<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
Quarterly Report Under Section 13 or 15(d) of the
Securities Exchange Act of 1934.
For Quarter Ended December 31, 1998 Commission file number 0-18410
THE PRODUCERS ENTERTAINMENT GROUP LTD.
(Exact name of registrant as specified in its charter)
Delaware 95-4233050
(State or other jurisdiction of (I.R.S. Employer Identification .)
incorporation or organization)
5757 Wilshire Blvd., PH1, Los Angeles, CA 90036
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (323) 634-8634
----------------------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS REQUIRED
TO BE FILED BY SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE REGISTRANT
WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH FILING
REQUIREMENTS FOR THE PAST 90 DAYS.
YES X NO
INDICATE THE NUMBER OF SHARES OUTSTANDING OF EACH OF THE ISSUER'S CLASSES OF
COMMON STOCK, AS OF THE LATEST PRACTICABLE DATE.
COMMON STOCK, $.001 PAR VALUE-- 10,696,635 SHARES AS OF February 15, 1999
<PAGE>
Part 1. Financial Information
Item 1. Financial Statements
THE PRODUCERS ENTERTAINMENT GROUP LTD. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31, 1998 JUNE 30, 1998
(UNAUDITED) (AUDITED)
<S> <C> <C>
ASSETS
Cash and cash equivalents $ (442,645) $ 73,751
Short term investments 0 0
Accounts receivable, net trade 2,582,352 938,130
Note Receivable 200,000 0
Receivable from related parties 289,584 47,778
Prepaid expenses 212,208 0
Film costs, net 1,484,006 1,189,392
Fixed assets, net 153,894 182,473
Covenant not to compete 0 115,000
Acquisition Costs 109,269 0
Goodwill 749,785 0
Other assets - 179,167
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TOTAL ASSETS $ 5,338,453 $ 2,725,691
----------- -----------
----------- -----------
LIABILITIES AND SHAREHOLDERS' EQUITY
Accounts payable and accrued expenses $3,552,142 $ 335,712
Obligations under capital leases 42,658 70,905
Dividends payable 106,250 106,250
Deferred income 131,543 0
Notes payable 349,260 84,346
----------- ------------
TOTAL LIABILITIES $4,181,853 $ 597,213
Shareholders' equity:
Preferred Stock, $.001 par value, authorized 20,000,000 shares
Series A Preferred Stock, $.001 par value, authorized
1,000,000 shares; issued and outstanding 1,000,000 shares 1,000 1,000
Series B Preferred Stock, $.001 par value, authorized 1,375,662
shares; none issued and outstanding 0 0
Series D Preferred Stock, $.001 par value, authorized 50,000
shares; issued and outstanding 50,000 shares 50 0
Series E Preferred Stock, $.001 par value, authorized 500,000
shares; issued and outstanding 25,000 shares 25 0
Series F Preferred Stock, $.001 par value, authorized 500,000
shares; issued and outstanding 75,000 shares 75 0
Common Stock, $.001 par value, authorized 50,000,000 shares;
issued and outstanding 7,876,647 and 6,672,943 shares 7,877 6,673
Additional paid-in capital 24,987,781 23,411,349
Accumulated deficit and dividends (22,784,016) (20,280,352)
Treasury stock, 93,536 shares at cost (1,010,192) (1,010,192)
------------ ------------
Net shareholders' equity $1,202,600 $ 2,128,478
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TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $5,338,453 $ 2,725,691
------------ ------------
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</TABLE>
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
<PAGE>
THE PRODUCERS ENTERTAINMENT GROUP LTD. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED DECEMBER 31,
--------------------------------
1998 1997
<S> <C> <C>
Revenues $ 108,965 $ 7,691,057
Costs related to revenues:
Amortization of film costs 0 5,666,079
Costs of projects sold 88,824 0
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Net Revenues 20,141 2,024,978
General and administrative expenses 1,376,038 1,669,732
--------------- ----------------
Operating income (loss) (1,376,897) 355,246
Other income (expenses):
Acquisition expense (180,498)
Interest Income 0 37,000
Amortization of Goodwill (41,000) 0
Amortization of Acquisition Costs (6,070) 0
Settlement expense (80,500) (69,000)
--------------- ----------------
Net other income (expense) (127,570) (212,498)
--------------- ----------------
Net income (loss) (1,504,467) (142,748)
Provision for income taxes 10,950 0
--------------- ----------------
Net income (loss) (1,515,417) 142,748
