the Underwriter may be
unable to continue to provide a market for the Company's securities during
certain periods while the Redeemable Warrants are exercisable. If the
Underwriter has engaged in any of the activities prohibited by Rule 10b-6
during the periods described above, the Underwriter undertakes to waive
unconditionally its right to receive a commission on the exercise of such
Redeemable Warrants.
All officers and directors of the Company, and certain holders of Common
Stock and securities exercisable, convertible or exchangeable for shares of
Common Stock, have agreed not to, directly or indirectly, offer, sell,
transfer, pledge, assign, hypothecate or otherwise encumber any shares of
Common Stock or convertible securities, or otherwise dispose of any interest
therein, without the prior written consent of the Underwriter for a period
ending upon the earlier of (i) eighteen months from the date of this
Prospectus, or (ii) two months after the Underwriter and each broker-dealer
controlled by any affiliate of the Underwriter at the time the "lock-up"
agreement was entered into, if any, transfers all of the Underwriter's
Warrants and all securities issuable upon exercise of the Underwriter's
Warrants. An appropriate legend shall be marked on the face of certificates
representing all such securities.
The Company has granted to the Underwriter an option, exercisable within
45 days of the date of the Registration Statement to purchase from the
Company at the initial public offering price per Unit less underwriting
discounts and the non-accountable expense allowance, up to an aggregate of an
additional 300,000 Units for the sole purpose of covering over-allotments, if
any.
In connection with this Offering, the Company has agreed to sell to the
Underwriter, for nominal consideration, Underwriter's Warrants to purchase
from the Company 200,000 Units. The Underwriter's Warrants are
51
<PAGE>
initially exercisable at a price equal to 165% of the initial public offering
price per Unit and may be exercised at any time during the four year period
commencing on the second anniversary of the date of issuance. The shares of
Common Stock and Redeemable Warrants issuable upon exercise of the
Underwriter's Warrants are identical to those offered to the public provided
that the Redeemable Warrants underlying the Underwriter's Warrants are
initially exercisable at a price equal to 165% of the initial exercise price
of the Redeemable Warrants underlying the Units offered to the public. The
Underwriter's Warrants contain anti-dilution provisions providing for
adjustment of the number of warrants and exercise price under certain
circumstances. The Underwriter's Warrants grant to the holders thereof
certain rights of registration of the securities issuable upon exercise of
the Underwriter's Warrants.
The Company has agreed that for five years from the effective date of the
Registration Statement, the Underwriter may designate one person for election
to the Company's Board of Directors and that the Company will reasonably
cooperate with the Underwriter in respect of such designation. The Company
has also agreed to retain the Underwriter as the Company's financial
consultant for a period of 24 months commencing upon the consummation of the
proposed public offering and to pay the Underwriter $2,000 per month all
payable in advance on the closing date set forth in the Underwriting
Agreement.
The Underwriter acted as Placement Agent for the Bridge Financing and
received in connection therewith a commission of $50,000, a non-accountable
expense allowance of $15,000 and 150,000 placement agent warrants (the
"Placement Agent's Warrants") to purchase 150,000 shares of Common Stock at
an exercise price of $1.12 per share. The Placement Agent's Warrants have
been canceled prior to the consummation of this Offering. The Company also
paid the fees and disbursements of the Underwriter's legal counsel.
Joseph Stevens & Company, L.P. commenced operations in May 1994 and
therefore does not have extensive experience as an underwriter of public
offerings of securities. Joseph Stevens & Company, L.P., has acted as the
managing underwriter for five public offerings. Joseph Stevens & Company,
L.P. is a relatively small firm and no assurance can be given that it will be
able to participate as a market maker in the Units and no assurance can be
given that another broker-dealer will make a market in the Units, the Common
Stock or the Redeemable Warrants. See "Risk Factors -- Lack of Experience of
Underwriter."
Prior to the Offering there has been a limited public market for the
Common Stock and no public market for the Units or the Redeemable Warrants.
The Common Stock is currently traded on NASDAQ and the BSE. Consequently, the
initial public offering price of the Units and terms of the Redeemable
Warrants were determined by negotiation between the Company and the
Underwriter. Among the factors considered in determining such price and
terms, in addition to prevailing market conditions, included the history of
and the prospects for the industry in which the Company competes, the market
price of the Common Stock, an assessment of the Company's management, the
prospects of the Company, its capital structure and such other factors that
were deemed relevant. The offering price does not necessarily bear any
relationship to the assets, results of operations or net worth of the
Company.
The Company and the Underwriter may jointly determine, based upon market
conditions, to delist the Units upon the expiration of the 30 day period
commencing on the date of this Prospectus.
The foregoing is a summary of the principal terms of the agreements
described above and does not purport to be complete. Reference is made to a
copy of each such agreement which are filed as exhibits to the Registration
Statement. See "Additional Information."
LEGAL MATTERS
The validity of the securities offered hereby will be passed upon for the
Company by Dempsey & Johnson, P.C., Los Angeles, California. Maloney, Mehlman
& Katz, New York, New York has acted as special counsel to the Company in
connection with the Offering. Orrick, Herrington & Sutcliffe LLP, New York,
New York has acted as counsel to the Underwriter in connection with the
Offering.
EXPERTS
The financial statements included in this Prospectus and the Registration
Statement of which this Prospectus is a part have been audited by Kellogg &
Andelson Accountancy Corporation, independent public accountants, as
indicated in their reports with respect thereto, and are included herein in
reliance upon the authority of said firm as experts in accounting and
auditing and giving said reports.
52
<PAGE>
ADDITIONAL INFORMATION
The Company has filed with the Securities and Exchange Commission,
Washington, D.C. 20549, a Registration Statement on Form SB-2 under the
Securities Act with respect to the Units offered hereby. This Prospectus does
not contain all of the information set forth in the Registration Statement
and the exhibits and schedules to the Registration Statement. For further
information with respect to the Company and such Units offered hereby,
reference is made to the Registration Statement and the exhibits and
schedules filed as a part of the Registration Statement. Statements contained
in this Prospectus concerning the contents of any contract or any other
document referred to are not necessarily complete; reference is made in each
instance to the copy of such contract or document filed as an exhibit to the
Registration Statement. Each such statement is qualified in all respects by
such reference to such exhibit. The Registration Statement, including
exhibits and schedules thereto, may be inspected without charge at the
Securities and Exchange Commission's principal office in Washington, D.C.,
and copies of all or any part thereof may be obtained from such office after
payment of fees prescribed by the Securities and Exchange Commission.
