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 MARCH 31, 1999 Commission file number 0-18410
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THE PRODUCERS ENTERTAINMENT GROUP LTD.
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(Exact name of registrant as specified in its charter)
Delaware 95-4233050
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(State or other jurisdiction of (I.R.S. Employee
incorporation or organization) Identification No.)
5757 Wilshire Blvd., PH1, Los Angeles, CA 90036
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (323) 634-8634
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(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
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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--11,869,269 SHARES AS OF MAY 13, 1999
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<PAGE>
Part 1. Financial Information
Item 1. Financial Statements
THE PRODUCERS ENTERTAINMENT GROUP LTD.
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
MARCH 31, 1999 JUNE 30, 1998
(UNAUDITED) (AUDITED)
ASSETS
<S> <C> <C>
Cash and cash equivalents ($47,086) $73,751
Accounts receivable, net trade 2,222,319 938,130
Note Receivable 200,000 0
Receivable from related parties 257,747 47,778
Prepaid expenses 39,487 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 103,199 0
Goodwill 708,785 0
Investment in Pacific Softworks - at cost 500,000 0
Investment in flowersandgifts.com - at cost 300,000 0
Other Assets 906,449 179,167
---------------- ----------------
TOTAL ASSETS $6,028,800 $2,725,691
================ ================
LIABILITIES AND SHAREHOLDERS' EQUITY
Accounts payable and accrued expenses $2,554,644 $335,712
Obligations under capital leases 28,474 70,905
Dividends payable 106,250 106,250
Deferred Income 131,543 0
Notes payable 0 84,346
---------------- ----------------
TOTAL LIABILITIES $2,820,910 $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 200 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 26,709,680 23,411,349
Accumulated deficit and dividends (22,500,800) (20,280,352)
Treasury stock, 93,536 shares at cost (1,010,192) (1,010,192)
---------------- ----------------
Net shareholders' equity $3,207,890 $2,128,478
================ ================
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $6,028,800 $2,725,691
================ ================
</TABLE>
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
Page 2
<PAGE>
THE PRODUCERS ENTERTAINMENT GROUP LTD.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 1998 AND 1999
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
----------------------------
1999 1998
<S> <C> <C>
Revenues $ 0 $ 6,196,754
Costs related to revenues:
Amortization of film costs 0 3,980,910
Costs of projects sold 0 532,800
------------------------------
Net Revenues 0 1,683,044
General and administrative expenses 381,840 1,370,219
------------------------------
Operating income (loss) (381,840) 312,825
Other income (expenses):
Acquisition expense 0 (12,700)
Recovery of Expenses 1,042,310 0
Interest income 0 11,092
Amortization of Goodwill (41,000) 0
Amortization of Acquisition Costs (6,070) 0
Settlement expense 0 (69,000)
------------------------------
Net other income (expense) 995,240 (74,582)
------------------------------
Net income (loss) 613,400 238,243
Provision for income taxes 0 0
------------------------------
Net income (loss) 613,400 238,243
Dividend requirement on Series A Preferred
Stock (106,250) (106,250)
==============================
Net income (loss) applicable to common
shareholders $ 507,150 $ 131,993
==============================
Net income (loss) per share (basic and
diluted) $.05 $.02
Average common shares
outstanding (basic and diluted) 10,061,725 6,335,976
------------------------------
</TABLE>
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
Page 3
<PAGE>
THE PRODUCERS ENTERTAINMENT GROUP LTD.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE NINE MONTHS ENDED MARCH 31, 1998 AND 1999
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED MARCH 31,
---------------------------
1999 1998
<S> <C> <C>
Revenues $ 1,142,188 $ 18,276,403
Costs related to revenues:
Amortization of film costs 817,946 12,422,090
Costs of projects sold 1,348 604,218
---------------------------------
Net Revenues 322,894 5,250,095
General and administrative expenses 3,001,561 3,997,429
---------------------------------
Operating income (loss) (2,678,667) 1,252,666
Other income (expenses):
Acquisition expense (6,695) (299,380)
Recovery of Expenses 1,042,310 0
Interest income 0 458,522
Amortization of Goodwill (116,000) 0
Amortization of Acquisition Costs (11,391) 0
Settlements expense (115,000) (207,000)
---------------------------------
Net other income (expense) 793,224 (451,832)
---------------------------------
Net income (loss) (1,885,443) 800,834
Provision for income taxes 16,254 0
---------------------------------
Net income (loss) (1,901,697) 800,834
Dividend requirement on Series A Preferred
Stock (318,750) (318,750)
---------------------------------
Net income (loss) applicable to common
shareholders ($2,220,447) $482,084
=================================
Net income (loss) per share (basic and
diluted) ($.25) $.08
Average common shares
outstanding (basic and diluted) 9,021,640 6,290,871
---------------------------------
</TABLE>
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
Page 4
<PAGE>
THE PRODUCERS ENTERTAINMENT GROUP LTD.
CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
NINE MONTHS ENDED MARCH 31, 1999
(UNAUDITED)
<TABLE>
<CAPTION>
SERIES SERIES SERIES SERIES SERIES SERIES
PREFERRED D D E E F F
STOCK SHARES AMT SHARES AMT SHARES AMOUNT
--------- ------ ------ ------- ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance,
June 30, 1998 $1,000
Issuance of common shares in
payment of dividends on Series A
Preferred Stock
Issuance of common shares in
connection with the acquisition
of MWI
Issuance of Series D
Preferred Stock 50,000 $50
Issuance of Series E
Preferred Stock 200,000 $200
Issuance of Series F
Preferred Stock 75,000 $75
Net Loss
Dividends on Series
A PREFERRED STOCK
----------------- --------- ------ ------ ------- ------ ------ ------
Balance,
March 31, 1998 $1,000 50,000 $50 200,000 $200 75,000 $75
Less:
Treasury Stock
NET SHAREHOLDER'S EQUITY
</TABLE>
<TABLE>
<CAPTION>
ADDITIONAL ACCUMU-
COMMON STOCK PAID-IN LATED
SHARES AMOUNT CAPITAL DEFICIT
--------- -------
<S> <C> <C> <C> <C> <C>
Balance,
June 30, 1998 6,672,943 $6,673 $23,411,349 ($20,280,352) $ 3,138,670
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 MWI 1,203,704 $1,204 823,581 $ 824,785
Issuance of Series D
Preferred Stock 499,950 500,000
Issuance of Series E
Preferred Stock 1,974,800 1,975,000
Issuance of Series F
Preferred Stock $ 75
Net Loss (2,220,447) (2,220,447)
Dividends on Series
A PREFERRED STOCK
----------------- --------- ------ ----------- -------------- -----------
Balance,
March 31, 1998 7,876,647 $7,877 $26,709,680 ($22,500,799) $4,218,083
Less:
Treasury Stock (93,536) (1,010,192)
NET SHAREHOLDER'S EQUITY 7,783,111 $3,207,891
</TABLE>
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
Page 5
<PAGE>
THE PRODUCERS ENTERTAINMENT GROUP LTD.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED MARCH 31,
1999 1998
----------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C>
Net income (loss) $ (2,220,447) $ 800,834
ADJUSTMENTS TO RECONCILE NET (LOSS) TO
NET CASH (USED IN) OPERATING ACTIVITIES:
Depreciation of fixed assets 28,579 43,871
Amortization of film costs 0 12,422,090
Write off of projects in development 0 0
Amortization of Goodwill 116,000 0
Amortization of Acquisition Costs 11,391 0
Amortization of non-competition agreement 115,000 207,000
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 (1,284,189) (1,850,811)
(Increase) decrease in other assets 297,273 65,944
(Increase) decrease in notes receivable (200,000) 0
Increase (decrease) in accounts payable
and accrued expenses 2,218,932 (216,143)
(Increase) in prepaid expenses (212,208) 0
Decrease (increase) in deferred revenues 131,543 50,000
------------------ --------------
Net cash (used in) operating activities (998,126) (2,700,940)
------------------ --------------
CASH FLOWS FROM INVESTING ACTIVITIES:
(Additions) to film costs, net (294,614) (476,020)
Company Acquisitions (800,000) 0
Capital (expenditures) on equipment 0 (58,497)
(Increase) in short term investments 0 (2,869,020)
(Increase) in investment for distribution
subsidiary 0 (140,493)
(Increase) in Goodwill (824,785) 0
(Increase) decrease in receivables from related
parties (261,806) 17,039
(Increase) in related pry covenant not to compete 0 (460,000)
Increase (decrease) in obligations under capital
leases (42,431) 0
(Increase) in Acquisition Costs (114,589) 0
------------------ --------------
Net cash (used in) investing activities (2,338,225) (48,998)
------------------ --------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of Common Stock 931,035 0
Proceeds from notes payable (84,346) 0
Proceeds from borrowings 0 496,000
Issuance of Series "D" Preferred Stock 500,000 0
Issuance of Series "E" Preferred Stock 1,868,750 0
Issuance of Series "F" Preferred Stock 75 0
(Payment) of cash dividends on Preferred Stock 0 (106,250)
------------------ --------------
Net cash provided by financing activities 3,215,514 315,000
------------------ --------------
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<PAGE>
Net cash increase (decrease) in cash (120,837) (411,315)
Cash and cash equivalents at beginning of period 73,751 1,344,870
------------------ --------------
Cash and cash equivalents at end of period $ (47,086) $ 933,555
------------------ --------------
</TABLE>
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
Page 7
<PAGE>
THE PRODUCERS ENTERTAINMENT GROUP LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
MARCH 31, 1999
(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 March 31, 1999 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
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 January 21, 1999, the Company announced that it was 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, on January 19, 1999, Messrs. Grosso and Jacobson did resign
from the Company and are expected to return a certain number of shares of the
Company's common stock in exchange for certain of the Company's projects. The
parties have entered into an agreement in principle whereby the Company would
invest the sum of $575,000 in Messrs. Grosso and Jacobson's new company named
Grosso-Jacobson Communications in exchange for the termination of their
respective employment agreements as well as releasing each other from all
obligations, including the promissory notes set forth in the Company's 10-QSB
for the period ended December 31, 1998. Additionally, the Company shall be
entitled to receive a 15% profit participation on those projects transferred to
Messrs. Grosso and Jacobson's private production Company. As further
consideration for this agreement, Messrs. Grosso and Jacobson agreed to return a
total of 1,666,666 shares of TPEG Common Stock to the Company. As a result of
this transaction the Company recognized the one time amount, set forth as
Recovery of Expenses on the
Page 8
<PAGE>
Company's financial statements.
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 a total of 1,203,704
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. Under the terms of the Merger
Agreement, the stockholders of MWI could have received 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. On January 20, 1999, the Company announced that it was
interested in selling this subsidiary. The Company is not in discussions at this
time regarding this sale. On January 21, 1999, one of the stockholders, Thomas
Daniels and the Company entered into an agreement in principle whereby Mr.
Daniels would be granted the option to purchase 500,000 shares of the Company's
Common Stock at a price equal to $0.82 per share, in exchange for the
relinquishment of Daniels' opportunity to receive the additional shares listed
above.
(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 issued 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 December 31, 1998. For the three months ended March 31, 1999, the Company
will issue shares of its Common Stock at a market value equivalent to $106,250
for the quarterly dividend required to be paid on the Series A Preferred Stock.
(4) LOSS PER SHARE
Loss per share for the three-month period ended March 31, 1999 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 March
31, 1999.
(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
Page 9
<PAGE>
accounts for the grant of options. The Company has made several grants of
options for the period ended March 31, 1999. At March 31, 1999 there were
options to acquire 2,670,665 shares outstanding at exercise prices ranging from
$0.82 per share to $24.00 per share of Common Stock.
