-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, HxeARNEiTG0ynduiX1cAt6U8moCKKoRaA8rtjFS3QM4fAUfMWrCFxspuXarz5qLs nAabpKDcg2QGk1IUrjMnlQ== 0000950148-97-002663.txt : 19971104 0000950148-97-002663.hdr.sgml : 19971104 ACCESSION NUMBER: 0000950148-97-002663 CONFORMED SUBMISSION TYPE: SB-2/A PUBLIC DOCUMENT COUNT: 11 FILED AS OF DATE: 19971031 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: TEAM COMMUNICATION GROUP INC CENTRAL INDEX KEY: 0001035700 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-MOTION PICTURE & VIDEO TAPE DISTRIBUTION [7822] IRS NUMBER: 954519215 STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: SB-2/A SEC ACT: SEC FILE NUMBER: 333-26307 FILM NUMBER: 97706154 BUSINESS ADDRESS: STREET 1: 12300 WILSHIRE BLVD STREET 2: SE 400 CITY: LOS ANGELES STATE: CA ZIP: 90025 BUSINESS PHONE: 3104423500 MAIL ADDRESS: STREET 1: 12300 WILSHIRE BLVD STREET 2: #400 CITY: LOS ANGELES STATE: CA ZIP: 90025 SB-2/A 1 AMENDMENT NO. 3 TO FORM SB-2 1 AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 31, 1997 REGISTRATION NUMBER 333-26307 ================================================================================ SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 AMENDMENT NO. 3 TO FORM SB-2 ------------------------ REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 ------------------------ TEAM COMMUNICATIONS GROUP, INC. EXACT NAME OF SMALL BUSINESS ISSUER AS SPECIFIED IN THE CHARTER CALIFORNIA 3652 95-5419215 (STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (IRS EMPLOYER INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NO.)
------------------------ TEAM COMMUNICATIONS GROUP, INC. 12300 WILSHIRE BOULEVARD, SUITE 400 LOS ANGELES, CALIFORNIA 90025 (310) 442-3500 (ADDRESS, INCLUDING ZIP CODE AND TELEPHONE NUMBER, INCLUDING AREA CODE OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES.) ------------------------ DREW S. LEVIN 12300 WILSHIRE BOULEVARD, SUITE 400 LOS ANGELES, CALIFORNIA 90025 (310) 442-3500 (NAMES, ADDRESS, INCLUDING ZIP CODE AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF AGENT FOR SERVICE) COPIES TO: BRUCE P. VANN, ESQ. THOMAS J. POLETTI, ESQ. KELLY LYTTON MINTZ & VANN LLP KATHERINE J. BLAIR, ESQ. 1900 AVENUE OF THE STARS, SUITE 1450 FRESHMAN, MARANTZ, ORLANSKI, COOPER & KLEIN LOS ANGELES, CALIFORNIA 90067 9100 WILSHIRE BLVD., 8E TELEPHONE NO: (310) 277-5333 BEVERLY HILLS, CALIFORNIA FACSIMILE NO: (310) 277-5953 TELEPHONE NO: (310) 273-1870 FACSIMILE NO: (310) 274-8357
------------------------ APPROXIMATE DATE OF PROPOSED SALE TO THE PUBLIC: as soon as practicable after the effective date of this registration statement. If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, as amended, check the following box. [X] If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box. [ ] THE REGISTRANT HEREBY AMENDS THE REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a), MAY DETERMINE. ================================================================================ 2 INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE. PRELIMINARY PROSPECTUS DATED OCTOBER 31, 1997 TEAM COMMUNICATIONS GROUP, INC. 1,500,000 SHARES Team Communications Group, Inc. (the "Company") hereby offers 1,500,000 shares of Common Stock, no par value, ("Common Stock"). Prior to this offering (the "Offering"), there has been no public market for the Common Stock of the Company, and there can be no assurance that an active market will develop. The offering price is expected to be between $5.50 and $7.00 per share. The offering price of the Common Stock has been determined by negotiation between the Company and H.J. Meyers & Co., Inc. ("H.J. Meyers" or the "Underwriter"), and is not necessarily related to the Company's asset value or any other established criterion of value. For the method of determining the initial offering price of the Common Stock, see "Risk Factors" and "Underwriting." Application has been made to have the Common Stock approved for listing on the Nasdaq SmallCap Market under the symbol "TMTV." The Company is also registering 193,870 shares of Common Stock issuable upon exercise of certain outstanding warrants that may be resold from time to time in the future by certain securityholders (the "Selling Securityholders"). The 193,870 shares of Common Stock underlying such warrants are subject to a 12 month lock-up beginning on the date of this Prospectus. The Company has covenanted to use its best efforts to keep the Registration Statement of which this Prospectus is a part effective in order to permit such resales, and it is expected that such resales will be made from time to time in the over-the-counter market or otherwise. Such resales are subject to prospectus delivery and other requirements of the Securities Act of 1933, as amended. The Company will not receive any proceeds from the market sales of the shares of Common Stock issuable upon exercise of such warrants other than proceeds relating to the exercise price of such warrants. The Company is paying all costs and expenses of registering these shares of Common Stock. See "Offering by Selling Securityholders." ------------------------ THE SHARES OF COMMON STOCK OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK AND IMMEDIATE AND SUBSTANTIAL DILUTION AND SHOULD BE CONSIDERED ONLY BY INVESTORS WHO CAN AFFORD THE LOSS OF THEIR ENTIRE INVESTMENT. SEE "RISK FACTORS" BEGINNING ON PAGE 8. ------------------------ THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
==================================================================================================== PROCEEDS TO PRICE TO PUBLIC COMPANY(2) UNDERWRITING DISCOUNTS AND COMMISSIONS(1) - ---------------------------------------------------------------------------------------------------- Per Share...................................... $ $ $ - ---------------------------------------------------------------------------------------------------- Total(3)....................................... $ $ $ ====================================================================================================
(1) Does not include additional compensation to be received by the Underwriter in the form of (i) a non-accountable expense allowance of $ (or $ if the Underwriter's over-allotment option described in footnote (3) is exercised in full) and (ii) a warrant to purchase up to 150,000 shares of Common Stock at $8.75 per share (based upon an assumed initial public offering price of $6.25 per share), exercisable over a period of four years, commencing one year from the date of this Prospectus (the "Underwriter's Warrant"). In addition, the Company has agreed to indemnify the Underwriter against certain civil liabilities under the Securities Act of 1933. See "Underwriting." (2) Before deducting expenses of the Offering payable by the Company, estimated at $ , including the Underwriter's non-accountable expense allowance. (3) The Company and Joseph Cayre (the "Selling Shareholder") have granted the Underwriter an option (together, the "Underwriter's over-allotment option"), exercisable within 30 business days of the date of this Prospectus, to purchase up to 225,000 additional shares of Common Stock on the same terms and conditions as set forth above to cover over-allotments, if any. If all such additional shares of Common Stock are purchased, the total Price to Public, Underwriting Discounts and Commissions and Proceeds to Company will be increased to $ , $ and $ , respectively, and the proceeds to the Selling Shareholder will be $ . See "Underwriting" and "Principal Shareholders." The shares of Common Stock offered hereby are offered on a "firm commitment" basis by the Underwriter, subject to prior sale when, as and if delivered to and accepted by the Underwriter, and subject to the right of the Underwriter to reject any order in whole or in part. It is expected that delivery of the certificates representing the shares of Common Stock will be made at the offices of H.J. Meyers & Co., Inc., 1895 Mt. Hope Avenue, Rochester, New York 14620 on or about , 1997. ------------------------ H.J. MEYERS & CO., INC. The date of this Prospectus is November , 1997. 3 PICTURES CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK. SPECIFICALLY, THE UNDERWRITER MAY OVERALLOT IN CONNECTION WITH THE OFFERING AND MAY BID FOR AND PURCHASE SHARES OF THE COMMON STOCK IN THE OPEN MARKET. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING." ------------------------ The Company intends to furnish its shareholders with annual reports containing audited financial statements with a report thereon by independent accountants and quarterly reports containing unaudited financial information for each of the first three quarters of each fiscal year. 4 PROSPECTUS SUMMARY The following summary is qualified in its entirety by, and should be read in conjunction with, the more detailed information and financial data appearing elsewhere in this Prospectus. Each prospective investor is urged to read this Prospectus in its entirety. This Prospectus contains forward-looking statements that involve risks and uncertainties. The Company's actual results could differ materially from those anticipated in these forward-looking statements as a result of certain factors, including those set forth under "Risk Factors" and elsewhere in this Prospectus. THE COMPANY Since its formation in February 1995, Team Communications Group, Inc. (the "Company") has focused its efforts on the development, production and distribution of a variety of television programming, including series, specials and made-for-television movies for exploitation in the domestic and international television market. The Company derives substantially all of its revenues from production fees earned in connection with Company-originated productions, distribution fees from the exploitation of product acquired from others, and the exploitation of Company-owned programming. The Company's production activities have focused on (i) family programming produced for U.S. cable and network television channels such as The Discovery Channel, The Family Channel, USA Network, and the Public Broadcasting System ("PBS"), and (ii) "how-to" instructional series, such as "Simply Style," a 60-episode series which debuted during the third quarter of 1995 on The Learning Channel. In addition, the Company co-developed and is co-producing a reality based five-day per week ("strip") syndicated series, called "Strange Universe," with United/Chris-Craft television stations and Rysher Entertainment. This series is currently airing on United/Chris-Craft stations and a commitment for the production of a second 13-week run (65 episodes) has been received from United/Chris-Craft. The Company has also recently completed the production of a series of 22 half hour episodes entitled "Amazing Tails," a reality based series focusing on extraordinary pets, which has been financed in conjunction with Friskies Pet Foods, a division of Nestles Food, and advertising leader The Interpublic Group of Companies ("Interpublic"). All episodes of this series have been produced and delivered to Interpublic, and the series is currently airing on Discovery Communications newest channel, Animal Planet. The Company has recently entered into an agreement with Discovery Communications for a second season of 26 new episodes of Amazing Tails, which is currently in production. The Company also has entered into a joint venture agreement with Interpublic for the production, subject to certain criteria, of a minimum of four pilots over the next year for non-fiction and light entertainment programming. The Company maintains a drama production unit which is developing and will produce movies- of-the-week for exhibition on network television, cable or ad hoc networks of independent stations which sometimes form to air special programming. In July 1996, the Company acquired the rights to produce a weekly dramatic television series based on the motion picture "Total Recall," which in 1990 grossed over $320 million in worldwide box office receipts. The Company has entered into an agreement with Alliance Production Ltd. ("Alliance"), a leading Canadian production company, pursuant to which Alliance, subject to certain conditions, will co-produce and finance an initial 22 episodes of the series with the Company. The Company has also entered into an agreement with Polygram Television, L.L.C. ("PolyGram"), pursuant to which PolyGram will co-finance and acquire television distribution rights to the series in the United States. Miramax Film Corp. ("Miramax"), which acquired the theatrical sequel rights to "Total Recall," has also acquired worldwide home video rights to the series from the Company. Based upon the initial pre-sales of the series with PolyGram, Miramax and various international broadcasters, the financial conditions contained in the co-production agreement with Alliance have been satisfied. In addition to reducing the Company's financial exposure, the Company anticipates that by co-producing the series with Alliance, the series will qualify for certain Canadian co-production and tax benefits. It is the intention of the parties that each episode will be produced for approximately $1,100,000 per episode, with the Company receiving a guaranteed producing fee of $25,000 per episode, as well as 50% of the profits derived from the exploitation of worldwide television, home video and merchandising rights to the series. The Company expects to produce 22 one-hour episodes for this series in 1998, and Ron Shusett, the 3 5 writer of the original film as well as the feature film "Alien," has written the basic treatment (i.e., story outline) for the pilot. The Company is also developing a wide variety of family, dramatic, reality-based and children's programing including a new pre-school series, tentatively entitled "LoCoMoTioN," which the Company hopes to place on domestic and international television in 1998. Although no assurance can be given that the Company will obtain a domestic timeslot, the Company is currently interviewing potential female celebrities to co-host this series, which will introduce toddlers to dance and exercise through contemporary urban music. The Company also maintains an international sales force and currently has distribution rights to over 335 half-hours of family and documentary series and specials, and 156 hours of dramatic series. The global television market has experienced substantial growth since 1985 and the Company believes this market will continue to experience substantial growth during the foreseeable future as state television monopolies end and commercial broadcast outlets expand to provide increasingly varied and specialized content to consumers throughout the world. In the United States alone, 60 new television channels have commenced operation since 1985. Such growth has led to the development and commercialization of specialized channels and distribution outlets, which, in turn, has led to increased demand for top quality and cost efficient programming in many categories and subjects. Europe, Latin America and the Pacific Rim are all experiencing similar growth with respect to satellite and cable channels. The Company's operating strategy is to fulfill the demand for programming by (i) expanding the activities of each of its operating divisions, (ii) implementing strategic acquisitions of libraries and smaller production companies and (iii) entering into joint ventures with, or acquisitions of, unaffiliated third parties which are intended to lower the Company's financial risk as it expands into related activities, such as direct marketing and interactive programming. The Company intends to acquire, co-produce and co-finance other series, movies and specials from third party producers in order to increase its programming library and self distribute this product on an worldwide basis. The Company believes that there are business opportunities to acquire other emerging companies, as well as more established production and distribution entities, which are engaged in programming development, production, distribution and other related media investments. While the number of distribution channels has been increasing, the Company believes there are economic incentives, including economies of scale and depth of financial and programming capability, for programmers and distribution entities to consolidate. No assurance can be given that the Company will be successful in obtaining the financing necessary for these acquisitions or that the acquisitions will prove financially successful. The Company was incorporated under the laws of the State of California in February 1995. The Company's executive offices are located at 12300 Wilshire Boulevard, Suite 400, Los Angeles, California 90025, and its telephone number is (310) 442-3500. ------------------------ NOTICE TO CALIFORNIA, MISSOURI, OREGON AND SOUTH CAROLINA INVESTORS Each purchaser of shares of Common Stock in California, Missouri, Oregon and South Carolina must meet one of the following suitability standards: (i) a liquid net worth (excluding home, furnishings and automobiles) of $250,000 or more and gross annual income during 1996, and estimated during 1997, of $65,000 or more from all sources or (ii) a liquid net worth (excluding home, furnishing and automobiles) of $500,000 or more. Each California, Missouri, Oregon and South Carolina resident purchasing shares of Common Stock offered hereby will be required to execute a representation that it comes within one of the aforementioned categories. 4 6 SUMMARY OF FINANCIAL INFORMATION
FOR THE PERIOD FROM FOR THE SIX FOR THE SIX FOR THE FEBRUARY 27, 1995 MONTHS ENDED MONTHS ENDED YEAR ENDED TO STATEMENT OF OPERATIONS DATA: JUNE 30, 1997 JUNE 30, 1996 DECEMBER 31, 1996 DECEMBER 31, 1995 ------------- ------------- ----------------- ----------------- (UNAUDITED) Revenues...................... $3,473,100 $3,314,600 $5,749,800 $1,245,300 Cost of revenues.............. 984,300 1,549,600 2,895,900 946,900 ---------- ---------- ---------- ----------- Gross profit.................. 2,488,800 1,765,000 2,853,900 298,400 General and administrative expenses.................... 987,400 976,300 2,323,800 1,288,200 Bad debt expense.............. 660,000 -- -- -- ---------- ---------- ---------- ----------- Net income from operations.... 841,400 788,700 530,100 (989,800) Interest expense.............. 523,400 200,000 677,700 42,700 Interest income............... 102,700 -- 58,300 -- Other income.................. -- -- 90,100 -- ---------- ---------- ---------- ----------- Net income (loss) before income taxes................ 420,700 588,700 800 (1,032,500) Provision for income taxes.... -- -- -- -- ---------- ---------- ---------- ----------- Net income (loss)............. $ 420,700 $ 588,700 $ 800 $(1,032,500) ========== ========== ========== =========== Net income (loss) per share(1).................... $ 0.23 $ 0.32 -- $ (0.57) ========== ========== ========== =========== Weighted average number of shares outstanding(1)....... 1,821,800 1,821,800 1,821,800 1,821,800 ========== ========== ========== ===========
JUNE 30, 1997 ------------------------------- BALANCE SHEET DATA: ACTUAL AS ADJUSTED(2) ----------- --------------- Liquidity capital (deficit)(3)........................... $(3,896,800) $ 3,595,340 Total assets............................................. 10,559,500 14,952,190 Notes payable(4)(5)...................................... 4,414,000 1,938,050 Accrued interest(4)(5)................................... 557,400 173,900 Shareholder loan and note payable(4)(5).................. 740,000 500,000 Accumulated deficit(5)................................... (611,000) (979,400) Shareholders' equity..................................... 620,100 8,112,240
- --------------- (1) See Note 2 of Notes to Consolidated Financial Statements for information regarding the calculation of net income (loss) per share. (2) As adjusted to reflect (i) the estimated net proceeds of the Offering, based upon an assumed initial public offering price of $6.25 per share, after deducting Underwriter's discounts and commissions and estimated offering expenses, (ii) the conversion of a note (the "Conversion Note"), in the principal amount of $322,000 into approximately 105,000 shares of Common Stock upon the closing of the Offering, (iii) interest of approximately $100,800 which accrued from July 1, 1997 through October 31, 1997 from the debt to be repaid from the Offering, and (iv) the Extraordinary Loss (see footnote 5 below). See "Use of Proceeds," "Capitalization" and "Description of Securities." (3) Represents (i) cash and cash equivalents plus accounts receivables (net), and the amount due from officer less (ii) accounts payable, accrued expenses and other liabilities, deferred revenue, accrued participations, notes payable, shareholder loan and note payable, and accrued interest. (4) See Notes 5 and 7 of Notes to Consolidated Financial Statements. 5 7 (5) An aggregate of $3,084,350 principal amount of indebtedness outstanding as of June 30, 1997 will be repaid with the proceeds of the Offering. Since said indebtedness was issued concurrently with warrants, the notes are recorded on the Company's financial statements at a lesser value and a value is ascribed to the warrants which management believes reflects the market value of the warrants; this value is reflected as a debt issuance discount and is amortized over the term of all such notes resulting in an effective interest rate of approximately 25%. Upon repayment of such debt, the Company will recognize an extraordinary loss equal to the value ascribed to such warrants. While the entire $3,084,350 principal amount of indebtedness will actually be repaid from the Offering, as adjusted reflects the repayment of the recorded value of such debt as of October 31, 1997 -- a value of $2,625,200 will be ascribed to said debt and a value of $368,400 will be ascribed to the warrants, resulting in the recognition of extraordinary loss of $368,400 (the "Extraordinary Loss") which becomes part of accumulated deficit. To the extent that other debt issued with warrants is extinguished upon the closing of the Proposed Bank Facility, the Extraordinary Loss for the fiscal year ended December 31, 1997 will be increased. 6 8 THE OFFERING Common Stock Offered by the Company............................. 1,500,000 shares Common Stock Outstanding after this Offering............................ 2,831,092(1) shares Use of Proceeds..................... Repayment of loans, accrued interest on loans, acquisition of foreign distribution rights to made for television movies, acquisition of foreign distribution rights to existing television series and corporate overhead and working capital, including salaries and wages. Proposed Nasdaq SmallCap Symbol..... "TMTV" - --------------- (1) Includes up to 199,748 shares which will be issued to a shareholder upon satisfaction of certain contractual dilution rights. See "Certain Transactions -- Transactions with Morris Wolfson and Others." RISK FACTORS THE SHARES OF COMMON STOCK OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK AND SHOULD BE CONSIDERED ONLY BY PERSONS WHO CAN AFFORD THE LOSS OF THEIR ENTIRE INVESTMENT. SEE "RISK FACTORS" BELOW. ------------------------ Except as otherwise specified, all information in this Prospectus (i) assumes no exercise of the Underwriter's over-allotment option, the Underwriter's Warrant, outstanding warrants to purchase 595,278 shares of Common Stock, 173,000 stock options outstanding or 164,500 stock options reserved for issuance under the Company's stock option plans, (ii) assumes no conversion of outstanding convertible notes except the Conversion Note and (iii) gives effect to a 2.2776-for-1 reverse stock split which occurred in January 1997 and a 1.0277-for-1 reverse stock split which occurred in April 1997. See "Management," "Description of Securities" and "Underwriting." 7 9 RISK FACTORS In addition to the other information in this Prospectus, each prospective investor should carefully consider the following factors in evaluating the Company and its business before purchasing the shares of Common Stock offered hereby. No investor should participate in the Offering unless such investor can afford a complete loss of his or her investment. This Prospectus contains forward-looking statements that involve risks and uncertainties. The Company's actual results could differ materially from those anticipated in these forward- looking statements as a result of certain factors, including those set forth in the following risk factors and elsewhere in this Prospectus. GOING CONCERN ASSUMPTION. The Company's independent accountants' report on the Company's financial statements for the fiscal years ended December 31, 1995 and December 31, 1996 and for the six months ended June 30, 1997 contains an explanatory paragraph indicating that the Company's losses raise substantial doubt as to the Company's ability to continue as a going concern. There can be no assurance that future financial statements will not include a similar explanatory paragraph if the Company is unable to raise sufficient funds or generate sufficient cash flow from operations to cover the cost of its operations. The existence of such an explanatory paragraph, which will state that there exists doubt as to the Company's ability to operate as a going concern, may have a material adverse effect on the Company's relationship with third parties who are concerned about the ability of the Company to complete projects that it is contractually required to develop or produce, and could also impact the ability of the Company to complete future financings. LIMITED OPERATING HISTORY; LIQUIDITY DEFICIT. The Company, which was formed in February 1995, has a limited operating history. Accordingly, prospective purchasers hereunder have limited information upon which an evaluation of the Company's business and prospects can be based. Although the Company has generated profitable operations during the fiscal year ended December 31, 1996 and the six months ended June 30, 1997, it has experienced a negative cash flow from operations during such period. No assurance can be given that the Company will continue to be profitable in the foreseeable future or that it will be able to generate positive cash flow from its operations. The Company will be unable to implement its business plan without the proceeds of the Offering. Implementation of the Company's business plan is subject to all the risks inherent in the establishment of a new business enterprise, including potential operating losses. In addition, the Company will be subject to certain factors affecting the entertainment industry generally, such as sensitivity to general economic conditions, critical acceptance of its products and intense competition. The likelihood of the success of the Company must be considered in light of the problems, expenses, difficulties, complications and delays frequently encountered in connection with the formation of a new business; accordingly a purchase of the shares of Common Stock offered hereby should be considered to be a highly speculative investment. As of June 30, 1997, the Company had an accumulated deficit of ($611,000) and had a liquidity deficit of ($3,896,800), such deficit being defined as (i) cash and cash equivalents plus accounts receivables (net), and the amount due from officer less (ii) accounts payable, accrued expenses and other liabilities, deferred revenue, accrued participations, notes payable, shareholder loan and note payable, and accrued interest. ADDITIONAL CAPITAL REQUIREMENTS; ENCUMBRANCE OF ASSETS; NO ASSURANCE OF FUTURE FINANCINGS. The entertainment industry is highly capital intensive. Management believes that if the Offering is completed, the net proceeds thereof, together with projected cash flow from operations, will be sufficient to permit the Company to conduct its operations as currently contemplated for the next 12 months. Such belief is based upon certain assumptions, including assumptions regarding (i) anticipated level of operations, (ii) the sales of the Company's original and acquired programming and (iii) anticipated expenditures required for the development and production of additional programming, including "Total Recall." However, if anticipated operations require additional financing, or the anticipated level of sales does not materialize, the Company will seek additional financing during this 12 month period. There can be no assurance that any additional financing will be available on acceptable terms, or at all, when required by the Company. Moreover, if additional financing is not available, the Company could be required to reduce or suspend its operations, seek an acquisition partner or sell securities on terms that may be highly dilutive or otherwise disadvantageous to investors purchasing the shares of Common Stock offered hereby. Certain of these transactions would require 8 10 the approval of the Underwriter if they occurred within 24 months from the effective date of this Offering. The Company has in the past, and may continue to experience, operational difficulties or delays in the development or production due to working capital constraints. Any such difficulties or delays could have a material adverse effect on the Company's business, financial condition and results of operations. See "Risk Factors -- Going Concern Assumption," "Capitalization," "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources" and Note 12 of Notes to Consolidated Financial Statements. At the conclusion of the Offering, the Company will have approximately $2,438,050 of indebtedness, which indebtedness is secured by substantially all of the assets of the Company. The Company intends to enter into multiple lines of credit with Mercantile National Bank (the "Proposed Bank Facility"), which lines of credit would permit borrowings pursuant to specified borrowing bases made up of the value of the library, accounts receivable and other assets, including cash. The Company currently intends to repay the $2,438,050 of indebtedness remaining after the Offering with proceeds from the Proposed Bank Facility. No assurance can be given that the Proposed Bank Facility will be entered into or that the Company will be able to use proceeds from such facility as indicated herein. COMPETITION. The entertainment industry is highly competitive. The Company competes with, and will compete with, many organizations, including major film studios, independent production companies, individual producers, and others, including networks, who are seeking the rights to literary properties, the services of creative and technical personnel, the financing for production of film and television projects, and favorable arrangements for the distribution of completed films. Many of the Company's present and future competitors are organizations of substantially larger size and capacity, with far greater financial, human and other resources and longer operating histories than the Company. Moreover, the entertainment industry is currently evolving into an industry in which certain multi-national, multi-media entities, including Viacom/Paramount Pictures, The News Corporation, The Walt Disney Company/Cap Cities-ABC, Time Warner/Turner Broadcasting and Westinghouse/CBS are anticipated to be in a position, by virtue of their control over key film, magazine, and/or television content, and their control of key network and cable outlets, to dominate certain communications industries activities. These competitors have numerous competitive advantages, including the ability to acquire and attract superior properties, personnel and financing. DEPENDENCE ON EMERGING MARKETS; DEPENDENCE ON FOREIGN SALES. A substantial portion of the Company's revenues to date have been, and for the foreseeable future may be, derived from the sale or license of its products to domestic television or cable networks such as the WB Network, UPN, The Discovery Channel and The Learning Channel which have been recently established, (i.e., not the traditional free network markets of CBS, NBC, ABC and Fox) and the growing specialized pay market, as well as the foreign television networks. The Company's success will depend in large part upon the development and expansion of these markets. The Company cannot predict the size of such markets or the rate at which they will grow. If the television market serviced by the Company fails to grow, grows more slowly than anticipated, or becomes saturated with competitors, the Company's business, financial condition, and results of operations would be materially adversely affected. In addition to the foregoing, a substantial portion of the Company's revenues are dependent on sales to sub-licensees and sub-distributors not domiciled in the United States. The marketing and distribution efforts of these entities could impact the ability of the Company to realize overages with respect to its product. Moreover, the collectibility of receivables from these customers is subject to all of the risks associated with doing business with foreign companies including rapid changes in the political and economic climates of such countries. Should the Company be involved in a protracted dispute with respect to the manner in which its product is distributed, or should the Company be forced to initiate collection activities in order to enforce the terms of the applicable sub-license or sub-distributor agreement, the potential profitability of any particular product may be adversely effected. ACCOUNTS RECEIVABLE; RELIANCE ON SIGNIFICANT CUSTOMERS. Revenues for the first six months of 1997 included approximately $3,241,000 from Beyond Distribution Pty., Ltd., which accounted for 93% of the revenue for the six months ended June 30, 1997. Revenues in fiscal 1996 included approximately $680,000 9 11 recognized from the license and related guaranty from The Gemini Corporation and Mel Giniger and Associates (collectively, the "Giniger Entities"), relating to the Company's current library and certain future product for Latin America and Europe. The revenues attributable to the guaranty (the "Giniger Guaranty") were 12% of the applicable revenues for the year ended December 31, 1996. Should the Company be unable to collect on the portion of the guaranty which was recognized in such period the Company would be forced to incur a significant write-down of its accounts receivable with respect to such account. Alliance, which licenses a variety of product from the Company's library for Canada, and King Records Company, Ltd., which acquired various library products for Japan, are obligated to pay the Company the sums of $764,100 and $996,300 respectively, or 13% and 17% of revenues, respectively, for fiscal 1996. Revenues in fiscal 1996 also included the license from Interpublic of $1,441,700 and the license from Eurolink of $618,400, both such licenses relating to the series "Amazing Tails." Revenues attributed to the Interpublic and Eurolink agreements respecting "Amazing Tails" constituted 25% and 11%, respectively, of revenues during the year ended December 31, 1996. The Eurolink receivable was written off as a bad debt expense in the six months ended June 30, 1997. Neither the revenues relating to the Giniger Guaranty nor the revenues related to the production of "Amazing Tails" should be considered to be recurring revenues. If the Company does not produce a series in fiscal 1997, or obtain other significant foreign sales, the Company's revenues will be materially reduced. PRODUCTION RISKS. There can be no assurance that once the Company commits to fund the production of a series licensed to a network, the network will order and exhibit a sufficient number of episodes to enable the Company to syndicate the series. Typically, at least 65 episodes of a series must be produced for it to be "stripped" or syndicated in the daily re-run market. Networks generally can cancel a series at stated intervals and, accordingly, do not commit in advance to exhibit a series for more than a limited period. If a series is canceled (or not carried for the period necessary to create enough episodes for syndication purposes), there is a significant chance that the production costs of the project will not be fully recovered. In that event, the financial condition of the Company could be materially and adversely affected. Similar risks apply even if a series is produced for a non-network medium. See "Business -- Operations" for a discussion of the financing of series and how deficits are potentially recouped. In addition, for the six months ended June 30, 1997 and the fiscal year ended December 31, 1996, respectively, the Company incurred approximately $1,462,000 and $1,977,000, respectively, in development costs associated with projects for which the Company is actively pursuing production commitments, but which have not been set for principal photography. See "Risk Factors -- Development Costs" for a discussion of the potential impact if such costs were to be written off or otherwise amortized on an accelerated basis. FLUCTUATIONS IN OPERATING RESULTS. The Company's revenues and results of operations are significantly dependent upon the timing and success of the television programming it distributes, which cannot be predicated with certainty. Revenues may not be recognized for any particular program until such program has been delivered to the licensee and is available (i.e., there are no holdbacks) for exploitation in the market it has been licensed for. Production delays may impact the timing of when revenues may be reported under generally accepted accounting principles. Moreover, the sale of existing programming is heavily dependent upon the occurrence of major selling markets, the most important of which are MIP-TV and MIPCOM-TV (the International Film and Program Market for TV, Video, Cable & Satellite) which take place in France in the second and fourth quarters, respectively. Finally, production commitments are typically obtained from networks in the spring (second) quarter, although production activity and delivery may not occur until subsequent periods. As a result of the foregoing, the Company may experience significant quarterly variations in its operations, and results in any particular quarter may not be indicative of results in subsequent periods. The Company's results will also be affected by the allocation of revenue between Company-owned product as compared to product owned by third party producers but distributed by the Company, for which the Company receives a sales commission. In the latter instance, the Company's expenses as a percentage of revenue will typically be higher, as the Company records, as an expense, the participations owing to the copyright owners. In instances where the Company is exploiting product which it has either produced or acquired on an outright basis, the Company does not record such expenses, and its margins will typically be higher than product it is distributing on an agency basis. 10 12 SPECULATIVE NATURE OF ENTERTAINMENT BUSINESS. Substantially all of the Company's revenues are derived from the production and distribution of its television series and made-for-television features. The entertainment industry in general, and the development, production and distribution of television programs, in particular, is highly speculative and involves a substantial degree of risk. Since each project is an individual artistic work and its commercial success is primarily determined by audience reaction, which is volatile and unpredictable, there can be no assurance as to the economic success of any entertainment property. Even if a production is a critical or artistic success, there is no assurance that it will generate sufficient audience acceptance. DEPENDENCE UPON KEY PERSONNEL. The Company is, and will be, heavily dependent on the services of Drew S. Levin, its Chairman of the Board, President and Chief Executive Officer. The loss of the services of Mr. Levin for any substantial length of time would materially adversely affect the Company's results of operations and financial condition. Mr. Levin is party to an employment agreement with the Company which expires in the year 2002. See "Management -- Employment Agreements." The Company has obtained a "key-man" insurance policy in respect of Mr. Levin in the amount of $1,000,000. In addition, the Company is highly dependent upon its ability to attract and retain highly qualified personnel. Competition for such personnel is intense. There can be no assurance that persons having the requisite skills and experience will be available on terms acceptable to the Company or at all. ABILITY TO MANAGE GROWTH. Subject to obtaining sufficient financing, the Company intends to pursue a strategy which management believes may result in rapid growth. As the Company's anticipated development, production and distribution activities increase, it is essential that the Company maintain effective controls and procedures regarding critical accounting and budgeting areas, as well as obtain and/or retain experienced personnel. There can be no assurance that the Company will be able to attract qualified personnel or successfully manage such expanded operations. DEVELOPMENT COSTS. Included in the Company's assets as of June 30, 1997 and December 31, 1996, are approximately $1,462,000 and $1,977,000, respectively, in television program costs in respect of projects which the Company is actively pursuing production commitments but which have not been set for principal photography. As of June 30, 1997, approximately $912,000 of this amount relates to the acquisition of the rights to produce a television series based on the feature film "Total Recall" and approximately $451,000 relates to expenditures in respect of "LoCoMoTioN." The Company intends, consistent with the standards set by the Financial Accounting Standards Board, including Statement of Financial Accounting Standards ("SFAS") No. 53, to write off the costs of all development projects when they are abandoned or, even if still being developed, if they have not been set for principal photography within three years of their initial development activity. In the event the Company is unable to produce either "Total Recall" or "LoCoMoTioN," the Company would incur a significant write-down with respect to the development costs of such projects, which, in turn, may adversely effect ongoing financing activities. REPAYMENT OF INSIDER DEBT; PROCEEDS OF OFFERING TO BENEFIT AFFILIATES OR SHAREHOLDERS. Upon the closing of the Offering, a non-management shareholder of the Company will receive approximately $240,000 for repayment of indebtedness. Concurrently with, or shortly after the closing of the Offering, other shareholders are also anticipated to receive approximately $1,743,900 to eliminate all other shareholder debt, such amounts to be obtained from the Proposed Bank Facility. See "Use of Proceeds" and "Certain Transactions." PREFERRED STOCK; POSSIBLE ANTI-TAKEOVER EFFECTS OF CERTAIN CHARTER PROVISIONS. Certain provisions of the Company's Articles of Incorporation and Bylaws and certain other contractual provisions could have the effect of making it more difficult for a third party to acquire, or of discouraging a third party from attempting to acquire control of the Company. Such provisions could limit the price that certain investors might be willing to pay in the future for shares of the Company's Common Stock. Certain of these provisions allow the Company to issue preferred stock with rights senior to those of the Common Stock without any further vote or action by the shareholders, and impose various procedural and other requirements which could make it more difficult for shareholders to affect certain corporate actions. These provisions could also have the effect of delaying or preventing a change in control of the Company. The issuance of preferred stock could decrease the amount of earnings and assets available for distribution to the holders of Common Stock or could adversely 11 13 affect the rights and powers, including voting rights, of the holders of the Common Stock. In certain circumstances, such issuance could have the effect of decreasing the market price of the Common Stock. The Company has agreed that for a two year period following the closing of the Offering it will not, without the prior written consent of the Underwriter, issue any shares of preferred stock. ABSENCE OF PUBLIC MARKET; DETERMINATION OF OFFERING PRICE; VOLATILITY. Prior to the Offering, there has been no public market for the Common Stock, and there can be no assurance that an active trading market will develop for such securities or, if any such market develops, that it will be sustained. The initial public offering price of the Common Stock will be determined by negotiations between the Company and the Underwriter and may not necessarily bear any relationship to the Company's asset value, book value, financial condition, or any other recognized indicia of value. No assurance can be given that the initial offering price will be sustained or that, in the absence of an active trading market, that shareholders will have sufficient liquidity to readily dispose of their shares. The trading price of the Common Stock could be subject to significant fluctuations in response to variations in quarterly operating results, changes in earnings estimates by analysts following the Company, if any, and general factors affecting the entertainment industry, as well as general economic, political and market conditions, and other factors and such factors could cause the market price of the Common Stock to fluctuate substantially. Due to analysts' expectations of continued growth, if any, and the high price/earnings ratio at which the Common Stock may trade, any shortfall in expectations could have an immediate and significant adverse effect on the trading price of the Common Stock. In addition the stock markets of the United States have, from time to time, experienced significant price and volume fluctuations that are unrelated or disproportionate to the operating performance of any individual company. Such fluctuations could adversely affect the price of the Company's Common Stock. See "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Underwriting." CONTINUED QUOTATION ON THE NASDAQ SMALLCAP MARKET; POSSIBLE ILLIQUIDITY OF TRADING MARKET; POSSIBLE INABILITY OF H.J. MEYERS TO MAKE A MARKET IN THE COMPANY'S COMMON STOCK. The Company has applied for listing to have the Common Stock quoted on the Nasdaq SmallCap Market upon consummation of the Offering. However, there can be no assurance that the Company will be able to satisfy the criteria for continued quotation on the Nasdaq SmallCap Market following the Offering. Failure to meet the maintenance criteria in the future may result in the Common Stock not being eligible for quotation in such market or otherwise. In such event, a holder of the Company's Common Stock may find it more difficult to obtain accurate quotations as to the market value of, the Common Stock. Trading, if any, in the Common Stock would therefore be conducted in the over-the-counter market on an electronic bulletin board established for securities that do not meet the Nasdaq SmallCap Market Listing requirements, or in what are commonly referred to as the "pink sheets." As a result, an investor would find it more difficult to dispose of, or to obtain accurate quotations as to the price of, the Company's Common Stock. Nasdaq has recently promulgated new rules which make continued listing of companies on the Nasdaq SmallCap Market more difficult and has significantly increased its enforcement efforts with regard to Nasdaq standards for such listing. In addition, if the Company's Common Stock were removed from the Nasdaq SmallCap Market, the Common Stock would be subject to so-called "penny stock" rules that impose additional sales practice and market making requirements on broker-dealers, who sell and/or make a market in such securities. Consequently, removal from the Nasdaq SmallCap Market, if it were to occur, could affect the ability or willingness of broker-dealers to sell and/or make a market in the Company's Common Stock and the ability of purchasers of the Company's Common Stock to sell their securities in the secondary market. In addition, if the market price of the Company's Common Stock is less than $5.00 per share, the Company may become subject to certain penny stock rules even if still quoted on the Nasdaq SmallCap Market. While such penny stock rules should not affect the quotation of the Company's Common Stock on the Nasdaq SmallCap Market, such rules may further limit the market liquidity of the Common Stock and the ability of purchasers in the Offering to sell such Common Stock in the secondary market. Any limitation on the ability of the Underwriter to make a market in the Company's Common Stock could adversely effect the liquidity or trading price of the Company's Common Stock, which could have a material adverse effect on the market price of the Company's Common Stock. The Company believes that the Chicago office of the Securities and Exchange Commission is conducting a private, nonpublic investigation of 12 14 H.J. Meyers, the Underwriter, pursuant to a Formal Order of Investigation issued by the Commission as to whether H.J. Meyers may have violated applicable securities laws and the rules and regulations thereunder, with respect to sales of certain securities. The Company is currently unable to assess the potential impact of the outcome of the Staff's investigation on H.J. Meyers' ability to make a market in the Company's Common Stock after the Offering or trading in the Company's securities. On July 16, 1996, the National Association of Securities Dealers, Inc. ("NASD") issued a notice of Acceptance, Waiver and Consent (the "AWC") whereby the Underwriter was censured and ordered to pay fines and restitution to retail cusotmers in the amount of $250,000 and approximately $1.025 million, respectively. The AWC was issued in connection with claims by the NASD that the Underwriter charged excessive markups and markdowns in connection with the trading of four certain securities originally underwritten by the Underwriter, the activities in question occurred during periods between December 1990 and October 1993. The Underwirter has informed the Company that the fines and refunds will not have a material adverse effect on the Underwriter's operations and that the Underwriter has effected remedial measures to help ensure that the subject conduct does not recur. IMMEDIATE SUBSTANTIAL DILUTION; DISPARITY OF SHARE CONSIDERATION; NO DIVIDENDS ANTICIPATED. Assuming an initial public offering price of $6.25 per share, purchasers of the shares of Common Stock offered hereby will experience immediate substantial dilution of $3.38 per share or 54% of their investment, based upon the net tangible book value of the Company at June 30, 1997. As a result, the purchasers of the shares of Common Stock offered hereby will bear a disproportionate part of the financial risk associated with the Company's business while effective control will remain with the existing shareholders and management. Also, there will be a substantial disparity based upon an assumed initial public offering price of $6.25 per share, between the total consideration and the average price per share paid by the Company's existing shareholders ($1,136,000 and $0.85, respectively), and that paid by new investors in the Offering ($9,375,000 and $6.25, respectively). See "Dilution." The Company has not paid dividends since its inception and does not intend to pay any dividends to its shareholders in the foreseeable future. No assurance can be given that it will pay dividends at any time. The Company presently intends to retain future earnings, if any, in the development and expansion of its business. See "Dividend Policy." SHARES ELIGIBLE FOR ADDITIONAL SALE; EXERCISE OF REGISTRATION RIGHTS. Sale of substantial amounts of the Company's Common Stock in the public market or the prospect of such sales could materially adversely affect the market price of the Common Stock. Upon completion of the Offering, the Company will have outstanding approximately 2,831,092 shares of Common Stock. Of these shares, approximately 1,331,092 shares are restricted shares ("Restricted Shares") under the Securities Act of 1933, as amended (the "Securities Act"). The 1,500,000 shares of Common Stock offered hereby will be immediately eligible for sale in the public market without restriction on the date of this Prospectus, subject to the lockups agreements set forth below. In addition, the Company has issued options and warrants which entitle the holders thereof to purchase 768,278 shares of Common Stock (collectively referred to herein as the "Warrant Shares") including 193,870 Warrant Shares which are being currently registered (the "Registered Warrant Shares"). Holders of substantially all of the Restricted Shares and the Warrant Shares (other than the Registered Warrant Shares, which are subject to a 12 month lock-up) have entered, or are expected to enter, into lockup agreements under which the holders of such shares agree not to sell or otherwise hypothecate or dispose of any of their shares for 18 months after the date of this Prospectus without the prior written consent of the Underwriter. The Underwriter may release some or all of the shares from the lockup at its discretion from time to time without notice to the public. The Underwriter has no formal policy with respect to such determinations, and may elect to release such shares or decline to release such shares as it may determine in its sole and absolute discretion. Additionally, the Underwriter's Warrant may be exercised at any time during the four year period beginning 12 months after the closing of the Offering in which case up to 150,000 shares of Common Stock would be eligible for sale in the public markets. The Company intends to file a registration statement on Form S-8 under the Securities Act to register the sale of approximately 337,500 shares of Common Stock reserved for issuance under its 1995 and 1996 Stock Plans. Shares of Common Stock issued upon exercise of options after the effective date of the registration statement on Form S-8 will be available for sale in the public 13 15 market, subject in some cases to volume and other limitations, including the lockup agreements referred to above. Sales in the public market of substantial amounts of Common Stock (including sales in connection with an exercise of certain registration rights by one or more holders) or the perception that such sales could occur could depress prevailing market prices for the Common Stock. See "Shares Eligible for Future Sale," "Underwriting" and "Description of Securities." No prediction can be made as to the effect, if any, that future sales of shares, or the availability of shares for future sales, will have on the market price of the Common Stock prevailing from time to time, should the Company complete the Offering and a market price for its securities be established. Should a market in the Company's securities develop, sales of substantial amounts of Common Stock, or the perception that such sales may occur, could adversely affect prevailing market prices for the Common Stock in the event a market does develop. FORWARD-LOOKING STATEMENTS. Although not applicable as a safe harbor to limit the Company's liability for sales made in the Offering, this Prospectus contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934 (the "Exchange Act"). Such forward-looking statements may be deemed to include the Company's plans to produce "Total Recall" and "LoCoMoTioN" in 1997 and 1998, and establish new strategic alliances and business relationships and acquire additional libraries or companies. Such forward-looking statements also may include the Company's planned uses of the proceeds of the Offering. Actual results could differ from those projected in any forward-looking statements for the reasons detailed in the other sections of this "Risk Factors" portion of this Prospectus. The forward-looking statements are made as of the date of this Prospectus and the Company assumes no obligation to update the forward-looking statements, or to update the reasons why actual results could differ from those projected in the forward-looking statements. USE OF PROCEEDS The net proceeds of the Company from the sale of the 1,500,000 shares offered by the Company hereby at an assumed initial public offering price of $6.25 per share, are estimated to be approximately $7,860,540, after deducting underwriting discounts and commissions and estimated offering expenses. The Company currently intends to use the estimated net proceeds of the Offering as follows:
APPROXIMATE PERCENTAGE NET PROCEEDS OF NET PROCEEDS ------------- --------------- Repayment of loans*........................... $ 3,084,350 39% Accrued interest on loans..................... 383,500 5% Acquisition of foreign distribution rights to made for television movies.................. $ 2,000,000 26% Acquisition of foreign distribution rights to existing television series.................. $ 1,275,000 16% Corporate overhead and general working capital, including salaries and wages....... $ 1,117,690 14%
- --------------- * The Company currently has outstanding approximately $5,154,000 of indebtedness. Approximately $3,084,350 of such indebtedness will be repaid from the proceeds of the Offering as follows: $969,350 for repayment of the 10% convertible secured notes issued between February and April 1997 (the "February 1997 Notes"), $900,000 for repayment of the 12% secured notes issued between February and June 1996 (the "February 1996 Notes"), $975,000 for repayment of the 10% convertible secured notes issued between June and October 1996 (the "June 1996 Notes"), and $240,000 for repayment of indebtedness owed to Joseph Cayre, a shareholder of the Company. The February 1997 Notes, the February 1996 Notes and the June 1996 Notes are referred to herein as the "Bridge Notes." The maturity date on the February 1996 Notes has been extended until November 15, 1997 or the completion of an initial public offering. Prior to effectiveness of the Offering, the balance of Company indebtedness (or approximately $2,438,050) will be extended through June 30, 1998, although it is anticipated that this balance will be repaid from the proceeds of the Proposed Bank Facility. As described in footnote (2) to "Capitalization," the ascribed value 14 16 of the indebtedness to be repaid from the proceeds of the Offering on the Company's financial statements is less than the outstanding principal balance of said indebtedness. The foregoing repayment schedule assumes conversion of the Conversion Note as well as the waiver of all conversion rights by the holders of Bridge Notes which have convertibility rights. See "Risk Factors -- Additional Capital Requirements; Encumbrance of Assets; No Assurance of Future Financings" and "Certain Transactions." The loan proceeds which are being repaid through the funds being raised hereby were used primarily by the Company for working capital, the acquisition of library product and the acquisition of the right to produce television product based on the feature film "Total Recall." The Company believes that there are a number of libraries and single or multiple television series, movies or special programming owned by unrelated third parties of which the Company may be able to acquire either ownership of, or long-term distribution rights to. At this date, the Company has not entered into discussion with respect to any such acquisition with any such third parties. The Company anticipates that the net proceeds of the Offering, together with projected cash flow from operations will be sufficient to permit the Company to conduct its operations as currently contemplated for at least the next 12 months. Such belief is based upon certain assumptions, including assumptions regarding the sales of the Company's original programming and anticipated expenditures required for the development and production of additional programming, and there can be no assurance that such resources will be sufficient for such purpose. The Company will be required to raise substantial additional capital in the future in order to further expand its production and distribution capabilities. There can be no assurances that additional financing will be available, or if available, that it will be on acceptable terms. In addition, contingencies may arise which may require the Company to obtain additional capital prior to such planned expansion. The foregoing use of proceeds are estimates only, and there may be significant variations in the use of proceeds due to changes in current economic and industry conditions, as well as changes in the Company's business and financial conditions. The amount and timing of expenditures will vary depending on a number of factors, including changes in the Company's contemplated operations and industry conditions. In addition, to the extent that favorable acquisition opportunities present themselves, both with respect to the acquisition of product or entities in allied fields, the use of proceeds contemplated hereunder may be varied significantly. These contingencies could also include a changing environment for the production of syndicated television series and a deterioration in the anticipated pricing structure with respect to the sales of the Company's products in certain foreign territories. Alternative uses of the proceeds could include increasing development of Company-owned product, increasing the number of co-productions with other entities, and financing movies of the week or new television series, to the extent that the budgets for such programing are not otherwise covered by distribution commitments. Pending use of the proceeds from the Offering as set forth above, the Company intends to invest all or a portion of such proceeds in short-term certificates of deposit, U.S. Government obligations, money market investments and short-term investment grade securities. DIVIDEND POLICY The Company has not paid any dividends on its Common Stock since its inception and does not intend to pay any dividends in the foreseeable future. The Company currently intends to retain earnings, if any, in the development and expansion of its business. The declaration of dividends in the future will be at the election of the Board of Directors and will depend upon the earnings, capital requirements, cash flow and financial condition, general economic conditions, and other pertinent factors, including any contractual prohibition with respect to the payment of dividends. 15 17 CAPITALIZATION The following table sets forth the short-term debt and capitalization of the Company (A) at June 30, 1997, and (B) as adjusted to reflect (i) the sale of 1,500,000 shares of Common Stock pursuant to the Offering at an assumed initial public offering price of $6.25 and the application of the estimated net proceeds therefrom and (ii) the conversion of the Conversion Note and the Extraordinary Loss. See "Use of Proceeds."
JUNE 30, 1997 -------------------------- ACTUAL AS ADJUSTED ---------- ----------- Short-term debt(1)................................................. $4,442,700 $ 2,438,050 ========== =========== Long-term debt(2).................................................. 711,300 -- ---------- ----------- Shareholders' equity: Preferred stock, $.01 par value; 2,000,000 shares authorized; no shares issued and outstanding actual, pro forma and as adjusted...................................................... -- -- Common stock, no par value; 18,000,000 shares authorized, 1,131,344 issued and outstanding actual, and 2,831,092 issued and outstanding as adjusted................................... 1,000 1,000 Paid-in capital(2)............................................ 1,230,100 9,090,640 Accumulated deficit(2)........................................ (611,000) (979,400) ---------- ----------- Total shareholders' equity............................... 620,100 8,112,240 ---------- ----------- Total capitalization............................................... $5,774,100 $10,550,290 ========== ===========
- --------------- (1) See Notes 5 and 7 of Notes to Consolidated Financial Statements. (2) An aggregate of $3,084,350 principal amount of indebtedness outstanding as of June 30, 1997 will be repaid with the proceeds of the Offering. Since said indebtedness was issued concurrently with warrants, the notes are recorded on the Company's financial statements at a lesser value and a value is ascribed to the warrants which management believes reflects the market value of the warrants; this value is reflected as a debt issuance discount and is amortized over the term of all such notes resulting in an effective interest rate of approximately 25%. Upon repayment of such debt, the Company will recognize an extraordinary loss equal to the value ascribed to such warrants. While the entire $3,084,350 principal amount of indebtedness will actually be repaid from the Offering, as adjusted reflects the repayment of the recorded value of such debt as of October 31, 1997 -- a value of $2,625,000 will be ascribed to said debt and a value of $368,400 will be ascribed to the warrants, resulting in the recognition of the Extraordinary Loss of $368,400 which becomes part of accumulated deficit. To the extent that other debt issued with warrants is extinguished upon the closing of the Proposed Bank Facility, the Extraordinary Loss for the fiscal year ended December 31, 1997 will be increased. 16 18 DILUTION At June 30, 1997, the Company had an adjusted net tangible book value of $620,100 or $.55 per share of Common Stock. After giving effect (i) to the sale by the Company of 1,500,000 shares of Common Stock offered hereby at an assumed initial public offering price of $6.25 per share, and the initial application of the estimated net proceeds therefrom, (ii) the issuance of an additional 199,748 shares to an investor upon satisfaction of certain contractual dilution rights (See "Certain Transactions -- Transactions with Morris Wolfson and Others"), (iii) the conversion of the Conversion Note and (iv) the Extraordinary Loss, the net tangible book value of the Company at such date would have been approximately $8,112,240 or $2.87 per share. This represents an immediate increase in net tangible book value of $2.32 per share to the current shareholders and an immediate dilution of $3.38 per share to new shareholders. Dilution represents the difference between the initial public offering price paid by purchasers in the Offering and the net tangible book value per share immediately after completion of the Offering. The following table illustrates this per share dilution: Assumed initial public offering price per share.............................. $ 6.25 Pro forma net tangible book value per share before the Offering............ $ 0.55 Increase in net tangible book value per share attributable to the sale of the Common Stock offered hereby..................................... 2.32 ----- Adjusted net tangible book value per share after the Offering................ 2.87 ----- Dilution per share to new shareholders*...................................... $ 3.38 -----
- --------------- * Represents dilution of approximately 54% to purchasers of Common Stock offered hereto. The following table sets forth, (i) the number of shares of Common Stock purchased from the Company by new shareholders pursuant to the Offering and acquired from the Company by the current shareholders of the Company (including the shares to be obtained upon conversion of the Conversion Note), (ii) the total consideration paid to the Company and (iii) the respective average purchase price per share.
SHARES PURCHASED TOTAL CONSIDERATION --------------------- ----------------------- AVERAGE NUMBER PERCENT AMOUNT PERCENT PRICE PER SHARE ---------- ------- ------------ ------- --------------- Current shareholders.............. 1,331,092 47.0% $ 1,136,100 10.8% $0.85 New shareholders.................. 1,500,000 53.0 9,375,000 89.2 $6.25 --------- ------ ---------- ------ Total................... 2,831,092 100.0% $ 10,511,100 100.0% ========= ====== ========== ======
- --------------- (1) The information set forth above does not reflect 337,500 shares of Common Stock reserved for issuance under the Company's stock option plans (of which approximately 173,000 shares are issuable upon exercise of stock options outstanding as of the date of this Prospectus) and 150,000 shares of Common Stock issuable upon exercise of the Underwriter's Warrant. See "Management -- Stock Option Plans" and "Underwriting." 17 19 SELECTED CONSOLIDATED FINANCIAL DATA The selected consolidated statement of operations data for the period ended December 31, 1995, the year ended December 31, 1996, the six months ended June 30, 1997 and the consolidated balance sheet data at such dates are derived from the Company's Consolidated Financial Statements included elsewhere in this Prospectus that have been audited by Price Waterhouse LLP, for 1995 and by Stonefield Josephson, Inc., for 1996 and the six month period ended June 30, 1997, both independent accountants, as indicated in their respective reports which are also included elsewhere in this Prospectus. Such selected consolidated financial data should be read in conjunction with those Consolidated Financial Statements and Notes thereto. For a discussion of the appointment of Stonefield Josephson, Inc., see "Experts."