Dividend requirement on Series A Preferred Stock (106,250) (106,250)
--------------- ----------------
Net income (loss) applicable to common
shareholders ($1,621,667) $ 36,498
--------------- ----------------
--------------- ----------------
Net income (loss) per share (basic and diluted) ($.377) $.02
Average common shares
outstanding (basic and diluted) 7,228,027 18,839,036
--------------- ----------------
</TABLE>
<PAGE>
THE PRODUCERS ENTERTAINMENT GROUP LTD. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED DECEMBER 31,
--------------------------------
1998 1997
<S> <C> <C>
Revenues $ 1,142,188 $ 12,079,649
Costs related to revenues:
Amortization of film costs 817,946 8,441,180
Costs of projects sold 1,348 71,418
--------------- ---------------
Net Revenues 322,894 3,567,051
General and administrative expenses 2,619,574 2,627,210
--------------- ---------------
Operating income (loss) (2,296,680) 939,841
Other income (expenses):
Acquisition expense (6,695) (286,680)
Interest income 0 47,430
Amortization of Goodwill (75,000) 0
Amortization of Acquisition Costs (5,320) 0
Settlements expense (115,000) (138,000)
--------------- ---------------
Net other income (expense) (202,015) (377,350)
--------------- ---------------
Net income (loss) (2,498,695) 562,591
Provision for income taxes 16,254 0
--------------- ---------------
Net income (loss) (2,514,949) 562,591
Dividend requirement on Series A Preferred Stock (212,500) (212,500)
--------------- ---------------
Net income (loss) applicable to common
shareholders ($2,727,449) $ 350,091
--------------- ---------------
--------------- ---------------
Net income (loss) per share (basic and diluted) ($.38) $.02
Average common shares
outstanding (basic and diluted) 7,228,027 18,806,427
--------------- ---------------
</TABLE>
<PAGE>
THE PRODUCERS ENTERTAINMENT GROUP LTD. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
SIX MONTHS ENDED DECEMBER 31, 1998 (UNAUDITED)
<TABLE>
<CAPTION>
SERIES SERIES SERIES SERIES ADDITIONAL
PREFERRED D D E E COMMON STOCK PAID-IN ACCUMULATED
STOCK SHARES AMT SHARES AMT SHARES AMOUNT CAPITAL DEFICIT
---------- ------- -------- -------- -------- ---------- --------- ---------- ------------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance,
June 30, 1998 $1,000 6,672,943 $6,672 $23,513,101 ($20,056,567) $3,464,206
Issuance of common
shares in payment of
dividends on Series A
Preferred Stock 0 0
Issuance of common
shares in connection
with the acquisition of 1,203,704 $824,785 $824,785
MWI
Issuance of Series D 50,000 220,000 220,000
Preferred Stock
Issuance of Series E
Preferred Stock 25,000 431,250 431,250
Net loss (2,727,449) (2,727,449)
Dividends on Series
A Preferred Stock
- ------------------------- --------- ------- -------- -------- -------- ---------- --------- ----------- ------------ ----------
Balance,
December 31, 1998 $1,000 50,000 220,000 25,000 431,250 7,876,647 $831,457 $23,406,851 ($22,784,016) $2,212,792
Less:
Treasury Stock (93,536) (1,010,192)
NET SHAREHOLDERS' EQUITY 7,783,111 $1,202,600
</TABLE>
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
<PAGE>
THE PRODUCERS ENTERTAINMENT GROUP LTD. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED DECEMBER 31,
--------------------------------
1998 1997
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (2,727,449) $ 419,843
ADJUSTMENTS TO RECONCILE NET (LOSS) TO
NET CASH (USED IN) OPERATING ACTIVITIES:
Depreciation of fixed assets 28,579 18,673
Amortization of film costs 0 2,775,101
Write off of projects in development 0 0
Amortization of Goodwill 75,000 0
Amortization of Acquisition Costs 5,320 0
Amortization of non-competition agreement 115,000 69,000
Decrease deferred tax asset 0 0
Issuance of Common Stock in Settlement 0 0
CHANGES IN OPERATING ASSETS AND LIABILITIES:
(Increase) decrease in accounts receivable (1,644,222) (671,569)
(Increase) decrease in other assets 0 (91,191)
(Increase) decrease in notes receivable 0 0
Increase (decrease) in accounts payable
and accrued expenses 3,096,768 152,771
Increase in prepaid expenses 212,208 0
Decrease (increase) in deferred revenues 131,543 (163,567)
---------- -----------
Net cash (used in) operating activities (678,253) 2,509,061
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