53
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Report of Independent Auditors.................................................................. F-2
Consolidated Balance Sheets June 30, 1994, 1995 and 1996........................................ F-3
Consolidated Statements of Operations -- Years Ended June 30, 1994, 1995 and 1996............... F-4
Consolidated Statement of Shareholders' Equity -- Years Ended June 30, 1994, 1995 and 1996...... F-5
Consolidated Statements of Cash Flows -- Years Ended June 30, 1994, 1995 and 1996............... F-6
Notes to Consolidated Financial Statements...................................................... F-8
</TABLE>
F-1
<PAGE>
Board of Directors
The Producers Entertainment Group Ltd.
Beverly Hills, California
INDEPENDENT AUDITORS' REPORT
We have audited the accompanying consolidated balance sheets of The Producers
Entertainment Group Ltd. and Subsidiaries as of June 30, 1994, 1995 and 1996,
and the related consolidated statements of operations, shareholders' equity
and cash flows for the years then ended. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated 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 consolidated financial
statements are free of material misstatement. An audit includes examining, on
a test basis, evidence supporting the amounts and disclosures in the
consolidated financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as
well as evaluating the overall consolidated 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 The Producers Entertainment Group Ltd. and Subsidiaries as of June 30,
1994, 1995 and 1996 and the results of its operations and its cash flows for
the years then ended, in conformity with generally accepted accounting
principles.
The accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. As discussed in
Note 2 to the consolidated financial statements, the Company has incurred
recurring losses from operations and negative cash flows. These factors raise
substantial doubt about the Company's ability to continue as a going concern.
Management's plans in regard to these matters are further described in Note 2
including the consummation of a pending public offering of its equity
securities. The accompanying consolidated financial statements do not include
any adjustments that might result from the outcome of the uncertainty
relating to the Company's ability to continue as a going concern.
KELLOGG & ANDELSON
ACCOUNTANCY CORPORATION
Sherman Oaks, California
August 6, 1996
F-2
<PAGE>
THE PRODUCERS ENTERTAINMENT GROUP LTD. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JUNE 30, 1994, 1995 AND 1996
ASSETS
<TABLE>
<CAPTION>
1994 1995 1996
------------- -------------- --------------
<S> <C> <C> <C>
Cash and cash equivalents .............................. $ 964,387 $ 832,754 $ 336,415
Accounts receivable, less allowances of $113,165,
$36,421 and $12,934 ................................... 1,390,030 360,833 222,200
Notes receivable, less allowance of $270,000 -- 1995 ... -- 402,842 260,000
Receivables from related parties ....................... 458,294 116,229 18,983
Film costs, net ........................................ 4,610,704 2,104,503 772,777
Right to receive revenue ............................... -- 291,241 291,241
Fixed assets, at cost, less accumulated depreciation and
amortization of $117,738, $149,344 and $167,967 ....... 93,914 76,439 50,242
Other assets ........................................... 89,399 199,829 154,979
------------- -------------- --------------
Total assets .......................................... $ 7,606,728 $ 4,384,670 $ 2,106,837
============= ============== ==============
LIABILITIES AND SHAREHOLDER EQUITY
Notes payable .......................................... $ 588,750 $ -- $ 600,000
Accounts payable and accrued expenses .................. 1,348,950 847,595 433,136
Deferred participations based on estimated revenues .... 800,000 350,000 --
Deferred revenue ....................................... 3,466,901 598,708 --
------------- -------------- --------------
Total liabilities ..................................... 6,204,601 1,796,303 1,033,136
------------- -------------- --------------
COMMITMENTS -- -- --
SHAREHOLDERS' EQUITY:
Preferred stock, $.001 par value
Authorized 10,000,000 shares
Issued and outstanding 1,000,000 shares -- Series A .. -- 1,000 1,000
Common stock, $.001 par value
Authorized -- 50,000,000 shares
Issued -- 2,702,208, 2,847,192 and 3,585,819
Outstanding -- 2,421,599, 2,566,583 and 3,305,210 . 2,702 2,847 3,586
Additional paid-in capital ........................... 10,551,409 15,329,756 16,114,017
Accumulated deficit .................................. (8,141,792) (11,735,044) (13,182,710)
------------- -------------- --------------
2,412,319 3,598,559 2,935,893
Treasury stock, 280,609 shares at cost ................. (1,010,192) (1,010,192) (1,010,192)
Notes receivable from related parties from sales of
common stock, net of imputed interest discount ....... -- -- (852,000)
------------- -------------- --------------
Net shareholder equity .......................... 1,402,127 2,588,367 1,073,701
------------- -------------- --------------
Total liabilities and shareholder equity ........ $ 7,606,728 $ 4,384,670 $ 2,106,837
============= ============== ==============
</TABLE>
The accompanying notes are an integral part of
the consolidated financial statements.