In connection with the Company's offering in 1996, the Company issued
5,100,000 Warrants to purchase 5,100,000 shares of common stock at an exercise
price of $1.75 per share (or one warrant for one share of Common Stock). These
warrants trade on the Nasdaq Small Cap market under the symbol "TPEGW". In April
1998, the Company's stockholders approved a 1-for-3 reverse stock split of the
Company's Common Stock. Pursuant to the terms of the Warrant Agreement governing
the warrants, the terms of the warrants were automatically adjusted so that the
5,100,000 warrants outstanding can now be exercised to purchase 1,700,00 shares
of Common Stock in the aggregate at $5.25 per share. Therefore, in order to
acquire one share of stock, a warrant holder must exercise three warrants and
pay an aggregate exercise price of $5.25.
(6) RELATED PARTY TRANSACTIONS
As of the period ended March 31, 1999, 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 $50,384.60, 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.
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
ability to change the direction of the Company. Other risk factors include the
competition in the internet industry, the status of the Company's liquidity in
future fiscal periods,
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<PAGE>
the Company's ability to integrate the acquisition of MWI and factors that
generally affect the internet and e-commerce industries, 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 herein
and 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
In December, 1998, the Company commenced a restructuring of its operations
in order to redirect its primary revenue sources. It determined that it would
seek opportunities in the internet and e-commerce sectors.
The Company has retained the services of Strategic Capital Consultants to
advise and assist the Company in locating acquisitions in the internet and
e-commerce industries. During the quarter ended March 31, 1999, the Company made
two investments in internet-related companies. 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 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. The initial investment
was $200,000 for 100,000 shares, representing approximately 2% of the
outstanding common stock of flowersandgifts.com. Additionally, the Company has
the right to purchase up to an additional $1,000,000 in common stock of
flowersandgifts.com at a price of $2.10 per share. The Company then invested the
sum of $100,000 for an additional 50,000 shares of the common stock.
Subsequently, on February 24, 1999, the Company entered into a Stock Sale
Agreement with Pacific Softworks, Inc. ("Pacific") to purchase 100,000
restricted shares of Pacific's common stock for the total sum of $500,000. The
Company has executed an agreement with Pacific to acquire up to an additional
100,000 of common stock in the aggregate at a price of $6.00 per share, subject
to certain conditions.
In view of the diminished revenue resulting from the discontinuance of
certain television production and distribution activities, the Company has
focused on the following areas in order to generate working capital over the
next twelve months: collection of current accounts receivables; revenues to be
derived from two made-for-television movies currently in development and
additional equity financings currently being negotiated.
It is the Company's intention to seek a strategic alliance, acquisition,
or merger, that would enable it to generate revenues sufficient to operate
profitably, although there can be no assurance that any such alliance,
acquisition or merger will be successful. Since the Company's experience has
been in the entertainment industry, it is focusing primarily on enabling
technologies in the converging telecommunications, cable, satellite, e-commerce,
entertainment and on-line industries.
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<PAGE>
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 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 MARCH 31, 1999, COMPARED TO THREE MONTHS ENDED MARCH 31, 1998
Revenues for the three months ended March 31, 1999 was $0.00, a 100%
decrease from $6,196,754 for the three months ended March 31, 1998. The Company
had no revenues for the three months ended March 31, 1999 from its television
and international distribution activities. Revenues of $6,196,142 for the three
months ended March 31, 1998 consisted of revenues from television production and
distribution activities and $353,223 from personal management fees. The decrease
in revenues was due to the lack of television production and decreased
international sales, as well as the elimination of the personal management
operation.
Amortization of film costs for the three months ended March 31, 1999 and
March 31, 1998 was $0.00 and $3,980,910, 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 March 31, 1999 and March 31,
1998, was $0.00 and $532,800, respectively. Cost of sales as a percentage of
total revenues decreased from 9% for the three months ended March 31, 1998 to 0%
for the three months ended March 31, 1999.
General and administrative expenses for the three months ended March 31,
1999 were $381,840 compared to $1,370,219 for the three months ended March 31,
1998. The $988,379, or 72%, decrease in general and administrative expenses
was due to (i) the elimination of certain staff and related benefits of
television production, international sales and talent management personnel in
the Los Angeles office, and (ii) a non-recurring credit for accrued expenses
which have been reversed.
During the three months ended March 31, 1999, the Company recorded no
additional amortization related to a November 4, 1996 non-competition agreement
with a former officer and director since such cost was fully amortized as of
December 31, 1998.
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<PAGE>
During the three months ended March 31, 1999, TPEG recorded no interest
income. During the three months ended March 31, 1998, interest income of $11,092
consisted of interest income earned on temporary cash investments. During the
three months ended March 31, 1999, TPEG recorded a recovery of expenses in the
amount of $1,042,310 in connection with the Grosso-Jacobson transaction
described in Note 1.
TPEG reported a profit of $507,150 or $.05 per share in the three months
ended March 31, 1999 compared to a profit of $131,993 or $.02 per share in the
three months ended March 31, 1998. The income 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 average common shares outstanding
increased to 10,061,725 as of the three months ended March 31, 1999 from
6,335,976 as of the three months ended March 31, 1998 due primarily from the
sale of securities to The Augustine Fund, LP and the issuance of Common Stock in
connection with the purchase of MWI. The calculation of average common shares
for both periods reflects the effect of the one-for-three stock split completed
during the fourth quarter 1998.
NINE MONTHS ENDED MARCH 31, 1999, COMPARED TO NINE MONTHS ENDED MARCH 31, 1998.
Revenues for the nine months ended March 31, 1999 were $1,142,188, a 94%
decrease from $18,276,403 for the nine months ended March 31, 1998. Revenues for
the nine months ended March 31, 1999 consisted of income from the continuing
international distribution of completed projects. Revenues of $1,142,188 for the
nine months ended March 31, 1999 consisted of revenues from production,
distribution, and talent management. The decrease in revenues was due to a
reduction in production or international distribution activities and the
elimination of the talent management activities.
Amortization of film costs for the nine months ended March 31, 1999 and
March 31, 1998 was $0.00 and $12,422,090, 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 nine months ended March 31, 1999 and March 31, 1998,
was $0.00 and $604,218, respectively.
General and administrative expenses for the nine months ended March 31,
1999 were $3,001,561 compared to $3,974,429 for the nine months ended March 31,
1998. The $3,592,589 decrease in general and administrative expenses was due to
a reduction in overhead and the discontinuation of certain television and
personal management operations.
During the nine months ended March 31, 1999, the Company recorded
($184,000) of amortization related to a November 4, 1996 non-competition
agreement with a former officer and director, which cost was
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fully amortized as of December 31, 1998.
During the nine months ended March 31, 1999, TPEG recorded no interest
income. During the nine months ended March 31, 1998, interest income of $58,522
consisted of interest income earned on temporary cash investments. During the
three months ended March 31, 1999, TPEG recorded a recovery of expenses in the
amount of $1,042,310 in connection with the Grosso-Jacobson transaction
described in Note 1.
TPEG reported a loss of $2,220,447 or ($.25) per share in the nine months
ended March 31, 1999 compared to a profit of $482,084 or $.08 per share in the
nine months ended March 31, 1998. 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 average common shares
outstanding increased to 9,021,640 as of the nine months ended March 31, 1999
from 6,290,871 as of the nine months ended March 31, 1998 due primarily to the
sales of securities to The Augustine Fund and the issuance of Common Stock in
connection with the Company's purchase of MWI. 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 of fiscal 1998.
LIQUIDITY AND CAPITAL RESOURCES
As of March 31, 1999, TPEG had decreased liquidity from the comparable
period ended March 31, 1998 primarily as a result of a decrease in revenue. Cash
and cash equivalents as of March 31, 1999 were ($47,086) and trade accounts
receivable increased to $2,222,319. As of March 31, 1999, the Company had
recorded accounts payable and accrued expenses of $2,554,644. In the comparable
period ending March 31, 1998, the Company had $933,555 in cash and cash
equivalents and $2,373,039 in trade accounts receivable available to provide
payment for $674,624 in recorded accounts payable and accrued expenses.
Management estimates that, as of March 31, 1999, the Company's cash
commitments for the next twelve months will aggregate approximately $1,700,000.
The figure includes (a) base compensation to its key officers, key independent
contractors and key consultants of approximately $550,000 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 March 31, 1999, total cash
general and administrative expenses for all categories aggregated approximately
$381,840. 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 and the Series E 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 additional funding
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 internet-related projects and ventures. However, there can be no
assurance that the Company will be able to raise adequate funds to continue
operations. The actual utilization of excess
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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
would 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 be able to seek those strategic alliances or acquisitions required
to diversify itself in the internet and e-commerce industries. 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 further draw on this equity-based line of
credit is subject to stockholder approval, among other requirements. Through
March 31, 1999, the Company has received approximately $2,500,000 from the
investor in exchange for the sale by the Company of Series D and Series E
convertible preferred stock and the issuance of Series F convertible preferred
stock to the investor. Subject to the restrictions described above, the Company
is committed to use $2,000,000 of the equity-based line of credit, which is
available to the Company through August 2000. All of the Series D Preferred
Stock issued has been converted into Common Stock. The holders of the Company's
Series E Preferred Stock are entitled to annual dividends of 6%, 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.
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 June 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
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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 December 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.
RISK FACTORS
RISKS ASSOCIATED WITH NEW BUSINESS STRATEGY
During the quarter ended March 31, 1999, we announced our intention to
expand our business in the internet and electronic commerce industries. The
internet and electronic commerce industries are new, highly speculative and
involve a substantial degree of risk. We retained the services of Strategic
Capital Consultants to advise us in locating acquisition candidates. The
internet and electronic commerce industries are a completely new business
venture for us, a business in which we have never operated. None of our current
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executives, other than Barry Sandrew, our Chief Technology Officer, have
experience operating internet-related companies. Although we believe that our
experience in the entertainment business lends itself well to the industry, we
cannot assure you that we will be able to operate successful businesses, or that
we will invest in or acquire interests in companies which will be successful. If
we are unable to locate acquisition targets, or if we are unable to consummate
acquisitions of internet and electronic commerce companies or if we are unable
to successfully integrate their businesses, there could be a material adverse
effect on our business and financial condition.
Our new business strategy will require substantial working capital. We
have spent and will continue to spend substantial funds to locate appropriate
acquisition candidates, to market our efforts and to establish an effective
management team with experience in the internet and electronic commerce
industries. We cannot assure you that we will be successful in any of these
areas.
CERTAIN FACTORS AFFECT OUR LIQUIDITY AND CAPITAL RESOURCES
Our cash commitments for the next 12 months include paying aggregate
minimum base compensation of approximately $550,000 to our officers and key
independent contractors and minimum office rent of approximately $150,000. We
also incur overhead and other costs such as employee salaries, related benefits,
office expenses, professional fees and similar expenses. For our fiscal year
ended June 30, 1998, our general and administrative expenses, which include
compensation and rent, totaled $4,151,252. Dividends on our outstanding Series A
Preferred Stock aggregate $425,000 annually. We also pay dividends of 6% per
annum on our outstanding Series E Preferred Stock. At our option, we may pay
dividends on all series of preferred stock in shares of common stock or in cash.
As a result of all of these expenses, we had an accumulated deficit of
($22,500,800) at March 31, 1999.
At March 31, 1999, we had cash and cash equivalents of ($49,101) and
accounts and contracts receivable of $2,222,319. At March 31, 1999, we also had
accounts payable and accrued expenses of $2,554,644. Other than our sale of
preferred stock, we have not arranged for external sources of financing such as
bank lines of credit and cannot assure you that additional financing will be
available on acceptable terms or at all.
