-----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, VCfhz/QpWhDQoRLAOeVk+oGS2nVieXdIuVwmHWfEvekW1IDE524b/h9TUUeGpyyc tYAtOUulDhH8QjxOTdlpMw== 0000950148-99-002545.txt : 19991122 0000950148-99-002545.hdr.sgml : 19991122 ACCESSION NUMBER: 0000950148-99-002545 CONFORMED SUBMISSION TYPE: SB-2/A PUBLIC DOCUMENT COUNT: 12 FILED AS OF DATE: 19991119 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: 333-89323 FILM NUMBER: 99761144 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 FORM SB-2 AMENDMENT 1 1 AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON NOVEMBER 19, 1999 REGISTRATION NUMBER 333-89323 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ AMENDMENT 1 TO FORM SB-2 ------------------------ REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 ------------------------ TEAM COMMUNICATIONS GROUP, INC. (NAME OF SMALL BUSINESS ISSUER AS SPECIFIED IN ITS 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. KELLY LYTTON MINTZ & VANN LLP 1900 AVENUE OF THE STARS, SUITE 1450 LOS ANGELES, CALIFORNIA 90067 TELEPHONE NO: (310) 277-5333 FACSIMILE NO: (310) 277-5953 APPROXIMATE DATE OF PROPOSED SALE TO THE PUBLIC: As soon as practicable after the effective date of this Registration Statement. 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 this Form is filed to register additional securities for an offering pursuant to Rule 462(d) 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 delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box. [ ] CALCULATION OF REGISTRATION FEE - -------------------------------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------------------------------- AMOUNT PROPOSED MAXIMUM PROPOSED MAXIMUM AMOUNT OF TITLE OF EACH CLASS OF TO BE OFFERING PRICE AGGREGATE REGISTRATION SECURITIES TO BE REGISTERED REGISTERED PER SHARE(1) OFFERING PRICE FEE - -------------------------------------------------------------------------------------------------------------------------- Common Stock.................................... 6,000,000 8,340 Common stock being sold by selling shareholder................................... 150,000 -------------- ------------------- ------------------- -------------- TOTAL........................................... 6,150,000 $8,340(2) - -------------------------------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------------------------------
(1) Estimated pursuant to Rule 457(a) solely for the purpose of calculating the registration fee. (2) Previously paid. THE REGISTRANT HEREBY AMENDS THIS 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 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a), MAY DETERMINE. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 2 THE INFORMATION IN THIS PRELIMINARY PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PRELIMINARY PROSPECTUS IS NOT AN OFFER TO SELL THESE SECURITIES, AND WE ARE NOT SOLICITING OFFERS TO BUY THESE SECURITIES, IN ANY STATE OR COUNTRY. SUBJECT TO COMPLETION. DATED NOVEMBER 19, 1999. 6,000,000 SHARES TEAM COMMUNICATIONS GROUP, INC. ------------------------- TEAM Communications Group, Inc., is offering 6,000,000 shares of its common stock and, the selling shareholder identified in this prospectus is offering an additional 150,000 shares, such shares initially being offered to the general public and institutional investors in the Federal Republic of Germany and to individuals and institutional investors located in other jurisdictions. We will not receive any of the proceeds for the sale of shares by the selling shareholder. We have applied to list the entirety of our common stock on the Neuer Markt of the Frankfurt Stock Exchange. Our common stock trades on The NASDAQ SmallCap Market under the symbol "TMTV." The public offering price for the common stock offered pursuant to this prospectus will be based on the average closing share price of our shares of common stock on The NASDAQ SmallCap Market as well as certain other exchanges, during the 10 trading days immediately prior to the date the price is determined. See "Risk Factors" beginning on page 10 to read about certain factors you should consider before buying shares of the common stock. ------------------------- NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY OTHER REGULATORY BODY HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. -------------------------
PER SHARE TOTAL --------- -------- Initial public offering price............................... Underwriting discount....................................... Proceeds, before expenses, to us............................ Proceeds, before expenses, to the selling shareholder.......
------------------------- The underwriters expect to deliver the shares against payment in , Germany on , 1999. ------------------------- GONTARD & METALLBANK AKTIENGESCELLSBHAFT DELBRUCK & CO. FURST FUGGER VEM VIRTUELLES PRIVATBANKIERS PRIVATBANK KG EMISSIONSHAUS AG
Prospectus dated November , 1999. 3 NO DEALER, SALESPERSON OR OTHER PERSON IS AUTHORIZED TO GIVE ANY INFORMATION OR TO REPRESENT ANYTHING NOT CONTAINED IN THIS PROSPECTUS. YOU MUST NOT RELY ON ANY UNAUTHORIZED INFORMATION OR REPRESENTATIONS. THIS PROSPECTUS IS AN OFFER TO SELL ONLY THE SHARES OFFERED HEREBY, BUT ONLY UNDER CIRCUMSTANCES AND IN JURISDICTIONS WHERE IT IS LAWFUL TO DO SO. THE INFORMATION CONTAINED IN THIS PROSPECTUS IS CURRENT ONLY AS OF ITS DATE. ------------------------ TABLE OF CONTENTS
PAGE ---- General Information......................................... 2 Presentation of Financial Information....................... 3 Prospectus Summary.......................................... 4 The Offering................................................ 6 Summary of Financial Information............................ 9 Risk Factors................................................ 10 Note Regarding Forward-Looking Statements................... 16 Use of Proceeds............................................. 16 Dividend Policy............................................. 17 Selected Consolidated Financial Data........................ 18 Unaudited Pro Forma Consolidated Financial Information for Acquisition of Dandelion Distribution Ltd................................ 19 Management's Discussion and Analysis of Financial Condition and Results of Operations................................. 24 Business.................................................... 30 Management.................................................. 37 Certain Relationships and Related Transactions.............. 41 Stock Option Plans.......................................... 43 Principal and Selling Shareholders.......................... 45 Description of Capital Stock and Other Securities........... 46 Shares Eligible for Future Sale............................. 50 The German Equity Market.................................... 51 German Tax Matters.......................................... 52 Certain United States Federal Income Tax Consequences to Non-United States Holders................................. 53 Statutory Information....................................... 56 Legal Matters............................................... 56 Experts..................................................... 56 Underwriting................................................ 57 Index to Consolidated Financial Statements of Team Communications Group, Inc. ............................... F-1 Index to the Financial Statements of Dandelion Distribution Ltd. ..................................................... F-21
THROUGH AND INCLUDING , 1999 (THE 25TH DAY AFTER THE DATE OF THIS PROSPECTUS), ALL DEALERS EFFECTING TRANSACTIONS IN THESE SECURITIES IN THE UNITED STATES, WHETHER OR NOT PARTICIPATING IN THIS OFFERING, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN ADDITION TO A DEALER'S OBLIGATION TO DELIVER A PROSPECTUS WHEN ACTING AS AN UNDERWRITER AND WITH RESPECT TO AN UNSOLD ALLOTMENT OR SUBSCRIPTION. 1 4 GENERAL INFORMATION RESPONSIBILITY FOR THE CONTENTS OF THIS PROSPECTUS We, together with the underwriters Gontard & MetallBank AG, Frankfurt am Main, Delbruck & Co. Privatbankiers, Furst Fugger Privatbank KG and VEM Virtuelles Emissionshaus AG, undertake, pursuant to sec. 13 of the German Securities Trading Act (Verkaufsprospektgesetz), and in conjunction with sec.sec. 45, 77 of the German Stock Exchange Act (Borsengesetz), responsibility for the contents of this prospectus and hereby state that, to the best of our knowledge, the information contained in this prospectus is correct and no material information has been omitted. In making an investment decision, you must rely on your own examination of our company and the terms of this offering, including the merits and risks involved. See "Business" and "Risk Factors." Pursuant to sec. 10 of the German Securities Prospectus Act, this prospectus will be published on a preliminary basis and will be supplemented in the future. The supplements and any terms of the offer that have been omitted in this prospectus will be published in Germany in conformity with the provisions of the German Securities Prospectus Act. The company report (Unternehmensbericht), on the basis of which we seek admission of our shares of common stock to the Frankfurt Stock Exchange's regulated market (Geregelter Markt) with trading on the Neuer Markt, will also be published in supplemented form after admission of the shares to exchange trading in the Federal Republic of Germany. AVAILABILITY OF DOCUMENTS FOR INSPECTION Certain documents we refer to in this prospectus as well as future annual and interim reports we prepare may be inspected during customary business hours at our offices at 12300 Wilshire Boulevard, Suite 400, Los Angeles, California 90025, U.S.A., as well as at the offices of Gontard & MetallBank AG, Flughafenstrasse 21, 63263 Neu Isenburg, Germany. We filed with the Securities and Exchange Commission a registration statement on Form SB-2 under the Securities Act of 1933 for the shares of common stock in this offering. This prospectus does not contain all of the information in the registration statement and the exhibits and schedule that were filed with the registration statement. For further information with respect to our company and our common stock, we refer you to the registration statement and the exhibits and schedule that were filed with the registration statement. Statements contained in this prospectus about the contents of any contract or any other document that is filed as an exhibit to the registration statement are not necessarily complete, and we refer you to the full text of the contract or other document filed as an exhibit to the registration statement. A copy of the registration statement and the exhibits and schedule that were filed with the registration statement may be inspected without charge at the public reference facilities maintained by the Securities and Exchange Commission in Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549, and copies of all or any part of the registration statement may be obtained from the Securities and Exchange Commission upon payment of the prescribed fee. The Securities and Exchange Commission maintains a website that contains reports, proxy statements and other information regarding registrants that filed electronically with the Securities and Exchange Commission. The address of the site is http://www.sec.gov. We are subject to the information and periodic reporting requirements of the Securities Exchange Act of 1934, and, in accordance with the requirements of the Securities Exchange Act of 1934, file periodic reports, proxy statements and other information with the Securities and Exchange Commission. These periodic reports, proxy statements and other information are available for inspection and copying at the regional offices, public reference facilities and website of the Securities and Exchange Commission referred to above. SUBJECT OF THIS OFFERING CIRCULAR This prospectus has been filed with the Securities and Exchange Commission. In the Federal Republic of Germany, this prospectus has been filed with the Frankfurt Stock Exchange (FSE) and will serve (i) as a preliminary sales prospectus (unvollstandiger Verkaufsprospekt) in relation to the sale of the 6,000,000 shares being offered by us and the 150,000 shares being offered hereby by the selling shareholder, and (ii) as a listing prospectus (Unternehmensbericht) in relation to our entire issued and outstanding share capital being 12,979,138 shares of common stock issued and outstanding after the issuance of the 6,000,000 new shares offered hereunder and 3,042,384 shares of common stock reserved for issuance upon the exercise of warrants, the conversion of convertible debt instruments and the exercise of options granted to our officers, directors, employees and consultants. The shares we are offering are issued pursuant to a resolution of our board of directors, approved on October 8, 1999, as supplemented on November , 1999. Our current shareholders 2 5 have no preemptive or other subscription rights to the newly issued shares. See "Description of Capital Stock." Neither we, the selling shareholder, nor the underwriters have taken, or will take any action in any jurisdiction other than Germany and the United States of America that would permit a public offering of the shares or possession or distribution of a prospectus in any jurisdiction where action for that purpose is required. We, the selling shareholder and the underwriters request that if this prospectus comes into your possession, you will acknowledge these restrictions, and inform yourself about and observe any and all such restrictions as to the offering and the distribution of this prospectus. PRESENTATION OF FINANCIAL INFORMATION Unless otherwise indicated, any reference in this prospectus to the "Consolidated Financial Statements" refers to our consolidated financial statements, including the notes thereto, for the years ended December 31, 1998, 1997 and 1996, audited by Stonefield Josephson, Inc., 1620 26th Street, Suite 400 South, Santa Monica, California 90404-4041. The Consolidated Financial Statements contained in this prospectus have been prepared in accordance with United States generally accepted accounting principles ("U.S. GAAP") with the United States dollar as the functional currency. Unless otherwise indicated herein, all information included in this prospectus refers to TEAM Communications Group, Inc., and its subsidiaries on a consolidated basis and has been presented in accordance with U.S. GAAP. Our fiscal year ends on December 31, and references in this prospectus to any specific fiscal year are to the twelve-month period ended December 31 of such year. 3 6 PROSPECTUS SUMMARY This summary highlights selected information contained elsewhere in this prospectus. This summary does not contain all the information that you should consider before investing in the common stock. You should read the entire prospectus carefully, including "Risk Factors" and the Consolidated Financial Statements, before making an investment decision. We develop, produce and distribute a variety of television programming, including dramatic and reality-based series, specials and made-for-television movies for exploitation in the domestic and international television markets. We derive substantially all of our revenues from the exploitation of our originally produced programs and product acquired from others. Our production activities are focused on programming produced for United States cable and network television channels such as The Discovery Channel, The Family Channel, Showtime Networks and USA Network. We have received a firm commitment, subject to certain financing considerations, from Discovery's Animal Planet for the initial production of 13 one-hour drama episodes of "The Call of the Wild," based on Jack London's classic novel. The series began pre-production in July 1999 with our Canadian production partner. Delivery is expected to take place from December 1999 through February 2000. We are also developing and producing "Destination Style" for Discovery's Travel Channel, "Conversations with Remarkable People" for the Wisdom Network (a new US basic cable network), and "Robin Leach's Wildlife Styles." In March 1999, our co-production of 22 episodes of Total Recall 2070, a television series based on the hit movie "Total Recall," began to air on Showtime Networks. We, along with Alliance Atlantis, our co-financing partner, have extended the period of time pursuant to which Showtime Networks must make a decision to order a second season. We are currently negotiating with Alliance Atlantis to produce a second season either for Showtime Networks, or directly for first run syndication. We have also completed production of a series of 48 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. All episodes of Amazing Tales have been produced and delivered, and the series is currently airing on Discovery's Animal Planet. In addition, we co-developed and co-produced a reality based five-day per week ("strip") syndicated series, called "Strange Universe," with United/Chris-Craft television stations and Rysher Entertainment. This series, which aired on United/Chris-Craft stations, involved the production of 130 episodes over its two, thirteen week commitments. We maintain a development and production department which develops and produces movies-of-the-week, drama and reality-based series for exhibition on network television, cable or ad hoc networks of independent stations which sometimes form to air special programming. We also currently have distribution rights to approximately 2,500 hours of family, dramatic and reality-based series and specials, and films. RECENT EVENTS AND OUTLOOK We are currently in discussions with a number of distribution and production companies regarding possible business combinations. As of October 1, 1999, we completed the purchase of Dandelion Distribution Ltd., a 20 year old United Kingdom ("UK") based television production and distribution company, for $5,000,000 in cash and common stock. Dandelion Distribution Ltd., has over 2,000 hours of television programming in its library. To address our short term financing needs, we have raised approximately $12,250,000 since July 1999. This amount includes: - $350,000 pursuant to the sale to 3 investors of 12% debentures and warrants to purchase up to 35,000 shares of our common stock; - $1,200,000 pursuant to a secured loan from Value Management & Research A.G. ("VMR"); - $4,000,000 pursuant to a loan from Hudson Investors, LLC, which matures on November 30, 2002 and accrues interest at the rate of 12% per year. Hudson Investors, LLC has the right to convert any outstanding balance on its promissory note into equity after November 30, 1999. Hudson Investors, LLC also received 340,000 warrants as part of the financing. From the Hudson Investors, LLC loan, VMR was repaid $1,000,000 of its loan; - $6,000,000 from Gontard & MetallBank AG, $2,000,000 from the sale of 500,000 shares of our common stock and $4,000,000 pursuant to a loan that matures on the earlier of completion of this 4 7 offering or December 31, 1999 and accrues interest at 10% per year. $2,500,000 of these proceeds was used to fund the cash portion of the Dandelion acquisition and $200,000 was used to repay the remaining balance of the VMR loan; and - $700,000 from the sale of 175,000 shares of our common stock to Arbora Vermogensverwaltungen AG, an existing shareholder. We continue to fulfill the increased demand for programming by implementing our growth strategies, including strategic acquisitions of production and distribution companies in the U.S. and Europe, acquisition of programming libraries and development and production of our original television programming for the domestic and international markets. Our address is 12300 Wilshire Boulevard, Suite 400, Los Angeles, California 90025, and our telephone number is (310) 442-3500. 