SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
___________________
FORM 10-QSB
Quarterly Report Under Section 13 or 15 (d)
of the Securities Exchange Act of 1934.
___________________
For Quarter Ended December 31, 1996 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. Employer
incorporation or organization) Identification No.)
9150 Wilshire Blvd., Suite 205, Beverly Hills, CA 90212
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (310) 285-0400
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Not applicable
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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-- 12,632,152 SHARES AS OF FEBRUARY 7, 1997
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Part 1. Financial Information
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Item 1. Financial Statements
THE PRODUCERS ENTERTAINMENT GROUP LTD. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1996 JUNE 30, 1996
(UNAUDITED) (NOTE)
ASSETS
Cash and cash equivalents $ 902,886 $ 336,415
Short term investments 3,843,264 ---
Accounts receivable, net trade 691,685 222,200
Receivable from related parties 25,822 18,983
Notes receivable, trade 276,687 260,000
Right to receive revenue 259,529 291,241
Film costs, net 887,512 772,777
Fixed assets, net 65,159 50,242
Investment in distribution subsidiary 63,336 ---
Covenant not to compete 529,000 ---
Other assets 133,840 154,979
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TOTAL ASSETS $ 7,678,720 $ 2,106,837
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LIABILITIES AND SHAREHOLDERS' EQUITY
Notes payable $ --- $ 600,000
Accounts payable and accrued expenses 126,051 433,136
Accrued payable for legal settlement 275,000 ---
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TOTAL LIABILITIES $ 401,051 $ 1,033,136
Shareholders' equity:
Preferred Stock, $.001 par value, authorized 10,000,000 shares,
issued and outstanding 1,000,000 shares - Series A 1,000 1,000
Common Stock, $.001 par value, authorized 50,000,000 shares;
issued 12,912,761 and 3,585,819;
outstanding 12,632,152 and 3,305,210 shares 12,913 3,586
Additional paid-in capital 23,741,261 16,114,017
Accumulated deficit (14,564,313) (13,182,710)
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9,190,861 2,935,893
Treasury stock 280,609 shares, at cost (1,010,192) (1,010,192)
Notes receivable from related parties from sales of
Common Stock, net of imputed interest discount (903,000) (852,000)
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Net shareholders' equity $ 7,277,669 $ 1,073,701
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TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 7,678,720 $ 2,106,837
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Note: The balance sheet at June 30, 1996 has been derived from the audited
financial statements at that date but does not include all the information and
footnotes required by generally accepted accounting principles for complete
financial statements
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
2
THE PRODUCERS ENTERTAINMENT GROUP LTD. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
SIX MONTHS ENDED DECEMBER 31,
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1996 1995
Revenues $ 820,863 $ 1,674,488
Film amortization (70,758) (697,000)
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Net Revenues 750,105 977,894
General and administrative expenses (1,859,780) (1,784,035)
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Operating (loss) (1,109,675) (806,141)
Other income (expenses):
Income (loss) from settlement of lawsuits (166,042) 217,633
Interest income 106,339 9,804
Interest income from related parties 51,000 15,000
Interest and financing expense (156,975) ---
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Net other income (expense) (165,678) 242,437
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Net (loss) (1,275,353) (563,704)
Dividend requirement on Series A Preferred Stock
at $.2125 per share (212,500) (212,500)
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Net (loss) applicable to common shareholders $ (1,487,853) $ (776,204)
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Net (loss) per share ($.16) ($.28)
Average common shares outstanding 9,480,490 2,740,114
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SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
3
THE PRODUCERS ENTERTAINMENT GROUP LTD. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
THREE MONTHS ENDED DECEMBER 31,
--------------------------------
1996 1995
Revenues $ 504,004 $ 601,493
Film amortization (7,758) (63,000
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Net Revenues 496,246 538,493
General and administrative expenses (1,056,277) (970,713)
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Operating (loss) (560,031) (432,220)
Other income (expenses):
Income (loss) from settlement of lawsuits (131,381) 217,633
Interest income 89,433 2,197
Interest income from related parties 27,000 15,000
Interest and financing expense --- ---
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Net other income (expense) (14,948) 234,830