(Additions) to film costs, net (294,613) (4,573,448)
Capital (expenditures) on equipment 0 (55,294)
(Increase) in short term investments 0 2,698,568
(Decrease) in Other Assets (179,167) 0
(Increase) decrease in receivables from related parties (241,806) 35,000
Increase (decrease) in obligations under capital leases (28,247) 0
---------- -----------
Net cash (used in) investing activities (385,499) (1,895,174)
---------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Obligations Under Capital Leases 0 0
Proceeds from notes payable 264,914 0
Proceeds from borrowings 0 416,000
(Repayment) of borrowings 0 0
Increase in dividends payable --- 0
(Payment) of cash dividends in Preferred Stock (106,250) (106,250)
---------- -----------
Net cash provided by financing activities 371,164 309,750
---------- -----------
Net increase (decrease) in cash (516,396) 923,637
Cash and cash equivalents at beginning of period 73,751 1,344,870
---------- -----------
Cash and cash equivalents at end of period. $(442,645) $2,268,507
---------- -----------
</TABLE>
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
<PAGE>
THE PRODUCERS ENTERTAINMENT GROUP LTD. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
December 31, 1998
(1) BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements of The
Producers Entertainment Group Ltd. ("TPEG" or the "Company") have been prepared
in accordance with generally accepted accounting principles for interim
financial information and in accordance with the instructions to Form 10-QSB.
Accordingly, they do not include all of the information and footnotes required
by generally accepted accounting principles for complete financial statements.
In the opinion of management, all material adjustments (consisting of normal
recurring accruals) considered necessary for a fair presentation have been
included. Operating results for the three-month period ended December 31, 1998
are not necessarily indicative of the results that may be expected for the year
ended June 30, 1999. The information contained in this Form 10-QSB should be
read in conjunction with the audited financial statements filed as part of the
Company's Form 10-KSB for the fiscal year ended June 30, 1998.
On October 20, 1997, the Company acquired 100% of the outstanding capital
stock of three entities comprising the "Grosso Jacobson Companies" (including
Grosso Jacobson Productions, Inc., Grosso Jacobson Entertainment Corporation,
and Grosso Jacobson Music Company, Inc) through the merger of three wholly-owned
subsidiaries of the Company into the Grosso Jacobson Companies. The Grosso
Jacobson Companies are engaged in the business of developing and producing
entertainment products including television movies and series. The
consideration paid by the Company to the sole shareholders of the Grosso
Jacobson Companies pursuant to the merger was paid through the issuance of
2,222,222 shares of the Company's Common Stock valued at an issue price of
$3.60 per share.
The mergers of the Company's wholly-owned subsidiaries into the Grosso
Jacobson Companies for Common Stock of the Company has been recorded, for
financial statement reporting purposes, as a pooling of interests, and
accordingly, the accompanying financial statements reflect the combined results
of the pooled businesses for the respective periods presented.
On July 15, 1998, the Company acquired 100% of the outstanding capital
stock of MWI Distribution, Inc., a California corporation ("MWI"), which is
engaged in the international co-production and licensing of television and video
programming, as well as merchandising. The acquisition was accomplished by
merger. The consideration paid by the Company to the sole shareholders of MWI
pursuant to the merger was paid through the issuance of 763,889 shares of the
Company's Common Stock valued at an issue price of $1.75 per share. In
addition, the Company may have to pay additional consideration, in the form of
Common Stock, to the stockholders of MWI, which payments are contingent upon the
performance of MWI over a period of time. The stockholders of MWI also shall
receive up to an additional 109,428 shares of Common Stock if the Common Stock
Average Price, as defined in the Merger Agreement, does not equal or exceed
$3.80 per share between July 15, 1998 and June 30, 1999.