5 8 THE OFFERING SHARES OFFERED Shares offered pursuant to this prospectus include 6,150,000 shares of our common stock, 6,000,000 shares of which to be newly issued by us for the purposes of this offering and 150,000 shares of which are sold by the selling shareholder. For further details see "Underwriting." PREFERENTIAL ALLOTMENT At our request, the underwriters have reserved up to 10 percent of the shares of common stock offered (excluding the shares being sold by the selling shareholder) for sale to directors, officers, employees, persons having business relationships with us and related persons at the public offering price. The number of shares available for sale to other investors will be reduced to the extent these persons purchase such reserved shares. For further details see "Underwriting." UNDERWRITERS The shares to be offered pursuant to this prospectus will initially be purchased by Gontard & MetallBank AG for the account of the underwriters. See "Underwriting." PUBLIC OFFERING PRICE AND NUMBER OF SHARES ALLOTTED It is currently expected that the period of time within which investors may offer to purchase shares will be from November 23, 1999 to November 25, 1999, subject to abbreviation in the discretion of the underwriters. The purchase price per share payable by investors is currently expected to be fixed by the underwriters together with us on November 25, 1999, and to be published in the Borsen Zeitung on November 26, 1999. Such final purchase price will be determined on the basis of the average closing share price of our shares of common stock on The NASDAQ SmallCap Market and on the German over-the-counter markets (Freiverkehr) in Frankfurt am Main, Berlin and Munich of the ten trading days immediately prior to and including November 22, 1999. See "Underwriting" for more details. It is currently expected that from November 29, 1999, investors who placed orders with an underwriter may enquire from such underwriter the number of shares allotted. DELIVERY OF SHARES, PAYMENTS, CLEARING AND TRANSFERABILITY OF SHARES It is currently expected that the purchase price for shares offered will be payable by investors on November 30, 1999, against delivery of such allotted shares in book entry form. The share certificates representing the offered shares will be deposited by us and the selling shareholder, respectively, with The Depository Trust Company of New York. The Depository Trust Company's nominee, Cede & Co., will be the registered owner of such shares. At the closing of the offering, The Depository Trust Company will electronically deposit the offered shares in the account of Deutsche Borse Clearing AG with The Depository Trust Company in book entry form for the benefit of Gontard & MetallBank AG acting for the account of the underwriters, and Gontard & MetallBank AG will thereby acquire beneficial ownership of the shares. Thereafter, Gontard & MetallBank AG will electronically transfer, in book entry form, beneficial ownership of the shares to the purchasers of the shares through their brokers and other financial institutions that are Deutsche Borse Clearing AG participants. Deutsche Borse Clearing AG will not hold any certificates for common stock. Certificates representing shares of common stock held through Deutsche Borse Clearing AG will not be issued unless such shares are withdrawn from Deutsche Borse Clearing AG, in which case the shares will not be eligible to trade on a German exchange unless such shares are re-deposited with The Depository Trust Company for credit to Deutsche Borse Clearing AG's account with The Depository Trust Company. Shares transferred from The Depository Trust Company to Deutsche Borse Clearing AG may be freely transferred among market participants through the Deutsche Borse Clearing AG clearing system. The shares to be offered and listed for trading on the Frankfurt Stock Exchange's Neuer Markt are registered shares (Namensaktien). Accordingly, shareholders holding share certificates who desire to transfer their shares outside The Depository Trust Company/Deutsche Borse Clearing AG clearing system may effect the transfer by submitting such shares to our transfer agent, and the transfer agent will issue a new certificate in the name of the transferee. If shareholders holding share certificates wish to transfer their shares to The Depository Trust Company/Deutsche Borse Clearing AG clearing system, the shareholders must submit their share certificates to our transfer agent, and the transfer agent will register the shares in the name of Cede & Co. 6 9 These shares will be credited to the account of Deutsche Borse Clearing AG at The Depository Trust Company. Upon registration of the shares with The Depository Trust Company for the benefit of Deutsche Borse Clearing AG and fulfillment of any other requirements of The Depository Trust Company or Deutsche Borse Clearing AG, beneficial ownership of the shares may be transferred to participants of Deutsche Borse Clearing AG system. TRANSFER AGENT, REGISTRAR AND PAYING AGENT Our shares of common stock will be registered and transferred via a transfer agent in the United States who will register the offered shares with Cede & Co. The name of this U.S. transfer agent and registrar is U.S. Stock Transfer Corporation. Gontard & MetallBank AG, Frankfurt am Main will act as the paying agent in Germany. NOTICES We will publish notices to shareholders in Germany in the German Federal Gazette (Bundesanzeiger) and in at least one supra-regional newspaper approved by the Frankfurt Stock Exchange. VOTING RIGHTS Each share of common stock entitles its holder to one vote at all of our shareholders' meetings. Neither Cede & Co. as the registered owner of the shares of common stock being offered hereunder, nor The Depositary Trust Company, will exercise any voting rights connected to such shares. Pursuant to the procedures generally applied by The Depositary Trust Company, The Depositary Trust Company will provide an omnibus proxy to us after each date on which our shareholders are identified for the purposes of assessing the shareholders eligible to vote at our shareholders' meetings. Insofar as shares of common stock are held through the clearing system of Deutsche Borse Clearing AG, such proxy will be for the benefit of Deutsche Borse Clearing AG who will inform the beneficial owners of shares held through Deutsche Borse Clearing AG via the respective Deutsche Borse Clearing AG participants. Deutsche Borse Clearing AG will exercise voting rights pursuant to the instructions of the beneficial owners of the shares and its general business conditions. You should contact your securities account-carrying bank or broker to inquire any fees that may be charged for the services rendered to you by such account-carrier in connection with your voting rights. DIVIDEND RIGHTS Each of the holders of the shares offered hereby will be eligible to receive dividends if and when declared by our Board of Directors. To date, we have not paid cash dividends on our shares of common stock. We intend to retain future earnings to fund growth of our business and do not anticipate paying any cash dividends on shares of common stock in the foreseeable future. (See "Dividend Policy") Dividends, if any, or any other payments to shareholders who hold shares of common stock through the clearing system of Deutsche Borse Clearing AG will initially be paid by us to Cede & Co. as The Depositary Trust Company's nominee. The Depositary Trust Company will credit such amounts to an account of Deutsche Borse Clearing AG with The Depository Trust Company who will then distribute such payments to the beneficial owners who hold shares of common stock with participants of Deutsche Borse Clearing AG. Payments of The Depository Trust Company and Deutsche Borse Clearing AG are subject to the decrees, procedures and laws in effect at the time of the respective payment. Our dividends would be paid in US dollars. Participants of Deutsche Borse Clearing AG may elect to receive dividends and other payments on the shares either in US dollars or Euros. You should contact your securities account-carrying bank or broker to inquire any fees that may be charged by such account-carrier for the distribution of our dividends or other payments to you. FISCAL YEAR Our fiscal year is the calendar year. STOCK EXCHANGE LISTING In connection with this offering, application has been made for the admission of the entirety of our issued shares of common stock to the Regulated Market with trading on the Neuer Markt of the Frankfurt Stock Exchange. It is currently expected that the admission will take place on November 26, 1999. The first day on which the offered shares will be quoted on the Neuer Markt is currently expected to be November 29, 1999. In 7 10 addition, our shares of common stock are currently traded on The Nasdaq SmallCap Market under the symbol "TMTV." SECURITIES IDENTIFICATION CODES The German securities identification code (WKN) for our shares is 917002, the international securities identification number (ISIN) for our shares is US 87815F 1084. TRADING SYMBOL FOR THE NEUER MARKT The expected trading symbol for the Neuer Markt is "TME." DESIGNATED SPONSORS FOR THE NEUER MARKT Gontard & MetallBank AG and Concord Effekten AG have been retained by us to act as "designated sponsors" for the shares on the Neuer Markt. See "The German Securities Market." SHARE DATA Number of shares outstanding as of November 10, 1999........ 6,979,138(1)(2) Number of shares to be registered pursuant to this 6,000,000 offering.................................................... ---------- Total number of shares outstanding.......................... 12,979,138 ==========
- --------------- (1) Does not include shares issuable upon exercise of warrants, options or convertible debt. (2) Does include up to 170,000 shares which may be issued in connection with the acquisition of the Film Libraries, Inc.'s library. See "Business -- Distributions." USE OF PROCEEDS We intend to use the proceeds from this offering for general corporate purposes, principally working capital and capital expenditures, as well as for the repayment of approximately $9,400,000 of outstanding loans, including accrued interest, net of discounts. In addition, we may use a portion of the net proceeds to acquire complementary products or businesses at some time in the future. Pending use of the net proceeds of this offering, we intend to invest the net proceeds in interest-bearing, investment-grade securities. We will not receive any proceeds from the sale of the shares being sold by the selling shareholder. ------------------------------------ Neither we, the selling shareholder, nor the underwriters have taken, or will take any action in any jurisdiction other than the Federal Republic of Germany and the United States of America that would permit a public offering of the shares or possession or distribution of a prospectus in any jurisdiction where action for that purpose is required. No person has been authorized to give any information or to make any representation 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. This prospectus has not been approved as an investment advertisement pursuant to Section 57 of the Financial Services Act 1986 and may not be issued or passed on in the UK except to a person who is of the kind described in Article 11(3) of the Financial Services Act (Investment Advertisements) (Exemptions) Order 1996 (as amended), or is a person to whom the prospectus may otherwise lawfully be issued or passed on. 8 11 SUMMARY OF FINANCIAL INFORMATION
FOR THE NINE MONTHS ENDED FOR THE FOR THE FOR THE ----------------------------- YEAR ENDED YEAR ENDED YEAR ENDED SEPTEMBER 30, SEPTEMBER 30, DECEMBER 31, DECEMBER 31, DECEMBER 31, 1999 1998 1998 1997 1996 ------------- ------------- ------------ ------------ ------------ (UNAUDITED) (UNAUDITED) STATEMENT OF OPERATIONS DATA: Revenues......................................... $13,273,300 $9,466,800 $13,581,900 $6,875,600 $5,749,800 Cost of revenues................................. 6,056,300 5,884,500 9,076,000 2,355,300 2,895,900 ----------- ---------- ----------- ---------- ---------- Gross profit..................................... 7,217,000 3,582,300 4,505,900 4,520,300 2,853,900 General and administrative expenses.............. 3,771,700 2,234,100 3,274,000 3,244,900 2,323,800 ----------- ---------- ----------- ---------- ---------- Net income from operations....................... 3,445,300 1,348,200 1,231,900 1,275,400 530,100 Interest expense................................. 477,900 768,400 902,600 1,040,100 677,700 Interest income.................................. 87,300 136,000 202,900 211,800 58,300 Other income..................................... -- -- -- -- 90,100 ----------- ---------- ----------- ---------- ---------- Net income before income taxes................... 3,054,700 715,800 532,200 447,100 800 Provision for income taxes....................... 1,149,900 60,500 57,500 -- -- Extraordinary loss from early extinguishment of debt........................................... 431,900 -- 69,500 -- -- ----------- ---------- ----------- ---------- ---------- Net income....................................... $ 1,472,900 $ 655,300 $ 405,200 $ 447,100 $ 800 =========== ========== =========== ========== ========== Net income per common share basic(1)............. $ .35 $ 0.43 $ 0.22 $ 0.40 $ -- =========== ========== =========== ========== ========== Weighted average number of shares outstanding basic(1)....................................... 4,198,176 1,506,672 1,833,340 1,131,344 1,131,344 =========== ========== =========== ========== ========== Net income per common share diluted(1)........... $ .29 $ 0.30 $ 0.17 $ 0.25 $ -- =========== ========== =========== ========== ========== Weighted average number of shares outstanding diluted(1)..................................... 4,986,711 2,197,128 2,434,017 1,821,800 1,821,800 =========== ========== =========== ========== ==========
SEPTEMBER 30, 1999 ----------------------------------------------- AS FURTHER ACTUAL AS ADJUSTED(2) ADJUSTED(3) ----------- -------------- -------------- BALANCE SHEET DATA: Liquidity capital (deficit)(4).............................. $(1,137,500) $(1,137,500) $ -- Total assets................................................ 35,117,700 38,220,700 -- Notes payable............................................... 4,387,200 8,187,200 -- Line of credit.............................................. 697,000 -- -- Accrued interest............................................ 324,200 324,200 -- Retained earnings........................................... 1,293,500 1,293,500 -- Shareholders' equity........................................ 17,441,300 17,441,300 --