FOR THE PERIOD FOR THE FROM SIX MONTHS FOR THE SIX FOR THE FEBRUARY 1995 ENDED MONTHS ENDED YEAR ENDED THROUGH STATEMENT OF OPERATIONS DATA: JUNE 30, 1997 JUNE 30, 1996 DECEMBER 31, 1996 DECEMBER 31, 1995 ------------- ------------- ----------------- ----------------- (UNAUDITED) Revenues............................ $ 3,473,100 $ 3,314,600 $ 5,749,800 $ 1,245,300 Cost of revenues.................... 984,300 1,549,600 2,895,900 946,900 ---------- ---------- ---------- ----------- Gross profits....................... 2,488,800 1,765,000 2,853,900 298,400 General and administrative expenses.......................... 987,400 976,300 2,323,800 1,288,200 Bad debt expense.................... 660,000 -- -- -- ---------- ---------- ---------- ----------- Net income from operations.......... 841,400 788,700 530,100 (989,800) Interest expense.................... 523,400 200,000 677,700 42,700 Interest income..................... 102,700 -- 58,300 -- Other income........................ -- -- 90,100 -- ---------- ---------- ---------- ----------- Net income (loss) before income taxes............................. 420,700 588,700 800 (1,032,500) Provision for income taxes.......... -- -- -- -- ---------- ---------- ---------- ----------- Net income (loss)................... $ 420,700 $ 588,700 $ 800 $(1,032,500) ========== ========== ========== =========== Net income (loss) per share......... $ 0.23 $ 0.32 -- $ (0.57) ========== ========== ========== =========== Weighted average number of shares outstanding....................... 1,821,800 1,821,800 1,821,800 1,821,800 ========== ========== ========== ===========
JUNE 30, 1997 ------------------------------ BALANCE SHEET DATA: ACTUAL AS ADJUSTED(2) ----------- -------------- Liquidity capital (deficit)(3)................................... $(3,896,800) $ 3,595,340 Total assets..................................................... 10,559,500 14,952,190 Notes payable(4)(5).............................................. 4,414,000 1,938,050 Accrued interest(4)(5)........................................... 557,400 173,900 Shareholder loan and note payable(4)(5).......................... 740,000 500,000 Accumulated deficit(5)........................................... (611,000) (979,400) Shareholders' equity............................................. 620,100 8,112,240
- --------------- (1) See Note 2 of Notes to Consolidated Financial Statements for information regarding the calculation of net income (loss) per share. (2) As adjusted to reflect (i) the estimated net proceeds of the Offering, based upon an assumed initial public offering price of $6.25 per share, after deducting Underwriter's discounts and commissions and estimated 18 20 offering expenses, (ii) the conversion of a note (the "Conversion Note"), in the principal amount of $322,000 into approximately 105,000 shares of Common Stock upon the closing of the Offering, (iii) interest of approximately $100,800 which accrued from July 1, 1997 through October 31, 1997 from the debt to be repaid from the Offering, and (iv) the Extraordinary Loss (see footnote 5 below). See "Use of Proceeds," "Capitalization" and "Description of Securities." (3) Represents (i) cash and cash equivalents plus accounts receivables (net), and the amount due from officer less (ii) accounts payable, accrued expenses and other liabilities, deferred revenue, accrued participations, notes payable, shareholder loan and note payable, and accrued interest. (4) See Notes 5 and 7 of Notes to Consolidated Financial Statements. (5) An aggregate of $3,084,350 principal amount of indebtedness outstanding as of June 30, 1997 will be repaid with the proceeds of this Offering. Since said indebtedness was issued concurrently with warrants, the notes are recorded on the Company's financial statements at a lesser value and a value is ascribed to the warrants which management believes reflects the market value of the warrants; this value is reflected as a debt issuance discount and is amortized over the term of all such notes resulting in an effective interest rate of approximately 25%. Upon repayment of such debt, the Company will recognize an extraordinary loss equal to the value ascribed to such warrants. While the entire $3,084,350 principal amount of indebtedness will actually be repaid from the Offering, as adjusted reflects the repayment of the recorded value of such debt as of October 31, 1997 -- a value of $2,625,200 will be ascribed to said debt and a value of $368,400 will be ascribed to the warrants, resulting in the recognition of extraordinary loss of $368,400 (the "Extraordinary Loss") which becomes part of accumulated deficit. To the extent that other debt issued with warrants is extinguished upon the closing of the Proposed Bank Facility, the Extraordinary Loss for the fiscal year ended December 31, 1997 will be increased. 19 21 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This Prospectus contains forward-looking statements that involve risks and uncertainties. The Company's actual results could differ materially from those anticipated in these forward-looking statements as a result of certain factors, including those set forth in the following and elsewhere in this Prospectus. The following discussion should be read in conjunction with the Consolidated Financial Statements and Notes thereto appearing elsewhere in this Prospectus. GENERAL The Company derives substantially all of its revenues from production fees earned in connection with Company originated productions, distribution fees from the exploitation of product acquired from others, and the exploitation of Company-owned programming. The Company was incorporated in February 1995 and commenced operations in March 1995. The Company is engaged in developing concepts and acquiring literary and other story properties, the most promising of which serve as the basis for the production of series, pilot films, or made-for-television features. If a script is accepted for production as a television feature or pilot, or if a pilot is accepted for production as a series, the Company and the network or distributor negotiate a license fee or distribution advance. This fee is a flat sum payment through which the Company generally attempts to cover a significant portion of its production costs and overhead. If programming is produced for an entity like PBS, which does not pay significant license fees or distribution advances (and in fact, may not pay any fee), the Company attempts to provide corporate sponsors or agreements for the license of ancillary rights such as foreign or home video distribution. With respect to series for the networks or pay cable channels, the Company generally attempts to negotiate significant license fees for both series and movies of the week. In many cases, the Company may invest additional sums in excess of network license fees to produce the best possible made-for-television feature, as such features are an essential sales tool in gaining network acceptance of a projected series, if applicable. In these cases, the Company will attempt to cover the excess of production costs from working capital, third-party financing, sales of the episodes in the foreign marketplace, or a combination of these financing techniques. Where necessary or desirable, the Company may seek to obtain funding in excess of network license fees from a studio or a third party who will provide such financing in return for a share of the profits from the syndication of such programming. Similarly, for television series, the Company may invest amounts in excess of network license fees in order to gain audience acceptance for the series and to enhance the potential value of future syndication rights. The Company recognizes revenues from licensing agreements covering entertainment product when the product is available to the licensee for telecast, exhibition or distribution, and other conditions of the licensing agreements have been met in accordance with Statement of Financial Accounting Standards ("SFAS") No. 53 "Financial Reporting by Producers and Distributors of Motion Picture Films." The Company, as required by SFAS No. 53, values its film cost at the lower of unamortized cost or net realizable value on an individual title basis. Film costs represent those costs incurred in the development, production and distribution of television projects. These costs have been capitalized in accordance with SFAS No. 53. Amortization of film cost is charged to expense and third party participations are accrued using the individual film forecast method whereby expense is recognized in the proportion that current year revenues bear to an estimate of ultimate revenues. These estimates of revenues are prepared and reviewed by management. The Company anticipates that a majority of its production or acquisition costs for its projects will be amortized within three years from the completion or acquisition of such project, with the balance amortized over an additional two years. Trade receivables historically increase as revenue increases. The Company, in accordance with SFAS No. 5, records a bad-debt expense allowance based, in part, on historical bad debt experience. Other than the write-off of the Eurolink receivable (see -- "Results of Operations -- The six months ended June 30, 1997 versus the six months ended June 30, 1996"), the Company has not experienced significant bad debt write-offs and collects its receivables in the ordinary course. Typically, when the Company makes a sale of a product, the 20 22 purchaser of such product agrees to a payment schedule, usually based upon a time table which is either tied to milestones in the development of the product or the time period of the contract. Because these payments often are spread out over a period of time, sometimes up to two years, the payments to be made in the future are recorded as discounted trade receivables. As sales increase, its trade receivable balance increases. The Company believes it has adequate resources to collect its trade receivables. RESULTS OF OPERATIONS The six months ended June 30, 1997 versus the six months ended June 30, 1996. Revenues for the six months ended June 30, 1997 were $3,473,100 compared with $3,314,600 for the six months ended June 30, 1996. Approximately 67% of revenues for the six months ended June 30, 1996 were primarily from the completion and delivery of "Amazing Tails." For the six month period ended June 30, 1997, approximately 94% of the Company's revenues were attributed to the exploitation of product outside the domestic (i.e., United States and Canada) market. The concentration relative to the foreign market is attributable to the absence of any programing being produced directly for the domestic market in such period. In prior periods, revenues were derived in a ratio of approximately 40% for the domestic market and 60% for the foreign market. Within the foreign market, allocations among the four principal geographic regions, Europe, South America, Asia and Australia and Africa, vary from period to period. The variations in revenues relate to the type of product being offered, as well as local economic trends and conditions, and the emergence of multiple broadcasting channels in the applicable territory. See Note 8 to the Consolidated Financial Statements for a breakdown of the geographic distribution of sales of the Company's product. Cost of revenues was $984,300 for the six months ended June 30, 1997 as compared to $1,549,600 for the six months ended June 30, 1996, such decrease principally attributable to the Company deriving more of its revenue from distribution activity rather than acquisition of product under license fees. Distribution activity has a lower gross margin because distribution fees of up to 70% are paid to the producers of the product. However, amortization expense, as calculated under FASB 53 (used for licensed products) has comparatively lower rates. For the period ended June 30, 1996, the Company's revenue attributable to product produced by others, for which producers are allocated a higher percentage of revenue as a participation expense, was less than similar product in the comparable period in 1997, when the Company distributed more product which it either owned outright or which was produced by the Company. For this product, the Company's margins are typically higher as no participation expenses need be paid to the product's copyright owners. For a discussion in how the product mix may affect quarterly results, see "Risk Factors -- Fluctuations in Operating Results." Gross profit margin improved from 53% for the six months ended June 30, 1996 to 72% for the six months ended June 30, 1997, primarily because of the profit margin on produced and acquired product. General and administrative expenses were $987,400 for the six months ended June 30, 1997 as compared to $976,300 for the six months ended June 30, 1996. Bad debt expense was $660,000 for the six months ended June 30, 1997 as compared to no bad debt expense for the six months ended June 30, 1996. The bad debt expense was a result of the write off of the Eurolink receivable. The Company had sold the rights to "Amazing Tails" for a majority of the Western European territories to Eurolink, a London based company. Eurolink subsequently experienced financial difficulties and was unable to pay amounts due to the Company under the contract for "Amazing Tails." The Company therefore reasserted its rights to "Amazing Tails" that it had sold to Eurolink, and wrote off the entire receivable under that contract. Eurolink and the Company are unrelated entities and had an arms length relationship. Interest expense was $523,400 for the six months ended June 30, 1997 as compared to $200,000 for the six months ended June 30, 1996, reflecting the issuance of Bridge Notes in the period. Net income for the six months ended June 30, 1997 was $420,700 compared with net income of $588,700 for the six months ended June 30, 1996. This decrease relates primarily to the write-off of the Eurolink receivable. Trade receivables increase to $5.8 million for the six months ended June 30, 1997 due to increased revenues. For a description of the Company's treatment of its trade receivables, see "Management's 21 23 Discussion and Analysis of Financial Conditions and Results of Operations -- General." The Company believes its existing bad debt reserve is adequate and that it has adequate resources to collect its trade receivables. Year ended December 31, 1996 versus the period from inception (February 27, 1995) to December 31, 1995. Revenues for the year ended December 31, 1996 were $5,749,800 compared with $1,245,300 in the period from inception (February 27, 1995) through December 31, 1995 (the "95 Period"). The revenues from the 95 Period were primarily attributable to the completion and delivery of "Simply Style." Revenues for the year ended December 31, 1996 included $1,441,700 from the recognition of revenues from Interpublic for the completion of the series "Amazing Tails," which revenues accounted for 25% of revenues during such period, a revenue guarantee received from the sale of certain library rights and revenue from the sales generated by the existing library. Included in this amount are revenues of approximately $680,000 arising from a license of a certain portion of the Company's film library to the Giniger Entities, with respect to the sale of a certain portion of the Company's library in certain Latin America countries and Europe. These revenues were 12% of revenues in that period. Finally, revenues in the period included $618,400 from Eurolink respecting additional sales of "Amazing Tails." This sale was approximately 11% of the Company's revenue during the period. Revenue from the Giniger Entities, Eurolink, and the production of "Amazing Tails" should not be considered to be recurring. If the Company does not produce a series in fiscal 1997, or obtain other significant foreign sales, the Company's revenues will be materially reduced. See "Risk Factors -- Accounts Receivable; Reliance on Significant Customers" for a further discussion of the non-recurring nature of these revenues, and recognition of future revenues from the Giniger Entities. Cost of revenues was $2,895,900 for the year ended December 31, 1996 as compared to $946,900 for the 95 Period, such increase being principally attributable to the increase in amortization of the product produced and acquired by the Company. Gross profit margin improved from 24% for the 95 Period to 50% for the year ended December 31, 1996 primarily because the profit margin on "Amazing Tails" and revenues recognized from the Giniger Entities was greater than the profit margin on "Simply Style." General and administrative expenses were $2,323,800 for the year ended December 31, 1996 as compared to $1,288,200 for the 95 Period, resulting primarily from increased personnel costs. As a percentage of revenues, however, general and administrative expenses decreased from 103% to 40%. The debt issuance costs were expensed and not capitalized because the expected maturity dates were within one year. See "-- Liquidity and Capital Resources." Interest expense was $677,700 as compared to $42,700 for the 95 Period reflecting the issuance of Bridge Notes in the period. Net income for the year ended December 31, 1996 was $800 compared with a net loss of ($1,032,500) incurred during the 95 Period, resulting primarily from an increase in sales activity in 1996. The 95 Period had limited sales activity, as the Company was in a start-up phase, but it included the costs associated with the Company's initial exhibition at trade shows, acquisition costs for programming and distribution, professional costs, and increases in personnel to accommodate future production activities and distribution. LIQUIDITY AND CAPITAL RESOURCES The entertainment industry is highly capital intensive. As of June 30, 1997, the Company had a liquidity deficit of ($3,896,800). Liquidity deficit is defined as (i) cash and cash equivalents, accounts receivable (net), and the amount due from officer less (ii) accounts payable, accrued expenses and other liabilities, deferred revenues, accrued participations, notes payable, shareholder loan and note payable and accrued interest. Included in the Company's assets as of June 30, 1997, is approximately $1,462,000 relating to projects under development but which have not been set for principal photography. As of June 30, 1997, approximately $912,000 of this amount relates to the acquisition of the rights to produce a television series based on the feature film "Total Recall" and approximately $451,000 relates to expenditures for "LoCoMoTioN." Included in the Company's assets as of December 31, 1996, are approximately $1,977,000 relating to projects which the Company is developing but which have not been set for principal photography. 22 24 Approximately $1,200,000 of this amount relates to the acquisition of the rights to produce a television series based on the feature film "Total Recall" and approximately $500,000 relates to expenditures in respect of "LoCoMoTioN." The Company intends, consistent with the standards set by the Financial Accounting Standards Board, including SFAS No. 53, to write off the costs of all development projects when they are abandoned or, even if not abandoned, if they have not been set for principal photography within three years of their initial development activity. Development activity with respect to LoCoMoTioN began in September 1995 and with respect to Total Recall in July 1996. In the event the Company is unable to produce either "Total Recall" or "LoCoMoTioN," the Company would incur a significant write-down with respect to the development costs of such projects, which, in turn, may effect ongoing financing activities. The Company has received a commitment letter from Mercantile National Bank for multiple lines of credit of up to $8,175,000 (the "Proposed Bank Facility"), which lines of credit would permit borrowings pursuant to specified borrowing bases made up of the value of the library (including a value for "Total Recall"), accounts receivable and other assets, including cash. The Company currently intends to repay the $2,069,650 of indebtedness remaining after the Offering with proceeds from the Proposed Bank Facility. The Proposed Bank Facility will contain covenants relating to the Company's tangible net worth, debt to equity ratio and profitability. No assurance can be given that the Proposed Bank Facility will be entered into or that the Company will be able to use proceeds from such facility as indicated herein. The Company has financed its operations from its own sales and production activities, loans from its shareholders aggregating $1,872,000, the sale of the Bridge Notes aggregating $2,844,350, and the special financing obtained with respect to "Total Recall" (the "Total Recall Financing") in the principal amount of $650,000. A portion of the shareholder loans are from (i) Joseph Cayre (two loans aggregating $740,000), (ii) Morris Wolfson, entities which may be affiliates of Mr. Wolfson and other parties to which Mr. Wolfson disclaims a beneficial ownership interest in or control of $822,000 (as more fully described below) and (iii) Affida Bank ($300,000). The Cayre loans, which were made in February and August 1995, bear interest at 14% and 10%, respectively, and are subject to an agreement requiring the payment of $240,000 from the net proceeds of the Offering and the pledge of certain assets to cover the unpaid amount due thereunder. Prior to the effectiveness of the Offering, the Company anticipates obtaining the consent from Mr. Cayre, subject to certain conditions, to extend the maturity date of any remaining amounts due to him to June 30, 1998. See "Certain Transactions -- Transactions with Joseph Cayre." A loan in the principal amount of $322,000 was made in January 1996 from AMAE Ventures, an affiliate of Mr. Wolfson, which was used by the Company for general overhead purposes and bears interest at 12%. This note is due on the earlier to occur of December 31, 1997 or the closing of the Offering. The holder of such note has the right to convert the principal amount into approximately 105,000 shares of the Company's Common Stock on a fully diluted basis through the completion of the Offering, and has indicated that it intends to convert such note. An April 1996 loan by South Ferry #2 L.P., a Delaware limited partnership, in the principal amount of $500,000 was used for the pre-production of "LoCoMoTioN." This loan bears interest at 10% and is currently due on December 31, 1997. Prior to the effectiveness of the Offering, the Company anticipates obtaining an extension of the maturity date of this obligation to June 30, 1998. Finally, the Chana Sasha Foundation, an entity controlled by Mr. Wolfson, extended the Company a $400,000 line of credit on a secured basis in November 1996, which credit line has been used and subsequently repaid by funds from the Company's operations. This line of credit bears interest at 10%. See "Certain Transactions" for additional information regarding these transactions. The July 1996 proceeds from the sale of this note in the Total Recall Financing were used to acquire the rights to produce a television series based on "Total Recall." This note, which is secured by the Company's underlying rights to the "Total Recall" series bear interest at 10%. The principal amount of this note has been repaid. In addition, the holders of this note received an aggregate of 53,403 shares of Common Stock, warrants to acquire 21,362 shares of Common Stock at an exercise price of $.43 and a 15% net profit participation in the Company's interest in the series. See "Certain Transactions" for a description of the consideration paid to the Morris Wolfson Family Limited Partnership in connection with this transaction. 23 25 In November 1996, the Company obtained a $300,000 loan from Affida Bank, which loan carries interest at 8%, and matures upon the earlier of the closing of the Offering or December 31, 1997. Affida Bank also received warrants to acquire 25,634 shares of the Company's Common Stock at an exercise price of $.43 in connection with this loan. Prior to the effectiveness of the Offering, the Company anticipates obtaining an extension of the maturity date of this obligation to June 30, 1998. The proceeds of this loan were used for working capital. In February 1996, the Company commenced a private placement of its secured notes and sold to accredited investors $900,000 in principal amount of secured promissory notes which bear interest at 12% and are due at the earlier to occur of the Offering or November 15, 1997. This offering was changed pursuant to its original terms with respect to subsequent investors in June 1996 when the Company completed the sale to accredited investors of $975,000 principal amount of secured notes which bear interest at 10% and are due at the earlier of the closing of the Offering or May 31, 1998. In December 1996, the Company obtained a $150,000 loan from an outside investor, which loan carries interest at 10% and matures upon the earlier of the closing of the Offering or December 31, 1997. The proceeds of this loan were used for working capital. In February and March 1997, the Company completed the sale of $969,350 of convertible secured notes to accredited investors (the "February 1997 Notes"). Each of the foregoing notes are secured, pro-rata and pari passu, by liens on substantially all of the Company's assets, except that the February 1997 Notes are junior to the other bridge notes. Assuming the repayment of short-term indebtedness as specified under the caption "Use of Proceeds," at the conclusion of the Offering, the Company will have approximately $2,438,050 of indebtedness, which indebtedness is due between October 15, 1997 and December 31, 1997 and is secured by substantially all of the assets of the Company. Management believes that if the Offering is completed, the net proceeds thereof, together with projected cash flow from operations, will be sufficient to permit the Company to conduct its operations as currently contemplated for at least the next 12 months. Such belief is based upon certain assumptions, including assumptions regarding (i) the sales of the Company's original and acquired programming and (ii) anticipated expenditures required for the development and production of additional programming, including "Total Recall." After such time period, the Company has assumed that its operations will be financed by cash flow from operations, proceeds from the Proposed Bank Facility (if obtained) and/or additional financings. See "Risk Factors -- Going Concern Assumption," "-- Additional Capital Requirements; Encumbrance of Existing Assets; No Assurance of Future Financing," "Capitalization" and "Description of Securities." 24 26 BUSINESS The following Business section contains forward-looking statements that involve risks and uncertainties. The Company's actual results could differ materially from those anticipated in these forward-looking statements as a result of certain factors, including those set forth under "Risk Factors" and elsewhere in this Prospectus. GENERAL Since its formation in February 1995, the Company has focused its efforts on the development, production and distribution of a variety of television programming, including series, specials and made-for-television movies for exploitation in the domestic and international television market. The Company derives substantially all of its revenue from production fees earned in connection with Company-originated productions, distribution fees from the exploitation of product acquired from others, and the exploitation of Company-owned programming. References to the Company after December 1995 refers to Team Communications Group, Inc. (formerly known as DSL Entertainment, Inc.) and its wholly-owned subsidiaries. In December 1995, two companies under common control of the shareholders of the Company were contributed to the Company without additional consideration. References to the Company prior to December 1995 refer to those three entities on a combined basis. The Company's development and production activities have focused on (i) family programming produced for U.S. cable and network television channels such as The Discovery Channel, The Family Channel, USA Network, and PBS, (ii) "how-to" instructional series, such as "Simply Style," a 60-episode series which debuted during the third quarter of 1995 on The Learning Channel, and (iii) reality based weekly and five-day per week ("strip") syndicated programming, such as "Strange Universe," which the Company is currently co-producing with the United/Chris-Craft television stations and Rysher Entertainment. This series is currently airing on United/Chris-Craft stations and a commitment for the production of a second 13-week run (65 episodes) has been received from United/Chris-Craft. The Company has also recently completed a production of a series of 22 half hour episodes entitled "Amazing Tails," a reality based series focusing on extraordinary pets, which has been financed in conjunction with Friskies Pet Foods, a division of Nestles Food, and advertising leader Interpublic. All episodes of this series have been produced and delivered to Interpublic, and the series is airing on Discovery Communications newest channel, Animal Planet. The Company has recently entered into an agreement with Discovery Communications for a second season of 26 new episodes of Amazing Tails, which is currently in production. The Company has entered into a joint venture agreement with Interpublic for the production of a minimum of four pilots over the next year for non-fiction and light entertainment programming. The Company also maintains a dramatic development and production unit which is developing and will produce movies-of-the-week for exhibition on network television, cable or ad hoc networks of independent stations which sometimes form to air special programming. In July 1996, the Company has acquired the rights to produce a weekly dramatic television series based on the motion picture "Total Recall," which in 1990 grossed over $320 million in worldwide box office receipts. The Company has entered into an agreement with Alliance, a leading Canadian production company, pursuant to which Alliance, subject to certain conditions, will co-produce and co-finance an initial 22 episodes of the series with the Company. The Company has also entered into an agreement with PolyGram Television, L.L.C. ("PolyGram"), pursuant to which PolyGram will acquire television distribution rights to the series in the United States. Miramax Film Corp. ("Miramax"), which acquired the theatrical sequel rights to "Total Recall," has also acquired worldwide home video rights to the series from the Company. The Company is also developing a wide variety of family, dramatic, reality-based and children's programming including a new pre-school series, tentatively entitled "LoCoMoTioN," which the Company hopes to place on domestic and international television in 1998. Although no assurance can be given that the Company will obtain a domestic timeslot, the Company is currently interviewing for female celebrities to co-host this series, which will introduce toddlers to dance and exercise through contemporary urban music. The Company also maintains a fully staffed international sales force and currently has distribution rights to over 335 half-hours of family and documentary series and specials, and 156 hours of dramatic series. 25 27 The global television market has experienced substantial growth since 1985 and the Company believes this market will continue to experience substantial growth during the foreseeable future as state television monopolies end and commercial broadcast outlets expand to provide increasingly varied and specialized content to the consumer. In the United States alone, 60 new television channels have commenced operation since 1985. Such growth has led to the development and commercialization of specialized channels and distribution outlets, which, in turn, has led to increased demand for top quality and cost efficient programming in many categories and subjects. The Company's operating strategy is to fulfill the demand for programming by (i) expanding the activities of each of its operating divisions, (ii) implementing strategic acquisitions of libraries and smaller production companies, and (iii) entering into joint ventures with, or acquisitions of, unaffiliated third parties which are intended to lower the Company's financial risk as it expands into related activities, such as direct marketing and interactive programming. The Company intends to acquire, co-produce and co-finance other series, movies and specials from third party producers in order to increase its programming library and self distribute this product on a worldwide basis. The Company believes that there are unique business opportunities to acquire other emerging companies, as well as more established production and distribution entities, which are engaged in programming development, production, distribution and other related media investments. While the number of distribution channels has been increasing, the Company believes there are powerful economic incentives, including economies of scale and depth of financial and programming capability, for programmers and distribution entities to consolidate. No assurance can be given that the Company will be successful in obtaining the financing necessary for these acquisitions or that the acquisitions will prove financially successful. No specific acquisitions have been identified and no assurance can be given that any transactions will be affected or if such acquisitions are consummated that they will be successful. In addition, a significant acquisition of product or another company could require the Company to obtain additional financing. No assurance can be given that such financing will be available or that it will be on terms that are favorable to the Company. The Company anticipates that the net proceeds of the Offering, together with projected cash flows from operations, will be sufficient to permit the Company to conduct its operations as currently contemplated for the next 12 months. Such belief is based upon certain assumptions, including assumptions regarding (i) the sales of the Company's original and acquired programming, and (ii) anticipated expenditures required for the development and production of additional programming, including "Total Recall." After such time period, the Company has assumed that its operations will be financed by internally generated funds and proceeds from additional financings. See "Risk Factors -- Going Concern Assumption," "-- Additional Capital Requirements, Encumbrance of Existing Assets; No Assurance of Future Financing," "Capitalization," "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources" and "Description of Securities -- Notes." OPERATIONS The Company currently operates three principal divisions: (i) production; (ii) distribution; and (iii) licensing, merchandising, and direct-marketing. PRODUCTION The production of television programming involves the development of a creative concept into a television script or teleplay, the selection of talent (including actors, directors, and other creative personnel), and the filming, technical, and post-production work necessary to create a finished product ready for exhibition. Such programming is generally produced for initial prime-time exhibition on one of the major U.S. networks, which include CBS, NBC, ABC and Fox, however, such programming may also be produced for new channels like United Paramount ("UPN"), and Warner Bros. ("WB") first-run pay television exhibition or directly for syndication (i.e., independent or non-network) television, including PBS, as well as a number of basic and pay cable channels or services, including HBO, Showtime, the Disney Channel, The Learning Channel, The Discovery Channel, Arts and Entertainment Network and the History Channel. 26 28 The Company is engaged in developing concepts and acquiring literary and other story properties, the most promising of which serve as the basis for the production of series, pilot films, or made-for-television features. Once an idea has been commissioned, it is presented to the network or other distributor for acceptance. If a script is accepted for production as a television feature or pilot, or if a pilot is accepted for production as a series, the Company and the network or distributor negotiate a license fee or distribution advance. This fee is a flat sum payment through which the Company generally attempts to cover a significant portion of its production costs and overhead. Entertainment companies in general attempt to finance the development costs for television programming from their working capital and seek to cover a substantial portion of their production costs, including overhead, through the license fees. If programming is produced for an entity like PBS, which does not pay significant license fees or distribution advances (and in fact, may not pay any fee), the Company attempts to provide corporate sponsors or agreements for the license of ancillary rights such as foreign or home video distribution. Even without a fee or advance, the Company believes that it can defray a significant portion of the production costs of PBS programming using these alternative financing methods, thus availing itself of the key demographics of PBS viewership, particularly in children's programming. With respect to series for the networks or pay cable channels, the Company generally attempts to negotiate significant license fees for both series and movies of the week. In many cases, the Company may invest additional sums in excess of network license fees to produce the best possible made-for-television feature, as such features are an essential sales tool in gaining network acceptance of a projected series, if applicable. In these cases, the Company will attempt to cover the excess of production costs from working capital, third-party financing, sales of the episodes in the foreign marketplace, or a combination of these financing techniques. Where necessary or desirable, the Company may seek to obtain funding in excess of network license fees from a studio or a third party who will provide such financing in return for a share of the profits from the syndication of such programming. Similarly, for television series, the Company may invest amounts in excess of network license fees in order to gain audience acceptance for the series and to enhance the potential value of future syndication rights. There can be no assurance, however, that once the Company commits to fund production of a series licensed to a network, the network will order and exhibit sufficient episodes to enable the Company to syndicate the series. Typically, at least 65 episodes of a series must be produced for it to be "stripped" or syndicated in the daily re-run market. Generally, networks can cancel a series at stated intervals and, accordingly, do not commit in advance to exhibit a series for more than a limited period. If a series is canceled (or not carried for the period necessary to create enough episodes for syndication purposes), there is a significant chance that the production costs of the project will not be fully recovered. Similar risks apply even if the series is produced for a non-network medium. The Company believes, however, that foreign pre-sales and international co-production opportunities will provide sufficient options to obtain production financing and additional revenue potential. Moreover, basic cable channels continue to provide outlets of series of between 13 to 26 episodes per season. The Company intends to focus its production activity in the following areas or genres: MOW ("Movies of the Week") and Mini-Series; Drama Series. It is the Company's intention to expand the production of dramatic programming, over the next 24 months, which programming if any, will be licensed, where the Company does not have foreign partners, in foreign markets through the Company's sales personnel. The Company has acquired the rights to produce a weekly dramatic television series based on the motion picture "Total Recall," which generated over $320 million in world-wide box office receipts in 1990. The Company has entered into an agreement with Alliance, a leading Canadian production company, pursuant to which Alliance, subject to certain conditions, will co-produce and co-finance an initial 22 episodes of the series with the Company. The Company has also entered into an agreement with PolyGram, pursuant to which PolyGram will co-finance and acquire television distribution rights to the series in the United States only. The domestic deal with Polygram includes a 22 episode commitment in exchange for a license fee and a percentage of the net profits of the series. Miramax, which acquired the theatrical sequel rights to "Total Recall," has also acquired worldwide home video rights to the series from the Company. Based upon the initial pre-sales of the series with Polygram, Miramax and various international broadcasters, the financial conditions 27 29 contained in the co-production agreement with Alliance have been satisfied. In addition to reducing the Company's financial exposure, the Company anticipates that by co-producing the series with Alliance, the series will qualify for certain Canadian co-production and tax benefits. The proceeds from the foreign distribution of the series, after recoupment of production costs, will be allocated 50% to the Company and 50% to Alliance. It is the intention of the parties that each episode will be produced for approximately $1,100,000 per episode, with the Company receiving a guaranteed producing fee of $25,000 per episode as well as 50% of the profits derived from the exploitation of worldwide television, home video and merchandising rights to the series. The Company expects to produce 22 one-hour episodes for this series in 1998, and Ron Shusett, the writer of the original film as well as the feature film "Alien," has written the basic treatment (i.e., story outline) for the pilot. As of the date hereof, television and home video pre-sales of approximately $15 million have been made with respect to "Total Recall" for the United States (Polygram), all of Asia and the Middle East, and parts of Europe, Latin America and Canada. Still remaining for licensing are most of the European territories, and parts of Latin America, among others. The Company has entered into an agreement with the Family Channel for the development of two MOWs, "Quake," a story about an earthquake in New York City, and "Down Fall," a story about an avalanche in an exclusive ski resort. The scripts for "Quake" and "Down Fall" have recently been completed and paid for by the Family Channel, with the projects having been in development for approximately six months. According to the terms of the agreement with the Family Channel, upon the final approval of such projects, the Family Channel will provide 85% of the financing necessary for the projects. The Company will contribute the remaining 15% of the financing, in return for which the Company will receive the Canadian rights in perpetuity as well as 35% of the net profits worldwide in perpetuity. The acquisition of the one hour dramatic series "Water Rats" (52 episodes delivered for the first and second season, and the one hour dramatic series "Cover Story" (26 episodes delivered), both series from the Australian production company Southern Star, is an example of the Company's strategy to acquire this type of programming from third parties. The Company has the rights for distribution in all Latin American countries, including Mexico and Puerto Rico, and has cumulative sales of approximately $1 million for Mexican broadcast television and pan-Latin American satellite broadcast television with the majority of terrestrial broadcast rights remaining available for sale. The Company has recently acquired Latin American home video and television distribution rights to 78 hours of dramatic series from Beyond Distribution PTY Ltd., a leading Australian production company. This brings the total hours of dramatic programming licensed by the Company in Latin America to 156. Live Action and Animated Children's Programming. To take advantage of what it believes is a significant television market for children's programming, the Company intends to develop and produce inventive and original shows, including both animated series and live-action series. The Company has commenced pre-production of "LoCoMoTioN," and hopes to place the show on domestic and international television in 1998. If the show is successful, it is anticipated that it will provide the Company with licensing and merchandising opportunities. The Company continues to acquire programming on an ongoing basis. As of October 1996 the Company acquired certain additional foreign distribution rights to three family movies from Feature Films for Families. As of December 19, 1996, the Company acquired thirteen 1/2 hour episodes for international distribution of the children's series "Jelly Bean Jungle." Non-Fiction/Light Entertainment Programming. With the rapid expansion of national cable and network programming outlets, consumer demand for non-fiction, reality based docudrama programming has increased. Channels such as Fox, United Paramount, the Warners' Brothers Network, TBS, The Discovery Channel, The Learning Channel and Lifetime have found quality non-fiction programming to be a mainstay of their programming portfolio. The Company intends to capitalize upon its programming expertise developed by management prior to the formulation of the Company, including the work by Mr. Levin in producing and distribution of "Future Quest," a 22 episode, half-hour PBS-TV series which explores technology, science and pop culture, to develop innovative programming of this genre. "Future Quest" was hosted by film actor Jeff 28 30 Goldblum and presents, on a weekly basis, a gallery of futurists, scientists and social commentators. The show was underwritten with a corporate grant from AT&T Corp. Other programming previously produced by Mr. Levin and previously distributed by the Company in this genre includes "Hollywood Stuntmakers," "FX Masters," "Legends of Hollywood" and "Mysterious Forces Beyond." The Company has an extensive development slate of new series which are currently being pre-sold in the international marketplace. Such new programs include "Strange Universe," a 130 half-hour 5 day per week ("strip") syndicated series being produced in association with United/Chris-Craft television stations and Rysher Entertainment. A commitment for the production of a second 13-week run (65 episodes) has been received from United/Chris Craft. "Amazing Tails," a weekly series of 22 half hours featuring people and their pets, was initially financed by a presale for approximately $1,441,700 to Interpublic for domestic distribution and broadcast. To date, the Company has also licensed "Amazing Tails" in the foreign territories of Japan for $300,000 and the U.K., France, Italy, Spain, Portugal and Greece for an additional $595,000. The Company has recently entered into an agreement with Discovery Communications for a second season of 26 new episodes of Amazing Tails, which is currently in production. The Company has entered into a "first look" arrangement with Interpublic pursuant to which the Company and Interpublic have agreed to fund, subject to the conditions contained therein, a minimum of four non-fiction or light entertainment pilots. Series which are developed from the pilots will be co-financed by each entity, and Interpublic will use its best efforts to seek an advertising sponsor for each series. Current co-productions include "America's Scenic Railway Journeys," a six hour documentary mini-series devoted to famous railway journeys. The Company has co-produced this series with Oregon Public Television for the PBS Network and has paid Oregon Public Television an advance for the international distribution rights to the mini-series. Syndicated Strip Shows. The Company is making a significant creative and development effort to provide syndicated daily programming, especially talk shows and reality series. The Company is currently developing a talk show "strip" anticipated for the 1998 season entitled "Chrystal Rose." Ms. Rose is a noted British talk show personality whose series was aired in the United Kingdom's ITV Network. No assurance can be given that the Company will be able to obtain sufficient station clearances to produce this show in the United States. The Company has also successfully licensed formats for such game shows as "Young Matchmakers,"which has been successfully launched on Holland's RTL4 channel, and is now being presented to domestic broadcasters. "How To"/Instructional Programming. From gardening and style to cooking and home repair, "how to" and instructional programming is an expanding market in which the Company has strived to develop, produce, and distribute a variety of programs which both entertain and educate. "Simply Style," a 60 episode "strip" created by the Company for The Discovery Channel and hosted by fashion expert Leah Feldon, is the first such series produced by the Company. Mr. Levin has previously produced "Laurie Cooks Light and Easy," 65 one-half hour episodes previously distributed by the Company. Hosted by Laurie Burrows Grad, this daily strip presented simple recipes prepared in a healthy manner. The show attracted celebrities such as Jill St. John, Steve Sax, Dom Deluise, Wolfgang Puck, Michael Tucker and Jill Eikenberry. DISTRIBUTION An active part of the Company's business is the presentation of its own product and product acquired from third-party producers to the international marketplace. The Company's current library includes 335 half hours of reality based series, mini-series and specials and 156 hours of dramatic series programming. This includes drama and non-fiction programming as well as Movies of the Week, and children's animation. With the rapid increase of networks and channels, there is an expanding demand for top-quality programming. To access these markets, the Company's distribution personnel attend such major international trade shows as MIPCOM-TV, Monte Carlo Television Festival, MIP-TV and NATPE. In certain territories like Latin America, the Company uses subdistributors like the Giniger Entities. The Company believes that these agents typically have long-standing relationships in territories the Company would have difficulty accessing or in obtaining favorable prices. 29 31 The Company has also recently entered into an agreement with Australia's Southern Star to distribute its successful drama series "Water Rats" in Latin America, including Mexico and Puerto Rico, through the Giniger Entities. In addition, the Company has an active "format" business oversees, where it represents and "reformats" successful foreign shows for the domestic marketplace, and vice versa. The Company also currently represents several other custom formats which are under consideration in numerous territories. LICENSING, MERCHANDISING AND DIRECT MARKETING The Company's strategic objectives encompasses the exploitation of additional revenue streams through licensing and merchandising efforts. The Company hopes to generate new profit centers from toy, publishing, CD-ROM, housewares, stationary, video, apparel, and other product category licenses. Although no assurance can be given that this strategy can be successfully implemented, the Company and Alliance, the co-producer of "Total Recall," have begun to focus on the marketing and merchandising rights that are available with respect to the "Total Recall" series. The Company also intends to focus on certain types of instructional or "how to" programming that can be translated into direct marketing opportunities. By their design, aspects of each how to/instructional program can be extended into a continuity club, infomercial, and retail products. For example, should it have sufficient financing, the Company intends to develop from the series "Amazing Tails" a pet "fan" club, with commercial tie-ins with its sponsors. POSSIBLE ACQUISITIONS; JOINT VENTURES The Company believes that there are numerous opportunities to acquire other production and distribution companies, as well as existing programming libraries. The Company believes that these acquisitions, if successful, will result in synergistic opportunities, and may increase the Company's revenue and income growth. No specific acquisition candidates have been identified, and no assurance can be given that any transactions will be effected, or if effected, will be successful. The Company is also committed to establishing joint ventures with strategic partners in order to expand the Company's operations without significantly expanding its overhead. For example, the Company has completed a "first negotiation" arrangement with Interpublic which would give Interpublic the first opportunity to provide sponsorship, commercial underwriting, and financing of the Company's children's and "how to" series. COMPETITION The entertainment industry is highly competitive. The Company competes with, and will compete with, many organizations, including major film studios, independent production companies, individual producers and others, including networks, who are seeking the rights to attractive literary properties, the services of creative and technical personnel, the financing for production of film and television projects and favorable arrangements for the distribution of completed films. Many of the Company's present and future competitors are organizations of substantially larger size and capacity, with far greater financial and personnel resources and longer operating history than the Company. Moreover, the entertainment industry is currently evolving into an industry in which certain multinational, multi-media entities, including Viacom/Paramount Pictures, The News Corporation/Twentieth Century Fox, The Walt Disney Company/Cap Cities-ABC, Time Warner/Turner Broadcasting and Westinghouse/CBS are anticipated to be in a position, by virtue of their control over key film, magazine, and/or television content and their control of key network and cable outlets, to dominate certain communications industries activities. These competitors have numerous competitive advantages, including the ability to acquire and attract superior properties, personnel and financing. EMPLOYEES The Company currently employs 12 full time employees, five of whom are members of senior management. From time to time, as projects go into production, temporary employees are employed. 30 32 PROPERTIES The Company currently rents its office space at 12300 Wilshire Boulevard, Los Angeles, California from an unaffiliated third party, pursuant to a 36 month lease that commenced on May 15, 1995. The Company currently rents approximately 4,600 square feet at a monthly rate of $1.75 per square foot. Mr. Levin has personally guaranteed the obligations under the lease. The Company believes that its current offices are adequate for its requirements, and that additional space, if required, is available throughout the Los Angeles area at reasonable rates. LEGAL PROCEEDINGS AND OTHER MATTERS In April 1997 the Company has been purportedly served with a judgment in the amount of $85,540 in a matter styled Levy Entertainment, Inc. vs. DSL Entertainment, Inc. filed in Franklin Superior Court, State of Vermont. The Company was not served with any papers relating to the case, did not enter any defense, and disputed the amounts allegedly owed to Plaintiff. The Company has recently agreed to settle this litigation by paying $30,000 to Levy Entertainment, Inc. ("Levy"). In addition, as part of the settlement, the Company has agreed to pay Levy approximately $60,000 for 15 years of additional rights in certain programs owned by Levy. Since such settlement relates to the acquisition of film rights, the related amounts are capitalized as film costs and will be amortized against future revenues. In April 1997 the Company was served with a complaint in a matter styled Allen vs. Team Communications Group, Inc. filed in Superior Court for the Central District of California. In the complaint, Allen, a former employee of the Company, alleges that the Company has breached an agreement to pay her 2% of the proceeds derived from any series she "brought" to the Company. The Company intends to file an answer to the complaint and to vigorously defend itself. In May 1997, the Company filed and served a complaint in a matter styled Team Communications Group, Inc. vs. Michael Jacobs. This action is against a former employee for, inter alia, unfair competition and breach of fiduciary duty. Mr. Jacobs filed a complaint on the same day, styled Jacobs vs. Team Communications Group, Inc. alleging breach of employment contract, fraud, and also seeking an accounting. The Company intends to vigorously pursue its action, and to defend itself in the counter-suit. The two actions have been consolidated by the Court. In March 1997, the Company was served with a complaint in a matter styled Ayckroyd vs. Barosse, et al., against all of the producers and production entities involved in the development and production of the television series "Strange Universe" (the "Series"). In this action, Peter Ayckroyd, a television producer, alleges that proprietary ideas and concepts belonging to him were incorporated into the Series without his permission. The Company intends to vigorously defend this action. In respect to the foregoing claims, the Company notes that each of the claims are in the early phases of discovery and, accordingly, no reserves have been taken. The Company's preliminary assessment of the merits of the claims, even assuming that the allegations therein were to be determined against the Company, is that none of these matters are expected to have a material adverse impact on the Company's results of operations or liquidity and capital resources. In October 1997, the Company received notice of a claim from C. Austin Burrell, formerly a consultant to the Company, contending that he has the right to receive 40,000 shares of Common Stock at the closing of this Offering, which shares are subject to anti-dilution protection. The Company believes that Mr. Burrell's claim is inaccurate as it fails to take into account two reverse stock splits effectuated by the Company. The Company has been indemnified by Mr. Levin with respect to this claim, and should Mr. Burrell prevail in establishing that he is to receive 40,000 shares rather than the approximate 17,000 shares which the Company believes he is entitled to, such additional shares will be contributed to the Company by Mr. Levin. As this provision relates to the operation of an anti-dilution provision, and any additional shares will be contributed by Mr. Levin, no reserve has been established with respect thereto and any adverse decision should not affect the Company's financial statements. 31 33 MANAGEMENT DIRECTORS AND EXECUTIVE OFFICERS The directors and executive officers of the Company, together with their respective ages and positions with the Company, are as follows:
NAME AGE POSITION - ------------------- --- ------------------------------------------------------------------- Drew S. Levin 43 President, Chief Executive Officer and Chairman of the Board Paul Yamamoto 43 Executive Vice President and Director Eric Elias 42 Senior Vice President, Business and Legal Affairs Todd C. Jackson 43 Senior Vice President, Domestic and International Sales Michael Latiner 27 Vice President, Controller and Secretary Bruce P. Vann 41 Nominated Director(1)(2) Seth M. Willenson 50 Nominated Director(1)(2)
- --------------- (1) Member of the Compensation Committee (2) Member of the Audit Committee Drew S. Levin has been President and Chairman of the Board of the Company since its founding in 1995. From 1987 through 1994, he was President of DSL Productions, Inc. ("DSP"), a privately held company that was sold to The Producer's Entertainment Group, Inc. ("TPEG") in 1994. Through February 1995, he continued to act as president of DSP, which operated as a subsidiary of TPEG. Mr. Levin has produced and co-produced hundreds of hours of programming, including "Pop Culture Meets Pure Science" for which Mr. Levin received an Emmy Award, "Laurie Cooks Light & Easy," "Future Quest" and "Simply Style." Mr. Levin has extensive experience in international co-productions, including co-producing a domestic and international version of "Top of the Pops" with the BBC for the CBS network. Paul Yamamoto has been Executive Vice President since September 1996 and a Director since December 1996. Mr. Yamamoto was a managing partner of the Favored Artists Agency from 1989 through 1992. From 1992 through July 1995, Mr. Yamamoto was self employed and ran his own management/production company. In August 1995, Mr. Yamamoto became the executive vice president of the Larry Thompson Organization, where he served until September 1996. Mr. Yamamoto intends to resign from the Board of Directors upon effectiveness of the Offering and the reconstitution of the Board of Directors, as described herein. Eric Elias has served in the capacity as Senior Vice President, Business and Legal Affairs since the Company's incorporation. Mr. Elias has previously served as corporate counsel and general manager for a retail/wholesale leisure electronics firm and for the past twelve years, has been in general private practice, providing business and legal affairs services for similarly situated television production entities. Todd C. Jackson has been Senior Vice President, Domestic and International Sales since May, 1997. From 1995, until he joined the Company, he served as Senior Vice President, Worldwide Distribution for Kinnevik Media Properties, Ltd. In 1993, Mr. Jackson founded California Concert Network, serving as its President and Chief Executive Officer until Prime Ticket Network was acquired by Liberty Media, a subsidiary of Tele-Communications, Inc. in May 1995. From 1989 to 1992, he served as Vice President, Program Distribution for Broadway Video Entertainment, and prior to that was Vice President, International and Cable Television at All American Television for two years. Mr. Jackson holds a Master of Arts in Law and Diplomacy from The Fletcher School at Tufts University and received his Bachelor of Arts from Northwestern University. Michael Latiner has been Vice President, Controller and Secretary since August 1997. From 1991 to 1994 Mr. Latiner was with Deloitte & Touche where he was a member of the audit group. From 1994 to 1995 Mr. Latiner was with Price Waterhouse where he was a member of the Entertainment, Media, and Communications Group. From 1995 to 1997 Mr. Latiner was with 20th Century Fox where he served as the Manager of Financial Reporting. 32 34 Bruce P. Vann, who has agreed to become a member of the Board of Directors upon the conclusion of the Offering and the completion of certain other matters (including the appointment of a Chief Financial Officer and the placement of directors and officers insurance), is a 1980 graduate of Duke Law School. Mr. Vann is an attorney who has been in practice in Los Angeles for over 16 years. From 1989 to 1994, Mr. Vann was a partner in the Los Angeles office of Keck, Mahin & Cate. He is currently a partner in the firm of Kelly Lytton Mintz & Vann LLP, counsel to the Company. Mr. Vann also serves as Senior Vice President, Business and Legal Affairs of Largo Entertainment, Inc., a subsidiary of The Victor Company of Japan. Mr. Vann is a member of the board of directors of J2 Communications. Seth Willenson, who has agreed to become a member of the Board of Directors upon the conclusion of the Offering and the completion of certain other matters (including the appointment of a Chief Financial Officer and the placement of directors and officers insurance), has over 25 years experience in the entertainment business. For the past 7 years, he has been the president of Seth Willenson, Inc., a marketing and management consulting firm in Los Angeles, California. Mr. Willenson has produced 9 films, including; "Jezebel's Kiss," "Delusion," "Gas, Food and Lodging," "Top Dog" and 'Pocahontas: The Legend." He has lectured extensively on the entertainment business, including speaking at The Sundance Film Festival, the Sundance Producer's Workshop, the University of California at Los Angeles, the University of Southern California and The Aspen Institute. Mr. Willenson was graduated from Cornell University in 1968 and attended the Annenburg School of Communications at the University of Pennsylvania. Directors are elected for one year terms at the Company's annual meeting of shareholders and serve until the due election and qualification of their successors. Officers are appointed by the Board of Directors and serve at the discretion of the Board. Although the Company's directors do not receive any compensation for their services as directors, it is anticipated that, following the Offering, non-management directors will receive a fee for each Board of Directors meeting attended, plus reimbursement for expenses. Additionally, certain non-management board members will receive mandatory stock option grants pursuant to the Company's 1996 Directors Plan. EXECUTIVE COMPENSATION The following table provides certain summary information concerning the compensation earned for services rendered in all capacities to the Company for the fiscal years ended December 31, 1995 and 1996, by the Company's Chief Executive Officer (the "Named Officer"): SUMMARY COMPENSATION TABLE - --------------------------------------------------------------------------------
STOCK ALL OTHER NAME AND PRINCIPAL POSITION(1) YEAR SALARY BONUS OPTIONS COMPENSATION - ----------------------------------------- ---- -------- ------- ------- ------------ Drew S. Levin Chairman of the Board, President and 1996 $350,000 $45,000(2) (3) $15,000(4) Chief Executive Officer 1995 $350,000 $ -- $13,750(4)
- --------------- (1) Other than salary described herein, the Company did not pay the Named Officer any compensation, including incidental personal benefits, in excess of 10% of such individual's salary. No other executive officer of the Company had a total annual salary and bonus which exceeded $100,000 during fiscal 1995 or 1996. (2) For the fiscal year ended December 31, 1996, Mr. Levin was entitled, pursuant to the terms of his prior agreement, to a bonus equal to certain producer's fees relating to the series "Amazing Tales." During such period Mr. Levin received $45,000 and, pursuant to the terms of his new employment agreement (which will be effective upon the closing of the Offering), has agreed to apply the balance of such accrued but unpaid bonus ($175,000) to repay certain loans made to him by the Company. See "Certain Transactions." This amount ($175,000) will be reflected in Mr. Levin's compensation for fiscal 1997. In the future, Mr. Levin will not receive production bonuses. The loan balance was $186,000 at December 31, 1996 and approximately $130,000 at September 30, 1997. See "Certain Transactions." 33 35 (3) Pursuant to the terms of Mr. Levin's restated employment agreement, Mr. Levin will be granted options to acquire 85,000 shares of the Company's Common Stock, exercisable at the Company's initial offering price. These options shall be deemed fully vested. (4) Mr. Levin was entitled to receive a car allowance of $1,250 each month for all or a portion of the year. In lieu of these payments, Mr. Levin applied such amounts to reduce his loan balance. EMPLOYMENT AGREEMENTS Mr. Levin has entered into a new employment agreement with the Company (the "Levin Agreement") providing for his services as President and Chief Executive Officer effective January 1, 1997 through December 31, 2001. Pursuant to the Levin Agreement, Mr. Levin will receive a salary of $240,000, plus $125,000 per annum as an advance against a pro-rata portion of producer's fees earned by Mr. Levin. Producer's fees in excess of $125,000 will be retained by the Company. Mr. Levin has agreed that any producer's fees relating to Company produced programming shall be allocated to the Company. Pursuant to the Levin Agreement, Mr. Levin will receive (i) from 5% to 7.5% of the Company's pre-tax profit beginning in 1997 pursuant to a formula based on specified earnings levels and (ii) options to acquire an aggregate of 85,000 shares of the Company's Common Stock at a per share exercise price equal to the initial public offering price, which options shall be deemed fully vested. The Levin Agreement also provides that certain unpaid bonus compensation owing to Mr. Levin will be applied to his loan from the Company. See "Certain Transactions." Mr. Paul Yamamoto entered into an employment agreement with the Company, providing for his services as an Executive Vice President from January 20, 1997 to June 30, 1997, which agreement was amended as of October 4, 1997 (the "Yamamoto Agreement"). Pursuant to the Yamamoto Agreement, Mr. Yamamoto's compensation will be as follows: (a) from January 20, 1997 to June 30, 1997, it will be based on an annual rate of $125,000 plus a performance bonus based on an annual rate of up to $25,000 to be paid weekly; (b) from July 1, 1997 to December 31, 1997, it will be based on an annual rate of $125,000 plus a performance bonus at a rate of up to $50,000 to be paid weekly; and (c) from January 1, 1998 to June 20, 1999, it will be based on an annual rate of $200,000; this is in addition to a further bonus of 2 1/2% of the Company's pre-tax profits up to $3,000,000 and then 4% thereafter pursuant to a formula based upon specified earnings levels, payable annually at the end of each calendar year. Mr. Yamamoto will also receive options to acquire 20,000 shares of Common Stock per year at $1.00 per share, such options to vest over the course of employment on terms no less favorable than granted to other employees. Mr. Todd Jackson entered into an employment agreement with the Company, providing for his services as Senior Vice President, Domestic and International Sales from May 19, 1997 to May 18, 1999, which agreement was amended as of October 4, 1997 (the "Jackson Agreement"). Pursuant to the Jackson Agreement, Mr. Jackson's compensation will be as follows: (a) from May 19, 1997 to May 18, 1998, an annual salary of $100,000, plus a performance bonus of up to $75,000 per year, both payable weekly; and (b) from May 19, 1998 to May 18, 1999, an annual salary of $200,000. In the event the Company elects to exercise its option for a third year of the Jackson Agreement, Mr. Jackson will receive a base salary of $225,000. In addition, Mr. Jackson will also receive a minimum guaranteed bonus at the rate of $25,000 per year, based upon the pre-tax profits of the Company. Mr. Jackson has also been given an option to terminate his agreement if the Company has not consummated an initial public offering by September 19, 1997. Since the Company did not consummate an initial public offering by such date, Mr. Jackson has the right to terminate his agreement upon 60 days prior written notice. Mr. Jackson also will receive 10,000 stock options per year of employment, such options to vest after each year of employment, pursuant to the terms of the Company's employee stock option plan. STOCK OPTION PLANS On December 14, 1995, the Company's Board of Directors approved, and recommended for adoption by the shareholders, who adopted such plans in March 1996, the 1995 Stock Option Plan and the 1995 Stock Option Plan for Non-Employee Directors (collectively, the "1995 Plans"). As of the date hereof, 78,000 options were outstanding under the 1995 Plans. In January 1997, the Company's shareholders voted to freeze the 34 36 1995 Plans and adopt two new plans, the Team Communications Group, Inc. Stock Awards Plan (the "1996 Employee Plan") and the Team Communications Group, Inc. Directors' Stock Option Plan (the "1996 Directors Plan," and together with the 1996 Employee Plan, (the "1996 Option Plans"). The following summary is qualified in its entirety by reference to the full text of the 1996 Option Plans. Unless otherwise indicated, the summary is applicable to each plan, as well as to the 1995 Plans. The 1996 Plans. The 1996 Option Plans provide for the granting of awards of incentive stock options ("ISOs") within the meaning of Section 422 of the Internal Revenue Code of 1986, as amended (the "Code"), nonqualified stock options ("NSOs"), and stock appreciation rights ("SARs") (awards of ISOs, NSOs, and SARs are sometimes hereinafter collectively referred to herein as "Awards"). Purpose. The purpose of the 1996 Option Plans is to provide key employees, officers, and directors with an additional incentive to promote the success of the Company's business and to encourage employees to remain in the employ of the Company. Administration-Employee Plan. The 1996 Employee Plan is to be administered by a committee of two or more directors of the Company; provided however, that if the Company becomes subject to Section 12 of the Exchange Act, such directors shall be "non-employee directors" as such term is used in Rule 16b-3 and, if feasible, such directors shall be "Outside Directors;" and provided further that if there are not at least two such "non-employee directors," any grants or awards hereunder to an individual subject to Section 16 of the Exchange Act shall also be approved by the Board of Directors of the Company. "Outside Director" shall have the meaning set forth in Treasury Regulation sec. 1.162-27(e)(3) as amended from time to time and as interpreted by the Internal Revenue Service. 1996 Directors Plan. Directors who are not employees of the Company will, on the effective date of this offering and each annual anniversary thereof, receive options to purchase 2,500 shares of Common Stock. The option price per share of Common Stock purchasable upon exercise of such stock options shall be 100% of the fair market value on the date of grant. Such options shall be exercisable immediately on the date of grant by payment in full of the purchase price in cash. The aggregate number of shares of Common Stock that may be granted pursuant to the 1996 Directors Plan is 20,000. 1996 Employee Stock Plan. The aggregate number of shares of Common Stock that may be granted under the 1996 Employee Plan is 180,000. The Employee Plan provides for the authority by the Employee Plan Committee to grant ISOs to any key employee of the Company or any affiliate of the Company and to determine the terms and conditions of each grant, including without limitation, the number of shares subject to each ISO. The ISO exercise price will also be determined by the Committee and will not be less than the fair market value of the Common Stock on the date of grant. The exercise price will not be less than 110% of such fair market value and the exercise period will not exceed five years if the participant was the holder of more than 10% of the Company's outstanding voting securities. The Manner of Exercise. The exercise price for options granted under the 1996 Option Plans may be paid in cash or shares of Common Stock, including shares of Common Stock which the participants received upon the exercise of one or more options provided that, with respect to ISOs, such shares have been held by the participant for at least the greater of two years from the date the option was granted or one year after the shares of Common Stock were transferred to the participant. The option exercise price may also be paid by the participant's delivery of an election directing the Company to withhold shares of Common Stock from the Common Stock otherwise due upon exercise of the option. CERTAIN TRANSACTIONS EMPLOYMENT AGREEMENT WITH DREW LEVIN; SHORT TERM BORROWINGS BY MR. LEVIN See "Management -- Employment Agreements" for a description of the arrangements between the Company and Mr. Levin relevant to his employment agreement and the amendment thereof. 35 37 The Company had due from officer balances of $129,000, $104,900, $11,300, and $42,200 at September 30, 1997, June 30, 1997, December 31, 1996 and December 31, 1995, respectively, representing short-term interest free loans made by the Company to Mr. Levin, less producer's fees earned for services on a Company production. At September 30, 1997, June 30, 1997 and December 31, 1996 and 1995, the amount of such loans owed by Mr. Levin to the Company (which also represents the highest amount borrowed during such periods) was $129,000, $104,900, and $11,300 and $42,200, respectively. Mr. Levin was owed producer's fees of $175,000, $175,000, and $175,000 and $0 for the three months ended September 30, 1997, the six months ended June 30, 1997 and the years ended December 31, 1996 and 1995, respectively. Any future borrowings by any officer of the Company will require the approval of a majority of the disinterested members of the Board. In connection with the Company's facilities, Mr. Levin has personally guaranteed the obligations under the Company's lease. See "Business -- Properties." TRANSACTIONS WITH JOSEPH CAYRE As of the date hereof, the Company was indebted to Joseph Cayre, one of its original shareholders, in respect of loans made in April and August 1995 in the amount of $500,000 and $240,000, respectively. Interest on the loans currently accrues at the rate of 12% and 14%, respectively. Mr. Cayre has waived interest that accrued on the loans prior to December 31, 1996. This interest expense, at fair value, was recorded as either a corresponding credit to paid in capital (1996), or accrued liabilities (1997 and 1995), which will be offset against paid in capital upon settlement of the obligations. Mr. Cayre's loans are currently secured by Mr. Levin's shares and all of the assets of the Company. Mr. Cayre and Mr. Levin have agreed, subject to documentation, that as of the closing date of this Offering, Mr. Cayre will receive payment of $240,000 in respect of the amounts owed to him, and the remaining debt, subject to adequate collateralization (which may include cash collateral) shall be extended until June 30, 1998. Subject to the foregoing, Mr. Levin and Mr. Cayre have also agreed, to restructure Mr. Cayre's investment in the Company. Mr. Cayre agreed that upon the closing of the Offering, Mr. Cayre's interest in the Company would be reduced to 214,874 shares of the Company's Common Stock by transferring to Mr. Levin 195,774 shares of the Company's common stock held by Mr. Cayre. Mr. Cayre will also be entering into a consulting agreement with the Company pursuant to which he will be paid $200,000 through September 30, 1998. In February 1996, in connection with a prior restructuring of this indebtedness, Mr. Cayre received options to purchase 48,743 shares of Common Stock at a price of $.43 per share. TRANSACTIONS WITH MORRIS WOLFSON AND OTHERS In January 1996, the Company entered into a transaction with AMAE Ventures, an affiliate of Mr. Wolfson, pursuant to which AMAE Ventures acquired 4% of the Company's outstanding Common Stock and lent to the Company the sum of $322,000, which amount was used by the Company for general overhead purposes and bears interest at 12%. This note is due on the earlier to occur of December 31, 1997 or the closing of the Offering. Interest on this line accrues at 10% per year. The holder of such note has the right to convert the principal amount into 3% of the Company's Common Stock on a fully diluted basis through the completion of the Offering, and has indicated that it intends to convert such note. An April 1996 loan by South Ferry #2 L.P., a Delaware limited partnership, in the principal amount of $500,000 was used for the pre-production of "LoCoMoTioN." This loan bears interest at 10% and is due on the earlier to occur of December 31, 1997 or upon the closing of the Offering. In connection with such loan, South Ferry #2 L.P. received 29,905 warrants exercisable at $.43 per share. South Ferry #2, L.P. is an entity controlled by Mr. Wolfson's brother and has an arms length relationship with the Company. Finally, the Chana Sasha Foundation, an entity controlled by Mr. Wolfson, extended the Company a $400,000 line of credit on a secured basis in November 1996, which credit line has been used and subsequently repaid by funds from the Company's operations. In addition the Company issued to Chana Sasha Foundation and others 6,408 shares of the Company's Common Stock with respect to such extension of credit. 36 38 The terms of AMAE Ventures' original agreement with the Company, as indicated above, enables such entity (or its investors) to receive up to an additional 199,748 shares of Common Stock upon the completion of the Offering. The July 1996 proceeds from the sale of the notes in the Total Recall Financing were used to acquire the rights to produce a television series based on "Total Recall." These notes, which are secured by the Company's underlying rights to the "Total Recall" series, bear interest at 10% and are due at the first to occur of June 30, 1997 or the closing of the Offering. The holders of these notes, ACA Equities, D&M Investments and Gilbert Karsenty, have agreed to extend the maturity date thereto through June 30, 1998. In addition, the holders of these notes received an aggregate of 53,403 shares of common stock, warrants to acquire 21,361 shares of Common Stock at an exercise price of $.43 and a 15% net profit participation in the Company's interest in the series. This loan has been repaid through an advance from Alliance. TPEG AGREEMENTS Beginning in early 1995, The Producer's Entertainment Group, Inc. ("TPEG") and Mr. Levin entered into a series of agreements (the "TPEG Agreements") which provided among other things, (i) for the formation of the Company and the retention by TPEG of a 19.9% ownership interest in the Company, (ii) the grant to the Company of distribution rights to certain product produced by DSP Productions, Inc. ("DSP"), (DSP was sold by Mr. Levin and other shareholders to TPEG in 1994), (iii) the assignment to the Company of certain of DSP's entire new production and development distribution portfolio, and (iv) production financing for the series "Simply Style." Certain disputes arose between Mr. Levin and Mr. Cayre, on the one hand, and TPEG on the other hand, which resulted in the execution of a settlement agreement (the "TPEG Settlement Agreement") with TPEG pursuant to which TPEG was obligated to complete the transfer of "Simply Style" to the Company. The Company also agreed to repurchase from TPEG, for $178,000, a sufficient number of Company shares to reduce TPEG's holding in the Company to 5%, on a fully diluted basis through the completion of the Offering. On June 28, 1996, the Company's Board of Directors determined that, in light of the Company's liquidity position at that time and its inability to complete the TPEG Settlement Agreement pursuant to its terms, it was advisable to assign the obligation to effectuate the TPEG Settlement Agreement to Mr. Levin. Consequently, Mr. Levin and a group of investors repurchased the entire holdings of TPEG in the Company. LOAN FROM AFFIDA BANK In November 1996, the Company obtained a $300,000 loan from Affida Bank, which loan carries interest at 8%, and matures upon the earlier of the closing of the Offering or December 31, 1997. Affida Bank also received warrants to acquire 25,634 shares of the Company's Common Stock at an exercise price of $0.43 in connection with this loan. Prior to the effectiveness of the Offering, the Company anticipates obtaining an extension of the maturity date of this obligation to June 30, 1998. The proceeds of this loan were used for working capital. Affida Bank is domiciled in Switzerland, is a merchant bank and has an arms length relationship with the Company. TRANSACTIONS WITH BRUCE P. VANN Mr. Vann, who has agreed to become a member of the Board of Directors upon the consummation of the Offering, is the holder of options to purchase 10,000 shares of Common Stock at a price of $1.00 per share which he acquired in October 1996, plus 4,273 shares of Common Stock which he received in October 1996 in lieu of fees relating to the acquisition of "Total Recall." Kelly Lytton Mintz & Vann LLP, where Mr. Vann is a partner, is counsel to the Company, has received fees from the Company through December 31, 1996 of approximately $46,000, and has received approximately $71,000 during the first three quarters of 1997. The Company believes that the foregoing transactions were on terms no less favorable to the Company than those available from unaffiliated parties. It is the Company's current policy that all transactions with officers, directors, 5% shareholders and their affiliates will be entered into only if such transactions are approved by a majority of the disinterested independent directors, and on terms no less favorable to the 37 39 Company than could be obtained from unaffiliated parties and are reasonably expected to benefit the Company. PRINCIPAL SHAREHOLDERS The following table sets forth, as of September 30, 1997, as adjusted to reflect the sale of the shares of Common Stock offered hereby and the conversion of the Conversion Note, the ownership of the Common Stock by (i) each person who is known by the Company to own of record or beneficially more than 5% of the outstanding Common Stock, (ii) each of the Company's directors and (iii) all directors and executive officers of the Company as a group. Except as otherwise indicated, the shareholders listed in the table have sole voting and investment power with respect to the shares indicated.