WE HAVE INCURRED LOSSES AND MAY NOT BE PROFITABLE IN THE FUTURE
For the fiscal years ended June 30, 1996, 1997 and 1998, we generated
revenues of $5,367,498, $5,521,441 and $22,369,511, respectively, and incurred
net losses of $1,447,666, $4,592,145 and $1,411,916, respectively (without
giving effect to the payment in 1996, 1997 and 1998 of dividends of $425,000
annually, on the Series A Preferred Stock which we paid by issuing shares of
common stock). As of March 31, 1999, we had an accumulated deficit of
($22,500,800). We cannot provide you any assurance that we will be profitable in
future fiscal periods.
RISKS ASSOCIATED WITH INTEGRATION OF RECENT ACQUISITION
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In July 1998, we acquired MWI Distribution, Inc., which does business under
the name MediaWorks International. On January 20, 1999, we announced that we are
considering the sale of MediaWorks. If we continue to own MediaWorks, we must
efficiently, effectively and timely integrate our operations with those of
MediaWorks International. Combining these businesses will, among other things,
require us to do the following:
o integrate management staffs;
o coordinate sales and marketing efforts;
o combine and organize purchasing departments; and
o identify and eliminate redundant overhead.
Our management will need to devote considerable effort in fully integrating
these businesses. We may experience difficulties associated with the integration
and we may not be efficient or successful in doing so. Furthermore, even if we
successfully combine the operations of the companies, we cannot assure you that
we will be able to operate profitably.
WE FACE YEAR 2000 RISKS
The Year 2000 issue is the result of computer programs being written using
two digits instead of four to represent the year in a date field. Computer
hardware and software applications that are date-sensitive may interpret a date
represented as "00" to be the year 1900 rather than the year 2000. The results
could include system failure, inability to process transactions or send invoices
or other miscalculations causing a disruption in our operations.
We have assessed our hardware and software systems, which are comprised only
of an internal personal computer network and commercially available software
products. Based on our assessment, we believe that our hardware and software
systems will function properly with respect to dates in the year 2000 and
beyond. We are also assessing the embedded system contained in our leased
equipment, which we expect to complete by the end of June 1999. Currently, we
are uncertain whether this embedded system is Year 2000 compliant. After we
complete all of our Year 2000 assessments, we intend to develop contingency
plans to reduce our Year 2000 exposure.
In addition, we are contacting our key vendors and customers to determine if
they have any significant Year 2000 exposures which would have an adverse affect
on us and our business. We are not presently aware of any Year 2000 issues
relating to these vendors and customers. However, we cannot assure you that
these parties will not experience Year 2000 problems. If they do encounter such
problems, they may not be able to solve them in a timely manner, which could
adversely affect our financial condition.
The Year 2000 issue presents numerous other risks that could adversely
affect us, such as disruptions of service from third parties who provide us with
electricity, water or telephone service. If these critical third party providers
experience difficulties that result in disruptions of services to us, a shutdown
of our operations at individual facilities could occur. Also, general
uncertainty exists regarding the Year 2000
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problem and its potential effect on the overall business environment and
economies of the United States and other nations. As a result, we cannot
determine at this time whether the Year 2000 problem will materially impact our
operations or financial condition as a result of significant disruptions to
these economies and/or business environment.
RISKS RELATED TO OUR INDUSTRIES
OUR INDUSTRIES ARE INTENSELY COMPETITIVE
The television industry is highly competitive and involves a substantial
degree of risk. We directly compete with many other television and motion
picture producers which are significantly larger than us. These producers
typically have financial and other resources which are far greater than those
available to us now or in the foreseeable future. New technologies and the
expansion of existing technologies in the television industry may further
increase the competitive pressures on us. We cannot assure you that we will be
successful in competing in the television field.
The feature film industry is highly competitive and involves a substantial
degree of risk. We currently compete with major film studios and other
established independent producers of feature films. Most of our current and
potential competitors in the film industry are significantly larger and have
greater financial, marketing and other resources than us. We may not be able to
compete successfully against these companies.
Our success depends upon our ability to produce programming for television
and theatrical release which will appeal to markets characterized by changing
popular tastes. In light of the intense competition in our industry, we cannot
give you assurance that we will continue to acquire and develop products which
can be made into profitable made-for-television movies, television series or
theatrical releases.
If we are successful in entering the internet and electronic commerce
industries, we expect to experience a similarly competitive environment, in
which many large companies have substantially greater market presence,
financial, technical, marketing and other resources.
EFFECT OF OUTSTANDING OPTIONS AND WARRANTS
As of the date of this Report, we have granted options and warrants to
purchase a total of 2,620,665 shares of common stock that have not been
exercised. To the extent that these outstanding options and warrants are
exercised, our stockholders' interests will be diluted. Also, the terms upon
which we will be able to obtain additional equity capital may be affected
adversely, since we can expect the holders of the outstanding options and
warrants to exercise them at a time when we would, in all likelihood, be able to
obtain any needed capital on more favorable terms than those provided in the
outstanding options and warrants.
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EFFECT OF CONVERSION OF CONVERTIBLE PREFERRED STOCK
In December 1994, we issued 1,000,000 shares of our Series A Preferred
Stock, which pays an annual dividend of 8 1/2%. During 1998 and 1999, we issued
200,000 shares of our Series E Preferred Stock, which has a face value of $10.00
per share and pays an annual dividend of 6%. Of the shares of Series E Preferred
Stock issued, the holder has converted 1,964,988 shares into common stock. At
our option, we can pay the dividends on all series of our preferred stock in
cash or in shares of common stock.
Holders of our convertible preferred stock could convert their shares into
common stock at any time in the future. This conversion would dilute the
interests of our common stockholders. Additionally, since these shares of common
stock will be registered for sale in the marketplace, future offers to sell such
shares could potentially depress the price of our common stock. In the future,
this could make it difficult for us or our stockholders to sell the common
stock. Also, we may have problems obtaining additional equity capital on terms
we like, since we can expect the holders of our convertible preferred stock to
convert their shares into common stock at a time when we would, in all
likelihood, be able to obtain any needed capital on more favorable terms than
those provided by the convertible preferred stock.
POSSIBLE ISSUANCE OF PREFERRED STOCK; ANTITAKEOVER PROVISIONS OF OUR CERTIFICATE
OF INCORPORATION
Our Certificate of Incorporation permits our Board of Directors to issue up
to 20,000,000 shares of "blank check" Preferred Stock. Our Board of Directors
also has the authority to determine the price, rights, preferences, privileges
and restrictions of those shares without any further vote or action by our
stockholders. We have issued 1,000,000 shares of Series A Preferred Stock,
50,000 shares of Series D Preferred Stock, 200,000 shares of Series E Preferred
Stock and 250,000 shares of our Series F Preferred Stock. We have reserved for
issuance an additional 300,000 shares of Series A Preferred Stock, 300,000
shares of Series E Preferred Stock and 300,000 shares of Series F Preferred
Stock. In January 1999, our Board of Directors authorized the issuance of
3,000,000 shares of Series C Preferred Stock. Additional issuances of preferred
stock with voting and conversion rights could adversely affect the rights of our
common stockholders by, among other things, causing them to lose their voting
control to others. Such an issuance could also delay, defer or prevent a change
in our control, even if these actions would benefit our stockholders.
We are also subject to Section 203 of the Delaware General Corporation Law
which generally prohibits us from engaging in any business combination with any
interested stockholder for three years following the date that such stockholder
became "interested." Generally, an interested stockholder is any entity or
person who beneficially owns 15% or more of a corporation's outstanding voting
stock and any entity or person affiliated with, controlling or controlled by
such entity or person. These provisions could discourage others from making
tender offers for our shares of common stock. Consequently, they may inhibit
fluctuations in the market price of our shares that could result from actual or
rumored takeover attempts. Such provisions could also prevent changes in our
management, even if such changes would be in the best interest of our
stockholders.
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ABSENCE OF DIVIDENDS ON COMMON STOCK; ANNUAL CASH DIVIDENDS ON SERIES A
PREFERRED STOCK, AND SERIES E PREFERRED STOCK
We have never paid cash dividends on our common stock and we do not expect
to pay these dividends in the foreseeable future. Holders of our Series A
Preferred Stock are entitled to annual dividends of 8 1/2% (aggregating $425,000
annually, assuming no conversion); holders of our Series E Preferred Stock are
entitled to annual dividends of 6%. We pay these dividends quarterly, in cash or
in shares of our common stock. For the foreseeable future, we anticipate that we
will retain all of our cash resources and earnings, if any, for the operation
and expansion of our business, except to the extent required to satisfy our
obligations under the terms of the Series A and Series E Preferred Stock.
OUR STOCK PRICE HAS BEEN VOLATILE
The market price of our common stock has been, and is likely to continue to
be, highly volatile. Factors such as our competitors' announcements, or our
announcements concerning our financial results may significantly impact the
market price of our securities. Further, we cannot assure you that the market
will react favorably to our efforts to expand our efforts in the internet and
electronic commerce industries. Any announcement we make could significantly
affect the market price of our common stock.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
THE PRODUCERS ENTERTAINMENT GROUP LTD. AND MWI DISTRIBUTION, INC. V. CRAIG
SUSSMAN, Before The American Arbitration Association, No. 72 160 00256 99.
On March 22, 1999, The Producers Entertainment Group ("TPEG") and MWI
Distribution, Inc., a wholly owned subsidiary of TPEG ("MWI"), filed a demand
for arbitration against Craig Sussman for breach of his employment agreement
with TPEG Merger Co., the predecessor-in-interest to MWI. TPEG and MWI allege
that Mr. Sussman engaged in serious misconduct while he was Chief Executive
Officer which entitled TPEG and MWI to terminate Mr. Sussman's employment
agreement for cause. Damages are in an amount to be determined. TPEG and MWI are
seeking declaratory relief that Mr. Sussman's misconduct amounts to breach of
his obligations and constitutes cause for termination under the agreement and
that in March 1999, TPEG and MWI did terminate Mr. Sussman's employment
agreement "for cause." In response to these claims, Mr. Sussman claims that TPEG
and MWI have breached their obligations to him under the agreement and believe
he is entitled to be compensated under his employment agreement. Craig Sussman
has not filed a response to TPEG's and MWI's demand for arbitration and is
taking the position, with which TPEG and MWI do not agree, that the matter at
issue does not fall within the mandatory arbitration provision of his employment
agreement. An arbitrator has yet not been selected to preside over this matter.
Due to the early stage of litigation and the fact that investigations are
ongoing, it is not possible at this time to predict the
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outcome of this case.
JERRY KATZ V. SUSSMAN, ET. AL.
- ------------------------------
Los Angeles County Superior Court, Case No. BC 203956
On January 19, 1999, Jerry Katz filed suit against The Producers
Entertainment Group ("TPEG"), TPEG Merger Co. ("Merger Co."), MWI Distribution,
Inc. ("MWI") and several individual defendants, including Craig Sussman, Tom
Daniels, Irwin Meyer, Larry Jacobson, Salvatore Grosso and Arthur Bernstein.
Plaintiff's alleged causes of action include breach of contract, fraud and other
tort claims.
The lawsuit is based primarily on alleged events arising prior to TPEG's
acquisition of MWI in July 1998. Mr. Katz alleges that in February 1997, he
entered into a letter of understanding with Craig Sussman and Tom Daniels, who
were then the sole shareholders and officers of MWI, whereby he would set up a
company named MediaSat to license MWI's product in foreign markets to a list of
approved broadcasters in return for a monthly draw of $2,500 against net profits
and a 49% interest in MediaSat. This transaction was for an initial period of 6
months commencing on March 18, 1998. The partnership agreement also allegedly
provided that Mr. Katz would continue to receive commissions from certain
earnings by MWI as a result of introductions by Mr. Katz. Mr. Katz claims that
in acquiring MWI, TPEG acquired all contractual rights to which MediaSat was a
party without his consent, and that the value of contracts to which MediaSat was
a party was a significant consideration in determining the value of the merger.