- --------------- (1) See Note 2 of Notes to Consolidated Financial Statements for information regarding the calculation of net income per share. (2) The "As Adjusted" column reflects: (i) proceeds of $4,000,000 from the bridge financing with Gontard & MetallBank AG; and (ii) the repayment of $697,000 on the line of credit and $200,000 in notes payable. (3) The "As Further Adjusted" column reflects the adjustments described in (2) above and the use of the estimated net proceeds from the issuance of common stock in this offering, see "Use of Proceeds." (4) 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 (due within one year), line of credit, and accrued interest. 9 12 RISK FACTORS You should consider carefully the following risk factors and all other information contained in this prospectus before purchasing our common stock. Investing in our common stock involves a high degree of risk. Additional risks and uncertainties that are not yet identified or that we currently think are immaterial may also materially adversely affect our business and financial condition in the future. GOING CONCERN ASSUMPTION. Contained in the independent accountants' report included in our financial statements for each of the fiscal years since our formation, and included in the footnotes to the unaudited financial statements for the nine months ended September 30, 1999, is an explanatory paragraph indicating that our financial condition raises substantial doubt as to our ability to continue as a going concern. There can be no assurance that future financial statements will not include a similar explanatory paragraph if we remain unable to raise enough money or generate sufficient cash flow from operations to cover the cost of running our business. The existence of such an explanatory paragraph may have a material adverse effect on our relationship with third parties who are concerned about our ability to complete projects that we are contractually required to develop or produce, and could also negatively impact our ability to complete future financings. WE HAVE A LIMITED OPERATING HISTORY THAT MAKES AN EVALUATION OF OUR BUSINESS DIFFICULT. We were incorporated in February 1995, and have a limited operating history. Although we have generated profitable operations during each of the fiscal years ended December 31, 1998, 1997 and 1996, and for the nine months ended September 30, 1999, we have experienced a negative cash flow from operations during such periods. We can not assure you that we will continue to be profitable in the foreseeable future or that we will be able to generate positive cash flow from our operations. Our business plan is subject to all the risks associated with starting a new business, including operating losses. In addition, we will be subject to certain factors affecting the entertainment industry generally, such as: - sensitivity to general economic conditions; - critical acceptance of our products; and - intense competition. The likelihood of our success must be considered in light of the problems, expenses, difficulties, complications and delays frequently encountered in connection with the formation of a new business. LIQUIDITY DEFICIT. As of September 30, 1999, we had retained earnings of $1,293,500 and a liquidity deficit of ($1,137,500). Liquidity deficit is defined as: - cash and cash equivalents plus accounts receivable (net), and the amount due from officer, less - accounts payable, accrued expenses and other liabilities, deferred revenue, accrued participations, notes payable (due within one year), line of credit, and accrued interest. See "Risk Factors -- Need for additional capital, dilution and no assurance of future financings," "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. OUR RELIANCE ON CERTAIN CUSTOMERS AND OUR ALLOWANCES FOR POSSIBLE UNCOLLECTIBLE RECEIVABLES. As of September 30, 1999, we had $10,936,700 in receivables. As of December 31, 1998, we had receivables of $4,736,700, of which $3,200,000 has been collected as of September 30, 1999. Of our $10,936,700 in receivables, approximately $9,100,000, or 83% is due within the next twelve months. To cover the possibility that one or more of our customers could fail to pay monies due to us, we currently maintain an allowance for doubtful accounts of approximately $837,000. If we are required to make an additional allowance for these receivables, our results of operations and financial condition in future periods could be adversely affected. As of September 30, 1999, receivables from three customers represented approximately 88% of our trade receivable balance. These customers are Stellar Group (13%), Renown Pictures Ltd (26%), and String of Pearls PLC (49%). All of these customers are current with respect to their obligations to us. See "Certain Relationships and Related Transactions." Although all of these entities are privately held companies, we believe that each of the licensees are reasonable credit risks. However, the failure to pay the amounts owed by any of these entities could lead to the write-off of the applicable receivable. Such a write-off would have a material adverse impact on our results. 10 13 NEED FOR ADDITIONAL CAPITAL, DILUTION AND NO ASSURANCE OF FUTURE FINANCINGS. The entertainment industry is highly capital intensive. Despite our initial public offering, our operations have been hurt by ongoing capital shortages caused by a slowness in collecting receivables and the inability to complete a long term banking relationship. To address our short term financing needs, we raised approximately $12,250,000 since July 1999. This amount includes: - $350,000 pursuant to the sale to 3 investors of 12% debentures and warrants to purchase up to 35,000 shares of our common stock; - $1,200,000 pursuant to a secured loan from VMR; - $4,000,000 pursuant to a loan from Hudson Investors, LLC, which matures on November 30, 2002 and accrues interest at the rate of 12% per year. Hudson Investors, LLC has the right to convert any outstanding balance on its promissory note into equity after November 30, 1999. Hudson Investors, LLC also received 340,000 warrants as part of the financing. From the Hudson Investors, LLC loan, VMR was repaid $1,000,000 of its loan; - $6,000,000 from Gontard & MetallBank AG, $2,000,000 from the sale of 500,000 shares of our common stock and $4,000,000 pursuant to a loan that matures on the earlier of the completion of this offering or December 31, 1999 and accrues interest at 10% per year. $2,500,000 of these proceeds was used to fund the cash portion of the acquisition of Dandelion and $200,000 was used to repay the remaining balance of the VMR loan; and - $700,000 from the sale of 175,000 shares of our common stock to Arbora Vermogensverwaltungen AG, an existing shareholder. These financings in general, and the convertible debt financing in particular, are dilutive to our shareholders. Despite the dilutive nature of these financings, we believe that completing these offerings was critical to our short term financial needs. As of November 15, 1999 we had indebtedness and related accrued interest of $9,361,000, including notes in the principal amount of $4,929,000, which mature within one year. Based on our current resources of cash, accounts receivable, available credit line, and our recent financings, we will be able to operate at current expenditure levels through March 31, 2000. If this offering is not completed and additional financing is not available, we will be required to: - reduce or suspend our operations; - seek an acquisition partner; or - try other ways to sell securities (on terms that may be highly dilutive or otherwise disadvantageous to current shareholders). In an effort to preserve cash resources, we have issued common stock and warrants to financial consultants rather than hire internal staff. To the extent option grants are below the current market price, we must record this as an additional expense in our general and administrative expense, even though no cost has been expended. These transactions are dilutive to existing shareholders. See "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. WE MAY BE UNABLE TO MEET OUR FUTURE CAPITAL REQUIREMENTS. We expect the net proceeds from this offering, cash on hand, cash equivalents and commercial credit facilities to meet our working capital and capital expenditure needs for the foreseeable future. To continue our expansion, we may need to raise additional funds, and we cannot be certain that we would be able to obtain additional financing on favorable terms, if at all. Further, if we issue equity securities, shareholders will have no pre-emptive rights to such newly issued equity securities and may experience additional dilution. The new equity securities may have rights, preferences or privileges senior to those of existing holders of common stock. If we cannot raise required funds on acceptable terms, we may not be able to develop or enhance our products, take advantage of future opportunities or respond to competitive pressures or unanticipated requirements, which could harm our business, financial condition and results of operations. 11 14 OUR DEPENDENCE ON EMERGING MARKETS AND ON FOREIGN SALES; FOREIGN EXCHANGE RISKS. A considerable portion of our revenues are, and for the foreseeable future will most likely be, derived from the sale or license of our products to recently established U.S. broadcasters, cable networks and syndicators such as: - The Discovery Channel; - Discovery's Animal Planet; - The Learning Channel; - The Travel Channel; - The Fox Family Channel; - the WB Network; and - Showtime Network. In addition to these, a portion of our revenues are dependent on sales to licensees and distributors in foreign markets, including South and Latin America and, to an increasing extent, Europe. Collecting receivables from these customers is subject to the risks associated with doing business with foreign companies including rapid changes in the political and economic climates of such countries and limitations on the transferability of monies out of such countries. If we become involved in a long term dispute over how our product is being distributed in a foreign country, or are forced to initiate collection activities to enforce the terms of a license or distribution agreement, the profitability of any particular product may be adversely effected. As of September 30, 1999, substantially all of our receivables are trade receivables from entities domiciled outside the U.S. These receivables, totaling $10,936,700, represent 100% of all trade receivables and 31% of our total assets. Any difficulty or delay in the collection of these receivables or any write-off of such receivables could have a material adverse effect on our financial condition or results of operations. See "Risk Factors -- Our reliance on certain customers and our allowances for possible uncollectible receivables." Changes in international economic conditions may impact our future sales and collections. Our international operations expose us to risks associated with currency fluctuations. Insofar as our international revenues are denominated in foreign currencies, an appreciation of the U.S. dollar relative to these foreign currencies could adversely affect our results of operations. To the extent that our international revenues are denominated in U.S. dollars, an appreciation of the U.S. dollar increases the price of our products in foreign countries and may cause our customers and potential customers difficulties in paying U.S. dollar amounts due to us or may keep them from licensing our products. The operating expenses of our subsidiaries Team Entertainment Germany GmbH and Team Dandelion Ltd., will be incurred in Deutsche Marks and British Pounds, respectively. The value of the Deutsche Mark is tied to the value of the Euro. Appreciation of the Euro or the British Pound relative to the U.S. dollar could adversely affect our results of operations. Even when foreign currency expenses substantially offset revenues in the same currency, profits may be diminished when reported in U.S. dollars. Due to the constantly changing currency exposures and the volatility of currency exchange rates, we could experience currency losses in the future, and we cannot predict the effect of the exchange rate fluctuations upon our future results of operations. To date, we have not engaged in any foreign exchange hedging transactions to limit our exposure to the above- described risks. If any of the risks associated with international operations materialize, our business, financial condition and results of operations could be materially adversely impacted. LACK OF SALES ORGANIZATION We currently rely on our own sales force for the distribution of our products and are subject to the limitations inherent to a small organization with limited personnel resources. We have undertaken and continue to undertake efforts to increase our own sales force in the U.S. and in certain key markets such as Germany and the United Kingdom. However, if we fail to further expand our sales capabilities through organic growth or if we do not effectively integrate sales organizations that we have acquired, we may not be able to increase sales of our products and grow our revenues. These limitations could have a material adverse effect on our business, financial condition and result of operations. 12 15 BUSINESS COMBINATIONS AND ACQUISITIONS. We are currently in discussions with a number of distribution and production companies regarding possible business combinations. No assurance can be given that any such acquisitions will be consummated, even though we may incur substantial costs related to such acquisitions. Even if such acquisitions are consummated, there can be no assurance that we will manage to successfully integrate and manage the acquired businesses. As of October 1, 1999, we completed the purchase of Dandelion Distribution Ltd., a UK based production and distribution company for $2,500,000 in cash and 386,847 shares of common stock. We may also be required to pay up to an additional $250,000 if the shares of our common stock delivered as part of the purchase price do not have a market value of at least $3,000,000 on October 1, 2001. See "Business -- Global Strategy." Even though the acquisition has been completed, there can be no assurance that we will be successful in timely integrating Dandelion into our operations or that they will remain profitable. The failure to successfully integrate Dandelion or a lack of profitability of Dandelion could have a material adverse impact on our financial condition and results of operations. COMPETITION. The entertainment industry is highly competitive. We compete with many entertainment organizations, who are all seeking, in varying degrees; - 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 and television projects. Virtually all of our competitors are substantially larger than we are, have been in business longer than we have and have more resources at their disposal. The entertainment industry is currently evolving into an industry in which certain multi-national, multi-media entities, because of their control over key film, magazine, and/or television content, as well as key network and cable outlets, will be able to dominate certain communications industry activities in the U.S. and abroad. These competitors have numerous competitive advantages, including the ability to acquire financing for their projects and attract superior properties, personnel, actors and/or celebrity hosts. Any further concentration and consolidation of the entertainment industry may further weaken our competitive position and may have a material adverse impact on our business, financial condition and results of operations. THE RISK THAT NOT ENOUGH EPISODES OF A SERIES WILL BE ORDERED TO ALLOW US TO SYNDICATE THE SERIES. There can be no assurance that once we commit to produce a series which has been licensed to a network, that the network will order and broadcast enough episodes so that we can syndicate the series in the U.S. Typically, there needs to be at least 65 episodes of a series produced in order to "strip" or syndicate the series in the daily re-run market. Networks can generally 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 before the minimum number of shows necessary to syndicate or "strip" have been produced, there is the risk that the production costs of the project will not be fully recovered. Similar risks apply for a series produced for a non-network medium. See "Business -- Operations" for a discussion of the financing of series. We presently have a commitment of 13 episodes for Call of the Wild, and have completed 22 episodes for Total Recall 2070, which is not enough episodes to syndicate or "strip" these series in the U.S. on any kind of significant basis. The syndication rights to Total Recall 2070, for which we are a profit participant, are owned by Universal, by virtue of Universal's 1998 acquisition of Polygram Filmed Entertainment. The show will be shown on a once a week syndication basis in January 2000. If the show is not renewed, there may only be one season in syndication, in which event we would not expect to receive significant amounts relative to our profit interests. FLUCTUATIONS IN OPERATING RESULTS. Our revenues and results of operations are significantly dependent upon the timing and success of the television programming we distribute, which cannot be predicted with certainty. Revenues for any particular program may not be recognized until the program is produced and available for delivery to the licensee. Production delays may impact the timing of when revenues may be recognized under generally accepted accounting principles. Significant sales of our product take place at the industry's 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 and 13 16 NATPE, which takes place in the U.S. in January. Finally, production commitments are typically obtained from networks in the spring (second quarter), although production activity and delivery may not occur until later periods. We may experience significant quarterly variations in our operations, and results in any particular quarter may not be indicative of results in subsequent periods. Such variations may lead to significant volatility of our share price. Our results will also be affected by the allocation of revenue between product we produce and own as compared to product which we distribute on behalf of third party producers and for which we are paid a sales commission. In addition, our margins are also affected by the age of the product which we acquired from third parties or previously produced. Where we are paid a sales commission, our expenses as a percentage of revenue will typically be higher, and our margins lower, because we record as an expense the participations owing to the copyright owners. Where we are exploiting product which we own outright we do not record such expenses, and our margins will typically be higher. With respect to sales of our own product, rather than recording a participation expense, we record as an expense the amortization of our acquisition or production costs, which amortization is typically recognized over several financial reporting periods. Sales of older product owned by us, where acquisition or production costs may be substantially or fully amortized, will have significantly higher margins than initial sales on newer product where the sales potential of the product has not been tested and we are incurring significant production costs. DEPENDENCE ON INTELLECTUAL PROPERTY RIGHTS AND RISK OF INFRINGEMENT OF THIRD PARTY INTELLECTUAL PROPERTY RIGHTS. Our business depends upon the protection of the intellectual property rights that we have to our film properties. Despite our efforts to protect our proprietary rights, unauthorized parties may attempt to copy or otherwise obtain and exploit our products. Monitoring authorized use of our products is difficult, and we cannot be certain that the steps we have taken will prevent unauthorized use of our film properties, particularly in foreign countries where the laws may not protect our proprietary rights as fully as in the U.S. and Europe. If we cannot manage to obtain the copyrights of attractive film properties, our business, financial condition and results of operations will be adversely affected. In recent years, there has been significant litigation in the U.S. involving intellectual property rights. We may become party to litigation in the future to protect our intellectual property rights or as a result of the alleged infringement of other's intellectual property. These claims and any resulting lawsuits could subject us to significant liability and invalidation of our property rights. Such litigation could also force us to take measures harmful to our operations, such as to stop selling certain products or to obtain a license from the owner of infringed intellectual property. Any such infringement claims, with or without merit, could be time-consuming to defend, result in costly litigation, divert management's attention and materially adversely affect our financial condition and results of operations. THE SPECULATIVE NATURE OF THE ENTERTAINMENT BUSINESS. Substantially all of our revenues are derived from the production and distribution of television series and made-for-television movies. 