PERCENTAGE BENEFICIALLY OWNED NAME AND ADDRESS NUMBER ---------------------------------- OF BENEFICIAL OWNER(1) OF SHARES(2) BEFORE OFFERING AFTER OFFERING - -------------------------------------------------- ------------ --------------- -------------- Drew S. Levin(3).................................. 685,123 48.4% 23.5% Joe Cayre(4)...................................... 263,617 19.1% 9.2% Morris Wolfson(5)................................. 110,777 8.3% 4.0% Aaron Wolfson(6).................................. 108,642 8.1% 3.8% Abraham Wolfson(7)................................ 102,233 7.7% 3.6% Affida Bank(8).................................... 82,305 6.2% 2.9% Bruce P. Vann(9).................................. 14,273 1.1% * Paul Yamamoto(10)................................. 10,000 * * All officers and directors as a group (seven persons, including nominee directors)........... 709,396 49.4% 24.2%
- --------------- * Less than 1% (1) Address is c/o Team Communications Group, Inc., 12300 Wilshire Boulevard, Suite 400, Los Angeles, California 90025. (2) Gives effect to the anti-dilution provisions of the sale of 2.5% of the Company's Common Stock from Mr. Drew Levin to Mr. Morris Wolfson, Mr. Abraham Wolfson, Mr. Aaron Wolfson and Mr. Edward Nagel and the conversion of the Conversion Note computed on a fully diluted basis. (3) Includes 249,488 shares which Mr. Cayre has agreed to transfer to Mr. Levin pursuant to Mr. Levin's arrangements with Mr. Cayre. Mr. Levin has pledged his shares and his options to Mr. Cayre pursuant to Mr. Cayre's loan transaction with the Company. Includes options to acquire 85,000 shares of Common Stock which the Company has agreed to grant to Mr. Levin concurrently with the execution of his new Employment Agreement. Mr. Levin has agreed to vote all shares held by him for a period of thirty six (36) months following the closing of the Offering for election to the Company's Board of Directors of one designee of H.J. Meyers reasonably acceptable to the Company. See "Certain Transactions" and "Employment Agreements." (4) Includes options to purchase 48,743 shares of the Company's Common Stock at an exercise price of $0.43 per share. Mr. Cayre has granted the Underwriter a 30-day option to purchase up to 30,000 additional shares to cover over-allotments, if any. If the Underwriter's over-allotment option is exercised in full, Mr. Cayre will own 7.6% of the outstanding shares of Common Stock of the Company after the Offering. (5) Includes 59,966 shares to be issued upon conversion of certain convertible debt upon the closing of the Offering. Does not include 210,875 shares owned by Abraham and Aaron Wolfson, Mr. Morris Wolfson's brothers, of which Mr. Morris Wolfson disclaims beneficial ownership. Also does not include 20,506 shares owned by Chana Sasha Foundation, of which Mr. Morris Wolfson is the president, and of which Mr. Morris Wolfson disclaims beneficial ownership. (6) Includes 59,966 shares to be issued upon conversion of certain convertible debt upon the closing of the Offering. Does not include 213,010 shares owned by Morris or Abraham Wolfson, Mr. Aaron Wolfson's brothers, of which Mr. Aaron Wolfson disclaims beneficial ownership. (7) Includes 59,966 shares to be issued upon conversion of certain convertible debt upon the closing of the Offering. Does not include 219,419 shares owned by Morris or Aaron Wolfson, Mr. Abraham Wolfson's brothers, of which Mr. Abraham Wolfson disclaims beneficial ownership. (8) Includes options to purchase 3,268 shares of Common Stock at an exercise price of $0.43 per share. 38 40 (9) Includes options to purchase 10,000 shares of Common Stock at an exercise price of $1.00 per share. (10) Includes options to purchase 10,000 shares of Common Stock at an exercise price of $1.00 per share. OFFERING BY SELLING SECURITYHOLDERS An additional 193,870 outstanding shares (the "Securityholder Shares") of Common Stock issuable upon exercise of warrants held by the Selling Securityholders have been registered pursuant to the registration statement under the Securities Act, of which this Prospectus forms a part, for sale by such holders. The Securityholders Shares may be sold on or about the effective date of the Offering if a current prospectus relating to the Securityholder Shares is in effect and the Securityholder Shares are qualified for sale. None of the shares being registered by the Selling Securityholders pursuant to this registration statement are being offered for sale in connection with this Offering. The shares of Common Stock underlying any such warrants are subject to a 12 month lock-up beginning on the date of this Prospectus. The Company will not receive any proceeds from the market sales of the Securityholder Shares, although it will receive the proceeds from the exercise of the warrants held by the Selling Securityholders. The Company is paying all costs and expenses of registering the Securityholder Shares. Sales of the Securityholder Shares or the potential of such sales could have an adverse effect on the market price of the Company's Common Stock. See "Risk Factors -- Shares Eligible for Future Sale." The Selling Securityholders and the number of Securityholder Shares held by each are as listed below.
SECURITYHOLDER SELLING SECURITYHOLDERS SHARES ---------------------------------------------------------------- -------------- Alan Parnes..................................................... 5,000 Arab International Trust Co..................................... 10,000 Duck Partners, LP............................................... 20,000 Gary & Paula Wayton............................................. 10,000 Michael Rosenbaum............................................... 20,000 RMK Financial LLC............................................... 15,000 Robert Bain..................................................... 20,000 Robert Frankel.................................................. 7,470 Roger Triemstra................................................. 10,000 Roland McAbee................................................... 6,400 Swan Alley (Nominees) Limited................................... 20,000 Van Moer Santerre & Cie......................................... 50,000 ------- Total................................................. 193,870 =======
There are no other material relationships between any of the Selling Securityholders and the Company, nor have any such material relationships existed within the past three years. The Company has been informed by the Underwriter that there are no agreements between the Underwriter and any Selling Securityholder regarding the distribution of the Securityholder Shares. The sale of the Securityholder Shares by the Selling Securityholders may be effected from time to time in transactions (which may include block transactions by or for the account of the Selling Securityholders) in the over-the-counter market or in negotiated transactions, a combination of such methods of sale or otherwise. Sales may be made at fixed prices which may be changed, at market prices prevailing at the time of sale, or at negotiated prices. Selling Securityholders may effect such transactions by selling their securities directly to purchasers, through broker-dealers acting as agents for the Selling Securityholders or to broker-dealers who may purchase shares as principals and thereafter sell the securities from time to time in the over-the-counter market, in negotiated transactions or otherwise. Such broker-dealers, if any, may receive compensation in the form of discounts, concessions or commissions from the Selling Securityholders and/or the purchasers from whom 39 41 such broker-dealer may act as agents or to whom they may sell as principals or otherwise (which compensation as to a particular broker-dealer may exceed customary commissions). At the time a particular offer of Securityholder Shares is made by or on behalf of a Selling Securityholder, to the extent required, a prospectus will be distributed which will set forth the number of Securityholder Shares being offered and the terms of the offering, including the name or names of any underwriters, dealers or agents, if any, the purchase price paid by any underwriter for any Securityholder Shares purchased from the Selling Securityholder and any discounts, commissions or concessions allowed or reallowed or paid to dealers, and the proposed selling price to the public. If any of the following events occurs, this Prospectus will be amended to include additional disclosure before offers and sales of the Securityholder Shares are made: (a) to the extent such securities are sold at a fixed price or by option at a price other than the prevailing market price, such price would be set forth in this Prospectus; (b) if the securities are sold in block transactions and the purchaser wishes to resell, such arrangements would be described in this Prospectus; and (c) if the compensation paid to broker-dealers is other than usual and customary discounts, concessions or commissions, disclosure of the terms of the transaction would be included in this Prospectus. This Prospectus would also disclose if there are other changes to the stated plan of distribution, including arrangements that either individually or as a group would constitute an orchestrated distribution of the Securityholder Shares. Under applicable rules and regulations under the Exchange Act, any person engaged in the distribution of Securityholder Shares may not simultaneously engage in market making activities with respect to any securities of the Company for a period of at least two (and possibly nine)business days prior to the commencement of such distribution. Accordingly, in the event that the Underwriter is engaged in a distribution of the Securityholder Shares, they will not be able to make a market in the Company's securities during the applicable restrictive period. However, the Underwriter has not agreed to nor are they obligated to act as broker-dealer in the sale of the Securityholder Shares and the Selling Securityholders may be required, and in the event that the Underwriter is a market maker, will likely be required, to sell such securities through another broker-dealer. In addition, each Selling Securityholder desiring to sell Securityholder Shares will be subject to the applicable provisions of the Exchange Act and the rules and regulations thereunder, including without limitation Rules 10b-6 and 10b-7, which provisions may limit the timing of the purchases and sales of shares of the Company's securities by such Selling Securityholders. The Selling Securityholders and broker-dealers, if any, acting in connection with such sales might be deemed to be "underwriters" within the meaning of Section 2(11) of the Securities Act and any commission received by them and any profit on the resale of the securities may be deemed underwriting discounts and commissions under the Securities Act. DESCRIPTION OF SECURITIES COMMON STOCK The Company is authorized to issue up to 18,000,000 shares of Common Stock, no par value. Holders of Common Stock are entitled to one vote for each share held of record on each matter submitted to a vote of shareholders. There is cumulative voting for election of directors. Subject to the prior rights of any series of preferred stock which may from time to time be outstanding, if any, holders of Common Stock are entitled to receive ratably, dividends when, as and if declared by the Board of Directors out of funds legally available therefor and, upon the liquidation, dissolution, or winding up of the Company, are entitled to share ratably in all assets remaining after payment of liabilities and payment of accrued dividends and liquidation preferences on the preferred stock, if any. Holders of Common Stock have no preemptive rights and have no rights to convert their Common Stock into any other securities. The outstanding shares of Common Stock are validly authorized and issued, fully paid, and nonassessable. 40 42 PREFERRED STOCK The Company is authorized to issue up to 2,000,000 shares of Preferred Stock. The Preferred Stock may be issued in one or more series, the terms of which may be determined at the time of issuance by the Board of Directors, without further action by shareholders and may include voting rights (including the right to vote as a series on particular matters), preferences as to dividends and liquidation, conversion rights, redemption rights and sinking fund provisions. The Company has no present plans for the issuance of shares of Preferred Stock and any issuance of such Preferred Stock for a period of two years from the date of this Prospectus will require the consent of the Underwriter prior to such issuance. The issuance of any Preferred Stock could adversely affect the rights of the holders of Common Stock and therefore, reduce the value of the Common Stock. The ability of the Board of Directors to issue Preferred Stock could also discourage, delay or prevent a takeover of the Company. See "Risk Factors -- Preferred Stock; Possible Anti-Takeover Effects of Certain Charter Provisions." WARRANTS In connection with the issuance of its prior secured notes, the Company issued an aggregate of 447,354 warrants, each warrant entitling the holder thereof to acquire one share of Common Stock; 224,293 warrants are exercisable at an exercise price equal to $0.43 per share, 29,191 warrants are exercisable at an exercise price equal to $0.97 per share and 193,870 warrants are exercisable at $0.97 per share, subject to adjustment as hereinafter provided. The warrants may be exercised, at the option of the holder thereof, at any time from the date of this Prospectus and terminating on the earlier to occur of the third anniversary of the effective date of the Offering or June 30, 2000, whichever is earlier (the "Termination Date"). Unless previously exercised, the right to exercise the warrants will terminate on the Termination Date. The Company has also issued 147,924 warrants to other consultants and investors in connection with prior financings of the Company. Of these warrants, 21,362 are exercisable at $1.07 per share and 126,562 are exercisable at $0.43 per share. The warrantholders have the opportunity to profit from a rise in the market price of the Common Stock without assuming the risk of ownership of the shares of Common Stock issuable upon the exercise of the warrants, with a resulting dilution in the interests of the Company's shareholders by reason of exercise of warrants at a time when the exercise price is less than the market price for the Common Stock. Further, the terms on which the Company could obtain additional capital during the life of the warrants may be adversely affected. The warrant holders may be expected to exercise their warrants at a time when the Company would, in all likelihood, be able to obtain any needed capital by an offering of Common Stock on terms more favorable than those provided for by the warrants. The holders of the warrants will not have any of the rights or privileges of shareholders of the Company, including voting rights and rights to receive dividends, prior to exercise of the warrants. The Company will reserve out of its authorized but unissued shares a sufficient number of shares of Common Stock for issuance on exercise of the warrants. The Common Stock issuable on exercise of the warrants will be, when issued, duly authorized and validly issued, fully paid, and nonassessable. For a holder to exercise the warrants, there must be a current registration statement in effect with the Commission and registration or qualification with, or approval from, various state securities agencies with respect to the shares or other securities underlying the warrants, or an opinion of counsel for the Company that there is an exemption from registration or qualification. Antidilution. In the event that the Company shall at any time (i) declare a dividend, or make a distribution, on the outstanding Common Stock payable in shares of its capital stock (ii) subdivide the outstanding Common Stock into a greater number of shares of Common Stock, (iii) combine the outstanding Common Stock into a smaller number of shares, or (iv) issue any shares of its capital stock by reclassification of the Common Stock (including any such reclassification in connection with a consolidation or merger in which the Company is the continuing corporation), then, in each case, the exercise price per warrant share in effect at the time of the record date for the determination of shareholders entitled to receive such dividend or 41 43 distribution or of the effective date of such subdivision, combination or reclassification shall be adjusted so that it shall equal the price determined by multiplying such exercise price by a fraction, the numerator of which shall be the number of shares of Common Stock outstanding immediately prior to such action, and the denominator of which shall be the number of shares of Common Stock outstanding after giving effect to such action. Upon such adjustments to the exercise price, the number of warrant shares issuable upon exercise of each warrant shall simultaneously be adjusted by multiplying the number of warrant shares theretofore issuable upon exercise of such warrant by the exercise price theretofore in effect and dividing the product so obtained by the exercise price, as adjusted. Reorganizations. In the event of any reclassification, capital reorganization or other similar change of outstanding Common Stock, any consolidation or merger involving the Company (other than a consolidation or merger which does not result in any reclassification, capital reorganization, or other similar change in the outstanding Common Stock), or a sale or conveyance to another corporation of the property of the Company as, or substantially as, an entirety, each warrant will thereupon become exercisable only for the kind and number of shares of stock or other securities, assets or cash to which a holder of the number of shares of Common Stock issuable (at the time of such reclassification, reorganization, consolidation, merger or sale) upon exercise of such warrant would have been entitled upon such reclassification, reorganization, consolidation, merger or sale. In the case above, the effect of these provisions would be that the holder of a warrant would thereafter be limited to exercising such warrant at the exercise price in effect at such time for the amount of cash per share that a warrant holder would have received had such holder exercised such warrant and received Common Stock immediately prior to the effective date of such cash merger or transaction. Depending upon the terms of such cash merger or transaction, the aggregate amount of cash so received could be more or less than the exercise price of the warrant. Exercise Procedure. Each holder of a warrant may exercise such warrant by surrendering the certificate evidencing such warrant, with the subscription form on the reverse side of such certificate properly completed and executed, together with payment of the exercise price, to the Company at its executive offices. Such offices will initially be located at 12300 Wilshire Blvd., Los Angeles, California 90025. The exercise price will be payable by cash or by certified or official bank check payable in United States dollars to the order of the Company. If fewer than all of the warrants evidenced by a warrant certificate are exercised, a new certificate will be issued for the remaining number of warrants. Certificates evidencing the warrants may be exchanged for new certificates of different denominations by presenting the warrant certificates at the office of the Company. UNDERWRITER'S WARRANT At the closing of the Offering, the Company will issue to the Underwriter the Underwriter's Warrant to purchase for investment a maximum of 150,000 shares of Common Stock. The Underwriter's Warrant will be exercisable for a four-year period commencing one year from the date of this Prospectus. The exercise price of the Underwriter's Warrant will be $8.75 per share (based upon an assumed initial public offering price of $6.25 per share). The Underwriter's Warrant will not be saleable, transferable, assignable or hypothecatable prior to its exercise date except to officers of the Underwriter and members of the selling group and officers and partners thereof. The Underwriter's Warrant will contain anti-dilution provisions. The Underwriter's Warrant does not entitle the Underwriter to any rights as a stockholder of the Company until such Warrant is exercised and shares are purchased thereunder. The Underwriter's Warrant and the shares of Common Stock thereunder may not be offered for sale except in compliance with the applicable provisions of the Securities Act. The Company has agreed that, if it shall cause to be filed with the Securities and Exchange Commission either an amendment to the Registration Statement of which this Prospectus is part or a separate registration statement, the Underwriter shall have the right during the four-year period commencing on the date of this Prospectus to include in such amendment or Registration Statement the Underwriter's Warrant and the shares of Common Stock issuable upon its exercise at no expense to the Underwriter. Additionally, the Company has agreed that, upon written request by a holder or holders of 50% or more of the Underwriter's Warrant which is made during the period prior to the exercise of the Underwriter's Warrant, the Company will, on two separate occasions, register the Underwriter's Warrant and the shares of Common Stock issuable upon exercise thereof. 42 44 The initial such registration will be at the Company's expense and the second such registration will be at the expense of the holder(s) of the Underwriter's Warrant. BRIDGE NOTES To finance its working capital needs, the Company has issued three separate series of bridge notes. In February 1997, the Company commenced the placement of Units consisting off $50,000 principal amount of 10% Convertible Notes (the "February 1997 Notes") and 10,000 common stock purchase warrants. The Company sold an aggregate of $969,350 principal amount of the February 1997 Notes. The principal amount of, and interest on, the February 1997 Notes shall be due and payable on the earlier to occur of (i) five business days after the completion of either a public offering of the Company's Common Stock (the "Initial Public Offering") or (ii) the public or private placement of debt or equity securities with gross proceeds to the Company in excess of $5,000,000 (together with an Initial Public Offering, a "Financing Event") or the second anniversary of the Closing Date (as defined therein). The February 1997 Notes are convertible into shares of Common Stock (the "Conversion Shares") of the Company during the period commencing 60 days after the Closing Date and continuing through the effective date of the Initial Public Offering, at which time any February 1997 Notes not so converted will be repaid. The conversion price (the "Conversion Price") is $5.00 per share, subject to an adjustment in certain events. The holders of these notes will waive, prior to the effective date of this Offering, their right to so convert. In June 1996 the Company commenced the placement of Units consisting of $50,000 principal amount of 10% Secured Convertible Notes (the "June 1996 Notes") and 10,000 common stock purchase warrants. The Company sold an aggregate of $975,000 principal amount of the June 1996 Notes. The principal amount of, and interest on, the June 1996 Notes shall be due and payable, if the holders thereof do not otherwise notify the Company that they wish to redeem their conversion feature, on the completion of the Offering. The June 1996 Notes are secured by substantially all of the assets of the Company. To the extent not otherwise repaid, the June 1996 Notes are convertible into shares of Common Stock of the Company, beginning 12 months after the completion of an Initial Public Offering, at a conversion price of $5.00 per share, subject to an adjustment in certain events. The holders of these notes will waive, prior to the effective date of the Offering, their right to so convert. In February 1996, the Company commenced the placement of Units consisting of $50,000 principal amount of 12% Secured Notes (the "February 1996 Notes") and 10,000 common stock purchase warrants. The Company sold an aggregate of $900,000 principal amount of the February 1996 Notes. The principal amount of, and interest on, the February 1996 Notes shall be due and payable on the second anniversary of the initial closing date thereof, and were secured by substantially all of the assets of the Company. These notes were not convertible. TRANSFER AGENT The transfer agent for the Company's Common Stock is U.S. Stock Transfer Corporation, Glendale, California, which also is responsible for record keeping functions in connection with the same. SHARES ELIGIBLE FOR FUTURE SALE Prior to the Offering, there has been no public market for the Common Stock of the Company. Sales of substantial amounts of Common Stock of the Company in the public market or the perception that such sales could occur could materially adversely affect the prevailing market price and the ability of the Company to raise equity capital in the future. Upon completion of the Offering, the Company will have outstanding approximately 2,831,092 shares of Common Stock. Of these shares, 1,331,092 are Restricted Shares. The 1,500,000 shares of Common stock that are sold by the Company to the public in the Offering will be freely tradeable without restriction under the Securities Act, unless purchased by "affiliates" of the Company as that term is defined in Rule 144 under the Securities Act. 43 45 The remaining shares of Common Stock outstanding upon completion of the Offering, determined as if all outstanding warrants have been exercised, will be held by approximately 60 holders and will be "restricted securities" as that term is defined in Rule 144 under the Securities Act ("Restricted Stock"). Restricted Stock may be sold in the public market only if registered or if qualified for an exemption from registration under Rule 144 or 701 promulgated under the Securities Act, which are summarized below, or other exemptions. Sales of the Restricted Stock in the public market, or the availability of such shares for sale, could materially adversely affect the market price of the Common Stock. In general, under Rule 144, which was amended and became effective on April 29, 1997, beginning 90 days after the date of this Prospectus, a person (or persons whose shares are aggregated) who has beneficially owned Restricted Stock for at least one year (including the holding period of any prior owner other than an affiliate of the Company) would be entitled to sell within any three month period a number of shares that does not exceed the greater of (i) one percent of the number of shares of Common Stock then outstanding or (ii) the average weekly trading volume of the Common Stock during the four calendar weeks preceding the filing of notice of such sale. Sales under Rule 144 are also subject to certain manner of sale provisions and notice requirements and to the availability of current public information about the Company. Under amended Rule 144(k), a person who is not deemed to have been an affiliate of the Company at any time during the three months preceding a sale, and who has beneficially owned the shares proposed to be sold for at least two years (including the holding period of any prior owner except an affiliate of the Company) is entitled to sell such shares without complying with the manner of sale, public information, volume limitation or notice provisions of Rule 144. Unless otherwise restricted, such shares of Restricted Stock may therefore be sold immediately upon the completion of this Offering. Any employee, officer or director of or consultant to the Company who purchased his or her shares pursuant to a written compensatory plan or contract may be entitled to rely on the resale provisions of Rule 701. Rule 701 permits affiliates of the Company to sell their Rule 701 shares under Rule 144 without complying with the holding period requirements of Rule 144. Rule 701 further provides that nonaffiliated shareholders may sell such shares in reliance on Rule 144 without having to comply with the public information, volume limitation or notice provisions of Rule 144. In both cases, a holder of Rule 701 shares is required to wait until 90 days after the date of this Prospectus before selling such shares. The holders of substantially all of the Company's capital stock have entered, or are anticipated to enter, into contractual "lock-up" agreements providing that they will not offer, sell, contract to sell or grant any option to purchase or otherwise dispose of the shares of stock owned by them or that could be purchased by them through the exercise of options to purchase stock of the Company for 18 months as to the Restricted Shares and the Warrant Shares and for a period of 12 months as to the Registered Warrant Shares after the date of this Prospectus without the prior written consent of the Underwriter. Taking into account the lock-up agreements and the restrictions of Rules 144 and 701 described above, approximately no Restricted Shares or Warrant Shares will be eligible for sale immediately after the Offering and approximately all Restricted Shares will be eligible for sale beginning 18 months after the date of this Prospectus, subject, in some cases, to the volume restrictions of Rule 144. The Company has agreed that for a period of 12 months from the date of this Prospectus, it will not sell any securities, with the exception of the shares of Common Stock issued upon exercise of currently outstanding options, without the Underwriter's prior written consent, which consent shall not be unreasonably withheld. In addition, for a period of 24 months from the date of this Prospectus, the Company will not issue any shares of Preferred Stock or sell or issue any securities pursuant to Regulation S or Regulation D under the Securities Act without the Underwriter's prior written consent. The Company intends to file a registration statement on Form S-8 under the Securities Act covering shares of Common Stock reserved for issuance under the 1995 Plans and the 1996 Plans. Based on the number of shares reserved for issuance under such Plans, such registration statement would cover approximately 337,500 shares. Such registration statement will automatically become effective upon filing. Accordingly, shares registered under such registration statement will, subject to Rule 144 volume limitations applicable to affiliates of the Company, be available for sale in the open market, subject to vesting restrictions and the lock-up agreements described above. 44 46 UNDERWRITING The Underwriter has agreed to purchase from the Company, subject to the terms and conditions of the Underwriting Agreement between the Company and the Underwriter, the number of shares of Common Stock set forth opposite its name. The underwriting discount set forth on the cover page of this Prospectus will be allowed to the Underwriter at the time of delivery to the Underwriter of the shares so purchased.
NUMBER OF SHARES TO BE NAME OF UNDERWRITER PURCHASED ------------------------------------------------ ------------- H.J. Meyers & Co., Inc. ........................ 1,500,000
The Underwriter has advised the Company that it proposes to offer the shares to the public at an offering price of between $5.50 and $7.00 per share and that the Underwriter may allow certain dealers who are members of the National Association of Securities Dealers, Inc. ("NASD") a concession of not in excess of $ per share. After completion of the Offering, the public offering price and concession may be changed. Each of the Company and the Selling Shareholder has granted to the Underwriter an option, exercisable during the 30 business-day period from the date of this Prospectus, to purchase up to an aggregate of 225,000 additional shares on the same terms set forth above. The Underwriter may exercise such rights only to satisfy over-allotments in the sale of the shares. The Company has agreed to pay to the Underwriter a non-accountable expense allowance equal to 3% of the total proceeds of the Offering, or $281,250 at an assumed initial public offering price of $6.25 per share (or $ payable by the Company and $ payable by the Selling Shareholder if the Underwriter exercises the over-allotment option in full). Of such non-accountable expense allowance, $60,000 has been paid to date. In addition to the Underwriter's commission and the Underwriter's non-accountable expense allowance, the Company is required to pay the costs of qualifying the shares of Common Stock, under federal and state securities laws, together with legal and accounting fees, printing and other costs in connection with the Offering, estimated to total approximately $365,000. At the closing of the Offering, the Company will issue to the Underwriter the Underwriter's Warrant to purchase for investment a maximum of 150,000 shares of Common Stock. The Underwriter's Warrant will be exercisable for a four-year period commencing one year from the date of this Prospectus. The exercise price of the Underwriter's Warrant, at an assumed initial offering price of $6.25, will be $8.75 per share (140% of the initial public offering price). The Underwriter's Warrant will not be saleable, transferable, assignable or hypothecatable prior to its exercise date except to officers of the Underwriter and members of the selling group and officers and partners thereof. The Underwriter's Warrant will contain anti-dilution provisions. The Underwriter's Warrant does not entitle the Underwriter to any rights as a shareholder of the Company until such Warrant is exercised and the shares of Common Stock are purchased thereunder. The Underwriter's Warrant and the shares of Common Stock thereunder may not be offered for sale except in compliance with the applicable provisions of the Securities Act. The Company has agreed that, if it shall cause to be filed with the Commission either an amendment to the Registration Statement of which this Prospectus is a part or a separate registration statement, the Underwriter shall have the right during the five-year period commencing on the date of this Prospectus to include in such amendment or Registration Statement the Underwriter's Warrant and the shares of Common Stock issuable upon its exercise at no expense to the Underwriter. Additionally, the Company has agreed that, upon written request by a holder or holders of 50% or more of the Underwriter's Warrant which is made during the exercise period of the Underwriter's Warrant, the Company will on two separate occasions, register the Underwriter's Warrant and the shares of Common Stock issuable upon exercise thereof. The initial such registration will be at the Company's expense and the second such registration will be at the expense of the holder(s) of the Underwriter's Warrant. For the period during which the Underwriter's Warrant is exercisable, the holder or holders will have the opportunity to profit from a rise in the market value of the Company's Common Stock, with a resulting dilution in the interests of the other shareholders of the Company. The holder or holders of the Underwriter's Warrant can be expected to exercise it at a time when the Company would, in all likelihood, be able to obtain 45 47 any needed capital from an offering of its unissued Common Stock on terms more favorable to the Company than those provided for in the Underwriter's Warrant. Such facts may materially adversely affect the terms on which the Company can obtain additional financing. To the extent that the Underwriter realizes any gain from the resale of the Underwriter's Warrant or the securities issuable thereunder, such gain may be deemed additional underwriting compensation under the Securities Act. The Company has agreed to enter into a consulting agreement with H.J. Meyers under the terms of which H.J. Meyers has agreed to perform consulting services related to corporate finance and will be paid a non-refundable fee of $6,000 per month for 12 months. The Company has agreed to pay H.J. Meyers the entire one year fee upon closing of the Offering. Holders of substantially all of the Company's capital stock outstanding prior to the Offering have entered, or are anticipated to enter, into lock-up agreements under which the holders of such shares will agree not to offer, sell, contract to sell or grant any option to purchase or sell or dispose of any shares owned by them prior to the Offering, or subsequently acquired under any option, warrant or convertible security owned prior to the Offering, for a period of 18 months as to the Restricted Shares and the Warrant Shares and for a period of 12 months as to the Registered Warrant Shares after the date of this Prospectus without prior written consent of the Underwriter. The Company has agreed that for a period of 12 months from the date of this Prospectus, it will not sell or otherwise dispose of any securities, with the exception of the shares of Common Stock issued upon exercise of currently outstanding options, without the Underwriter's prior written consent, which consent shall not be unreasonably withheld. In addition, for a period of 24 months from the date of this Prospectus, the Company will not sell or issue any securities pursuant to Regulation S or Regulation D under the Securities Act without the Underwriter's prior written consent. In addition, the Company has agreed that, for the three years following the Offering, it will not implement a "poison pill" or other device designed to prevent a hostile takeover of the Company, or increase the size of the Company's Board of Directors, without the approval of those members of the Company's Board of Directors who are not employees of the Company. Moreover, the Company has agreed, for three years following the Offering, that it will not increase the compensation of or introduce severance packages for, its directors and officers, without the consent of the Compensation Committee of the Company's Board of Directors. The Underwriting Agreement provides for reciprocal indemnification between the Company and the Underwriter against certain liabilities in connection with the Registration Statement, including liabilities under the Securities Act. In connection with the Offering, the Company has agreed that for a period of 36 months from the closing of the Offering, H.J. Meyers shall have the right to designate one member to the Company's Board of Directors, provided that the designee is acceptable to the Company. The Underwriter does not intend to exercise this right in the near future. The Underwriter has advised the Company that the Underwriter does not intend to confirm sales to any account over which they exercise discretionary authority. Prior to the Offering, there has been no public market for the shares of Common Stock. The initial public offering price has been negotiated among the Company and the Underwriter. Among the factors considered in determining the initial public offering price of the Common Stock, in addition to prevailing market conditions, are estimates of the business potential and earnings prospects of the Company, an assessment of the Company's management and the consideration of the above factors in relation to market valuation of companies in related businesses. Any limitation on the ability of the Underwriter to make a market in the Company's Common Stock could adversely impact the liquidity or trading price of the Company's Common Stock, which could have a material adverse impact on the market price of the Company's Common Stock. The Chicago office of the Securities and Exchange commission is conducting a private, nonpublic investigation of H.J. Meyers, the 46 48 Underwriter, pursuant to a Formal Order of Investigation issued by the Commission. The investigation is focused on whether H.J. Meyers may have violated applicable securities laws and the rules and regulations thereunder, with respect to sales of certain securities. The Company is currently unable to assess the potential impact of the outcome of the Staff's investigation on H.J. Meyers' ability to make a market in the Company's Common Stock after the Offering or trading in the Company's securities. On July 16, 1996, the NASD issued a notice of Acceptance, Waiver and Consent (the "AWC") whereby the Underwriter was censured and ordered to pay fines and restitution to retail customers in the amount of $250,000 and approximately $1.025 million, respectively, The AWC was issued in connection with claims by the NASD that the Underwriter charged excessive markups and markdowns in connection with the trading of four ceratin securities originally underwritten by the Underwriter, the activities in question occurred during periods between December 1990 and October 1993. The Underwriter has informed the Company that the fines and refunds will not have a material adverse effect on the Underwriter's operations and that the Underwriter has effected remedial measures to help ensure that the subject conduct does not recur. In connection with the Offering, the Underwriter may engage in transactions that stabilize, maintain or otherwise affect the price of the Common Stock. Specifically, the Underwriter may overallot the Offering, creating a syndicate short position. In addition, the Underwriter may bid for and purchase shares of Common Stock in the open market to cover syndicate short positions or to stabilize the price of the Common Stock. Finally, the underwriting syndicate may reclaim selling concessions from syndicate members in the Offering, if the syndicate repurchases previously distributed Common Stock in syndicate covering transactions, in stabilization transactions or otherwise. Any of these activities may stabilize or maintain the market price of the Common Stock above independent market levels. The Underwriter is not required to engage in these activities, and may end any of these activities at any time. LEGAL MATTERS Certain legal matters in connection with the validity of the shares of Common Stock being offered hereby will be passed upon for the Company by Kelly Lytton Mintz & Vann LLP, 1900 Avenue of the Stars, Suite 1450, Los Angeles, California 90067. Bruce P. Vann, a member of Kelly Lytton Mintz & Vann LLP, is a nominee director of the Company and the beneficial owner of 4,273 and options to acquire 10,000 shares of the Company's Common Stock. Certain legal matters will be passed upon for the Underwriter by Freshman, Marantz, Orlanski, Cooper & Klein, Beverly Hills, California. EXPERTS The consolidated financial statements as of December 31, 1995, December 31, 1996 and the six months ended June 30, 1997 included in the Prospectus have been so included in reliance on the report of Price Waterhouse LLP, for 1995 and by Stonefield Josephson, Inc., for 1996, both independent accountants, and are so included in reliance upon their reports given on their respective authority as experts in auditing and accounting. On July 1, 1997, Price Waterhouse LLP (the "Prior Accountants") resigned as independent accountants and withdrew their report on the Company's Financial Statements for the year ended December 31, 1996. On or about August 7, 1997, the Company agreed to accept the resignation of the Prior Accountants. In connection with such decision, the Company appointed Stonefield Josephson, Inc. (the "the Stonefield Firm" or "New Accountants") to audit the fiscal year ended December 31, 1996, and review and audit subsequent periods on a going forward basis. The decision to accept the resignation of the Prior Accountants was approved by the board of directors of the Company. There were no disagreements with Prior Accountants on any matters of accounting principle or practices, financial statement disclosure or auditing scope or procedure which if not resolved to the Prior Accountant's satisfaction would have caused it to make reference to the subject matter of the disagreement in connection with its report. The Company's decision to restate its results relates to the existence of a provision of a clause in a security agreement relating to certain licenses to "Amazing Tales" and "Total Recall" which was provided to 47 49 the Prior Accountants subsequent to the date of their audit opinion, which had the potential of creating a contingency with respect to revenue from a related licensing agreement which the Company had included in its 1996 financial statements. The restatement had the effect of reducing revenues by $367,000, cost of revenue by $125,800 and net income by $241,200 ($.13 per share). See Note 2 to the Consolidated Financial Statements. In light of the Company's intention to restate its results for fiscal 1996, the Company determined to appoint the New Accountants to complete such audit as well as to audit the six month period ending June 30, 1997. The Prior Accountants' opinion for 1995 contained an explanatory paragraph relating to the ability of the Company to function as a going concern. The engagement of the Stonefield Firm is effective as of August 7, 1997. No discussion was made with the Stonefield Firm as to application of any specific accounting principle. The Company has authorized the Prior Accountants to respond fully to any inquiries of the New Accountants. A copy of the letter from the Prior Accountants relating to this disclosure is attached as Exhibit 23.2 to the Registration Statement of which this Prospectus is a part. ADDITIONAL INFORMATION The Company has filed with the Commission, Washington D.C. 20549 a Registration Statement on Form SB-2 (including all amendments and exhibits thereto, the "Registration Statement") under the Securities Act with respect to the Common Stock offered hereby. This Prospectus, which constitutes part of the Registration Statement, does not contain all of the information set forth in the Registration Statement and the exhibits and schedules thereto, certain parts of which are omitted in accordance with the rules and regulations of the Commission. For further information with respect to the Company and the Common Stock, reference is hereby made to the Registration Statement, including exhibits, schedules and reports filed as a part thereof. Statements contained in this Prospectus as to the contents of any contract or other document filed as an exhibit to the Registration Statement referred to herein set forth the material terms of such contract or other document but are not necessarily complete, and in each instance reference is made to the copy of such document filed as an exhibit to the Registration Statement, each such statement being qualified in all respects by such reference. The Registration Statement, including the exhibits and schedules thereto, may be inspected without charge at the principal office of the public reference facilities maintained by the Commission at Room 1024, 450 Fifth Street, N.W., Washington D.C. 20549, and at the Commission's Regional Offices located at The Northwestern Atrium Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661 and 7 World Trade Center, 13th Floor, New York, New York 10048. Copies of such material can also be obtained at prescribed rates by mail from the Public Reference Section of the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549. The Registration Statement, including the exhibits and schedules thereto, can also be accessed through the EDGAR terminals in the Commission's Public Reference Rooms in Washington, Chicago and New York or through the World Wide Web at http://www.sec.gov. 48 50 INDEX TO FINANCIAL STATEMENTS
PAGE ----- Report of Stonefield Josephson, Inc., Independent Auditors............................ F-2 Report of Price Waterhouse LLP, Independent Accountants............................... F-3 Consolidated Balance Sheet at December 31, 1995, December 31, 1996, and June 30, 1997................................................................................ F-4 Consolidated Statement of Operations for the period from February 27, 1995 to December 31, 1995, for the year ended December 31, 1996, for the six months ended June 30, 1996 and for the six months ended June 30, 1997..................................... F-5 Consolidated Statement of Cash Flows for the period from February 27, 1995 to December 31, 1995, for the year ended December 31, 1996, for the six months ended June 30, 1996 and for the six months ended June 30, 1997..................................... F-6 Consolidated Statement of Cash Flows Supplemental Schedule of Non Cash Activities for the period from February 27, 1995 to December 31, 1995, for the year ended December 31, 1996, for the six months ended June 30, 1996 and for the six months ended June 30, 1997............................................................................ F-7 Consolidated Statement of Shareholders' Equity (Deficit) for the period from February 27, 1995 to December 31, 1995, for the year ended December 31, 1996, and for the six months ended June 30, 1997.......................................................... F-8 Notes to Consolidated Financial Statements............................................ F-9
F-1 51 REPORT OF INDEPENDENT AUDITORS Board of Directors and Shareholders Team Communications Group, Inc. We have audited the consolidated balance sheets of Team Communications Group, Inc. and subsidiaries as of December 31, 1996 and June 30, 1997, and the related consolidated statements of operations, shareholders' equity and cash flows for the year and six month period then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statements presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Team Communication Group, Inc. and its subsidiaries as of December 31, 1996 and June 30, 1997, respectively, and the consolidated results of its operations and its cash flows for the year and six month period then ended, respectively, in conformity with generally accepted accounting principles. The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 12, the Company has had significant losses in the past, has been dependent on outside equity investors to finance its operations, and certain notes payable are past due. These factors raise substantial doubt about the Company's ability to continue as a going concern. Management's plans with respect to these matters are described in Note 12 to the financial statements. The financial statements do not include any adjustments that might result from the outcome of these uncertainties. STONEFIELD JOSEPHSON, INC. CERTIFIED PUBLIC ACCOUNTANTS Santa Monica, California September 19, 1997 F-2 52 REPORT OF INDEPENDENT ACCOUNTANTS May 28, 1996, except as to Note 10, which is as of September 27, 1996 To the Board of Directors and Shareholders of DSL Entertainment Group, Inc. In our opinion, the accompanying consolidated balance sheet and the related consolidated statements of operations, of shareholders' deficit and of cash flows present fairly, in all material respects, the consolidated financial position of DSL Entertainment Group, Inc. and its subsidiaries at December 31, 1995 and the results of their operations and their cash flows for the period from February 27, 1995 to December 31, 1995 in conformity with generally accepted accounting principles. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audit of these statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for the opinion expressed above. The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 12 to the financial statements, the Company's recurring losses from operations and limited capital resources raise substantial doubt about its ability to continue as a going concern. Management's plans in regard to these matters are also described in Note 12. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. PRICE WATERHOUSE LLP F-3 53 TEAM COMMUNICATIONS GROUP, INC. CONSOLIDATED BALANCE SHEET ASSETS
JUNE 30, DECEMBER 31, DECEMBER 31, 1997 1996 1995 ----------- ------------- ------------ Cash and cash equivalents............................... $ 105,900 $ 214,300 $ 39,000 Trade receivables, less allowance for doubtful accounts of $63,800, $63,800 and $0, respectively (Note 2)..... 5,831,800 3,342,100 53,100 Television program costs, less accumulated amortization of $1,908,900, $1,599,691 and $490,600, respectively (Note 3).............................................. 4,174,000 3,555,900 596,100 Due from officer (Note 5)............................... 104,900 11,300 42,200 Fixed assets, net (Note 2).............................. 35,400 42,100 18,200 Organizational costs and other assets (Note 2).......... 307,500 144,900 24,500 ---------- ----------- ----------- Total assets.................................. $10,559,500 $ 7,310,600 $ 773,100 ========== =========== =========== LIABILITIES AND SHAREHOLDERS' EQUITY Accounts payable, accrued expenses and other liabilities (Note 2).............................................. $ 2,549,000 $ 1,220,200 $ 458,800 Deferred revenue (Note 2)............................... 255,200 4,500 498,000 Accrued participations (Note 2)......................... 1,423,800 1,428,400 126,100 Notes payable (Note 7).................................. 4,414,000 3,762,900 18,500 Accrued interest (Note 5 and 7)......................... 557,400 242,000 40,200 Shareholder loan and note payable (Note 5).............. 740,000 740,000 750,000 ---------- ----------- ----------- Total liabilities............................. $ 9,939,400 $ 7,398,000 $ 1,891,600 ========== =========== =========== Commitments and contingencies (Notes 6 and 10) Shareholders' deficit: Preferred stock, no par value; 2,000,000 shares authorized; no shares issued and outstanding (Note 11)........................................ 0 0 0 Common stock, no par value; 18,000,000 shares authorized; 1,131,344, 1,131,344 and 1,024,059 shares issued and outstanding (Note 2)........... 1,000 1,000 1,000 Paid in capital.................................... 1,230,100 943,300 0 Treasury stock receivable (Note 10)................ 0 0 (87,000) Accumulated deficit................................ (611,000) (1,031,700) (1,032,500) ---------- ----------- ----------- Total shareholders' equity (deficit).......... 620,100 (87,400) (1,118,500) ---------- ----------- ----------- Total liabilities and shareholders' equity (deficit)................................... $10,559,500 $ 7,310,600 $ 773,100 ========== =========== ===========
The accompanying notes are an integral part of these consolidated financial statements. F-4 54 TEAM COMMUNICATIONS GROUP, INC. CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE PERIOD FROM FOR THE SIX MONTHS FOR THE SIX MONTHS FOR THE YEAR ENDED FEBRUARY 27, 1995 ENDED JUNE 30, 1997 ENDED JUNE 30, 1996 DECEMBER 31, 1996 TO DECEMBER 31, 1995 ------------------- ------------------- ------------------ -------------------- (UNAUDITED) Revenues (Note 2)..................... $ 3,473,100 $ 3,314,600 $5,749,800 $ 1,245,300 Cost of revenues...................... 984,300 1,549,600 2,895,900 946,900 ---------- ---------- ---------- ----------- Gross profit.......................... 2,488,800 1,765,000 2,853,900 298,400 General and administrative expense.... 987,400 976,300 2,323,800 1,288,200 Bad debt expense...................... 660,000 -- -- -- ---------- ---------- ---------- ----------- Net income from operations............ 841,400 788,700 530,100 (989,800) Interest expense (Note 5)............. 523,400 200,000 677,700 42,700 Interest income....................... 102,700 -- 58,300 -- Other income.......................... -- -- 90,100 -- ---------- ---------- ---------- ----------- Net income (loss) before income taxes............................... 420,700 588,700 800 (1,032,500) Provision for income taxes (Note 4)... -- -- -- -- ---------- ---------- ---------- ----------- Net income (loss)..................... $ 420,700 $ 588,700 $ 800 $ (1,032,500) ========== ========== ========== =========== Net income (loss) per share (Note 2).................................. $ 0.23 $ 0.32 -- $ (0.57) ========== ========== ========== =========== Weighted average number of shares outstanding (Note 2)................ 1,821,800 1,821,800 1,821,800 1,821,800 ========== ========== ========== ===========
The accompanying notes are an integral part of these consolidated financial statements. F-5 55 TEAM COMMUNICATIONS GROUP, INC. CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE PERIOD FROM FOR THE SIX MONTHS FOR THE SIX MONTHS FOR THE YEAR ENDED FEBRUARY 27, 1995 ENDED JUNE 30, 1997 ENDED JUNE 30, 1996 DECEMBER 31, 1996 TO DECEMBER 31, 1995 ------------------- ------------------- ------------------ -------------------- (UNAUDITED) OPERATING ACTIVITIES: Net income (loss)................... $ 420,700 $ 588,700 $ 800 $ (1,032,500) Adjustments to reconcile net income to cash used for operating activities: Depreciation and amortization.... 6,700 6,600 15,600 4,500 Loss on TPEG settlement (Note 10)............................ -- 53,700 -- 180,000 Provision for doubtful accounts receivable..................... 63,800 10,600 Amortization of television program costs.................. 309,200 950,900 1,100,800 490,700 Additions to television program costs.......................... (927,300) (2,982,100) (4,060,600) (1,045,800) Amortization of notes payable discount....................... -- -- 353,300 -- Changes in assets and liabilities: Increase in trade receivables................. (2,489,700) (2,436,300) (3,352,900) (193,700) Increase in organization costs and other assets............ (162,600) (28,900) (123,000) (25,400) Increase in accounts payable, accrued expense and other liabilities................. 1,328,800 1,920,400 939,500 280,800 Increase (decrease) in deferred revenue..................... 250,700 (319,700) (343,500) 498,000 Increase in accrued participations.............. (4,600) 472,500 1,302,300 126,100 Increase in accrued interest... 315,400 98,400 201,800 40,200 ---------- ---------- ---------- ---------- Net cash used for operating activities................ (952,700) (1,675,800) (3,902,100) (666,500) ---------- ---------- ---------- ---------- INVESTING ACTIVITIES -- purchase of fixed assets............ (27,000) (36,900) (21,800) ---------- ---------- ---------- ---------- Net cash used for investing activities................ -- (27,000) (36,900) (21,800) ---------- ---------- ---------- ---------- FINANCING ACTIVITIES: Proceeds from shareholder loan and notes payable.................... -- 1,872,000 -- 750,000 Proceeds from issuance of note payable and warrants............. 937,900 (10,000) 4,747,000 67,500 Principal payment on loan due to stockholder...................... -- (18,500) (10,000) -- Principal payment of notes payable.......................... -- -- (748,600) (49,000) Issuance of common stock............ -- -- -- 1,000 Decrease (increase) in due from officer.......................... (93,600) (113,000) 30,900 (42,200) Waiver of interest on loan due to stockholder...................... -- 47,500 95,000 -- ---------- ---------- ---------- ---------- Net cash provided by financing activities...... 844,300 1,778,000 4,114,300 727,300 ---------- ---------- ---------- ---------- Net change in cash.................... (108,400) 75,200 175,300 39,000 Cash at beginning of period........... 214,300 39,000 39,000 -- ---------- ---------- ---------- ---------- Cash at end of period................. $ 105,900 $ 114,200 $ 214,300 $ 39,000 ========== ========== ========== ========== SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Interest paid....................... $ -- $ -- $ 15,100 $ 2,500 ========== ========== ========== ========== Income taxes paid................... $ -- $ -- $ 4,000 $ 2,400 ========== ========== ========== ==========
The accompanying notes are an integral part of these consolidated financial statements. F-6 56 TEAM COMMUNICATIONS GROUP, INC. CONSOLIDATED STATEMENT OF CASH FLOWS SUPPLEMENTAL SCHEDULE OF NON CASH ACTIVITIES
FOR THE SIX MONTHS ENDED FOR THE SIX JUNE 30, 1996 FOR THE PERIOD FROM MONTHS ENDED ------------- FOR THE YEAR ENDED FEBRUARY 27, 1995 JUNE 30, 1997 DECEMBER 31, 1996 TO DECEMBER 31, 1995 ------------- (UNAUDITED) -------------------- --------------------- TPEG settlement (Note 10): Treasury stock receivable........... $ -- $ -- $ -- $ 87,000 Television program costs received... -- -- -- 41,000 Receivable assigned to TPEG......... -- -- -- 130,000 Assumption of payable associated with settlement.................. -- -- -- 178,000 Extinguishment of TPEG settlement payable by assignment of the treasury stock receivable........... -- 178,000 178,000 -- Issuance of warrants in conjunction with notes payable (Note 7):........ -- -- 602,700 -- Transfer of shares by principal shareholder to notes payable holder (Note 7)............................ -- -- 45,700 -- Issuance of shares in connection with notes payable (Note 7).............. -- -- 84,200 -- Issuance of shares in connection with services provided to Company........ -- -- 24,700 --
The accompanying notes are an integral part of these consolidated financial statements. F-7 57 TEAM COMMUNICATIONS GROUP, INC. CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
PREFERRED STOCK COMMON STOCK -------------------- -------------------- TREASURY NUMBER NUMBER PAID IN STOCK ACCUMULATED OF SHARES AMOUNT OF SHARES AMOUNT CAPITAL RECEIVABLE DEFICIT --------- ------ --------- ------ ---------- ----------- ----------- Balance at February 27, 1995................. 0 $ 0 0 $ 0 $ 0 $ 0 $ 0 Common stock issued.... 1,024,059 1,000 TPEG settlement (Note 10).................. (87,000) Net loss for period from February 27, 1995 to December 31, 1995................. (1,032,500) ----- ----- --------- ------ -------- ----- ---------- Balance at December 31, 1995................. 0 0 1,024,059 1,000 0 (87,000) (1,032,500) Transfer of shares by principal shareholder to notes payable holder (Note 7)...... 45,700 Exchange of treasury stock receivable with related party for extinguishment of TPEG settlement payable (Note 10).... 91,000 87,000 Issuance of shares in connection with notes payable (Note 7)..... 79,708 0 84,200 Issuance of warrants in connection with private placements (Note 7)............. 602,700 Issuance of shares in connection with anti- dilution provisions of convertible promissory note (Note 7)................... 4,292 Issuance of shares in connection with services provided to the Company.......... 23,285 24,700 Waiver of interest on loan due to shareholder.......... 95,000 Net income for year ended December 31, 1996................. 800 ----- ----- --------- ------ -------- ----- ---------- Balance at 12/31/96.... 1,131,344 1,000 943,300 0 (1,031,700) Issuance of warrants in connection with private placement.... 286,800 Net income for six months ended June 30, 1997................. 420,700 ----- ----- --------- ------ -------- ----- ---------- Balance at June 30, 1997................. 0 $ 0 1,131,344 $1,000 $1,230,100 $ 0 $ (611,000) ===== ===== ========= ====== ======== ===== ==========