Certain figures for the three months ended September 30, 1997 have been
restated to conform with the current presentation.
(2) GOODWILL
Goodwill related to the acquisition of MWI is being amortized over a period
of five years.
(3) DIVIDEND ON SERIES A PREFERRED STOCK
For the three months ended September 30, 1998 and December 31, 1998, the
Company will issue shares of its Common Stock at a combined market value
equivalent to $212,000, representing the $106,250 quarterly dividend required to
be paid on the Series A Preferred Stock for each of the quarters ended September
30, 1998 and
<PAGE>
December 31, 1998.
(4) LOSS PER SHARE
Loss per share for the three- month period ended December 31, 1998 has been
computed after deducting the dividend requirements of the Series A Preferred
Stock. It is based on the weighted average number of common and common
equivalent shares reported outstanding during the entire period ending on
December 31, 1998.
(5) STOCK OPTIONS AND WARRANTS
The Company uses APB Opinion No. 25 "Accounting for Stock Issued to
Employees" to calculate the compensation expense related to the grant of options
to purchase Common Stock under the intrinsic value method. Accordingly, the
Company makes no adjustments to its compensation expense or equity accounts for
the grant of options. The Company has made no grant of options for the period
ended December 31, 1998. At December 31, 1998 there were options to acquire
287,028 shares outstanding at exercise prices ranging from $3.36 per share to
$39.00 per share of Common Stock.
In addition to the Redeemable Warrants to purchase an aggregate of
1,700,000 shares of Common Stock at $5.25 per share issued in connection with
the September 1996 public offering, the Company has other existing warrants
outstanding to purchase an aggregate of 142,518 shares of Common Stock at prices
ranging from $23.10 to $43.20 per share. There were a total of approximately
1,842,518 warrants outstanding as of December 31, 1998.
(6) RELATED PARTY TRANSACTIONS
As of the period ended September 30, 1998, the Company issued a promissory
note to Mountaingate Productions, LLC, an affiliate of Irwin Meyer, Chief
Executive Officer and Co-Chairman of the Board of Directors of the Company, for
the sum of $79,760, which represents amounts owed to Mountaingate Productions,
LLC under its production agreement with the Company. The promissory note bears
interest at the rate of ten percent (10%) per annum.
As of the period ended September 30, 1998, the Company issued a promissory
note to S.A.G. Productions, Inc., an affiliate of Salvatore Grosso, Chief
Operating Officer and Co-Chairman of the Board of Directors of the Company,
for the sum of $145,923, which represents amounts owed to S.A.G. Productions,
Inc. under its production agreement with the Company. The promissory note bears
interest at the rate of ten percent (10%) per annum.
As of the period ended September 30, 1998, the Company issued a promissory
note to Lawrence Jacobson Associates, Inc., an affiliate of Lawrence Jacobson,
President and Co-Chairman of the Board of Directors of the Company, for the sum
of $145,923, which represents amounts owed to Lawrence Jacobson Associates, Inc.
under its production agreement with the Company. The promissory note bears
interest at the rate of ten percent (10%) per annum.
<PAGE>
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
FORWARD LOOKING STATEMENTS
This report contains statements that constitute "forward-looking
statements" within the meaning of Section 21E of the Securities Exchange Act of
1934 and Section 27A of the Securities Act of 1933 with respect to the Company
and its operations that are subject to certain risks and factors which could
cause the Company's future actual results of operations and future financial
condition to differ materially from those described herein. The words "expect,"
"estimate," "anticipate," "predict," "believe" and similar expressions and
variations thereof are intended to identify forward-looking statements. These
statements appear in a number of places in this filing and include statements
regarding the intent, belief or current expectations of the Company with respect
to, among other things, the integration of the acquisition of MWI, trends
affecting the Company's financial condition and the Company's future business
and strategies. The stockholders of TPEG are cautioned not to put undue reliance
on these forward-looking statements. Such forward-looking statements involve
risks and uncertainties, including the number of the Company's projects in
development that result in completed productions, the lapse in time between the
expenditures made by the Company and the receipt of cash and the Company's
intention to change the direction of the Company. Other risk factors include the
intensity of the Company's current competition from other television and motion
picture producers and distributors and competition in the internet industry, the
status of the Company's liquidity in future fiscal periods, the Company's
ability to integrate the acquisition of MWI and factors that generally affect
the entertainment industry such as changes in management at the major studios,
broadcast and distribution companies, as well as economic, political,
regulatory, technological and public taste environments. The readers of this
filing are cautioned that any such forward-looking statements are not guarantees
of future performance and involve risks and uncertainties, and that actual
results may differ materially from those projected in this filing, including,
without limitation, those risks and uncertainties discussed under the headings
"Factors That Could Impact Future Results" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations" in the Company's
Annual Report on Form 10-K for the fiscal year ended June 30, 1998 as well as
the information set forth below. The Company does not ordinarily make
projections of its future operating results and undertakes no obligation to
publicly update or revise any forward looking statements, whether as a result of
new information, future events or otherwise.