F-3
<PAGE>
THE PRODUCERS ENTERTAINMENT GROUP LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED JUNE 30, 1994, 1995 AND 1996
<TABLE>
<CAPTION>
1994 1995 1996
-------------- -------------- ---------------
<S> <C> <C> <C>
Revenues ................................... $10,782,850 $ 5,290,745 $ 5,367,498
-------------- -------------- ---------------
Amortization of film costs ................. 4,316,300 3,768,728 857,199
Costs of projects sold ..................... 5,654,113 -- 2,579,277
-------------- -------------- ---------------
Total amortization and costs ............... 9,970,413 3,768,728 3,436,476
-------------- -------------- ---------------
Net revenues ............................... 812,437 1,522,017 1,931,022
Write-off of projects in development ....... 233,903 335,233 103,404
General and administrative expenses ........ 5,221,365 4,696,554 3,567,611
-------------- -------------- ---------------
Operating (loss) ......................... (4,642,831) (3,509,770) (1,739,993)
-------------- -------------- ---------------
Other income (expense):
Interest income .......................... 110,485 63,166 80,260
Interest and financing expense ........... (157,177) (303,908) (22,920)
Provision for note receivable ............ -- (270,000) --
Settlements of lawsuits .................. (400,000) -- 303,003
Reduction in deferred participations ..... 427,260 -- --
Forgiveness of receivable from related
party ................................. -- -- (68,016)
-------------- -------------- ---------------
Total other income (expense) ............ (846,692) (83,482) 292,327
-------------- -------------- ---------------
Net (loss) ................................. (5,489,523) (3,593,252) (1,447,666)
Dividend requirement of Series A Preferred
Stock .................................... -- (232,600) (425,000)
-------------- -------------- ---------------
Net (loss) applicable to common shareholders $(5,489,523) $(3,825,852) $ (1,872,666)
============== ============== ===============
Net (loss) per common share ................ $ (2.34) $ (1.52) $ (.63)
============== ============== ===============
Weighted average number of common shares
outstanding .............................. 2,341,500 2,513,130 2,967,483
============== ============== ===============
</TABLE>
The accompanying notes are an integral part of
the consolidated financial statements.
F-4
<PAGE>
THE PRODUCERS ENTERTAINMENT GROUP LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDER EQUITY
YEARS ENDED JUNE 30, 1994, 1995 AND 1996
<TABLE>
<CAPTION>
Series A
Preferred Stock Common stock
---------------------------- ----------------------------
Shares Issued Amount Shares Issued Amount
--------------- --------- --------------- ---------
<S> <C> <C> <C> <C>
Balance at July 1, 1993 .............. -- $ -- 2,451,667 $2,452
Exercise of stock options and warrants -- -- 250,541 250
Settlement of lawsuit ................ -- -- -- --
Net loss of DSL duplicated in
statement of operations ............. -- -- -- --
Net loss of DSL applicable to
subchapter S shareholders ........... -- -- -- --
Net loss ............................. -- -- -- --
--------------- --------- --------------- ---------
Balance at June 30, 1994 ............. -- -- 2,702,208 2,702
Sale of preferred stock and warrants
in public offering .................. 1,000,000 1,000 -- --
Issuance of shares for interest ...... -- -- 69,109 69
Exercise of stock options ............ -- -- 75,875 76
Dividend on preferred stock .......... -- -- -- --
Net (loss) ........................... -- -- -- --
--------------- --------- --------------- ---------
Balance at June 30, 1995 ............. 1,000,000 1,000 2,847,192 2,847
Issuance of common stock in payment of
dividends on preferred stock ........ -- -- 213,627 214
Sale of common stock to related
parties for notes receivable ........ -- -- 525,000 525
Net (loss) ........................... -- -- -- --
--------------- --------- --------------- ---------
Balance at June 30, 1996 ............. 1,000,000 $1,000 3,585,819 $3,586
=============== ========= =============== =========
Less notes receivable from related parties from sales of common stock, net of imputed interest
discount ........................................................................................
</TABLE>
(RESTUBBED TABLE CONTINUED FROM ABOVE)
<TABLE>
<CAPTION>
Additional Net
Paid-in Accumulated Treasury Shareholders'
Capital Deficit Stock Equity
------------- --------------- -------------- ---------------
<S> <C> <C> <C> <C>
Balance at July 1, 1993 .............. $11,658,443 $ (5,626,873) $(1,010,192) $ 5,023,830
Exercise of stock options and warrants 1,323,468 -- -- 1,323,718
Settlement of lawsuit ................ 400,000 -- -- 400,000
Net loss of DSL duplicated in
statement of operations ............. -- 144,102 -- 144,102
Net loss of DSL applicable to
subchapter S shareholders ........... (2,830,502) 2,830,502 -- --
Net loss ............................. -- (5,489,523) -- (5,489,523)
------------- --------------- -------------- ---------------
Balance at June 30, 1994 ............. 10,551,409 (8,141,792) (1,010,192) 1,402,127
Sale of preferred stock and warrants
in public offering .................. 4,175,467 -- -- 4,176,467
Issuance of shares for interest ...... 274,931 -- -- 275,000
Exercise of stock options ............ 454,299 -- -- 454,375
Dividend on preferred stock .......... (126,350) -- -- (126,350)
Net (loss) ........................... -- (3,593,252) -- (3,593,252)
------------- --------------- -------------- ---------------
Balance at June 30, 1995 ............. 15,329,756 (11,735,044) (1,010,192) 2,588,367
Issuance of common stock in payment of
dividends on preferred stock ........ (214) -- -- --
Sale of common stock to related
parties for notes receivable ........ 784,475 -- -- 785,000
Net (loss) ........................... -- (1,447,666) -- (1,447,666)
------------- --------------- -------------- ---------------
Balance at June 30, 1996 ............. $16,114,017 $(13,182,710) $(1,010,192) 1,925,701
============= =============== ============== ===============
Less notes receivable from related parties from sales of common stock, net of imputed
interest discount ...................................................................... (852,000)
---------------
$ 1,073,701
===============
</TABLE>
The accompanying notes are an integral part
of the consolidated financial statements.