The accompanying notes are an integral part of these consolidated financial statements. F-8 58 TEAM COMMUNICATIONS GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 -- DESCRIPTION OF THE COMPANY: Team Communications Group, Inc. (formerly known as DSL Entertainment Group, Inc.) and its wholly owned subsidiaries (collectively, the "Company") are primarily engaged in developing, producing, and distributing television series, programs and specials, and made-for-television movies in the domestic and foreign television markets. The Company's focus is on developing and producing children's programming and reality based programming for PBS and alternative cable channels such as the Learning Channel and the Discovery Channel. NOTE 2 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: PRINCIPLES OF CONSOLIDATION The accompanying consolidated statements include the accounts of Team Communications Group, Inc. and subsidiaries. All significant intercompany transactions and accounts have been eliminated. REVENUE RECOGNITION Revenue from licensing agreements covering entertainment product owned by the Company is recognized when the entertainment product is available to the licensee for telecast, exhibition or distribution, and other conditions of the licensing agreements have been met in accordance with Statement of Financial Accounting Standard ("SFAS") No. 53, "Financial Reporting by Producers and Distributors of Motion Picture Films." The portion of recognized revenue which is to be shared with the producers and owners of the license program material (participations payable and due to producers) is accrued as the revenue is recognized. Deferred revenues consist principally of advance payments received on television contracts for which program materials are not yet available for broadcast or exploitation. Such amounts are normally repayable by the Company only if it fails to deliver the related product to the licensee. Sales to one major customer accounted for approximately 91% of the Company's total operating revenue for the six months ended June 30, 1997. Sales to two major customers accounted for approximately 57% of the Company's total operating revenue for the six months ended June 30, 1996. Sales to six major customers accounted for approximately 81% of the Company's total operating revenue for the year ended December 31, 1996. Sales to two major customers accounted for approximately 73% of the Company's total operating revenue for 1995. During 1997, the Company became aware of a clause of a security agreement, which had the potential of creating a contingency with respect to revenue from a related licensing agreement which the Company had included in its 1996 financial statements. Accordingly, the previously issued financial statements for 1996 were restated, having the effect of reducing revenues by $367,000, cost of revenues by $125,800 and net income of $241,000 ($.13 per share). CASH The Company maintains its cash in bank deposit accounts which, at times, may exceed federally insured limits. The Company has not experienced any losses in such accounts. TELEVISION PROGRAM COSTS Television program costs are valued at the lower of unamortized cost or net realizable value on an individual title basis. Television program costs represent those costs incurred in the development, production and distribution of television projects. These costs have been capitalized in accordance with SFAS No. 53. Amortization of television program costs is charged to expense and third-party participations are accrued using the individual film forecast method whereby expense is recognized in the proportion that current year revenues F-9 59 TEAM COMMUNICATIONS GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 2 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED) bear to an estimate of ultimate revenue. Such estimates of ultimate revenue are prepared and reviewed by management, and estimated losses, if any, are provided for in full. Development costs are reviewed by management and charged to expense when abandoned or, even if still being actively developed, if not set for principal photography within three years of initial development activity. FIXED ASSETS Fixed assets include office furnishings, fixtures and equipment. Office furnishings, fixtures and equipment are depreciated over a useful life of five years. All depreciation expense is calculated using Modified Accelerated Cost Recovery System. Fixed assets are net of $23,400, $16,700 and $3,600 in accumulated depreciation at June 30, 1997, December 31, 1996 and December 31, 1995, respectively. ORGANIZATIONAL COSTS AND OTHER ASSETS The balance represents security deposits, prepaid expenses and the unamortized portion of the original costs relating to the incorporation of the Company. Organizational costs are amortized using the straight-line method over five years and are net of $1,500, $2,600 and $900 in accumulated amortization at June 30, 1997, December 31, 1996 and at December 31, 1995, respectively. UNCLASSIFIED BALANCE SHEET In accordance with the provisions of SFAS No. 53, the Company has elected to present an unclassified balance sheet. FINANCIAL INSTRUMENTS The carrying amounts of financial instruments including cash and cash equivalents, short term accounts receivable, accounts payable, loans payable, and deferred revenue approximated fair value as of June 30, 1997 and December 31, 1996 because of the relatively short maturity of these instruments. The carrying value of long term accounts receivable and notes payable approximated fair value as of June 30, 1997 and December 31, 1996 because the instruments are valued at the Company's effective borrowing rate. USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. COMMON STOCK In January 1996 the Company effected a 2,397.004 for one stock split for shareholders of record on February 23, 1996. In addition, authorized shares were increased from 1,000 to 18,000,000. In January and April of 1997, the Company effected a 2.2776 and 1.0277 for one share reverse stock splits, respectively. All share and per share data in the financial statements reflect the stock split and subsequent reverse stock split for all periods presented. F-10 60 TEAM COMMUNICATIONS GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 2 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED) CONCENTRATION OF CREDIT RISK Approximately 89% and 72% of the trade receivable balance at June 30, 1997 and December 31, 1996, respectively, were represented by four customers. EARNINGS PER SHARE Earnings per share is based on the weighted average number of common shares and common stock equivalents outstanding during each period, after retroactive adjustment for the stock splits (see above). Pursuant to requirements of the Staff of the Securities and Exchange Commission, shares related to stock sold and options issued subsequent to February 6, 1996 have been shown as outstanding for all periods presented. Fully diluted earnings per common and common equivalent shares are not presented as such amounts are the same as primary earnings per share. The Financial Accounting Standards Board (FASB) has issued a new statement recently (FASB No. 128) which requires companies to report "basic" earnings per share, which will exclude options, warrants, and other convertible securities. The accounting and disclosure requirements of this statement are effective for financial statements for fiscal years beginning after December 15, 1997, with earlier adoption encouraged. Management does not believe that the adoption of this pronouncement will have a material impact on the financial statements. The convertible debt was not included in the calculation of weighted average shares because the President and principal shareholder has personally guaranteed to the Company that he will assume any convertible debt where the debt holder wishes to convert in exchange for his own personal shares. The total number of shares that the convertible debt may convert into is approximately 199,748. IMPAIRMENT OF LONG-LIVED ASSETS AND LONG-LIVED ASSETS TO BE DISPOSED OF: On April 1, 1997, the Company adopted the provision of FASB No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of. This statement requires that long-lived assets and certain identifiable intangibles be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future net cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amounts of the assets exceed the fair values of the assets. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell. Adoption of this statement did not have a material impact on the Company's financial position, results of operations, or liquidity. NOTE 3 -- TELEVISION PROGRAM COSTS: Television program costs consist of the following:
JUNE 30, DECEMBER 31, DECEMBER 31, 1997 1996 1995 ---------- ------------ ------------ In process and development................ $1,462,000 $1,977,000 $213,700 Released, less accumulated amortization... 2,712,000 1,578,900 382,400 ---------- ---------- -------- Total television program costs......................... $4,174,000 $3,555,900 $596,100 ========== ========== ========
F-11 61 TEAM COMMUNICATIONS GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 3 -- TELEVISION PROGRAM COSTS: (CONTINUED) Based on management's estimates of future gross revenue as of June 30, 1997, approximately 60% of the $2,598,000 in unamortized released television program costs will be amortized during the three years ending June 30, 1999 and 80% will be amortized during the four years ending June 30, 2000. NOTE 4 -- INCOME TAXES: During the period ended December 31, 1995, the Company generated a net loss before taxes on a consolidated basis, however, since the individual subsidiaries were not eligible for consolidation until December 31, 1995, the tax provision is calculated on the individual companies, separately. One company's loss does not offset another company's income, as the companies are not consolidated for tax purposes. For the period ended June 30, 1997 and December 31, 1996, the tax provision is calculated on the consolidated basis. Deferred tax expense results from temporary differences in the recognition of expense for tax and financial statement reporting purposes. A reconciliation of the difference between the statutory federal income tax rate and the Company's effective income tax rate applied to income (loss) before income taxes are as follows for the periods ending:
JUNE 30, JUNE 30, DECEMBER 31, DECEMBER 31, 1997 1996 1996 1995 -------- -------- ------------ ------------ Statutory federal tax (benefit) rate............................... 34% 34% 34% (34)% State income tax provision, net of federal benefit.................... 0% 0% 0% 0% Benefits of operating loss carryforward....................... (34)% (34)% (34)% 0% Increase in valuation reserve against deferred tax asset................. 0% 0% 0% 34% --- --- --- --- Effective tax rate................... 0% 0% 0% 0% === === === ===
The Company accounts for taxes under SFAS No. 109, which requires recognition of deferred tax liabilities and assets for the expected future tax consequences of events that have been included in financial statements or tax returns. Under this method, deferred tax liabilities and assets are determined based on the difference between the financial statement and tax basis of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. The components of the net deferred tax asset are as follows:
JUNE 30, JUNE 30, DECEMBER 31, DECEMBER 31, 1997 1996 1996 1995 --------- --------- ------------ ------------ Net operating loss (carryforward)................ $ 193,850 $ 216,315 $ 336,620 $ 336,890 Valuation allowance............. $(193,850) $(216,315) (336,620) (336,890) --------- --------- --------- --------- Net deferred tax asset............... $ 0 $ 0 $ 0 $ 0 ========= ========= ========= ========= Total current and deferred taxes payable....................... $ 0 $ 0 $ 0 $ 0 ========= ========= ========= =========
At June 30, 1997, December 31, 1996, and December 31, 1995 respectively, the Company has a federal net operating loss carryforward of $570,158, $990,058, and $990,858 respectively, which will begin to expire in 2010. NOTE 5 -- RELATED PARTY TRANSACTIONS: The due from officer balances of $104,900, $11,300, and $42,200 at June 30, 1997, December 31, 1996, and December 31, 1995 respectively, represent payments made by the Company on behalf of and short-term F-12 62 TEAM COMMUNICATIONS GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 5 -- RELATED PARTY TRANSACTIONS: (CONTINUED) interest free loans made to the President and principal shareholder, less producer's fees earned by the president and principal shareholder for services on a company production. The shareholder loan and note payable balance are comprised of the following:
JUNE 30, DECEMBER 31, DECEMBER 31, 1997 1996 1995 ------------ ------------ ------------ Promissory notes: 12% secured promissory note due July 1, 1996(i)......... $500,000 $500,000 $500,000 14% secured promissory note due July 1, 1996(ii)........ 240,000 240,000 250,000 -------- -------- -------- $740,000 $740,000 $750,000 ======== ======== ========
- --------------- (i) In April 1995, the Company entered into a $500,000 promissory note with a shareholder. The notes accrued interest at 10% through December 31, 1995 and at 12% thereafter. The note and all unpaid interest are due November 15, 1997, as amended. The note is secured by all of the President and principal shareholders' shares and the assets of the Company. The shareholder has waived all accrued interest relating to this note totaling $30,000 and $60,000 as of June 30, 1997 and as of December 31, 1996, respectively. This interest expense, at fair value, was recorded as either a corresponding credit to paid-in capital (1996) or accrued liabilities (1997 and 1995) which will be offset against paid-in capital upon settlement of the obligations. (ii) In August 1995, the Company entered into a $250,000 promissory note with a shareholder. The notes accrued interest at 12% through November 1, 1995 and at 14% thereafter. The note and all unpaid interest are due November 15, 1997, as amended. The note is secured by all of the President and principal shareholder's shares and the assets of the Company. The shareholder has waived all accrued interest relating to this note totaling $17,500 and $35,000 as of June 30, 1997 and December 31, 1996, respectively. This interest expense, at fair value, was recorded as either a corresponding credit to paid-in capital (1996) or accrued liabilities (1997 and 1995) which will be offset against paid-in capital upon settlement of the obligations. The Company issued 48,743 warrants exercisable at $0.43 in connection with the extension of the maturity date of the loan to July 1, 1996. NOTE 6 -- COMMITMENTS AND CONTINGENCIES: The Company has entered into a new employment agreement with the president of the Company requiring payment, effective January 1, 1997 through December 31, 2001, of annual compensation of $240,000 plus $125,000 per annum as an advance against a pro-rata portion of producer's fees earned by Mr. Levin. The Company has obtained a distribution guarantee from Mel Giniger & Associates for the Latin American territories and The Gemini Corporation for the European territories (collectively the "Giniger Entities"). This guarantee relates to the Company's current library and certain future product for Latin America and Europe. For the year ended December 31, 1996, revenue of $680,000, was recognized against this guarantee, which represents 11% of revenue for 1996. The Company believes that the Giniger Entities ability to deliver on this distribution guarantee is predicate on its licensing the Company's product to unaffiliated third parties. As such, at December 31, 1996, the Company only recognized the portion of the guarantee for which the Giniger Entities have entered into sales agreements with unaffiliated third parties for such rights and for which program materials were available to the Giniger Entities. As of June 30, 1997, all rights held by the Giniger Entities have been conveyed back to the Company, and no revenue was recognized through this transaction for the six months then ended. The Company leases office space and certain office equipment. The total lease expense was $48,200, $55,745, $113,700 and $82,200 for the periods ended June 30, 1997, June 30, 1996, December 31, 1996 and F-13 63 TEAM COMMUNICATIONS GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 6 -- COMMITMENTS AND CONTINGENCIES: (CONTINUED) for the period ended December 31, 1995, respectively. The various operating leases to which the Company is presently subject require minimum lease payments for the years ending December 31, as follows: 1997.............................................. $110,300 1998.............................................. 44,600 1999.............................................. 5,600 2000.............................................. 4,600 2001.............................................. 0 -------- $165,100 ========
The Company has been purportedly served with a judgment in the amount of $85,540 in a matter styled Levy Entertainment, Inc. vs. DSL Entertainment, Inc. filed in Franklin Superior Court, State of Vermont. The plaintiff in this action has obtained a writ of attachment against the Company in California and has attempted to levy against assets of the Company. The Company was not served with any papers relating to the case, did not enter any defense, and disputes the amounts allegedly owed to Plaintiff. The Company is attempting to obtain counsel in Vermont to overturn the judgment. No assurance can be given that the Company will be successful in seeking to have the judgment reversed. NOTE 7 -- NOTE PAYABLE: Notes payable consists of the following at June 30, 1997 and December 31, 1996:
JUNE 30, 1997 DECEMBER 31, 1996 ----------------- ----------------- Private placements: 12% secured notes due November and December 1997(i)........ $ 900,000 $ 900,000 10% secured convertible notes due May 1998(ii)............. 773,900 657,000 10% secured convertible notes due February 1999(iii)....... 711,300 Promissory notes: 12% convertible secured promissory note due December 31, 1997(iv)................................................ 322,000 322,000 10% secured promissory note due December 1997(v)........... 500,000 500,000 10% secured promissory note due June 1997(vi).............. 0 885,000 8% secured note due December 1997(vii)..................... 281,300 239,900 10% secured note due December 1997(viii)................... 140,600 124,100 11% unsecured promissory note past due..................... 134,900 134,900 10% secured note due on October 1997(x).................... 650,000 0 ---------- ---------- $ 4,414,000 $ 3,762,900 ========== ==========
- --------------- (i) During February - June 1996, the Company participated in a private placement offering. The Company sold 18 placement units to the following investors: Matthew and Barbara Geisser, Central Scale Co., Vijaya Kani Rehala, Vijay-Kumar Rekhala, M.D., United Congregation Mesorah, Samuel Marinelli, Mildred Geiss, Jon Kastendieck, Bank Leumi-Affida Bank, Cooperative Holding Corporation, Aaron Wolfson, Abraham Wolfson, Arielle Wolfson, and LEVPOL. Each unit consisted of a $50,000 note payable with interest of 12% per annum, compounded quarterly, and 6,408 Common Stock Purchase warrants. The accrued interest balance was $148,600 and $88,400 at June 30, 1997 and December 31, 1996 respectively. Each warrant entitles the holder to buy one share of common stock at an exercise price of $0.43. The warrants are exercisable commencing two business days following the effective date of the registration statement relating to an initial public offering and terminating on the third F-14 64 TEAM COMMUNICATIONS GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 7 -- NOTE PAYABLE: (CONTINUED) anniversary of that date. Through this private offering, the Company raised $900,000 and issued 115,351 warrants. Principal and interest are due no later than November 15, 1997, as amended. The notes are secured by substantially all of the assets of the Company. The fair value of the notes and the carrying amount and fair value of the associated warrants were determined by the market rate, approximately 25%, based upon management's estimate of its borrowing rate in an arm's length transaction for a financial instrument of this risk. The notes were discounted at this market rate, the value of the warrants amounted to $127,600 and is included in paid in capital. (ii) During June - October 1996, the Company participated in a second private placement offering. The Company sold 19.5 placement units to the following investors: Wellington Corporation, Crescent Capital Company, LLC, Arthur Steinberg IRA Rollover, Robert Steinberg IRA Rollover, Robert Ram Steinberg, A Partnership, Heiko Theime, Alpha Ventures, Tuch Family Trust, Third World Trust Company LTD., Alfred Ross, Fred Chanowski, Allen Goodman, Felix Paige, Rogal America, Mark Levine, Joseph Sullivan, Robert Gopen, Colony Financial Services, John Carberry, Daniel and Thalia Federbush, and Michael Berlin. Each unit consisted of a $50,000 senior convertible note payable with interest of 10% per annum, compounded quarterly, and 4,272 Common Stock Purchase warrants. The notes are convertible at their principal amount into common stock of the Company at any time one year after the initial public offering through maturity at the conversion price of $5.00 per share subject to adjustment in certain circumstances. Each warrant entitles the holder to buy one share of common stock at an exercise price of $0.43. The warrants are exercisable commencing two business days following the effective date of the registration statement relating to an initial public offering and terminating on the third anniversary of that date. As of December 31, 1996, the Company raised $975,000 and issued 83,308 warrants. Principal and interest are due no later than May 31, 1998. The accrued interest balance was $36,800 at December 31, 1996. The notes are secured by substantially all of the assets of the Company. The carrying amount and fair value of the notes and associated warrants were determined by the market rate, approximately 25%, for a financial instrument of this risk. The notes were discounted at this market rate, the value of the warrants amounted to $254,400 and is included in paid in capital. (iii) During January 1997, the Company participated in a third private placement offering. The Company sold 19.4 placement units to the following investors: Alan Parness, Arab International Trust Co., Duck Partners, LP, Gary and Paula Wayton, Michael Rosenbaum, RMK Financial LLC, Robert Bain, Robert Frankel, Roger Triemstra, Roland McAbee, Swan Alley Limited, and Van Moer Santerr & Cie. Each unit consisted of a $50,000 senior convertible note payable with interest of 10% per annum, payable at six month intervals, and 10,000 Common Stock Purchase warrants. The notes are convertible at their principal amount into common stock of the Company at any time before the initial public offering at the conversion price of $5.00 per share subject to adjustment in certain circumstances. The maturity date of the notes will be no later than two years. Each warrant entitles the holder to buy one share of common stock at an exercise price of $.97. The warrants are exercisable commencing two business days following the effective date of the registration statement relating to an initial public offering and terminating on the third anniversary of that date. As of June 30, 1997, the Company raised $969,000 and issued 193,870 warrants. Principal and interest are due no later than February 1999. The accrued interest balance was $32,700 at June 30, 1997. The notes are secured by substantially all of the assets of the Company. The carrying amount and fair value of the notes and associated warrants were determined by the market rate, approximately 25%, for a financial instrument of this risk. The notes were discounted at this market rate, the value of the warrants amounted to $258,100 and is included in paid-in capital. (iv) In January 1996, the Company entered into an agreement with AMAE Ventures, an outside investor. The Company received $322,000 in exchange for (i) a convertible secured promissory note, convertible into 3% of the Company's outstanding stock on a fully diluted basis through an initial public offering F-15 65 TEAM COMMUNICATIONS GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 7 -- NOTE PAYABLE: (CONTINUED) and (ii) the transfer from the principal shareholder of 4% of the Company's issued and outstanding stock on a fully diluted basis through an initial public offering. The note accrues interest at 12% per annum and is due December 31, 1997, as amended. The note is secured by certain receivables and television distribution rights. The accrued interest balance was $54,158 at June 30, 1997 and $36,200 at December 31, 1996. The fair value of the note and carrying value and fair value of the associated shares were determined by the market rate for a financial instrument of this risk. (v) In April 1996, the Company entered into a $500,000 promissory note with South Ferry #2, L.P., an outside investor, to finance a television program. The note accrues interest at 10% per annum and is due on December 31, 1997, as amended. The accrued interest balance was $54,600 at June 30, 1997 and $29,600 at December 31, 1996. The note is secured by certain assets and rights associated with the television program. There were 29,906 warrants (exercisable at $0.43 per warrant) issued in connection with this note. The fair value of the note was estimated using discounted cash flow methods based on the Company's borrowing rates, approximately 25%, for similar types of borrowing arrangements with comparable terms and maturities. (vi) In July 1996, the Company entered into a $1,200,000 promissory note with 3 outside investors, ACA Equities, D&M Investments and Gilbert Karsenty, to acquire the television rights to "Total Recall." The note accrues interest at 10% per annum and is due on June 30, 1997, as amended. As of June 30, 1997, there had been $1,200,000 repaid in respect to this debt. As of December 31, 1996 there has been $315,000 repaid in respect to this debt. The accrued interest balance was $83,100 at June 30, 1997 and $47,800 at December 31, 1996. There were 53,403 shares of common stock issued in connection with the origination of this debt and 21,362 warrants (exercisable at $0.43 per warrant) were issued to extend the loan. The outside investors are also entitled to 15% of any net profits earned from the exploitation of these rights. The fair value of the notes was estimated using discounted cash flow methods based on the Company's borrowing rates, approximately 25%, for similar types of borrowing arrangements with comparable terms and maturities. (vii) In November 1996, the Company entered into a $300,000 promissory note with Affida Bank. The note bears interest at 8% per annum, compounding quarterly, and is due the sooner of an initial public Offering or December 31, 1997. The accrued interest balance was $15,000 at June 30, 1997 and $2,800 at December 31, 1996. The note is secured by substantially all of the assets of the Company. There were 25,634 Common Stock Purchase warrants issued in connection with this note. Each warrant entitles the note holder to buy one share of common stock at an exercise price of $.43. The warrants are currently exercisable and terminate on the earlier to occur of the third anniversary of the effective date of an initial public offering or June 30, 2000. The note is secured by substantially all of the assets of the Company. The carrying amount and fair value of the notes and associated warrants were determined by the market rate, approximately 25%, for a financial instrument of this risk. The notes were discounted at this market rate, the value of the warrants amounted to $66,000 and is included in paid in capital. (viii) In December 1996, the Company entered into a $150,000 promissory note with Phillip Tewel. The note bears interest at 10% per annum, compounding quarterly, and is due the sooner of an initial public offering or December 31, 1997. The accrued interest balance was $7,800 at June 30, 1997 and $400 at December 31, 1996. The note is secured by substantially all of the assets of the Company. There were 29,191 Common Stock Purchase warrants issued in connection with this note. Each warrant entitles the note holder to buy one share of common stock at an exercise price of $.43. The warrants are currently exercisable and terminate on the earlier to occur of the third anniversary of the effective date of an initial public offering or June 30, 2000. The note is secured by substantially all of the assets of the Company. The carrying value of the warrants amounted to $26,500 and is included in paid-in capital. F-16 66 TEAM COMMUNICATIONS GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 7 -- NOTE PAYABLE: (CONTINUED) (ix) In September 1996, the Company entered into a $150,000 unsecured promissory note with Time Life to repay an advance provided to the Company in October 1995. The note bears interest at 11% per annum from October 1995 and required payments such that the note would be repaid by March 31, 1997. As of December 31, 1996, there was $6,810 of accrued interest. During 1996, the Company made a $30,250 payment, of which $15,125 was applied to the principal balance, and $15,125 was applied to accrued interest. The holder of the note has not filed a notice of default and the Company is negotiating an extension of the payment terms. (x) In June 1997, the Company entered into a $650,000 secured promissory note with Alliance. The note bears interest at the prime rate plus one per cent per annum from June 1996 and required payments such that the note, as amended, would be repaid by November 15, 1997. As of June 30, 1997 there was $2,170 of accrued interest. The note is secured by all the television rights and interest owned with regards to the "Total Recall" project. The Company intends to enter into a line of credit with Mercantile National Bank in order to repay this outstanding note. NOTE 8 -- GEOGRAPHIC INFORMATION: The Company operates in a single industry segment, the development, production and distribution of television programming. All of the Company's operations are conducted in the United States. A summary of the Company's revenues by geographic area is presented below:
JUNE 30, JUNE 30, DECEMBER 31, DECEMBER 31, 1997 1996 1996 1995 ---------- ---------- ------------ ------------ North America............. $ 180,000 $1,480,000 $2,221,900 $ 768,000 Europe.................... 307,100 994,600 1,332,900 185,000 South America............. 1,600,000 400,000 732,400 25,000 Asia...................... 136,000 300,000 1,306,500 196,300 Australia and Africa...... 1,250,000 140,000 156,100 71,000 ---------- ---------- ---------- ---------- Total........... $3,473,100 $3,314,600 $5,749,800 $1,245,300 ========== ========== ========== ==========
NOTE 9 -- STOCK OPTION PLANS: The Company has established stock option plans for its employees and consultants (the "1995 Stock Option Plan") and for its non-employee directors (the "1995 Stock Option Plan for Non-Employee Directors"). The 1995 Stock Option Plan allows for options (including Incentive Stock Options) to be granted to employees and consultants at less than fair market value at date of grant. These options may be immediately exercisable and expire over a period determined by the Stock Option Committee of the Board of Directors (the "Committee"). The Committee is comprised of two members of the Board of Directors. The total number of options available to grant under this plan is 270,000. The 1995 Stock Option Plan for Non-Employee Directors allows for a set number of immediately exercisable options to be granted at fair market value to non-employee members of the Board of Directors. The total number of options available to grant under this plan is 67,500. There were no options granted exercised, forfeited, expired or outstanding pursuant to the Director Plan for the six months ended June 30, 1997 and the year ended December 31, 1996. F-17 67 TEAM COMMUNICATIONS GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 9 -- STOCK OPTION PLANS: (CONTINUED) A summary of the Key Employee Plan as of and for the six months ended June 30, 1997 and the year ended December 31, 1996 is presented below:
WEIGHTED AVERAGE KEY EMPLOYEE PLAN SHARES EXERCISE PRICE ----------------------------------------------------- ------- ---------------- Outstanding as of January 1, 1996.................... -- -- Granted............................................ 35,000 $ 1.14 Exercised.......................................... -- -- Forfeited/Expired.................................. -- -- ------- Outstanding as of June 30, 1997 and December 31, 1996............................................... 35,000 ======= Weighted-average fair value of options granted during the year........................................... $ 1.14 =======
The following table summarizes information about options outstanding at June 30, 1997 and December 31, 1996:
SHARES EXERCISABLE AT JUNE 30, 1997 AND DATE TOTAL SHARES EXERCISE PRICE DECEMBER 31, 1996 OPTIONS EXPIRE - ------------ -------------- --------------------- -------------- 30,000 $ 1.00 10,000 July 1, 2006 5,000 $ 2.00 5,000 June 6, 2006 ------ ------ 35,000 15,000 ====== ======
The Company has elected, as permitted by FASB Statement No. 123, "Accounting for Stock Based Compensation" ("FASB 123"), to account for its stock compensation arrangements under the provisions of Accounting Principles Board No. 25, "Accounting for Stock Issued to Employees" ("APB 25"). Accordingly, because the exercise price of the Company's employee stock options equals or exceeds the market price of the underlying stock on the date of grant, no compensation expense is recognized. Pro forma information regarding net income and earnings per share is required by FASB 123 and has been determined as if the Company had accounted for its employee stock options under the fair value method of such pronouncement. The fair value for these options was estimated at the date of grant using the binomial option pricing model with the following weighted average assumptions: risk-free interest rate of 6.33%, no dividend yield, expected lives of two and a half years, and volatility of 0%. For purposes of pro forma disclosure, the estimated fair value of the options is zero, hence neither proforma net income nor earnings per share are presented. During the period, the Company issued 21,362 warrants exercisable at $1.07 and 20,934 warrants exercisable at $0.43 to three outside parties for services provided in raising outside debt. The Company also issued 23,000 warrants exercisable at $1.00 and 20,000 warrants exercisable at $2.50 to two outside parties for services rendered to the Company. The Company recognized $5,000 in compensation related to these warrants during the year ended December 31, 1996. In January 1997, the Company's shareholders voted to freeze the 1995 Stock Option Plans and adopt two new plans, the Team Communications Group, Inc. Stock Awards plan (the "1996 Employee Plan") and the Team Communications Group, Inc. Directors' Stock Option Plan (the "1996 Director's Plan"). The 1996 Directors Plan allows Directors who are not employees of the Company, on the effective date of an initial public offering and each annual anniversary thereof, to receive options to purchase 2,500 shares. The option price per share of Common Stock purchasable upon exercise of such stock options shall be 100% of the F-18 68 TEAM COMMUNICATIONS GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 9 -- STOCK OPTION PLANS: (CONTINUED) fair market value on the date of grant. Such options shall be exercisable immediately on the date of grant by payment in full of the purchase price in cash. The aggregate number of shares of Common Stock that may be granted pursuant to the 1996 Directors Plan is 20,000. The aggregate number of shares of Common Stock that may be granted under the 1996 Employee Plan is 180,000. The Employee Plan provides for the authority by the Employee Plan Committee to grant ISO's to any key employee of the Company or any affiliate of the Company and to determine the terms and conditions of each grant, including without limitation, the number of shares subject to each ISO. The ISO exercise price will also be determined by the Committee and will not be less than the fair market value of the Common Stock on the date of grant. The exercise price will not be less than 110% of such fair market value and the exercise period will not exceed five years if the participant was the holder of more than 10% of the Company's outstanding voting securities. NOTE 10 -- TPEG SETTLEMENT: The Company was a cross complainant and a defendant in an action entitled The Producer's Entertainment Group ("TPEG") v. Drew S. Levin. In the action, which arose from disputes over the February 1995 separation agreements between TPEG and Drew S. Levin, the Company and TPEG sought, among other things, damages and a court order regarding the copyright interest in the series "Simply Style." Effective December 1995, this action was settled, pending final payment as per the terms of the TPEG Litigation Settlement Agreement. Pursuant to the TPEG Litigation Settlement Agreement TPEG agreed to (i) transfer to the Company all rights, title and interest to the series "Simply Style;" and (ii) sell back to the Company a sufficient number of shares of the Company's common stock, such that TPEG would own five percent of the Company's common stock issued and outstanding. In connection with the TPEG settlement agreement, the Company agreed to pay TPEG $258,000, of which $130,000 was paid by the assignment of a certain receivable. The Company incurred an additional $50,000 obligation to TPEG when it was unable to pay the remaining balance as of February 28, 1996. The resulting balance was payable on June 30, 1996. The Company's agreement to repurchase 152,585 shares of the Company's common stock (14.9% of the Company's common stock issued and outstanding) resulted in a treasury stock receivable as of December 31, 1995. After giving value to the other elements of the settlement, the treasury stock was attributed a value of $87,000 or $0.10 per share. The Company recorded a loss on the settlement of $180,000. On June 27, 1996 the Company assigned to its President and principal shareholder the rights and obligations pursuant to the TPEG Settlement Agreement. The President and principal shareholder paid the final payment due on June 30, 1996 and received the 14.9% of outstanding common stock pursuant to the settlement agreement. In conjunction with the assignment, the President and principal shareholder sold 79,037 of the 152,585 shares acquired in this transaction to an outside investor for $185,000. The President and principal shareholder subsequently agreed to acquire the remaining five percent owned by TPEG. In conjunction therewith, the President and principal shareholder arranged for the sale of one-half of this stock to an outside investor. This stock was sold on the agreement that the President and principal shareholder, through transfers from his personal stock holdings, would see that this holding represents 2.5% of the Company's common stock on a fully diluted basis. NOTE 11 -- SUBSEQUENT EVENTS: In January 1997, the Board of Directors reduced the authorized common stock shares from 20,000,000 to 18,000,000 and authorized 2,000,000 shares of preferred stock. All references in the financial statements to number of shares of the Company's common stock and preferred stock have been retroactively restated. F-19 69 TEAM COMMUNICATIONS GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 11 -- SUBSEQUENT EVENTS: (CONTINUED) The Company has signed a letter of intent with an underwriter for the sale of its common stock to the public. The underwriter expects to sell 1,500,000 shares of common stock at $5.50 to $7.00 per share. The Company has received a commitment letter from Mercantile National Bank for multiple lines of credit of up to $8,175,000 (the "Proposed Bank Facility"), which lines of credit would permit borrowings pursuant to specified borrowing bases made up of the value of the library (including a value for "Total Recall"), accounts receivable and other assets, including cash. The Company currently intends to repay the $2,069,650 of indebtedness remaining after the Offering with proceeds from the Proposed Bank Facility. The Proposed Bank Facility will contain covenants relating to the Company's tangible net worth, debt to equity ratio and profitability. No assurance can be given that the Proposed Bank Facility will be entered into or that the Company will be able to use proceeds from such facility as indicated herein. NOTE 12 -- GOING CONCERN: The Company's financial statements for the six months ended June 30, 1997 and the year ended December 31, 1996 have been prepared on a going concern basis which contemplates the realization of assets and the settlement of liabilities and commitments in the normal course of business. The Company expects to incur substantial expenditures to produce television programs and/or acquire distribution rights to television programs produced by third parties. The Company's working capital plus limited revenue from the licensing of its current inventory of television programs will not be sufficient to fund the Company's ongoing operations, including completing projects that the Company is contractually required to develop or produce. Management recognizes that the Company must generate additional resources to enable it to continue operations. Management's plans include the sale of additional equity securities. Towards this goal management has engaged an underwriter to assist in the initial public offering of the Company's common stock. However, no assurance can be given that the Company will be successful in raising additional capital. Further, there can be no assurance, assuming the Company successfully raises additional equity, that the Company will achieve profitability or positive cash flow. F-20 70 ====================================================== NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATION IN CONNECTION WITH THE OFFERING OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR THE UNDERWRITER. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY OF THE SECURITIES OFFERED HEREBY IN ANY JURISDICTION TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH AN OFFER IN SUCH JURISDICTION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THE INFORMATION HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF OR THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE SUCH DATE. ------------------------ TABLE OF CONTENTS
PAGE ----- Prospectus Summary.................... 3 Risk Factors.......................... 8 Use of Proceeds....................... 14 Dividend Policy....................... 15 Capitalization........................ 16 Dilution.............................. 17 Selected Consolidated Financial Data................................ 18 Management's Discussion and Analysis of Financial Condition and Results of Operations....................... 20 Business.............................. 25 Management............................ 32 Certain Transactions.................. 35 Principal Shareholders................ 38 Offering by Selling Securityholders... 39 Description of Securities............. 40 Shares Eligible for Future Sale....... 43 Underwriting.......................... 45 Legal Matters......................... 47 Experts............................... 47 Additional Information................ 48 Index to Consolidated Financial Statements.......................... F-1 ------------------------ UNTIL , 1997 (25 CALENDAR DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL DEALERS EFFECTING TRANSACTIONS IN THE COMMON STOCK, WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS DELIVERY REQUIREMENT IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS. =============================================
====================================================== 1,500,000 SHARES TEAM COMMUNICATIONS GROUP, INC. COMMON STOCK ------------------------ PROSPECTUS ------------------------ H.J. MEYERS & CO., INC. , 1997 ====================================================== 71 PART II EXHIBITS ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS Directors of the Company are presently entitled to indemnification as expressly authorized under Section 317 of the California General Corporation Law ("Section 317") and the Bylaws of the Company (which generally authorize the Company to indemnify its Agents where such indemnification is authorized by Section 317). Section 317 provides a detailed statutory framework covering indemnification of any agent of a corporation who is threatened to be made a party to any legal proceeding by reason of his or her actions on behalf of the corporation. Article 5 of the Company's Articles of Incorporation (exhibit 3.1) provides that a director will not be liable for monetary damages arising out of the director's breach of his or her fiduciary duties to the Company and the shareholders to the fullest extent permissible under the California Law. Liability for breach of a director's fiduciary duty arises when the director has failed to exercise sufficient care in reaching decisions or otherwise attending to his responsibilities as a director and in other circumstances. Article V does not eliminate these duties; it only eliminates monetary damage awards occasioned by a breach of these duties. Accordingly, a breach of fiduciary duty is still a valid basis for a suit seeking to stop a proposed transaction from occurring. However, after a transaction has occurred, the Shareholders do not have a claim against directors for monetary damages based on a breach of fiduciary duty, even if that breach involves negligence on the part of the directors. Additionally, as a practical matter, equitable remedies such as rescission may not be available after a transaction has already been consummated or in other circumstances. The Company intends to enter into indemnification agreements with the Company that attempt to provide the maximum indemnification allowed under the California Law. The Indemnification Agreements will make mandatory indemnification which is permitted by California Law in situations in which the Indemnitee would otherwise be entitled to indemnification only if the Board of Directors, the Shareholders, independent legal counsel retained by the Company or a court in which an action was or is pending made a discretionary determination in a specific case to award such indemnification. However, in part because the California Law was only recently enacted, the extent to which the indemnification permitted by the California Law may be expanded by indemnification agreements is unsettled and has yet to be the subject of any judicial interpretation. ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION The expenses in connection with the issuance and distribution of the securities being registered are as follows (estimated except as noted): SEC registration fee (actual)..................................... $ 4,168 NASD filing fee (actual).......................................... 1,874 Nasdaq SmallCap Market listing fee (actual)....................... 20,000 Printing and engraving expenses................................... 100,000 Legal fees and expenses........................................... 90,000 Accounting fees and expenses...................................... 90,000 Transfer agent and registration fees and expenses................. 10,000 Underwriter's non-accountable expense allowance(1)................ 281,250 Blue sky qualification fees and expenses.......................... 35,000 Miscellaneous..................................................... 14,708 -------- Total................................................... $ 647,000 ========
- --------------- (1) $323,438 if the Underwriter exercises the over-allotment option in full. II-1 72 ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES 1. A loan in the principal amount of $322,000 was made in January 1996 from AMAE Ventures, an affiliate of Mr. Wolfson, which was used by the Company for general overhead purposes and bears interest at 12%. This note is due on the earlier to occur of December 31, 1997 or the closing of the Offering. The holder of such note has the right to convert the principal amount into 3% of the Company's common stock on a fully diluted basis through the completion of the Offering, and has indicated that it intends to convert such note. 2. Mr. Cayre and Mr. Levin have agreed, subject to documentation, that as of the closing date of the Offering, Mr. Cayre will receive payment of $250,000 in respect of the amounts owed to him, and the remaining debt, subject to adequate collateralization (which may include cash collateral) shall be extended until June 30, 1998. Subject to the foregoing, Mr. Levin and Mr. Cayre have also agreed, to restructure Mr. Cayre's investment in the Company. Mr. Cayre agreed that upon the closing of the Offering, Mr. Cayre's interest in the Company would be reduced to 164,874 shares of the Company's Common Stock by transferring to Mr. Levin 195,774 shares of the Company's common stock held by Mr. Cayre. In February 1996, in connection with a prior restructuring of this indebtedness, Mr. Cayre received options to purchase 48,743 shares of Common Stock of $.43 per share. 3. In June 1996, South Ferry #2, L.P., an entity controlled by Mr. Wolfson's brother, advanced to the Company the sum of $500,000 in respect of "LoCoMoTioN" in consideration of which such entity received options to acquire 29,906 shares of Common Stock at $.43 per share. This loan bears interest at 10% and is due on the earlier to occur of December 31, 1997 or upon the closing of the Offering. 4. The Chana Sasha Foundation, an entity controlled by Mr. Wolfson, extended the Company a $400,000 line of credit on a secured basis in November 1996, which credit line has been used and subsequently repaid by funds from the Company's operations In October 1996 Mr. Wolfson extended the Company approximately $400,000 of credit on a secured basis in November 1996, which credit line has been used and subsequently repaid by funds from the Company's operations. Mr. Wolfson received 6,408 shares of the Company's Common Stock with respect to such extension of credit. 5. The July 1996 proceeds from the sale of the note in the Total Recall Financing was used to acquire the rights to produce a television series based on "Total Recall." This note, which was sold to ACA Equities, D&M Investments and Gilbert Karsentry, was secured by the Company's underlying rights to the "Total Recall" series, bears interest at 10% and is due at the first to occur of June 30, 1997 or the Offering. The holders of this note have agreed to extend the maturity date thereto through June 30, 1998. In addition, the holders of this note received an aggregate of 53,403 shares of common stock, warrants to acquire 14,954 shares of Common Stock at an exercise price of $.43 and a 13% net profit participation in the Company's interest in the series. As of the date hereof, $1,200,000 has been repaid in respect to this obligation. Mr. Wolfson received 8,544 shares of the Company's Common Stock and 2% of the net profits of the series with respect to the Total Recall Financing. 6. The Company commenced two private placements under Rule 506 of Regulation D of its Secured Notes in February and in May, 1996. In February 1996, the Company sold to 14 accredited investors $900,000 in principal amount of secured promissory notes which bear interest at 12% and are due at the earlier to occur of the Offering or November 15, 1997. These notes were sold to the following investors: Matthew and Barbara Geisser, Central Scale Co., Vijaya Kani Rehala, Vijay-Kumar Rekhala, M.D., United Congregation Mesorah, Samuel Marinelli, Mildred Geiss, Jon Kastendieck, Bank Leumi-Affida Bank, Cooperative Holding Corporation, Aaron Wolfson, Abraham Wolfson, Arielle Wolfson, and LEVPOL. In June through November 1996, the Company sold to 22 accredited investors $975,000 principal amount of secured notes which bear interest at 10% and are due at the earlier of this Offering or May 31, 1998. These notes were sold to the following investors: Wellington Corporation, Crescent Capital Company, LLC, Arthur Steinberg IRA Rollover, Robert Steinberg IRA Rollover, Robert Ram Steinberg, A Partnership, Heiko Theime, Alpha Ventures, Tuch Family Trust, Third World Trust Company LTD, Alfred Ross, Fred Chanowski, Allen Goodman, Felix Paige, Rogal America, Mark Levine, Joseph Sullivan, Robert Gopen, Colony Financial Services, John Carberry, Daniel and Thalia Federbush, and Michael Berlin. An aggregate of 198,659 warrants to purchase a like number of shares of Common Stock at an exercise price of $.43 per share were issued in connection with such placements. The holders of these notes have waived all conversion rights with respect thereto. II-2 73 7. In October 1996, the Company obtained a loan from Affida Bank in the amount of $300,000 and, in connection therewith, issued warrants to acquire 29,191 shares of Common Stock at an exercise price of $.97 per share. 8. In January, February and March 1997, the Company completed the sale of $969,000 of convertible secured notes to 13 accredited investors (the "February 1997 Notes") pursuant to Rule 506 of Regulation D. Each of the foregoing notes are secured, pro-rata and pari passu, by liens on substantially all of the Company's assets, except that the February 1997 Notes are junior to the prior notes. An aggregate of 193,970 warrants to purchase a like number of shares of Common Stock at an exercise price of $1.00 per share were issued in connection with such placements. The February 1997 Notes were sold to the following investors: Alan Parness, Arab International Trust Co., Duck Partners, LP, Gary and Paula Wayton, Michael Rosenbaum, RMK Financial LLC, Robert Bain, Robert Frankel, Roger Triemstra, Roland McAbee, Swan Alley Limited, and Van Moer Santerr & Cie. The above securities were offered by the Registrant in reliance upon an exemption from registration under either (i) Section 4(2) of the Securities Act as transactions not involving any public offering or (ii) Rule 701 under the Securities Act. No underwriters were involved in connection with the sales of securities referred to in this Item 15. II-3 74 ITEM 27. (a) EXHIBITS 1.0 Form of Underwriting Agreement(2) 3.1 Articles of Incorporation(1) 3.2 By-laws of the Company(1) 4.1 Form of Warrant Agreement March 1996(1) 4.2 Form of Warrant Agreement May 1996(1) 4.3 Form of Warrant Agreement February 1997(1) 4.4 Form of Convertible Note March 1996 and related Security Agreement(1) 4.5 Form of Convertible Note May 1996 and related Security Agreement(1) 4.6 Form of Convertible Note February 1997(1) 4.7.1 Extensions relating to South Ferry #2, L.P. Indebtedness(2) 4.7.2 Extensions relating to Certain February 1996 Convertible Notes(2) 4.8 Restated Joe Cayre Agreement(1) 4.9 Agreement with AMAE Ventures, related note and Security Agreement(1) 4.10 Agreements re Total Recall Financing July 1996(1) 4.11 Agreements re LoCoMoTioN Financing with South Ferry #2, L.P.(1) 4.12 1996 Employee Stock Option Plan(1) 4.13 1996 Directors Stock Option Plan(1) 4.14 Form of Consulting Agreement between H.J. Meyers & Co., Inc. and the Company(1) 4.15 Specimen Certificate(1) 4.16 Form of Underwriter's Warrant(2) 5.1 Opinion and Consent of Kelly Lytton Mintz & Vann LLP(2) 10.1 Agreement with Mel Giniger(1) 10.2 Agreement with Beyond Distribution PTY. Limited(1) 10.3 Interpublic Group of Companies Contract(1) 10.4 Employment Agreement, dated as of January 1, 1997, between the Company and Drew Levin(3) 10.5 Lease between the Company and TCW(1) 10.6 Agreement with Alliance Production Ltd. re Total Recall(2) 10.7 Interpublic -- Team Co-financing Agreement(1) 10.8 Miramax Term Sheet(1) 10.9 Agreement with Leucadia Film Corp.(1) 10.10 Agreements with the Family Channel re Quake and Down Fall(1) 10.11 Agreements with Discovery Communications, Inc., re Amazing Tails II(1) 10.12 Employment Agreement, dated March 19, 1997, amended as of October 4, 1997, between the Company and Todd C. Jackson(3) 10.13 Employment Agreement, dated as of January 20, 1997, amended as of October 4, 1997, between the Company and Paul Yamamoto(1) 10.14 Consulting Agreement, dated October 9, 1997, between the Company and Joseph Cayre(1) 11 Statement re: Computation of per share earnings(1) 21 Subsidiaries of the Registrant(1) 23.1 Consent of experts and named counsel(2) (consent of Kelly Lytton Mintz & Vann LLP included in Exhibit 5.1) 23.2 Consent of Price Waterhouse LLP to disclosure re Prior Accountants(2) 23.3 Consent of Bruce P. Vann, Esq. (Nominated Director)(1) 23.4 Consent of Seth M. Willenson (Nominated Director)(1) 24 Power of Attorney(1)
- --------------- * To be filed by Amendment. (1) Previously filed. (2) Filed herewith. (3) Previously filed documents being filed herewith with conformed signatures. II-4 75 ITEM 28. UNDERTAKINGS The Registrant hereby undertakes to provide to the Underwriter at the closing specified in the underwriting Agreement certificates in such denominations and registered in such names as required by the Underwriter to permit prompt delivery to each purchaser. Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers, and controlling persons of the Registrant pursuant to the California General Corporation Law, the Articles of Incorporation of the Registrant, the Underwriting Agreement, or otherwise, the Registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act, and is, therefore, unenforceable. In the event that a claim of or indemnification against such liabilities (other than the payment by the Registrant of expenses incurred or paid by a director, officer or controlling person of the Registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered hereunder, the Registrant will, unless in the opinion of counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue. The Registrant hereby undertakes that: (1) For the purposes of determining any liability under the Act, the information omitted from the form of Prospectus filed as part of this Registration Statement in reliance upon Rule 430A and contained in a form of Prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4), or 497(h) under the Act shall be deemed to be part of this Registration Statement as of the time it was declared effective. (2) For the purpose of determining any liability under the Securities Act of 1933, each post-effective amendment that contains a form of Prospectus shall be deemed to be a new Registration Statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. The Registrant hereby undertakes: (1) To file, during any period in which offers or sales are being made, a post-effective amendment to this registration Statement; (i) To include any prospectus required by Section 10(a)(3) of the Securities Act of 1933; (ii) To reflect in the prospectus any facts or events arising after the effective date of the registration Statement (or the most recent post-effective amendment thereof) which, individually or in the aggregate, represent a fundamental change in the information set forth in the registration Statement. Notwithstanding the foregoing, any increase or decrease in volume of securities offered (if the total dollar value of securities offered would not exceed that which was registered) and any deviation from the low or high end of the estimated maximum offering range may be reflected in the form of prospectus filed with the Commission pursuant to Rule 424(b) if, in the aggregate, the changes in volume and price represent no more than a 20 percent change in the maximum aggregate offering price set forth in the "Calculation of Registration Fee" table in the effective registration Statement. (iii) To include any material information with respect to the plan of distribution not previously disclosed in the registration Statement or any material change to such information in the registration Statement." (2) That, for the purpose of determining any liability under the Securities Act of 1933, each such posteffective amendment shall be deemed to be a new Registration Statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. (3) To remove from registration by means of a post-effective amendment any of the securities being registered which remain unsold at the termination of the offering. II-5 76 SIGNATURES In accordance with the requirement of the Securities Act of 1933, the Registrant certifies that it has reasonable ground to believe that it meets all of the requirements for filing on Form SB-2 and authorized this Amendment No. 3 to the Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized in the City of Los Angeles, State of California, on this 31st day of October, 1997. Team Communications Group, Inc. By: /s/ DREW LEVIN ------------------------------------ DREW LEVIN Chairman of the Board, President, and Chief Executive Officer Pursuant to the requirements of the Securities Act of 1933, this Amendment No. 3 to the Registration Statement has been signed by the following persons in the capacities and on the dates indicated.
SIGNATURE CAPACITY DATE - --------------------------------------------- --------------------------- ------------------ /s/ DREW LEVIN Chairman of the Board, October 31, 1997 - --------------------------------------------- President, Chief Executive DREW LEVIN Officer and Director * Director October 31, 1997 - --------------------------------------------- PAUL YAMAMOTO /s/ MICHAEL LATINER Vice President, October 31, 1997 - --------------------------------------------- Controller and Secretary MICHAEL LATINER
*By: /s/ DREW LEVIN --------------------------------- DREW LEVIN Attorney-in-Fact II-6 77 TEAM COMMUNICATIONS GROUP, INC. SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS FOR THE PERIOD FROM FEBRUARY 27, 1995 TO DECEMBER 31, 1995, THE YEAR ENDED DECEMBER 31, 1996 AND THE SIX MONTHS ENDED JUNE 30, 1997
1997 ---------------------------------------------------------------- OTHER BALANCE ADDITIONS DEDUCTIONS ADJUSTMENTS BALANCE AT AT BEGINNING CHARGED FROM DURING END OF DESCRIPTION OF PERIOD TO INCOME RESERVE PERIOD PERIOD - ------------------------------------------ ------------ --------- ---------- ----------- ---------- Deducted from accounts receivable for doubtful accounts and returns........... $ 63,800 $ 660,000 $ (660,000) $ 0 $ 63,800
1996 ---------------------------------------------------------------- Deducted from accounts receivable for doubtful accounts and returns........... $ 0 $ 71,300 $ (7,500) $ 0 $ 63,800
1995 ---------------------------------------------------------------- Deducted from accounts receivable for doubtful accounts and returns........... $ 0 $ 10,600 $ (10,600) $ 0 $ 0
S-1 78 INDEX TO EXHIBITS
SEQUENTIALLY EXHIBIT NUMBERED NUMBER DESCRIPTION PAGE - ------ ------------------------------------------------------------------------- ------------ 1.0 Form of Underwriting Agreement(2)........................................ 3.1 Articles of Incorporation(1)............................................. 3.2 By-laws of the Company(1)................................................ 4.1 Form of Warrant Agreement March 1996(1).................................. 4.2 Form of Warrant Agreement May 1996(1).................................... 4.3 Form of Warrant Agreement February 1997(1)............................... 4.4 Form of Convertible Note March 1996 and related Security Agreement(1).... 4.5 Form of Convertible Note May 1996 and related Security Agreement(1)...... 4.6 Form of Convertible Note February 1997(1)................................ 4.7.1 Extensions relating to South Ferry #2, L.P. Indebtedness(2).............. 4.7.2 Extensions relating to Certain February 1996 Convertible Notes(2)........ 4.8 Restated Joe Cayre Agreement(1).......................................... 4.9 Agreement with AMAE Ventures, related note and Security Agreement(1)..... 4.10 Agreements re Total Recall Financing July 1996(1)........................ 4.11 Agreements re LoCoMoTioN Financing with South Ferry #2, L.P.(1).......... 4.12 1996 Employee Stock Option Plan(1)....................................... 4.13 1996 Directors Stock Option Plan(1)...................................... 4.14 Form of Consulting Agreement between H.J. Meyers & Co., Inc. and the Company(1)............................................................... 4.15 Specimen Certificate(1).................................................. 4.16 Form of Underwriter's Warrant(2)......................................... 5.1 Opinion and Consent of Kelly Lytton Mintz & Vann LLP(2).................. 10.1 Agreement with Mel Giniger(1)............................................ 10.2 Agreement with Beyond Distribution PTY. Limited(1)....................... 10.3 Interpublic Group of Companies Contract(1)............................... 10.4 Employment Agreement, dated as of January 1, 1997, between the Company and Drew Levin(3)........................................................ 10.5 Lease between the Company and TCW(1)..................................... 10.6 Agreement with Alliance Production Ltd. re Total Recall(2)............... 10.7 Interpublic -- Term Co-financing Agreement(1)............................ 10.8 Miramax Term Sheet(1).................................................... 10.9 Agreement with Leucadia Film Corp.(1).................................... 10.10 Agreements with the Family Channel re Quake and Down Fall(1)............. 10.11 Agreements with Discovery Communications, Inc., re Amazing Tails II(1)... 10.12 Employment Agreement, dated March 19, 1997, amended as of October 4, 1997, between the Company and Todd C. Jackson(3).........................