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Net (loss) (574,979) (197,390)
Dividend requirement on Series A Preferred
Stock at $.10625 per share (106,250) (106,250)
Net (loss) applicable to common
shareholders $ (681,229) $ (303,640)
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Net (loss) per share ($.12) ($.05)
Average common shares outstanding 12,631,799 2,894,312
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SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
4
THE PRODUCERS ENTERTAINMENT GROUP LTD. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
SIX MONTHS ENDED DECEMBER 31, 1996
(UNAUDITED)
ADDITIONAL
PREFERRED COMMON STOCK PAID-IN ACCUMULATED
STOCK SHARES AMOUNT CAPITAL DEFICIT NET
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Balance,
June 30, 1996 $1,000 3,585,819 $ 3,586 $16,114,017 ($13,182,710) $ 2,935,893
Issuance of common
shares in payment of
dividends on Series A
Preferred Stock 94,442 94 (94)
Issuance of common
shares to Cypress in
connection with legal
settlement 32,500 33 36,530 36,563
Sale of Units in Public
Offering, Net Proceeds 9,200,000 9,200 7,590,808 7,600,008
Net (loss) (1,275,353) (1,275,353)
Dividends paid on Series
A Preferred Stock (106,250) (106,250)
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Balance,
December 31, 1996 $1,000 12,912,761 $12,913 $23,741,261 ($14,564,313) $ 9,190,861
Less:
Treasury stock (1,010,192)
Notes receivable from
related parties for sales of
Common Stock, net
imputed interest discount (903,000)
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NET SHAREHOLDERS' EQUITY $7,277,669
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
5
THE PRODUCERS ENTERTAINMENT GROUP LTD. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
SIX MONTHS ENDED DECEMBER 31,
-------------------------------
1996 1995
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) $(1,275,353) $ (563,704)
ADJUSTMENTS TO RECONCILE NET (LOSS) TO
NET CASH (USED IN) OPERATING ACTIVITIES:
Depreciation of fixed assets 12,753 16,712
Amortization of film costs 70,758 697,000
Write off of projects in development 30,779 ---
Amortization of right to receive revenue 31,552 ---
(Accrued) interest income on note receivable (16,687) ---
(Accrued) interest income on investments (57,270) ----
Amortization of imputed interest (discount) (51,000) (15,000)
(Income) from settlement of lawsuit --- (217,633)
Issuance of shares of Common Stock to Cypress 36,563 ---
CHANGES IN OPERATING ASSETS AND LIABILITIES:
(Increase) decrease in accounts receivable (412,215) 194,456
(Increase) in other assets (102,037) (13,278)
(Decrease) in accounts payable
and accrued expenses (307,085) (65,759)
(Decrease) in deferred revenues --- (598,708)
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Net cash (used in) operating activities (2,039,242) (565,914)
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CASH FLOWS FROM INVESTING ACTIVITIES:
(Additions) to film costs, net (216,272) (96,939)
Capital (expenditures) on equipment (27,670) (7,166)
(Increase) in short term investments (3,843,264) ---
(Increase) in investment for distribution subsidiary (63,336) ---
(Increase) decrease in receivables from related parties (6,839) 25,547
(Increase) in related party covenant not to compete (529,000) ---
Increase in accrued legal settlement payable 275,000 ---
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Net cash (used in) investing activities (4,411,381) (78,558)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Sale of 2,300,000 Units in public offering, net 7,585,841 ---
Decrease in deferred financing costs 137,503 ---
Proceeds from borrowings 275,000 ---
(Repayment) of borrowings (875,000) ---
(Payment) of cash dividends on Preferred Stock (106,250) ---
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Net cash provided by financing activities 7,017,094 ---
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Net increase (decrease) in cash 566,471 (644,472)
Cash and cash equivalents at beginning of period 336,415 832,754
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Cash and cash equivalents at end of period $ 902,886 $ 188,282
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SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
6
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
As disclosed in Note (2), during the six months ended December 31, 1996, the
Company issued 32,500 shares of Common Stock to Cypress Entertainment LP in
connection with the settlement of certain litigation.
As disclosed in Note (4), during the six months ended December 31,
1996, the Company issued 94,442 shares of Common Stock as payment of dividends
in the form of Common Stock that were due on the Series A Preferred Stock for
the quarter ended June 30, 1996.
7
THE PRODUCERS ENTERTAINMENT GROUP LTD. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
December 31, 1996
(1) Basis of Presentation
---------------------
In June 1996, the Company effected a one-for-four reverse split of the
outstanding shares of Common Stock. This reverse stock split has been
retroactively reflected for all periods reported in the accompanying condensed
consolidated financial statements and notes.