TPEG does not deny the limited relationship between Mr. Katz and MWI; however,
the Company believes, based on actual completed sales attributable to Mr. Katz
that no money may be due to him under the letter of understanding. In this
lawsuit, Mr. Katz asserts various causes of action against the defendants in an
effort to recover lost earnings, other ancillary benefits, and stock ownership
in TPEG, which he claims is over $1 million. Since the Company was not a party
to the letter of understanding with Mr. Katz, Mr. Daniels and Mr. Sussman and
have no contractual relationship with Mr. Katz regarding the receipt by Mr. Katz
of any shares resulting from the merger, the Company has answered the complaint
and asserted various affirmative defenses. Plaintiff has served an initial set
of discovery, but TPEG has not responded. Due to the early stage of litigation
and the fact that investigations are ongoing, it is not possible at this time to
predict the outcome of this case.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
(c) The Company and Strategic Capital Consultants entered into a
Securities Purchase Agreement, dated as of January 14, 1999 (the "Strategic
Agreement"), pursuant to which Strategic purchased 1,700,000 shares of the
Series C Convertible Preferred Stock, par value $0.001 per share (the "Series C
Convertible Preferred Stock") for a purchase price of $1,700.00. Strategic
serves as the Company's financial advisor. All 1,700,000 shares of the Series C
Convertible Preferred Stock are convertible at a fixed rate of $0.50 per share.
As of the effective date of the Strategic Agreement, the conversion price for
the shares of the Series C Convertible Preferred Stock was above market value.
The closing sales price of the Company's Common Stock on January 14, 1999 was
$0.3125. The sale of securities was deemed to be exempt from registration in
reliance on Section 4(2) of the Securities Act as transactions by an issuer not
involving a public offering.
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The Company and Mountaingate Productions ("Mountaingate") entered
into a Securities Purchase Agreement, dated as of January 14, 1999 (the
"Mountaingate Agreement"). Mountaingate purchased for $1,300.00, 1,300,000
shares of the Series C Convertible Preferred Stock convertible at a fixed rate
of $0.50 per share. Mountaingate has provided production services to the Company
since October 1, 1995. Mountaingate is owned by Alison Meyer Marcus and Patricia
Meyer, Mr. Irwin Meyer's adult children. Mr. Meyer has no direct or indirect
beneficial interest in Mountaingate. As of the effective date of the
Mountaingate Agreement, the conversion price for the shares of each of the
Series C Convertible Preferred Stock, convertible at $0.50, was above market
value. The closing sales price of the Company's Common Stock on January 14, 1999
was $0.3125. The sale of securities was deemed to be exempt from registration in
reliance on Section 4(2) of the Securities Act as transactions by an issuer not
involving a public offering.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K AND FORM 8-K/A
(a) EXHIBITS
10.1 Securities Purchase Agreement with Strategic Capital Consultants,
dated as of January 14, 1999.
10.2 Securities Purchase Agreement with Mountaingate Productions, LLC,
dated as of January 14, 1999.
27.1 Financial Data Schedule
(b) Reports on Form 8-K
None.
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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.
--------------------------------------
(Registrant)
Dated: MAY 24, 1999 /S/ IRWIN MEYER
------------ ---------------
Irwin Meyer, Chief Executive Officer
Dated: MAY 24,1999 /S/ ARTHUR H. BERNSTEIN
----------- -----------------------
Arthur Bernstein, Executive Vice President,
Principal Financial Officer
Page 24
SECURITIES PURCHASE AGREEMENT
THIS SECURITIES PURCHASE AGREEMENT (this "Agreement") is made as of
this 14th day of January, 1999, by and between The Producers Entertainment Group
Ltd., a Delaware corporation (the "Company") and Strategic Capital Consultants
(the "Purchaser").
R E C I T A L S
WHEREAS, the Company desires to sell to the Purchaser and the Purchaser
desires to purchase from the Company 1,700,000 shares of the Company's Series C
Preferred Stock, par value $.001 per share (the "Shares"), for a purchase price
of $.001 per share; and
WHEREAS, the terms of the Preferred Stock are set forth on Exhibit A
hereto.
A G R E E M E N T
NOW, THEREFORE, in consideration of the mutual promises hereinafter set
forth and other good and valuable consideration, the receipt and adequacy of
which is hereby acknowledged, the parties agree as follows:
1. SALE AND DELIVERY OF SHARES. As of the date hereof, the Company
agrees to sell to the Purchaser and the Purchaser agrees to purchase from the
Company the Shares for an aggregate purchase price of One Thousand Seven Hundred
Dollars ($1,700) by delivery of a check for the full purchase price to the
Company. In exchange for such check, the Company shall deliver the Purchaser
certificates representing the Shares in the name of the Purchaser.
2. STOCK CERTIFICATES. The certificates evidencing the Shares shall
bear legends substantially in the following form:
"THE SECURITIES EVIDENCED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), AND MAY NOT
BE SOLD, PLEDGED, HYPOTHECATED, ASSIGNED, TRANSFERRED OR OTHERWISE
DISPOSED OF EXCEPT IN ACCORDANCE WITH THE ACT AND THE RULES AND
REGULATIONS OF THE SECURITIES AND EXCHANGE COMMISSION THEREUNDER."
3. SECURITIES LAW RESTRICTIONS. None of the Shares or any shares of
Common Stock of the Company issuable upon conversion of the Shares shall be
sold, transferred, assigned, pledged, encumbered or otherwise disposed of (with
or without consideration) (each a "Transfer") and the Company shall not be
required to register any such Transfer and the Company may instruct its
<PAGE>
transfer agent not to register any such Transfer, unless and until all of the
following events shall have occurred:
a. the Shares or the shares of Common Stock issued upon
conversion of the Shares are Transferred pursuant to and in conformity with (i)
(x) an effective registration statement filed with the Securities and Exchange
Commission (the "Commission") pursuant to the Securities Act of 1933, as amended
(the "Securities Act"), or (y) an exemption from registration under the
Securities Act, and (ii) the securities laws of any state of the United States;
and
b. Purchaser has, prior to the Transfer of such Shares, and if
requested by the Company, provided all relevant information to Company's counsel
so that upon Company's request, Company's counsel is able to, and actually
prepares and delivers to the Company a written opinion that the proposed
Transfer (i) (x) is pursuant to a registration statement which has been filed
with the Commission and is then effective, or (y) is exempt from registration
under the Securities Act as then in effect, and the rules and regulations
thereunder, and (ii) is either qualified or registered under any applicable
state securities laws, or exempt from such qualification or registration. The
Company shall bear all reasonable costs of preparing such opinion.
4. MARKET STAND-OFF. In connection with any underwritten public
offering by the Company of its equity securities pursuant to an effective
registration statement filed under the Securities Act, Purchaser shall not sell,
make any short sale of, loan, hypothecate, pledge, grant any option for the
purchase of, or otherwise dispose or transfer for value or otherwise agree to
engage in any of the foregoing transactions with respect to the Shares or any
shares of Common Stock issued upon conversion of the Shares without the prior
written consent of the Company or its underwriters, for such period of time from
and after the effective date of such registration statement as may be requested
by the Company or such underwriters; provided, however, that in no event shall
such period exceed 180 days or such other period as is reasonably requested by
the managing underwriter. This Section 4 shall only remain in effect for the
two-year period immediately following the date hereof and shall thereafter
terminate and cease to be in force or effect. Purchaser agrees to execute and
deliver to the Company such further documents or instruments as the Company
reasonably determines to be necessary or appropriate to effect the provisions of
this Section 4. In the event of any stock dividend, stock split,
recapitalization, or other change affecting the Company's outstanding Common
Stock effected without receipt of consideration, any new, substituted, or
additional securities distributed with respect to the Shares shall be
immediately subject to the provisions of this Section 4, to the same extent the
Shares are at such time covered by such provisions. In order to enforce the
provisions of Section 4, the Company may impose stop-transfer instructions with
respect to the Shares until the end of the applicable stand-off period.
5. REPRESENTATIONS OF PURCHASER. The Purchaser has been advised that
the Shares have not been registered and will not be registered under the
Securities Act nor qualified under any state blue sky law, on the ground that no
distribution or public offering of any of the Shares is to be effected, and that
in this connection the Company is relying in part on the representations of the
Purchaser set forth in this Section 5. The Purchaser represents, warrants and
covenants that:
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<PAGE>
a. Purchaser is an "accredited investor" as such term is defined
in the rules and regulations promulgated under the Securities Act;
b. Purchaser has such knowledge and experience in business and
financial matters as to be capable of evaluating the merits and risks of an
investment in the Shares and has the capacity to protect its own interest in
connection with the acquisition of the Shares;
c. Purchaser has the financial ability to bear the economic risk
of its investment, has adequate means for providing for its current needs and
foreseeable contingencies, has no need now, and anticipates no need in the
foreseeable future, to sell the Shares, is able to hold the Shares for an
indefinite period of time and can afford a complete loss of its investment;
d. Purchaser is acquiring the Shares for its own account and not
with a view to or for sale in connection with any resale or distribution of such
Shares in violation of the Securities Act;
e. At no time was Purchaser presented with or solicited by any
leaflet, public promotional meeting, circular, newspaper or magazine article,
radio or television advertisement or any other form of general advertising or
solicitation for the purchase of the Shares;
f. Purchaser understands that there is no public market for the
Shares Purchaser acquires and that such Shares must be held indefinitely unless
the Transfer (as defined above) of such Shares is registered, or exempt from
registration, under the Securities Act and that transferability of the Shares
will be limited as provided by this Agreement and applicable federal and state
securities laws;
g. Purchaser and/or Purchaser's representatives have been
afforded full and free access to corporate books, financial statements, records,
contracts, documents, and other information concerning the Company and its
offices and facilities, have been afforded an opportunity to ask such questions
of the Company's officers and employees concerning the Company's business,
operations, financial condition, assets, liabilities and other relevant matters
as deemed necessary or desirable, and have been given all such information as
has been requested, in order to evaluate the merits and risks of the investment
in the Shares;
h. Purchaser understands that any projections delivered to
Purchaser with respect to the Company or its business are estimates of future
performance which are inherently inaccurate, and that such projections are not a
guarantee of future performance and that Purchaser is not relying on the
accuracy of any such projections in making an investment in the Company; and
i. Purchaser understands that an investment in the Shares
involves a high degree of risk and acknowledges that the Company has provided
Purchaser with a document discussing certain risk factors that have been
carefully considered by Purchaser.
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<PAGE>
7. GENERAL.
a. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED AND ENFORCED
IN ACCORDANCE WITH THE LAWS OF THE STATE OF CALIFORNIA APPLICABLE TO CONTRACTS
MADE AND TO BE PERFORMED ENTIRELY WITHIN SUCH STATE. JURISDICTION AND VENUE OVER
ANY LEGAL ACTION BROUGHT HEREUNDER SHALL RESIDE EXCLUSIVELY IN THE COUNTY OF LOS
ANGELES, STATE OF CALIFORNIA.
b. The section headings herein are for convenience of reference
only and shall not affect in any way the meaning or interpretation of this
Agreement.
c. This Agreement, and the parties's rights and obligations
hereunder, may not be assigned by either party.
d. This Agreement may be amended, modified, superseded or
canceled, and the terms or covenants hereof maybe waived, only by a written
instrument executed by both of the parties hereto, or, in the case of a waiver,
by the party waiving compliance. The failure of either party at any time or
times to require performance of any provision hereof shall in no manner affect
the right at a later time to enforce the same. No waiver by either party of the
breach of any term or covenant contained in this Agreement, whether by conduct
or otherwise, in any one or more instances, shall be deemed to be, or construed
as, a further or continuing waiver of any such breach, or a waiver of the breach
of any other term or covenant contained in this Agreement.
e. This Agreement may be executed in any number of counterparts,
each of which shall be deemed an original, but all of which taken together shall
constitute one and the same instrument.
f. This Agreement constitutes the entire agreement between the
parties and no party shall be liable or bound to any other party in any manner
by any warranties, representations, or covenants except as specifically set
forth herein.