79
SEQUENTIALLY EXHIBIT NUMBERED NUMBER DESCRIPTION PAGE - ------ ------------------------------------------------------------------------- ------------ 10.13 Employment Agreement, dated as of January 20, 1997, amended as of October 4, 1997, between the Company and Paul Yamamoto(1)........................ 10.14 Consulting Agreement, dated October 9, 1997 between the Company and Joseph Cayre(1).......................................................... 11 Statement re: Computation of per share earnings(1)....................... 21 Subsidiaries of the Registrant(1)........................................ 23.1 Consent of experts and named counsel(2) (consent of Kelly Lytton Mintz & Vann LLP included in Exhibit 5.1)........................................ 23.2 Consent of Price Waterhouse LLP to disclosure re Prior Accountants(2) 23.3 Consent of Bruce P. Vann, Esq. (Nominated Director)(1)................... 23.4 Consent of Seth M. Willenson (Nominated Director)(1)..................... 24 Power of Attorney(1).....................................................
- --------------- * To be filed by Amendment. (1) Previously filed. (2) Filed herewith. (3) Previously filed documents being filed herewith with conformed signatures. EX-1.0 2 EXHIBIT 1.0 1 EXHIBIT 1.0 TEAM COMMUNICATIONS GROUP, INC. 12300 Wilshire Boulevard, Suite 400 Los Angeles, California 90025 UNDERWRITING AGREEMENT ________________, 1997 H.J. Meyers & Co., Inc. 1895 Mt. Hope Avenue Rochester, New York 14620 Ladies and Gentlemen: TEAM COMMUNICATIONS GROUP, INC., a California corporation (the "Company"), proposes to issue and sell pursuant to this Underwriting Agreement (the "Agreement"), an aggregate of 1,500,000 shares of Common Stock, no par value per share (the "Shares"), commencing on the effective date of the Registration Statement (the "Effective Date"). In addition, each of the Company and Mr. Joseph Cayre (the "Selling Shareholder") proposes to grant the option referred to in Section 2(b) to purchase all or any part of an aggregate of 225,000 additional Shares. The aggregate of 1,500,000 Shares, together with all or any part of the 225,000 Shares you have the option to purchase, are herein called the "Shares." The Common Stock of the Company to be outstanding after giving effect to the sale of the Shares (including the 225,000 Shares Underwriters have the option to purchase) is herein called the "Common Stock." You have advised the Company and the Selling Shareholder that you desire to purchase the Shares. The Company and the Selling Shareholder confirm the agreements made by each of them with respect to the purchase of the Shares by you, as follows: 1. Representations and Warranties of the Company and the Selling Shareholder. A. The Company represents and warrants to, and agrees with you that: (a) A registration statement (File No. 333-26307) on Form SB-2 relating to the public offering of the Shares, including a preliminary form of prospectus, copies of which have heretofore been delivered to you, has been prepared by the Company in conformity with the requirements of the Securities Act of 1933, as amended (the "Act"), and the rules and regulations (the "Rules and Regulations") of the Securities and Exchange Commission (the "Commission") thereunder, and has 1 2 been filed with the Commission under the Act. "Preliminary Prospectus" shall mean each prospectus filed pursuant to Rule 430 of the Rules and Regulations. The registration statement (including all financial schedules and exhibits) as amended at the time it becomes effective and the final prospectus included therein are respectively referred to as the "Registration Statement" and the "Prospectus," except that (i) if the prospectus first filed by the Company pursuant to Rule 424(b) or Rule 430A of the Rules and Regulations or otherwise utilized and not required to be so filed shall differ from said prospectus as then amended, the term "Prospectus" shall mean the prospectus first filed pursuant to Rule 424(b) or Rule 430A or so utilized from and after the date on which it shall have been filed or utilized, and (ii) if such registration statement or prospectus is amended or such prospectus is supplemented, after the effective date of such registration statement and prior to the Option Closing Date (as defined in Section 2(b)), the term "Registration Statement" shall include such registration statement as so amended, and the term "Prospectus" shall include the prospectus as so amended or supplemented, or both, as the case may be. (b) At the time the Registration Statement becomes effective and at all times subsequent thereto up to the Option Closing Date (hereinafter defined), (i) the Registration Statement and Prospectus will in all material respects conform to the requirements of the Act and the Rules and Regulations; and (ii) neither the Registration Statement nor the Prospectus will include any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein not misleading in light of the circumstances under which they were made; provided, however, that the Company makes no representations, warranties or agreements as to information contained in or omitted from the Registration Statement or Prospectus in reliance upon, and in conformity with, written information furnished to the Company by or on behalf of you specifically for use in the preparation thereof. It is understood that the statements set forth in the Prospectus with respect to stabilization, the material set forth under the heading "Underwriting" and the identity of counsel to you under the heading "Legal Matters" constitute the only information furnished in writing by you for inclusion in the Registration Statement and Prospectus, as the case may be. (c) The Company has been duly incorporated and is validly existing as a corporation in good standing under the laws of the jurisdiction of its incorporation, with full power and authority (corporate and other) to own its properties and conduct its business as described in the Prospectus and is duly qualified to do business as a foreign corporation and is in good standing in all other jurisdictions in which the nature of its business or the character or location of its properties requires such qualification, except where failure to so qualify is not reasonably likely to materially adversely affect the Company's business, properties or financial condition. (d) The authorized capital stock of the Company as of the Effective Date was as set forth under "Capitalization" in the Prospectus. The shares of issued and outstanding capital stock of the Company set forth thereunder have been duly authorized, validly issued and are fully paid and non-assessable; except as set forth in the Prospectus, as of the date specified in the Prospectus no options, warrants or other rights to purchase, agreements or other obligations to issue, or agreements or other rights to convert any obligation into, any shares of capital stock of the Company have been granted or entered into by the Company. The Shares and Underwriter's Warrant (as that term is 2 3 defined in Section 11 herein, the Underwriter's Warrant) conform in all material respects to all statements relating thereto contained in the Registration Statement and Prospectus. (e) The Shares are duly authorized and, when issued, delivered and paid for pursuant to this Agreement, will be duly authorized, validly issued, fully paid and non-assessable and free of preemptive rights of any security holder of the Company. The certificates evidencing the Shares are and will be in valid and proper legal form. The Underwriter's Warrant will be exercisable for shares of Common Stock of the Company in accordance with the terms of the Underwriter's Warrant and at the prices therein provided for. The shares of Common Stock have been duly authorized and reserved for issuance upon such exercise, and such shares, when issued upon such exercise in accordance with the terms of the Underwriter's Warrant and when the price is paid, shall be fully paid and non-assessable. Neither the filing of the Registration Statement nor the offering or sale of the Shares as contemplated in this Agreement gives rise to any rights, other than those which have been waived or satisfied, for or relating to the registration of any securities of the Company, except as described in the Registration Statement. (f) This Agreement and the Underwriter's Warrant have been duly and validly authorized, executed and delivered by the Company, and assuming due execution by the other party or parties hereto and thereto, constitute valid and binding obligations of the Company enforceable against the Company in accordance with their respective terms, except as rights to indemnity and contribution hereunder may be limited by applicable law and except as enforceability may be limited by bankruptcy, insolvency or other laws affecting the rights of creditors generally or by general equitable principles. The Company has full power and lawful authority to authorize, issue and sell the Shares to be sold by it hereunder on the terms and conditions set forth herein, and no consent, approval, authorization or other order of any governmental authority is required in connection with such authorization, execution and delivery or with the authorization, issue and sale of the Shares or the Underwriter's Warrant, except such as may be required under the Act or state securities laws. (g) Except as described in the Prospectus, the Company is not in material violation, breach or default of or under, and consummation of the transactions herein contemplated and the fulfillment of the terms of this Agreement and the Underwriter's Warrant will not conflict with, or result in a breach of, any of the terms or provisions of, or constitute a default under, or result in the creation or imposition of any lien, charge or encumbrance pursuant to the terms of, any indenture, mortgage, deed of trust, loan agreement or other agreement or instrument to which the Company is a party or by which the Company may be bound or to which any of the property or assets of the Company are subject, which would have a material adverse effect on the business, properties or financial condition of the Company, nor will such action result in any violation of the provisions of the articles of incorporation or the by-laws of the Company, as amended, or any statute or any order, rule or regulation applicable to the Company of any court or of any regulatory authority or other governmental body having jurisdiction over the Company, which would have a material adverse effect on the business, properties or financial condition of the Company. (h) The Company owns no real property and, subject to the qualifications stated in the Prospectus, the Company has good and marketable title to all properties and assets described in the Prospectus as owned by it, free and clear of all liens, charges, encumbrances or restrictions, 3 4 except such as are not materially significant or important in relation to its business; all of the leases and subleases under which the Company is the lessor or sublessor of properties or assets or under which the Company holds properties or assets as lessee or sublessee as described in the Prospectus are in full force and effect, and, except as described in the Prospectus, the Company is not in default in any respect with respect to any of the terms or provisions of any of such leases or subleases which would have a material adverse effect on the business, properties or financial condition of the Company, and no claim has been asserted by anyone adverse to rights of the Company as lessor, sublessor, lessee or sublessee under any of the leases or subleases mentioned above, or affecting or questioning the right of the Company to continued possession of the leased or subleased premises or assets under any such lease or sublease except as described or referred to in the Prospectus, which would have a material adverse effect on the business properties or financial condition of the Company; and the Company owns or leases all such properties described in the Prospectus as are necessary to its operations as now conducted and, except as otherwise stated in the Prospectus, as proposed to be conducted as set forth in the Prospectus. (i) Each of Price Waterhouse LLP and Stonefield Josephson, Inc., who have given their respective reports on certain financial statements filed and to be filed with the Commission as a part of the Registration Statement, which are included in the Prospectus, are with respect to the Company independent public accountants as required by the Act and the Rules and Regulations. (j) The financial statements and schedules, together with related notes, set forth in the Prospectus or the Registration Statement present fairly the financial position and results of operations and changes in financial position of the Company on the basis stated in the Registration Statement, at the respective dates and for the respective periods to which they apply. Said statements and schedules and related notes have been prepared in accordance with generally accepted accounting principles applied on a basis which is consistent during the periods involved, [provided, however, that the quarterly statements do not contain all notes to such statements as are required under such principles and such statements do not contain normal year end adjustments]. (k) Subsequent to the respective dates as of which information is given in the Registration Statement and Prospectus, the Company has not incurred any liabilities or obligations, direct or contingent, not in the ordinary course of business, or entered into any transaction not in the ordinary course of business, which is material to the business of the Company, and there has not been any change in the capital stock of, or any incurrence of long-term debt by, the Company or any issuance of options, warrants or other rights to purchase the capital stock of the Company or any adverse change or any development involving, so far as the Company can now reasonably foresee, a prospective adverse change in the condition (financial or other), net worth, results of operations, business, key personnel or properties of it which would be material to the business or financial condition of the Company, and the Company has not become party to, and neither the business nor the property of the Company has become the subject of, any material litigation whether or not in the ordinary course of business. (l) Except as set forth in the Prospectus, there is not now pending nor, to the knowledge of the Company, threatened, any action, suit or proceeding (including those related to 4 5 environmental matters or discrimination on the basis of age, sex, religion or race) to which the Company is a party before or by any court or governmental agency or body, which, if adversely determined, would result in any material adverse change in the condition (financial or otherwise), business prospects, net worth or properties of the Company; and, except as set forth in the Prospectus, no labor disputes involving the employees of the Company exist which, if adversely determined, would result in any material adverse change in the condition (financial or otherwise), business prospects, net worth or property of the Company. (m) Except as disclosed in the Prospectus, the Company has filed all necessary federal, state and foreign income and franchise tax returns and has paid all taxes shown as due thereon; and there is no tax deficiency which has been or to the knowledge of the Company might be asserted against the Company which has not been adequately reserved for on the Company's balance sheet. (n) The Company has sufficient licenses, permits and other governmental authorizations currently required for the conduct of its business or the ownership of its property as described in the Prospectus and is in all material respects complying therewith and owns or possesses adequate rights to use all material patents, patent applications, trademarks, mark registrations, copyrights and licenses necessary for the conduct of such business and has not received any notice of conflict with the asserted rights of others in respect thereof. To the best knowledge of the Company, none of the activities or business of the Company is in violation of, or causes the Company to violate, any law, rule, regulation or order of the United States, any state, county or locality, or of any agency or locality, the violation of which would have a material adverse effect upon the condition (financial or otherwise), business prospects, net worth or properties of the Company. (o) The Company has not, directly or indirectly, at any time (i) made any contributions to any candidate for foreign political office, or if made, failed to disclose fully any such contribution made in violation of law, or (ii) made any payment to any state, federal or foreign governmental officer or official, or other person charged with similar public or quasi-public duties, other than payments or contributions required or allowed by applicable law. The Company's internal accounting controls and procedures are sufficient to cause the Company to comply in all material respects with the Foreign Corrupt Practices Act of 1977, as amended. (p) On the Closing Dates (as defined in Section 2(c)), all transfer or other taxes (including franchise, capital stock or other tax, other than income taxes imposed by any jurisdiction), if any, which are required to be paid in connection with the sale and transfer of the Shares to you hereunder will have been fully paid or provided for by the Company or the Selling Shareholder, as applicable and all laws imposing such taxes will have been fully complied with. (q) All contracts and other documents of the Company which are, under the Rules and Regulations, required to be filed as exhibits to the Registration Statement have been so filed. (r) The Company has not taken and will not take, directly or indirectly, any action designed to cause or result in, or which has constituted or which might reasonably be expected to 5 6 constitute, the stabilization or manipulation of the price of the Shares or to facilitate the sale or resale of the Shares. (s) The Company has no subsidiaries. (t) Except for this Agreement and other agreements with you, the Company has not entered into any agreement pursuant to which any person is entitled either directly or indirectly to compensation from the Company for services as a finder in connection with the proposed public offering. (u) The Shares have been approved for listing on the Nasdaq SmallCap Market. (v) The Company is not, and upon consummation of the transactions contemplated hereby will not be, subject to registration as an "investment company" under the Investment Company Act of 1940. (w) The Company (i) is in compliance with any and all applicable foreign, federal, state and local laws and regulations relating to the protection of human health and safety, the environment or hazardous or toxic substances or wastes, pollutants or contaminants ("Environmental Laws"), (ii) has received all permits, licenses or other approvals required of it under applicable Environmental Laws to conduct its respective business and (iii) is in compliance with all terms and conditions of any such permit, license or approval, except where such noncompliance, failure to receive required permits, licenses or other approvals or failure to comply with the terms and conditions of such permits, licenses or approvals will not in the aggregate have a material adverse effect on the Company. (x) Each employee benefit plan, within the meaning of Section 3(3) of the Employee Retirement Income Security Act of 1974, as amended ("ERISA"), that is maintained, administered or contributed to by the Company for employees or former employees of the Company has been maintained in compliance with its respective terms and the requirements of any applicable statutes, orders, rules and regulations, including but not limited to ERISA and the Internal Revenue Code of 1986, as amended (the "Code"). No prohibited transaction, within the meaning of Section 406 of ERISA or Section 4975 of the Code, has occurred with respect to any such plan, excluding transactions effected pursuant to a statutory or administrative exemption. For each such plan that is subject to the funding rules of Section 412 of the Code or Section 302 of ERISA, no "accumulated funding deficiency," as defined in Section 412 of the Code, has been incurred, whether or not waived, and the fair market value of the assets of each such plan (excluding for these purposes accrued but unpaid contributions) exceeded the present value of all benefits accrued under such plan determined using reasonable actuarial assumptions. (y) The Company maintains a system of internal accounting controls that, taken as a whole, are sufficient to provide reasonable assurance that (i) transactions are executed in accordance with management's general or specific authorizations; (ii) transactions are recorded as necessary to permit preparation of financial statements in conformity with generally accepted accounting principles and to maintain asset accountability; (iii) access to assets is permitted only in 6 7 accordance with management's general or specific authorization; and (iv) the recorded accountability for assets is compared with the existing assets at reasonable intervals and appropriate action is taken with respect to any differences. (z) The Company maintains insurance of the types and in the amounts generally deemed adequate for its respective business, including, without limitation, insurance covering real and personal property owned or leased by it against theft, damage, destruction, acts of vandalism and all other material risks customarily insured against, all of which insurance is in full force and effect. The Company has no reason to believe that it will not be able to renew existing insurance coverage as and when such coverage expires or to obtain similar coverage from similar insurers as may be necessary to continue its respective business. B. Representations and Warranties of the Selling Shareholder. (a) The Selling Shareholder is the lawful owner of the Shares of Common Stock to be sold by him pursuant to this Agreement and has, and on the Option Closing Date will have, good and clear title to such Shares, free of all restrictions on transfer, liens, encumbrances, security interests and claims whatsoever. (b) Upon delivery of and payment for such Shares pursuant to this Agreement, good and clear title to such Shares will pass to you, free of all restrictions on transfer, liens, encumbrances, security interests and claims whatsoever. (c) The Selling Shareholder has, and on the Option Closing Date will have, full legal right, power and authority to enter into this Agreement and the Custody Agreement between the Selling Shareholder and U.S. Stock Transfer Corporation, Custodian (the "Custody Agreement") and to sell, assign, transfer and deliver such Shares in the manner provided herein and therein, and this Agreement and the Custody Agreement have been duly authorized, executed and delivered by or on behalf of such Selling Shareholder and each of this Agreement and the Custody Agreement is a valid and binding agreement of the Selling Shareholder enforceable against the Selling Shareholder in accordance with its terms, except as rights to indemnity and contribution hereunder may be limited by applicable law and except as the enforcement thereof may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or other similar laws relating to or affecting creditors' rights generally or by general equitable principles. (d) All information furnished by or on behalf of the Selling Shareholder relating to the Selling Shareholder and the Selling Shareholder's Shares that is set forth in the Registration Statement and the Prospectus is, and at the time the Registration Statement became or becomes, as the case may be, effective and at all times subsequent thereto up to and on the Option Closing Date (hereinafter defined) was or will be, true, correct and complete, and does not, and at the time the Registration Statement became or becomes, as the case may be, effective and at all times subsequent thereto up to and on the Option Closing Date, will not, contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make such information not misleading. 7 8 (e) Neither the Selling Shareholder nor any of the Selling Shareholder's affiliates directly, or indirectly through one or more intermediaries, controls, or is controlled by, or is under common control with, or had any other association with (within the meaning of Article I of the Bylaws of the National Association of Securities Dealers, Inc. (the "NASD")), any member firm of the NASD. (f) This Agreement has been duly and validly authorized, executed and delivered by the Selling Shareholder, and assuming due execution by the other party or parties hereto and thereto, constitutes valid and binding obligations of the Selling Shareholder enforceable against the Selling Shareholder in accordance with their respective terms, except as rights to indemnity and contribution hereunder may be limited by applicable law and except as enforceability may be limited by bankruptcy, insolvency or other laws affecting the rights of creditors generally or by general equitable principles. The Selling Shareholder has full power and lawful authority to authorize, issue and sell the Securities to be sold by it hereunder on the terms and conditions set forth herein, and no consent, approval, authorization or other order of any governmental authority is required in connection with such authorization, execution and delivery or with the authorization, issue and sale of the Shares, except such as may be required under the Act or state securities laws. (g) Except as described in the Prospectus, the Selling Shareholder is not in material violation, breach or default of or under, and consummation of the transactions herein contemplated and the fulfillment of the terms of this Agreement, will not conflict with, or result in a breach of, any of the terms or provisions of, or constitute a default under, or result in the creation or imposition of any lien, charge or encumbrance pursuant to the terms of, any indenture, mortgage, deed of trust, loan agreement or other agreement or instrument to which the Selling Shareholder is a party or by which the Selling Shareholder may be bound or to which any of the property or assets of the Selling Shareholder are subject, which would have a material adverse effect on the business, properties or financial condition of the Selling Shareholder, nor will such action result in any violation of any statute or any order, rule or regulation applicable to the Selling Shareholder of any court or of any regulatory authority or other governmental body having jurisdiction over the Selling Shareholder, which would have a material adverse effect on the business, properties or financial condition of the Selling Shareholder. (h) The Selling Shareholder has not taken and will not take, directly or indirectly, any action designed to cause or result in, or which has constituted or which might reasonably be expected to constitute, the stabilization or manipulation of the price of the Shares or to facilitate the sale or resale of the Shares. (i) The Selling Shareholder has not entered into any agreement pursuant to which any person is entitled either directly or indirectly to compensation from the Company for services as a finder in connection with the proposed public offering. 2. Purchase, Delivery and Sale of the Shares. (a) Subject to the terms and conditions of this Agreement, and upon the basis of the representations, warranties and agreements herein contained, the Company agrees to issue and 8 9 sell to you, and you agree to buy from the Company at $_____ per Share at the place and time hereinafter specified, the number of Shares set forth opposite your name in Schedule I hereto (the "Firm Shares"). Delivery of the Firm Shares against payment therefor shall take place at the offices of H.J. Meyers & Co., Inc., 1895 Mt. Hope Avenue, Rochester, New York 14620 (or at such other place as may be designated by agreement between you and the Company) at ________a.m. New York time on _____________, 1997, or at such other time and date, not later than ten (10) business days thereafter, as you may designate, such time and date of payment and delivery for the Firm Shares being herein called the "First Closing Date." Time shall be of the essence and delivery at the time and place specified in this subsection (a) is a further condition to your obligations hereunder. (b) In addition, subject to the terms and conditions of this Agreement, and upon the basis of the representations, warranties and agreements herein contained, the Company and the Selling Shareholder hereby grant you an option to purchase all or any part of an aggregate of 225,000 additional Shares at the same price per Share as you shall pay for the Shares being sold pursuant to the provisions of subsection (a) of this Section 2 (such additional Shares being referred to herein as the "Option Shares"). This option may be exercised on one occasion within thirty (30) business days after the Effective Date upon notice by you to the Company and the Selling Shareholder advising each of them as to the amount of Option Shares as to which the option is being exercised, the names and denominations in which the certificates for such Option Shares are to be registered and the time and date when such certificates are to be delivered. Such time and date shall be determined by you but shall not be earlier than four and not later than 10 full business days after the exercise of said option, nor in any event prior to the First Closing Date (although if such option is exercised within one day after the Effective Date, the closing of the option shall occur on the First Closing Date), and such time and date is referred to herein as the "Option Closing Date." Delivery of the Option Shares against payment therefor shall take place at the offices of H.J. Meyers & Co., Inc., 1895 Mt. Hope Avenue, Rochester, New York 14620. Time shall be of the essence and delivery at the time and place specified in this subsection (b) is a further condition to your obligations hereunder. The Option granted hereunder may be exercised only to cover over-allotments in the sale by you of Firm Shares referred to in subsection (a) above. (c) The Company and the Selling Shareholder, as applicable, will make the certificates for the Shares to be purchased by you hereunder available to you for checking at least one full business day prior to the First Closing Date or the Option Closing Date (which are collectively referred to herein as the "Closing Dates" and individually as a "Closing Date"), as the case may be. The certificates shall be in such names and denominations as you may request, at least two full business days prior to the relevant Closing Dates. Time shall be of the essence and the availability of the certificates at the time and place specified in this Agreement is a further condition to your obligations. 9 10 Definitive engraved certificates in negotiable form for the Shares to be purchased by you hereunder will be delivered by the Company and the Selling Shareholder, as applicable, to you for your account against payment of the purchase price by you, at your option, by certified or bank cashier's checks in New York Clearing House funds or by wire transfer, payable to the order of the Company. In addition, in the event you exercise the option to purchase from the Company and the Selling Shareholder all or any portion of the Option Shares pursuant to the provisions of subsection (b) above, payment for such Option Shares shall be made to or upon the order of the Company and the Selling Shareholder by you, at your option, by certified or bank cashier's checks payable in New York Clearing House funds or by wire transfer, at the offices of H.J. Meyers & Co., Inc. at the time and date of delivery of such Option Shares as required by the provisions of subsection (b) above, against receipt of the certificates for such Option Shares by you, registered in such names and in such denominations as you may request. It is understood that you propose to offer the Shares to be purchased hereunder to the public upon the terms and conditions set forth in the Registration Statement, after the Registration Statement becomes effective. 3. Covenants of the Company. The Company covenants and agrees with you that: (a) The Company will use its best efforts to cause the Registration Statement to become effective and, upon notification from the Commission that the Registration Statement has become effective, will so advise you and will not at any time, whether before or after the Effective Date, file any amendment to the Registration Statement or supplement to the Prospectus of which you shall not previously have been advised and furnished with a copy or to which you or your counsel shall have reasonably objected in writing or which is not in compliance with the Act and the Rules and Regulations. At any time prior to the later of (A) the completion by you of the distribution of the Shares contemplated hereby (but in no event more than nine (9) months after the Effective Date) and (B) twenty-five (25) days after the Effective Date, the Company will prepare and file with the Commission, promptly upon your request, any amendments or supplements to the Registration Statement or Prospectus which, in your reasonable opinion, may be necessary or advisable in connection with the distribution of the Shares. Promptly after you or the Company is advised thereof, you will advise the Company or the Company will advise you, as the case may be, and confirm the advice in writing, of the receipt of any comments of the Commission, of the effectiveness of any post-effective amendment to the Registration Statement, of the filing of any supplement to the Prospectus or any amended Prospectus, of any request made by the Commission for amendment of the Registration Statement or for supplementing of the Prospectus or for additional information with respect thereto, of the issuance by the Commission or any state or regulatory body of any stop orders or other order suspending the effectiveness of the Registration Statement or any order preventing or suspending the use of any preliminary prospectus or the Prospectus, or of the suspension of the qualification of 10 11 the Shares for offering in any jurisdiction, or the institution of any proceedings for any of such purposes, and will use its best efforts to prevent the issuance of any such order and, if issued, to obtain as soon as possible the lifting thereof. The Company has caused to be delivered to you copies of each Preliminary Prospectus, and the Company has consented and hereby consents to the use of such copies for the purposes permitted by the Act. The Company authorizes you and selected dealers to use the Prospectus in connection with the sale of the Shares for such period not to exceed nine months from the Effective Date as in the reasonable opinion of counsel for you the use thereof is required to comply with the applicable provisions of the Act and the Rules and Regulations. In case of the happening, at any time within such period as a Prospectus is required under the Act to be delivered in connection with sales by an underwriter or dealer, of any event of which the Company has knowledge and which materially affects the Company or the Shares, or which in the opinion of counsel for the Company or counsel for you should be set forth in an amendment to the Registration Statement or a supplement to the Prospectus in order to make the statements therein not then misleading, in light of the circumstances existing at the time the Prospectus is required to be delivered to a purchaser of the Shares, or in case it shall be necessary to amend or supplement the Prospectus to comply with the Act or with the Rules and Regulations, the Company will notify you promptly and forthwith prepare and furnish to you copies of such amended Prospectus or of such supplement to be attached to the Prospectus, in such quantities as you may reasonably request, in order that the Prospectus, as so amended or supplemented, will not contain any untrue statement of a material fact or omit to state any material facts necessary in order to make the statements in the Prospectus, in the light of the circumstances under which they are made, not misleading. The preparation and furnishing of any such amendment or supplement to the Registration Statement or amended Prospectus or supplement to be attached to the Prospectus shall be without expense to the Underwriters, except that in case you are required, in connection with the sale of the Shares, to deliver a Prospectus nine (9) months or more after the Effective Date, the Company will upon request of and at your expense, amend or supplement the Registration Statement and Prospectus and furnish you with reasonable quantities of prospectuses complying with Section 10(a)(3) of the Act. (b) The Company will comply with the Act, the Rules and Regulations and the Securities Exchange Act of 1934, as amended (the "Exchange Act") and the rules and regulations thereunder in connection with the offering and issuance of the Shares. The Company will use its best efforts to qualify or register the Shares for sale under the securities or "blue sky" laws of such jurisdictions as you may have designated in writing prior to the execution hereof and will make such applications and furnish such information to counsel for you as may be required for that purpose and to comply with such laws, provided that the Company shall not be required to qualify as a foreign corporation or a dealer in securities or to execute a general consent to service process in any jurisdiction. The Company will, from time to time, prepare and file such statements and reports as are or may be required to continue such qualification in effect for so long a period as you may reasonably request. Legal fees for such qualifications shall be itemized based on the time expended and costs incurred, shall be reasonable and shall not in any event exceed $35,000.00, exclusive of filing fees (unless otherwise agreed). You shall supply copies of all applications for the registration of Shares and related documents 11 12 (except for the Registration Statement and Prospectus) filed with the various states to the Company's counsel, concurrently with their transmission to the various states, and copies of all comments and orders received from the various states shall be supplied to the Company's counsel. You have advised counsel for the Company in writing of all states wherein the Offering has been registered for sale, canceled, withdrawn or denied. (c) The Company will instruct its transfer agent to provide you with copies of the Depository Trust Company stock transfer sheets on a weekly basis for a period of six (6) weeks from the First Closing Date and on a monthly basis thereafter for six (6) additional months. (d) The Company will use its best efforts to cause a Registration Statement under the Exchange Act to be declared effective on the Effective Date. (e) For so long as the Company is a reporting company under either Section 12(g), 13 or 15(d) of the Exchange Act, the Company, at its expense, will furnish to its shareholders an annual report (including financial statements audited by independent public accountants), in reasonable detail and at its expense, will furnish to you during the period ending five (5) years from the date hereof, (i) as soon as practicable after the end of each fiscal year, a balance sheet of the Company and any subsidiaries as at the end of such fiscal year, together with statements of income, shareholders equity and cash flows of the Company and any subsidiaries as at the end of such fiscal year, all in reasonable detail and accompanied by a copy of the certificate or report thereon of independent accountants; (ii) as soon as they are available, a copy of all reports (financial or other) mailed to security holders; (iii) as soon as they are available, a copy of all non-confidential reports and financial statements furnished to or filed with the Commission; and (iv) such other information of a public nature as you may from time to time reasonably request. (f) In the event the Company has an active subsidiary or subsidiaries, such financial statements referred to in subsection (e) above will be on a consolidated basis to the extent the accounts of the Company and its subsidiary or subsidiaries are consolidated in reports furnished to its shareholders generally. (g) The Company will deliver to you at or before the First Closing Date one signed copy of the Registration Statement including all financial statements and exhibits filed therewith, and of all amendments thereto. The Company will deliver to or upon your order, from time to time until the Effective Date as many copies of any Preliminary Prospectus filed with the Commission prior to the Effective Date as the Underwriters may reasonably request. The Company will deliver to you on the Effective Date and thereafter for so long as a Prospectus is required to be delivered under the Act, from time to time, as many copies of the Prospectus, in final form, or as thereafter amended or supplemented, as you may from time to time reasonably request. (h) The Company will make generally available to its security holders and deliver to you as soon as it is practicable to do so, but in no event later than ninety (90) days after the end of twelve (12) months after its current fiscal quarter, an earnings statement (which need not be audited) covering a period of at least twelve (12) consecutive months beginning after the Effective Date which shall satisfy the requirements of Section 11(a) of the Act. 12 13 (i) The Company will apply the net proceeds from the sale of the Shares substantially for the purposes set forth under "Use of Proceeds" in the Prospectus, and will file such reports with the Commission with respect to the sale of the Shares and the application of the proceeds therefrom as may be required pursuant to Rule 463 of the Rules and Regulations. (j) The Company will, promptly upon your request, prepare and file with the Commission any amendments or supplements to the Registration Statement, Preliminary Prospectus or Prospectus and take any other action, which in the opinion of Freshman, Marantz, Orlanski, Cooper & Klein, counsel to you, may be reasonably necessary or advisable in connection with the distribution of the Shares and will use its best efforts to cause the same to become effective as promptly as possible. (k) Prior to the Effective Date, the Company will use its best efforts to cause the Selling Shareholder and the shareholders holding the Registered Warrant Shares (as defined in the Prospectus) and the Restricted Shares and Warrant Shares (as each is defined in the Prospectus) to enter into a written agreement with you, which, among other things, shall provide that for a period of 12 and 18 months, respectively, following the closing date of the Offering, such shareholders will not sell, assign, hypothecate or pledge any of the shares of Common Stock of the Company owned by them on the Effective Date, or subsequently acquired by the exercise of any options or warrants or conversion of any convertible security of the Company held by them on the Effective Date directly or indirectly, except with your prior written consent and such shareholders will permit all certificates evidencing those shares to be stamped with an appropriate restrictive legend, and the Company will cause the transfer agent for the Company to note such restrictions on the transfer books and records of the Company. (l) The Company shall, upon the initial filing of the Registration Statement, make all filings required to obtain approval for the quotation of the Shares on the Nasdaq SmallCap Market and will use its best efforts to effect and maintain the aforesaid approval for at least five (5) years from the date of this Agreement. Within ten (10) business days after the Effective Date, the Company shall cause the Company to be listed in the Standard & Poor's Corporate Records and cause such listing to be maintained for five years from the date of this Agreement. The Company will use its best efforts to cause the Shares to be accepted for listing upon the Pacific Stock Exchange and/or other exchange acceptable to you, prior to the Effective Date. In the event that listing cannot take place prior to the Effective Date the Company agrees to cause such listing to occur as soon as practicable after the Closing Date. (m) The Company represents that it has not taken, and agrees that it will not take, directly or indirectly, any action designed to or which has constituted or which might reasonably be expected to cause or result in the stabilization or manipulation of the price of the Shares or to facilitate the sale or resale the Shares. (n) During the period of the offering, and for a period of twelve (12) months from the Effective Date, the Company will not sell or otherwise dispose of any securities of the Company without your prior written consent, which consent shall not be unreasonably withheld, except for shares of Common Stock issuable upon exercise of options or warrants or conversion of convertible 13 14 securities outstanding on the Effective Date. For a period of twenty-four (24) months from the Effective Date, the Company will not issue, sell or otherwise dispose of any securities of the Company pursuant to Regulation S or Regulation D under the Act without your prior written consent. (o) During the five (5) year period after the First Closing Date, you shall be given the right to purchase for your own account or sell for the account of the Company's officers, directors, and principal shareholders (any person holding five percent (5%) or more of the Company's voting securities). any securities sold pursuant to Rule 144 under the Act. (p) Prior to the Effective Date, the Company shall retain a public relations firm acceptable to you, and shall continue to retain such firm, or any alternate firm acceptable to you, for a minimum period of two (2) years. (q) The Company will reserve and keep available that maximum number of its authorized but unissued securities which are issuable upon exercise of the Underwriter's Warrant outstanding from time to time. (r) The Company shall deliver to you, at the Company's expense, three (3) bound volumes in form and content reasonably acceptable to you, containing the Registration Statement and all exhibits filed therewith, and all amendments thereto, and all other material correspondence, filings, certificates and other documents filed and/or delivered in connection with this offering. The Company shall use its best efforts to deliver such volumes with one hundred eighty (180) days of the First Closing Date. (s) For a period of twenty-four (24) months from the closing of the offering, you shall have the right to designate an observer to the Board of Directors provided that the designee is acceptable to the Company. If notified by you of its election to designate said member, the Company will cause such election to occur within thirty (30) days of the date of election. If you request said inclusion of designee, this request shall be satisfied by a resolution of the Board of Directors of the Company increasing the authorized number of directors to accommodate the designee and then electing such designee to fill the newly-created vacancy. In addition, the Company shall cause such designee to be on the slate of directors presented to the Company's shareholders for election at any annual or special meeting of shareholders where directors of the Company are elected and the Company shall cause such designee to be included in any of their respective proxy material prepared for use at such meeting. Such members shall be entitled to the same compensation, reimbursements and indemnification as other members of the Company's Board of Directors. In the event that the Company is unable to obtain the Directors' and Officers' Liability Insurance described in subparagraph (v) below, you shall have the right for such forty-eight (48) month period to designate a consultant to the Board of Directors of the Company, which consultant shall have the right to attend all Board and Board committee meetings and shall be compensated on the same basis as outside members of the Board. The Company shall hold at least four (4) meetings per year. (t) The Company shall deliver to you an executed financial consulting agreement in form and substance acceptable to you whereby you agree to act as a financial consultant for a 14 15 period of twelve (12) months from the effective date for a non-refundable fee of $6,000 per month payable on a monthly basis. The entire one year fee shall be paid to you by the Company on the Closing Date. (u) The Company shall have acquired reasonable amount of Director and Officer Liability Insurance (provided that such insurance can be obtained at a reasonable cost as determined by the Company and you) from a responsible insurer, all satisfactory you. 4. Conditions of Obligations of H.J. Meyers & Co., Inc. Your obligations to purchase and pay for the Shares which you have agreed to purchase hereunder are subject to the accuracy (as of the date hereof, and as of the Closing Dates) of and compliance with the representations and warranties of the Company herein, to the performance by the Company of its obligations hereunder, and to the following conditions: (a) The Registration Statement shall have become effective and you shall have received notice thereof not later than 10:00 a.m., New York time, on the date of this Agreement, or at such later time or on such later date as to which you may agree in writing; on the Closing Dates, no stop order suspending the effectiveness of the Registration Statement shall have been issued and no proceedings for that or any similar purpose shall have been instituted or shall be pending or, to your knowledge or to the knowledge of the Company, shall be contemplated by the Commission; any request on the part of the Commission for additional information shall have been complied with to the reasonable satisfaction of Freshman, Marantz, Orlanski, Cooper & Klein, counsel to you; and no stop order shall be in effect denying or suspending effectiveness of the Registration Statement nor shall any stop order proceedings with respect thereto be instituted or pending or threatened under the Act. (b) At the First Closing Date, you shall have received the opinion, dated as of the First Closing Date, of Kelly Lytton Mintz & Vann LLP, counsel for the Company, in form and substance reasonably satisfactory to counsel for you, to the effect that: (i) The Company has been duly incorporated and is validly existing as a corporation in good standing under the laws of the State of California and is duly qualified or licensed to do business as a foreign corporation in good standing in each other jurisdiction in which the ownership or leasing of its properties or the conduct of its business requires such qualification, except where failure to so qualify will not have a material adverse effect on the business, properties or financial condition of the Company. The Company has the corporate power to own, lease and operate its properties and to conduct its business as described in the Prospectus and to enter into and perform its obligations under this Agreement and the Underwriter's Warrant; (ii) The authorized capitalization of the Company as of the date of the Prospectus was as set forth in the Prospectus; all of the shares of the Company's outstanding stock requiring authorization for issuance by the Company's Board of Directors have been duly authorized and validly issued, are fully paid and non-assessable and conform to the 15 16 description thereof contained in the Prospectus; the outstanding shares of Common Stock of the Company, to such counsel's knowledge, have not been issued in violation of the preemptive rights of any shareholder and the shareholders of the Company do not have any preemptive rights or other rights to subscribe for or to purchase the Shares; except for the transfer restrictions regarding "affiliates" contained in Rule 144 promulgated under the Act, there are no restrictions upon the voting or transfer of any of the Shares; the Common Stock and the Underwriter's Warrant conform in all material respects to the respective descriptions thereof contained in the Prospectus; the Shares to be issued as contemplated in the Registration Statement and this Agreement have been duly authorized and, when paid for in accordance with the terms of the Agreement, will be validly issued, fully paid and non-assessable and free of preemptive rights contained in the Company's certificate or articles of incorporation or By-laws, or any other document, instrument or agreement known to counsel; a sufficient number of shares of Common Stock has been reserved for issuance upon exercise of the Underwriter's Warrant; to such counsel's knowledge, neither the filing of the Registration Statement nor the offering or sale of the Shares as contemplated by this Agreement gives rise to any registration rights or other rights, other than those contemplated by the Underwriter's Warrant or described in the prospectus or which have been waived or satisfied, for or relating to the registration of the Shares; (iii) This Agreement and the Underwriter's Warrant (sometimes hereinafter collectively referred to as the "Underwriter Agreements") have been duly and validly authorized, executed and delivered by the Company, and assuming due execution and delivery of this Agreement by you, such agreements are, or when duly executed will be, the valid and legally binding obligations of the Company except as enforceability may be limited by bankruptcy, insolvency, moratorium or other laws affecting the rights of creditors, or by general equitable principles; provided that no opinion need be expressed as to the enforceability of the indemnity provisions contained in Section 6 or the contribution provisions contained in Section 7 of this Agreement; (iv) The certificates evidencing the Shares are in valid and proper legal form; the Underwriter's Warrant will be exercisable for shares of Common Stock of the Company in accordance with the terms of the Underwriter's Warrant and at the prices therein provided for; the shares of Common Stock of the Company issuable upon exercise of the Underwriter's Warrant have been duly authorized and reserved for issuance upon such exercise, and such shares, when issued upon such exercise in accordance with the terms of the Underwriter's Warrant and when the price is paid shall be fully paid and non-assessable; (v) Such counsel knows of no pending or threatened legal or governmental proceedings to which the Company is a party which are required to be described or referred to in the Registration Statement which are not so described or referred to; (vi) The execution and delivery of this Agreement and the Underwriter's Warrant and the incurrence of the obligations herein and therein set forth and the consummation of the transactions herein or therein contemplated will not result in a violation 16 17 of, or constitute a default under, the articles of incorporation or by-laws of the Company, or in a violation of or default under any obligation, agreement, covenant or condition contained in any material bond, debenture, note or other evidence of indebtedness or in any of the material contracts, indentures, mortgages, loan agreements, leases, joint ventures or other agreements or instruments to which the Company is a party that are filed as Exhibits to the Registration Statement or otherwise known to counsel; (vii) The Registration Statement has become effective under the Act, and to such counsels knowledge, no stop order suspending the effectiveness of the Registration Statement is in effect, no proceedings for that purpose have been instituted or are pending before, or threatened by, the Commission and the Registration Statement and the Prospectus (except, in the case of both the Registration Statement and any Amendment thereto, and the Prospectus and any supplement thereto for the financial statements and notes and schedules thereto, and other financial information or statistical data contained therein, or omitted therefrom, as to which such counsel need express no opinion) comply as to form in all material respects with the applicable requirements of the Act and the Rules and Regulations; (viii) All descriptions in the Registration Statement and the Prospectus, and any amendment or supplement thereto, of contracts, plans, options and other documents are accurate and fairly present the information required to be shown, and such counsel is familiar with all contracts and other documents referred to in the Registration Statement and the Prospectus and any such amendment or supplement, or filed as exhibits to the Registration Statement, and such counsel does not know of any contracts or documents of a character required to be summarized or described therein or to be filed as exhibits thereto which are not so summarized, described or filed; (ix) No authorization, approval, consent or license of any governmental or regulatory authority or agency is necessary in connection with the authorization, issuance, transfer, sale or delivery of the Shares by the Company, in connection with the execution, delivery and performance of this Agreement or the Underwriter's Warrant by the Company or in connection with the taking of any action contemplated herein or therein, or the issuance of the Underwriter's Warrant or the Shares underlying the Underwriter's Warrant, other than registration or qualification of the Shares under applicable state or foreign securities or blue sky laws (as to which such counsel need express no opinion) and registration under the Act; (x) The statements in the Registration Statement under the caption "Description of Capital Securities," to the extent that such statements constitute a matter of law or legal conclusion have been reviewed by such counsel and are correct in all material respects; (xi) The Shares have been approved for listing on the Nasdaq SmallCap Market; (xii) The Company is not, and after receipt of payment for the Shares will not be an "investment company" within the meaning of Investment Company Act; 17 18 (xiii) Except as disclosed in the Prospectus under the caption "Shares Eligible for Future Sale," to the best knowledge of such counsel, there are no persons with registration or other similar rights to have any equity or debt securities registered for sale under the Registration Statement or included in the offering contemplated by this Agreement; and (xiv) The Company is not in violation of its articles or by-laws or any law, administrative regulation or administrative or court decree applicable to the Company or is in default in the performance and observance of any obligation, agreement, covenant or condition contained in any material existing instrument, except in each such case for such violations or defaults as would not, individually or in the aggregate, result in a material adverse change in the financial condition or results of operations of the Company. Such counsel has participated in the preparation of the Registration Statement and the Prospectus and although such counsel has not reviewed the accuracy or completeness of the statements contained in the Registration Statement or Prospectus nothing has come to the attention of such counsel that caused such counsel to have reason to believe that the Registration Statement or any amendment thereto at the time it became effective contained any untrue statement of a material fact or omitted to state any material fact required to be stated therein or necessary to make the statements therein not misleading or that the Prospectus or any supplement thereto contains any untrue statement of a material fact or omits to state a material fact necessary in order to make statements therein in light of the circumstances under which they were made not misleading (except, in the case of both the Registration Statement and any amendment thereto and the Prospectus and any supplement thereto, for the financial statements, notes and schedules thereto and other financial information and statistical data contained therein, as to which such counsel need express no opinion); In rendering such opinion, such counsel may rely upon certificates of any officer of the Company or public officials as to matters of fact; and in rendering such opinion may either (i) rely as to all matters of law other than the law of the United States or of the State of California upon opinions of counsel satisfactory to you, in which case the opinion shall state that they have no reason to believe that you and they are not entitled to so rely or (ii) assume that the laws of any state other than the State of California are identical to the laws of the State of California, in rendering such opinion. (c) All corporate proceedings and other legal matters relating to this Agreement, the Registration Statement, the Prospectus, and other related matters shall be reasonably satisfactory to or approved by Freshman, Marantz, Orlanski, Cooper Klein, counsel to you, and you shall have received from such counsel a signed opinion, dated as of the First Closing Date, with respect to the validity of the issuance of the Shares, the form of the Registration Statement and Prospectus (other than the financial statements and other financial data contained therein), the execution of this Agreement and other related matters as you may reasonably require. The Company shall have furnished to counsel for you such documents as they may reasonably request for the purpose of enabling them to render such opinion. 18 19 (d) You shall have received letters on and as of the Effective Date and again on and as of the First Closing Date, in each instance describing procedures carried out to a date within five (5) days of the date of the letter, from each of Stonefield Josephson, Inc. and Price Waterhouse LLP, independent public accountants for the Company, substantially in the form approved by you. (e) At each of the Closing Dates, (i) the representations and warranties of each of the Company and the Selling Shareholder contained in this Agreement shall be true and correct with the same effect as if made on and as of such Closing Date, and each of the Company and the Selling Shareholder shall have performed all of its obligations hereunder and satisfied all the conditions on its part to be satisfied at or prior to such Closing Date; (ii) the Registration Statement and the Prospectus and any amendments or supplements thereto shall contain all statements which are required to be stated therein in accordance with the Act and the Rules and Regulations, and shall in all material respects conform to the requirements thereof, and neither the Registration Statement nor the Prospectus nor any amendment or supplement thereto shall contain any untrue statements of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein not misleading in light of the circumstances under which they were made; (iii) there shall have been, since the respective dates as of which information is given, no material adverse change in the business, properties, condition (financial or otherwise), results of operations, capital stock, long-term or short-term debt or general affairs of the Company from that set forth in the Registration Statement and the Prospectus, except changes which the Registration Statement and Prospectus indicate might occur after the Effective Date and the Company shall not have incurred any material liabilities nor entered into any agreement not in the ordinary course of business other than as referred to in the Registration Statement and Prospectus; and (iv) except as set forth in the Prospectus, no action, suit or proceeding at law shall be pending or threatened against the Company which would be required to be disclosed in the Registration Statement, and no proceedings shall be pending or threatened against the Company before or by any commission, board or administrative agency in the United States or elsewhere, wherein an unfavorable decision, ruling or finding would materially and adversely affect the business, property, condition (financial or otherwise), results of operations or general affairs of the Company. In addition, you shall have received, at the First Closing Date, a certificate signed by the President and the principal financial or accounting officer of the Company, dated as of the First Closing Date, evidencing compliance with the provisions of this subsection (e). (f) Upon exercise of the option provided for in Section 2(b) hereof, your obligations to purchase and pay for the Option Shares referred to therein will be subject (as of the date hereof and as of the Option Closing Date) to the following additional conditions: (i) The Registration Statement shall remain effective at the Option Closing Date, no stop order suspending the effectiveness thereof shall have been issued, and no proceedings for that purpose shall have been instituted or shall be pending, or, to your knowledge or the knowledge of the Company, shall be contemplated by the Commission, and any reasonable request on the part of the Commission for additional information shall have been complied with to the reasonable satisfaction of Freshman, Marantz, Orlanski, Cooper & Klein, counsel to you. 19 20 (ii) At the Option Closing Date there shall have been delivered to you the signed opinion of Kelly Lytton Mintz & Vann LLP, counsel for the Company, dated as of the Option Closing Date, in form and substance reasonably satisfactory to Freshman, Marantz, Orlanski, Cooper & Klein, counsel to you, which opinion shall be substantially the same in scope and substance as the opinion furnished to you at the First Closing Date pursuant to Section 4(b) hereof, except that such opinion, where appropriate, shall cover the Option Shares rather than the Firm Shares. If the First Closing Date is the same as the Option Closing Date, such opinions may be combined. In addition, at the Option Closing Date, you shall have received the additional opinion, dated as of the Option Closing Date, of _____________________________, counsel for the Selling Shareholder, in form and substance reasonably satisfactory to counsel for you, to the effect that: (a) The Underwriting Agreement has been duly authorized, executed and delivered by or on behalf of, and is a valid and binding agreement of the Selling Shareholder, enforceable against the Selling Shareholder in accordance with its terms, except as rights to indemnification thereunder may be limited by applicable law and except as the enforcement thereof may be limited by bankruptcy, insolvency, reorganization, moratorium or other similar laws relating to or affecting creditors' rights generally or by general equitable principles; (b) The execution and delivery by the Selling Shareholder of, and the performance by the Selling Shareholder of its obligations under, this Agreement and its Custody Agreement will not contravene or conflict with, result in a breach of, or constitute a default under, the charter or by-laws, partnership agreement, trust agreement or other organizational documents, as the case may be, of the Selling Shareholder, or to the best of such counsel's knowledge, violate or contravene any provision of applicable law or regulation, or violate, result in a breach of or constitute a default under the terms of any other agreement or instrument to which the Selling Shareholder is a party or by which it is bound or any judgment, order or decree applicable to any court, regulatory body, administrative agency, governmental body or arbitrator having jurisdiction over such Selling Shareholder; (c) The Selling Shareholder has good and valid title to all of the Shares which may be sold by the Selling Shareholder under this Agreement and has the legal right and power, and all authorizations and approvals required under its charter and bylaws or other organizational documents, as the case may be, to enter into this Agreement and its Custody Agreement, to sell, transfer and deliver all of the Share which may be sold by the Selling Shareholder under this Agreement and to comply with its other obligations under the this Agreement and the Custody Agreement of the Selling Shareholder has been duly authorized, executed and delivered by the Selling Shareholder and is a valid and binding agreement of the Selling Shareholder, enforceable against the Selling Shareholder in accordance with its terms, except as rights to indemnification thereunder may be limited by applicable law and except as the enforcement thereof may be limited by bankruptcy, insolvency, 20 21 reorganization, moratorium or other similar laws relating to or affecting creditors' rights generally or by general equitable principles; (d) Assuming that the Underwriter purchases the Shares which is sold by the Selling Shareholder pursuant to this Agreement for value, in good faith and without notice of any adverse claim, the delivery of the Shares pursuant to this Agreement will pass good and valid title to such Shares, free and clear of any security interest, mortgage, pledge, lieu encumbrance or other claim; and (e) No consent, approval, authorization or other order of, or registration or filing with, any court or governmental authority or agency, is required for the consummation by the Selling Shareholder of the transactions contemplated in this Agreement, except as required under the Securities Act, applicable state securities or blue sky laws, and from the NASD. (iii) At the Option Closing Date, there shall have been delivered to you a certificate of the President and the Chairman of the Board of the Company and a certificate of the Selling Shareholder, each dated the Option Closing Date, in form and substance reasonably satisfactory to Freshman, Marantz, Orlanski, Cooper & Klein, counsel to you, substantially the same in scope and substance as the certificate furnished to you at the First Closing Date pursuant to Section 4(e) hereof. (iv) At the Option Closing Date, there shall have been delivered to you a letters in form and substance satisfactory to you from each of Stonefield Josephson, Inc. and Price Waterhouse LLP, each dated the Option Closing Date and addressed to you, confirming the information in their letter referred to in Section 4(d) hereof as of the date thereof and stating that, without any additional investigation required, nothing has come to their attention during the period from the ending date of their review referred to in said letter to a date not more than five (5) days prior to the Option Closing Date which would require any change in said letter if it were required to be dated the Option Closing Date. (v) All proceedings taken at or prior to the Option Closing Date in connection with the sale and issuance of the Option Shares shall be reasonably satisfactory in form and substance to you, and you and Freshman, Marantz, Orlanski, Cooper & Klein, counsel to you, shall have been furnished with all such documents and certificates as you may request in connection with this transaction in order to evidence the accuracy and completeness of any of the representations, warranties or statements of each of the Company and the Selling Shareholder, either of their compliance with any of the covenants or conditions contained therein. (g) If any of the conditions herein provided for in this Section shall not have been completely fulfilled as of the date indicated, this Agreement and all obligations of the Underwriters under this Agreement may be canceled at, or at any time prior to, each Closing Date by your notification to the Company of such cancellation in writing or by telegram at or prior to the 21 22 applicable Closing Date. Any such cancellation shall be without liability of you to the Company and the Selling Shareholder, as applicable, except as otherwise provided herein. 