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 that any entertainment property will make money. Even if a production is a critical or artistic success, there is no assurance that it will be profitable. In particular, to the extent that our product caters to the tastes of television audiences in the U.S., our results may be affected by the inability to attract audiences in our newly addressed markets, especially Europe. If we are unable to attract productions which compete effectively in the global marketplace, our financial condition and results of operations could be materially adversely effected. THE ABILITY TO MANAGE OUR GROWTH. Subject to obtaining sufficient financing, we intend to pursue a strategy which management believes may result in rapid growth. As our anticipated development, production and distribution activities increase, it is essential that we maintain effective controls and procedures regarding critical accounting and budgeting areas. There can be no assurance that rapid growth will occur or that, if such growth does occur, that we will be able to successfully manage such expanded operations. 14 17 WE DEPEND ON OUR KEY PERSONNEL TO MANAGE OUR BUSINESS EFFECTIVELY. Our success depends largely upon the skills, experience and performance of our executive officers and key employees. Our founder and Chief Executive Officer, Mr. Drew S. Levin, is of particular importance to our U.S. operations. In addition, we have recently managed to retain certain key personnel in Germany and the United Kingdom to oversee our European operations. If we lose one or more of our key employees without finding appropriate replacements or if we fail to attract and retain highly skilled personnel, our financial condition and results of operations could be materially adversely effected. CAPITALIZATION OF DEVELOPMENT AND PRODUCTION COSTS. Included in our assets as of September 30, 1999 and December 31, 1998 are television program costs of approximately $2,242,000 and $1,017,400, respectively, which represent aggregate costs of projects for which we are actively pursuing production commitments, but which have not been set for principal photography. We intend, as required by accounting standards, 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 this regard we wrote down our development costs in the series LoCoMoTioN by approximately $450,000 in the second quarter of 1999. Under generally accepted accounting principals, we are required to capitalize the costs of production. The costs of production are amortized over the estimated revenue life of the product. Therefore, the success of our programming, and the aggregate amount of sales with respect thereto, will affect the amortization rate applicable to such productions. If our actual results are less than projected, management will be required to revise sales estimates downward, and accelerate the amortization of capitalized production costs. PREFERRED STOCK; POSSIBLE ANTI-TAKEOVER EFFECTS OF CERTAIN CHARTER PROVISIONS. Certain provisions of our 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 us. Such provisions could limit the price that certain investors might be willing to pay in the future for shares of our common stock. Certain of these provisions allow us 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. The issuance of preferred stock could decrease the amount of earnings and assets available for distribution to the holders of our common stock or could adversely affect the rights and powers, including voting rights, of the holders of our common stock. Such issuance could have the effect of decreasing the market price of our common stock. VOLATILITY OF SHARE PRICE; LACK OF ACTIVE TRADING MARKET. Our common stock has been listed on The NASDAQ SmallCap Market since July 29, 1998. The market prices for securities of companies with limited operating history, including us, have historically been highly volatile both on The NASDAQ SmallCap Market and the Frankfurt Stock Exchange's Neuer Markt. Significant volatility in the market price of our common stock may arise due to factors such as: - our developing business; - a continued negative cash flow; - relatively low price per share; - relatively low public float; - variations in quarterly operating results; - general trends in the entertainment industry; - the number of holders of our common stock; and - the interest of securities dealers in maintaining a market for our common stock. As long as there is only a limited public market for our common stock, the sale of a significant number of shares of our common stock at any particular time could be difficult to achieve at the market prices prevailing immediately before such shares are offered, and could cause a severe decline in the price of our common stock. 15 18 As long as there is only a limited public market for our common stock, the sale of a significant number of shares of our common stock at any particular time could be difficult to achieve at the market prices prevailing immediately before such shares are offered, and could cause a severe decline in the price of our common stock. WE HAVE NEVER PAID A DIVIDEND AND DO NOT ANTICIPATE PAYING ONE IN THE FORESEEABLE FUTURE. We have not paid dividends since our formation and do not intend to pay any dividends to our shareholders in the foreseeable future. No assurance can be given that we will pay dividends at any time. We presently intend to retain future earnings, if any, for the development and expansion of our business. See "Dividend Policy." SHARES ELIGIBLE FOR ADDITIONAL SALE AND EXERCISE OF REGISTRATION RIGHTS. Sale of substantial amounts of our common stock, the issuance of substantial amounts of warrants and options granting the right to receive shares of our common stock or the prospect of such sales or issuances, respectively, could materially adversely affect the market price of our common stock. Upon completion of this offering, we will have outstanding approximately 12,979,138 shares of common stock and approximately 3,042,384 shares of common stock underlying outstanding warrants and options. Of these shares, approximately 1,921,304 shares are restricted shares under the Securities Act of 1933. We filed a registration statement on Form S-8 under the Securities Act of 1933 to register the sale of approximately 1,100,000 shares of our common stock reserved for issuance under our 1999 Stock Option, Deferred Stock and Restricted Stock Plan. Shares of our common stock issued upon exercise of options are available for sale in the public market, subject in some cases to volume and other limitations. NOTE REGARDING FORWARD-LOOKING STATEMENTS This prospectus contains forward-looking statements that involve risks and uncertainties. These statements relate to future events or our future financial performance. We use words such as "may," "will," "should," "estimates," "predicts," "anticipates," "believes," "plans," "expects," "future," "intends," "potential" and similar expressions to identify forward-looking statements. These statements are only predictions. Actual events or results may differ materially. In evaluating these statements, you should specifically consider various factors, including the risks described above and in other parts of this prospectus. Although we believe that the expectations reflecting the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. Moreover, neither we nor any other person assumes responsibility for the accuracy and completeness of such statements. In addition, these forward-looking statements apply only as of the date of this prospectus. We are under no duty to update any of the forward-looking statements after the date of this prospectus or to conform such statements to actual results or to changes in our expectations. USE OF PROCEEDS The net proceeds from the sale of the 6,000,000 shares of common stock offered by us are estimated to be $ -- , at an assumed initial public offering price of $ -- per share, after deducting the estimated underwriting discounts and commissions payable to the underwriters as well as estimated other offering expenses payable by us (approximately $ -- ). We expect to use the net proceeds from this offering for general corporate purposes, principally working capital and capital expenditures, as well as for the repayment of approximately $9,400,000 of outstanding loans, including accrued interest, net of discount. In addition, we may use a portion of the net proceeds to acquire complementary products or businesses at some time in the future. 16 19 Set forth below, in tabular form, is a breakdown of our anticipated use of proceeds.
APPROXIMATE PERCENTAGE NET PROCEEDS OF NET PROCEEDS ------------- ---------------- Repayment of all outstanding loans, including accrued interest.................................. $ 9,400,000 % Development of our European operations, including potential acquisitions of production and distribution companies and programming.............. 40% Corporate overhead and general working capital (including the build out of the our new headquarters)..................................... %
Pending use of the net proceeds of this offering, we intend to invest the net proceeds in interest-bearing, investment-grade securities. We will not receive any proceeds from the sale of the shares being sold by the selling shareholder. See "Principal and Selling Shareholders." DIVIDEND POLICY We have never declared or paid cash dividends. We intend to retain and use any future earnings for the development and expansion of our business and do not anticipate paying any cash dividends in the foreseeable future. 17 20 SELECTED CONSOLIDATED FINANCIAL DATA The selected consolidated statement of operations data for the years ended December 31, 1998, December 31, 1997 and December 31, 1996 are derived from our Consolidated Financial Statements included elsewhere in this prospectus that have been audited by Stonefield Josephson, Inc., as indicated in their respective reports which are also included elsewhere in this prospectus. The selected consolidated financial data for the nine months ended September 30, 1999 and 1998 have been derived from the unaudited consolidated financial statements of the Company, included elsewhere in this prospectus, which, in the opinion of management, have been prepared on the same basis as the audited financial statements and includes all normal and required adjustments necessary for fair presentation. The results for the nine months ended September 30, 1999 are not necessarily indicative of future results. Such selected consolidated financial data should be read in conjunction with those Consolidated Financial Statements and the Notes thereto.
FOR THE NINE MONTHS ENDED FOR THE FOR THE FOR THE ------------------------------ YEAR ENDED YEAR ENDED YEAR ENDED SEPTEMBER 30, SEPTEMBER 30, DECEMBER 31, DECEMBER 31, DECEMBER 31, 1999 1998 1998 1997 1996 ------------- -------------- ------------ ------------ ------------ (UNAUDITED) (UNAUDITED) STATEMENT OF OPERATIONS DATA: Revenues........................................ $13,273,300 $9,466,800 $13,581,900 $6,875,600 $5,749,800 Cost of revenues................................ 6,056,300 5,884,500 9,076,000 2,355,300 2,895,900 ----------- ---------- ----------- ---------- ---------- Gross profit.................................... 7,217,000 3,582,300 4,505,900 4,520,300 2,853,900 General and administrative expenses............. 3,771,700 2,234,100 3,274,000 3,244,900 2,323,800 ----------- ---------- ----------- ---------- ---------- Net income from operations...................... 3,445,300 1,348,200 1,231,900 1,275,400 530,100 Interest expense................................ 477,900 768,400 902,600 1,040,100 677,700 Interest income................................. 87,300 136,000 202,900 211,800 58,300 Other income.................................... -- -- -- -- 90,100 ----------- ---------- ----------- ---------- ---------- Net income before income taxes.................. 3,054,700 715,800 532,200 447,100 800 Provision for income taxes...................... 1,149,900 60,500 57,500 -- -- Extraordinary loss from early extinguishment of debt.......................................... 431,900 -- 69,500 -- -- ----------- ---------- ----------- ---------- ---------- Net income...................................... $ 1,472,900 $ 655,300 $ 405,200 $ 447,100 $ 800 =========== ========== =========== ========== ========== Net income per common share basic(1)............ $ .35 $ 0.43 $ 0.22 $ 0.40 $ -- =========== ========== =========== ========== ========== Weighted average number of shares outstanding basic(1)...................................... 4,198,176 1,506,672 1,833,340 1,131,344 1,131,344 =========== ========== =========== ========== ========== Net income per common share diluted(1).......... $ .29 $ 0.30 $ 0.17 $ 0.25 $ -- =========== ========== =========== ========== ========== Weighted average number of shares outstanding diluted(1).................................... 4,986,711 2,197,128 2,434,017 1,821,800 1,821,800 =========== ========== =========== ========== ==========
SEPTEMBER 30, 1999 ----------------------------------------------- AS FURTHER ACTUAL AS ADJUSTED(2) ADJUSTED(3) ----------- -------------- -------------- BALANCE SHEET DATA: Liquidity capital (deficit)(4).............................. $(1,137,500) $(1,137,500) $ -- Total assets................................................ 35,117,700 38,220,700 -- Notes payable............................................... 4,387,200 8,187,200 -- Line of credit.............................................. 697,000 -- -- Accrued interest............................................ 324,200 324,200 -- Retained earnings........................................... 1,293,500 1,293,500 -- Shareholders' equity........................................ 17,441,300 17,441,300 --
- --------------- (1) See Note 2 of Notes to Consolidated Financial Statements for information regarding the calculation of net income per share. (2) The "As Adjusted" column reflects: (i) proceeds of $4,000,000 from the bridge financing with Gontard & MetallBank AG; and (ii) the repayment of $697,000 on the line of credit and $200,000 in notes payable. (3) The "As Further Adjusted" column reflects the adjustments described in (2) above and the use of the estimated net proceeds from the issuance of common stock in this offering, see "Use of Proceeds." (4) 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 (due within one year), line of credit, and accrued interest. 18 21 UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL INFORMATION FOR ACQUISITION OF DANDELION DISTRIBUTION LTD. The unaudited pro forma consolidated financial information reflects financial information with respect to the Company's acquisition of Dandelion Distribution Ltd. ("Dandelion"). The acquisition of Dandelion was completed as of October 1, 1999, and has been accounted for under the purchase method of accounting. The financial statements of Dandelion included in the unaudited pro forma consolidated financial information were translated from British Pounds to U.S. dollars at the rate of 1.64, 1.63 and 1.65 for the September 30, 1999 unaudited consolidated balance sheet, the September 30, 1999 unaudited consolidated statement of operations and the December 31, 1998 unaudited consolidated statement of operations, respectively. The unaudited pro forma consolidated statements of operations were prepared as if the acquisition occurred as of January 1, 1998. The unaudited pro forma consolidated balance sheet was prepared as if the acquisition occurred on September 30, 1999. The unaudited pro forma consolidated financial information should be read in conjunction with the Company's historical financial statements and notes thereto included elsewhere in this prospectus. The unaudited pro forma consolidated financial information does not purport to represent what the financial position or results of operations of the Company would have been if the acquisition had in fact been consummated on such date or at the beginning of the period indicated or to project the financial position or results of operations for any future date or period. The pro forma adjustments are based upon available information and upon certain assumptions that the Company's management believe are reasonable. In the opinion of management, all adjustments necessary to present fairly the unaudited pro forma consolidated financial information have been made. The allocation of the purchase price to the assets and liabilities acquired reflected in this proforma financial data is preliminary. Accordingly, the actual financial position and results of operations may differ from these pro forma amounts. 19 22 UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET SEPTEMBER 30, 1999 FOR ACQUISITION OF DANDELION DISTRIBUTION LTD.