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<PAGE>
IN WITNESS WHEREOF, this Agreement has been duly executed on behalf of
the parties hereto by their duly authorized representatives as of the date first
written above.
THE PRODUCERS ENTERTAINMENT GROUP LTD.
By: /S/ ARTHUR BERNSTEIN
--------------------------
Its: EXECUTIVE VICE PRESIDENT
--------------------------
STRATEGIC CAPITAL CONSULTANTS
By: /S/ TODD SANDERS
--------------------------
Its: PRESIDENT
-------------------------
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<PAGE>
EXHIBIT A
---------
CERTIFICATE OF DESIGNATIONS,
PREFERENCES, LIMITATIONS AND RELATIVE RIGHTS
OF SERIES C CONVERTIBLE PREFERRED STOCK
OF
THE PRODUCERS ENTERTAINMENT GROUP LTD.
THE PRODUCERS ENTERTAINMENT GROUP LTD., a corporation organized and
existing under the General Corporation Law of the State of Delaware (the
"Corporation"), does hereby certify that the following resolutions were adopted
by the Board of Directors of the Corporation (the "Board of Directors") pursuant
to authority conferred upon the Board of Directors in the Restated Certificate
of Incorporation and pursuant to the provisions of Section 151 of the Delaware
General Corporation Law:
RESOLVED, that, pursuant to the authority granted to and vested in the
Board of Directors, in accordance with the provisions of the Certificate of
Incorporation (as amended from time to time) of the Corporation, the Board of
Directors hereby creates out of the Corporation's previously authorized
preferred stock, $.001 par value per share, of the Corporation a series of
preferred stock to consist of not more than Three Million (3,000,000) shares,
and the Board of Directors hereby fixes the designation and the powers,
preferences and rights, and the qualifications, limitations or restrictions of
the shares of such series as follows:
1. DESIGNATION. This resolution shall provide for a single series of
convertible preferred stock, the designation of which shall be as follows: Three
Million (3,000,000) shares of convertible preferred stock are hereby designated
"Series C Preferred Stock." The stated value of each share of Series C Preferred
Stock is $.001 (the "Stated Value"). The number of authorized shares of Series C
Preferred Stock may be reduced or increased by a further resolution duly adopted
by the Board of Directors of the Corporation and by the filing of an amendment
to the Corporation's Certificate of Incorporation pursuant to the provisions of
the General Corporation Law of the State of Delaware stating that such reduction
or increase has been so authorized.
2. VOTING. Except as expressly required by the laws of the State of
Delaware or as set forth herein, the holders of the Series C Preferred Stock
shall have no voting rights. Any corporate action that may require a vote of the
holders of the Series C Preferred Stock as a class shall be deemed to have been
approved by that class upon the affirmative vote by the holders of a majority of
the issued and outstanding Series C Preferred Stock unless a higher voting
requirement is imposed by the Delaware General Corporation Law. If any corporate
action shall require a vote of the holders of the Series C Preferred Stock other
than as a class, the Series C Preferred Stock shall vote with the Corporation's
common stock, $.001 par value per share (the "Common Stock") as if the Series C
Preferred Stock had been fully converted three (3) business days prior to the
date of the vote.
<PAGE>
3. DIVIDENDS.
3.1 RATE. Holders of Series C Preferred Stock shall be entitled
to receive, out of any funds of the Corporation legally available for that
purpose, non-cumulative dividends from the date of issuance at the rate of 8%
per year per share of Preferred Stock, payable quarterly (pro-rated for partial
quarters) in arrears in cash, or, at the option of the Corporation, in shares of
its Free-Trading Common Stock (as defined herein) at the applicable Conversion
Rate (as defined in Section 5.2 below), on the first day of April, July, October
and January of each year commencing July 1, 1999 (each such date being
hereinafter individually referred to as the "Dividend Payment Date" and
collectively as the "Dividend Payment Dates"); PROVIDED, HOWEVER, that such
dividends will only be paid to holders of Series C Preferred Stock in the event
the Corporation has earnings in any fiscal year greater than $1.0 million.
Notwithstanding the preceding sentence, should the Corporation in its discretion
determine to pay said dividends in shares of Free Trading Common Stock, then all
unpaid dividends shall be paid at the time of each conversion of the Series C
Preferred Stock, such that upon each conversion of the Series C Preferred Stock
by the holder thereof, the Corporation shall pay all unpaid dividends owed as of
the date of such conversion. Each such dividend shall be paid to the holders of
record of the Series C Preferred Stock as they appear on the books of the
Corporation on the record date which shall be not less than 30 days prior to the
related Dividend Payment Date. Dividends on the Series C Preferred Stock shall
be declared and paid to the extent the Corporation is legally able to do so and
shall be cumulative to the extent not declared and paid. Holders of Series C
Preferred Stock shall not be entitled to any dividends, whether payable in cash,
property or stock, in excess of full dividends as herein provided on the Series
C Preferred Stock. "Free-Trading Common Stock" shall mean shares of Common Stock
that are either "restricted securities" as defined in Rule 144 under the
Securities Act of 1933 (the "Securities Act"), but the resales of such shares
have been registered under a registration statement filed with the United States
Securities and Exchange Commission or are otherwise freely tradable without
restriction.
3.2 DIVIDENDS ON COMMON STOCK. No dividends (other than those
payable solely in Common Stock) shall be paid with respect to the Common Stock
during any fiscal year of the Corporation unless all unpaid dividends and the
quarterly dividend on the shares of Series C Preferred Stock for the then
current dividend period shall have been declared and a sum sufficient for the
payment thereof set apart. No shares of Common Stock shall be purchased,
redeemed or acquired by the Corporation, and no funds shall be paid into or set
aside or made available for a sinking fund for the purchase, redemption or
acquisition thereof except (A) in transactions aggregating not more than
$100,000.00 per year, (B) in transactions resulting from a legal obligation of
the Corporation to redeem, purchase or otherwise acquire its securities arising
prior to the date hereof, or (C) pursuant to Section 5.1 herein.
4. REDEMPTION. Except as provided in Section 3.2 herein, the Series C
Preferred Stock shall not be redeemable at any time prior to January 1, 2004.
Thereafter, the Corporation, on the sole authority of its Board of Directors,
may, at its option and at any time prior to notice of conversion of the Series C
Preferred Stock by the holder thereof as hereinafter provided, redeem all or any
part of the Series C Preferred Stock at the time issued and outstanding for an
amount in cash equal to 110% of the Stated Value per share plus any unpaid
dividends. Except
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<PAGE>
as provided in Section 3.2 herein, if less than all the Series C Preferred Stock
are to be redeemed, then such redemption shall be pro rata based on the number
of Series C Preferred Stock owned of record by each Preferred Shareholder.
Written notice of redemption stating the date and place of redemption and the
amount of the redemption price shall be mailed by the Corporation not less than
30 days nor more than 60 days prior to the redemption date to the record holders
of the shares to be redeemed directed to their last known address as shown by
the Corporation's records. If notice of redemption is given as provided above
and if on the redemption date the Corporation has set apart in trust for the
purpose sufficient funds for such redemption, then from and after the redemption
date, notwithstanding that any certificate for such shares has not been
surrendered for cancellation, the Series C Preferred Stock called for redemption
shall no longer be deemed to be outstanding and all rights with respect to such
shares shall forthwith cease and terminate, except only the right of the holders
thereof to receive the redemption price without interest upon surrender of
certificates representing the shares called for redemption. Any monies remaining
in trust after one year from the redemption date shall be returned to the
Corporation and thereafter holders of certificates for such shares shall look
only to the Corporation for the redemption price thereof. Upon conversion of any
Series C Preferred Stock called for redemption into Common Stock, then the
portion of the monies held in trust for redemption of such shares shall
forthwith be returned to the Corporation.
5. CONVERSION.
5.1 PROHIBITION AGAINST SHORT SALES. No holder of Series C
Preferred Stock shall directly or indirectly effect a short sale of the
Corporation's Common Stock for the holder's own account or for the account of a
Related Person. "Short sale" shall mean any sale of a security which the seller
does not beneficially own or any sale which is consummated by the delivery of a
security borrowed by, or for the account of, the seller, in either case whether
or not the seller is the owner of Common Stock at the time of such sale.
"Related Person" shall mean (A) any member of the holder's immediate family; (B)
any entity of which the holder is an officer, director, or holder of a position
having comparable duties or responsibilities; (C) any entity in which the holder
is the owner of an equity interest; and (D) any person which would be deemed to
be an "affiliate" of the holder as that term is defined in the Securities Act of
1933 or the rules and regulations promulgated thereunder.
5.2 CONVERSION RATE. So long as a holder of Series C Preferred
Stock is not in breach of Section 5 herein and subject to Section 5.8 herein,
such holder shall have the right to surrender the certificate or certificates
evidencing such shares and receive in lieu and in conversion thereof, and in
lieu of unpaid dividends thereon, shares of the Corporation's Common Stock. Each
share of Series C Preferred Stock may be converted, at any time at the option of
the holder in its sole and absolute discretion, into one share of Common Stock,
at a price of $0.50 per share.
5.3 MECHANICS OF CONVERSION.
(a) HOLDER'S DELIVERY REQUIREMENTS. To convert Series C
Preferred Stock into full shares of Common Stock, the holder thereof shall (A)
deliver or transmit by
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<PAGE>
facsimile, for receipt on or prior to 5:00 p.m., New York time (the "Conversion
Notice Deadline") on the date of conversion, a copy of the fully executed notice
of conversion ("Notice of Conversion") to the Corporation at the office of the
Corporation or its designated transfer agent (the "Transfer Agent") with a copy
also delivered to the Corporation, and (B) surrender to a common carrier for
delivery to the office of the Corporation or the Transfer Agent, the original
certificates representing the Series C Preferred Stock being converted (the
"Preferred Stock Certificates"), duly endorsed for cancellation. The holder of
the Series C Preferred Stock shall have the right to convert fewer than the full
number of shares of Series C Preferred Stock held at any given time.
(b) CORPORATION'S RESPONSE. Upon receipt by the Corporation
or the Transfer Agent of the Preferred Stock Certificates to be converted
pursuant to a Notice of Conversion (or an indemnification undertaking reasonably
satisfactory to the Corporation and the posting of a bond if and as reasonably
required by the Company's transfer agent with respect to such shares in the case
of their loss, theft or destruction) together with the originally executed
Notice of Conversion, the Corporation shall, within two business days after the
date of receipt (the "Deadline"), instruct the Transfer Agent to issue and
surrender to a common carrier for either overnight or (if delivery is outside
the United States) two (2) day delivery to the address as specified in the
Notice of Conversion, a certificate for the number of shares of Common Stock to
which the holder shall be entitled as aforesaid, and the Corporation shall take
all reasonable steps to ensure that the Transfer Agent has complied with such
instructions. In the case of a dispute as to the calculation of the conversion
rate, the Corporation shall promptly issue to the holder the number of shares of
Common Stock that is not disputed and shall submit the disputed calculations to
its outside accountant via facsimile within one (1) day of receipt of such
holder's Notice of Conversion. The Corporation shall cause the accountant to
perform the calculations and notify the Corporation and the holder of the
results no later than twenty-four (24) hours from the time it receives the
disputed calculations. Such accountant's calculation shall be deemed conclusive
absent manifest error. Should the Notice of Conversion specify a smaller number
of Series C Preferred Stock to be converted than are represented by the
Preferred Stock Certificate surrendered to the Corporation, then the Corporation
shall immediately issue a new Preferred Stock Certificate representing the
number of Series C Preferred Stock not yet converted, and deliver the same to
the holder thereof along with the Common Stock as stated above.