5. Conditions of the Obligations of the Company and the Selling Shareholder. The obligation of the Company and the Selling Shareholder, as applicable, to sell and deliver the Shares is subject to the following conditions: (a) The Registration Statement shall have become effective not later than 9:00 a.m. New York time, on the date of this Agreement, or on such later date or time as you and the Company may agree in writing. (b) On the Closing Dates, no stop order suspending the effectiveness of the Registration Statement shall have been issued under the Act or any proceedings therefor initiated or threatened by the Commission. If the conditions to the obligations of the Company and the Selling Shareholder provided for in this Section have been fulfilled on the First Closing Date but are not fulfilled after the First Closing Date and prior to the Option Closing Date, then only the obligation of the Company and the Selling Shareholder to sell and deliver the Option Shares on exercise of the option provided for in Section 2(b) hereof shall be affected. 6. Indemnification. (a) Indemnification of the Underwriter by the Company. The Company agrees to indemnify and hold you harmless and your officers and employees, and each person, if any, who controls you within the meaning of the Act and the Exchange Act against any loss, claim, damage, liability or expense, as incurred, to which you or such controlling person may become subject, under the Act, the Exchange Act or other federal or state statutory law or regulation, or at common law or otherwise (including in settlement of any litigation, if such settlement is effected with the written consent of the Company), insofar as such loss, claim, damage, liability or expense (or actions in respect thereof as contemplated below) arises out of or is based (i) upon any untrue statement or alleged untrue statement of a material fact contained in the Registration Statement, or any amendment thereto, including any information deemed to be a part thereof pursuant to Rule 430A or Rule 434 under the Act, or the omission or alleged omission therefrom of a material fact required to be stated therein or necessary to make the statements therein not misleading; or (ii) upon any untrue statements or alleged untrue statement of a material fact contained in any preliminary prospectus or the Prospectus (or any amendment or supplement thereto), or the omission or alleged omission therefrom of a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading; or (iii) in whole or in part upon any inaccuracy in the representations and warranties of the Company contained herein, or (iv) in whole or in part upon any failure of the Company to perform its obligations hereunder or under law, or (v) any act or failure to act or any alleged act or failure to act by you in connection with, or relating in any manner to, the Shares or the offering contemplated hereby, and which is included as part of or referred to in any loss, claim, damage, liability or action arising out of or based upon any 22 23 matter covered by clause (i) or (ii) above, provided that the Company shall not be liable under this clause (v) to the extent that a court of competent jurisdiction shall have determined by a final judgment that such loss, claim, damage, liability or action resulted directly from any such acts or failures to act undertaken or omitted to be taken by you through bad faith or willful misconduct; and to reimburse you and each such controlling person for any and all expenses (including the fees and disbursements of counsel chosen by H.J. Meyers & Co., Inc.) As such expenses are reasonably incurred by you or such controlling person in connection with investigating, defending, settling, compromising or paying any such loss, claim, damage, liability, expense or action; provided, however, that the foregoing indemnity agreement shall not apply to any loss, claim, damage, liability or expense to the extent, but only to the extent, arising out of or based upon any untrue statement or alleged untrue statement or omission or alleged omission made in reliance upon and in conformity with written information furnished to the Company by you expressly for use in the Registration Statement, any preliminary prospectus or the Prospectus (or any amendment or supplement thereto); and provided, further, that with respect to any preliminary prospectus, the foregoing indemnity agreement shall not inure to the benefit of you from whom the person asserting any loss, claim, damage, liability or expense purchased Shares, or any person controlling you, if copies of the Prospectus were timely delivered to you pursuant to the provision hereunder and a copy of the Prospectus (as then amended or supplemented if the Company shall have furnished any amendments or supplements thereto) was not sent or given by or on your behalf to such person, if required by law so to have been delivered, at or prior to the written confirmation of the sale of the Shares to such person, and if the Prospectus (as so amended or supplemented) would have cured the defect giving rise to such loss, claim, damage, liability or expense. The indemnity agreement set forth in this Section 6(a) shall be in addition to any liabilities that the Company may otherwise have. (b) Indemnification of the Underwriters by the Selling Shareholder. The Selling Shareholder agrees to indemnify and hold you harmless and your officers and employees, and each person, if any, who controls you within the meaning of the Act and the Exchange Act against any loss, claim, damage, liability or expense, as incurred, to which you or such controlling person may become subject, under the Act, the Exchange Act or other federal or state statutory law or regulation, or at common law or otherwise (including in settlement of any litigation, if such settlement is effected with the written consent of the Company), insofar as such loss, claim, damage, liability or expense (or actions in respect thereof as contemplated below) arises out of or is based (i) upon any untrue or alleged untrue statement of a material fact contained in the Registration Statement, any preliminary prospectus or the Prospectus (or any amendment or supplement thereto, or arises out of or is based upon the omission or alleged omission to state therein a material fact required to be stated thereon or necessary to make the statements therein not misleading, in each case to the extent, but only to the extent, that such untrue statement or alleged untrue statement or omission or alleged omission was made in the Registration Statement, any preliminary prospectus, the Prospectus (or any amendment or supplement thereto), in reliance upon and in conformity with written information furnished to the Company by the Selling Shareholder expressly for use therein, or (ii) in whole or in part upon any inaccuracy in the representations and warranties of the Selling Shareholder contained herein, or (iii) in whole or in part upon any failure of the Selling Shareholder to perform its obligations hereunder or under law, or (iv) any act or failure to act or any alleged act or failure to act by you in connection with, or relating in any manner to, the Shares or the offering contemplated hereby, and which is included as part of or referred to in any loss, claim, damage, 23 24 liability or action arising out of or based upon any matter covered by clause (i) above, provided that the Selling Shareholder shall not be liable under this clause (iv) to the extent that a court of competent jurisdiction shall have determined by a final judgment that such loss, claim, damage, liability or action resulted directly from any such acts or failures to act undertaken or omitted to be taken by you through bad faith or willful misconduct; and to reimburse you and each such controlling person for any and all expenses (including the fees and disbursements of counsel chosen by H.J. Meyers & Co., Inc.) As such expenses are reasonably incurred by you or such controlling person in connection with investigating, defending, settling, compromising or paying any such loss, claim, damage, liability, expense or action; provided, however, that the foregoing indemnity agreement shall not apply to any loss, claim, damage, liability or expense to the extent, but only to the extent, arising out of or based upon any untrue statement or alleged untrue statement or omission or alleged omission made in reliance upon and in conformity with written information furnished to the Company by you expressly for use in the Registration Statement, any preliminary prospectus or the Prospectus (or any amendment or supplement thereto); and provided, further, that with respect to any preliminary prospectus, the foregoing indemnity agreement shall not inure to the benefit of you from whom the person asserting any loss, claim, damage, liability or expense purchased Shares, or any person controlling you, if copies of the Prospectus were timely delivered to you pursuant to the provision hereunder and a copy of the Prospectus (as then amended or supplemented if the Company shall have furnished any amendments or supplements thereto) was not sent or given by or on your behalf to such person, if required by law so to have been delivered, at or prior to the written confirmation of the sale of the Shares to such person, and if the Prospectus (as so amended or supplemented) would have cured the defect giving rise to such loss, claim, damage, liability or expense. The indemnity agreement set forth in this Section 6(b) shall be in addition to any liabilities that the Selling Shareholder may otherwise have. (c) Indemnification of the Company, its Directors and Officers and of the Selling Shareholder. You agree, to indemnify and hold harmless the Company, each of its directors, each of its officers who signed the Registration Statement, the Selling Shareholder and directors and each person, if any, who controls the Company within the meaning of the Act or the Exchange Act, against any loss, claim, damage, liability or expense, as incurred to which the Company, the Selling Shareholder or any such director, officer or controlling person may become subject, under the Act, the Exchange Act, or other federal or state statutory law or regulation, or at common law or otherwise (including in settlement of any litigation, if such settlement is effected with your written consent, insofar as such loss, claim, damage, liability or expense (or actions in respect thereof as contemplated below) arises out of or is based upon any untrue or alleged untrue statement of a material fact contained in the Registration Statement, any preliminary prospectus or the Prospectus (or any amendment or supplement thereto, or arises out of or is based upon the omission or alleged omission to state therein a material fact required to be stated thereon or necessary to make the statements therein not misleading, in each case to the extent, but only to the extent, that such untrue statement or alleged untrue statement or omission or alleged omission was made in the Registration Statement, any preliminary prospectus, the Prospectus (or any amendment or supplement thereto), in reliance upon and in conformity with written information furnished to the Company and the Selling Shareholder by you expressly for use therein; and to reimburse the Company, the Selling Shareholder, or any such director, officer or controlling person for any legal and other expense reasonably incurred by the Company, the Selling Shareholder, or any such director, officer or 24 25 controlling person in connection with investigating, defending, settling, compromising or paying any such loss, claim, damage, liability, expense or action. Each of the Company and the Selling Shareholder hereby acknowledges that the only information that you have furnished to the Company and the Selling Shareholder expressly for use in the Registration Statement, any preliminary prospectus or the Prospectus (or any amendment or supplement thereto) are the statements set forth in the Prospectus with respect to stabilization, the material set forth under the heading "Underwriting" and the identity of counsel to you under the heading "Legal Matters"; and the Underwriters confirm that such statements are correct. The indemnity agreement set forth in this Section 6(c) shall be in addition to any liabilities that you may otherwise have. (d) Notifications and Other Indemnification Procedures. Promptly after receipt by an indemnified party under this Section 6 of notice of the commencement of any action, such indemnified party will, if a claim in respect thereof is to be made against an indemnifying party under this Section 6, notify the indemnifying party in writing of the commencement thereof, but the omission so to notify the indemnifying party will not relieve it from any liability which it may have to any indemnified party for contribution or otherwise than under the indemnity agreement contained in this Section 6 or to the extent it is not prejudiced as a proximate result of such failure. In case any such action is brought against any indemnified party and such indemnified party seeks or intends to seek indemnity from an indemnifying party, the indemnifying party will be entitled to participate in, and, to the extent that it shall elect, jointly with all other indemnifying parties similarly notified, by written notice delivered to the indemnified party promptly after receiving the aforesaid notice from such indemnified party, to assume the defense thereof with counsel reasonably satisfactory to such indemnified party; provided, however, if the defendants in any such action include both the indemnified party and the indemnifying party and the indemnified party shall have reasonably concluded that a conflict may arise between the positions of the indemnifying party and the indemnified party in conducting the defense of any such action or that there may be legal defenses available to it and/or other indemnified parties which are different from or additional to those available to the indemnifying party, the indemnified party or parties shall have the right to select separate counsel to assume such legal defenses and to otherwise participate in the defense of such action on behalf of such indemnified party or parties. Upon receipt of notice from the indemnifying party to such indemnified party of such indemnifying party's election so to assume the defense of such action and approval by the indemnified party of counsel, the indemnifying party will not be liable to such indemnified party under this Section 6 for any legal or other expenses subsequently incurred by such indemnified party in connection with the defense thereof unless (i) the indemnified party shall have employed separate counsel in accordance with the provisions to the next preceding sentence (it being understood, however, that the indemnifying party shall not be liable for the expenses of more than one separate counsel (together with local counsel), approved by the indemnifying party (H.J. Meyers & Co., Inc. in the case of Section 6(c) and Section 7), representing the indemnified parties who are parties to such action) or (ii) the indemnifying party shall not have employed counsel satisfactory to the indemnified party to represent the indemnified party within a reasonable time after notice of commencement of the action, in each of which cases the fees and expenses of counsel shall be at the expense of the indemnifying party. (e) Settlements. The indemnifying party under this Section 6 shall not be liable for any settlement of any proceeding effected without its written consent, but if settled with such 25 26 consent or if there be a final judgment for the plaintiff, the indemnifying party agrees to indemnify the indemnified party against any loss, claim, damage, liability or expense by reason of such settlement or judgment. Notwithstanding the foregoing sentence, if at any time an indemnified party shall have requested an indemnifying party to reimburse the indemnified party for fees and expenses of counsel as contemplated by Section 6(d) hereof, the indemnifying party agrees that it shall be liable for any settlement of any proceeding effected without its written consent if (i) such settlement is entered into more than thirty (30) days after receipt by such indemnifying party of the aforesaid request and (ii) such indemnifying party shall not have reimbursed the indemnified party in accordance with such request prior to the date of such settlement. No indemnifying party shall, without the prior written consent of the indemnified party, effect any settlement, compromise or consent to the entry of judgment in any pending or threatened action, suit or proceeding in respect of which any indemnified party is or could have been a party and indemnity was or could have been sought hereunder by such indemnified party, unless such settlement, compromise or consent includes an unconditional release of such indemnified party from all liability on claims that are the subject matter of such action, suit or proceeding. 7. Contribution. If the indemnification provided for in Section 6 is for any reason held to be unavailable to or otherwise insufficient to hold harmless an indemnified party of any losses, claims, damages, liabilities or expenses referred to therein, then each indemnifying party shall contribute to the aggregate amount paid or payable by such indemnified party, as incurred, as a result of any losses, claims, damages, liabilities or expenses referred to therein (i) in such proportion as is appropriate to reflect the relative benefits received by the Company and the Selling Shareholder, on the one hand, and you, on the other hand, from the offering of the Shares pursuant to this Agreement or (ii) if the allocation provided by clause (i) above is not permitted by applicable law, in such proportion as is appropriate to reflect not only the relative benefits referred to in clause (i) above but also the relative fault of the Company, and the Selling Shareholder, on the one hand, and you, on the other hand, in connection with the statements or omissions or inaccuracies in the representations and warranties herein which resulted in such losses, claims, damages, liabilities or expenses, as well as any other relevant equitable considerations. The relative benefits received by the Company, and the Selling Shareholder, on the one hand, and you, on the other hand, in connection with the offering of the Shares pursuant to this Agreement shall be deemed to be in the same respective proportions as the total net proceeds from the offering of the Shares pursuant to this Agreement (before deducting expenses) received by the Company, and the Selling Shareholder, and the total underwriting discount received by you, in each case as set forth on the front cover page of the Prospectus bear to the aggregate initial public offering price of the Shares as set forth on such cover. The relative fault of the Company, and the Selling Shareholder, on the one hand, and you, on the other hand, shall be determined by reference to, among other things, whether any such untrue or alleged untrue statement of a material fact or omission or alleged omission to state a material fact or any such inaccurate or alleged inaccurate representation or warranty relates to information supplied by the Company, or the Selling Shareholder, on the one hand, or you, on the other hand, and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission. 26 27 The amount paid or payable by a party as a result of the losses, claims, damages, liabilities and expenses referred to above shall be deemed to include, subject to the limitations set forth in Section 6(d), any legal or other fees or expenses reasonably incurred by such party in connection with investigating or defending any action or claim. The provisions set forth in Section 6(d) with respect to notice of commencement of any action shall apply if a claim for contribution is to be made under this Section 7; provided, however, that no additional notice shall be required with respect to any action for which notice has been given under Section 6(c) for purposes of indemnification. The Company, the Selling Shareholder and you agree that it would not be just and equitable if contribution pursuant to this Section 7 were determined by pro rata allocation (even if you were treated as one entity for such purpose) or by any other method of allocation which does not take account of the equitable considerations referred to in this Section 7. Notwithstanding the provisions of this Section 7, you shall be required to contribute any amount in excess of the underwriting commissions you received in connection with the Shares underwritten by it and distributed to the public. No person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Securities Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. For purposes of this Section 7, each of your officers and employees and each person, if any, who controls you within the meaning of the Act and the Exchange Act shall have the same rights to contribution as you, and each director of the Company, each officer of the Company who signed the Registration Statement, and each person, if any, who controls the Company with the meaning of the Act and the Exchange Act shall have the same rights to contribution as the Company. 8. Costs and Expenses. (a) Whether or not this Agreement becomes effective or the sale of the Shares to you is consummated, the Company will pay all costs and expenses incident to the performance of this Agreement by the Company, including but not limited to the fees and expenses of counsel to the Company and of the Company's accountants; the costs and expenses incident to the preparation, printing, filing and distribution under the Act of the Registration Statement (including the financial statements therein and all amendments and exhibits thereto), each Preliminary Prospectus and the Prospectus, as amended or supplemented, the fee of the NASD in connection with the filing required by the NASD relating to the offering of the Shares contemplated hereby; all expenses, including reasonable fees (but not in excess of the amount set forth in Section 3(b)) and disbursements of counsel to you, in connection with the qualification of the Shares under the State Securities or Blue Sky Laws which you shall designate; the cost of printing and furnishing to you copies of the Registration Statement, each Preliminary Prospectus, the Prospectus, this Agreement, the Warrant Agreement and the Blue Sky Memorandum; the cost of printing the certificates representing the Shares, the expenses of Company due diligence meetings and presentations, (but not of you or your counsel in connection therewith) and the expense (which shall not exceed $10,000) of placing one or more "tombstone" advertisements as directed by you. The Company shall pay any and all taxes (including any transfer, franchise, capital stock or other tax imposed by any jurisdiction) on sales to you hereunder. The Company will also pay all costs and expenses incident to the furnishing of 27 28 any amended Prospectus or of any supplement to be attached to the Prospectus as called for in Section 3(a) of this Agreement except as otherwise set forth in said Section. (b) In addition to the foregoing expenses, the Company shall at the First Closing Date pay to you the balance of a non-accountable expense allowance equal to three percent (3%) of the gross proceeds of the offering. In the event the over-allotment option is exercised in part or in full, the Company shall pay to you at the Option Closing Date an additional amount equal to three percent (3%) of the gross proceeds received upon exercise of the overallotment option. In the event the transactions contemplated hereby are not consummated due to the Company's breach of this Agreement or any covenant, condition, representation or warranty contained herein, the Company shall be liable for your actual accountable out-of-pocket expenses, including legal fees, provided however, that any portion previously paid by the Company that has not been utilized by you in connection with the offering on an accountable basis shall be refunded by you to the Company. (c) No person is entitled either directly or indirectly to compensation from the Company, from any Underwriter or from any other person for services as a finder in connection with the proposed offering, and the Company agrees to indemnify and hold harmless you, and you agree to indemnify and hold harmless, the Company from and against any losses, claims, damages or liabilities, (which shall, for all purposes of this Agreement, include, but not be limited to, all reasonable costs of defense and investigation and all reasonable attorneys' fees), to which the indemnified party may become subject insofar as such losses, claims, damages or liabilities (or actions in respect thereof) arise out of or are based upon the claim of any person (other than an employee of the party claiming indemnity) or entity that he or it is entitled to a finder's fee in connection wit the proposed offering by reason of such person's or entity's influence or prior contact with the indemnifying party. 9. Effective Date. The Agreement shall become effective upon its execution, except that you may, at your option, delay its effectiveness until the earlier to occur of 10:00 A.M., New York time on the first full business day following the Effective Date as you in your discretion shall first commence the initial public offering by you of any of the Shares. The time of the initial public offering shall mean the time of release by you of the first newspaper advertisement with respect to the Shares, or the time when the Shares are first generally offered by you to dealers by letter or telecopier, whichever shall first occur. This Agreement may be terminated by you at any time before it becomes effective as provided above, except that Sections 3(c), 6, 7, 8, 12, 13, 14 and 15 shall remain in effect notwithstanding such termination. 10. Termination. (a) This Agreement, except for Sections 3(c), 6, 7, 8, 12, 13, 14 and 15, may be terminated at any time prior to the First Closing Date, and the option referred to in Section 2(b), if exercised, may be canceled, at any time prior to the Option Closing Date, by you if in your judgment it is impracticable to offer for sale or to enforce contracts made by you for the resale of the Shares agreed to be purchased hereunder, by reason of (i) the Company having sustained a material loss, 28 29 whether or not insured, by reason of fire, earthquake, flood, accident or other calamity, or from any labor dispute or court or government action, order or decree, (ii) trading in securities on the New York Stock Exchange or the American Stock Exchange having been suspended or limited, (iii) material governmental restrictions having been imposed on trading in securities generally which are not in force and effect on the date hereof, (iv) a banking moratorium having been declared by federal of New York State authorities, (v) an outbreak of major international hostilities or other national or international calamity having occurred, (vi) the passage by the Congress of the United States or by any state legislative body of similar impact, of any act or measure, or the adoption of any orders, rules or regulations by any governmental body or any authoritative accounting institute or board, or any governmental executive, which is reasonably believed likely by you to have a material adverse impact on the business, financial condition or financial statements of the Company, (vii) any material adverse change in the financial or securities markets beyond normal fluctuations in the United States having occurred since the date of this Agreement, or (viii) any material adverse change having occurred, since the respective dates for which information is given in the Registration Statement and Prospectus, in the earnings, business, prospects or general condition of the Company, financial or otherwise, whether or not arising in the ordinary course of business. (b) If you elect to prevent this Agreement from becoming effective or to terminate this Agreement as provided in this Section 10 or in Section 9, the Company shall be promptly notified by you, by telephone or facsimile transmission, confirmed by letter. 11. Underwriter's Warrant. On the First Closing Date, the Company will issue to you, for a consideration of $5.00 and upon the terms and conditions set forth in the form of Underwriter's Warrant annexed as an exhibit to the Registration Statement, an Underwriter's Warrant to purchase 150,000 Shares. In the event of conflict in the terms of this Agreement and the Underwriter's Warrant, the language of the Underwriter's Warrant shall control. 12. Representations, Warranties and Agreements to Survive Delivery. The respective indemnities, agreements, representations, warranties and other statements of the Company or the Selling Shareholder, where appropriate, and you, set forth in or made pursuant to this Agreement will remain in full force and effect regardless of any investigation made by or on behalf of you, the Company or any of its officers or directors or any controlling persons and will survive delivery of and payment for the Shares and the termination of this Agreement. 13. Notice. All communications hereunder will be in writing and, except as otherwise expressly provided herein, if sent to you, will be mailed, delivered or telecopied and confirmed to it at H.J. Meyers & Co., Inc., 1895 Mt. Hope Avenue, Rochester, New York 14620-4596, with a copy sent to Thomas J. Poletti, Esq. at Freshman, Marantz, Orlanski, Cooper & Klein, 9100 Wilshire Boulevard, 8th Floor East, Beverly Hills, California 90212-3480, or if sent to the Company, will be 29 30 mailed, delivered, or facsimiled and confirmed to Drew Levin, 12300 Wilshire Boulevard, Suite 400, Los Angeles, California 90025, with copy sent to Bruce P. Vann, Esq., Kelly Lytton Mintz & Vann, LLP, 1900 Avenue of the Stars, Suite 1450, Los Angeles, California 90067 or if sent to the Selling Shareholder, will be mailed, delivered or telecopied and confirmed to Mr. Joseph Cayre, ________________________________________________, with a copy sent to _________________________________. 14. Parties in Interest. The Agreement herein set forth is made solely for your benefit, the Company and, to the extent expressed, the Selling Shareholder, any person controlling the Company, the Selling Shareholder or you, and directors of the Company, nominees for directors of the Company (if any) named in the Prospectus, the officers of the Company who have signed the Registration Statement, and their respective executors, administrators, successors and assigns, and no other person shall acquire for have any right under or by virtue of this Agreement. The term "successors and assigns" shall not include any purchaser, as such purchaser, from you of the Shares. 15. Applicable Law. This Agreement will be governed by, and construed in accordance with, the laws of the State of New York applicable to agreements made and to be entirely performed within New York. 30 31 If the foregoing is in accordance with your understanding of our agreement, kindly sign and return this Underwriting Agreement, whereupon it will become a binding agreement between the Company and you in accordance with its terms. Very truly yours, Team Communications Group, Inc. Dated: __________, 1997 By:________________________________ Name: Title: The Selling Shareholder ____________________________________ Joseph Cayre Dated: __________, 1997 The foregoing Underwriting Agreement is hereby confirmed and accepted as of the date first above written. H.J. Meyers & Co., Inc. Dated: __________, 1997 By:________________________________ Authorized Officer 32 SCHEDULE I Underwriting Agreement dated ________, 1997
Number of Firm Shares Underwriter to be Purchased H.J. Meyers & Co., Inc. 1,500,000
32 EX-4.7.1 3 EXHIBIT 4.7.1 1 EXHIBIT 4.7.1 NOTE AMENDMENT Reference is made to that certain 12% Secured Redeemable Note (the "Note"), dated as of March 15, 1996 made by DSL Entertainment Group, Inc. ("Maker) in favor of South Ferry #2, (hereinafter, the "Holder"). This Amendment will confirm that the Holder has (i) agreed that the term "Maturity Date", as used in the Note, shall now mean June 30, 1998 and (ii) consented to a change in the name of the Maker to Team Communications Group, Inc. All other terms of the Note shall remain as set forth in therein. Agreed to this 31st day of October, 1997. South Ferry #2 -------------------------------- Abraham Wolfson, General Partner By: /s/ Abraham Wolfson ------------------------------ Its: General Partner ----------------------------- Team Communications Group, Inc. By: /s/ Drew S. Levin ------------------------------ Its: President ----------------------------- EX-4.7.2 4 EXHIBIT 4.7.2 1 EXHIBIT 4.7.2 NOTE AMENDMENT Reference is made to that certain 12% Secured Redeemable Note (the "Note"), dated as of March 15, 1996 made by DSL Entertainment Group, Inc. ("Maker) in favor of Aaron Wolfson, (hereinafter, the "Holder"). This Amendment will confirm that the Holder has (i) agreed that the term "Maturity Date", as used in the Note, shall now mean June 30, 1998 and (ii) consented to a change in the name of the Maker to Team Communications Group, Inc. All other terms of the Note shall remain as set forth in therein. Agreed to this 31st day of October, 1997. Aaron Wolfson -------------------------------- By: /s/ Aaron Wolfson ------------------------------ Its: ----------------------------- Team Communications Group, Inc. By: /s/ Drew S. Levin ------------------------------ Its: President ----------------------------- 2 NOTE AMENDMENT Reference is made to that certain 12% Secured Redeemable Note (the "Note"), dated as of March 15, 1996 made by DSL Entertainment Group, Inc. ("Maker) in favor of Abraham Wolfson, (hereinafter, the "Holder"). This Amendment will confirm that the Holder has (i) agreed that the term "Maturity Date", as used in the Note, shall now mean June 30, 1998 and (ii) consented to a change in the name of the Maker to Team Communications Group, Inc. All other terms of the Note shall remain as set forth in therein. Agreed to this 31st day of October, 1997. Abraham Wolfson -------------------------------- By: /s/ Abraham Wolfson ------------------------------ Its: ----------------------------- Team Communications Group, Inc. By: /s/ Drew S. Levin ------------------------------ Its: President ----------------------------- 3 NOTE AMENDMENT Reference is made to that certain 12% Secured Redeemable Note (the "Note"), dated as of March 15, 1996 made by DSL Entertainment Group, Inc. ("Maker) in favor of Arielle Wolfson, (hereinafter, the "Holder"). This Amendment will confirm that the Holder has (i) agreed that the term "Maturity Date", as used in the Note, shall now mean June 30, 1998 and (ii) consented to a change in the name of the Maker to Team Communications Group, Inc. All other terms of the Note shall remain as set forth in therein. Agreed to this 31st day of October, 1997. Arielle Wolfson -------------------------------- By: /s/ Arielle Wolfson ------------------------------ Its: ----------------------------- Team Communications Group, Inc. By: /s/ Drew S. Levin ------------------------------ Its: President ----------------------------- EX-4.16 5 EXHIBIT 4.16 1 EXHIBIT 4.16 Warrant to Purchase 150,000 Shares of Common Stock UNDERWRITER'S WARRANT Dated: __________, 1997 THIS CERTIFIES THAT H.J. Meyers & Co., Inc. (herein sometimes called the "Holder" or the "Underwriter") is entitled to purchase from TEAM COMMUNICATIONS GROUP, INC., a California corporation (the "Company"), at the price and during the period as hereinafter specified, up to One Hundred Fifty Thousand (150,000) shares of Common Stock, no par value per share (the "Common Stock") at a purchase price of $_____ per share, subject to adjustment as described below, at any time during the four-year period commencing one (1) year from the effective date of the Registration Statement (the "Effective Date"). This Underwriter's Warrant (the "Underwriter's Warrant") is issued pursuant to an Underwriting Agreement between the Company and H.J. Meyers & Co., Inc. in connection with a public offering, through the Underwriters, of 1,500,000 shares of Common Stock as therein described (and up to 225,000 additional shares of Common Stock covered by an over-allotment option granted by the Company to the Underwriters), and in consideration of $5.00 received by the Company for the Underwriter's Warrant. Except as specifically otherwise provided herein, the Common Stock issued pursuant to the Underwriter's Warrant shall bear the same terms and conditions as described under the caption "Description of Securities" in the Registration Statement on Form SB-2, File No. 333-26307 (the "Registration Statement") except that the Holder shall have registration rights under the Securities Act of 1933, as amended (the "Act"), for issuance pursuant thereto, the Underwriter's Warrant and the Common Stock issuable pursuant thereto, as more fully described in paragraph 6 herein. 1. The rights represented by the Underwriter's Warrant shall be exercised at the price, subject to adjustment in accordance with Section 8 hereof (the "Exercise Price"), and during the periods as follows: (a) During the period from the Effective Date to and through ___________, 1998 (the "First Anniversary Date"), inclusive, the Holder shall have no right to purchase any Common Stock hereunder, except that in the event of any merger, consolidation or sale of substantially all the assets of the Company as an entirety prior to the First Anniversary Date (other than (i) a merger or consolidation in which the Company is the continuing corporation and which does not result in any reclassification or reorganization of an outstanding shares of Common Stock or (ii) any sale/leaseback, mortgage or other financing transaction), the Holder shall have the right to exercise the Underwriter's Warrant concurrently with 1 2 such event and into the kind and amount of shares of stock and other securities and property (including cash) receivable by a holder of the number of shares of Common Stock into which the Underwriter's Warrant were exercisable immediately prior thereto. (b) Between ___________, 1998 and __________, 2002, (five (5) years from the Effective Date, i.e. the "Expiration Date") inclusive, the Holder shall have the option to purchase Common Stock hereunder at a price of $______ per share (140% of public offering price per share of Common Stock). (c) After the Expiration Date, the Holder shall have no right to purchase any Common Stock hereunder. 2. (a) The rights represented by the Underwriter's Warrant may be exercised at any time within the periods above specified, in whole or in part, by (i) the surrender of the Underwriter's Warrant (with the purchase form at the end hereof properly executed) at the principal executive office of the Company (or such other office or agency of the Company as it may designate by notice in writing to the Holder at the address of the Holder appearing on the books of the Company); (ii) payment to the Company of the exercise price then in effect for the number of shares of Common Stock specified in the above-mentioned purchase form together with applicable stock transfer taxes, if any; and (iii) delivery to the Company of a duly executed agreement signed by the person(s) designated in the purchase form to the effect that such person(s) agree(s) to be bound by the provisions of paragraph 6 and subparagraphs (b), (c) and (d) of paragraph 7 hereof. The Underwriter's Warrant shall be deemed to have been exercised, in whole or in part to the extent specified, immediately prior to the close of business on the date the Underwriter's Warrant is surrendered and payment is made in accordance with the foregoing provisions of this paragraph 2, and the person or persons in whose name or names the certificates for shares of Common Stock shall be issuable upon such exercise shall become the holder or holders of record of such Common Stock at that time and date. The Common Stock and the certificates for the Common Stock so purchased shall be delivered to the Holder within a reasonable time, not exceeding ten (10) business days, after the rights represented by this Underwriter's Warrant shall have been so exercised. (b) Notwithstanding anything to the contrary contained in paragraph 2(a), the Holder may elect to exercise this Underwriter's Warrant in whole or in part by receiving shares of Common Stock equal to the value (as determined below) of this Underwriter's Warrant, or any part hereof, upon surrender of the Underwriter's Warrant at the principal office of the Company together with notice of such election in which event the Company shall issue to the Holder a number of shares of Common Stock computed using the following formula: X = Y(A-B) ------ A 2 3 Where X = the number of shares of Common Stock to be issued to the Holder; Y = the number of shares of Common Stock to be exercised under this Underwriter's Warrant (the "Shares"); A = the current fair market value of one share of Common Stock; B = the Exercise Price of the Underwriter's Warrant; As used herein, current fair market value of Common Stock shall mean with respect to each share of Common Stock the average of the closing prices of the Company's Common Stock sold on the principal national securities exchanges on which the Common Stock is at the time admitted to trading or listed, or, if there have been no sales of any such exchange on such day, the average of the highest bid and lowest ask price on such day as reported by NASDAQ, or any similar organization if NASDAQ is no longer reporting such information, either (i) on the date which the form of election is deemed to have been sent to the Company (the "Notice Date") or (ii) over a period of five (5) trading days preceding the Notice Date, whichever of (i) or (ii) is greater. If on the date for which current fair market value is to be determined the Common Stock is not listed on any securities exchange or quoted in the NASDAQ System or the over-the-counter market, the current fair market value of Common Stock shall be the highest price per share which the Company could then obtain from a willing buyer (not a current employee or director) for shares of Common Stock sold by the Company, from authorized but unissued shares, as determined in good faith by the Board of Directors of the Company, unless prior to such date the Company has become subject to a binding agreement for a merger, acquisition or other consolidation pursuant to which the Company is not the surviving party, in which case the current fair market value of the Common Stock shall be deemed to be the value to be received by the holders of the Company's Common Stock for each share thereof pursuant to the Company's acquisition. 3. The Underwriter's Warrant shall not be transferred, sold, assigned, or hypothecated for a period of one year commencing on the Effective Date except that it may be transferred to successors of the Holder, and may be assigned in whole or in part to any person who is an officer of the Holder. This Underwriter's Warrant must be executed immediately upon its transfer at any time after one year from the Effective Date, and if not so executed, shall lapse. Any such assignment shall be effected by the Holder by (i) executing the form of assignment at the end hereof and (ii) surrendering the Underwriter's Warrant for cancellation at the office or agency of the Company referred to in paragraph 2 hereof, accompanied by a certificate (signed by an officer of the Holder if the Holder is a corporation) stating that each transferee is a permitted transferee under this paragraph 3; whereupon the Company shall issue, in the name or 3 4 names specified by the Holder (including the Holder), a new Underwriter's Warrant or Warrants of like tenor and representing in the aggregate rights to purchase the same number of shares of Common Stock as are purchasable hereunder at such time. 4. The Company covenants and agrees that all shares of Common Stock which may be purchased hereunder will, upon issuance and delivery against payment therefor of the requisite purchase price, be duly and validly issued, fully paid and nonassessable. The Company further covenants and agrees that, during the periods within which the Underwriter's Warrant may be exercised, the Company will at all times have authorized and reserved a sufficient number of shares of its Common Stock to provide for the exercise of the Underwriter's Warrant. 5. The Underwriter's Warrant shall not entitle the Holder to any voting rights or other rights, including without limitation notice of meetings of other actions or receipt of dividends, as a shareholder of the Company. 6. (a) The Company shall advise the Holder or its permitted transferee, whether the Holder holds the Underwriter's Warrant or has exercised the Underwriter's Warrant and holds shares of Common Stock relating thereto, by written notice at least four weeks prior to the filing of any new registration statement thereto under the Act, or the filing of a notification on Form 1-A under the Act for a public offering of securities, covering any securities of the Company, for its own account or for the account of others, except for any registration statement filed on Form S-4 or S-8 (or other comparable form), and will, during the five (5) year period from the Effective Date, upon the request of the Holder, include in any such new registration statement (or notification as the case may be) such information as may be required to permit a public offering of, all or any of the shares of Common Stock underlying the Underwriter's Warrant (the "Registrable Securities"). (b) At any time during the four (4) year period beginning one (1) year after the Effective Date, a 50% Holder (as defined below) may request, on up to an aggregate of two occasions, that the Company register under the Act any and all of the Registrable Securities held by such 50% Holder. Upon the receipt of any such notice, the Company will promptly, but no later than four weeks after receipt of such notice (subject to the last sentence of this Section 6(b)), file a post-effective amendment to the current Registration Statement or a new registration statement pursuant to the Act, so that such designated Registrable Securities may be publicly sold under the Act as promptly as practicable thereafter and the Company will use reasonable efforts to cause such registration to become and remain effective (including the taking of such reasonable steps as are necessary to obtain the removal of any stop order) within 120 days (subject to the provision of the last sentence of this Section 6 (b)) after the receipt of such notice, provided, that such Holder shall furnish the Company with appropriate information in connection therewith as the Company may reasonably request in writing. The 50% Holder may, at its option, request the registration of any of the Common Stock underlying the Underwriter's Warrant in a registration statement made by the Company as contemplated by Section 6(a) or in connection with a request made pursuant to this Section 6(b) prior to acquisition of the shares of Common Stock issuable upon exercise of the Underwriter's Warrant. The 50% Holder may, at 4 5 its option, request such post-effective amendment or new registration statement during the described period with respect to the Underwriter's Warrant or separately as to the Common Stock, and such registration rights may be exercised by the 50% Holder prior to or subsequent to the exercise of the Underwriter's Warrant. Within ten days after receiving any such notice pursuant to this subsection (b) of paragraph 6, the Company shall give notice to any other Holders of the Underwriter's Warrant, advising that the Company is proceeding with such post-effective amendment or registration statement and offering to include therein the securities underlying that part of the Warrant held by the other Holders, provided that they shall furnish the Company with such appropriate information (relating to the intentions of such Holders) in connection therewith as the Company shall reasonably request in writing. All costs and expenses of the first post-effective amendment or new registration statement shall be borne by the Company, except that the Holder(s) shall bear the fees of their own counsel and any other advisors retained by them and any underwriting discounts or commissions applicable to any of the securities sold by them. All costs and expenses of the second such post-effective amendment or new registration statement shall be borne by the Holder(s). The Company will use its best efforts to maintain such registration statement or post-effective amendment current under the Act for a period of at least six months (and for up to an additional three (3) months if so requested by the Holder(s)) from the effective date thereof. The Company shall supply prospectuses, and such other documents as the Holder(s) may reasonably request in order to facilitate the public sale or other disposition of the Registrable Securities, use its best efforts to register and qualify any of the Registrable Securities for sale in such states (i) as such Holder(s) designate and (ii) with respect to which the Company obtained a qualification in connection with its initial public offering and furnish indemnification in the manner provided in paragraph 7 hereof. Notwithstanding the foregoing set forth in this paragraph 6(b), the Company shall not be required to include in any registration statement any Registrable Securities which in the opinion of counsel to the Company (which opinion is reasonably acceptable to counsel to the Underwriters) would be saleable immediately without restriction under Rule 144 (or its successor) if the Underwriter's Warrant was exercised pursuant to paragraph 2(b) herein. Notwithstanding anything to the contrary, if the Company shall furnish to the Holders requesting a registration or filing of a post-effective amendment pursuant to this Section 6 a certificate signed by the President of the Company stating that, in the good faith judgement of the board of Directors of the Company, it would be materially detrimental to the Company and its stockholders for such registration statement or post-effective amendment to be filed and it is therefore in the best interests of the Company to defer such filing, the Company shall have a right to defer such filing for a period not to exceed 30 after the date on which the Company would be required to so file such registration statement or post-effective amendment, provided, however, that the Company shall not be entitled to provide such notice to such Holder or Holders more than once in any 12-month period. (c) The term "50% Holder" as used in this paragraph 6 shall mean the Holder(s) of at least 50% of the Underwriter's Warrant and/or the Common Stock underlying the Underwriter's Warrant (considered in the aggregate). 5 6 7. (a) Whenever pursuant to paragraph 6 a registration statement relating to any Common Stock issued upon exercise of (or issuable upon the exercise of any Warrants purchasable under) the Underwriter's Warrant is filed under the Act, amended or supplemented, the Company will indemnify and hold harmless each Holder of the Common Stock covered by such registration statement, amendment or supplement (such Holder being hereinafter called the "Distributing Holder"), and each person, if any, who controls (within the meaning of the Act) the Distributing Holder, and each underwriter (within the meaning of the Act) of such Common Stock and each person, if any, who controls (within the meaning of the Act) any such underwriter, against any losses, claims, damages or liabilities, joint or several, to which the Distributing Holder, any such controlling person or any such underwriter may become subject, under the Act or otherwise, insofar as such losses, claims, damages or liabilities, or actions in respect thereof, arise out of or are based upon any untrue statement or alleged untrue statement of any material fact contained in any such registration statement as declared effective or any final prospectus constituting a part thereof or any amendment or supplement thereto, or arise out of or are based upon the omission or the alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading and will reimburse the Distributing Holder or such controlling person or underwriter for any legal or other expense reasonably incurred by them in connection with investigating or defending any such loss, claim, damage, liability or action; provided, however, that the Company will not be liable in any such case to the extent that any such loss, claim, damage or liability arises out of or is based upon an untrue statement or alleged untrue statement or omission or alleged omission made in said registration statement, said preliminary prospectus, said final prospectus or said amendment or supplement in reliance upon and in conformity with written information furnished by such Distributing Holder or any other Distributing Holder for use in the preparation thereof and provided further, that the indemnity agreement provided in this Section 7(a) with respect to any preliminary prospectus shall not inure to the benefit of any Distributing Holder, controlling person of such Distributing Holder, underwriter or controlling person of such underwriter from whom the person asserting any losses, claims, charges, liabilities or litigation based upon any untrue statement or alleged untrue statement of a material fact or omission or alleged omission to state therein a material fact, received such preliminary prospectus, if a copy of the prospectus in which such untrue statement or alleged untrue statement or omission or alleged omission was corrected has not been sent or given to such person within the time required by the Act and the Rules and Regulations thereunder. (b) The Distributing Holder will indemnify and hold harmless the Company, each of its directors, each of its officers who have signed said registration statement and such amendments and supplements thereto, and each person, if any, who controls the Company (within the meaning of the Act) against any losses, claims, damages or liabilities, joint or several, to which the Company or any such director, officer or controlling person may become subject, under the Act or otherwise, insofar as such losses, claims, damages or liabilities, or actions in respect thereof, arise out of or are based upon any untrue or alleged untrue statement of any material fact contained in said registration statement, said preliminary prospectus, said final prospectus, or said amendment or supplement, or arise out of or are based upon the omission or the alleged omission to state therein a material fact required to be stated therein or necessary to 6 7 make the statements therein not misleading, in each case to the extent, but only to the extent, that such loss, claim, damage or liability arises out of or is based upon an untrue statement or alleged untrue statement or omission or alleged omission made in said registration statement, said preliminary prospectus, said final prospectus or said amendment or supplement in reliance upon and in conformity with written information furnished by such Distributing Holder for use in the preparation thereof; and will reimburse the Company or any such director, officer or controlling person for any legal or other expenses reasonably incurred by them in connection with investigating or defending any such loss, claim, damage, liability or action. (c) Promptly after receipt by an indemnified party under this paragraph 7 of notice of the commencement of any action, such indemnified party will, if a claim in respect thereof is to be made against any indemnifying party, give the indemnifying party notice of the commencement thereof, but the omission so to notify the indemnifying party will not relieve it from any liability which it may have to any indemnified party otherwise than under this paragraph 7. (d) In case any such action is brought against any indemnified party, and it notifies an indemnifying party of the commencement thereof, the indemnifying party will be entitled to participate in and, to the extent that it may wish, jointly with any other indemnifying party similarly notified, to assume the defense thereof, with counsel reasonably satisfactory to such indemnified party, and after notice from the indemnifying party to such indemnified party of its election so to assume the defense thereof, the indemnifying party will not be liable to such indemnified party under this paragraph 7 for any legal or other expenses subsequently incurred by such indemnified party in connection with the defense thereof other than reasonable costs of investigation. 8. The Exercise Price in effect at the time and the number and kind of securities purchasable upon the exercise of this Underwriter's Warrant shall be subject to adjustment from time to time upon the happening of certain events as follows: (a) In case the Company shall (i) declare a dividend or make a distribution on its outstanding shares of Common Stock in shares of Common Stock, (ii) subdivide or reclassify its outstanding shares of Common Stock into a greater number of shares, (iii) combine or reclassify its outstanding shares of Common Stock into a smaller number of shares, or (iv) enter into any transaction whereby the outstanding shares of Common Stock of the Company are at any time changed into or exchanged for a different number or kind of shares or other security of the Company or of another corporation through reorganization, merger, consolidation, liquidation or recapitalization, then appropriate adjustments in the number of Shares (or other securities for which such Shares have previously been exchanged or converted) subject to this Underwriter's Warrant shall be made and the Exercise Price in effect at the time of the record date for such dividend or distribution or of the effective date of such subdivision, combination, reclassification, reorganization, merger, consolidation, liquidation or recapitalization shall be proportionately adjusted so that the Holder of this Underwriter's Warrant exercised after such date shall be entitled to receive the aggregate number and kind of Shares which, if this 7 8 Underwriter's Warrant had been exercised by such Holder immediately prior to such date, he would have been entitled to receive upon such dividend, distribution, subdivision, combination, reclassification, reorganization, merger, consolidation, liquidation or recapitalization. For example, if the Company declares a 2 for 1 stock distribution and the Exercise Price hereof immediately prior to such event was $8.40 per share and the number of Shares purchasable upon exercise of this Underwriter's Warrant was 150,000 the adjusted Exercise Price immediately after such event would be $4.20 per share and the adjusted number of Shares purchasable upon exercise of this Underwriter's Warrant would be 300,000. Such adjustment shall be made successively whenever any event listed above shall occur. (b) In case the Company shall fix a record date for the issuance of rights or warrants to all holders of its Common Stock entitling them to subscribe for or purchase shares of Common Stock (or securities convertible into Common Stock) at a price (the "Subscription Price") (or having a conversion price per share) less than the Exercise Price on a per share basis (the "Per Share Exercise Price") on such record date, the Exercise Price shall be adjusted so that the same shall equal the price determined by multiplying the Per Share Exercise Price in effect immediately prior to the date of issuance by a fraction, the numerator of which shall be the sum of the number of shares outstanding on the record date mentioned below and the number of additional shares of Common Stock which the aggregate offering price of the total number of shares of Common Stock so issued (or the aggregate conversion price of the convertible securities so issued) would purchase at the Per Share Exercise Price in effect immediately prior to the date of such issuance, and the denominator of which shall be sum of the number of shares of Common Stock outstanding on the record date mentioned below and the number of additional shares of Common Stock so issued (or into which the convertible securities so offered are convertible). Such adjustment shall be made successively whenever such rights or warrants are issued and shall become effective immediately after the record date for the determination of shareholders entitled to receive such rights or warrants; and to the extent that shares of Common Stock are not delivered (or securities convertible into Common Stock are not delivered) after the expiration of such rights or warrants the Exercise Price shall be readjusted to the Exercise Price which would then be in effect had the adjustments made upon the issuance of such rights or warrants been made upon the basis of delivery of only the number of shares of Common Stock (or securities convertible into Common Stock) actually delivered. (c) In case the Company shall hereafter distribute to all holders of its Common Stock evidences of its indebtedness or assets (excluding cash dividends or distributions and dividends or distributions referred to in Subsection (a) above) or subscription rights or warrants (excluding those referred to in Subsection (b) above, then in each such case the Exercise Price in effect thereafter shall be determined by multiplying the Per Share Exercise Price in effect immediately prior thereto by a fraction, the numerator of which shall be the total number of shares of Common Stock then outstanding multiplied by the current market price per share of Common Stock (as defined in Subsection (e) below), less the fair market value (as determined by the Company's Board of Directors) of said assets, or evidences of indebtedness so distributed or of such rights or warrants, and the denominator of which shall be the total number of shares of Common Stock outstanding multiplied by such current market price per share of Common Stock. 8 9 Such adjustment shall be made whenever any such distribution is made and shall become effective immediately after the record date for the determination of shareholders entitled to receive such distribution. (d) Whenever the Exercise Price payable upon exercise of the Underwriter's Warrant is adjusted pursuant to Subsections (a), (b) or (c) above, the number of Shares purchasable upon exercise of this Underwriter's Warrant shall simultaneously be adjusted by multiplying the number of Shares issuable upon exercise of this Underwriter's Warrant by the Exercise Price in effect on the date hereof and dividing the product so obtained by the Exercise Price, as adjusted. (e) For the purpose of any computation under Subsection (c) above, the current market price per share of Common Stock at any date shall be deemed to be the average of the daily closing prices of the Common Stock for 30 consecutive business days before such date. The closing price for each day shall be the last sale price regular way or, in case no such reported sale takes place on such day, the average of the last reported bid and asked prices regular way, in either case on the principal national securities exchange on which the Common Stock is admitted to trading or listed, or, if not listed or admitted to trading on such exchange, the average of the highest reported bid and lowest reported asked prices as reported by NASDAQ, or other similar organization if NASDAQ is no longer reporting such information, or if not so available, the fair market price as determined by the Board of Directors. (f) No adjustment in the Exercise Price shall be required unless such adjustment would require an increase or decrease of at least five cents ($0.05) in such price; provided, however, that any adjustments which may by reason of this Subsection (f) are not required to be made shall be carried forward and taken into account in any subsequent adjustment required to be made hereunder. All calculations under this Section 8 shall be made to the nearest cent or to the nearest one-hundredth of a share, as the case may be. Anything in this Section 8 to the contrary notwithstanding, the Company shall be entitled, but shall not be required, to make such changes in the Exercise Price, in addition to those required by this Section 8, as it shall determine, in its sole discretion, to be advisable in order that any dividend or distribution in shares of Common Stock, or any subdivision, reclassification or combination of Common Stock, hereafter made by the Company shall not result in any Federal income tax liability to the holders of the Common Stock or securities convertible into Common Stock. (g) Whenever the Exercise Price is adjusted, as herein provided, the Company shall promptly cause a notice setting forth the adjusted Exercise Price and adjusted number of Shares issuable upon exercise of the Underwriter's Warrant to be mailed to the Holder, at its address set forth herein, and shall cause a certified copy thereof to be mailed to the Company's transfer agent, if any. The Company may retain a firm of independent certified public accountants selected by the Board of Directors (who may be the regular accountants employed by the Company) to make any computation required by this Section 8, and a certificate signed by such firm shall be conclusive evidence of the correctness of such adjustment. 9 10 (h) In the event that at any time, as a result of an adjustment made pursuant to the provisions of this Section 8, the Holder of the Underwriter's Warrant thereafter shall become entitled to receive any shares of the Company other than Common Stock, thereafter the number of such other shares so receivable upon exercise of the Underwriter's Warrant shall be subject to adjustment from time to time in a manner and on terms as nearly equivalent as practicable to the provisions with respect to the Common Stock contained in Subsections (a) to (f), inclusive, above. 9. This Agreement shall be governed by and in accordance with the laws of the State of New York without regard to conflict of laws provision. IN WITNESS WHEREOF, TEAM COMMUNICATIONS GROUP, INC. has caused this Underwriter's Warrant to be signed by its duly authorized officers under its corporate seal, and this Underwriter's Warrant to be dated _________, 1997. TEAM COMMUNICATIONS GROUP, INC. By: _________________________________ Name: Title: (Corporate Seal) Attest: _________________________________ Name: Title: 10 11 PURCHASE FORM (To be signed only upon exercise of Warrant) The undersigned, the holder of the foregoing Underwriter's Warrant, hereby irrevocably elects to exercise the purchase rights represented by such Warrant for, and to purchase thereunder, _______________ shares of no par value Common Stock of TEAM COMMUNICATIONS GROUP, INC. and herewith makes payment of $_______ therefor, and requests that the certificates for the shares of Common Stock be issued in the name(s) of, and delivered to _________________, whose address(es) is (are): Dated: _______________, 19__ By: _________________________________ _________________________________ _________________________________ Address 12 TRANSFER FORM (To be signed only upon transfer of Warrant) For value received, the undersigned hereby sells, assigns, and transfers unto ______________________________ the right to purchase shares of Common Stock represented by the foregoing Underwriter's Warrant to the extent of __________ shares of no par value Common Stock, and appoints _________________________ attorney to transfer such rights on the books of ____________ _________________, with full power of substitution in the premises. Dated: _______________, 19__ __________________________________ __________________________________ __________________________________ In the presence of: EX-5.1 6 EXHIBIT 5.1 1 EXHIBIT 5.1 [KELLY, LYTTON, MINTZ & VANN LLP LETTERHEAD] October 31, 1997 Board of Directors Team Communications Group, Inc. 12300 Wilshire Boulevard, Suite 400 Los Angeles, California 90025 Gentlemen: We have acted as special counsel to Team Communications Group, Inc., a California corporation (the "Company"), in connection with the preparation and filing of the Company's Registration Statement on Form SB-2, as amended (Registration No. 333-26307) (the "Registration Statement"), under the Securities Act of 1933, as amended, relating to the proposed offering of an aggregate of 2,068,870 shares of common stock, no par value, of the Company, including 1,695,000 shares to be offered by the Company, 343,870 shares to be issued with respect to the certain warrants, and up to 30,000 additional shares to cover over-allotments, if any, to be offered by a selling shareholder (the "Selling Shareholder"). We have examined all instruments, documents and records which we deemed relevant and necessary for the basis of our opinion hereinafter expressed. We have also obtained from officers of the Company such advice as we considered necessary for the purposes of this opinion and insofar as our opinion is based on matters of fact upon which conclusions of law are expressed, we have relied upon such advice. In our examination, we have assumed the genuineness of all signatures and the authenticity of all documents submitted to us as originals and the conformity to the originals of all documents submitted to us as copies. Based upon the foregoing, and subject to the limitations, qualifications and assumptions set forth herein, we are of the opinion that: 1. The shares of the Company's common stock to be offered by the Company to the public pursuant to the Registration Statement have been duly authorized and, when issued and paid for in the manner described in the Registration Statement, will be validly issued, fully paid and non-assessable. 2. The shares of the Company's common stock to be offered by the Selling Shareholder to the public pursuant to the Registration Statement have been duly authorized and are validly issued, fully paid and non-assessable. The opinions expressed herein are limited to the General Corporation Law of the State of California. We assume no obligations to supplement this letter if any applicable laws change after the date hereof or if we become aware of any facts that might change the opinions expressed herein after the date hereof. The opinions expressed herein are solely for your benefit and may not be relied upon in any manner or for any purpose by any other person and may not be quoted in whole or in part without our prior written consent. We hereby consent to the filing of this opinion as an exhibit to the Registration Statement and to the reference to this firm and this opinion under the heading "Legal Matters" in the prospectus comprising a part of such Registration Statement and any amendment thereto. In giving such consent, we do no hereby admit that we come within the category of persons whose consent is required under Section 7 of the Securities Act of 1933, as amended, or the rules and regulations of the Securities and Exchange Commission thereunder. Very truly yours, /s/ KELLY, LYTTON, MINTZ & VANN LLP Kelly, Lytton, Mintz & Vann LLP EX-10.4 7 EXHIBIT 10.4 1 EXHIBIT 10.4 EMPLOYMENT AGREEMENT This Employment Agreement ("Agreement") is entered into as of the 1st day of January, 1997 by and between TEAM COMMUNICATIONS GROUP, INC, a California company ("Company") and DREW S. LEVIN ("Executive"), in connection with Company's engagement of Executive's personal services as President of Company. 