F-5
<PAGE>
THE PRODUCERS ENTERTAINMENT GROUP LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED JUNE 30, 1994, 1995 AND 1996
<TABLE>
<CAPTION>
1994 1995 1996
--------------- -------------- --------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) ........................................... $ (5,489,523) $(3,593,252) $(1,447,666)
Net loss of DSL duplicated in statement of operations 144,102 --
Adjustments to reconcile net (loss) to net cash (used
in) provided by operating activities:
Amortization of film costs ........................ 4,316,300 3,768,728 857,199
Depreciation ...................................... 74,026 34,688 33,364
Write-off of projects in development .............. 223,903 335,233 103,404
(Gain) loss from settlement of lawsuits ........... 400,000 -- (303,003)
Cash from settlement of lawsuit ................... -- -- 517,500
Forgiveness of receivable -- related party ........ -- -- 68,016
Amortization of imputed interest discount ......... -- -- (67,000)
Provision for notes receivable .................... -- 270,000 --
Issuance of shares of common stock for interest ... -- 275,000 --
Reduction in deferred participations .............. -- (427,260) --
Changes in assets and liabilities:
Decrease (increase) in accounts receivable ...... (200,893) 720,588 138,633
Increase in notes receivable .................... -- -- (260,000)
Decrease (increase) in other assets ............. 38,690 63,700 (129,281)
(Decrease) increase in accounts payable and
accrued expenses ............................. (379,902) (524,095) 56,618
(Decrease) increase in deferred revenue ......... 1,640,240 (2,868,193) (598,708)
--------------- -------------- --------------
Net cash (used in) provided by operating activities .. 766,943 (1,944,863) (1,030,924)
--------------- -------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to film costs .............................. (5,168,513) (1,771,890) (87,479)
Purchases of equipment ............................... (12,926) (17,213) (7,167)
Decrease (increase) in receivables from related
parties ........................................... (101,650) (43,409) 29,230
--------------- -------------- --------------
Net cash (used in) investing activities .............. (5,283,089) (1,832,512) (65,415)
--------------- -------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Sale of units in public offering ..................... -- 4,176,467 --
Proceeds from borrowings ............................. 887,000 -- 700,000
Repayments of borrowings ............................. (1,504,750) (588,750) (100,000)
Proceeds from exercise of warrants and stock options . 1,323,718 454,375 --
Loan to former president of DSL ...................... -- (270,000) --
Payment of dividend on preferred stock ............... -- (126,350) --
Sale of stock by DSL ................................. -- -- --
--------------- -------------- --------------
Cash provided by financing activities ................ 705,968 3,645,742 600,000
--------------- -------------- --------------
Net (decrease) increase in cash and cash equivalents . (3,810,178) (131,633) (496,339)
Cash and cash equivalents:
Beginning of period .................................. 4,774,565 964,387 832,754
--------------- -------------- --------------
End of period ........................................ $ 964,387 $ 832,754 $ 336,415
=============== ============== ==============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
CASH PAID FOR:
Interest ............................................. $ 157,200 $ 39,000 $ 1,700
=============== ============== ==============
</TABLE>
The accompanying notes are an integral part
of the consolidated financial statements.
F-6
<PAGE>
THE PRODUCERS ENTERTAINMENT GROUP LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
During the year ended June 30, 1994, the Company agreed to settle a lawsuit,
subject to court approval, by issuing to the plaintiff stock purchase
warrants with an aggregate value of $400,000. The effect of this settlement
was reflected as an expense and corresponding increase to additional paid in
capital. These warrants subsequently expired unexercised.
As discussed in Note 3, as of February 27, 1995, the Company transferred
certain projects in development with carrying amount of approximately
$174,000 to a new corporation (DEG) in exchange for a 19.9% ownership
interest in DEG which was subsequently sold.
As discussed in Note 3, during the year ended June 30, 1996, the Company sold
an aggregate of 525,000 shares of its common stock to related parties for an
aggregate $1,050,000 principal amount of promissory notes.
As discussed in Note 6, during the year ended June 30, 1996, the Company
issued 213,627 shares of its common stock in payment of dividends on its
Series A preferred stock.
The accompanying notes are an integral part
of the consolidated financial statements.
F-7
<PAGE>
THE PRODUCERS ENTERTAINMENT GROUP LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization and Operations
The Producers Entertainment Group Ltd. (the Company) was incorporated
under the laws of the State of Delaware on August 10, 1989. The
Company is engaged in the acquisition, development, production and
distribution of dramatic, comedy, documentary and instructional
television series, made-for-television movies and theatrical motion
pictures. The Company is also engaged in personal management of the
careers of performers and writers. Unless the context indicates
otherwise, the term "Company" includes The Producers Entertainment
Group Ltd. and all of its subsidiaries.
Principles of Consolidation
The accompanying consolidated financial statements include the
accounts of the Company and its subsidiaries. All significant
intercompany accounts and transactions have been eliminated in
consolidation. Certain reclassifications have been made to the 1994
and 1995 financial statements to conform to the 1996 presentation.
Acquisition of DSL and Restatement of Financial Statements
In May 1994, the Company acquired all of the capital stock of DSL
Productions, Inc. and its affiliates (DSL) in exchange for 32,500
shares of its previously unissued common stock. This transaction was
accounted for as a pooling of interests. Accordingly, the
accompanying 1994 financial statements and notes have been restated
to include the accounts of DSL.
Revenue Recognition
Amounts received as license fees for projects in production are
deferred until the project becomes available for broadcast in
accordance with the terms of the licensing agreement and are
recognized as revenues at such time. Additional licensing and
distribution fees are recognized as earned in accordance with the
terms of the related agreements. Revenues from the sale of completed
productions are recognized upon their sale.
Cash and Cash Equivalents
Cash and cash equivalents include money market funds and certificates
of deposit with a maturity of three months or less.
Film Costs and Amortization
Film costs include the cost of completed projects, costs of projects
in production and costs expended on projects in development. Film
costs are stated at the lower of amortized cost or estimated net
realizable value. Amortization of completed projects is charged to
operations on an individual project basis in a ratio that the current
year's revenue bears to management's estimate of total revenues
(current and future years) from all sources. This is commonly
referred to as the individual-film-forecast method. Adjustments of
amortization resulting from changes in estimates of total revenues
are recognized in the current year's amortization. When a completed
project is fully amortized, its cost and related accumulated
amortization are removed from the accounts. If, in the opinion of
management, any property in the development stage is not planned for
use, the net carrying value of such property is charged to current
year's operations.
Costs Related to Projects Sold
Costs related to projects sold consist of direct costs incurred in
the production of projects that are subsequently sold to third
parties. The Company does not retain any ownership interest in these
projects and, accordingly, upon their sale, all incurred costs are
charged to operations. Participations in future profits from projects
that are sold are included in revenues when earned.
F-8
<PAGE>
THE PRODUCERS ENTERTAINMENT GROUP LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (Continued)
Depreciation and Amortization
Depreciation and amortization of fixed assets (consisting of
furniture, equipment and leasehold improvements) is provided on the
straight-line method over the estimated useful lives of the related
assets which range from three to five years.