The financial information included herein is unaudited; however, such
information reflects all adjustments (consisting of normal recurring accruals)
which are, in the opinion of management, necessary to present fairly the results
of operations for the periods presented. 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, 1996.
(2) Settlement of Litigation
------------------------
During the six months ended December 31, 1996, the Company settled certain
litigation relating to DSL Entertainment JV (described in the June 30, 1996 Form
10-KSB) by paying $50,000 in cash and issuing 32,500 shares of the Company's
Common Stock valued at $1.125 per share to Cypress Entertainment LP.
On November 4, 1996, the Company settled its litigation with a former officer
and Director in a negotiated stipulated settlement filed with the Los Angeles
County Superior Court that requires the Company to make aggregate payments of
$575,000 before July 1997 in exchange for an agreement by this individual not to
compete with the Company through December 31, 1998. As of December 31, 1996,
$300,000 of the settlement had been paid.
(3) Public Offering of Common Stock and Warrants
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The Company issued a total of 2,300,000 Units consisting of 9,200,000 shares
of its Common Stock and 4,600,000 Redeemable Warrants to purchase Common Stock
(at an exercise price of $1.75 per share), each Unit comprised of four shares of
Common Stock and two Redeemable Warrants, pursuant to a public offering which
commenced on September 12, 1996. The total number of shares of Common Stock and
Redeemable Warrants issued pursuant to the public offering included 300,000
Units (comprised of 1,200,000 shares of Common Stock and 600,000 Redeemable
Warrants) which were issued by the Company pursuant to exercise by the
Underwriter of its over-allotment option on September 26, 1996, which was
consummated on October 2, 1996.
Each of the Units was priced at $4.00. The net proceeds derived by the
Company from the public offering of 2,300,000 Units described above equaled
$7,574,987 representing gross proceeds of $9,200,000 from the sale of such Units
less (a) the Underwriter's discount of $920,000 less (b) the Underwriter's
- ---- ----
reimbursable costs and other fees associated with the offering of $368,181. The
Company's other aggregate costs associated with the offering were $336,832.
8
(4) Dividend on Series A Preferred Stock
------------------------------------
During the six months ended December 31, 1996, the Company issued a total
of 94,442 shares of Common Stock representing the then fair market value of
such shares of Common Stock in payment of the $106,250 dividend required to be
paid on the Series A Preferred Stock for the quarter ended June 30, 1996. The
Company paid $106,250 in cash for the dividend required to be paid for the
quarter ended September 30, 1996. On March 14, 1997, the Company plans to pay
$106,250 in cash for the dividend required to be paid for the quarter ended
December 31, 1996.
(5) (Loss) Per Share
----------------
(Loss) per share for the three month and six month periods has been
computed after deducting the dividend requirements of the Series A Preferred
Stock. It is based on the weighted average number of common and common
equivalent shares reported outstanding during the entire period ending on
December 31, 1996 after giving effect to the shares of Common Stock sold in the
public offering described in Note (3). The weighted average number of common and
common equivalent shares for the periods ending on December 31, 1995 has been
adjusted for the one-for-four reverse stock split which occurred in May 1996.
(6) Stock Options and Warrants
--------------------------
The Company is using 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 made no adjustments to its compensation expense or equity accounts
for the grant of options for the period ended December 31, 1996. There were a
total of 826,916 options outstanding as of December 31, 1996 at exercise prices
ranging from $1.12 to $13.00 per share of Common Stock.
If the Company had adopted FASB 123 "Accounting for Stock Based
Compensation" for its accounting treatment, then there would have been
recognition of compensation expense related to the granting of stock options. On
August 15, 1996, the Company granted options to purchase 50,000 shares of Common
Stock to its Chief Financial Officer at the exercise price of $1.12 per share
which equaled the fair market value of the Common Stock on the date of the
grant. One-half of such options vested on the date of grant and the other half
vest one year from the date of grant subject to certain conditions. On October
22, 1996 the Company granted options to purchase 150,000 shares of Common Stock
to the Senior Vice President at the exercise price of $1.2187 per share. The
average fair market value of the Common Stock high and low price on the date of
the grant was $1.2187. One-half of such options vested on the date of grant and
the other half vest on June 30, 1997 subject to certain conditions.