OVERVIEW
The Company's revenues in connection with its television activities are
primarily derived from the production and distribution of television projects,
and producer fees. In June 1998, the Company ceased providing personal
management services. The amount of revenues derived by the Company from its
television production activities in any one period is dependent upon, among
other factors, projects completed during any such period and the distribution of
completed projects. Accordingly, the amount of revenues recognized in any period
are not necessarily indicative of revenues to be recognized by the Company in
future periods.
Revenues received from license fees for distribution rights to
projects-in-process constitute deferred income until the project becomes
available for broadcast in accordance with the terms of its licensing agreements
and are recognized as revenue at such time. The portion of the license fees
which equals the amount allowed within the project's budget for the Company's
producer fees is recognized as revenue during the production phase. Revenues
from completed projects where distribution rights are owned by the Company are
recognized when the project becomes contractually available for broadcasting or
exhibition in certain media and geographical territories by the licensee.
Revenues from the sale of projects completed under straight producer
arrangements are recognized during the production phase. Additional licensing,
distribution fees or profit participation is recognized as earned in accordance
with the terms of the related agreements.
Revenues received by MWI are primarily derived from the licensing of rights
of family television programming, as well as the sale of home video programming.
Amortization of film costs is charged to operations on a project by
project basis. The cost charged per period is determined by multiplying the
remaining unamortized costs of the project by a fraction, whose numerator
<PAGE>
is the income generated by the project during the period and whose denominator
is management's estimate of the total gross revenue to be derived by the project
over its useful life from all sources. This is commonly referred to as the
Individual Film Forecast Method under FASB 53. The effects on the amortization
of completed projects resulting from revision of management's estimates of total
gross revenue on certain projects are reflected in the year in which such
revisions are made.
RESULTS OF OPERATIONS
THREE MONTHS ENDED DECEMBER 31, 1998, COMPARED TO THREE MONTHS ENDED DECEMBER
31, 1997
Revenues for the three months ended December 31, 1998 were $108,965, a 98%
decrease from $7,691,057 for the three months ended December 31, 1997. Revenues
for the three months ended December 31, 1998 consisted of income from the
continuing international distribution of completed projects. Revenues of
$7,171,761 for the three months ended December 31, 1997 consisted of revenues
from production and distribution and $519,296 from personal management fees. The
decrease in revenues was due primarily to the lack of television production and
decreased international sales.
Amortization of film costs for the three months ended December 31, 1998 and
December 31, 1997 was $0 and $5,666,079, respectively, and was computed using
the Individual Film Forecast Method. The difference in amortization as a
percentage of total revenues related to the amortization of projects and
reflects the mix of projects in which TPEG has no expectation of additional
revenues that are amortized at 100% of cost and projects in which TPEG has
retained distribution rights held for future sale that are amortized according
to the Individual Film Forecast Method.
Cost of sales for the three months ended December 31, 1998 and December 31,
1997, was $88,824 and $0, respectively. Cost of sales as a percentage of total
revenues increased from 0% for the three months ended December 31, 1997 to 82%
for the three months ended December 31, 1998.
General and administrative expenses for the three months ended December 31,
1998 were $1,376,038 compared to $1,669,732 for the three months ended December
31, 1997. The $293,694, or 17%, decrease in general and administrative expenses
was due to the elimination of certain staff and related benefits of personnel in
the Los Angeles office.