Unclassified Balance Sheet
The Company has elected to present unclassified balance sheets in
accordance with SFAS No. 53.
Net (Loss) Per Common Share
Net (loss) per common share has been computed after deducting (in
1995 and 1996) the dividend requirement of the Company's Series A
Preferred Stock from net (loss) and is based on the weighted average
number of common shares outstanding during the periods. The assumed
conversion of the Series A Preferred Stock and the assumed exercise
of outstanding stock purchase warrants and options have not been
included because the effect would be anti-dilutive.
Reverse Stock Split
In June 1996, the Company effected a one-for-four reverse split of
the outstanding shares of common stock. This reverse stock split has
been retroactively reflected for all periods reported on in the
accompanying consolidated financial statements and notes.
Concentration of Credit Risk
Financial instruments that potentially subject the Company to
significant credit risks consist of cash and trade receivables. The
Company places its cash with high credit quality financial
institutions or in high quality short-term investments such as
insured certificates of deposit. At times, the cash in any one bank
may exceed the FDIC insured limit of $100,000. With regard to
receivables, the risk is relatively limited due to most customers
being either domestic or foreign broadcasting networks or established
domestic and foreign distributors.
Management Estimates
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.
NOTE 2 -- LIQUIDITY AND CAPITAL RESOURCES
The accompanying consolidated financial statements have been prepared
in conformity with generally accepted accounting principles which
contemplates the continuation of the Company as a going concern,
including the realization of assets and liquidation of liabilities in
the ordinary course of business. For the years ended June 30, 1994,
1995 and 1996, the Company incurred net losses of $5,489,523,
$3,593,252 and $1,447,666, respectively. During fiscal year ended
June 30, 1996, net cash used in operating activities was $1,030,924.
At June 30, 1996, the Company had cash and accounts and notes
receivable aggregating $818,615 and notes payable, accounts payable
and accrued expenses aggregating $1,033,136. At June 30, 1996 the
Company had shareholders equity of $1,073,701 including an
accumulated deficit of $13,182,710.
The Company's cash commitments for the year ending June 30, 1997
include payment of its current liabilities of $1,033,136,
compensation to officers and key independent contractors and office
rent of approximately $1,239,000. The Company also incurs other costs
such as salaries, related benefits,
F-9
<PAGE>
THE PRODUCERS ENTERTAINMENT GROUP LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
NOTE 2 -- LIQUIDITY AND CAPITAL RESOURCES - (Continued)
professional fees, office and other expenses. For the year ended June
30, 1996, general and administrative expenses, which include
compensation and rent, aggregated $3,567,611. Dividends on the
Company's Series A Preferred Stock aggregate $425,000 annually. At
the Company's option, these dividends may be paid in shares of the
Company's common stock. The Company's operations have been financed
in large part by the net proceeds received from prior public
offerings of its securities and proceeds received from exercise of
stock options and warrants. At June 30, 1996, substantially all of
the Company's outstanding stock options and warrants were exercisable
at prices substantially above the market price of the Company's
common stock. The Company has no arrangements for external sources of
liquidity such as bank line of credit. These conditions raise
substantial doubt about the Company's ability to continue as a going
concern.
The Company has filed a registration statement for a pending offering
of its securities. Management believes that the net proceeds
(estimated to be in excess of $6,000,000) from this offering,
together with funds derived from its operations will enable the
Company to continue as a going concern.
If the Company continues to incur cash losses and if external sources
of funds (including the net proceeds from the pending offering) are
not available to offset these cash losses, there will be substantial
doubts about the Company's ability to continue as a going concern.
The accompanying financial statements do not include any adjustments
that might result from the outcome of this uncertainty.
NOTE 3 -- RELATED PARTY TRANSACTIONS
During the year ended June 30, 1994, the Company advanced $70,000 to
a corporation that provided the Company with the services of its
present Chief Executive Officer and others. This advance was to be
repaid from future compensation payable to this corporation, bore
interest at 8% per annum, was due on December 31, 1994 and was
secured by certain stock options. The market price of the Company's
common stock was substantially less then the exercise prices of these
stock options. During the year ended June 30, 1995, this advance was
reduced by application of $13,500 of participations earned by this
corporation on certain of the Company's completed projects. During
the year ended June 30, 1996, the agreement to provide such services
was terminated and the outstanding balance of this advance, including
accrued interest, in the aggregate amount of $68,016 was forgiven by
the Company.
During the year ended June 30, 1996, the Company entered into
agreement to provide substantially similar services with a company of
which the adult children of this Chief Executive Officer are the sole
members (the "Loan-Out Company"). This agreement provides for annual
base compensation and other direct payments through June 30, 1998 in
the annual amount of $280,000. The Company also entered into an
employment agreement with its Chief Executive Officer which provides
for annual compensation of $50,000 through June 30, 1998. During
fiscal 1996, the Company borrowed $100,000 from the sole members of
the Loan-Out Company. This borrowing was repaid from the proceeds of
another borrowing (see Note 7).
During the year ended June 30, 1996, the Company sold an aggregate of
525,000 shares of its common stock to related parties in exchange for
an aggregate of $1,050,000 principal amount of promissory notes. Of
these shares, 500,000 were sold to the Loan-Out Company for
$1,000,000 principal amount of promissory notes and 25,000 shares
were sold to a then officer and director of the Company for $50,000
principal amount of promissory notes. The principal amounts of the
promissory notes received by the Company are payable as follows:
April 1, 1997- $131,250; October 1, 1998 -- $131,250; and October 1,
2000 -- $787,500. Interest on these notes is computed at an annual
rate of 7%, compounded semi-annually and is payable with the
principal of the notes. The notes are secured by the purchased shares
with the personal liability of the purchaser limited to 25% of the
principal amount (aggregate -- $262,500) plus accrued interest
thereon.