Using the Black-Scholes pricing model to evaluate the fair market value of
the options, if using FASB 123 the Company would have recorded an increase to
Additional Paid-In Capital of $176,052, a deferred compensation expense asset of
$123,176 for vested options in fiscal 1996, and it would have recorded a $52,876
option expense on a monthly amortization basis for the period ending December
31, 1996. This additional expense would have increased the net loss to
($1,540,729) or ($.16 per share) for the six month period ended on December 31,
1996.
In addition to the 4,600,000 Redeemable Warrants exercisable at $1.75 per
share of Common Stock issued in connection with the September 1996 public
offering, there are approximately 831,916 other outstanding warrants. As part
of a June 1996 private placement of $500,000 aggregate principal amount of 10%
promissory notes ("Bridge Notes"), 500,000 "Bridge Warrants" were issued. Upon
repayment of the Bridge Notes in September 1996, the Bridge Warrants were
automatically exchanged for Redeemable Warrants exercisable at $1.75 per share.
The Company has other preexisting warrants outstanding to purchase an aggregate
of 331,916 shares of Common Stock at prices ranging from $7.70 to $14.40 per
share. There were a total of 5,431,916 warrants outstanding as of December 31,
1996.
9
(7) Related Party Transactions
--------------------------
In November 1995, the Company sold an aggregate of 525,000 shares of its
Common Stock to related parties in exchange for an aggregate of $1,050,000
principal amount of promissory notes. Of these shares, 500,000 were sold to
Mountaingate Productions, LLC, a California company that provides the Company
with producer services of its President/Chief Executive Officer and others. The
25,000 balance of these shares was sold to a former officer and Director of the
Company.
The principal amount of the promissory notes is payable as follows:
April 1, 1997 -- $131,250; October 1, 1998 -- $131,250; and October 1, 2000 --
$787,500. Interest on these notes is computed at the annual rate of 7%
compounded semi-annually, and is payable with the installment payments of
principal on the notes. The notes are secured by the purchased shares with the
personal liability of the purchasers limited to 25% of the principal amount
thereof (aggregate $262,500) plus accrued interest thereon.
The promissory notes received by the Company were recorded at their
principal amount less an imputed interest discount in the aggregate amount of
approximately $265,000. This imputed interest discount is being amortized over
the term of the notes using the present value method to provide an effective
interest rate of 12% per annum. During the six months ended December 31, 1996,
the Company recorded approximately $51,000 of interest income on these notes.
The difference between this imputed interest rate and the stated rate on the
notes may be deemed to be additional compensation to the purchasers of the
shares. For further information regarding these transactions and the vesting of
the shares of Common Stock purchased in these transactions, reference is made to
Item 10. (Executive Compensation) of the Company's Form 10-KSB for the fiscal
year ended June 30, 1996.
(8) Investment in Distribution Subsidiary
In October 1996 the Company announced its intention to form a joint venture
with Rigel Independent Distribution and Entertainment ("RIGEL") to
internationally distribute the Company's cable and syndicated television series
and reality programs. The impending RIGEL joint venture will be organized as a
majority owned subsidiary of the Company. The agreement with RIGEL is currently
being finalized and contemplates that RIGEL will design marketing campaigns,
solicit sales and service the physical delivery elements to customers outside of
the United States. The Company will be responsible for sales contract
administration, collections and financial controls for the business operations
of the joint venture. As RIGEL has been performing its sales function since
October, the Company commenced funding the required recoupable advances to cover
the costs of trade show attendance of $180,000 per year plus other advances as
may be required for business operation. As of December 31, 1996 the Company had
invested $63,336 of its commitment to fund.
10
Part 1. Financial Information
Item 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
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The following discussion and analysis should be read in conjunction with the
Company's accompanying condensed consolidated financial statements and Notes.
The Notes to the Condensed Consolidated Financial Statements and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" set forth herein contain certain forward-looking statements 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.
These risk factors include, but are not limited to, the number of the Company's
projects in development that result in completed productions that yield
revenues, the timing of such production expenditures and related revenues, the
intensity of competition from other television and motion picture producers and
distributors, the status of the Company's liquidity in future fiscal periods and
other factors that generally affect the entertainment industry such as changes
in management at the major studios, broadcast and distribution companies,
economic, political, regulatory, technological and public taste environments.
The Company's revenues are primarily derived from the production and
distribution of completed television projects, producer fees and personal
management fees. The amount of revenues derived by the Company in any one
period is dependent upon, among other factors, projects completed during any
such period and the distribution of completed projects. Revenues from producer
fees are primarily dependent on the number of projects being produced by the
Company and other parties, and the agreements related to such projects.