PRO FORMA TEAM DANDELION(1) ADJUSTMENTS COMBINED ----------- ------------ ----------- ----------- ASSETS Cash and cash equivalents................ $ 2,173,200 $ 639,000 $ -- $ 2,812,200 Trade receivables, net................... 10,936,700 696,200 1,250,000(2) 12,882,900 Television programming costs, net........ 20,697,100 1,579,300 3,700,000(3) 25,976,400 Due from officer......................... 170,400 -- -- 170,400 Fixed assets, net........................ 55,200 723,700 (175,000)(4) 603,900 Goodwill................................. -- -- 978,200(5) 978,200 Prepaid and other assets................. 1,085,100 69,500 -- 1,154,600 ----------- ---------- ---------- ----------- Total assets................... $35,117,700 $3,707,700 $5,753,200 $44,578,600 =========== ========== ========== =========== LIABILITIES AND SHAREHOLDERS' EQUITY Accounts payable, accrued expenses and other liabilities...................... $ 8,410,900 $2,200,900 $2,260,000(6) $12,871,800 Deferred revenue......................... 85,600 -- -- 85,600 Accrued participations................... 3,771,500 -- -- 3,771,500 Bank line of credit...................... 697,000 -- -- 697,000 Notes payable............................ 4,387,200 -- 2,500,000(7) 6,887,200 Accrued interest......................... 324,200 -- -- 324,200 Shareholder loan and note payable........ -- -- -- -- ----------- ---------- ---------- ----------- Total liabilities.............. 17,676,400 2,200,900 4,760,000 24,637,300 ----------- ---------- ---------- ----------- Commitments and contingencies Shareholders' equity..................... 17,441,300 1,506,800 993,200(8) 19,941,300 ----------- ---------- ---------- ----------- Total liabilities and shareholders' equity......... $35,117,700 $3,707,700 $5,753,200 $44,578,600 =========== ========== ========== ===========
20 23 UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS FOR ACQUISITION OF DANDELION DISTRIBUTION LTD. FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999
PRO FORMA TEAM DANDELION(1) ADJUSTMENTS COMBINED ----------- ------------ ----------- ----------- Revenues.......................... $13,273,300 $2,207,900 $ -- $15,481,200 Cost of revenues.................. 6,056,300 1,277,900 157,200(9) 7,491,400 ----------- ---------- --------- ----------- Gross profit...................... 7,217,000 930,000 (157,200) 7,989,800 General and administrative expenses........................ 3,771,700 905,300 36,700(10) 4,713,700 ----------- ---------- --------- ----------- Income from operations............ 3,445,300 24,700 (193,900) 3,276,100 Interest expense.................. 477,900 60,000 187,500(11) 725,400 Interest income................... 87,300 21,100 -- 108,400 Other income...................... -- 19,400 -- 19,400 ----------- ---------- --------- ----------- Income before income taxes........ 3,054,700 5,200 (381,400) 2,678,500 Provision for income taxes........ 1,149,900 20,900 (137,900)(12) 1,032,900 ----------- ---------- --------- ----------- Income from continuing operations...................... $ 1,904,800 $ (15,700) $(243,500) $ 1,645,600 =========== ========== ========= =========== Income from continuing operations per common share basic.......... $ 0.45 $ 0.36 =========== =========== Weighted average number of shares basic........................... 4,198,176 386,847 4,585,023 =========== ========= =========== Income from continuing operations per common share diluted........ $ 0.38 $ 0.31 =========== =========== Weighted average number of shares diluted......................... 4,986,711 386,847 5,373,558 =========== ========= ===========
21 24 UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS FOR ACQUISITION OF DANDELION DISTRIBUTION LTD. FOR THE YEAR ENDED DECEMBER 31, 1998
PRO FORMA TEAM DANDELION(1) ADJUSTMENTS COMBINED ----------- ------------ ----------- ----------- Revenues.............................. $13,581,900 $3,290,500 $ -- $16,872,400 Cost of revenues...................... 9,076,000 1,988,000 150,800(9) 11,214,800 ----------- ---------- --------- ----------- Gross profit.......................... 4,505,900 1,302,500 (150,800) 5,657,600 General and administrative expenses... 3,274,000 1,090,400 48,900(10) 4,413,300 ----------- ---------- --------- ----------- Income from operations................ 1,231,900 212,100 (199,700) 1,244,300 Interest expense...................... 902,600 86,300 250,000(11) 1,238,900 Interest income....................... 202,900 37,000 -- 239,900 Other income.......................... -- 38,200 -- 38,200 ----------- ---------- --------- ----------- Income before income taxes............ 532,200 201,000 (449,700) 283,500 Provision for income taxes............ 57,500 51,900 (60,100)(12) 49,300 ----------- ---------- --------- ----------- Income from continuing operations..... $ 474,700 $ 149,100 $(389,600) $ 234,200 =========== ========== ========= =========== Income from continuing operations per common share basic.................. $ 0.26 $ 0.11 =========== =========== Weighted average number of shares basic............................... 1,833,340 386,847 2,220,187 =========== ========= =========== Income from continuing operations per common share diluted................ $ 0.20 $ 0.08 =========== =========== Weighted average number of shares diluted............................. 2,434,017 386,847 2,820,864 =========== ========= ===========
22 25 NOTES TO UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL INFORMATION FOR ACQUISITION OF DANDELION DISTRIBUTION LTD. The following table sets forth the determination and allocation of the purchase price of Dandelion. Per the terms of the agreement the Company will pay $5 million, $2.5 million in cash and $2.5 million in the Company's common stock by issuing 386,847 shares. In addition, if the 386,847 shares of common stock do not have a market value of at least $3,000,000 on October 1, 2001, the Company will be required to make a cash payment of up to $250,000. Cash payment................................................ $ 2,500,000 Equity payment.............................................. 2,500,000 Contingent payment.......................................... 250,000 Transaction costs........................................... 100,000 ----------- Total purchase price........................................ 5,350,000
The preliminary allocation of the pro forma purchase price is as follows: Net assets.................................................. (1,506,800) Increase in trade receivables............................... (1,250,000) Increase in television programming costs.................... (3,700,000) Decrease in fixed assets.................................... 175,000 Increase in deferred income taxes........................... 1,910,000 ----------- Cost in excess of fair market value of net assets acquired.................................................. $ 978,200 ===========
(1) The financial statements of Dandelion included in the unaudited pro forma consolidated financial information were translated from British Pounds to U.S. dollars at the rate of 1.64, 1.63 and 1.65 for the September 30, 1999 unaudited consolidated balance sheet, the September 30, 1999 unaudited consolidated statement of operations and the December 31, 1998 unaudited consolidated statement of operations, respectively. (2) Reflects an adjustment to record accounts receivable at fair market value. (3) Reflects an adjustment to the Dandelion film and television program library to record it on the books at fair market value. (4) Reflects an adjustment to a building owned by Dandelion to record it on the books at fair market value. (5) Reflects the excess purchase price over the fair value of the assets acquired and liabilities assumed. (6) Reflects an adjustment to record the deferred tax effect of the pro forma balance sheet adjustments and certain costs of the acquisition. (7) Reflects an adjustment to record a bridge loan covering the cash portion of the acquisition. (8) The net increase to stockholder's equity results from the issuance of $2.5 million in equity and the elimination of Dandelion's historical net assets. (9) Reflects an adjustment to cost of revenues resulting from the write-up of the library and the amortization of those costs over the revenue life of the programming. (10) To reflect the amortization of goodwill over 20 years. (11) Reflects an adjustment to record the increase to interest expense resulting from the bridge loan used to cover the cash portion of the acquisition. The borrowing rate used is 10% per year based on the Company's most recent debt financing. (12) To record the tax effect of the pro forma adjustments to amortization of television programming costs and interest expense. The amortization of goodwill is not deductible for tax purposes. 23 26 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion should be read in conjunction with our financial statements and the notes thereto and the other financial information appearing elsewhere in this prospectus. In addition to historical information, the following discussion and other parts of this prospectus contain forward-looking information that involves risks and uncertainties. Our actual results could differ materially from those anticipated by such forward-looking information due to factors discussed under "Risk Factors," "Business" and elsewhere in this prospectus. OVERVIEW We derive substantially all of our revenues from production fees earned in connection with our original programming, distribution fees from the licensing of programming acquired from others, and the licensing of our original programming. We were incorporated in February 1995 and began operations in March 1995. We are engaged in developing concepts and acquiring literary and other story properties, the most promising of which serve as the basis for our 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, we and the network or distributor negotiate a license fee or distribution advance. This fee is a flat sum payment through which we generally attempt to cover a significant portion of our 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), we attempt 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, we generally attempt to negotiate significant license fees for both series and movies-of-the-week. In many cases, we may invest additional sums in excess of network license fees to produce the best possible pilot, as such pilots are an essential sales tool in gaining network acceptance of a proposed series, if applicable. In these cases, we will attempt to cover the excess 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, we 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, we 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. We recognize 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." As required by SFAS No. 53, we value our 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 revenue. We anticipate that a majority of our production or acquisition costs for our projects will be amortized within three years from the completion or acquisition of such project, with the balance amortized over an additional two years. Our trade receivables historically increase as revenue increases. We, in accordance with SFAS No. 5, record an allowance for doubtful accounts based, in part, on historical bad debt experience. In 1999, we have recorded $500,000 as a provision for an allowance for doubtful accounts. In 1998, the Company recorded $664,000 as a provision for an allowance for doubtful accounts. In 1997, the Company recorded $1,115,600 as a provision for an allowance for doubtful accounts. Typically, when we make a sale of a product, the 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. If customers fail to make scheduled payments, our license agreements provide that we can repossess and resell such product. Because these payments often are spread out over a period of time, up to two years, the payments to be made in the future are recorded as discounted trade receivables. As sales increase, our trade receivables balance will increase accordingly. We believe we have adequate resources to collect our trade receivables. 24 27 RESULTS OF OPERATIONS The nine months ended September 30, 1999 versus the nine months ended September 30, 1998. For the nine months ended September 30, 1999, the Company reported net income of approximately $1,472,900 on total revenues of approximately $13,273,300 compared to net income of approximately $655,300 on total revenues of approximately $9,466,800 for the same period ended September 30, 1998. Revenue increased by 40 percent or $3,806,500 for the nine months ended September 30, 1999 compared to 1998, primarily due to the sales of certain broadcast rights of a library of twenty movie-of-the-week titles which the Company acquired in June 1999. Cost relating to revenues was $6,056,300 for the nine months ended September 30, 1999 as compared to $5,884,500 for the nine months ended September 30, 1998. The costs relate to amortization of production or acquisition costs of television programming for which revenue was recognized during the period. Gross profit margin on sales of television programming for the nine months ended September 30, 1999 was 54 percent compared to 38 percent for the same period in 1998. Included in cost of sales for 1999 is a charge of approximately $450,000 as the Company wrote off development costs incurred on a project which has been in development since 1995. The higher gross profit margin for the nine months ended September 30, 1999 was due to the Company selling television programming acquired by the Company at attractive rates as opposed to selling programming owned and produced by the Company in the nine months ended September 30, 1998. General and administrative expenses were $3,771,700 for the nine months ended September 30, 1999, as compared to $2,234,100 for the nine months ended September 30, 1998. The $3,771,700 excludes $1,740,700 in general and administrative expense that was capitalized to television programming costs, as an allocation of costs related to production, in accordance with SFAS No. 53. The increase in general and administrative expenses, prior to capitalizing certain expenses, are a result of an increase in expenses for staff, primarily for the Company's increased activities in production and development, an increase in the accounts receivable allowance for doubtful accounts and certain litigation costs. Also included in such costs are expenses associated with the issuance of securities to financial consultants for services. The Company believes that payments with these securities issuances are justifiable even though dilutive to current shareholders as opposed to cash outlays. Interest expense was $477,900 for the nine months ended September 30, 1999 as compared to $768,400 for the nine months ended September 30, 1998. The decrease is due to the retirement of debt. Receivables at September 30, 1999 were $10,936,700, all of which are from entities domiciled outside the U.S. These receivables represent approximately 31 percent of the total assets of the Company. At September 30, 1999, 3 receivables represented approximately 88 percent of our accounts receivable balance. As a consequence of the Company's October 1999 acquisition of Dandelion Distribution Ltd. (Dandelion), certain receivables resulting from sales made prior to the acquisition are now considered due from related parties for financial reporting purposes. In June 1999 the Company entered into a five year license agreement for certain territories including the UK of 20 made-for-television movies with Renown Pictures, Ltd., a UK company owned by Noel Cronin, formerly the owner of Dandelion. At September 30, 1999 the receivable due from Renown was $2,900,000. Subsequent to such date the Company received a payment of $725,000 per the terms of the agreement. Noel Cronin is also a director of String of Pearls Plc. In September 1999, the Company entered into a 10 year license agreement for certain European territories including Germany, France and Italy, of 20 made-for-television movies with String of Pearls Plc. At September 30, 1999, the receivable due from String of Pearls Plc was $5,375,000. Subsequent to such date the Company received a payment of $290,000 per the terms of agreement. Mr. Cronin has personally guaranteed the obligation of String of Pearls. See "Risk Factors" and "Certain Relationships and Related Transactions." We have established $837,000 as an allowance for doubtful accounts as of September 30, 1999. We believe the allowance for doubtful accounts is adequate and we have adequate resources to collect our trade receivables. Year ended December 31, 1998 versus year ended December 31, 1997. Revenues for the year ended December 31, 1998 of $13,581,900 were comprised of approximately $6,672,700 on sales and availability for Total Recall 2070 produced by us and Alliance Atlantis, approximately $2,755,300 for the sale of a movie-of-the-week developed by us, "Earthquake in New York" to Fox Family Channel, approximately $1,527,900 on sales for our reality based series "Amazing Tails," approximately $882,000 on sales of satellite rights of the Australian television series "Water Rats," and approximately $1,744,000 on sales of other library product acquired by us. For the year ended December 31, 1998, approximately 26 percent of revenues were attributable to sales to customers outside North America, i.e. United States and Canada. Revenues of $6,875,600 for the year ended December 31, 1997, were comprised of 25 28 approximately $1,975,500 on sales of our reality based series "Amazing Tails," approximately $1,250,000 on sales of "Water Rats," approximately $2,460,000 on sales of movies acquired by us and approximately $1,190,100 on sales of other reality based programming acquired by us. For the year ended December 31, 1997, approximately 80 percent of revenues were attributable to sales to customers outside North America. Within the foreign market, allocations among the four principal geographic regions in which we do business, Europe, Asia and Australia, South America 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 9 to the Consolidated Financial Statements for a breakdown of the geographic distribution of sales of our product. Cost of revenues was $9,076,000 for the year ended December 31, 1998 as compared to $2,355,300 for the year ended December 31, 1997. The costs primarily relate to amortization of production costs of television programming for which revenue was recognized during the respective period. Cost of revenues increased due to the increase in revenues. Gross profit margin on sales of television programming for the year ended December 31, 1998 was 33 percent compared to 66 percent for the period ended December 31, 1997. The lower gross profit margin for the year ended December 31, 1998 was due to our producing and selling original programming as opposed to primarily selling previously produced programming. We co-produced our first drama series Total Recall 2070 with Alliance Atlantis. Production of drama series such as Total Recall 2070 are more expensive than the reality based programming we had produced and acquired in 1997. Original programming generally has higher amortization rates in its initial cycle until it demonstrates audience acceptance. However, a successful drama series will be worth substantially more than reality based programming in ancillary markets. General and administrative expenses were approximately $3,274,000 for the year ended December 31, 1998 as compared to $3,244,900 for the year ended December 31, 1997. Included in general and administrative expenses was $664,000 as an allowance for doubtful accounts for the year ended December 31, 1998 compared to $1,115,600 for the year ended December 31, 1997. Subtracting the effect from the allowance of doubtful, general and administrative expenses was $2,610,000 for the year ended December 31, 1998 compared to $2,129,300 for the year ended December 31,1997. The increase is primarily due to additional staff hired in 1998 to focus on development of new television programming. Interest expense was $902,600 for the year ended December 31, 1998, as compared to $1,040,100 for the year ended December 31, 1997. The decrease is due to the retirement of debt from the proceeds of our initial public offering. Interest income was $202,900 for the year ended December 31, 1998 as compared to $211,800 for the year ended December 31, 1997. All $4,736,700 included in receivables as of December 31, 1998, are due from entities domiciled outside the United States. These receivables represent approximately 28 percent of our total assets. We have established $337,000 as an allowance for doubtful accounts as of December 31, 1998. We believe the allowance for doubtful accounts is adequate and we have adequate resources to collect our trade receivables. Year ended December 31, 1997 versus year ended December 31, 1996. Revenues for the twelve months ended December 31, 1997 were $6,875,600 compared with $5,749,800 for the twelve months ended December 31, 1996. Revenues for the year ended December 31, 1996 included: (i) $1,441,700 from the recognition of revenues from Interpublic for the completion of the series "Amazing Tails," which accounted for 25 percent of revenues during such period; (ii) a revenue guarantee received from the sale of certain library rights; and (iii) revenue from the sales generated by the existing library. Included in this amount are revenues of approximately $680,000 arising from the license of a certain portion of our film library to the Giniger Entities, with respect to the sale of a certain portion of our library in certain Latin America countries and Europe. These revenues were 12 percent of all revenues in such period. Finally, revenues in the period included $618,000 from Eurolink representing additional sales of "Amazing Tails," which was approximately 11 percent of our revenue during such period. For the twelve month period ended December 31, 1997, approximately 80 percent of our revenues were attributed to the exploitation of product outside North America. The concentration relative to the foreign market is attributable to less programming being produced by us directly for the North American market in such period. In prior periods, revenues were generated approximately 40 percent from the North American market and 60 percent from the foreign market. 26 29 Cost of revenues was $2,355,300 for the twelve months ended December 31, 1997, as compared to $2,895,900 for the twelve months ended December 31, 1996. As a percentage of revenue, however, cost of revenue was 34 percent of revenue for the twelve months ended December 31, 1997 compared to 50 percent of revenue to the comparable period in 1996. This decrease is attributable to our deriving more of our revenue from distribution activity relating to our own product rather than product acquired from third parties under license agreements. Third party distribution activity has a lower gross margin because distribution fees of up to 70 percent are paid to the producers of the product. However, amortization expense, as calculated under FASB 53, has comparatively lower rates. For the period ended December 31, 1996, our 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 we distributed more product which we either owned outright or which was produced by us. For this product, our 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 50 percent for the twelve months ended December 31, 1996 to 66 percent for the twelve months ended December 31, 1997, primarily because of higher profit margins on produced and acquired product. General and administrative expenses were $3,244,900 for the twelve months ended December 31, 1997, as compared to $2,323,800 for the twelve months ended December 31, 1996. The increase was principally attributable to a $1,115,600 provision for an allowance for doubtful accounts recorded in 1997. The provision for allowance for doubtful accounts was $1,115,600 for the twelve months ended December 31, 1997, as compared to a $71,300 provision for the twelve months ended December 31, 1996. The 1997 provision consists of the following: (i) $660,000 for the write off of the Eurolink receivable; (ii) $170,600 for the write off of the Giniger Guaranty; and (iii) $285,000 for the write off of the Alliance receivable. Regarding 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 us under the contract for "Amazing Tails." We therefore reasserted our rights to "Amazing Tails" and wrote off the entire receivable under the Eurolink contract. Eurolink and us are unrelated entities and had an arms length relationship. The write down of the Alliance Atlantis receivable occurred as a result of a restructuring of our obligations to Alliance Atlantis. Pursuant to such agreements, Alliance Atlantis and us agreed to: (i) extend the "Total Recall" promissory note; and convert the minimum guarantee to a profit sharing arrangement, which allows Alliance Atlantis to recoups its advance of $225,000, plus entitles Alliance Atlantis to receive a 30 percent distribution fee and actual distribution materials costs prior to our splitting the remaining receipts with Alliance Atlantis. Although we believe that we will receive more than the $225,000 that we have already received from licensing such programing, because of this new structure, we will be unable to recognize any more revenue with respect to our license agreements with Alliance Atlantis until Alliance Atlantis recoups its advance and costs. The write down of the Giniger Guaranty was due to our selling the rights to Water Rats I, prior to the Giniger Entities doing so. Interest expense was $1,040,100 for the twelve months ended December 31, 1997, as compared to $677,700 for the twelve months ended December 31, 1996. The increase was principally attributable to an increase in debt and the related interest expense. Interest income was $211,800 for the twelve months ended December 31, 1997, as compared to $58,300 for the twelve months ended December 31, 1996. The increase in interest income was due to the amortization of the discount taken under the guidelines of APB 21. Trade receivables increased to $6,740,800 for the twelve months ended December 31, 1997, as compared to $3,342,100 for the twelve months ended December 31, 1996, which increase was due to increased revenues. For a description of our treatment of our trade receivables, see "Management's Discussion and Analysis of Financial Conditions and Results of Operations -- Overview." 27 30 LIQUIDITY AND CAPITAL RESOURCES The entertainment industry is highly capital intensive. As of September 30, 1999, we had retained earnings of $1,293,500 and a liquidity deficit of $(1,137,500). Liquidity deficit is defined as: - cash and cash equivalents plus accounts receivable (net), and the amount due from officer, less - accounts payable, accrued expenses and other liabilities, deferred revenue, accrued participations, notes payable (due within one year), line of credit, and accrued interest. We continue to finance our operations from our own sales and production activities, notes payables, lines of credit and loans from our shareholders. Despite our public offering on July 29, 1998, our operations have been hurt by ongoing capital shortages caused by a slowness in collecting receivables and the inability to complete a long term banking relationship. To address our short term financing needs, we raised approximately $12,250,000 since July 1999. This amount includes: - $350,000 pursuant to the sale to 3 investors of 12% debentures and warrants to purchase up to 35,000 shares of our common stock; - $1,200,000 pursuant to a secured loan from VMR; - $4,000,000 pursuant to a loan from Hudson Investors, LLC, which loan matures on November 30, 2002 and accrues interest at the rate of 12% per year. Hudson Investors, LLC has the right to convert any outstanding balance on its promissory note into equity after November 30, 1999. Hudson Investors, LLC also received 340,000 warrants as part of the financing. From the Hudson Investors, LLC loan, VMR was repaid $1,000,000 of its loan; - $6,000,000 from Gontard & MetallBank AG, $2,000,000 from the sale of 500,000 shares of our common stock and $4,000,000 pursuant to a loan that matures on the earlier of this offering or December 31, 1999 and accrues interest at 10% per year, $2,500,000 of these proceeds was used to fund the cash portion of the acquisition of Dandelion; and - $700,000 from the sale of 175,000 shares of our common stock to Arbora Vermogensverwaltungen AG, an existing shareholder. As of November 15, 1999, the Company had cash and accounts receivable due to be collected within one year of approximately $12,243,000. See "Risk Factors -- Our reliance on certain customers and our allowances for possible uncollectible receivables." Also as of November 15, 1999, the Company had indebtedness and related accrued interest of $9,361,000, including notes payable of $8,191,000, net of discount of $740,000, of which $4,929,000 matures within one year, accrued interest of $330,000, and $840,000 outstanding on a revolving line of credit. As we continue to pursue and work toward financing alternatives and search for additional capital as described above, we also continue to explore a variety of other financial alternatives to increase our working capital, including increasing our line of credit with a commercial bank, or pursuing other types of debt or equity financing. No assurance can be given that such financing can ultimately be obtained or that it will be on reasonably attractive terms. We believe that without this offering but solely with our current resources of cash, accounts receivable, available credit line, and our recent financings, we will be able to operate at current expenditure levels through March 31, 2000. Our belief is based upon certain assumptions regarding the anticipated level of operations and overhead, anticipated sales of programming, and anticipated expenditures required for development and production of programming. If sales do not materialize and this offering or alternative financings are not completed by these dates, we will have to limit our development and production activities, reduce our overhead spending, restructure debt pay outs and take other cost reduction measures. Further, even with if we successfully raise additional financing, there is no assurance that we will continue to be profitable or maintain positive cash flow. RECENT ACCOUNTING PRONOUNCEMENTS In April 1998, Statement of Position 98-5 "Reporting on the Costs of Start-Up Activities" ("SOP 98-5") was issued. SOP 98-5 provides guidance on the financial reporting of start-up costs and organization costs. We have adopted SOP 98-5 which did not materially effect our financial statements. In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," effective for fiscal year beginning after June 15, 2000. We anticipate that due to our limited use of 28 31 derivative instruments, the adoption of SFAS No. 133 will not have a material effect on our financial statements. In October 1998, the FASB released an exposure draft of the proposed statement on "Rescission of FASB Statement No. 53, Financial Reporting by Producers and Distributors of Motion Picture Films." An entity that previously was subject to the requirements of SFAS No. 53 would follow the guidance in a proposed Statement of Position, "Accounting by Producers and Distributors of Films." This proposed Statement of Position effects financial statements for fiscal years beginning after December 15, 1999 and could have a significant impact on our results of operations and financial position depending on its final outcome. We have not concluded on its impact given the preliminary stages of the proposed Statement of Position. YEAR 2000 COMPLIANCE As has been widely reported, many computer systems process dates based on two digits for the year of a transaction and are unable to process dates in the year 2000 and beyond. Since our formation in 1995, we have installed new information systems which are year 2000 compliant. Although we do not expect year 2000 to have a material adverse effect on our internal operations, it is possible that year 2000 problems could have a significant adverse effect on our suppliers and their ability to service us and to accurately process payments received. 