F-10
<PAGE>
THE PRODUCERS ENTERTAINMENT GROUP LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
NOTE 3 -- RELATED PARTY TRANSACTIONS - (Continued)
The 500,000 shares purchased by the Loan-Out Company were subject to
forfeiture and return to the Company (together with the related
promissory note) in the event of, among other things, the termination
of the employment of the Company's Chief Executive Officer. Through
June 30, 1996, 375,000 of these shares vested and the 125,000 share
balance will vest on June 30, 1997. Similar vesting and forfeiture
provisions applicable to the 25,000 shares sold to the former officer
were waived by the Company in connection with his subsequent
resignation.
These promissory notes have been recorded at their principal amount
less an imputed interest discount of approximately $265,000. This
imputed interest discount is being amortized over the term of the
notes to provide an effective interest rate of 12% per annum. During
the year ended June 30, 1996, the Company recorded approximately
$67,000 of interest income on these notes. The difference between the
imputed interest rate and the stated interest rate of the notes may
be deemed to be compensation to the purchasers of the shares.
The Company also sold 375,000 shares of its common stock to one of
its then officers and directors for $750,000 principal amount of
promissory notes on the same terms as the above sales. These shares
were subsequently forfeited and returned to the Company for
cancellation and the related promissory notes were canceled (see Note
11).
During the year ended June 30, 1996, the stock options held by the
sole members of the Loan-Out Company, which entitled them to purchase
an aggregate of 135,834 shares of the Company's common stock at
prices ranging from $7.50 to $13.00 per share, were canceled and
options to purchase an aggregate of 150,000 shares of common stock at
a price of $2.00 per share were granted. During the year ended June
30, 1996, stock options held by other related parties to purchase an
aggregate of 193,542 shares of common stock at prices ranging from
$6.00 to $13.00 per share were canceled and options to purchase an
aggregate of 112,500 shares of common stock at prices of $1.12 and
$2.00 per share were granted.
During the year ended June 30, 1994, the Company acquired DSL
Productions, Inc. and its affiliates ("DSL") in exchange for 32,500
shares of its previously unissued common stock. Prior to its
acquisition by the Company, DSL had made unsecured loans to its
President. These loans bore interest at 4.5% and aggregated
(including accrued interest) approximately $402,000. The former owner
of DSL had made advances to DSL prior to its acquisition by the
Company. These advances aggregated $2,687,000 at the date of
acquisition of DSL by the Company. A total of $1,887,000 of these
advances has been repaid. This individual was entitled to receive up
to a maximum of $800,000 solely out of revenues, as defined, received
from certain completed projects.
The Company had guaranteed the repayment of a $270,000 loan made by
the then President of DSL due to one of the former shareholders of
DSL. During the year ended June 30, 1995, the Company loaned this
individual $270,000 for the purpose of repaying this loan. This loan
bore interest at prime plus 1%, was due on December 31, 1997 and was
secured only by stock options previously granted to this individual
which entitled him to purchase an aggregate of 100,000 shares of the
Company's common stock through December 31, 1997 at a price of $10.88
per share. In 1995, due to the market price of the Company's common
stock being substantially below the exercise price of such stock
options, the Company established an allowance for the entire amount
of this note.
As of February 27, 1995, the Company entered into an agreement with
the former President of DSL which resulted in the termination of the
employment agreement with this individual. In connection with this
agreement, the Company transferred approximately $174,000 of projects
in development to a new corporation ("DEG") in exchange for a 19.9%
ownership interest in DEG. The remaining 80.1% of DEG is owned by the
former President of DSL. Subsequently, various claims and cross-
complaints were filed by the Company, the former president of DSL and
the former owner of DSL concerning the agreements, loans and payment
terms.
F-11
<PAGE>
THE PRODUCERS ENTERTAINMENT GROUP LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
NOTE 3 -- RELATED PARTY TRANSACTIONS - (Continued)
During the year ended June 30, 1996, the Company, the former
President of DSL and the former owner of DSL settled all litigation
between them. In pertinent part, this settlement provided for the
payment to the Company of $308,000, elimination of the note
receivable from the former President of DSL, the transfer of a
completed project with a carrying amount of $222,980 to DEG and the
release of the Company's obligation to pay the former owner of DSL a
portion of future revenues from certain completed projects. In
connection with this settlement, the Company reduced its accounts
payable and accrued expenses by $255,455 representing the amounts
previously recorded related to DSL and this litigation and also sold
its investment in DEG for $209,500 in cash. The effect of this
settlement has been reflected in the accompanying June 30, 1996
consolidated statement of operations as a separate item.
NOTE 4 -- DISTRIBUTION RIGHTS
During the year ended June 30, 1995, the Company transferred a
completed television series with a net carrying amount of $291,241 in
exchange for the right to receive a portion of the distribution
revenue from the series. During the year ended June 30, 1996, the
Company sold the domestic distribution rights to one of its fully
amortized completed projects in exchange for a $260,000 principal
amount promissory note. Required principal payments on this note are
as follows: June 14, 1997 -- $100,000; June 14, 1998 -- $100,000; and
June 14, 1999 -- $60,000. Interest is computed at the annual rate of
12% and is payable with each principal payment. The note is secured
by the distribution rights sold and requires mandatory repayments,
both as to principal and interest, in an amount equal to 85% of the
distribution revenues received from this series.
NOTE 5 -- FILM COSTS
Film costs consists of the following:
<TABLE>
<CAPTION>
June 30, June 30, June 30,
1994 1995 1996
------------- ------------- ------------
<S> <C> <C> <C>
Completed projects $7,475,715 $10,688,000 $3,754,151
Less: accumulated
amortization ... 5,781,600 9,550,328 3,105,300
------------- ------------- ------------
Released, net of
amortization ... 1,694,115 1,137,672 648,851
Productions in
progress ....... 2,252,784 775,629 --
Projects in
development .... 663,805 191,202 123,926
------------- ------------- ------------
$4,610,704 $ 2,104,503 $ 772,777
============= ============= ============
</TABLE>
During the year ended June 30, 1996, completed projects with a cost
of $6,698,227 were fully amortized and their cost and related
amortization were removed from the accounts. During the year ended
June 30, 1996, the carrying amount of certain completed projects were
reduced by $235,662 representing the amount previously recorded as
accounts payable and accrued expenses for additional expenditures
relating to these projects that were not incurred.