Accordingly, the amount of revenues recognized in any period are not necessarily
indicative of revenues to be recognized by the Company in future periods.
Amounts received from license fees for distribution rights to projects-in-
process are deferred income until the project becomes available for broadcast in
accordance with the terms of its licensing agreements and are recognized as
revenue at such time. The portion of the license fees which equal the amount
allowed within the project's budget for the Company's producer fees are
recognized as revenue during the production phase. Revenues from completed
projects where distribution rights are owned by the Company are recognized when
the project becomes contractually available for broadcasting or exhibition in
certain media and geographical territories by the licensee. Revenues from the
sale of projects completed under straight producer arrangements are recognized
during the production phase. Additional licensing, distribution fees or profit
participation's are recognized as earned in accordance with the terms of the
related agreements.
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.
11
RESULTS OF OPERATIONS
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SIX MONTHS ENDED DECEMBER 31, 1996, COMPARED TO SIX MONTHS
- ----------------------------------------------------------
ENDED DECEMBER 31, 1995
- -----------------------
Revenues for the six months ended December 31, 1996 consisted of $167,992
from the continuing international distribution of completed projects and
$652,871 from personal management fees for total revenues of $820,863, a 51%
decrease from the comparable six months ended December 31, 1995 resulting from
lower levels of project production and delivery. Revenues of $1,674,894 for the
six months ended December 31, 1995 were comprised of approximately $1,030,000 of
international distribution revenues from completed projects and a new series
entitled "Simply Style;" and approximately $500,000 in producer fees from the
two CBS television series "Dave's World" and "Can't Hurry Love;" and the
Showtime movie for television entitled "Lily Dale." The remainder of
approximately $145,000 in revenues was generated by personal management fees.
Amortization of film costs for the six months ended December 31, 1996 and
1995 was $70,758 and $697,000, respectively, and was computed using the
Individual Film Forecast Method. The difference in amortization as a percentage
of total revenues related to the distribution of projects of 42% and 68%,
respectively, reflects the mix of projects in which the Company has no
expectation of additional revenues that are amortized at 100% of cost and
projects in which the Company has retained distribution rights held for future
sale that are amortized according to the Individual Film Forecast Method. No
new projects were completed during the six months ended December 31, 1996, so
the rate of amortization was based on distribution rights retained to completed
projects in the Company's film library.
The Company has entered into firm script development deals for a total of six
television movies and one syndicated television series with the ABC, NBC and Fox
Television broadcast networks, the Showtime cable channel and with Polygram/ITC,
the firm that syndicates programs to independent television stations within the
United States and Canada. Based on its customer relationships, the Company
believes that it will commence production on one or more projects in the next
fiscal quarter. The start of production is dependent on the Company obtaining a
sufficient number of purchase agreements to cover the cost of the project either
through direct installment payments and/or by financing contracts to purchase
completed projects.
General and administrative expenses for the six months ended December 31,
1996, were $1,859,780 compared to $1,784,035 for the six months ended December
31, 1995. The $75,745 increase in general and administrative expenses was
primarily attributable to the expansion of staff in the accounting and
television development departments, the addition of professional consultants and
the marketing costs associated with preparing for trade shows in connection with
the Company's expansion of production and international distribution activities
in the RIGEL joint venture described in Note (8). As trade shows take place at
certain times of the year, the Company expects that these marketing costs will
fluctuate in future fiscal periods.
During the six months ended December 31, 1996, the Company's non-recurring
expenses consisted of the settlement of various litigation related to a former
officer and Director for $575,000 described in Note (2), which cost is being
amortized over the life of the non-compete agreement at $23,000 per month. As
of December 31, 1996 the recognized costs were $46,000 towards this settlement.
In addition, the Company incurred unusual legal fee expenses of approximately
$120,000 in connection with the negotiated stipulated settlement of this
litigation. During the six months ended December 31, 1995, the Company agreed
to settle various litigation related to its former international distribution
division, DSL Entertainment, Joint Venture (described in the June 30, 1996 Form
10-KSB). The Company recorded $217,663 of income related to that settlement.