During the three months ended December 31, 1998, the Company recorded
($80,500) of amortization related to a November 4, 1996 non-competition
agreement with a former officer and director, which cost is being amortized over
the life of the non-competition agreement at ($23,000) per month.
During the three months ended December 31, 1998, TPEG recorded no interest
income. During the three months ended December 31, 1997, interest income of
$37,000 consisted of interest income earned on temporary cash investments.
TPEG reported a loss of $1,621,667 or $.22 per share in the three months
ended December 31, 1998 compared to a profit of $36,498 or $.02 per share in the
three months ended December 31, 1997. The income (loss) for both compared
periods included required dividend payments of $106,250 to holders of the
Company's outstanding Series A Preferred Stock. The number of weighted average
common shares outstanding decreased to 7,228,027 as of the three months ended
December 31, 1998 from 18,839,036 as of the three months ended December 31, 1997
due primarily to the reverse split of the Company's Common Stock. The
calculation of weighted average common shares for both periods reflects the
effect of the one-for-three stock split completed during the fourth quarter
1998.
SIX MONTHS ENDED DECEMBER 31, 1998, COMPARED TO SIX MONTHS ENDED DECEMBER
31, 1997
Revenues for the six months ended December 31, 1998 were $1,142,188, a
90% decrease from $12,079,649 for the six months ended December 31, 1997.
Revenues for the six months ended December 31, 1998 consisted of income from
the continuing international distribution of completed projects. Revenues
of $12,079,649 for the six months ended December 31, 1997 consisted of
revenues from production and distribution and $763,756 from personal
management fees. The decrease in revenues was due primarily to the lack of
television production and decreased international sales.
Amortization of film costs for the six months ended December 31, 1998
and December 31, 1997 was $817,946 and $8,441,180, respectively, and was
computed using the Individual Film Forecast Method. The difference in
amortization as a percentage of total revenues related to the amortization of
projects and reflects the mix of projects in which TPEG has no expectation of
additional revenues that are amortized at 100% of cost and projects in which
TPEG has retained distribution rights held for future sale that are amortized
according to the Individual Film Forecast Method.
Cost of sales for the six months ended December 31, 1998 and December
31, 1997, was $1,348 and $71,418, respectively. Cost of sales as a percentage
of total revenues remained unchanged for the six months ended December 31,
1997 and the six months ended December 31, 1998.
General and administrative expenses for the six months ended December
31, 1998 were $2,619,574 compared to $2,627,210 for the six months ended
December 31, 1997. The $7,636 decrease in general and administrative expenses
was negligible.
During the six months ended December 31, 1998, the Company recorded
($115,000) of amortization related to a November 4, 1996 non-competition
agreement with a former officer and director, which cost is being amortized
over the life of the non-competition agreement at ($23,000) per month.
During the six months ended December 31, 1998, TPEG recorded no interest
income. During the six months ended December 31, 1997, interest income of
$47,430 consisted of interest income earned on temporary cash investments.
TPEG reported a loss of $2,727,449 or ($.38) per share in the six months
ended December 31, 1998 compared to a profit of $350,091 or $.02 per share in
the six months ended December 31, 1997. The income (loss) for both compared
periods included required dividend payments of $106,250 to holders of the
Company's outstanding Series A Preferred Stock. The number of weighted
average common shares outstanding decreased to 7,228,027 as of the six months
ended December 31, 1998 from 18,839,036 as of the six months ended December
31, 1997 due primarily to the reverse split of the Company's Common Stock.
The calculation of weighted average common shares for both periods reflects
the effect of the one-for-three stock split completed during the fourth
quarter 1998.
LIQUIDITY AND CAPITAL RESOURCES
As of December 31, 1998, TPEG had decreased liquidity from the comparable
period ended December 31, 1997 primarily as a result of a decrease in revenue.
Cash and cash equivalents as of December 31, 1998 were
<PAGE>
($442,645) and trade accounts receivable increased to $2,582,352. As of December
31, 1998, the Company had recorded accounts payable and accrued expenses of
$3,432,480. In the comparable period ending December 31, 1997, the Company had
$1,737,257 in cash and cash equivalents and $1,184,748 in trade accounts
receivable available to provide payment for $577,999 in recorded accounts
payable and accrued expenses.