(c) DATE OF CONVERSION. The date on which conversion occurs
(the "Date of Conversion") shall be deemed to be the date set forth in such
Notice of Conversion, provided (A) that the advance copy of the Notice of
Conversion is faxed to the Corporation before 5:00 p.m., New York time, on the
Date of Conversion, and (B) that the original Preferred Stock Certificates
representing the Series C Preferred Stock to be converted, together with the
originally executed Notice of Conversion, are surrendered by depositing such
certificates and Notice with a common carrier, as provided above, and received
by the Transfer Agent or the Corporation on or prior to the second (2nd)
business day following the date set forth in the Notice of Conversion. In the
event the Preferred Stock Certificates and the originally executed Notice of
Conversion are not received on or prior to the second (2nd) business day after
the date of the Notice of Conversion, the Notice of Conversion shall be deemed
null and void and no conversion of Series C Preferred Stock shall be effected
thereby. The person or persons entitled to receive the shares
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<PAGE>
of Common Stock issuable upon such conversion shall be treated, as of the Date
of Conversion, for all purposes as the record holder or holders of such shares
of Common Stock on the Date of Conversion.
(d) Notwithstanding anything contained herein to the
contrary, if any action is required herein to be taken by the Corporation or the
Transfer Agent on a day which is not a business day, then such action shall be
deemed to be timely if taken on the next following business day.
5.4 OPTIONAL CONVERSION. At the option of the Corporation, if any
Series C Preferred Stock remain outstanding on June 30, 2005, then all or any
part of such Series C Preferred Stock as the Corporation elects shall be
converted in accordance with Section 5.3 as if the holders of such Series C
Preferred Stock had given the Notice of Conversion effective as of that date,
and the Date of Conversion had been fixed as of June 30, 2005 for all purposes
of Paragraph 5.3. Following notice by the Corporation to the holders, all
holders of Preferred Stock certificates shall within five (5) business days
after receipt of such notice surrender all Preferred Stock certificates, duly
endorsed for cancellation, to the Corporation or the Transfer Agent, as the
Corporation may direct. No person shall thereafter have any rights in respect of
Series C Preferred Stock, except the right to receive shares of Common Stock on
conversion thereof as provided in this Section 5.
5.5 ADJUSTMENT FOR RECLASSIFICATION, EXCHANGE OR SUBSTITUTION. If
the Common Stock issuable upon the conversion of Series C Preferred Stock shall
be changed into the same or a different number of shares of any class or classes
of stock, whether by capital reorganization, reclassification or otherwise
(other than a reorganization, merger, consolidation or sale of assets provided
for below), then and in each such event, the holder of each Preferred Share
shall have the right thereafter to convert such share into the kind and amount
of shares of stock and other securities and property receivable upon such
reorganization, reclassification or other change by holders of the number of
shares of Common Stock into which such Series C Preferred Stock might have been
converted immediately prior to such reorganization, reclassification or change,
all subject to further adjustment as provided herein.
5.6 MERGER OR OTHER TRANSACTIONS. In the event the Corporation,
at any time while any of the Series C Preferred Stock are outstanding, shall be
consolidated with or merged into any other corporation or corporations or shall
sell or lease all or substantially all of its property and business as an
entirety, then lawful provisions shall be made as part of the terms of such
consolidation, merger, sale or lease so that the holder of any Series C
Preferred Stock may thereafter receive in lieu of such Common Stock otherwise
issuable to him upon conversion of his Series C Preferred Stock, but at the
conversion rate which would otherwise be in effect at the time of conversion, as
hereinbefore provided, the same kind and amount of securities or assets as may
be issuable, distributable or payable upon such consolidation, merger, sale or
lease with respect to Common Stock of the Corporation.
5.7 FRACTIONAL SHARES. No fractional shares or scrip representing
fractional shares shall be issued upon conversion of Series C Preferred Stock.
If more than one certificate
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<PAGE>
shall be surrendered for conversion at any one time by the same holder, the
number of full shares of Common Stock issuable upon conversion thereof shall be
computed on the basis of the aggregate number of shares so surrendered. In lieu
of any fractional shares of Common Stock which would otherwise be issuable upon
conversion of any shares of Series C Preferred Stock, the number of shares of
Common Stock issuable upon conversion shall be rounded up to the nearest whole
share.
5.8 RESERVATION OF COMMON SHARES. The Corporation shall at all
times reserve and keep available out of its authorized but unissued Common Stock
the number of shares of Common Stock deliverable upon conversion of all the
issued and outstanding Series C Preferred Stock and shall take such action to
obtain such permits or orders as may be necessary to enable the Corporation
lawfully to issue such Common Stock upon the conversion of the Series C
Preferred Stock.
6. RIGHTS ON LIQUIDATION. In the event of the liquidation,
dissolution or winding up of the Corporation, whether voluntary or involuntary,
resulting in any distribution of its assets to its shareholders, the holders of
the Series C Preferred Stock then issued and outstanding shall be entitled to
receive out of the assets of the Corporation available for distribution to its
shareholders, an amount equal to the Stated Value per Preferred Share, and no
more, before any payment or distribution of the assets of the Corporation is
made to or set apart for the holders of Common Stock. If the assets of the
Corporation distributable to the holders of Series C Preferred Stock are
insufficient for the payment to them of the full preferential amount described
above, such assets shall be distributed ratably among the holders of the Series
C Preferred Stock. The holders of the Common Stock shall be entitled to the
exclusion of the holders of the Series C Preferred Stock to share in all
remaining assets of the Corporation in accordance with their respective
interests. For purposes of this paragraph, a consolidation or merger of the
Corporation with any other corporation or corporations shall not be deemed to be
a liquidation, dissolution or winding up of the Corporation. Notwithstanding
anything in these Articles of Amendment to the contrary, all shares of Series C
Preferred Stock shall (i) rank senior to any class or series of capital stock of
the Corporation hereafter created (unless otherwise agreed to by a majority of
the holders of the Series C Preferred Stock then outstanding), and (ii) shall
rank junior to all of the preferred stock of the Corporation issued and
outstanding as of the date of execution of this Certificate.
7. NOTICE. Any notice required to be given to the holders of Series
C Preferred Stock or any securities issued upon conversion thereof shall be
deemed to have been given upon the earlier of personal delivery or three days
after deposit in the United States mails by registered or certified mail, return
receipt requested, with postage fully prepaid, and addressed to each holder of
record at his address as it appears on the stock transfer records of the
Corporation. Any notice to the Corporation shall be in writing and shall be
deemed to have been given only upon actual receipt thereof.
8. LEGEND. All certificates representing the Series C Preferred
Stock, all shares of Common Stock issued upon conversion thereof and any and all
securities issued in replacement thereof or in exchange therefor shall bear such
legends (or not) as shall be required by law or contract.
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<PAGE>
IN WITNESS WHEREOF, THE PRODUCERS ENTERTAINMENT GROUP LTD. has caused
its corporate seal to be affixed hereto and this certificate to be signed by its
President and Secretary this 20th day of May, 1999.
THE PRODUCERS ENTERTAINMENT GROUP LTD.
[S E A L] By: /S/ IRWIN MEYER
-------------------------------------
Irwin Meyer, Chief Executive Officer
ATTEST:
/S/ ARTHUR BERNSTEIN
- -------------------------------
Arthur Bernstein, Secretary
Page 7
SECURITIES PURCHASE AGREEMENT
THIS SECURITIES PURCHASE AGREEMENT (this "Agreement") is made as of
this 14th day of January, 1999, by and between Mountaingate Productions, LLC., a
California limited liability company (the "Purchaser") and The Producers
Entertainment Group Ltd. (the "Company").
R E C I T A L S
WHEREAS, the Company desires to sell to the Purchaser and the Purchaser
desires to purchase from the Company 1,300,000 shares of the Company's Series C
Preferred Stock, par value $.001 per share (the "Shares"), for a purchase price
of $.001 per share; and
WHEREAS, the terms of the Preferred Stock are set forth on Exhibit A
hereto.
A G R E E M E N T
NOW, THEREFORE, in consideration of the mutual promises hereinafter set
forth and other good and valuable consideration, the receipt and adequacy of
which is hereby acknowledged, the parties agree as follows:
1. SALE AND DELIVERY OF SHARES. As of the date hereof, the Company
agrees to sell to the Purchaser and the Purchaser agrees to purchase from the
Company the Shares for an aggregate purchase price of One Thousand Three Hundred
Dollars ($1,300) by delivery of a check for the full purchase price to the
Company. In exchange for such check, the Company shall deliver the Purchaser
certificates representing the Shares in the name of the Purchaser.
2. STOCK CERTIFICATES. The certificates evidencing the Shares shall
bear legends substantially in the following form:
"THE SECURITIES EVIDENCED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), AND MAY NOT
BE SOLD, PLEDGED, HYPOTHECATED, ASSIGNED, TRANSFERRED OR OTHERWISE
DISPOSED OF EXCEPT IN ACCORDANCE WITH THE ACT AND THE RULES AND
REGULATIONS OF THE SECURITIES AND EXCHANGE COMMISSION THEREUNDER."
3. SECURITIES LAW RESTRICTIONS. None of the Shares or any shares of
Common Stock of the Company issuable upon conversion of the Shares shall be
sold, transferred, assigned, pledged, encumbered or otherwise disposed of (with
or without consideration) (each a "Transfer") and the Company shall not be
required to register any such Transfer and the Company may instruct its
<PAGE>
transfer agent not to register any such Transfer, unless and until all of the
following events shall have occurred:
a. the Shares or the shares of Common Stock issued upon
conversion of the Shares are Transferred pursuant to and in conformity with (i)
(x) an effective registration statement filed with the Securities and Exchange
Commission (the "Commission") pursuant to the Securities Act of 1933, as amended
(the "Securities Act"), or (y) an exemption from registration under the
Securities Act, and (ii) the securities laws of any state of the United States;
and
b. Purchaser has, prior to the Transfer of such Shares, and if
requested by the Company, provided all relevant information to Company's counsel
so that upon Company's request, Company's counsel is able to, and actually
prepares and delivers to the Company a written opinion that the proposed
Transfer (i) (x) is pursuant to a registration statement which has been filed
with the Commission and is then effective, or (y) is exempt from registration
under the Securities Act as then in effect, and the rules and regulations
thereunder, and (ii) is either qualified or registered under any applicable
state securities laws, or exempt from such qualification or registration. The
Company shall bear all reasonable costs of preparing such opinion.
4. MARKET STAND-OFF. In connection with any underwritten public
offering by the Company of its equity securities pursuant to an effective
registration statement filed under the Securities Act, Purchaser shall not sell,
make any short sale of, loan, hypothecate, pledge, grant any option for the
purchase of, or otherwise dispose or transfer for value or otherwise agree to
engage in any of the foregoing transactions with respect to the Shares or any
shares of Common Stock issued upon conversion of the Shares without the prior
written consent of the Company or its underwriters, for such period of time from
and after the effective date of such registration statement as may be requested
by the Company or such underwriters; provided, however, that in no event shall
such period exceed 180 days or such other period as is reasonably requested by
the managing underwriter. This Section 4 shall only remain in effect for the
two-year period immediately following the date hereof and shall thereafter
terminate and cease to be in force or effect. Purchaser agrees to execute and
deliver to the Company such further documents or instruments as the Company
reasonably determines to be necessary or appropriate to effect the provisions of
this Section 4. In the event of any stock dividend, stock split,
recapitalization, or other change affecting the Company's outstanding Common
Stock effected without receipt of consideration, any new, substituted, or
additional securities distributed with respect to the Shares shall be
immediately subject to the provisions of this Section 4, to the same extent the
Shares are at such time covered by such provisions. In order to enforce the
provisions of Section 4, the Company may impose stop-transfer instructions with
respect to the Shares until the end of the applicable stand-off period.