During the six months ended December 31, 1996, the Company recorded $157,339
of interest income of which $51,000 consisted of amortization of the imputed
interest discount on notes receivable from related parties in connection with
sales of the Company's Common Stock described in Note (7). Interest
12
income for this period also included $16,687 of imputed interest related to a
trade note receivable and $89,652 interest earned on a portion of the proceeds
from the Company's September 1996 public offering described in Note (3). During
the six months ended on December 31, 1995, interest income of $24,804 consisted
of $15,000 imputed interest discount on the same related party notes and $9,804
earned on temporary cash investments.
Interest and financing expense of $156,975 for the six months ended December
31, 1996 included $137,503 of deferred financing charges which were expensed to
operations upon repayment of the $500,000 aggregate principal amount of 10%
promissory notes ("Bridge Notes") described in Note (6). The one time charge to
operations represented complete amortization of the deferred financing costs
over the term of the Bridge Notes which were repaid in September 1996. There
was no interest expense for the six months ended December 31, 1995.
The Company reported a loss of ($1,487,853) or ($.16 per share) in the second
quarter of fiscal 1997 compared to a loss ($776,204) or ($.28 per share) in the
second quarter of fiscal 1996. The loss for both compared periods included
required dividend payments of $212,500 owed to holders of the Series A Preferred
Stock. The number of weighted average common shares outstanding increased to
9,480,490 in the second quarter of 1997 from 2,740,114 in the second quarter of
fiscal 1996 due to the combined effect of the one-for-four reverse stock split
in June 1996 and the recent public offering described in Note (3).
THREE MONTHS ENDED DECEMBER 31, 1996, COMPARED TO THREE MONTHS
- --------------------------------------------------------------
ENDED DECEMBER 31, 1995
- -----------------------
Revenues for the three months ended December 31, 1996 consisted of $44,889
from the continuing international distribution of completed product and $459,115
from personal management fees for total revenues of $504,004, a 16% decrease
from the first quarter of 1995 resulting from the lower level of production and
delivery of projects. Revenues of $601,493 for the three months ended December
31, 1995 were comprised of approximately $150,000 of international distribution
revenues from completed projects and approximately $375,000 in producer fees
from two CBS television series "Dave's World" and "Can't Hurry Love" and a
Showtime movie for television entitled "Lily Dale." The remainder of
approximately $77,500 in revenues was generated by personal management fees.
Amortization of film costs for the three months ended December 31, 1996 and
1995 was $7,758 and $63,000, respectively, and was computed using the Individual
Film Forecast Method in connection with revenues from international
distribution. No new projects were completed during the six months ended
December 31, 1996 so the rate of amortization was based on distribution rights
retained to completed projects in the Company's film library.
General and administrative expenses for the three months ended December 31,
1996, were $1,056,277 compared to $970,713 for the three months ended December
31, 1995. The $85,564 increase in general and administrative expenses was
primarily attributable to the expansion of staff in the accounting and
television development departments, professional consultants and the marketing
costs associated with attendance at trade shows related to international
distribution activities. The Company's non-recurring expenses consisted of the
settlement of various litigation related to a former officer and Director for
$575,000 described in Note (2), which cost is being amortized over the life of
the non-compete agreement at $23,000 per month. As of December 31, 1996 the
recognized settlement costs were $46,000 and approximately $85,000 of unusual
legal fee expenses incurred in connection with the negotiated stipulated
settlement of this litigation. During the three months ended December 31, 1995,
the Company agreed to settle various litigation related to its former
international distribution division, DSL Entertainment, Joint Venture (described
in the June 30, 1996 Form 10-KSB). The Company recorded $217,663 of income
related to that settlement.
13
During the three months ended December 31, 1996, the Company recorded
$116,433 of interest income of which $27,000 consisted of amortization of the
imputed interest discount on notes receivable from related parties in connection
with sales of the Company's Common Stock described in Note (7). Interest income
for this period also included $8,823 of imputed interest related to a trade note
receivable and $80,602 interest earned on a portion of the proceeds from the
Company's September 1996 public offering described in Note (3). During the
three months ended on December 31, 1995, interest income of $17,197 consisted of
$15,000 imputed interest discount on related party notes and $2,197 earned on
temporary cash investments. There was no interest expense for the three months
ended December 31, 1996 or December 31, 1995.