Management estimates that, as of December 31, 1998, the Company's cash
commitments for the next twelve months will aggregate approximately $2,200,000.
The figure includes (a) base compensation to its key officers, key independent
contractors and key consultants of approximately $1,200,000 and (b) office rent
of approximately $150,000.
The Company also incurs other general and administrative costs such as
staff salaries, employee benefits, employer taxes, premiums on insurance
policies, marketing costs, office expenses, professional fees, consulting fees
and other expenses. For the three months ended December 31, 1998, total cash
general and administrative expenses for all categories aggregated approximately
$1,376,038. In addition to general and administrative expenses, the required
dividends on the shares of Series A Preferred Stock are $425,000 annually. The
dividends on the Series A Preferred Stock may be paid either in shares of the
Company's Common Stock or in cash.
The Company's projected costs of operation will require funding of
overhead costs in order to continue its operations and to establish other
activities. The Company anticipates that funds raised in the course of the
year will be used to further its entertainment and internet related projects
and ventures. The actual utilization of excess working capital is subject to
change based on the then present circumstances and management's evaluation of
alternative projects. An inability to raise additional capital could prevent
the Company from achieving its objectives and have a material adverse effect
on the Company's business, results of operations and financial condition.
The Company is seeking to obtain additional external financing or
capital. The Company's ability to rely on external sources of funds, rather
than its own liquid resources, will be significant in determining the extent
to which the Company will expand and diversify its production and
distribution activities and its new business ventures. There is no assurance
that such external sources of funds will be available to the Company or that,
if available, the terms thereof will be at reasonable cost to the Company. No
new agreements have been entered into for any such external financing as of
the date of this Report. In July 1998, the Company secured access to a
$5,500,000 equity-based line of credit with an institutional investor. The
Company's ability to draw on this equity-based line of credit is subject to
certain trading requirements. Through December 31, 1998, the Company has
received $750,000 from the investor in exchange for the sale by the Company
of Series D and Series E convertible preferred stock to the investor. The
Company is committed to use $2,000,000 of the equity-based line of credit,
which is available to the Company, subject to certain restrictions, through
August 2000. The holders of the Series D Preferred Stock are entitled to
annual dividends of 6% (aggregating $30,000 annually assuming no conversion)
and holders of the Company's Series E Preferred Stock are entitled to annual
dividends of 6% (aggregating $15,000 annually assuming no conversion), all of
which are payable quarterly in cash, or at the Company's option, in shares of
Common Stock.
IMPACT OF YEAR 2000
The Year 2000 issue is the result of computer programs being written using
two digits instead of four to define the applicable year. Any of the Company's
computer programs that have time-sensitive software or facilities or equipment
containing embedded micro-controllers may recognize a date using "00" as the
year 1900 rather than the Year 2000. This could cause a system failure or
miscalculations resulting in potential disruptions of operations, including,
among other things, a temporary inability to process transactions, send
invoices or engage in similar normal business activities.
<PAGE>
The Company has assessed its hardware and software systems, which are
comprised solely of an internal personal computer network and commercially
available software products. Based on this assessment,the Company believes
that its hardware and software systems are Year 2000 compliant. The Company
has begun to assess the embedded system contained in its leased equipment and
expects to finish this assessment by the end of March 1999. At this time, the
Company is uncertain whether the embedded systems contained in its leased
equipment are ready for the Year 2000.
In addition, the Company is contacting its key vendors and customers to
determine if there are any significant Year 2000 exposures which would have a
material effect on the Company. The Company is not yet aware of any Year 2000
issues relating to third parties with which the Company has a material
relationship. There can be no assurance, however, that the systems of third
parties on which the Company or its systems rely will not present Year 2000
problems that could have a material adverse effect on the Company. The Year
2000 issue presents a number of other risks and uncertainties that could
impact the Company, such as disruptions of service from third parties
providing electricity, water or telephone service. If such critical third party
providers experience difficulties resulting in disruption of service to the
Company, a shutdown of the Company's operations at individual facilities could
occur for the duration of the disruption.