1. EMPLOYMENT; DUTIES AND ACCEPTANCE: (a) Employment by Company. Company hereby engages Executive, and Executive hereby agrees to provide to Company, his full-time services as President on the terms and conditions of this Agreement. In such capacity Executive will report to, and serve under the direction and subject to the control of Company's Board of Directors. Throughout the Term (as hereinafter defined) of this Agreement, Executive shall devote substantially all of his work time to the employment described hereunder; and Executive shall not engage in or participate in the operation or management of, or render any services to, any other business, enterprise or individual, directly or indirectly. (b) Acceptance of Employment by the Executive. The Executive accepts such employment and shall render the services described in Section 1.(a). (c) Location of Employment: Executive shall render his services at Company's offices in Los Angeles, California; provided, however, that Executive agrees to render his services at such other locations from time-to-time as the proper performance of Executive's duties may reasonably require. Notwithstanding the foregoing, Company's principal offices shall remain in Southern California and Executive need not relocate to render his duties hereunder. 2. TERM: The term of Executive's employment hereunder shall be for a period of five (5) years commencing as of January 1, 1997 and ending on December 31, 2001 (the "Term") unless sooner terminated pursuant to Section 7 hereof ("Termination Sections"). 3. COMPENSATION AND BENEFITS: (a) Salary. During the Term, Executive shall receive a base salary at the rate of two hundred twenty thousand dollars ($220,000.00) plus a maximum advance against producer's fees 1 2 of one hundred forty five thousand dollars ($145,000.00) per annum (collectively the "Annual Salary"). Executive's Annual Salary shall be payable in fifty-two (52) weekly payments per year. Such salary shall be less such deductions as shall be required to be withheld by applicable law and regulations and shall be pro-rated for any period that does not constitute a full twelve (12) month period. The Company, as represented by the Board of Directors and Executive shall, in good faith, renegotiate the compensation payable to Executive for the period commencing upon the expiration of the first two (2) years of the Term through the end of the Term and for the Option Period, after having given due consideration to the improvements in the profits of the Company and cost of living increases, provided that in no event shall the Annual Salary (as defined below) and Bonus (as defined below) payable to Executive be less than the Annual Salary and Bonus payable during the initial two (2) year period of the Term hereof and provided further that the increase of the Annual Salary shall not be increased by more than ten (10%) percent per annum in any given year through the remainder of the contract. (b) Bonus. (i) Beginning with the fiscal year for the period ending December 31, 1997 (the twelve month period commencing January 1 and ending December 31 hereinafter referred to as "Fiscal Year"), and continuing thereafter for each such full or partial Fiscal Year of the Term hereof, Executive shall receive a bonus in the sum calculated below based upon the "Net Pre-Tax Earnings" of the Company (the "Bonus"). For any Fiscal Year of the Company in which Net Pre- Tax Earnings are from one dollar ($1.00) up to, but not not greater than, two million dollars ($2,000,000), Executive shall receive an amount equal to five percent (5%) of such Net Pre-Tax Earnings of the Company. For any Fiscal Year of the Company in which Net Pre-Tax Earnings of the Company are greater than two million dollars ($2,000,000) , Executive shall receive an amount equal to seven and one half percent (7.5%) of such Net Pre-Tax Earnings of the Company. For purposes hereof, the term "Net Pre-Tax Earnings" shall mean that amount as determined by the Company's outside accountant in accordance with generally accepted accounting principles and such amount shall specifically be determined after the calculation of the Annual Salary. (ii) Executive's Bonus shall be paid to Executive on a quarterly basis, within thirty (30) days following the preparation and filing of the company's quarterly statements (10Q or equivalents) of Company's accounts for such relevant period. If such above described accounts are not finalized within 30 days following the end of any fiscal quarter, then Company shall within 30 days following the expiration of such 30 day period pay to Executive his Bonus for such fiscal quarter based upon the most complete information then available to Company at such date and any adjustment to such amount so paid shall be made as soon as practical after the accounts are completed and approved by Company. (iii) Notwithstanding anything to the contrary contained above, the Bonus shall be calculated prior to, and without regard to, any other profit shares or bonus payable to other employees of the Company employed by Company for such same fiscal quarter. 2 3 (c) The Company shall be further obligated to cause to be granted to Executive 85,000 options to purchase shares of the Company's common stock under the companies employee stock option plan as in effect as of the date of this agreement, such options to vest in full as of the date of this agreement. 4. PARTICIPATION IN EXECUTIVE BENEFIT PLANS; (a) Fringe Benefits. Executive shall be permitted during the Term to participate in any group life, medical, hospitalization, dental, and disability plans, to the extent that Executive is eligible under the provisions of such plans, and in any other plans and benefits, if any, generally maintained by Company for executives of the stature and rank of Executive during the Term hereof, each in accordance with the terms and conditions of such plans (collectively referred to herein as "Fringe Benefits"); provided, however, that Company shall not be required to establish or maintain any such Fringe Benefits. (b) Vacation. Executive shall accrue, in addition to sick days and days in which Company is closed, paid vacation days at the rate of one and two thirds (12/3) days per month up to a maximum of twenty (20) work days (four [4] work weeks). Under no circumstances can Executive accrue more vacation than twenty (20) work days (the "Ceiling"). Thus, once the maximum amount of paid vacation time is accrued or earned, no further vacation time is accrued or earned until after vacation is taken and the amount of Executive's accrued vacation time goes below the Ceiling as stated above. At that point, Executive will start to accrue vacation time again until Executive reaches the Ceiling. Subject to the requirements of Executive's office, Executive shall be entitled to annual vacation in accordance with the vacation policy of Company. (c) Expenses. (i) Company will reimburse Executive for actual and necessary travel and accommodation costs, entertainment and other business expenses incurred as a necessary part of discharging the Executive's duties hereunder, subject to receipt of reasonable and appropriate documentation by Company. Guidelines for reasonable and normal expenses will be determined by the compensation committee of the board of directors. (ii) Company shall pay all business related operating expenses of Executive's automobile, at the rate of $.29 per mile. 5. CERTAIN COVENANTS OF EXECUTIVE: 3 4 Without in any way limiting or waiving any right or remedy accorded to Company or any limitation placed upon Executive by law, Executive agrees as follows: (a) Non-Compete. Provided that Company is at all times relevant hereto, carrying on the Business of the Company (as defined below), Executive agrees that during the Term of this Agreement, and solely in the event that Executive does not exercise his option to extend the Term hereof for the Option Period, for an additional period of one (1) year after the Term hereof, Executive shall not within the United States directly or indirectly, in any form, capacity or manner, participate in activities which are competitive with the Business of the Company (as defined below), or of those divisions, subsidiaries and affiliated companies of Company (each of which, including Company, is referred to as a "Protected Company") or have a direct monetary interest in or invest capital in any competitive company of Company, whether such interest be by way of (i) ownership, (ii) stock interest, (iii) financing, (iv) lending arrangements, or (v) in any other form or of any other nature. Upon the execution of this Agreement and during the Term hereof, Executive shall disclose to Company any stock owned by him and his family in any company competitive with a Protected Company; provided, however, Executive shall not be prohibited from investing in any competitive company, as aforesaid, the stock of which is publicly traded so long as his and his family's ownership collectively is nominal and for investment purposes only. For purposes hereof, the term "Business of the Company" shall mean television production and distribution. Notwithstanding the foregoing, in the event that a court of competent jurisdiction determines that the foregoing restriction is invalid, Executive hereby agrees to indemnify and hold Company harmless from any and all damages, liabilities, costs, losses and expenses (including legal costs and reasonable attorneys' fees) arising out of or connected with any claim, demand or action which is based upon a breach by Executive of the foregoing restriction. This section shall not be operative in the event that Executive is terminated by the Company without cause. (b) Confidential Information. Executive agrees that, neither during the Term nor at any time thereafter shall the Executive (i) disclose to any person, firm, or corporation not employed by any Protected Company or not engaged to render services to any Protected Company or (ii) use for the benefit of himself, or others, any confidential information of any Protected Company obtained by the Executive prior to the execution of this Agreement, during the Term or any time thereafter, including, without limitation, "know-how" trade secrets, details of supplier's, manufacturer's, distributor's contracts, pricing policies, financial data, operational methods, marketing and sales information or strategies, product development techniques or plans or any strategies relating thereto, technical processes, designs and design projects, and other proprietary information of any Protected Company; provided, however, that this provision shall not preclude the Executive from (x) upon advice of counsel, making any disclosure required by any applicable law or (y) using or disclosing information known generally to the public (other than information known generally to the public as a result of any violation of this Section 5.(b) by or on behalf of the Executive). 4 5 (c) Property of Company. Any interest in trademarks, service marks, copyrights, copyright applications, patents, patent applications, slogans, developments and processes which the Executive, during the Term, may develop relating to the Business of the Company in which the Company may then be engaged and any memoranda, notes, lists, records and other documents (and all copies thereof) made or compiled by the Executive or made available to the Executive concerning the business of any Protected Company shall belong and remain in the possession of any Protected Company, and shall be delivered to the Company promptly upon the termination of the Executive's employment with Company or at any other time on request. (d) Executive will not, for a period of one (1) year after the Term hereof, induce any person who is an executive, officer or agent of the Company, to terminate their relationship with the Company. 6. OTHER PROVISIONS; (a) Rights and Remedies Upon Breach. If the Executive breaches, or threatens to commit a breach of, any of the provisions of Section 5. hereof (the "Restrictive Covenants"), the Company shall have the following rights and remedies, each of which rights and remedies shall be independent of the other and severally enforceable, and all of which rights and remedies shall be in addition to, and not in lieu of, any other rights and remedies available to the Company at law or in equity. (b) Accounting. The right and remedy to require the Executive to account for and pay over to the Company all compensation, profits, monies, accruals, increments or other benefits (collectively "Benefits") derived or received by the Executive as a result of any transactions constituting a breach of any of the Restrictive Covenants, and the Executive shall account for and pay over such Benefits to the Company. (c) Severability of Covenants. If any court determines that any of the Restrictive Covenants, or any part thereof, is invalid or unenforceable, the remainder of the Restrictive Covenants shall not thereby be affected and shall be given full effect, without regard to the invalid portions. (d) Blue-Pencilling. If any court construes any of the Restrictive Covenants, or any part thereof, to be unenforceable because of the duration or geographic scope of such provision, such court shall 5 6 have the power to reduce the duration or scope of such provision and, in its reduced form, such provision shall then be enforceable. (e) Enforceability in Jurisdictions. The parties intend to and hereby confer jurisdiction to enforce the Restrictive Covenants upon the courts of any jurisdiction within the geographical scope of such Restrictive Covenants. If the courts of any one or more of such jurisdictions hold the Restrictive Covenants unenforceable by reason of the breadth of such scope or otherwise, it is the intention of the parties that such determination not bar or in any way affect Company's right to the relief provided in this Section 6 in the courts of any other jurisdiction within the geographical scope of such Restrictive Covenants, as to breaches of such Restrictive Covenants in such other respective jurisdictions, such Restrictive Covenants as they relate to each jurisdiction being, for this purpose, severable into diverse and independent covenants. (f) Executive agrees and understands that the remedy at law for any breach by Executive of the provisions of Paragraph 5 hereof may be inadequate and that damages resulting from such breach may not be susceptible to being measured in monetary terms. Accordingly, it is acknowledged that upon Executive's breach of any provision of Paragraph 5 hereof, the Company shall be entitled to seek to obtain from any court of competent jurisdiction injunctive relief to prevent the continuation of such breach. Nothing contained herein shall be deemed to limit the Company's remedies at law or in equity for any breach of the provisions of Paragraph 5 hereof which may be available to the Company. 7. TERMINATION: (a) Termination Upon Death or Disability. If during the Term, Executive should (i) die or (ii) Executive becomes so physically or mentally disabled whether totally or partially, that Executive is unable to perform the duties, functions and responsibilities required hereunder for (aa) a period of three (3) consecutive months or (bb) shorter periods aggregating to four (4) months within any period of twelve (12) months ("Disability"), then in such event, Company may, at any time thereafter, by written notice to Executive, terminate Executive's employment hereunder. Executive agrees to submit to reasonable medical examinations upon the request of Company. The existence of Executive's disability for the purposes of this Agreement shall be determined by a reputable physician selected by Company who is experienced in the relevant field of medicine. If Executive's services are terminated, as aforesaid, Executive or the designated beneficiary of Executive, shall be entitled to receive Executive's base salary, accrued share of the Bonus for that Fiscal Year and unused vacation (hereinafter collectively referred to as "Fringe Benefits"), if any, earned through the date of Executive's termination and continuing thereafter for an additional period of one year. (b) Termination for Cause. 6 7 Company may terminate this Agreement and Executive's employment hereunder, without any further obligation to Executive after the date of termination (except as expressly provided herein) for "cause" which includes, and shall be limited to, any of the following; (i) a material breach of this Agreement by Executive; (ii) the failure of Executive to perform services and duties exclusively for Company (excluding any passive income or unrelated activities); (iii) a material failure by Executive to comply with any material rule or regulation of Company reasonably related to his employment (which rule or regulation has been previously disclosed in writing to Employer); (iv) Executive's willful insubordination; or (v) Executive's commission of a felony. Any termination of Executive's services hereunder shall be effected by notice in writing stating the reason therefor, which notice shall be given to Executive as provided in Paragraph 11 hereof. To the extent practicable, Executive shall have the opportunity to cure any breach within forty five (45) days after receiving written notice thereof from Company. The foregoing cure provision will not be applicable to conduct which had previously been the subject of such notification. In the event Executive is terminated for "cause", Company's obligations to Executive shall be limited to the payment to Executive of the base salary through such effective date of termination, Executive's accrued share of the Bonus for that Fiscal Year and all of Executive's Fringe Benefits. (c) Termination Without Cause. If the Company terminates this Agreement without cause by written notice to the Executive: (i) Executive shall be entitled to receive from the Company within seven (7) days from the effective date specified in the Company's notice of termination, a lump sum payment equal to the Annual Salary, unpaid vacation pay, unreimbursed business expenses, and any other monies payable to the Executive under any employee benefit plan, in each case earned through the date of the Executive's termination, and; (ii) Executive shall have the right to obtain a transfer of any life insurance policy existing for the benefit of Executive from and after the effective date specified in the Company's notice of termination through the last day of the Term, and (iii) Executive will be paid, as due and scheduled under this Agreement, as if Executive had not been terminated, one half of the balance of the Annual Salary payable through the end of the then current term, with a minimum payable of one (1) year's Annual Salary, and a maximum payable of two (2) years' Annual Salary. (d) No Duty to Mitigate. In the event that Executive's services to Company are terminated for any reason other than as provided in Paragraph 7(b) above prior to the completion of the Term hereof, or in the event that Executive terminates this Agreement based upon the Company's material failure to perform its obligations hereunder, Executive shall have no duty, either express or implied, to mitigate any damages hereunder and the Company shall remain liable for all compensation (whether salary, bonus or other benefits) provided for under the terms of this Agreement. Any compensation earned by Executive in any capacity after the date of such termination shall not reduce or mitigate 7 8 the amounts payable by the Company hereunder. Nothing herein shall be deemed to imply that the Company has the right to terminate Executive's services without cause. (e) Designation of Beneficiary. The parties hereto agree that the Executive shall designate, by written notice to the Company, a beneficiary to receive the payments described in Section 7. in the event of his death and the designation of any such beneficiary may be changed by the Executive from time to time by written notice to the Company. In the event the Executive fails to designate a beneficiary as herein provided, any payments which are to be made to the Executive's designated beneficiary under Section 7. shall be made to the Executive's widow, if any, during her lifetime. If the Executive has no designees or widow, such payments shall be paid to the Executive's estate. 8. EXECUTIVE'S REPRESENTATIONS AND WARRANTIES: (a) Right to Enter Into Agreement. Executive has the unfettered right to enter into this entire Agreement on all of the terms, covenants and conditions hereof; and Executive has not done or permitted to be done anything which may curtail or impair any of the rights granted to Company herein. (b) Breach Under Other Agreement or Arrangement. Neither the execution and delivery of this Agreement nor the performance by Executive of any of his obligations hereunder will constitute a violation or breach of, or a default under, any agreement, arrangement or understanding, or any other restriction of any kind, to which Executive is a party or by which Executive is bound. 9. USE OF NAME: Company shall have the right during the Term hereof to use Executive's name, biography and approved likenesses in connection with Company's business, including advertising their products and services; and Company may grant such rights to others, but not for use as a direct endorsement. 10. ARBITRATION: (a) Jurisdiction. Any dispute whatsoever arising out of or referable to this Agreement, including, without limitation, any dispute as to the rights and entitlements and performance of the parties under this Agreement or concerning the termination of Executive's employment or of this 8 9 Agreement or its construction or its validity or enforcement, or as to the arbitrator's jurisdiction, or as to the arbitrability of any such dispute, shall be submitted to final and binding arbitration in Los Angeles, California by and pursuant to the Labor Arbitration Rules of the American Arbitration Association with discovery proceedings pursuant to Section 1283.05 of the California Code of Civil Procedure. The arbitrator shall be entitled to award any relief which might be available at law or in equity, including that of a provisional, permanent or injunctive nature. The prevailing party in such arbitration as determined by the arbitrator, or in any proceedings in respect thereof as determined by the person presiding, shall be entitled to receive its or his reasonable attorneys' fees incurred in connection therewith. 11. NOTICES: (a) Delivery. Any notice, consent or other communication under this Agreement shall be in writing and shall be delivered personally, telexed, sent by facsimile transmission or overnight courier (regularly providing proof of delivery) or sent by registered, certified, or express mail and shall be deemed given when so delivered personally, telexed, sent by facsimile transmission or overnight courier, or if mailed, two (2) days after the date of deposit in the United States mail as follows: to the parties at the following addresses (or at such other address as a party may specify by notice in accordance with the provisions hereof to the other): (i) If to Executive, to his address at: Drew S. Levin 16715 Monte Alto Place Pacific Palisades CA 90272 (ii) If to Company, to its address at: TEAM Communications Group, Inc. 12300 Wilshire Boulevard Suite 400 Los Angeles CA 90025 (b) Change of Address. Either party may change its address for notice hereunder by notice to the other party in accordance with this Section 11. 12. COMPLETE AGREEMENT; MODIFICATION AND TERMINATION: This Agreement contains a complete statement of all the arrangements between the parties with respect to Executive's employment by Company and supersedes all existing agreements between them concerning Executive's employment. This Agreement may be amended, modified, superseded or canceled, and the terms and conditions hereof may be waived, only by a written 9 10 instrument signed by the parties or, in the case of a waiver, by the party waiving compliance. No delay on the part of any party in exercising any right or remedy hereunder shall operate as a waiver thereof, nor shall any waiver on the part of any party of any such right or remedy, nor any single or partial exercise of any such right or remedy preclude any other or further exercise thereof or the exercise of any other right or remedy. 13. GOVERNING LAW: This Agreement shall be governed by and construed in accordance with the law of the State of California applicable to agreements entered into and performed entirely within such State. 14. HEADINGS: The headings in this Agreement are solely for the convenience of reference and shall not affect its interpretation. WHEREFORE, the parties hereto have executed this Agreement as of the day and year first above written. TEAM COMMUNICATIONS GROUP, INC. By: /s/ DREW S. LEVIN --------------------------------- Agreed to and Accepted: /s/ DREW S. LEVIN - ------------------------------ Drew S. Levin 10 EX-10.6 8 EXHIBIT 10.6 1 EXHIBIT 10.6 [BLOOM, HERGOTT, COOK, DIEMER AND KLEIN, LLP LETTERHEAD] As of November 8, 1996 6868.2520 Daniel H. Black, Esq. Heenan Blaikie 9401 Wilshire Boulevard, Suite 1100 Beverly Hills, California 90212 Re: "TOTAL RECALL" - ALLIANCE PRODUCTIONS W/TEAM ENTERTAINMENT DEAR DAN: This is to confirm the agreement (the "Agreement") between Alliance Productions Ltd. ("Alliance") and TEAM Entertainment Group ("TEAM") with regard to the financing, production and distribution of a television series (the "Series") and/or other productions based upon the rights in and to the "Total Recall" property (the "Property") currently owned by TEAM as set forth more fully in the attached Exhibit A (collectively, the "Rights"). The main points of the Agreement are as follows: 1. Acquisition of Ownership Interest. (a) Promptly upon full execution of this Agreement and Alliance's review and approval of TEAM's acquisition costs in connection with the Rights (which approval is hereby acknowledged as given), Alliance will pay a sum equal to fifty percent (50%) of the direct, actual, verifiable, out-of-pocket costs paid by TEAM to acquire the Rights, not to exceed US $1,500,000 (i.e., Alliance's share not to exceed US$750,000), into an interest-bearing escrow account with a mutually-approved escrow agent in connection with which the parties agree to promptly prepare and mutually approve escrow instructions consistent with the terms hereof. (b) Promptly upon Alliance's receipt of evidence acceptable to Alliance that TEAM has obtained (i) a non-cancellable, firm, bankable guarantee (consistent with industry custom and practice) for U.S. distribution of the Series with a value at the time of commencement of principal photography of no less than US$250,000 per episode (inclusive of all television, home video, and merchandising exploitation) for a minimum -1- 2 Daniel H. Black, Esq. As of November 8, 1996 Page 2 of twenty-two (22) episodes, or (ii) non-cancellable, firm, bankable guarantees (consistent with industry custom and practice) for distribution of the Series from all sources with a cumulative value at the time of commencement of principal photography of no less than the mutually-approved Series budget (inclusive of all television, home video, and merchandising exploitation) for a minimum of twenty-two (22) episodes; and provided that Alliance has confirmed consistent with industry custom and practice that TEAM is able to convey an unencumbered 50% ownership interest in the Rights (as set forth in paragraph 9 below), TEAM shall assign to Alliance a 50% ownership interest in the Rights and the exploitation thereof throughout the universe in perpetuity (subject to the allocation of distribution proceeds set forth in paragraph 5 below), and all monies in the escrow account (including interest) will be released to TEAM. (c) If TEAM fails to obtain acceptable guarantees for the distribution of the Series as specified in subparagraph (b) above by June 1, 1997, then Alliance and TEAM will negotiate in good faith for ten (10) business days for either Alliance or TEAM to provide deficit financing for the Series and for corresponding adjustments in the parties' profit participations set forth in paragraph 5 below and in any other applicable terms hereof. If the parties reach a mutually-acceptable agreement for such deficit financing to be provided by either party, then such funds will be recouped out of the first monies available after recoupment of production costs and distribution expenses (as described in paragraph 5 below) on a pari passu basis with Alliance's recoupment of its budget contribution set forth in paragraph 3 below. In the event that the parties are unable to reach an agreement for either party to provide such deficit financing, then either Alliance or TEAM can still elect to provide such deficit financing on all the terms set forth herein (including without limitation recoupment as set forth above and those profit participations set forth in paragraph 5 below), provided that if both parties make such an election, then the parties will provide such deficit financing on a 50/50 basis. In the absence of either an agreement to provide such deficit financing or an election by one or both parties to provide such financing as set forth above, the parties shall have no further obligations to one another hereunder, in which event all monies in the escrow account (including interest) will be immediately released to Alliance. 2. Budget. The budget for the Series will be mutually approved by the parties at an amount no greater than US$1,000,000 per episode for the first production year (with mutually-approved 3-5% escalations in subsequent production years), inclusive of producing fees of US$35,000 per episode for Alliance and US$25,000 per episode for TEAM, a CAA package commission of US$20,000 per episode, financing costs, completion bond, and contingency. In addition, the parties' rights acquisition costs will be repaid on a pari passu basis pro rata over the initial twenty-two (22) episodes of the Series and will be included as a line item in the budget. Any change in the budgeted -2- 3 Daniel H. Black, Esq. As of November 8, 1996 Page 3 amount will be subject to the mutual written approval of both parties. Underages will be split on a 50/50 basis. The initial two (2) episodes may be produced as a multi-part episode with the intent of being released as a two (2) hour movie. 3. Financing. It is the intent of the parties that the production will be fully funded prior to production based upon pre-sales; provided, however, that Alliance agrees to guarantee revenue from Canada of not less than 20% of the mutually-approved production budget (including without limitation producing fees, financing costs, completion bond, and contingency) to fund the production of the Series. Alliance agrees to cash flow directly or through a bank, the foreign receivables it approves, for the production of the Series. All such foreign receivables will flow directly through Alliance and will be used for production funding. U.S. receivables may flow through TEAM, provided that if TEAM has failed to provide Alliance with evidence acceptable to Alliance of bank financing and production cash flow of such U.S. contracts within two (2) weeks prior to the commencement of pre-production of the Series, then all such U.S. receivables shall be assigned to and shall flow through Alliance and be used for production funding. All financing costs will be recoupable through the production budget at the actual rate charged by the third-party lender. If either party elects to self-finance then the production will be charged the lowest rate of interest available to such party but in no event greater than one (1) point over the prime rate charged by the Royal Bank of Canada for the applicable accounting period. All banking agreements entered into by either party will be subject to the approval of the other party, such approval not to be unreasonably withheld, and if either party is dissatisfied with any banking arrangement reached by the other party, the dissatisfied party will have the right to bring another lender to the table provided this has no impact upon the flow of funds. 4. Distribution Rights; Canadian Content. For contractual purposes and for purposes of making the sales effort, Alliance will distribute and exploit the Series in the world outside the U.S. and TEAM will do the same in the U.S. Both parties agree to participate in pitch meetings and to cooperate in good faith in the sales effort both in and outside the U.S. All non-U.S. distribution agreements will be contracted through Alliance but will reference TEAM and provide that such agreements are freely assignable to TEAM, and the U.S. distribution agreement will be contracted through TEAM (subject to the requirements of paragraph 3 above) but will reference Alliance and provide that such agreement is freely assignable to Alliance. All distribution agreements will be subject to the mutual approval of the parties provided such approvals are exercised in such a manner so as to secure benefits from CAVCO or any other applicable content or co-production rules, regulations, or treaties. In this regard the parties acknowledge and agree that the Series will be produced as a Canadian-content production so as to qualify for all reasonably available government subsidies, grants, tax credits, and other funds. The -3- 4 Daniel H. Black, Esq. As of November 8, 1996 Page 4 parties specifically acknowledge and agree that, subject to the requirements of the U.S. broadcaster, at least two-thirds (2/3) of the episodes produced in each production season will qualify for no less than 8 out of 10 points in the Canadian-content system, provided that in any event all episodes of the Series must qualify for no less than 6 out of 10 points. 5. Distribution Proceeds. All proceeds from the distribution of the Series will be paid by the distributor into an Alliance- and TEAM-established escrow account/"lockbox" (escrow agent and instructions to be mutually-approved) and applied in the following order of priority: (a) all unrecouped production costs; (b) all actual, direct, verifiable, out-of-pocket, mutually-approved distribution expenses incurred after the date hereof capped at 10%; and (c) any and all unrecouped guarantees/deficit financing provided by the parties (pari passu); and (d) any and all mutually-approved third-party payments. All remaining proceeds will be distributed to the parties on a 60% to TEAM, 40% to Alliance basis. Neither party will be entitled to charge a distribution fee. 6. Approvals and Controls. The parties intend to act in concert and TEAM will have those customary approvals permitted to a distributor by CAVCO over key creative elements and the Series budget but, as required by CAVCO, Alliance will be the actual production company and will have all final approvals. All approvals shall be exercised in good faith, in such a manner so as not to frustrate the intent of the parties or the purposes of this Agreement, and in such a manner so as to secure benefits from CAVCO or any other applicable content or co-production rules, regulations or treaties. 7. Credit. Drew Levin will receive "Executive Producer" credit in first position on each episode of the Series, such credit and placement to be subject to any and all applicable content or co-production rules, regulations, or treaties. TEAM will be entitled to a production company credit in first position on each episode of the Series, all other aspects of such credit to be no less favorable than Alliance's production company credit, provided such credit, placement, and aspects are subject to any and all applicable content or co-production rules, regulations, or treaties. Alliance will receive a production company credit and may also designate an individual to receive an "Executive Producer" credit. 8. Public Relations. In connection with the subject matter of this Agreement and the Series, all press releases will be mutually approved and neither party may issue any press releases or publicity relating to the Series without the prior written consent of the other. The parties anticipate that each will retain its own PR firm in this regard -4- 5 Daniel H. Black, Esq. As of November 8, 1996 Page 5 (which two firms shall work cooperatively), unless the parties mutually agree upon a single such firm. All such approvals will be exercised in good faith and in such a manner so as not to frustrate the intent of the parties or the purposes of this Agreement or to jeopardize the Canadian content status of the Series. 9. Representations and Warranties; Indemnification. TEAM represents and warrants that it has the full right and authority to enter into this Agreement and to grant all rights herein granted and agreed to be granted and to perform fully all of its obligations hereunder; and that the consent of no other person or entity is necessary in order for TEAM to enter into and fully perform this Agreement. TEAM further represents and warrants that, upon TEAM's assignment of 50% of its ownership interest in and to the Rights to Alliance and the release of the monies in the escrow account to TEAM as described in paragraph 1(b) above, TEAM will be the sole and exclusive owner of the Rights; that all of the Rights will be free and clear from any and all claims, demands, liens, or other encumbrances; that there will be no outstanding options with respect to all or a portion of the Rights; that none of the Rights granted herein will have been or will in the future be granted or assigned or otherwise transferred to any third party; and that there will be no claim or pending litigation that would interfere with the exploitation of the Rights granted hereunder or that would interfere with the operation of this Agreement and the parties' exploitation of the Rights granted hereunder. TEAM further covenants that it will take no actions between the date hereof and the date of assignment of Rights to Alliance that would in any way encumber any of the Rights. Each party separately warrants and represents that all of the services and material supplied by the respective party hereunder and all attendant rights thereto shall be free from any third-party claim, including any so-called moral rights, and shall not violate or infringe upon the rights of any third party. In addition, both parties warrant and represent that they will fully perform and comply with all of the terms and conditions hereof. Alliance separately represents and warrants that it has the full right and authority to enter into this Agreement and to grant all rights herein granted and agreed to be granted and to perform fully all of its obligations hereunder, and that the consent of no other person or entity is necessary in order for Alliance to enter into and fully perform this Agreement. Both parties agree to indemnify the other (including reasonable outside attorneys' fees) in connection with any breach of the above warranties. 10. Ownership. The copyright in the Series and any other production produced hereunder will be owned by Alliance as required by CAVCO. The underlying Property shall be owned jointly by Alliance and TEAM in perpetuity. All ancillary rights will be administered pursuant to the mutual agreement of the parties, although it is currently anticipated that such rights will be administered by a third party. -5- 6 Daniel H. Black, Esq. As of November 8, 1996 Page 6 11. Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the State of California applicable to agreements made and to be wholly performed therein. The parties consent to the jurisdiction of the courts of the State of California for all disputes arising hereunder or related thereto. 12. Relationship of Parties. Nothing herein contained shall constitute a partnership between, or joint venture of, the parties hereto or constitute either party the agent of the other. Neither party shall pledge the credit of the other nor make any binding commitment on the part of the other, except as otherwise specifically provided herein. 13. Miscellaneous. The parties intend to prepare a more formal agreement incorporating the terms hereof and the standard terms and conditions (subject to such changes, if any, as may be mutually agreed upon by the parties pursuant to good faith negotiations) customary in agreements of this type, including without limitation provisions relating to force majeure, default, suspension, termination, remedies, and so forth. However, unless and until a more formal agreement is executed, this Agreement shall constitute the valid, binding and entire understanding of the parties with respect to the subject matter hereof and may not be modified or amended except in a writing signed by both parties. If the foregoing is in accordance with your understanding, please have your client sign below in the space indicated. Very truly yours, LEIGH BRECHEEN of BLOOM, HERGOTT, COOK, DIEMER and KLEIN, LLP AGREED TO AND ACCEPTED BY: TEAM ENTERTAINMENT GROUP ALLIANCE PRODUCTIONS LTD. By: By: [SIG] -------------------------------- --------------------------------- Its: Its: ------------------------------ -------------------------------- -6- 7 [HEENAN BLAIKIE LETTERHEAD] As of December 9, 1996 File NO. TEA 1-1 Leigh Brecheen, Esq. Bloom, Hergott, Cook, Diemer and Klein, LLP 150 South Rodeo Drive, Third Floor Beverly Hills, CA 90212 Re: "Total Recall" - TEAM Entertainment/ Alliance Productions Dear Leigh: Reference hereby is made to the letter agreement (the "Agreement") dated as of November 8, 1996 between Alliance Productions Ltd. ("Alliance") and TEAM Entertainment Group ("TEAM") in respect of "Total Recall" (the "Property"). All terms used herein and defined in the Agreement shall have the same meanings given to them as in the Agreement. Alliance and TEAM hereby agree to amend the Agreement as follows: 1. Without modifying or deleting any of the language of Paragraph 4 of the Agreement, the following sentence shall be added as the fourth sentence of said paragraph: "If Alliance does not proceed with production of the Series, then Alliance promptly shall assign to TEAM all non-U.S. distribution agreements and, concurrently therewith, and subject to the terms and provisions of this Agreement, TEAM shall assume in writing the executor obligations of Alliance pursuant to said distribution agreements and shall defend, indemnify and hold harmless Alliance, its parent, subsidiary, affiliated and related companies and its successors, licensees and assigns, and the officers, directors, shareholders, attorneys, agents and employees of each of them, from any claims, liabilities, losses, costs and expenses (including reasonable outside attorneys fees) arising from any breach by TEAM of such agreements; 8 Leigh Brecheen, Esq. Bloom, Hergott, Cook, Diemer and Klein, LLP December 9, 1996 Page 2 provided further that if Alliance does not proceed with production of the Series, then there shall exist a lien in favor of Alliance for Alliance's share of all mutually-approved development costs, payable on an amortized basis over the first season's episodes." 2. The last sentence of Paragraph 8 hereby is deleted, and the following sentence inserted in lieu thereof: "All such approvals will be exercised timely (approval to be deemed given if no communication is received within 72 hours of providing any proposed press release or publicity to the other party), in good faith and in such a manner so as not to frustrate the intent of the parties or the purposes of this Agreement or to jeopardize the Canadian content status of the Series." Except as otherwise expressly modified herein, the terms and provisions of the Agreement remain in full force and effect. Sincerely, /s/ DANIEL H. BLACK ----------------------- DANIEL H. BLACK DHB:kf AGREED TO AND ACCEPTED: TEAM ENTERTAINMENT GROUP By: [SIG] ------------------------------ Its President -------------------------- ALLIANCE PRODUCTIONS LTD. By: [SIG] ------------------------------- Its ---------------------------- 9 As of June 12, 1997 Direct Dial Number (310) 859-6821 6868.2520 Daniel H. Black, Esq. Heenan Blaikie 9401 Wilshire Boulevard, Suite 1100 Beverly Hills, California 90212 Re: "TOTAL RECALL" - ALLIANCE PRODUCTIONS W/ TEAM ENTERTAINMENT Dear Dan: Reference is made to the fully-executed agreement dated as of November 8, 1996 between Alliance Productions Ltd. ("Alliance") and TEAM Entertainment Group ("TEAM"), as amended by that fully-executed amendment dated as of December 9, 1996 (collectively, the "Agreement"), with regard to the financing, production and distribution of a television series (the "Series") and/or other productions based upon the rights in and to the "Total Recall" property (the "Property") owned by TEAM as set forth more fully in Schedule "1" to the attached Exhibit "A" (collectively, the "Rights"). Capitalized terms used herein and not otherwise defined herein shall have those meanings ascribed to them in the Agreement. For good and valuable consideration, the receipt and sufficiency of which are mutually acknowledged, the parties hereby amend the Agreement (the, "Amendment") as follows: 1. Paragraph 1 of the Agreement is deleted in its entirety and replaced with the following: "Acquisition of Ownership Interest. (a) By the later of close of business on June 13, 1997 or execution of this Amendment by both parties and execution by TEAM of the shortform assignment attached hereto as Exhibit "A", Alliance shall pay the sum of Three Hundred Thousand Dollars ($300,000) (the "Initial Acquisition Payment") to TEAM, and TEAM shall assign to Alliance an ownership interest in the Rights and the exploitation thereof throughout the universe in perpetuity equal to 50% of 100% of the Rights owned by TEAM as of the date of the Agreement, including without limitation a 50% of 100% interest in the 10 Daniel H. Black, Esq. As of June 12, 1997 Page 2 proceeds from the distribution of the Series as described in Paragraph 5 of the Agreement (with TEAM retaining a 37-1/2% interest in such distribution proceeds and the remaining 12-1/2% interest in such distribution proceeds having been granted to Miramax). Alliance may elect to make the Initial Acquisition Payment and all other payments hereunder directly to TEAM or by directing its law firm, Bloom, Hergott, Cook, Diemer and Klein, LLP ("BHCDK"), to make such payments from the amount of Six Hundred Eighty-Three Thousand Eight Hundred Ninety-Two Dollars and Seventeen Cents ($683,892.17) currently held by BHCDK for the account of Alliance. Notwithstanding the representations and warranties contained in Paragraph 9 of the Agreement, the parties acknowledge that the Rights may currently be subject to certain claims, demands, liens and/or encumbrances (collectively, the, "Encumbrances"). TEAM represents and warrants that a full and complete list of all such Encumbrances is attached hereto as Exhibit "B". (b) Promptly upon Alliance's receipt of evidence acceptable to Alliance that TEAM has obtained (i) a non-cancellable, firm, bankable guarantee (consistent with industry custom and practice) for U.S. distribution of the Series with a value at the time of commencement of principal photography of no less than US$250,000 per episode (inclusive of all television, home video, and merchandising exploitation) for a minimum of twenty-two (22) episodes, or (ii) non-cancellable, firm, bankable guarantees (consistent with industry custom and practice) for distribution of the Series from all sources with a cumulative value at the time of commencement of principal photography of no less than the mutually-approved Series budget (inclusive of all television, home video, and merchandising exploitation) for a minimum of twenty-two (22) episodes; and provided that Alliance has confirmed consistent with industry custom and practice that all of the Rights are free of all Encumbrances (all such conditions shall be referred to herein collectively as the "Payment Conditions"), then Alliance shall pay to TEAM the sum of Three Hundred Eighty-Three Thousand Eight Hundred Ninety-Two Dollars and Seventeen Cents ($383,892.17) (the "Remaining Acquisition Payment"). (c) If TEAM fails to satisfy any of the Payment Conditions described in Paragraph l(b) above to the satisfaction of Alliance by the close of business on June 20, 1997, then Alliance may elect any of the following options, in its sole and absolute discretion: (i) Alliance may pay the Remaining Acquisition Payment to TEAM, in which case TEAM agrees to continue to use best efforts to satisfy all of the Payment Conditions to the satisfaction of Alliance; -2- 11 Daniel H. Black, Esq. As of June 12, 1997 Page 3 (ii) If the Rights are not free of Encumbrances by the close of business on June 20, 1997, Alliance may pay to the applicable lienholder(s) of the Encumbrance(s) such portion of the Remaining Acquisition Payment as is necessary to remove the Encumbrance(s) from all of the Rights (or, in Alliance's sole and absolute discretion, such portion as is necessary to remove the Encumbrance(s) from Alliance's 50% ownership interest in the Rights only) and pay the remaining portion of the Remaining Acquisition Payment, if any, to TEAM (in which case TEAM agrees to continue to use best efforts to satisfy any other Payment Conditions, if any, that remain unsatisfied); (iii) Alliance may elect for TEAM to repay to Alliance the Initial Acquisition Payment paid by Alliance to TEAM pursuant to Paragraph 1(a) above, and TEAM shall make such repayment, and upon receipt of such payment Alliance shall reconvey to TEAM all Rights conveyed by TEAM to Alliance pursuant to Paragraph 1(a) above and the parties shall have no further obligations to one another under the Agreement or this Amendment; or (iv) Alliance may enter into good faith negotiations with TEAM for a period not to exceed ten (10) business days to reach an acceptable agreement to continue with the development, financing, production and distribution of the Series. If the parties reach a mutually-acceptable agreement for deficit financing for the Series to be provided by either party, then such funds will be recouped out of the first monies available after recoupment of production costs and distribution expenses (as described in paragraph 5 of the Agreement) on a pari passu basis with Alliance's recoupment of its budget contribution set forth in paragraph 3 of the Agreement. In the event that the parties are unable to reach an agreement for either party to provide such deficit financing, then either Alliance or TEAM can still elect to provide such deficit financing on all the terms set forth in the Agreement and this Amendment (including without limitation recoupment as set forth above and those profit participations set forth in paragraph 5 of the Agreement, as amended hereby), provided that if both parties make such an election, then the parties will provide such deficit financing on a 50/50 basis. In either of the foregoing events, Alliance shall pay the remainder of the Remaining Acquisition Payment to TEAM. In the absence of either an agreement to provide such deficit financing or an election by one or both parties to provide such financing as set forth above, then Alliance shall be required to elect one of the other options set forth in Paragraph l(c)(i-iii) above." -3- 12 Daniel H. Black, Esq. As of June 12, 1997 Page 4 2. Except as expressly amended hereby, all terms and conditions of the Agreement shall remain in full force and effect (except, as indicated in Paragraph 1(a) above, the allocation of distribution proceeds pursuant to Paragraph 5 of the Agreement shall be 50% to TEAM and 50% to Alliance). The parties to this Agreement have duly executed the same and made it effective as of the date first written above. AGREED TO AND ACCEPTED BY: TEAM ENTERTAINMENT GROUP ALLIANCE PRODUCTIONS LTD. By: [SIG] (illegible) By [SIG] (illegible) ---------------------------- --------------------------------- Its: President/CEO Its: --------------------------- ------------------------------- -4- 13 EXHIBIT "A" ASSIGNMENT KNOW ALL PERSONS BY THESE PRESENTS: that for good and valuable consideration, receipt of which is hereby acknowledged, the undersigned, TEAM Entertainment Group ("Owner"), hereby grants, sells, assigns and sets over to Alliance Productions Ltd. ("Purchaser"), and Purchaser's representatives, successors, and assigns, as of June 13, 1997, fifty percent (50%) of one hundred percent (100%) of all right, title and interest in all rights to produce and fully exploit television motion pictures, series and other productions based upon and with respect to that certain motion picture presently entitled "Total Recall," as more fully described in Schedule "1" hereto (collectively, the "Rights"), for production, advertising and exploitation purposes, in all languages throughout the universe, in perpetuity. Owner and Purchaser have entered into a formal agreement dated as of November 8, 1996, as amended December 9, 1996 and as further amended June 12, 1997 (collectively, the "Agreement"), relating to the transfer and assignment of the Rights, and this assignment is expressly made subject to all of the terms, conditions and provisions contained in the Agreement, all of which are incorporated herein by reference. IN WITNESS WHEREOF, the undersigned has executed this assignment this ___________day of ____________, 199____. TEAM ENTERTAINMENT GROUP By:_______________________________ Its:______________________________ STATE OF__________________) )SS. COUNTY OF_________________) On_____________________before me,_____________________personally appeared ______________________personally known to me (or proved to me on the basis of satisfactory evidence) to be the person(s) whose name(s) is/are subscribed to the within instrument and acknowledged to me that he/she/they executed the same in his/her/their authorized capacity(ies), and that by his/her/their signature(s) on the instrument the person(s), or the entity upon behalf of which the person(s) acted, executed the instrument. WITNESS my hand and official seal. ___________________ Notary's Signature (SEAL) 14 SCHEDULE I 2. GRANT OF RIGHTS TO PURCHASER Owner agrees to convey, grant, transfer, and assign exclusively and irrevocably to Purchaser, forever and throughout the universe, under copyright and otherwise the right to produce and exploit the Television Series based on the underlying material on which the Picture is based (the "Material"), and any and all parts thereof, including without limitation the right to develop, produce, exhibit, transmit, disseminate and generally exploit one or more television episodic series and movies of the week based on, but not copied from, !he Material, including the Picture's title, theme, ideas, characters, characterizations, plot, setting, and story; it being acknowledged that the foregoing does not include the use of any music, dialogue, scenes or stories from the Picture. The rights being transferred to Purchaser shall include the following: 2.1 Television rights, including the right to create "pilots", "Series" "movies" of the week", "mini-series" and "specials" as such terms are commonly understood in the United States television industry), for broadcast on television (whether through network cable or other at home delivery, including satellite or through phone lines, and whether such delivery system exists now or is hereafter created). The term "Television Rights" or words of similar import, as used in this Agreement, shall be deemed to mean and include the right to create, produce, distribute and transmit any present or future kind of television production, with or without sound recorded synchronously therewith, whether the same is produced on film or magnetic or video tape, or wire, or any other substance or by any other method or means now or hereafter used for the production, exhibition, and transmission of any kind of television production and which is produced and broadcast initially for television exhibition or transmission based on the Material but not including any footage or music compositions from the Picture; 2.2 The right to make or sell videotape copies of episodes of the Television Series, including without limitation the right to produce, project, exhibit and transmit programs by means of non-broadcast public or private use by means of a mechanical, optical, magnetic, holographic or any other device, whether now known or hereafter devised, intended to be used in connection with a television receiver, monitor or other similar device, whether now known or here after devised based on the Material but not including any music or footage from the Picture; 2.3 All multimedia rights in respect of the Television Series, including without limitation CD-ROM and all other CD-format or other discs and/or formats, networked multimedia and generally any and all methods and forms of enabling a multimedia presentation of any kind or nature whether now or hereafter existing; provided however, any CD-ROM or other multimedia version must be limited solely to presenting one or more versions of the Television Series, plus such additional material not related to the Picture, such as behind-the-television scenes interviews, excerpts regarding television special effects and makeup, and the inclusion of television scripts. In -1- 15 no way may any CD-ROM or other multimedia version be interactive (to the extent that viewer can edit, choose different sequences or endings or create new characters, stories, etc.) or contain games or similar promotional options. 2.4 Subject to the provisions of paragraph 3 below, and the other terms and conditions of this Agreement, any and all other ancillary merchandising and/or commercial tie-in rights in respect of the Television Rights; provided Producer acknowledges only characters and other elements which are Producer's sole creations (and not those which appear in the Picture) may be used in connection with such merchandising and commercial tie-ins. In all cases any such use is expressly allowed only on the condition that all such merchandise and commercial tie-ins be identified clearly and conspicuously as derived from the television version (and not based on the Picture) and that the product or tie - -in is solely ancillary to the television program(s) and not to the Picture. 2.5 To enable Purchaser to exploit fully the Television Rights described in subparagraphs 2.1, 2.2 and 2.3 above, Owner agrees that such rights shall include without limitation the right to: 2.5.1 Combine the Material in any manner with any other work or works in the making of the Television Series and other productions, including without limitation the right to create one or more television screenplays and/or other television works in connection with the Television Series based on the Picture; 2.5.2 Use the Material and any part thereof, in conjunction with television programs based upon all or any part or parts of the Picture and/or other literary, dramatic and/or dramatic musical works, and/or in conjunction with musical compositions (but not music from the Picture) used for or in connection with such television productions, whether or not written for, or used in or in connection with, or in any manner whatsoever apart from, any such television productions; 2.5.3 Transmit, broadcast and otherwise reproduce the Television Series and any part or parts thereof pictorially and audibly by the process of cinematography or any process analogous thereto in any manner, including the right to transmit, reproduce and exhibit television productions and any part or parts thereof (including without limitation by so-called "pay", "free", "free home, "closed circuit", "theater", "toll", "CATV", "satellite" or "subscription" television), and by the use of video cassettes, video discs, digital video discs, or other devices similar and by any other process of transmission now known or hereafter devised. 2.5.4 Publish, use, copyright, vend, license, exhibit, perform and otherwise exploit, and license others to publish, use, copyright, vend, license, exhibit, perform and otherwise exploit the Television Rights and the scripts and musical compositions (but not music from the Picture) of the same and any part thereof -2- 16 2.5.5 As part of the Television Rights in a Television Series based on the Picture, record, reproduce and transmit sound, including spoken words, dialogue, music and songs (but no music or songs from the Picture), by any manner or means (including mechanical and electrail means and any other means now known or hereafter devised), and to interpolate other spoken words, dialogue, music and songs, in or in connection with or as part of the production, reproduction, transmission, exhibition, performance or presentation of such motion pictures and other productions; 2.5.6 Solely in respect of Television Series based in whole or in part or the Picture, make, copyright, use, vend, license and otherwise exploit, and license others to make, copyright, use, vend, license and otherwise exploit, in any manner, records, tapes and other sound-reproducing devices, based on episodes of the Television Series; but not CD-ROM or other multimedia versions; 2.5.7 With respect to the Television Series, generally to produce, reproduce, remake, reissue, transmit, exhibit and perform broadcast television production of any and all kinds whatsoever and videotape copies of episodes of the Television Series produced and initially broadcast; and 2.5.8 To use the title by which the Picture is now known as the title of any Television Series based thereon in whole or in part, but Purchaser shall not be obligated to use said title, and may use any other title or titles, for any Television Series versions of the work. 2.6 Owner, having acknowledged its understanding of the needs of Purchaser to have the unlimited right to change, vary, alter, add to, take from, substitute, combine and modify the Material to the extent necessary to exploit the Television Rights, Owner hereby waives (for itself, and its executors, administrators, assigns and "spiritual heirs") the benefits of any provisions of law known as the "droit moral" or any similar laws or legal principles, and agrees (for itself, its heirs, executors, administrators, assigns and "spiritual heirs") not to institute, support, maintain or permit directly or indirectly any litigation or proceedings instituted or maintained on the ground that any television program (whether a series, episode, mini-series, pilot, movie of the week or otherwise) produced, distributed or exhibited by Purchaser and based, or claimed to be based, upon the Picture or using any material therefrom, in any way constitutes an infringement or violation of any of his "droit moral" or is in any way a defamation or mutilation of the Picture, or of any part thereof, or contains unauthorized variations, alterations, modifications, charges or translations. 2.7 Purchaser understands and agrees that every use or exploitation granted hereunder is expressly allowed only on the condition that such use or exploitation shall be identified clearly and conspicuously as the television version based on the Picture and is solely based on the television version and not the Picture. -3- 17 EXHIBIT "B" ENCUMBRANCES 1. The lien evidenced by that certain Copyright Mortgage and Assignment, "Total Recall", from DSL Entertainment Group, Inc., a California corporation, as Grantor, in favor of ACA Equities, D&M Investment Corp. and Mr. Gilbert Karsenty, or their assign(s), as Grantee, executed on July 10, 1996 and recorded in the United States Copyright Office in Volume 3262, Page 295. 2. The lien evidenced by that certain UCC-1 Financing Statement from TEAM Communications Group, Inc., as Debtor, in favor of Miramax Film Corp., as Secured Party, filed with the California Secretary of State on May 9, 1997 as Instrument No. 9713260588. 3. The lien evidenced by that certain UCC-1 Financing Statement from DSL Entertainment Group, Inc., as Debtor, in favor of Mildred J. Greiss, Samuel F. Marinelli, Affida Bank and Cooperative Holding Corporation recorded with the California Secretary of State on March 11, 1996 as Instrument No. 960720811. 18 PROMISSORY NOTE THIS PROMISSORY NOTE (THE "NOTE") HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), OR ANY STATE SECURITIES LAWS AND MAY NOT BE OFFERED, SOLD, PLEDGED, ASSIGNED, OR OTHERWISE TRANSFERRED UNLESS (1) A REGISTRATION STATEMENT WITH RESPECT THERETO IS EFFECTIVE UNDER THE SECURITIES ACT AND ANY APPLICABLE STATE SECURITIES LAWS, OR (2) THE COMPANY RECEIVES AN OPINION OF COUNSEL TO THE HOLDER OF THIS NOTE, WHICH COUNSEL AND OPINION ARE REASONABLY SATISFACTORY TO THE COMPANY, THAT THIS NOTE MAY BE OFFERED, SOLD, PLEDGED, ASSIGNED, OR OTHERWISE TRANSFERRED IN THE MANNER CONTEMPLATED WITHOUT AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OR APPLICABLE STATE SECURITIES LAWS. TEAM COMMUNICATIONS GROUP, INC. AS OF JUNE 18, 1997 $650,000.00 PRINCIPAL AMOUNT LOS ANGELES, CALIFORNIA TEAM COMMUNICATIONS GROUP, INC. a California corporation (the "Company"), for value received, hereby promises to pay Alliance Productions Ltd. with an address of: 301 North Canon Drive, Suite 321, Beverly Hills CA 90210 or registered assigns (the "Holder"), the principal aggregate amount of six hundred fifty thousand dollars ($650,000.00) on the Maturity Date (as such term is defined below), or such earlier date as may be provided herein, together with interest on the unpaid principal balance hereof at the rate (calculated on the basis of a 360-day year consisting of twelve 30-day months) of prime rate plus one per cent, per annum. In no event shall any interest to be paid hereunder exceed the maximum rate permitted by law. In any such event, this Note shall automatically be deemed amended to permit interest charges (including the default rate set forth in Section 2 below) at an amount equal to, but no greater than, the maximum rate permitted by law. SECTION 1 PAYMENTS. (a) (i) All unpaid principal and interest shall be due and payable on October 18, 1997, (the "Maturity Date"). (b) Interest on this Note shall accrue from the date of issuance hereof. Payments shall be applied first to any costs or expenses, then to accrued interest and then to principal. 