The Company reported a loss of ($681,229) or ($.05 per share) in the three
months ended December 31, 1996 compared to a loss ($303,640) or ($.12 per share)
in the three months ended December 31, 1995. The loss for both compared periods
included required dividend payments of $106,250 owed to holders of the Series A
Preferred Stock. The number of weighted average common shares outstanding
increased to 12,631,799 from 2,894,312 for the three months ended December 31,
1996 and 1995, respectively, due to the combined effect of the one-for-four
reverse stock split in June 1996 and the September 1996 public offering
described in Note (3).
LIQUIDITY AND CAPITAL RESOURCES
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As of December 31, 1996, the Company had increased liquidity from the
comparable period ended December 31, 1995 primarily as a result of the public
offering in September 1996. Cash and cash equivalents as of that date were
$902,886, marketable securities were $3,843,264 and trade accounts receivable
increased to $691,685. As of December 31, 1996, the Company had recorded
accounts payable and accrued expenses of $401,051. In the comparable period
ending December 31, 1995, the Company had $188,282 in cash and cash equivalents
and $715,618 in trade accounts receivable to cover $310,759 of current
liabilities. As of February 7, 1997, the Company's cash, cash equivalents and
marketable securities were approximately $4,100,000.
As of December 31, 1996, the Company's firm cash commitments for the next
twelve months aggregated to approximately $2,700,000 which include (a) base
compensation to its officers, key independent contractors and consultants of
approximately $2,160,000, (b) office rent of approximately $279,600 and (c)
$275,000 of required installment payments to a former officer and Director of
the Company as described under Note (2). The Company also incurs other costs
such as employee benefits, premiums on insurance policies, marketing costs,
office expenses, professional fees and other expenses. For the six months ended
December 31, 1996, general and administrative expenses, including compensation
and rent, but excluding unusual legal expenses, aggregated approximately
$1,900,000. Required cash dividends on the shares of Series A Preferred Stock
are $425,000 annually. The dividends on the Series A Preferred Stock may be
paid either in shares of the Company's Common Stock or in cash. The Company has
agreed with the Underwriter of the September 1996 public offering of 2,300,000
Units described in Note (3) that it will not pay such dividends on the Series A
Preferred Stock in shares of Common Stock without the Underwriter's approval
through March 1998.
The Company's projected business plan is to use a substantial portion of its
liquid resources to expand its operations and to establish other activities
related to its core business. The Company anticipates that cash and cash
equivalents will be used to finance timing differences between production costs
and collection of license fees, to acquire the copyrights and distribution
rights to third party product, to contribute to its RIGEL international
distribution joint venture, to develop new revenue streams related to the
merchandising of characters and story ideas created in its television projects,
to maintain its present level of television development and administrative
staffs and to pay cash dividends on its Series A Preferred Stock. The actual
utilization of excess working capital is subject to change based on the then
present circumstances and management's evaluation of alternative projects.
14
The financing of production or acquisition timing differences of certain
projects may require the Company to obtain additional external financing or
capital. The Company's ability to rely on external sources of funds, rather
than its own liquid resources, will be significant in determining the extent to
which the Company will expand and diversify its production and distribution
activities. 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 agreements have been entered into for any
such external financing as of the date of this report. The Company currently
has no commitments for capital expenditures.
Management anticipates that the Company will continue to incur losses through
the third quarter of the Company's current fiscal year in the event that it does
not obtain contracts or licenses for the production of new projects in which it
retains distribution rights. Projects made under producer arrangements provide
a lower contribution margin than projects in which distribution rights are held.
The Company's ability to cover Selling, General and Administrative costs with
cash flow from operations will depend on the product mix, number of projects and
timing of delivery of projects in the third and fourth quarters. The Company
believes that its present level of liquidity and capital resources will be
sufficient to meet its cash needs for the next twelve months.
INFLATION
Inflation has not had a material effect on the Company.
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PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Reference is made to Item 1. of Part II of the Company's Form 10-QSB
quarterly report for the period ended September 30, 1996 and to Note (2) of the
Condensed Consolidated Financial Statements included in this 10-QSB report for
information concerning the settlement in November 1996 of certain litigation
between the Company and Ronald Lightstone.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits - None.
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(a) Reports on Form 8-K - No reports on Form 8-K were filed during the six
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months ended December 31, 1996.
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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.
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(Registrant)
Dated: February 14, 1997 /s/ Irwin Meyer
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Irwin Meyer,
President and
Chief Executive Officer
Dated: February 14, 1997 /s/ Lenore Nelson
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Lenore Nelson,
Chief Financial Officer
17