Write-offs of projects in development for the years ended June 30,
1994, 1995 and 1996 aggregated $233,903, $335,233 and $103,404,
respectively. Based on management's present estimate of future
revenues at June 30, 1996, substantially all of the unamortized costs
of completed projects will be amortized by June 30, 1999.
NOTE 6 -- BRIDGE FINANCINGS AND PUBLIC OFFERINGS
During fiscal 1993, the Company issued an aggregate of 63,000
three-year warrants in connection with a bridge financing. Each
three-year warrant is exercisable for one share of common stock at a
price of $7.70 per share. During the year ended June 30, 1994, 22,750
of these warrants were exercised for proceeds of $175,175.
F-12
<PAGE>
THE PRODUCERS ENTERTAINMENT GROUP LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
NOTE 6 -- BRIDGE FINANCINGS AND PUBLIC OFFERINGS - (Continued)
In connection with its April 1993 public offering of securities, the
Company issued an aggregate of 239,583 warrants, each of which was
exercisable for one share of common stock at a price of $16.00
through April 1996, at which time the warrants expired. In connection
with this offering, the underwriter received a five-year option to
purchase 20,833 units (two shares of common stock and one warrant) at
a price of $28.80 per unit. None of these warrants have been
exercised.
In October 1994, the Company completed a bridge financing consisting
of subordinated notes in the aggregate principal amount of
$1,100,000. These notes bore interest at 7% per annum and were repaid
from the proceeds of the Company's December 1994 public offering. In
accordance with the terms of these notes, upon their repayment the
note-holders were issued shares of the Company's common stock with a
market value equal to 25% of the principal amount of the notes
($275,000). This amount has been included in the accompanying 1995
consolidated financial statements as a charge to interest and
financing expense with a corresponding increase to common stock and
additional paid-in capital.
In December 1994, the Company completed a public offering of its
securities, selling 1,000,000 units at a price of $5.00 per unit for
net proceeds of $4,176,467. Each unit consisted of one share of
nonvoting Series A 8.5% Convertible Preferred Stock (Series A Stock)
and one Class B Warrant. In connection with this offering, the
underwriter received a five-year option to purchase 100,000 units at
a price of $7.00 per unit. Each share of Series A Stock has a
liquidating preference of $5.00 (aggregate -- $5,000,000), is
convertible into 1.25 shares of common stock (aggregate -- 1,250,000
shares) at any time and is entitled to cumulative quarterly dividends
at the annual rate of $.425 (aggregate -- $425,000) and may, at the
Company's option, be paid either in cash or in shares of the
Company's common stock valued at the then market price. During the
year ended June 30, 1995, the first dividend on the Series A Stock
($126,350) was paid in cash and was recorded as a charge to
additional paid-in capital. Subsequent dividends on the Series A
Stock were paid by the Company issuing 213,627 shares of common stock
in fiscal 1996. Each Class B Warrant is exercisable for .25 of a
share of common stock at a price of $8.00 per share through December
1997. The Company may redeem the Class B Warrants at a price of $.01
each if the defined market price of the Company's common stock is at
least $10.40 per share.
In June 1996, the Company issued $500,000 principal amount of
promissory notes ("Bridge Notes") together with 500,000 warrants
("Bridge Warrants") for gross proceeds of $500,000. In connection
with this transaction, the Company incurred expenses of $137,503
which have been recorded as deferred financing costs (included in
other assets) and are being charged to operations over the term of
the Bridge Notes. The Bridge Notes bear interest at the rate of 10%
per annum and are payable upon the earlier of the consummation of any
financing which provides the Company with gross proceeds of at least
$1,000,000 or June 7, 1997. In the event of consummation of the
pending public offering of its equity securities, the bridge warrants
shall be automatically converted to redeemable warrants having terms
identical to those being offered by the Company pursuant to such
public offering. Each Bridge Warrant entitles the holder to purchase
one share of the Company's common stock at a price of $1.12 per share
commencing June 7, 1997.
NOTE 7 -- NOTES PAYABLE
Notes payable at June 30, 1996 consist of:
<TABLE>
<CAPTION>
<S> <C>
Note payable bearing interest at 10% per annum, originally due July 31, 1996
but extended to earlier of August 31, 1996 or effective date of pending
public offering of securities, secured by revenues to be derived from a
currently airing television series ....................................... $100,000
Bridge notes (see Note 6) .................................................. 500,000
------------
$600,000
============
</TABLE>
F-13
<PAGE>
THE PRODUCERS ENTERTAINMENT GROUP LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
NOTE 8 -- STOCK OPTIONS AND WARRANTS
The Company's stock option plan authorizes the granting of stock
options to officers and key employees to purchase an aggregate of
250,000 shares of common stock. No options may be granted after May
2006. The Company may also grant other stock options outside its
stock option plan. As of June 30, 1995, an aggregate of 781,500 stock
options had been granted at prices ranging from $2.00 to $13.00 per
share. During the year ended June 30, 1996, an aggregate of 131,208
stock options expired, 329,376 were cancelled and replaced by 262,500
stock options at prices of $1.12 and $2.00 per share (see Note 3) and
18,750 stock options were granted at $2.00 per share. As of June 30,
1996, there were approximately 626,916 stock options outstanding at
exercise prices ranging from $1.12 to $13.00 per share. As of June
30, 1996, all of these outstanding options were exercisable. During
the years ended June 30, 1995 and 1994, stock options were exercised
for aggregate proceeds of $454,375 and $1,323,718, respectively. No
stock options were exercised during the year ended June 30, 1996. In
addition, in August 1996, the Company granted options to purchase
50,000 shares of Common Stock to its newly hired Chief Financial
Officer. One-half of such options vested on the date of grant and
one-half vest one year from the date of grant and all such options
have an exercise price of $1.12, the fair market value of a share of
Common Stock on the date of grant.