5. REPRESENTATIONS OF PURCHASER. The Purchaser has been advised that
the Shares have not been registered and will not be registered under the
Securities Act nor qualified under any state blue sky law, on the ground that no
distribution or public offering of any of the Shares is to be effected, and that
in this connection the Company is relying in part on the representations of the
Purchaser set forth in this Section 5. The Purchaser represents, warrants and
covenants that:
Page 2
<PAGE>
a. Purchaser is an "accredited investor" as such term is defined
in the rules and regulations promulgated under the Securities Act;
b. Purchaser has such knowledge and experience in business and
financial matters as to be capable of evaluating the merits and risks of an
investment in the Shares and has the capacity to protect its own interest in
connection with the acquisition of the Shares;
c. Purchaser has the financial ability to bear the economic risk
of its investment, has adequate means for providing for its current needs and
foreseeable contingencies, has no need now, and anticipates no need in the
foreseeable future, to sell the Shares, is able to hold the Shares for an
indefinite period of time and can afford a complete loss of its investment;
d. Purchaser is acquiring the Shares for its own account and not
with a view to or for sale in connection with any resale or distribution of such
Shares in violation of the Securities Act;
e. At no time was Purchaser presented with or solicited by any
leaflet, public promotional meeting, circular, newspaper or magazine article,
radio or television advertisement or any other form of general advertising or
solicitation for the purchase of the Shares;
f. Purchaser understands that there is no public market for the
Shares Purchaser acquires and that such Shares must be held indefinitely unless
the Transfer (as defined above) of such Shares is registered, or exempt from
registration, under the Securities Act and that transferability of the Shares
will be limited as provided by this Agreement and applicable federal and state
securities laws;
g. Purchaser and/or Purchaser's representatives have been
afforded full and free access to corporate books, financial statements, records,
contracts, documents, and other information concerning the Company and its
offices and facilities, have been afforded an opportunity to ask such questions
of the Company's officers and employees concerning the Company's business,
operations, financial condition, assets, liabilities and other relevant matters
as deemed necessary or desirable, and have been given all such information as
has been requested, in order to evaluate the merits and risks of the investment
in the Shares;
h. Purchaser understands that any projections delivered to
Purchaser with respect to the Company or its business are estimates of future
performance which are inherently inaccurate, and that such projections are not a
guarantee of future performance and that Purchaser is not relying on the
accuracy of any such projections in making an investment in the Company; and
i. Purchaser understands that an investment in the Shares
involves a high degree of risk and acknowledges that the Company has provided
Purchaser with a document discussing certain risk factors that have been
carefully considered by Purchaser.
Page 3
<PAGE>
7. GENERAL.
a. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED AND ENFORCED
IN ACCORDANCE WITH THE LAWS OF THE STATE OF CALIFORNIA APPLICABLE TO CONTRACTS
MADE AND TO BE PERFORMED ENTIRELY WITHIN SUCH STATE. JURISDICTION AND VENUE OVER
ANY LEGAL ACTION BROUGHT HEREUNDER SHALL RESIDE EXCLUSIVELY IN THE COUNTY OF LOS
ANGELES, STATE OF CALIFORNIA.
b. The section headings herein are for convenience of reference
only and shall not affect in any way the meaning or interpretation of this
Agreement.
c. This Agreement, and the parties's rights and obligations
hereunder, may not be assigned by either party.
d. This Agreement may be amended, modified, superseded or
canceled, and the terms or covenants hereof maybe waived, only by a written
instrument executed by both of the parties hereto, or, in the case of a waiver,
by the party waiving compliance. The failure of either party at any time or
times to require performance of any provision hereof shall in no manner affect
the right at a later time to enforce the same. No waiver by either party of the
breach of any term or covenant contained in this Agreement, whether by conduct
or otherwise, in any one or more instances, shall be deemed to be, or construed
as, a further or continuing waiver of any such breach, or a waiver of the breach
of any other term or covenant contained in this Agreement.
e. This Agreement may be executed in any number of counterparts,
each of which shall be deemed an original, but all of which taken together shall
constitute one and the same instrument.
f. This Agreement constitutes the entire agreement between the
parties and no party shall be liable or bound to any other party in any manner
by any warranties, representations, or covenants except as specifically set
forth herein.
Page 4
<PAGE>
IN WITNESS WHEREOF, this Agreement has been duly executed on behalf of
the parties hereto by their duly authorized representatives as of the date first
written above.
THE PRODUCERS ENTERTAINMENT GROUP LTD.
By: /S/ ARTHUR BERNSTEIN
--------------------------
Its: EXECUTIVE VICE PRESIDENT
--------------------------
MOUNTAINGATE PRODUCTIONS, LLC
By: /S/ IRWIN MEYER
--------------------------
Its: PRESIDENT
--------------------------
Page 5
<PAGE>
EXHIBIT A
---------
CERTIFICATE OF DESIGNATIONS,
PREFERENCES, LIMITATIONS AND RELATIVE RIGHTS
OF SERIES C CONVERTIBLE PREFERRED STOCK
OF
THE PRODUCERS ENTERTAINMENT GROUP LTD.
THE PRODUCERS ENTERTAINMENT GROUP LTD., a corporation organized and
existing under the General Corporation Law of the State of Delaware (the
"Corporation"), does hereby certify that the following resolutions were adopted
by the Board of Directors of the Corporation (the "Board of Directors") pursuant
to authority conferred upon the Board of Directors in the Restated Certificate
of Incorporation and pursuant to the provisions of Section 151 of the Delaware
General Corporation Law:
RESOLVED, that, pursuant to the authority granted to and vested in the
Board of Directors, in accordance with the provisions of the Certificate of
Incorporation (as amended from time to time) of the Corporation, the Board of
Directors hereby creates out of the Corporation's previously authorized
preferred stock, $.001 par value per share, of the Corporation a series of
preferred stock to consist of not more than Three Million (3,000,000) shares,
and the Board of Directors hereby fixes the designation and the powers,
preferences and rights, and the qualifications, limitations or restrictions of
the shares of such series as follows:
1. DESIGNATION. This resolution shall provide for a single series of
convertible preferred stock, the designation of which shall be as follows: Three
Million (3,000,000) shares of convertible preferred stock are hereby designated
"Series C Preferred Stock." The stated value of each share of Series C Preferred
Stock is $.001 (the "Stated Value"). The number of authorized shares of Series C
Preferred Stock may be reduced or increased by a further resolution duly adopted
by the Board of Directors of the Corporation and by the filing of an amendment
to the Corporation's Certificate of Incorporation pursuant to the provisions of
the General Corporation Law of the State of Delaware stating that such reduction
or increase has been so authorized.
2. VOTING. Except as expressly required by the laws of the State of
Delaware or as set forth herein, the holders of the Series C Preferred Stock
shall have no voting rights. Any corporate action that may require a vote of the
holders of the Series C Preferred Stock as a class shall be deemed to have been
approved by that class upon the affirmative vote by the holders of a majority of
the issued and outstanding Series C Preferred Stock unless a higher voting
requirement is imposed by the Delaware General Corporation Law. If any corporate
action shall require a vote of the holders of the Series C Preferred Stock other
than as a class, the Series C Preferred Stock shall vote with the Corporation's
common stock, $.001 par value per share (the "Common Stock") as if the Series C
Preferred Stock had been fully converted three (3) business days prior to the
date of the vote.
<PAGE>
3. DIVIDENDS.
3.1 RATE. Holders of Series C Preferred Stock shall be entitled
to receive, out of any funds of the Corporation legally available for that
purpose, non-cumulative dividends from the date of issuance at the rate of 8%
per year per share of Preferred Stock, payable quarterly (pro-rated for partial
quarters) in arrears in cash, or, at the option of the Corporation, in shares of
its Free-Trading Common Stock (as defined herein) at the applicable Conversion
Rate (as defined in Section 5.2 below), on the first day of April, July, October
and January of each year commencing July 1, 1999 (each such date being
hereinafter individually referred to as the "Dividend Payment Date" and
collectively as the "Dividend Payment Dates"); PROVIDED, HOWEVER, that such
dividends will only be paid to holders of Series C Preferred Stock in the event
the Corporation has earnings in any fiscal year greater than $1.0 million.
Notwithstanding the preceding sentence, should the Corporation in its discretion
determine to pay said dividends in shares of Free Trading Common Stock, then all
unpaid dividends shall be paid at the time of each conversion of the Series C
Preferred Stock, such that upon each conversion of the Series C Preferred Stock
by the holder thereof, the Corporation shall pay all unpaid dividends owed as of
the date of such conversion. Each such dividend shall be paid to the holders of
record of the Series C Preferred Stock as they appear on the books of the
Corporation on the record date which shall be not less than 30 days prior to the
related Dividend Payment Date. Dividends on the Series C Preferred Stock shall
be declared and paid to the extent the Corporation is legally able to do so and
shall be cumulative to the extent not declared and paid. Holders of Series C
Preferred Stock shall not be entitled to any dividends, whether payable in cash,
property or stock, in excess of full dividends as herein provided on the Series
C Preferred Stock. "Free-Trading Common Stock" shall mean shares of Common Stock
that are either "restricted securities" as defined in Rule 144 under the
Securities Act of 1933 (the "Securities Act"), but the resales of such shares
have been registered under a registration statement filed with the United States
Securities and Exchange Commission or are otherwise freely tradable without
restriction.
3.2 DIVIDENDS ON COMMON STOCK. No dividends (other than those
payable solely in Common Stock) shall be paid with respect to the Common Stock
during any fiscal year of the Corporation unless all unpaid dividends and the
quarterly dividend on the shares of Series C Preferred Stock for the then
current dividend period shall have been declared and a sum sufficient for the
payment thereof set apart. No shares of Common Stock shall be purchased,
redeemed or acquired by the Corporation, and no funds shall be paid into or set
aside or made available for a sinking fund for the purchase, redemption or
acquisition thereof except (A) in transactions aggregating not more than
$100,000.00 per year, (B) in transactions resulting from a legal obligation of
the Corporation to redeem, purchase or otherwise acquire its securities arising
prior to the date hereof, or (C) pursuant to Section 5.1 herein.
4. REDEMPTION. Except as provided in Section 3.2 herein, the Series C
Preferred Stock shall not be redeemable at any time prior to January 1, 2004.
Thereafter, the Corporation, on the sole authority of its Board of Directors,
may, at its option and at any time prior to notice of conversion of the Series C
Preferred Stock by the holder thereof as hereinafter provided, redeem all or any
part of the Series C Preferred Stock at the time issued and outstanding for an
amount in cash equal to 110% of the Stated Value per share plus any unpaid
dividends. Except
Page 2
<PAGE>
as provided in Section 3.2 herein, if less than all the Series C Preferred Stock
are to be redeemed, then such redemption shall be pro rata based on the number
of Series C Preferred Stock owned of record by each Preferred Shareholder.
Written notice of redemption stating the date and place of redemption and the
amount of the redemption price shall be mailed by the Corporation not less than
30 days nor more than 60 days prior to the redemption date to the record holders
of the shares to be redeemed directed to their last known address as shown by
the Corporation's records. If notice of redemption is given as provided above
and if on the redemption date the Corporation has set apart in trust for the
purpose sufficient funds for such redemption, then from and after the redemption
date, notwithstanding that any certificate for such shares has not been
surrendered for cancellation, the Series C Preferred Stock called for redemption
shall no longer be deemed to be outstanding and all rights with respect to such
shares shall forthwith cease and terminate, except only the right of the holders
thereof to receive the redemption price without interest upon surrender of
certificates representing the shares called for redemption. Any monies remaining
in trust after one year from the redemption date shall be returned to the
Corporation and thereafter holders of certificates for such shares shall look
only to the Corporation for the redemption price thereof. Upon conversion of any
Series C Preferred Stock called for redemption into Common Stock, then the
portion of the monies held in trust for redemption of such shares shall
forthwith be returned to the Corporation.