The Year 2000 project cost has not been material to date and, based on
preliminary information, is not currently anticipated to have a material
adverse effect on the Company's financial condition, results of operations or
cash flow in future periods. However, if the Company, its customers or vendors
are unable to resolve any Year 2000 compliance problems in a timely manner,
there could result a material financial impact on the Company. Accordingly,
management plans to devote the resources it considers appropriate to resolve
all significant Year 2000 problems in a timely manner.
The project is estimated to be completed not later than mid-1999. After
completion of its Year 2000 assessment, the Company will develop contingency
plans to reduce its Year 2000 exposure and expects to have such contingency
plans in place by January 1999.
Readers are cautioned that forward-looking statements contained in this
Year 2000 disclosure should be read in conjunction with the Company's
disclosures under the heading, "Forward-looking Statements," beginning above.
Readers should understand that the dates on which the Company believes the
Year 2000 project will be completed are based upon Management's best
estimates, which were derived utilizing numerous assumptions of future events,
including the availability of certain resources, third-party modification
plans and other factors. However, there can be no guarantee that these estimates
will be achieved, or that there will not be a delay in, or increased costs
associated with, the implementation of the Company's Year 2000 compliance
project. A delay in specific factors that might cause differences between
estimates and actual results include, but are not limited to, the availability
and costs of personnel trained in these areas, the ability of locating and
correcting all relevant computer code, timely responses to and corrections by
third parties and suppliers, the ability to implement interfaces between the new
systems and the systems not being replaced, and similar uncertainties. Due to
the general uncertainty inherent in the Year 2000 problem, resulting in part
from the uncertainty of the Year 2000 readiness of third parties and the
interconnection of national and international businesses, the Company cannot
ensure that its ability to timely and cost effectively resolve problems
associated with the Year 2000 issue will not affect its operations and business,
or expose it to third party liability.
<PAGE>
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
On January 20, 1999, the Company announced that it is interested in selling
its wholly-owned subsidiary, MediaWorks International. Currently, certain
companies are conducting their due diligence with respect to a potential
acquisition.
On January 28, 1999, the Company announced that it is in discussions
with Messrs. Grosso and Jacobson whereby they would re-establish their
private production company and resign as officers and directors of the
Company. As part of this transaction, Messrs. Grosso and Jacobson are
expected to return certain shares of the Company's common stock in exchange
for certain of the Company's projects. The Company expects to participate in
numerous of the television projects of Messrs. Grosso and Jacobson.
The Company has retained the services of Strategic Capital Consultants
to advise and assist the Company in locating acquisitions in many industries,
including the Internet and e-commerce fields. As part of this new strategy,
on February 4, 1999, the Company announced that it made an initial investment
in flowersandgifts.com, a storefront on the Internet to sell flowers and
gifts. The initial investment was $200,000 for 100,000 shares, representing
approximately 2% of the outstanding common stock of flowersandgifts.com. The
Company has executed an agreement with flowersandgifts.com to acquire up to
$1,000,000 of common stock in the aggregate, subject to certain conditions.
<PAGE>
The Company received a letter from NASDAQ stating that if the trading value
of the Company's Common Stock did not reach $1.00, and maintain at least a
closing bid price of $1.00 for at least ten consecutive trading days, the
Company's shares of Common Stock may be delisted from the NASDAQ Small Cap
Market. The Company timely filed for an appeal. Since the time that the Company
filed for this appeal, the closing bid price of the Company's Common Stock has
been in excess of the minimum bid price requirement of $1.00 and the Company has
received a letter from NASDAQ stating that the Company is now in compliance with
this requirement.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K AND FORM 8-K/A
(a) EXHIBITS
27.1 - Financial Data Schedule
(b) Reports on Form 8-K
None.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this Report to be signed on its behalf by the
undersigned thereunto duly authorized.
THE PRODUCERS ENTERTAINMENT GROUP LTD.
Dated: February 19, 1999 /s/ IRWIN MEYER
---------------
Irwin Meyer, Chief Executive Officer
Dated: February 19, 1999 /s/ ARTHUR H. BERNSTEIN
-----------------------
Arthur Bernstein, Executive Vice
President, Principal Financial Officer
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