29 32 BUSINESS OVERVIEW OUR HISTORY We were formed in February 1995. We have focused our efforts on the development, production and distribution of a variety of television programming, including dramatic and reality-based series, specials and made-for-television movies for exploitation in the domestic and international television markets. We derive substantially all of our revenues from production fees earned from our original productions, distribution fees from the exploitation of product acquired from others, and the exploitation of our owned programming. Our production activities have focused on (i) programming produced for U.S. cable and network television channels such as The Discovery Channel, The Family Channel, Showtime Networks and USA Network, 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. We have received a firm commitment from Discovery's Animal Planet for the initial production of 13 one-hour drama episodes of "The Call of the Wild," based on Jack London's classic novel. The series began pre-production in July 1999 with our Canadian production partner. Delivery is expected to take place from December 1999 through February 2000. We are also developing and producing "Destination Style" for Discovery's Travel Channel, "Conversations With Remarkable People" for the Wisdom Network (a new U.S. basic cable network), and "Robin Leach's Wildlife Styles," which has been sold to Canada's Microtainment Productions. In March 1999 our co-production of 22 episodes of a television series based on the hit movie "Total Recall" (Total Recall 2070) began to air on Showtime Networks. We, along with Alliance Atlantis, our co-financing partner, have extended the period of time pursuant to which Showtime must make a decision to order a second season. The Company is currently negotiating with Alliance Atlantis to produce a second season for Showtime or first run syndication. In addition, we co-developed and co-produced a reality-based five-day per week ("strip") syndicated series, called "Strange Universe," with United/Chris-Craft television stations and Rysher Entertainment. This series, which aired on United/Chris-Craft stations, involved the production of 130 episodes over its two, thirteen week commitments. We have also completed production of a series of 48 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. All episodes of Amazing Tales have been produced and delivered, and the series is currently airing on Discovery's Animal Planet. We maintain a development and production department which produces movies-of-the-week, drama and reality-based series for exhibition on network television, cable or ad hoc networks of independent stations in the U.S. market which sometimes form to air series and special programming. This latter process is known as "syndication." We also maintain an international sales force and currently have distribution rights to approximately 2,500 hours of family, dramatic and reality-based series and specials, and films. We are also developing a wide variety of original family, dramatic, reality-based and children's programming. GLOBAL STRATEGY The global television market has experienced substantial growth since 1985 and we believe this market will continue to experience substantial growth during the foreseeable future as foreign state television monopolies end and commercial broadcast outlets expand to provide increasingly varied and specialized content to consumers throughout the world. In the U.S. alone, there have been numerous new television channels which have commenced operation since 1985. Such growth has led to the development and commercialization of specialized cable and satellite 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. Although we have been significantly impacted by recurring cash flow problems, our operating strategy is to fulfill the demand for programming by: (i) expanding the activities of our three operating departments, development and production, distribution, and licensing and merchandising; (ii) implementing strategic acquisitions of film, television and video libraries and production companies; and (iii) entering into joint ventures with, or acquisitions of, unaffiliated third parties, with the intention that such acquisitions or joint 30 33 ventures would lower our financial risk should we expand, as anticipated, into related activities, such as direct marketing and interactive programming. We intend, subject to financing, to acquire, co-produce and co-finance other series, movies and specials from third party producers in order to increase our programming library and self distribute such product on a worldwide basis. The European marketplace currently represents a substantial portion of our total revenue. In the next 5 years, we anticipate this percentage to increase. To fully capitalize on this rapidly expanding market, we have plans to grow through internally generated development and production, international co-productions, acquisitions and strategic investments and the establishment of fully staffed European operations. We have agreed with the underwriters of this offering that we will use a minimum of 40 percent of the total net proceeds of this offering to expand our European operations. We have started a new company in Germany, Team Entertainment Germany GmbH, based in Munich, and have already funded it with $230,000. We anticipate another $800,000 will be spent in the next 12 months for start-up expenses and the securing of the personnel to manage it. Team Entertainment Germany GmbH, will develop formats, as well as produce programming for both German speaking territories and the rest of the world. We also have plans to use Team Entertainment Germany GmbH, to acquire other German production and distribution companies, and to partner with established companies for original German language co-productions. In furtherance of our European strategy, on October 1, 1999 we completed the acquisition of Dandelion Distribution Ltd., for the sum of $2,500,000 in cash and 386,847 shares of our common stock. We may also be required to pay up to an additional $250,000 if the shares of our common stock delivered as part of the purchase price do not have a market value of at least $3,000,000 on October 1, 2001. This London based production and distribution company, formed over 20 years ago, has a library in excess of 2,000 hours of programming. Noel Cronin, the founder and Managing Director of Dandelion, will remain as Managing Director of the newly renamed entity, Team Dandelion, Ltd. Team Dandelion Ltd., will further strengthen our presence in the international media arena, and provide us with a solid foundation to create European community content programming and co-production opportunities. In addition, Team Dandelion, Ltd. will serve as the base for all European sales except those in German speaking territories. We believe 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 (including the dissemination of product on and through the Internet) and other related media investments. While the number of distribution channels has been increasing, we believe 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 we will be successful in obtaining the financing necessary for these acquisitions or that, if consummated, such acquisitions would prove financially successful. In addition, a significant acquisition of product or another company could require us to obtain financing for such acquisition. No assurance can be given that such financing will be available at all, or that if available it will be on terms that are favorable to us. OPERATIONS We currently have three principal operating groups: (i) development and production; (ii) distribution; and (iii) licensing and merchandising. 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, when initiated in the US, is generally produced for prime-time exhibition on one of the major U.S. networks, which include CBS, NBC, ABC and Fox. Such programming may also be produced for new networks such as the United Paramount Network ("UPN") and the Warner Bros.'s "WB" Network, 31 34 first-run pay television exhibition or directly for syndication (i.e., independent or non-network) television, including PBS, as well as numerous 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. We are 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 by us, it is presented to a 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, we negotiate a license fee or distribution advance with the network or distributor. This fee is a flat sum payment through which we generally attempt to cover a significant portion of our 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 license fees. If programming is produced for an entity like PBS, which does not pay significant license fees or distribution advances (and in many instances, may not pay any fee), we attempt 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, we believe that we can defray a significant portion of the production costs of PBS programming using these alternative financing methods, thus availing ourselves of the key demographics of PBS viewership, particularly in children's programming. For other specialty programming produced for initial exhibition on cable networks like the Discovery Channel, or for first run syndication, we do attempt to obtain license fees to partially offset the production costs. With respect to series for the networks or pay cable channels, we generally attempt to negotiate significant license fees for both series and movies-of-the-week. In many cases, we may invest additional sums in excess of network license fees to produce the best possible pilot, as such pilots are an essential sales tool in gaining network acceptance of a projected series, if applicable. In these cases, we 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, we may seek to obtain funding in excess of license fees from a distributor or a third party who will provide such financing in return for a share of the profits from the distribution of such programming. Similarly, for television series, we may invest amounts in excess of U.S. license fees in order to gain a global audience acceptance for the series and to enhance the potential value of future syndication rights. There can be no assurance, however, that once we commit to fund production of a series licensed to a network, the network will order and exhibit sufficient episodes to enable us 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. We believe, 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 for series of between 13 to 26 episodes per season. We intend to focus our production activity in the following areas or genres: drama series, reality-based series, game shows, comedy series, movies-of-the-week, and mini-series. It is our intention to expand the production of our dramatic and reality-based programming, over the next 24 months. Such programming, if any, will be licensed in foreign markets through our sales personnel where we do not have foreign partners. We 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. We entered into an agreement with Alliance Atlantis, a leading Canadian production company, pursuant to which Alliance Atlantis co-produced and co-financed the initial 22 episodes of the series with us. The German rights have been licensed by Pro-Sieben, who is acting as a co-producer of the series. We also entered into an agreement with PolyGram Television (which was subsequently sold to Universal Pictures), pursuant to which PolyGram co-financed and acquired U.S. television distribution rights to the series. The agreement with PolyGram includes a 22 episode commitment in exchange for a license fee and a percentage of the net profits of the series. PolyGram sold the series, entitled Total Recall 2070, to the U.S. pay television network, Showtime Network, where it debuted in March 1999. "First run" domestic syndication is being handled by PolyGram for 32 35 airing to begin in January 2000. Miramax, which acquired the theatrical sequel rights to "Total Recall," has also acquired worldwide (other than Canada, Japan and Spain) home video rights to the series from us. We, together with Alliance Atlantis, have agreed to extend the date pursuant to which Showtime must elect to proceed with a second season, and are currently providing interim financing so as to reserve production facilities and retain the services of the appropriate actors. A second season is desirable as Universal has sold 44 episodes (which would include a second season) in over 80% of the U.S. television markets. No assurance can be given, however, that we will be able to obtain financing for the second season, or if the decision is made to proceed, that we will be able to hold the creative elements in place to effectuate a second season. Moreover, if a second season is commenced, it will not likely have a material impact on the Company's financial results for fiscal 1999. By co-producing the series with Alliance Atlantis, the series qualifies for certain Canadian co-production and tax benefits. The proceeds from all distribution of the series, after recoupment of production costs, will be allocated 40% to us and 60% to Alliance. As part of the co-production agreement, we are to assign our license agreements to the co-production and pay over to the production account all deposits we have received to date. We have also entered into agreements with the Fox Family Channel in the U.S. for the production of two movies-of-the-week. The first, Earthquake in New York is a story about an earthquake in New York City. The production was financed by the Fox Family Channel. We have received our executive producing fee. Earthquake in New York aired on the Fox Family Channel in October 1998, and on ARD in Germany after that date. The second movie-of-the-week, Down Fall, is about an avalanche at an exclusive ski resort. The script for Down Fall which has already been written, was paid for by the Fox Family Channel. No additional funds have been advanced by the Fox Family Channel for the Down Fall production as of this date, although we expect this to occur by the end of 1999 so that production can be completed for an early 2000 U.S. air date. We have received a firm commitment, subject to satisfaction of the condition that financing for the series be in place by December 1, 1999, from Discovery's Animal Planet for the initial production of 13 one-hour episodes of The Call of the Wild, based on Jack London's classic novel. The series began pre-production in July 1999 with our Canadian production partner. We have agreed to guaranty $1,000,000 of interim financing from a third party investor relative to this financing, and the Company has received a commitment from Imperial Bank for the permanent financing. Delivery of the series is expected to take place from December 1999 through February 2000. The Company has entered into a letter of intent with Scanbox Asia Pacific Limited ("Scanbox") pursuant to which Scanbox has agreed to a distribution guarantee of $310,000 per episode in exchange for distribution rights outside the U.S. The agreement is subject to numerous conditions, and no assurance can be given that the Scanbox transaction will be effected. LIVE ACTION AND ANIMATED CHILDREN'S PROGRAMMING. To take advantage of what we believe is a significant television market for children's programming, we intend to develop and produce inventive and original shows, including both animated series and live-action series. 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 The Fox Network, UPN, The WB Network, TBS, The Discovery Channel, The Learning Channel, Animal Planet, The Travel Channel and Lifetime have found quality non-fiction programming to be a mainstay of their programming portfolio. We intend to capitalize upon the programming expertise developed by management prior to our formation. We have an extensive slate of reality-based series which are currently being sold in the international marketplace. Such programs include Strange Universe, a 130 half-hour five day per week ("strip") syndicated series which was produced in association with United/Chris-Craft television stations and Rysher Entertainment. Amazing Tails, a weekly series of 48 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. We have sold, and are currently in production on, 26 half-hours of Destination: Style, to Discovery's Travel Channel. Destination: Style offers a cinema verite look at today's most exotic faces in the world's most exotic places. From the runway show to the seductive magazine spread, each episode takes a behind-the-scenes peek at some of today's most recognizable and desirable international models, including a personal look at their emotions, how they cope with the locales, the elements, the time clock, how they rest and how they play. The series is scheduled to debut in mid-October. Destination: Style is being produced in association with Big Daddy Productions. Additionally, we have sold Conversations with Remarkable People, which is hosted by Chantal Westerman, to the Wisdom Network. Two one-hour primetime specials, one featuring Father Thomas 33 36 Keeting and the other Quincy Jones, have been completed. A third primetime special with former Texas Governor Anne Richards is in pre-production and will be completed by year-end. We have an agreement in principle with Canada's Microtainment Productions, to act as a co-producer with us, of 26 episodes of a series entitled Robin Leach's Wildlife Styles. The primetime magazine focuses on the drama, mystery and majesty of the animal kingdom. Robin Leach's Wildlife Styles travels the world with well known celebrities bringing animal-loving viewers the most dramatic, amazing and hilarious wildlife styles ever seen on television. The series begins production shortly and is scheduled to broadcast worldwide by spring of 2000. Other co-productions include America's Scenic Railway Journeys, a six hour documentary mini-series devoted to famous railway journeys. We have co-produced this series with Oregon Public Television for the PBS Network and have paid Oregon Public Television an advance for the international distribution rights to the mini-series. ACQUISITIONS AND SIGNIFICANT LICENSES An active part of our business is the presentation of our own product as well as product acquired from third-party producers to the international marketplace. Our current library includes approximately 3,000 hours of family, dramatic, reality-based series and specials and films. With the rapid increase of networks and channels, there is an expanding demand for top-quality programming. To access these markets, our distribution personnel attend such major international trade shows as MIPCOM-TV, MIP-TV and NATPE. On June 25, 1999, we purchased from Film Libraries, Inc., a library of 28 made-for-television movies for a total purchase price of $2,200,000, $1,200,000 payable in cash and $1,000,000 payable in our common stock. Of the purchase price, $200,000 in cash and $100,000 in our common stock are payable to 2 individuals as commissions. As of the date hereof, the Company has accepted 20 of the 28 titles. Eight of the titles have delivery deficiencies which have not yet