In addition to the Bridge Warrants (see Note 6), the Company has
warrants outstanding to purchase an aggregate of 331,916 shares of
common stock at prices ranging from $7.70 to $14.40 per share. In
connection with its December 1994 public offering (see Note 5) the
Company issued warrants to the underwriter to purchase 100,000 units
consisting of an aggregate of 100,000 shares of Series A Stock and
25,000 Class B Warrants (after giving effect to one-for-four reverse
stock split) at a price of $7.00 per unit.
NOTE 9 -- EMPLOYMENT AGREEMENTS
The Company has entered into agreements for the services of certain
of its officers and others. These agreements expire through June 30,
1999 and provide for approximate aggregate base payments as follows
for the years ending June 30: 1997 -- $1,004,000; 1998 -- $410,000
and 1999 -- $80,000. Certain of these agreements provide for payments
by the Company in the event of death, disability, termination or a
change in control of the Company.
NOTE 10 -- INCOME TAXES
The Company files its income tax returns using an October 31
year-end. At June 30, 1996 the Company has net operating loss
carryforwards which, if not used, will expire as follows:
<TABLE>
<CAPTION>
Tax Year End
October 31, Federal California
------------------------------- ------------- --------------
<S> <C> <C>
1997 $ 0 $ 377,569
1998 0 435,994
1999 0 1,690,608
2000 0 1,759,834
2001 0 1,533,133
2005 755,137 0
2006 871,987 0
2008 3,381,216 0
2009 3,519,668 0
2010 3,066,267 0
------------- --------------
Net operating loss carryforward $11,594,275 $5,797,138
Deferred tax assets $ 4,449,300
Less valuation allowance (4,449,300)
-----------
$ 0
===========
</TABLE>
Utilization of the net operating loss carryforwards in any one year
may be limited by, among other things, alternative minimum tax rules
and restrictions caused by changes in the Company's stock ownership.
F-14
<PAGE>
THE PRODUCERS ENTERTAINMENT GROUP LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
NOTE 11 -- COMMITMENTS AND CONTINGENCIES
The Company's office lease provides for a minimum annual base rental
and payment of certain defined operating expenses. The lease expires
September 30, 1997 and the minimum rent payable for the years ending
June 30 are as follows: 1997 -- $228,780 and 1998 -- $57,195. Rent
expense for the years ended June 30, 1995 and 1996 was $197,011 and
$149,607, respectively.
The Company is a party to various agreements relating to its
properties that provided for payments to others upon sale, production
and/or distribution of the property. Other agreements provide for
participation by others in the net revenues and/or profits from
completed projects.
As of November 14, 1995, the Company sold 375,000 shares of it common
stock to one of its the officers and directors for $750,000 principal
amount of promissory notes (see Note 3). The Company also executed a
purported employment agreement (which was not approved or ratified by
the Company's Board of Directors) with this officer and director
which provided for, among other things, annual compensation of
$262,000 through June 30, 1998. In December 1995, the Company
terminated the employment of this individual and the related
purported employment agreement. As a result of such termination, the
shares of common stock sold to this individual and the related notes
received by the Company for such shares were forfeited to the Company
and cancelled. The Company subsequently filed a legal action against
this individual claiming, among other things, breach of fiduciary
duty and return of amounts previously paid. This individual has filed
a cross-complaint against the Company and its Chief Executive Officer
claiming, among other things, that his employment with the Company
was improperly terminated and his employment and stock purchase
agreements were improperly cancelled. This cross-complaint seeks
substantial damages. The Company believes that the ultimate outcome
of these actions will not have a material adverse effect on its
consolidated financial statements.
In the normal course of its business, the Company is subject to
various lawsuits and claims. The Company believes that the final
outcome of these matters, either individually or in the aggregate,
will not have a material effect on its consolidated financial
statements.
NOTE 12 -- SUBSEQUENT EVENTS
On July 22, 1996, the Company's Board of Directors approved the
following:
Proposed public offering of up to 2,000,000 units (each unit
comprised of four shares of common stock and two redeemable
warrants to purchase shares of common stock) at $4.00 per Unit. An
additional 300,000 units may be sold to the underwriter pursuant to
an over-allotment option.
Payment of the June 30, 1996 quarterly dividend on the Company's
Series A Preferred Stock in Shares of Common Stock on August 23,
1996.
F-15
<PAGE>
=============================================================================
No dealer, salesman or other person has been authorized to give any
information or to make any representations other than those contained in this
Prospectus, and, if given or made, such information or representations must
not be relied upon as having been authorized by the Company or Underwriter.
Neither the delivery of this Prospectus nor any sale made hereunder shall,
under any circumstances, create any implication that the information
contained herein is correct as of any date after the date hereof. This
Prospectus does not constitute an offer to sell or a solicitation of an offer
to buy the securities offered hereby by anyone in any jurisdiction in which
such offer or solicitation is not authorized or in which the person making
such offer or solicitation is not qualified to do so or to anyone whom it is
unlawful to make such offer or solicitation.
------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
--------
<S> <C>
Prospectus Summary ........................................... 4
Risk Factors ................................................. 8
The Company .................................................. 17
Recent Bridge Financing ...................................... 17
Concurrent Offering .......................................... 17
Use of Proceeds .............................................. 18
Dilution ..................................................... 20
Capitalization ............................................... 21
Market for Common Equity and Related Shareholder Matters ..... 22
Dividend Policy .............................................. 22
Selected Financial Data ...................................... 23
Management's Discussion and Analysis of Financial Condition
and Results of Operations .................................. 24
Business ..................................................... 28
Management ................................................... 36
Certain Transactions ......................................... 41
Principal Stockholders ....................................... 43
Selling Securityholders ...................................... 45
Description of Securities .................................... 47
Shares Eligible for Future Sale .............................. 49
Underwriting ................................................. 51
Legal Matters ................................................ 52
Experts ...................................................... 52
Additional Information ....................................... 53
Index to Financial Statements ................................ F-1
</TABLE>
<PAGE>
=============================================================================
LOGO
2,000,000 UNITS
EACH UNIT CONSISTING OF FOUR
SHARES OF COMMON STOCK AND TWO
REDEEMABLE WARRANTS
------
PROSPECTUS
------
JOSEPH STEVENS & COMPANY, L.P.
September 12, 1996
=============================================================================