5. CONVERSION.
5.1 PROHIBITION AGAINST SHORT SALES. No holder of Series C
Preferred Stock shall directly or indirectly effect a short sale of the
Corporation's Common Stock for the holder's own account or for the account of a
Related Person. "Short sale" shall mean any sale of a security which the seller
does not beneficially own or any sale which is consummated by the delivery of a
security borrowed by, or for the account of, the seller, in either case whether
or not the seller is the owner of Common Stock at the time of such sale.
"Related Person" shall mean (A) any member of the holder's immediate family; (B)
any entity of which the holder is an officer, director, or holder of a position
having comparable duties or responsibilities; (C) any entity in which the holder
is the owner of an equity interest; and (D) any person which would be deemed to
be an "affiliate" of the holder as that term is defined in the Securities Act of
1933 or the rules and regulations promulgated thereunder.
5.2 CONVERSION RATE. So long as a holder of Series C Preferred
Stock is not in breach of Section 5 herein and subject to Section 5.8 herein,
such holder shall have the right to surrender the certificate or certificates
evidencing such shares and receive in lieu and in conversion thereof, and in
lieu of unpaid dividends thereon, shares of the Corporation's Common Stock. Each
share of Series C Preferred Stock may be converted, at any time at the option of
the holder in its sole and absolute discretion, into one share of Common Stock,
at a price of $0.50 per share.
5.3 MECHANICS OF CONVERSION.
(a) HOLDER'S DELIVERY REQUIREMENTS. To convert Series C
Preferred Stock into full shares of Common Stock, the holder thereof shall (A)
deliver or transmit by
Page 3
<PAGE>
facsimile, for receipt on or prior to 5:00 p.m., New York time (the "Conversion
Notice Deadline") on the date of conversion, a copy of the fully executed notice
of conversion ("Notice of Conversion") to the Corporation at the office of the
Corporation or its designated transfer agent (the "Transfer Agent") with a copy
also delivered to the Corporation, and (B) surrender to a common carrier for
delivery to the office of the Corporation or the Transfer Agent, the original
certificates representing the Series C Preferred Stock being converted (the
"Preferred Stock Certificates"), duly endorsed for cancellation. The holder of
the Series C Preferred Stock shall have the right to convert fewer than the full
number of shares of Series C Preferred Stock held at any given time.
(b) CORPORATION'S RESPONSE. Upon receipt by the Corporation
or the Transfer Agent of the Preferred Stock Certificates to be converted
pursuant to a Notice of Conversion (or an indemnification undertaking reasonably
satisfactory to the Corporation and the posting of a bond if and as reasonably
required by the Company's transfer agent with respect to such shares in the case
of their loss, theft or destruction) together with the originally executed
Notice of Conversion, the Corporation shall, within two business days after the
date of receipt (the "Deadline"), instruct the Transfer Agent to issue and
surrender to a common carrier for either overnight or (if delivery is outside
the United States) two (2) day delivery to the address as specified in the
Notice of Conversion, a certificate for the number of shares of Common Stock to
which the holder shall be entitled as aforesaid, and the Corporation shall take
all reasonable steps to ensure that the Transfer Agent has complied with such
instructions. In the case of a dispute as to the calculation of the conversion
rate, the Corporation shall promptly issue to the holder the number of shares of
Common Stock that is not disputed and shall submit the disputed calculations to
its outside accountant via facsimile within one (1) day of receipt of such
holder's Notice of Conversion. The Corporation shall cause the accountant to
perform the calculations and notify the Corporation and the holder of the
results no later than twenty-four (24) hours from the time it receives the
disputed calculations. Such accountant's calculation shall be deemed conclusive
absent manifest error. Should the Notice of Conversion specify a smaller number
of Series C Preferred Stock to be converted than are represented by the
Preferred Stock Certificate surrendered to the Corporation, then the Corporation
shall immediately issue a new Preferred Stock Certificate representing the
number of Series C Preferred Stock not yet converted, and deliver the same to
the holder thereof along with the Common Stock as stated above.
(c) DATE OF CONVERSION. The date on which conversion occurs
(the "Date of Conversion") shall be deemed to be the date set forth in such
Notice of Conversion, provided (A) that the advance copy of the Notice of
Conversion is faxed to the Corporation before 5:00 p.m., New York time, on the
Date of Conversion, and (B) that the original Preferred Stock Certificates
representing the Series C Preferred Stock to be converted, together with the
originally executed Notice of Conversion, are surrendered by depositing such
certificates and Notice with a common carrier, as provided above, and received
by the Transfer Agent or the Corporation on or prior to the second (2nd)
business day following the date set forth in the Notice of Conversion. In the
event the Preferred Stock Certificates and the originally executed Notice of
Conversion are not received on or prior to the second (2nd) business day after
the date of the Notice of Conversion, the Notice of Conversion shall be deemed
null and void and no conversion of Series C Preferred Stock shall be effected
thereby. The person or persons entitled to receive the shares
Page 4
<PAGE>
of Common Stock issuable upon such conversion shall be treated, as of the Date
of Conversion, for all purposes as the record holder or holders of such shares
of Common Stock on the Date of Conversion.
(d) Notwithstanding anything contained herein to the
contrary, if any action is required herein to be taken by the Corporation or the
Transfer Agent on a day which is not a business day, then such action shall be
deemed to be timely if taken on the next following business day.
5.4 OPTIONAL CONVERSION. At the option of the Corporation, if any
Series C Preferred Stock remain outstanding on June 30, 2005, then all or any
part of such Series C Preferred Stock as the Corporation elects shall be
converted in accordance with Section 5.3 as if the holders of such Series C
Preferred Stock had given the Notice of Conversion effective as of that date,
and the Date of Conversion had been fixed as of June 30, 2005 for all purposes
of Paragraph 5.3. Following notice by the Corporation to the holders, all
holders of Preferred Stock certificates shall within five (5) business days
after receipt of such notice surrender all Preferred Stock certificates, duly
endorsed for cancellation, to the Corporation or the Transfer Agent, as the
Corporation may direct. No person shall thereafter have any rights in respect of
Series C Preferred Stock, except the right to receive shares of Common Stock on
conversion thereof as provided in this Section 5.
5.5 ADJUSTMENT FOR RECLASSIFICATION, EXCHANGE OR SUBSTITUTION. If
the Common Stock issuable upon the conversion of Series C Preferred Stock shall
be changed into the same or a different number of shares of any class or classes
of stock, whether by capital reorganization, reclassification or otherwise
(other than a reorganization, merger, consolidation or sale of assets provided
for below), then and in each such event, the holder of each Preferred Share
shall have the right thereafter to convert such share into the kind and amount
of shares of stock and other securities and property receivable upon such
reorganization, reclassification or other change by holders of the number of
shares of Common Stock into which such Series C Preferred Stock might have been
converted immediately prior to such reorganization, reclassification or change,
all subject to further adjustment as provided herein.
5.6 MERGER OR OTHER TRANSACTIONS. In the event the Corporation,
at any time while any of the Series C Preferred Stock are outstanding, shall be
consolidated with or merged into any other corporation or corporations or shall
sell or lease all or substantially all of its property and business as an
entirety, then lawful provisions shall be made as part of the terms of such
consolidation, merger, sale or lease so that the holder of any Series C
Preferred Stock may thereafter receive in lieu of such Common Stock otherwise
issuable to him upon conversion of his Series C Preferred Stock, but at the
conversion rate which would otherwise be in effect at the time of conversion, as
hereinbefore provided, the same kind and amount of securities or assets as may
be issuable, distributable or payable upon such consolidation, merger, sale or
lease with respect to Common Stock of the Corporation.
5.7 FRACTIONAL SHARES. No fractional shares or scrip representing
fractional shares shall be issued upon conversion of Series C Preferred Stock.
If more than one certificate
Page 5
<PAGE>
shall be surrendered for conversion at any one time by the same holder, the
number of full shares of Common Stock issuable upon conversion thereof shall be
computed on the basis of the aggregate number of shares so surrendered. In lieu
of any fractional shares of Common Stock which would otherwise be issuable upon
conversion of any shares of Series C Preferred Stock, the number of shares of
Common Stock issuable upon conversion shall be rounded up to the nearest whole
share.
5.8 RESERVATION OF COMMON SHARES. The Corporation shall at all
times reserve and keep available out of its authorized but unissued Common Stock
the number of shares of Common Stock deliverable upon conversion of all the
issued and outstanding Series C Preferred Stock and shall take such action to
obtain such permits or orders as may be necessary to enable the Corporation
lawfully to issue such Common Stock upon the conversion of the Series C
Preferred Stock.
6. RIGHTS ON LIQUIDATION. In the event of the liquidation,
dissolution or winding up of the Corporation, whether voluntary or involuntary,
resulting in any distribution of its assets to its shareholders, the holders of
the Series C Preferred Stock then issued and outstanding shall be entitled to
receive out of the assets of the Corporation available for distribution to its
shareholders, an amount equal to the Stated Value per Preferred Share, and no
more, before any payment or distribution of the assets of the Corporation is
made to or set apart for the holders of Common Stock. If the assets of the
Corporation distributable to the holders of Series C Preferred Stock are
insufficient for the payment to them of the full preferential amount described
above, such assets shall be distributed ratably among the holders of the Series
C Preferred Stock. The holders of the Common Stock shall be entitled to the
exclusion of the holders of the Series C Preferred Stock to share in all
remaining assets of the Corporation in accordance with their respective
interests. For purposes of this paragraph, a consolidation or merger of the
Corporation with any other corporation or corporations shall not be deemed to be
a liquidation, dissolution or winding up of the Corporation. Notwithstanding
anything in these Articles of Amendment to the contrary, all shares of Series C
Preferred Stock shall (i) rank senior to any class or series of capital stock of
the Corporation hereafter created (unless otherwise agreed to by a majority of
the holders of the Series C Preferred Stock then outstanding), and (ii) shall
rank junior to all of the preferred stock of the Corporation issued and
outstanding as of the date of execution of this Certificate.
7. NOTICE. Any notice required to be given to the holders of Series
C Preferred Stock or any securities issued upon conversion thereof shall be
deemed to have been given upon the earlier of personal delivery or three days
after deposit in the United States mails by registered or certified mail, return
receipt requested, with postage fully prepaid, and addressed to each holder of
record at his address as it appears on the stock transfer records of the
Corporation. Any notice to the Corporation shall be in writing and shall be
deemed to have been given only upon actual receipt thereof.
8. LEGEND. All certificates representing the Series C Preferred
Stock, all shares of Common Stock issued upon conversion thereof and any and all
securities issued in replacement thereof or in exchange therefor shall bear such
legends (or not) as shall be required by law or contract.
Page 6
<PAGE>
IN WITNESS WHEREOF, THE PRODUCERS ENTERTAINMENT GROUP LTD. has caused
its corporate seal to be affixed hereto and this certificate to be signed by its
President and Secretary this 20th day of May, 1999.
THE PRODUCERS ENTERTAINMENT GROUP LTD.
[S E A L] By: /S/ IRWIN MEYER
-------------------------------------
Irwin Meyer, Chief Executive Officer
ATTEST:
/S/ ARTHUR BERNSTEIN
- -------------------------------
Arthur Bernstein, Secretary
Page 7
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<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-START> JUL-01-1998
<PERIOD-END> MAR-31-1999
<CASH> (47,086)
<SECURITIES> 0
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<CURRENT-ASSETS> 0
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0
1,325
<COMMON> 7,877
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<TOTAL-LIABILITY-AND-EQUITY> 6,028,800
<SALES> 1,142,188
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<CGS> 819,294
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<OTHER-EXPENSES> 3,001,561
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