19 (c) If the Maturity Date falls on a day that is not a Business Day (as defined below), the payment due on such date will be made on the next succeeding Business Day with the same force and effect as if made on the Maturity Date. "Business Day" means any day which is not a Saturday or Sunday and is not a day on which banking institutions are generally authorized or obligated to close in the City of Los Angeles, California. (d) Company may, at its option, prepay all or any part of the principal of this Note, without payment of any premium or penalty. All payments on this Note shall be applied first to accrued and unpaid interest hereon and the balance to the payment of principal hereof. (e) Payments of principal of, and interest on, this Note shall be made by check sent to the Holder's address set forth above or to such other address as the Holder may designate for such purpose from time to time by written notice to the Company, in such coin or currency of the United States of America as at the time of payment shall be legal tender for the payment of public and private debts. (f) The obligations to make the payments provided for in this Note are absolute and unconditional and not subject to any defense, set-off, counterclaim, rescission, recoupment, or adjustment whatsoever. The Company hereby expressly waives demand and presentment for payment, notice of non-payment, notice of dishonor, protest, notice of protest, bringing of suit, and diligence in taking any action to collect any amount called for hereunder, and shall be directly and primarily liable for the payment of all sums owing and to be owing hereon, regardless of, and without any notice, diligence, act or omission with respect to, the collection of any amount called for hereunder. SECTION 2 EVENTS OF DEFAULT. The occurrence of any of the following events shall constitute an event of default (an "Event of Default"): (a) A default in the payment of the principal on the Note, when and as the same shall become due and payable. (b) A default in the payment of any interest accrued on the Note, when and as the same shall become due and payable, which default shall continue for five business days after the date fixed for the making of such interest payment. (c) A final judgment or judgments for the payment of money in excess of $100,000 in the aggregate shall be rendered by one or more courts, administrative or arbitral tribunals, or other bodies having jurisdiction against the Company and the same shall not be discharged (or provision shall not be made for such discharge), or a stay of execution thereof shall not be procured, within 60 days from the date of entry thereof and the Company shall not, within such 60-day period, or such longer period during which execution of the same shall have been stayed, appeal therefrom and cause the execution thereof to be stayed during such appeal. -2- 20 (d) The entry of a decree or order by a court having jurisdiction adjudging the Company a bankrupt or insolvent, or approving a petition seeking reorganization, arrangement, adjustment or composition of, or in respect of, the Company, under federal bankruptcy law, as now or hereafter constituted, or any other applicable federal or state bankruptcy, insolvency, or other similar law, and the continuance of any such decree or order unstayed and in effect for a period of 60 days; or the commencement by the Company of a voluntary case under federal bankruptcy law, as now or hereafter constituted, or any other applicable federal or state bankruptcy, insolvency, or other similar law, or the consent by it to the institution of bankruptcy or insolvency proceedings against it, or the filing by it of a petition or answer or consent seeking reorganization or relief under federal bankruptcy law or any other applicable federal or state law, or the consent by it to the filing of such petition or to the appointment of a receiver, liquidator, assignee, trustee, sequestrator, or similar official of the Company or of any substantial part of its property, or the making by it of an assignment for the benefit of creditors, or the admission by it in writing of its inability to pay its debts generally as they become due, or the taking of corporate action by the Company in furtherance of any such action. (e) A default is declared under the terms of any collateral security agreements. (f) A sale of all or substantially all of the assets of the Company. then, and in every such case, during the continuance of the Event of Default, the Holder may, without presentment, demand or notice declare the principal of this Note, together with all unpaid accrued interest thereon, to be immediately due and payable, and upon any such declaration the same shall become and be immediately due and payable, anything in this Note to the contrary notwithstanding. The Holder, if not paid promptly at maturity or acceleration of this Note, shall be entitled to, and the Borrowers covenant and agree to pay to the Holder, such additional amount as shall be sufficient to cover the cost and expenses of collection of this Note, including, without limitation, reasonable attorneys' fees and costs. Upon an Event of Default, the Holder may take such action as it deems desirable for the enforcement and collection of the principal of, and unpaid accrued interest on, this Note, as well as all additional sums to which the Holder may be entitled as aforesaid. The Holder's rights hereunder shall be in addition to any other rights the Holder may have at law or in equity. If an Event of Default has occurred under the Agreement, or this Note in addition to any agreed upon charges, the principal balance of this Note shall thereafter, at Holder's option, bear interest at five percent (5.00%) in addition to the rate set forth in above, calculated over a year of 360 days, however the total rate of interest will not exceed the maximum allowable legal rate of interest. SECTION 3 REMEDIES UPON DEFAULT. (a) Upon the occurrence of an Event of Default, the principal amount then outstanding of, and the accrued and unpaid interest on, this Note shall automatically become immediately due and payable without presentment, demand, protest, or other formalities of any kind, all of which are hereby expressly waived by the Company. (b) The Holder may institute such actions or proceedings in law or equity as it shall deem expedient for the protection of its rights and may prosecute and enforce its claims against all assets of the Company, and in connection with any such action or proceeding shall be entitled to -3- 21 receive from the Company payment of the principal amount of this Note plus accrued interest to the date of payment plus reasonable expenses of collection, including, without limitation, attorneys' fees and expenses. SECTION 4 SECURITY. This note shall be secured pursuant to that certain Security Agreement, Assignment and Mortgage of Copyright by and between Company and Holder dated of even date herewith. SECTION 5 MISCELLANEOUS. (a) Any notice or other communication required or permitted to be given hereunder shall be in writing and shall be mailed by certified mail, return receipt requested, or by Federal Express, Express Mail, or similar overnight delivery or courier service or delivered (in person or by telecopy, telex, or similar telecommunications equipment) against receipt to the party to whom it is to be given, (i) if to the Company, at its address at 12300 Wilshire Boulevard, Suite 400, Los Angeles, California 90025 Attention: President, (ii) if to the Holder, at its address set forth on the first page hereof, or (iii) in either case, to such other address as the party shall have furnished in writing in accordance with the provisions of this Section 6(a). Any notice or other communication given by certified mail shall be deemed given at the time of receipt. Any notice given by other means permitted by this Section 6(a) shall be deemed given at the time of receipt thereof. (b) Upon receipt of evidence satisfactory to the Company of the loss, theft, destruction, or mutilation of this Note (and upon surrender of this Note if mutilated), the Company shall execute and deliver to the Holder a new Note of like date, tenor, and denomination. (c) No course of dealing and no delay or omission on the part of the Holder in exercising any right or remedy shall operate as a waiver thereof or otherwise prejudice the Holder's rights, powers, or remedies. No right, power, or remedy conferred by this Note upon the Holder shall be exclusive of any other right, power, or remedy referred to herein or now or hereafter available at law, in equity, by statute or otherwise, and all such remedies may be exercised singly or concurrently. (d) This Note may be amended only by a written instrument executed by the Company and the Holder hereof. Any amendment shall be endorsed upon this Note, and all future Holders shall be bound thereby. (e) This Note has been negotiated and consummated in the State of California and shall be governed by, and construed in accordance with, the laws of the State of California, without giving effect to principles governing conflicts of law. (f) Company irrevocably consents to the jurisdiction of the courts of the State of California and of any federal court located in such State in connection with any action or proceeding arising out of, or relating to, this Note, any document or instrument delivered pursuant to, in connection with, or simultaneously with this Note, or a breach of this Note or any such document or instrument. In any such action or proceeding, the Company waives personal service of any summons, complaint, or other process and agrees that service thereof may be made in accordance with Section 4(a). Within 30 days after such service, or such other time as may be mutually agreed -4- 22 upon in writing by the attorneys for the parties to such action or proceeding, the Company shall appear or answer such summons, complaint, or other process. Should the Company fail to appear or answer within such 30-day period or such extended period, as the case may be, the Company shall be deemed in default and judgment may be entered against the Company for the amount as demanded in any summons, complaint, or other process so served. (g) Company represents and warrants that: (i) the Company has the requisite power and authority to execute, deliver and perform each of its obligations under this Note and to consummate the transactions provided for herein. (ii) This Note has been duly executed and delivered by the Company and constitutes the legal, valid and binding obligation of Company, enforceable against it in accordance with its terms. IN WITNESS WHEREOF, the Company has caused this Note to be executed and dated the day and year first above written. TEAM COMMUNICATIONS GROUP, INC. BY: DREW LEVIN --------------------------------- DREW LEVIN PRESIDENT AND CHIEF EXECUTIVE OFFICER -5- 23 SECURITY AGREEMENT, ASSIGNMENT, AND MORTGAGE OF COPYRIGHT THIS SECURITY AGREEMENT, ASSIGNMENT AND MORTGAGE OF COPYRIGHT (this "Agreement") is dated as of June 19th, 1997, and is between Alliance Productions Ltd., a Canadian corporation ("Secured Party"), having offices at 301 North Canon Drive, Suite 321, Beverly Hills, CA, and Team Entertainment Group, a California corporation ("Debtor"), having offices at 12300 Wilshire Boulevard, Suite 400, Los Angeles, CA. For good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, Debtor, having full power and authority to enter into this Agreement, hereby irrevocably grants and assigns to Secured Party a continuing first-priority (subject to Schedule 2 attached hereto) security interest in and copyright mortgage on all of Debtor's right, title and interest of every kind and nature, whether now owned or hereafter acquired, in and to "Total Recall" and as more specifically described on Exhibit "A" attached hereto (the "Collateral") in order to secure performance by Debtor of the Obligations (as such term is hereinafter defined in Paragraph I below), subject to termination as and when provided herein. I. OBLIGATIONS SECURED. The security interest and mortgage of copyright herein granted and assigned to Secured Party secures the timely performance of each and every obligation of Debtor (collectively, the "Obligations") (A) under that certain Promissory Note from Debtor in favor of Secured Party dated of even date herewith in the original principal amount of $650,000; and/or (B) hereunder. II. WARRANTIES, REPRESENTATIONS, AND COVENANTS OF DEBTOR. Debtor represents, warrants, and covenants as follows: A. No Claims. Subject to and except as expressly set forth in the preamble hereto, the Collateral is free and clear of any claims whether or not resulting from acts or omissions of Debtor or any parent, affiliate, or subsidiary of Debtor, and Debtor has not caused or permitted, and shall not hereafter cause or permit, either voluntarily or by operation of law, any security interest, lien, encumbrance or adverse claim whatsoever to accrue against the Collateral, without Secured Party's prior written consent, which Secured Party may withhold in Secured Party's sole discretion. B. No Legal Proceedings. Debtor has no knowledge of any legal proceedings now pending, threatened or reasonably anticipated against Debtor which might impede performance of Debtor's obligations as to the Collateral or the ability of -1- 24 Secured Party to exercise its rights hereunder or pursuant to the Rights Agreement, and shall promptly notify Secured Party if Debtor hereafter learns of any such legal proceeding. C. No Inconsistent Grant of Rights. Neither Debtor nor any party acting on behalf or with the authority of Debtor has heretofore made any grant, license, or other transfer of all or any rights in, to, or in respect of the Collateral or any or all of the literary, dramatic, or other material created for the Collateral or on which the Collateral are based that is inconsistent with the grant of rights to Secured Party hereunder or as set forth in the Rights Agreement, except as may otherwise be set forth on Schedule 1 attached hereto. D. Change of Address. Debtor shall, within five (5) business days after a change in the address hereinabove set forth, give Secured Party written notice thereof. E. Due Authority. Debtor has authority to enter into this Agreement, and any person signing on Debtor's behalf has been duly authorized to execute this Agreement for Debtor. III. DECLARATION OF TRUST. Until delivery of any item of Collateral to Secured Party, Debtor shall hold such item as trustee for Secured Party. IV. DEFAULT BY DEBTOR. Each of the following shall constitute a default by Debtor: A. Nonperformance. Failure by Debtor to perform any of the Obligations set forth in Paragraph I above. B. Insolvency/Bankruptcy. The commencement by a third party of any insolvency proceeding against Debtor or Debtor's petition for or consent to any relief under any bankruptcy, reorganization, receivership, liquidation, insolvency, moratorium, compromise or similar Federal or State statutes, Debtor's consent to appointment of a receiver, trustee or assignee in bankruptcy of Debtor or a substantial part of Debtor's assets or Debtor's making an assignment for the benefit of or a composition with creditors. V. RIGHTS AND REMEDIES ON DEFAULT BY DEBTOR. Upon any default by Debtor: A. Secured Party's Rights and Remedies. Secured Party shall have all rights, privileges, and remedies to the maximum extent permitted by law (including, -2- 25 without limitation, all legal, equitable, administrative, and self-help rights and remedies). The foregoing are cumulative and the exercise of one or more thereof shall not preclude Secured Party from a later or concurrent exercise of any other. B. Assembling Collateral. Secured Party may require Debtor to assemble all the Collateral and make it available at a place and time designated by Secured Party. C. Nonwaiver. To be effective, a waiver by Secured Party of any default by Debtor must be in writing, and any such waiver of failure of Secured Party to insist upon strict performance by Debtor of any of Debtor's obligations as to the Programs shall not constitute a waiver of any subsequent or other default by Debtor. VI. EXECUTE DOCUMENTS. Debtor shall execute and deliver to Secured Party any and all further documents consistent with this Agreement as Secured Party may reasonably require to perfect, protect, evidence, renew, continue and/or terminate the security interest and copyright mortgage hereunder and/or to effectuate the purposes and intent of this Agreement, including, without limitation, the execution of financing statements, termination statements, assignment and mortgages of copyright (including, but not limited to, the Copyright Mortgage and Assignment attached hereto as Exhibit "B"), access letters, and pledgeholder agreements with film laboratories and other parties holding any film or other physical properties related to the Programs. Debtor hereby appoints Secured Party its irrevocable attorney-in-fact to execute any such documents for Debtor if Debtor fails to execute any such documents within five (5) business days after Secured Party's request. The rights of Secured Party under this Paragraph VI constitute a power coupled with an interest and are irrevocable. VII. TERMINATION. Secured Party's security interest hereunder shall be terminated upon the indefeasible performance of all of Debtor's Obligations set forth in Paragraph I above. VIII. GOVERNING LAW. This Agreement shall be governed and construed by the laws of the State of California applicable to agreements entered into and to be wholly performed within said State. IX. PARTIES BOUND. This Agreement shall bind and inure to the benefit of the parties hereto and their respective successors, heirs and assigns. X. NO JOINT VENTURE OR PARTNERSHIP. Nothing contained in this Agreement or the Rights Agreement shall be construed as creating a joint venture or -3- 26 partnership between Debtor and Secured Party or a third party beneficiary relationship as to any third parties. XI. SEVERABILITY OF PROVISIONS. Any provision of this Agreement declared invalid under any law shall not invalidate any other provision hereof. XII. NOTICES. Notice hereunder shall be deemed effective only when in writing and duly sent by certified or registered mail to the receiving party's mailing address as herein set forth: To Debtor: Team Entertainment Group 12300 Wilshire Boulevard, Suite 400 Los Angeles, CA 90025 Attention: Eric S. Elias, Esq. Phone: 310/442-3500 Fax: 310/442-3501 with a copy to: Heenan Blaikie 9401 Wilshire Boulevard Suite 1100 Beverly Hills, California 90212 Attention: Daniel H. Black, Esq. Phone: 310/275-3600 Fax: 310/724-8340 To Secured Party: Alliance Productions Ltd. 301 North Canon Drive, Suite 321 Beverly Hills, CA 90210 Attention: John Morayniss, Esq. Phone: 310/275-5501 Fax: 310/275-5502 with a copy to: Bloom, Hergott, Cook, Diemer and Klein, LLP 150 South Rodeo Drive, Third Floor Beverly Hills, California 90212 Attention: Leigh Brecheen, Esq. Phone: 310/859-6821 Fax: 310/859-2788 -4- 27 XIII. CAPTIONS. Captions are inserted for reference and convenience only and in no way define, limit or describe the scope of this Agreement or intent of any provision. The parties hereto have executed this Agreement as of the date first above written. TEAM ENTERTAINMENT GROUP ALLIANCE PRODUCTIONS LTD. By: /s/ DREW S. LEVIN By: /s/ JOHN MORAYNISS ----------------------------- ------------------------------- Print Name: Drew S. Levin Print Name: John Morayniss -------------------- ----------------------- Title: President/CEO Title: SR. V.P. ------------------------- ---------------------------- -5- 28 EXHIBIT "A" COLLATERAL (a) All of Grantor's right, title and interest in and to the following: (i) All rights of every kind and nature of Grantor (including, without limitation, copyrights, whether now owned or hereafter acquired) in and to the right to make one or more television programs, series or television movies based on the feature film "Total Recall" (the "Rights"), including without limitation, all rights pursuant to that Purchase Agreement entered into and made effective as of May 1, 1996, by and between Grantor and Carolco Pictures, Inc. et al, and incorporated herein by reference. (ii) All collateral, allied, ancillary and subsidiary rights of Grantor of every kind and nature, without limitation, derived from, appurtenant to or related to the Rights, including, without limitation, all production, exploitation, reissue, remake, sequel, serial or series production rights by use of film, tape or any other recording devices now known or hereafter devised, whether based upon, derived from or inspired by the Rights or any part thereof, all rights to use, exploit and license others to use or exploit any and all novelization, publishing, commercial tie-ups and merchandising rights of every kind and nature, including, without limitation, all novelization, publishing, merchandising rights and commercial tie-ups arising out of or connected with or inspired by the Rights, and including further, without limitation, any and all commercial exploitation in connection with or related to the Rights; (iii) All rights of Grantor of every kind or nature, present and future, in and to all agreements relating to the development, production, completion, delivery and exploitation of the Rights; (iv) All rights in and to all copyrights and renewals and extensions of copyrights, domestic and foreign, heretofore or hereafter obtained in the Rights or any part thereof, and the right (but not the obligation) to make publication thereof for copyright purposes, to register claims under copyright, and the right (but not the obligation) to renew and extend such copyrights, and the right (but not the obligation) to sue in the name of Grantor or in the name of Grantee (or any of them) for past, present and future of copyright; (v) All rights to produce, release, sell, distribute, lease, market, license, exhibit, broadcast, reproduce, publicize or otherwise exploit the Rights and any and all rights therein in perpetuity, without limitation, in any manner and in any media whatsoever throughout the universe, including without limitation, all forms of television (including, without limitation, free, pay, toll, cable, sustaining, subscription, sponsored and direct satellite broadcast), non- 29 theatrically, on cassettes, cartridges, discs and other similar and dissimilar video devices and by any and all other scientific, mechanical or electronic means, methods, processes or devices now known or hereafter conceived, devised or created; (vi) Any and all accounts, accounts receivable, general intangibles, contract rights, chattel paper, documents, instruments and goods, including inventory (as those terms are defined in the applicable Uniform Commercial Code enacted in the jurisdiction where such collateral may be located or in comparable provisions of governing law of foreign jurisdictions) not elsewhere included in this definition, which may arise in connection with the production, sale, distribution or exploitation of the Rights or any element thereof, or any collateral described herein; (b) All cash and cash equivalents of Grantor derived from or relating to the Rights and all drafts, check, letters of credit, certificates of deposit, notes, bills of exchange and other writings relating to the Rights which evidence a right to the payment of money to Grantor and are not themselves security agreements or leases and are of a type which is in the ordinary course of business transferred by delivery with any necessary endorsement or assignment whether now owned or hereafter acquired. 30 EXHIBIT B COPYRIGHT MORTGAGE AND ASSIGNMENT ("TOTAL RECALL") For good and valuable consideration, receipt of which is hereby acknowledged, the undersigned, TEAM Communications Group, Inc., a California corporation ("Grantor"), does hereby mortgage, assign, grant, convey and transfer for security to Alliance Productions Ltd. ("Grantee"), and their successors and assigns, throughout the world in perpetuity, all of Grantor's rights, title and interest of every kind and nature, without limitation, in and to all copyrights and rights and interests of every kind or nature in copyrights and works protectable by copyright, whether now owned or hereafter created or acquired and all renewals and extensions thereof in and to the rights of Grantor to make and exploit one or more television series, movies or other properties based on the feature film "Total Recall" (the "Work") and any rights necessary to produce, release, sell, distribute, lease, market, license, exhibit, broadcast, reproduce, publicize or otherwise exploit the Work, and such other Collateral as defined below. Grantor agrees that if any person, firm or corporation shall do or perform any acts which the Grantee believes to constitute a copyright infringement of the Work, or any derivative work, or constitute a plagiarism, or violate or infringe any right of the Grantor or the Grantee therein or if any person, firm or corporation shall do or perform any acts which the Grantee believes to constitute an unauthorized or unlawful distribution, exhibition, or use thereof, then and in any such event, the Grantee may and shall have the right, but not the obligation, to take such steps and institute such suits or proceedings as the Grantee may deem advisable or necessary to prevent such acts and conduct and to secure damages and other relief by reason thereof, and to generally take such steps as may be advisable or reasonably necessary or proper for the full protection of the rights of the parties. The Grantee may take such steps or institute such suits or proceedings in its own name or in the name of the Grantor or in the names of the parties jointly. Grantor hereby irrevocably constitutes and appoints Grantee its lawful attorney-in-fact to do all acts and things permitted or reasonably contemplated by the terms hereof and pursuant to the Security Agreement referred to below. Without limiting the generality of the foregoing, the aforesaid conveyance and assignment includes all prior choses-in-action, at law, in equity and otherwise, the right to recover all damages and other sums, and the right to other relief allowed or awarded at law, in equity, by statute or otherwise. Grantor and Grantee have entered into a Security Agreement, Assignment, and Mortgage of Copyright dated as of June 1997, as the same may hereinafter be amended, supplemented, renewed, extended or replaced (the "Security Agreement") relating to the mortgage and assignment for security in and to the aforesaid rights and this Copyright Mortgage and Assignment is expressly made in accordance with the terms and conditions contained in the Security Agreement. For purposes hereof, the term "Collateral" shall have the meaning set forth in Exhibit "A" hereto which is incorporated herein by this reference. "Grantor": TEAM Communications Group, Inc. By: ___________________________ Drew S. Levin Its: President and CEO 1 31 EXHIBIT B COPYRIGHT MORTGAGE AND ASSIGNMENT ("TOTAL RECALL") For good and valuable consideration, receipt of which is hereby acknowledged, the undersigned, TEAM Communications Group, Inc., a California corporation ("Grantor"), does hereby mortgage, assign, grant, convey and transfer for security to Alliance Productions Ltd. ("Grantee"), and their successors and assigns, throughout the world in perpetuity, all of Grantor's rights, title and interest of every kind and nature, without limitation, in and to all copyrights and rights and interests of every kind or nature in copyrights and works protectable by copyright, whether now owned or hereafter created or acquired and all renewals and extensions thereof in and to the rights of Grantor to make and exploit one or more television series, movies or other properties based on the feature film "Total Recall" (the "Work") and any rights necessary to produce, release, sell, distribute, lease, market, license, exhibit, broadcast, reproduce, publicize or otherwise exploit the Work, and such other Collateral as defined below. Grantor agrees that if any person, firm or corporation shall do or perform any acts which the Grantee believes to constitute a copyright infringement of the Work, or any derivative work, or constitute a plagiarism, or violate or infringe any right of the Grantor or the Grantee therein or if any person, firm or corporation shall do or perform any acts which the Grantee believes to constitute an unauthorized or unlawful distribution, exhibition, or use thereof, then and in any such event, the Grantee may and shall have the right, but not the obligation, to take such steps and institute such suits or proceedings as the Grantee may deem advisable or necessary to prevent such acts and conduct and to secure damages and other relief by reason thereof, and to generally take such steps as may be advisable or reasonably necessary or proper for the full protection of the rights of the parties. The Grantee may take such steps or institute such suits or proceedings in its own name or in the name of the Grantor or in the names of the parties jointly. Grantor hereby irrevocably constitutes and appoints Grantee its lawful attorney-in-fact to do all acts and things permitted or reasonably contemplated by the terms hereof and pursuant to the Security Agreement referred to below. Without limiting the generality of the foregoing, the aforesaid conveyance and assignment includes all prior choses-in-action, at law, in equity and otherwise, the right to recover all damages and other sums, and the right to other relief allowed or awarded at law, in equity, by statute or otherwise. Grantor and Grantee have entered into a Security Agreement, Assignment, and Mortgage of Copyright dated as of June __, 1997, as the same may hereinafter be amended, supplemented, renewed, extended or replaced (the "Security Agreement") relating to the mortgage and assignment for security in and to the aforesaid rights and this Copyright Mortgage and Assignment is expressly made in accordance with the terms and conditions contained in the Security Agreement. For purposes hereof, the term "Collateral" shall have the meaning set forth in Exhibit "A" hereto which is incorporated herein by this reference. "Grantor": TEAM Communications Group, Inc. By: ___________________________ Drew S. Levin Its: President and CEO 1 32 EXHIBIT "A" COLLATERAL (a) All of Grantor's right, title and interest in and to the following: (i) All rights of every kind and nature of Grantor (including, without limitation, copyrights, whether now owned or hereafter acquired) in and to the right to make one or more television programs, series or television movies based on the feature film "Total Recall" (the "Rights"), including without limitation, all rights pursuant to that Purchase Agreement entered into and made effective as of May 1, 1996, by and between Grantor and Carolco Pictures, Inc. et al, and incorporated herein by reference. (ii) All collateral, allied, ancillary and subsidiary rights of Grantor of every kind and nature, without limitation, derived from, appurtenant to or related to the Rights, including, without limitation, all production, exploitation, reissue, remake, sequel, serial or series production rights by use of film, tape or any other recording devices now known or hereafter devised, whether based upon, derived from or inspired by the Rights or any part thereof; all rights to use, exploit and license others to use or exploit any and all novelization, publishing, commercial tie-ups and merchandising rights of every kind and nature, including, without limitation, all novelization, publishing, merchandising rights and commercial tie-ups arising out of or connected with or inspired by the Rights, and including further, without limitation, any and all commercial exploitation in connection with or related to the Rights; (iii) All rights of Grantor of every kind or nature, present and future, in and to all agreements relating to the development, production, completion, delivery and exploitation of the Rights; (iv) All rights in and to all copyrights and renewals and extensions of copyrights, domestic and foreign, heretofore or hereafter obtained in the Rights or any part thereof, and the right (but not the obligation) to make publication thereof for copyright purposes, to register claim under copyright, and the right (but not the obligation) to renew and extend such copyrights, and the right (but not the obligation) to sue in the name of Grantor or in the name of Grantee (or any of them) for past, present and future infringements of copyright; (v) All rights to produce, release, sell, distribute, lease, market, license, exhibit, broadcast, reproduce, publicize or otherwise exploit the Rights and any and all rights therein in perpetuity, without limitation, in any manner and in any media whatsoever throughout the universe, including without limitation, all forms of television (including, without limitation, free, pay, toll, cable, sustaining subscription, sponsored and direct satellite broadcast), non- 33 theatrically, on cassettes, cartridges, discs and other similar and dissimilar video devices and by any and all other scientific, mechanical or electronic means, methods, processes or devices now known or hereafter conceived, devised or created; (vi) Any and all accounts, accounts receivable, general intangibles, contract rights, chattel paper, documents, instruments and goods, including inventory (as those terms are defined in the applicable Uniform Commercial Code enacted in the jurisdiction where such collateral may be located or in comparable provisions of governing law of foreign jurisdictions) not elsewhere included in this definition, which may arise in connection with the production, sale, distribution or exploitation of the Rights or any element thereof, or any collateral described herein; (b) All cash and cash equivalents of Grantor derived from or relating to the Rights and all drafts, check, letters of credit, certificates of deposit, notes, bills of exchange and other writings relating to the Rights which evidence a right to the payment of money to Grantor and are not themselves security agreements or leases and are of a type which is in the ordinary course of business transferred by delivery with any necessary endorsement or assignment whether now owned or hereafter acquired. 34 SCHEDULE 1 1. That certain agreement between Polygram Television and Team Communications Group, Inc. dated as of April 1, 1997 2. That certain term sheet between Miramax Films and Team Communications Group, Inc. dated as of March 18, 1997, and its accompanying Mortgage of Copyright, Short Form Assignment, and UCC-1. 35
THIS SPACE FOR USE OF FILING OFFICE SCHEDULE 2 FINANCING STATEMENT -- FOLLOW INSTRUCTIONS This Financing Statement is presented for filing pursuant to the Uniform Commercial Code and will remain effective, with certain exceptions, for 5 years from date of filing. - ------------------------------------------------------------------------ A. NAME & TEL. # OF CONTACT AT FILER B. FILING OFFICE ACCT. # (optional) (optional) - ------------------------------------------------------------------------ C. RETURN COPY TO: (Name and Mailing Address) - ------------------------------------------------------------------------ D. OPTIONAL DESIGNATION / / LESSOR/LESSEE / / CONSIGNOR/CONSIGNEE (if applicable) / / NON-UCC FILING - ------------------------------------------------------------------------------------------------------------- 1. DEBTOR'S EXACT FULL LEGAL NAME - insert only one debtor name (1a or 1b) ---------------------------------------------------------------------------------------------------------- 1a. ENTITY'S NAME TEAM Communications Group, Inc. d/b/a TEAM Entertainment Group ---------------------------------------------------------------------------------------------------------- OR 1b. INDIVIDUAL'S LAST NAME FIRST NAME MIDDLE NAME SUFFIX - ------------------------------------------------------------------------------------------------------------- 1c. MAILING ADDRESS CITY STATE COUNTRY POSTAL CODE 12300 Wilshire Boulevard, Suite #400 Los Angeles CA - 90025 - ------------------------------------------------------------------------------------------------------------- 1d. S.S. OR TAX I.D. # OPTIONAL 1e. TYPE OF ENTITY 1f. ENTITY'S STATE 1g. ENTITY'S ORGANIZATIONAL 954519215 ADD'NL INFO RE OR COUNTRY OF I.D. #, if any / / NONE ENTITY DEBTOR ORGANIZATION - ------------------------------------------------------------------------------------------------------------- 2. ADDITIONAL DEBTOR'S EXACT FULL LEGAL NAME - insert only one debtor name (2a or 2b) ---------------------------------------------------------------------------------------------------------- 2a. ENTITY'S NAME OR ---------------------------------------------------------------------------------------------------------- 2b. INDIVIDUAL'S LAST NAME FIRST NAME MIDDLE NAME SUFFIX - ------------------------------------------------------------------------------------------------------------- 2c. MAILING ADDRESS CITY STATE COUNTRY POSTAL CODE - ------------------------------------------------------------------------------------------------------------- 2d. S.S. OR TAX I.D. # OPTIONAL 2e. TYPE OF ENTITY 2f. ENTITY'S STATE 2g. ENTITY'S ORGANIZATIONAL ADD'NL INFO RE OR COUNTRY OF I.D. #, if any / / NONE ENTITY DEBTOR ORGANIZATION - ------------------------------------------------------------------------------------------------------------- 3. SECURED PARTY'S (ORIGINAL S/P or ITS TOTAL ASSIGNEE) EXACT FULL LEGAL NAME - insert only one secured party name (3a or 3b) ---------------------------------------------------------------------------------------------------------- 3a. ENTITY'S NAME Miramax Film Corp. ---------------------------------------------------------------------------------------------------------- OR 3b. INDIVIDUAL'S LAST NAME FIRST NAME MIDDLE NAME SUFFIX - ------------------------------------------------------------------------------------------------------------- 3c. MAILING ADDRESS CITY STATE COUNTRY POSTAL CODE 375 Greenwich Street New York NY 10013 - ------------------------------------------------------------------------------------------------------------- 4. This FINANCING STATEMENT covers the following types or items of property: See Schedule A attached hereto and made a part thereof. - ------------------------------------------------------------------------------------------------------------- Filed with: Sec. of State, California - ------------------------------------------------------------------------------------------------------------- 5. CHECK This FINANCING STATEMENT is signed by the Secured Party 7. If filed in Florida BOX / / instead of the Debtor to perfect a security interest (a) (check one) (if applicable) in collateral already subject to a security interest in / / Documentary stamp another jurisdiction when it was brought into this state, tax paid or when the debtor's location was changed to this state, / / Documentary stamp or (b) in accordance with other statutory provisions tax not applicable (additional date may be required) - ------------------------------------------------------------------------------------------------------------- 6. REQUIRED SIGNATURE(S) TEAM Communications Group, Inc. 8. / / This FINANCING STATEMENT is to be d/b/a TEAM Entertainment Group filed (for record) (or recorded Miramax Film Corp. in the REAL ESTATE RECORDS Attach Addendum (if applicable) - ------------------------------------------------------------------------------------------------------------- 9. / / Check to REQUEST SEARCH CERTIFICATE(S) on Debtor(s) [ADDITIONAL FEE] (optional) / / All Debtors / / Debtor 1 / / Debtor 2 - ------------------------------------------------------------------------------------------------------------- (1) FILING OFFICER COPY - NATIONAL FINANCING STATEMENT (FORM UCC1)(TRANS)(REV. 12/18/95)
36 SCHEDULE A Continuation of Box 4 The Collateral shall be deemed to include the following: (I) An undivided twelve and one-half percent (12.5%) interest in and to all of Debtor's right, title and interest in and to the following, whether now owned or hereafter acquired, and of whatever kind and nature: (1) Copyrights: All common law and statutory United States and other copyrights, renewals and extensions of such copyright relating to the theatrical motion picture entitled "TOTAL RECALL" (the "Picture"), any other intellectual property relating to the Picture, and any and all proceeds and products of the foregoing; (2) Physical Properties: All positive and negative film and film-materials relating to the Picture, whether now owned or hereafter acquired by Debtor, and wherever located, and the results and proceeds and products of the foregoing; and (3) Underlying Properties: All literary, musical, dramatic and other written materials created for the Picture or upon which the Picture is based or which are used in or in connection with the Picture, and the proceeds and products of the foregoing; and (4) Contract Rights: All rights in all agreements and understandings (whether or not evidenced in writing) with third parties relating to the Picture, or to any of the elements described in subparagraph (1) through (3) in this Subsection (I), and any rights derived therefrom or relating thereto, and the results and proceeds and products of the foregoing; and (5) Other Items: Any and all of Debtor's rights in and to those certain accounts, inventories, and general intangibles, gross receipts and/or revenues from and/or relating to the exploitation of the Picture (and in any bank account into which such proceeds have been or are to be deposited), and all other items deemed inventories, Equipment, Accounts and General Intangibles (as defined under the California Uniform Commercial Code or other applicable law) relating to the exploitation of the Picture; and (II) A one hundred percent (100%) interest in and to all of the Debtor's right, title and interest in and to the following, whether now owned or hereafter acquired, and of whatever kind and nature: (1) Total Recall Television Series: All forms of home video rights, now or hereafter known, in and to the first twenty-six episodes of a television series (the "Total Recall Series") to be produced by, in association with or under authority of Debtor, based on the Picture; and 37 (2) Physical Properties: All positive and negative film, film materials, video and video materials and any sound materials, relating to the Total Recall Series, whether now owned or hereafter acquired by Debtor, and wherever located, and the results and proceeds and products of the foregoing; and (3) Underlying Properties: All literary, musical, dramatic and other written materials created for the Total Recall Series or upon which the Total Recall Series is based or which are used in or in connection with the Total Recall Series, and any and all other underlying materials on which the Total Recall Series is based, and the proceeds and products of the foregoing; and (4) Contract Rights: All rights in all agreements and understandings (whether or not evidenced in writing) with third parties relating to the Total Recall Series, or to any of the elements described in subparagraph (1) through (3) in this Subsection (II), and any rights derived therefrom or relating thereto, and the results and proceeds and products of the foregoing; and (III) A one hundred percent (100%) interest in and to all of the Debtor's right, title and interest in and to the following, whether now owned or hereafter acquired, and of whatever kind and nature: (1) Amazing Tails Television Series: All forms of home video rights, now or hereafter known, in and to the twenty-two episodes of a television series (the "Amazing Tails Series") produced by Debtor and entitled "Amazing Tails"; and (2) Physical Properties: All positive and negative film, film materials, video and video materials and any sound materials, relating to the Amazing Tails Series, whether now owned or hereafter acquired by Debtor, and wherever located, and the results and proceeds and products of the foregoing; and (3) Underlying Properties: All literary, musical, dramatic and other written materials created for the Amazing Tails Series or upon which the Amazing Tails Series is based or which are used in or in connection with the Amazing Tails Series, and any and all other underlying materials on which the Amazing Tails Series is based, and the proceeds and products of the foregoing; and (4) Contract Rights: All rights in all agreements and understandings (whether or not evidenced in writing) with third parties relating to the Amazing Tails Series, or to any of the elements described in subparagraph (1) through (3) in this Subsection (III), and any rights derived therefrom or relating thereto, and the results and proceeds and products of the foregoing. END OF SCHEDULE A 2 38 UNIFORM COMMERCIAL CODE -- FINANCING STATEMENT -- FORM UCC-1 This FINANCING STATEMENT is presented to a Filing Officer | No. of Additional | for filing pursuant to the Uniform Commercial Code. | Sheets Presented: 2 | 3. [ ] The Debtor is a transmitting utility. - ----------------------------------------------------------------------------------------------------------------------------------- 1. Debtor(s) (Last Name First) and Address(es): | 2. Secured Party(ies) Name(s) | 4. For Filing Officer: Date, Time, TEAM Communications Group, Inc. | and Address(es) | No. Filing Office d/b/a TEAM Entertainment Group | Miramax Film Corp. | 12300 Wilshire Blvd. #400 | 375 Greenwich Street | Los Angeles, CA 90025 | New York, NY 10013 | | | - ----------------------------------------------------------------------------------------------------------------------------------- 6. This Financing Statement covers the following types (or items) of property: | 6. Assignee(s) of Secured Party and Address(es) | See Schedule A attached hereto and made a part hereof. | | | -------------------------------------------------- Filed with: Secretary of State, New York | 7. [ ] The described crops are growing or to be [x] Products of the Collateral are also covered. | grown on: * - ---------------------------------------------------------------------------------| [ ] The described goods are or are to be 8. Describe Real Estate Here: [ ] This statement is to be | 9. Name of a | affixed to: * indexed in the Real | Record Owner | [ ] The lumber to be cut or minerals or the Estate Records: | | like (including oil and gas) is on: * | | * (Describe Real Estate Below) | -------------------------------------------------- | ---------------------------------------------------------------------- No. & Street Town or City County Section Block Lot - ----------------------------------------------------------------------------------------------------------------------------------- 10. This statement is filed without the debtor's signature to perfect a security interest in collateral (check appropriate box) [ ] under a security agreement signed by debtor authorizing secured party to file this statement, or [ ] which is proceeds of the original collateral described above in which a security interest was perfected, or [ ] acquired after a change of name, identity or corporate structure of the debtor, or [ ] as to which the filing has lapsed, or already subject to a security interest in another jurisdiction: [ ] when the collateral was brought into the state, or [ ] when the debtor's location was changed to this state. TEAM Communications Group, Inc. d/b/a TEAM Entertainment Group Miramax Film Corp. - -------------------------------------------------------------- ----------------------------------------------------------------- By: [SIG] By: ----------------------------------------------------------- -------------------------------------------------------------- Signature(s) of Debtor(s) Signature of Secured Party(ies) (1) FILING OFFICER COPY - NUMERICAL (5/82) STANDARD FORM - FORM UCC-1
39 SCHEDULE A Continuation of Box 5 The Collateral shall be deemed to include the following. (I) An undivided twelve and one-half percent (12.5%) interest in and to all of Debtor's right, title and interest in and to the following, whether now owned or hereafter acquired, and of whatever kind and nature: (1) Copyrights: All common law and statutory United States and other copyrights, renewals and extensions of such copyright relating to the theatrical motion picture entitled "TOTAL RECALL" (the "Picture"), any other intellectual property relating to the Picture, and any and all proceeds and products of the foregoing; (2) Physical Properties: All positive and negative film and film materials relating to the Picture, whether now owned or hereafter acquired by Debtor, and wherever located, and the results and proceeds and products of the foregoing; and (3) Underlying Properties: All literary, musical, dramatic and other written materials created for the Picture or upon which the Picture is based or which are used in or in connection with the Picture, and the proceeds and products of the foregoing; and (4) Contract Rights: All rights in all agreements and understandings (whether or not evidenced in writing) with third parties relating to the Picture, or to any of the elements described in subparagraph (1) through (3) in this Subsection (I), and any rights derived therefrom or relating thereto, and the results and proceeds and products of the foregoing; and (5) Other Items: Any and all of Debtor's rights in and to those certain accounts, inventories, and general intangibles, gross receipts and/or revenues from and/or relating to the exploitation of the Picture (and in any bank account into which such proceeds have been or are to be deposited), and all other items deemed inventories, Equipment, Accounts and General Intangibles (as defined under the California Uniform Commercial Code or other applicable law) relating to the exploitation of the Picture; and (II) A one hundred percent (100%) interest in and to all of the Debtor's right, title and interest in and to the following, whether now owned or hereafter acquired, and of whatever kind and nature: (1) Total Recall Television Series: All forms of home video rights, now or hereafter known, in and to the first twenty-six episodes of a television series (the "Total Recall Series") to be produced by, in association with or under authority of Debtor, based on the Picture; and 40 (2) Physical Properties: All positive and negative film, film materials, video and video materials and any sound materials, relating to the Total Recall Series, whether now owned or hereafter acquired by Debtor, and wherever located, and the results and proceeds and products of the foregoing; and (3) Underlying Properties: All literary, musical, dramatic and other written materials created for the Total Recall Series or upon which the Total Recall Series is based or which are used in or in connection with the Total Recall Series, and any and all other underlying materials on which the Total Recall Series is based, and the proceeds and products of the foregoing; and (4) Contract Rights: All rights in all agreements and understandings (whether or not evidenced in writing) with third parties relating to the Total Recall Series, or to any of the elements described in subparagraph (1) through (3) in this Subsection (II), and any rights derived therefrom or relating thereto, and the results and proceeds and products of the foregoing; and (III) A one hundred percent (100%) interest in and to all of the Debtor's right, title and interest in and to the following, whether now owned or hereafter acquired, and of whatever kind and nature: (1) Amazing Tails Television Series: All forms of home video rights, now or hereafter known, in and to the twenty-two episodes of a television series (the "Amazing Tails Series") produced by Debtor and entitled "Amazing Tails"; and (2) Physical Properties: All positive and negative film, film materials, video and video materials and any sound materials, relating to the Amazing Tails Series, whether now owned or hereafter acquired by Debtor, and wherever located, and the results and proceeds and products of the foregoing; and (3) Underlying Properties: All literary, musical, dramatic and other written materials created for the Amazing Tails Series or upon which the Amazing Tails Series is based or which are used in or in connection with the Amazing Tails Series, and any and all other underlying materials on which the Amazing Tails Series is based, and the proceeds and products of the foregoing; and (4) Contract Rights: Ail rights in all agreements and understandings (whether or not evidenced in writing) with third parties relating to the Amazing Tails Series, or to any of the elements described in subparagraph (1) through (3) in this Subsection (III), and any rights' derived therefrom or relating thereto, and the results and proceeds and products of the foregoing. END OF SCHEDULE A 2 41 SHQRT FORM ASSIGNMENT For good and valuable consideration, receipt of which is hereby acknowledged, the undersigned, TEAM COMMUNICATIONS GROUP, INC. D/B/A TEAM ENTERTAINMENT GROUP ("Owner") does hereby transfer and Assign to MIRAMAX FILM CORP. ("Assignee"), its successors and assigns the following: 1. All forms of home video rights, now or hereafter known, in and to the first twenty-six episodes of a television series (the "Series") to be produced by, in association with or under authority of Owner, based on the motion picture entitled "Total Recall" and all underlying rights thereto (the "Underlying Property") throughout the universe (other than Japan and Spain) (the "Territory"), for a term commencing on the date hereof and continuing through and including the date which is twenty-two years after the date of delivery to Miramax of the last episode of the Series (whether such episode is delivered pursuant to this paragraph 1 or pursuant to paragraph 2 below). 2. The option to acquire all forms of home video rights, now or hereafter known, in and to all other episodes of the Series produced by, in association with or under authority of Owner, based on the Underlying Property throughout the Territory, for a term commencing on the date hereof and continuing through and including the date which is twenty-two years after the date of delivery to Assignee of the last episode of the Series delivered pursuant to this paragraph 2. 3. A right of first negotiation and first refusal to acquire all forms of home video rights, now or hereafter known, in and to all other programs and productions based on the Underlying Property produced by, in association with or under authority of Owner, including, without limitation, television movies and mini-series not broadcast as part of a television season, such right to be in effect for programs and productions commenced during any television season as to which Assignee has 42 home video rights to Series episodes, and for a period of three years thereafter. 4. Any and all causes of action which Owner now has or hereafter may have for any past, present or future infringement or interference with any of the rights granted to Assignee in and to the Underlying Property as such pertain to the grants granted or which may be granted pursuant hereto. Owner hereby appoints Assignee, its successors and assigns as Owner's attorney-in-fact (which appointment shall be irrevocable and coupled with an interest), with full power of substitution and delegation in Owner's or in Assignee's name to enforce and protect all rights, licenses, privileges or property granted hereunder under any and all copyrights therein and thereto; to prevent or terminate any infringement or other violation or any threatened infringement or threatened violation of such rights, licenses, privileges or property; and to litigate and collect for all damages arising from any such infringement or threatened violation, and to join Owner, in the discretion of Assignee, as party plaintiff or defendant in any such suit or proceeding, and in such event, Owner shall have the right, at Owner's sole expense, to be represented by counsel of owner's choice in any such suit or proceeding. Owner and Assignee acknowledge that this Assignment should be read in conjunction with each of (i) that certain Letter Agreement (the "Agreement"), dated as of March 18, 1997, between Owner and Assignee and (ii) the "Total Recall" Term Sheet (as defined in the Agreement). In the event of any conflict between the provisions of this Assignment, on the one hand, and the Agreement and the "Total Recall" Term Sheet, on the other. The provisions of the Agreement and the "Total Recall" Term Sheet shall control. This Assignment and the provisions hereof shall be binding upon Owner, its successors and assigns. 2 43 IN WITNESS WHEREOF, the undersigned has caused this Assignment to be executed by an officer thereunto duly authorized, on this 6th day of May, 1997. TEAM COMMUNICATIONS GROUP, INC. d/b/a Team Entertainment Group By: [SIG] ------------------------------- Its: President/C.E.O. ------------------------------- 3 44 COPYRIGHT MORTGAGE AND ASSIGNMENT ("TOTAL RECALL") For good and valuable consideration, receipt of which is hereby acknowledged, the undersigned, TEAM Communications Group, Inc., a California corporation ("Grantor"), does hereby mortgage, assign, grant, convey and transfer for security to Alliance Productions Ltd. ("Grantee"), and their successors and assigns, throughout the world in perpetuity, all of Grantor's rights, title and interest of every kind and nature, without limitation, in and to all copyrights and rights and interests of every kind or nature in copyrights and works protectable by copyright, whether now owned or hereafter created or acquired and all renewals and extensions thereof in and to the rights of Grantor to make and exploit one or more television series, movies or other properties based on the feature film "Total Recall" (the "Work") and any rights necessary to produce, release, sell, distribute, lease, market, license, exhibit, broadcast, reproduce, publicize or otherwise exploit the Work, and such other Collateral as defined below. Grantor agrees that if any person, firm or corporation shall do or perform any acts which the Grantee believes to constitute a copyright infringement of the Work, or any derivative work, or constitute a plagiarism, or violate or infringe any right of the Grantor or the Grantee therein or if any person, firm or corporation shall do or perform any acts which the Grantee believes to constitute an unauthorized or unlawful distribution, exhibition, or use thereof, then and in any such event, the Grantee may and shall have the right, but not the obligation, to take such steps and institute such suits or proceedings as the Grantee may deem advisable or necessary to prevent such acts and conduct and to secure damages and other relief by reason thereof, and to generally take such steps as may be advisable or reasonably necessary or proper for the full protection of the rights of the parties. The Grantee may take such steps or institute such suits or proceedings in its own name or in the name of the Grantor or in the names of the parties jointly. Grantor hereby irrevocably constitutes and appoints Grantee its lawful attorney-in-fact to do all acts and things permitted or reasonably contemplated by the terms hereof and pursuant to the Security Agreement referred to below. Without limiting the generality of the foregoing, the aforesaid conveyance and assignment includes all prior choses-in-action, at law, in equity and otherwise, the right to recover all damages and other sums, and the right to other relief allowed or awarded at law, in equity, by statute or otherwise. Grantor and Grantee have entered into a Security Agreement, Assignment and Mortgage of Copyright dated as of June , 1997, as the same may hereinafter be amended, supplemented, renewed, extended or replaced (the "Security Agreement") relating to the mortgage and assignment for security in and to the aforesaid rights and this Copyright Mortgage and Assignment is expressly made in accordance with the terms and conditions contained in the Security Agreement. For purposes hereof, the term "Collateral" shall have the meaning set forth in Exhibit "A" hereto which is incorporated herein by this reference. "Grantor": TEAM Communications Group, Inc. By:/s/ DREW S. LEVIN ------------------------------- Drew S. Levin Its: President and CEO 1 45 STATE OF CALIFORNIA ) )SS. COUNTY OF LOS ANGELES ) On 6/18/97, 1997, before me, Patricia A. Martinez-Perez, Notary Public, personally appeared Drew S. Levin personally known to me or proved to me on the basis of satisfactory evidence to be the person(s) whose name(s) is/are subscribed to the within instrument and acknowledged to me that he/she/they executed the same in his/her/their authorized capacity(ies), and that by his/her/their signature(s) on the instrument the person(s), or the entity upon behalf of which the person(s) acted, executed the instrument. WITNESS my hand and official seal. /s/ PATRICIA A. MARTINEZ-PEREZ ---------------------------------- Notary Public (SEAL) 2 46 EXHIBIT "A" COLLATERAL (a) All of Grantor's right, title and interest in and to the following: (i) All rights of every kind and nature of Grantor (including, without limitation, copyrights, whether now owned or hereafter acquired) in and to the right to make one or more televisions programs, series or television movies based on the feature film "Total Recall" (the "Rights"), including without limitation, all rights pursuant to that Purchase Agreement entered into and made effective as of May 1, 1996, by and between Grantor and Carolco Pictures, Inc. et al, and incorporated herein by reference. (ii) All collateral, allied, ancillary and subsidiary rights of Grantor of every kind and nature, without limitation, derived from, appurtenant to or related to the Rights, including, without limitation, all production, exploitation, reissue, remake, sequel, serial or series production rights by use of film, tape or any other recording devices now known or hereafter devised, whether based upon, derived from or inspired by the Rights or any part thereof; all rights to use, exploit and license others to use or exploit any and all novelization, publishing, commercial tie-ups and merchandising rights of every kind and nature, including, without limitation, all novelization, publishing, merchandising rights and commercial tie-ups arising out of or connected with or inspired by the Rights, and including further, without limitation, any and all commercial exploitation in connection with or related to the Rights; (iii) All rights of Grantor of every kind or nature, present and future, in and to all agreements relating to the development, production, completion, delivery and exploitation of the Rights; (iv) All rights in and to all copyrights and renewals and extensions of copyrights, domestic and foreign, heretofore or hereafter obtained in the Rights or any part thereof, and the right (but not the obligation) to make publication thereof for copyright purposes, to register claims under copyright, and the right (but not the obligation) to renew and extend such copyrights, and the right (but not the obligation) to sue in the name of Grantor or in the name of Grantee (or any of them) for past, present and future infringements of copyright; (v) All rights to produce, release, sell, distribute, lease, market, license, exhibit, broadcast, reproduce, publicize or otherwise exploit the Rights and any and all rights therein in perpetuity without limitation, in any manner and in any media whatsoever throughout the universe, including without limitation, all forms of television (including, without free, pay, toll, cable, sustaining, subscription, sponsored and direct satellite broadcast), non- 47 theatrically, on cassettes, cartridges, discs and other similar and dissimilar video devices and by any and all other scientific, mechanical or electronic means, methods, processes or devices now known or hereafter conceived, devised or created; (vi) Any and all accounts, accounts receivable, general intangibles, contract rights, chattel paper, documents, instruments and goods, including inventory (as those terms are defined in the applicable Uniform Commercial Code enacted in the jurisdiction where such collateral may be located or in comparable provisions of governing law of foreign jurisdictions) not elsewhere included in this definition, which may arise in connection with the production, sale, distribution or exploitation of the Rights or any element thereof, or any collateral described herein; (b) All cash and cash equivalents of Grantor derived from or relating to the Rights and all drafts, check, letters of credit, certificates of deposit, notes, bills of exchange and other writings relating to the Rights which evidence a right to the payment of money to Grantor and are not themselves security agreements or leases and are of a type which is in the ordinary course of business transferred by delivery with any necessary endorsement or assignment whether now owned or hereafter acquired. 48 October 16, 1997 Mr. John Morayniss Senior Vice President, Business Affairs Alliance Entertainment 301 North Canon Drive Suite 321 Beverly Hills CA 90210 RE: "TOTAL RECALL" Dear Mr. Morayniss: Reference is made to that certain promissory note (the "Note") dated as of June 18, 1997, from TEAM Communications Group, Inc. (the "Company") to Alliance Productions Ltd. (the "Holder") in the principal amount of $650,000. Section 1 (a)(i) of the Note is hereby amended as follows: "All unpaid principal and interest shall be due and payable on the "Maturity Date" defined as the sooner of November 15, 1997 or the completion of any public offering of the stock of the Company." TEAM hereby confirms that the grant of security interest from TEAM to Alliance described in that certain Security Agreement, Assignment, and Mortgage of Copyright dated as of June 19, 1997 between TEAM, as Debtor thereunder, and Alliance, as Secured Party thereunder, includes, but is not limited to, a grant of a security interest from TEAM to Alliance in the producer fees which are payable to TEAM as a result of the production of the series "Total Recall." Please have Alliance's acceptance and agreement of the foregoing indicated by having a copy of this letter dated, countersigned and returned to our office by telecopier as soon as possible as we 49 Mr. John Morayniss October 16, 1997 Page 2 will be proceeding and relying thereon. Thank you very much. TEAM Communications Group, Inc. By: /s/ ERIC S. ELIAS ------------------------------------------ Eric S. Elias Senior Vice President, Business Affairs ESE/ja Agreed to and accepted: Alliance Productions Ltd. By: John Morayniss Date: October 16, 1997 ----------------------------------- ----------------- Its: Senior Vice President Business and Legal Affairs EX-10.12 9 EXHIBIT 10.12 1 EXHIBIT 10.12 EMPLOYMENT AGREEMENT WITH TODD C. JACKSON March 19, 1997 Mr. Todd C. Jackson 720 Steiner Street San Francisco CA 94117 Dear Mr. Jackson: Following are the basic deal points of the offer of employment to you from TEAM Entertainment Group ("TEAM"): 1. Start Date: May 19, 1997. 2. Initial Term: Two (2) years, through May 18, 1999 3. Second Term: At TEAM's option, May 19, 1999 through May 18, 2000. Such option will be exercised by TEAM no less than 120 days prior to the end of the Initial Term. 4. Title: Senior Vice President, Domestic and International Sales 5. Duties and Responsibilities: To include acquisition, sales and packaging of internally produced and acquired product, running the day to day operations of the division, traffic and conventions. You will report to Mr. Levin and the board of directors. You will be provided with a shared assistant and a director of sales, currently Lisa Veatch. 6. Compensation: (a) May 19, 1997 to May 18, 1998, salary payable at the rate of $175,000 per year, in weekly installments on the Company's usual payroll schedule. (b) May 19, 1998 to May 18, 1999, salary payable at the rate of $200,000 per year, in weekly installments on the Company's usual payroll schedule. (c) In the event that TEAM elects to exercise its option for a third year, May 19, 1999 to May 18, 2000, salary payable at the rate of $225,000 per year, in weekly installments on the Company's usual payroll schedule. (d) You will also receive a minimum guaranteed bonus at the rate of $25,000 per year ($2083.33 per month), or pro rata for portion employed thereof, such bonus to be applicable against all sales commissions earned as set forth below. This advance will further be carried over, and recoupable, from year to year of employment. By way of example only, if by December 31, 1997, you have earned a sales commission of $10,000, the difference of the 1997 minimum bonus (7/12 of $25,000, or $14583.33) would be $4583.33, payable with the 2 Mr. Todd Jackson March 19, 1997 Page 2 commission payment. This $4583.33 would be carried over into the next year, wherein you would still receive the minimum bonus, but in order to receive any additional bonus, you would have to earn commission in excess of $29,583.33. 7. TEAM will further pay a yearly expense fee not to exceed $10,000 per year (i.e. up to $834 per month) for preapproved expenses. This expense fee shall be applicable against commissions earned as set forth below. Any additional preapproved expenses shall be reimbursed for travel to conventions, sales trips etc. All international and transcontinental travel will be business class. Pre-approved expenses will be reimbursed within the normal payables cycle, not to exceed 30 days; 8. Commission Structure: Commission will be payable as a bonus at the end of each calendar year (i.e. December 31) payable within 45 days after the end of each calendar year, earned at the following rates; i) two and a half percent (2 1/2%) of the first two million dollars of the sales divisions pre-tax profits; ii) four percent (4%) of the next two million dollars of the sales divisions pre-tax profits; iii) five percent (5%) of the sales divisions pre-tax profits for all profits exceeding four million dollars. a) Pre-tax profits will be calculated as follows; on internally produced product an imputed distribution fee of thirty percent (30%), and a cost cap of five percent (5%) of gross sales; on acquired and other product, the fee's and costs will be as negotiated on each such product; less, the costs of the division (including salaries, trade-shows, expenses etc. and other costs of sales) 9. Vacations: You will accrue two (2) weeks for the first year; three (3) weeks for the second year; and four (4) weeks for all subsequent years. 10. Benefits: You will receive health insurance as it is provided to other employees, commencing ninety (90) days after start of employment. 11. Exclusivity: You will be full time and exclusive to TEAM during the term of employment and it has been agreed that you will perform as is reasonably necessary, at TEAM's Los Angeles office. It is acknowledged that you will continue with non-exclusive consultancy arrangements with Kinnevik Media Properties Limited and Bill Graham Presents Inc. and with Cable Network Services Inc., none of which shall interfere with your otherwise exclusive services to TEAM. 12. Proprietary Information and Confidentiality: It is agreed that all proprietary information, trade secrets and internal operations of TEAM, including but not limited to the terms and conditions of this agreement, shall remain confidential, except as the necessity arises to have this 3 Mr. Todd Jackson March 19, 1997 Page 3 agreement reviewed by attorneys, accountants or other professionals in the ordinary and usual course of business. This confidentiality provision will survive the term of employment. 13. Out Clause/Stock Options: It has been agreed that if TEAM does not implement the anticipated Initial Public Offering (IPO) by September 19, 1997 then you will thereafter have the right to terminate this agreement with sixty (60) days advance written notice. You will receive ten thousand (10,000) stock option shares per year of employment, such options to vest after each year, pursuant to the terms of the existing employee stock option plan. Please review the above and indicate your acceptance thereof by signing, dating, and returning a copy of this letter. We will thereafter prepare a more formal employment agreement for signature. Thank you. Sincerely, /s/ Eric S. Elias - ------------------------------------ Eric S. Elias Business Affairs Agreed to and accepted: /s/ Todd C. Jackson Date: 3/21/97 - ------------------------------------ ------------ Todd C. Jackson 4 AMENDMENT TO THE AGREEMENT WITH TODD C. JACKSON October 4, 1997 Mr. Todd C. Jackson 720 Steiner Street San Francisco CA 94117 Dear Mr. Jackson: This is to confirm the following change to your employment agreement dated March 19, 1997. Paragraph 6 is now amended to read as follows: 6. Compensation: (a) May 19, 1997 to May 18, 1998, salary payable at the rate of $100,000 per year, in weekly installments on the Company's usual payroll schedule, plus a performance bonus of up to $75,000 per year, payable in weekly installments, along with your base salary. (b) May 19, 1998 to May 18, 1999, salary payable at the rate of $200,000 per year, in weekly installments on the Company's usual payroll schedule. (c) In the event that TEAM elects to exercise its option for a third year, May 19, 1999 to May 18, 2000, salary payable at the rate of $225,000 per year, in weekly installments on the Company's usual payroll schedule. (d) You will also receive a minimum guaranteed bonus at the rate of $25,000 per year ($2083.33 per month), or pro rata for portion employed thereof, such bonus to be applicable against all sales commissions earned as set forth below. This advance will further be carried over, and recoupable, from year to year of employment. By way of example only, if by December 31, 1997, you have earned a sales commission of $10,000, the difference of the 1997 minimum bonus (7/12 of $25,000, or $14583.33) would be $4583.33, payable with the commission payment. This $4583.33 would be carried over into the next year, wherein you would still receive the minimum bonus, but in order to receive any additional bonus, you would have to earn commission in excess of $29,583.33. All other terms and conditions will remain the same. Please indicate your understanding and acceptance of the above by signing and returning a copy of this letter amendment as soon as possible. Thank you. Sincerely, /s/ ERIC S. ELIAS Eric S. Elias Business Affairs Agreed to and accepted: /s/ TODD C. JACKSON Date: October 4, 1997 - ------------------------------ ------------------- Todd C. Jackson EX-23.1 10 EXHIBIT 23.1 1 EXHIBIT 23.1 CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the use in the Prospectus constituting part of this Registration Statement on Form SB-2 of our report dated September 19, 1997, relating to the financial statements of Team Communications Group, Inc., which appears in such Prospectus. We also consent to the application of such report to the Financial Statement Schedule for the period from January 1, 1996 to December 31, 1996 and January 1, 1997 to June 30, 1997 listed in this Registration Statement when such schedule is read in conjunction with the financial statements referred to in our report. The audit referred to in such report also included this schedule. We also consent to the references to us under the headings "Experts" and "Selected Consolidated Financial Data" in such Prospectus. /s/ STONEFIELD JOSEPHSON, INC. STONEFIELD JOSEPHSON, INC. Santa Monica, California October 31, 1997 EX-23.2 11 EXHIBIT 23.2 1 EXHIBIT 23.2 CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the use in the Prospectus constituting part of this Registration Statement on Form SB-2 of our report dated May 28, 1996, except as to Note 10 which is as of September 27, 1996, relating to the financial statements of Team Communications Group, Inc., which appears in such Prospectus. We also consent to the application of such report to the Financial Statement Schedule for the period from February 27, 1995 to December 31, 1995 listed in this Registration Statement when such schedule is read in conjunction with the financial statements referred to in our report. The audit referred to in such report also included this schedule. We also consent to the references to us under the headings "Experts" and "Selected Consolidated Financial Data" in such Prospectus. However, it should be noted that Price Waterhouse LLP has not prepared or certified such "Selected Consolidated Financial Data". /s/ PRICE WATERHOUSE LLP PRICE WATERHOUSE LLP Century City, California October 10, 1997 2 EXHIBIT 23.2 October 10, 1997 Securities and Exchange Commission 450 Fifth Street, N.W. Washington, D.C. 20549 Ladies and Gentlemen: Team Communications Group, Inc. ------------------------------- We have read the Experts section of Team Communications Group, Inc.'s Form SB-2 dated October 10, 1997 and are in agreement with the statements contained in the Experts section. Yours very truly, /s/ PRICE WATERHOUSE LLP PRICE WATERHOUSE LLP -----END PRIVACY-ENHANCED MESSAGE-----