been cured. The Company is negotiating with the seller regarding a reduction of the purchase price if these rights are ultimately undeliverable. If the price is reduced, either the cash or common stock purchase, or both, may be adjusted. As of the date hereof, the Company has paid approximately $1,100,000 in respect of the purchase, and has not yet issued any common stock, but reserved 170,000 shares for such issuance. On August 2, 1999, we purchased from DD Video, the worldwide rights outside the UK of a library of approximately 11 television series (from 2 to 38 episodes each) and 20 one hour documentary specials. The purchase price was $3,400,000; $1,187,500 of which has been paid; $737,500 which is due by December 15, 1999; $737,500 which is due by March 15, 2000 and $737,500 which is due by June 15, 2000. We have acquired the rights for distribution in all Latin American countries, including Mexico and Puerto Rico, of the one hour dramatic series Water Rats, a high suspense police action drama set in Sydney, Australia (116 episodes delivered for the first four seasons), and the one hour dramatic series Cover Story,which takes place on the set of a television entertainment magazine program (26 episodes delivered). These shows were acquired from the Australian production company Southern Star. To date, we have cumulative sales of approximately $700,000 for Mexican broadcast television and pan-Latin American satellite broadcast television with the majority of terrestrial broadcast rights remaining available for sale. We have also acquired Latin American home video and television distribution rights to 78 hours of dramatic films from Beyond Distribution PTY Ltd., a leading Australian production company. See "Business -- Legal Proceeding" for a discussion regarding a lawsuit which has been filed by Beyond. In addition, we have an active "format" business overseas, where we represent and "reformat" successful foreign shows for the domestic marketplace and vice versa. We also currently represent several other custom formats which are under consideration in numerous territories. The acquisition of Dandelion Distribution Ltd., will enhance our distribution capacity in England and Europe and bring us close to offering approximately 2,500 hours of programming. On June 28, 1999, we entered into a five year license for 20 of the made-for-television-movies with Renown Pictures, Ltd., a UK based company. For the license, we will receive $3,300,000, $400,000 of which was received in August 1999 and $725,000 of which was received in October 1999, with the balance due in three equal payments of $725,000 each on December 30, 1999, March 30, 2000 and June 30, 2000. See 34 37 "Certain Relationships and Related Transactions" for a discussion of the impact of the acquisition of Dandelion Distribution Ltd., on the receivable from Renown Pictures, Ltd. In September 1999, the Company entered into a 10 year license agreement for certain European territories including Germany, France and Italy, of 20 made-for-television movies with String of Pearls Plc. At September 30, 1999, the receivable due from String of Pearls Plc was $5,375,000. Subsequent to such date the Company received a payment of $290,000 per the terms of agreement. Further, one of our shareholders has personally guaranteed the obligation of String of Pearls to pay the entire license fee. As of November 15, 1999, we also agreed to purchase worldwide distribution rights (exclusive of the United Kingdom, France, Scandinavia, South Africa, Spain and Benelux) from String of Pearls PLC, to six feature films for a purchase price of $3,360,000. We will pay $336,000 on or about November 20, 1999 with 10 consecutive monthly payments of $280,000 commencing December 20, 1999 and a final payment of $229,000 by October 20, 2000. The term for the acquisition is through October 31, 2009. To the extent that String of Pearls Plc fails to pay any amounts owed to us, we have the right to offset against amounts owed to String of Pearls Plc. LICENSING AND MERCHANDISING Our strategic objectives encompass the exploitation of additional revenue streams through licensing and merchandising efforts. We hope 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, we and Alliance Atlantis, the co-producer of Total Recall 2070, have begun to focus on the marketing and merchandising rights that are available with respect to the Total Recall 2070 series. The financial importance of these rights will likely be impacted by the decision to renew for a second season. COMPETITION The entertainment industry is highly competitive. We compete 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 our competitors are organizations of substantially larger size and capacity, with far greater financial and personnel resources and longer operating histories. 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 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 industry activity. These competitors have numerous competitive advantages, including the ability to acquire financing for their projects and attract superior properties, personnel, actors and/or celebrity hosts. As compared to the major production and distribution entities referred to above, our market capitalization and revenue is de minimis. EMPLOYEES We currently employ, including our newly acquired and formed European operations, 19 full-time employees, eight of whom are members of senior management. From time to time, as projects go into production, temporary employees are also employed by us. During the periods ended December 31, 1998, December 31, 1997 and December 31, 1996 we had an average of 13, 11, and 8 employees, respectively. INVESTMENTS During 1998, 1997, 1996 and the nine months ended September 30, 1999 we made no material investments in the acquisition of fixed assets and the acquisition of financial assets, such as equity holdings or other investments. A substantial portion of our assets is in intangible assets, largely film rights which are intellectual property. We do not have significant investments in fixed assets such as plant and equipment, real property or inventory. We consider financial assets to be equity or debt securities which are tradeable and have a readily available market value. As of the date hereof we do not consider our investments in or acquisitions of wholly-owned subsidiaries as financial assets. For 1999, we currently expect to make aggregate investments in fixed assets in the amount of approximately $500,000, which will be financed largely through working capital. Approximately 60% of these 35 38 investments will be made in the U.S. and 40% in Europe. We currently have no definite plans for the acquisition of financial assets. DIVIDENDS We currently intend to retain all earnings and thus will not be issuing dividends. Moreover, certain of our notes restrict our ability to pay dividends, and we anticipate similar prohibitions if we obtain a regular commercial line of credit. LICENSES AND MATERIAL CONTRACTS The exploitation of products produced by and acquired from third-party producers forms an important part of our business operations. See "Business -- Distribution". As part of the ordinary course of our business, we carefully assess the title of our licensing partners to such properties. We also seek to obtain contractual representations and warranties from our licensing partners to the effect that such licensing partners have sufficient title to and may license the properties licensed by us. The exploitation of film properties forms a particularly significant part of our business. The validity and enforceability of the licensing agreements to which we are a party is important to our financial position and results of operations. As of September 30, 1999, three license agreements comprised 88% of our accounts receivable. See "Risk Factors -- Our reliance on certain customer and our allowances for possible uncollectible receivables." DESCRIPTION OF PROPERTY We currently lease office space at 12300 Wilshire Boulevard, Los Angeles, California from an unaffiliated third party, pursuant to a 36 month lease that began on May 15, 1995 and was extended for an additional 12 months. The lease terminated on May 14, 1999; however, we continue to rent the space, which is approximately 4,700 square feet, on a month to month basis, at a monthly rate of $2.35 per square foot. As of November 3, 1999, we have entered into a lease for 11,000 square feet of office space at 11818 Wilshire Blvd., Los Angeles, California from an unaffiliated third party. The lease is for a period of five years which will commence upon the earlier of our occupancy of the premises or February 15, 2000. The rent is initially $2.85 per square foot; gradually increasing to $3.21 per square foot in the fifth lease year. It is estimated that the cost of the build out for the new space will be approximately $800,000, of which approximately 40 percent will be paid by the landlord. We believe that this new office space will be adequate for our requirements over the term of the lease. Additional space if necessary for growth or short term productions is available throughout the Los Angeles area at commercially reasonable rates. LEGAL PROCEEDINGS In January 1999, we were served with a complaint in a matter styled Mel Giniger & Associates vs. Team Communications Group, Inc. et al filed in the Superior Court of the County of Los Angeles. In the complaint, the Plaintiff, an individual who served as a sales agent for us, alleges that he is owed commissions for sales of certain of our programming and that we have failed to pay in full the amounts Plaintiff alleges are owed to him. The complaint seeks damages for breach of contract, services rendered, account stated and for payment of value for services rendered. We have filed an answer in this action, and intend to vigorously defend ourselves. The Plaintiff recently obtained a writ of attachment in the amount of $100,000 and we have posted a bond with the Superior Court of the County of Los Angeles with respect to this obligation. On October 24, 1999, the Company was served with a complaint from Beyond Entertainment, the licensee of Water Rats Seasons I & II. The complaint, which seeks an accounting and termination of the license agreement, seeks $3,000,000 in contractual damages and $6,000,000 for negligence and fraud. The Company believes the complaint to be totally without merit and intends to vigorously contest the matter. At this time, the outcome of any of the above matters cannot be determined with any certainty. Other than as indicated above, within the past 2 years, we have not been involved in any other legal dispute or arbitration proceeding the outcome of which could materially impact our business, financial condition and results of operations, nor are we aware that any such additional legal proceedings are threatened. 36 39 MANAGEMENT DIRECTORS AND EXECUTIVE OFFICERS The following table sets forth certain information with respect to the directors and executive officers of the Company.
NAME AGE POSITION ---- --- -------- Chairman of the Board of Directors and Chief Executive Drew S. Levin.............. 46 Officer Jonathan D. Shapiro........ 44 President, Chief Operating Officer and Director Larry Friedricks........... 62 Co-President of Team International Paula Fierman.............. 51 Co-President of Team International Timothy A. Hill............ 33 Senior Vice President, Chief Financial Officer, Secretary Eric Elias................. 44 Senior Vice President, Business and Legal Affairs Declan O'Brien............. 34 Senior Vice President, Development Jane Sparango.............. 37 Senior Vice President, Development and Production W. Russell Barry(1)(2)..... 63 Director Michael Jay Solomon(1)(2)............ 61 Director
- --------------- (1) Member of the Compensation Committee (2) Member of the Audit Committee Drew S. Levin has been our President, Chief Executive Officer and Chairman of the Board of since we were formed in 1995. With the hiring of Mr. Shapiro in January 1999, Mr. Levin relinquished the title of President. From 1987 through 1994, Mr. Levin 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 "Future Quest," for which Mr. Levin received an Emmy Award, "Hollywood Stuntmakers," "FX Masters" and "Forces Beyond" for the Discovery Network. Mr. Levin has extensive experience in international co-productions, including co-producing a domestic and international version of "Top of the Pops" with the British Broadcasting Company for the CBS television network and the Montreux Rock Festival for the Showtime Network. Jonathan D. (Jody) Shapiro has been President, Chief Operating Officer and a Director since January 1, 1999. Before joining the Company, Mr. Shapiro was employed at Harmony Holdings Inc., where he was Executive Vice President, as well as President of Harmony Entertainment, Inc., from 1998 to 1999. During 1997, Mr. Shapiro was an independent consultant. From 1993 to December 1996, he was President and Chief Executive Officer of CST Entertainment, Inc., where he executive produced the award winning made for television movie "Wyatt Earp: Return to Tombstone", as well as other series. From 1990 to 1993, Mr. Shapiro was President of RHI Television Sales (formerly New Line Television Distribution). From 1986 to 1990, he was at Qintex Entertainment, Inc., where he served as both Executive Vice President of Qintex Telecommunications Group and President of Hal Roach Studios Syndication, Inc. Mr. Shapiro began his career at Telepictures Corporation, attaining the position of Senior Vice President of Domestic Television. Michael Jay Solomon has been a member of the Board of Directors since August 1998. Mr. Solomon has over 41 years experience in the entertainment business. In 1978, Mr. Solomon founded Telepictures Corp., serving as its Chairman of the Board and Chief Executive Officer. In 1985, Telepictures Corp. merged with Lorimar Inc., with Mr. Solomon being appointed as the combined companies' President. From 1989 to April 1994, Mr. Solomon was President of Warner Bros. International Television, heading up that company's sales and marketing to television, cable and satellite companies outside of the United States. For the past four years, Mr. Solomon has been Chairman and Chief Executive Officer of Solomon Broadcasting International, a television communications company which he formed in April 1994. In 1997, Mr. Solomon became the U.S. representative of Telefonica, Spain, in its new digital Pay TV, Pay-Per-View and Basic Cable Television System -- Via Digital. Mr. Solomon serves on the Boards of Directors of the International Council of the National Academy of Television Arts and Sciences and the New York University Stern School of Business. W. Russell Barry has been a member of the Board of Directors since March 16, 1999. Mr. Barry has more than thirty years experience as a senior management executive in broadcasting, television production, and worldwide distribution. From 1961 to 1976, Mr. Barry worked for CBS and held various sales and management positions including Vice President and General Manager of KNXT (CBS owned station in Los Angeles). In 1976, he joined 20th Century Fox as Vice President Network Sales and subsequently became 37 40 President of 20th Century Fox Television. Recruited in 1981 by Playboy Enterprises as President of their production company, he negotiated a joint venture with Cablevision and launched the Playboy Channel. From 1983 to 1986, he was President of Taft Entertainment Television. In 1986, he was named President, and then in June of 1995, Chairman of Turner Program Services, the television distribution company for Turner Broadcasting. During those twelve years, his responsibilities included the worldwide marketing and sales of CNN, the MGM library, Hanna Barbera and other Turner programing. Currently, he is a partner in Bandit Films and consults for several companies. Larry Friedricks has recently been hired to be a Co-President of a to be formed subsidiary of the Company, Team International. Before that, he has been a consultant to the Company since March 1998. Mr. Friedricks co-founded PAULAR Entertainment L.L.C. in July 1996, where he has served as consultant since such date. PAULAR specializes in sales and marketing, both domestically and internationally, to all forms of media. Before forming PAULAR Entertainment, Mr. Friedricks served as Executive Vice President with Jones Entertainment Group ("JEG"), a division of Jones Intercable, where he was responsible for overseeing world-wide marketing and distribution of their television product as well as locating outside investment opportunities. He also supervised co-productions with European partners. Mr. Friedricks was with the NASDAQ-traded Kushner-Locke Company from 1991 to 1995 as President of the newly formed sales division. Between 1982 and 1991, Mr. Friedricks was Executive Vice President of AMEX-traded Fries Entertainment. Mr. Friedricks is married to Ms. Fierman. Paula Fierman has also recently been hired to be the other Co-President of Team International. Before that, she has been a consultant to the Company since March 1998. From 1996 to November 1999, Ms. Fierman worked as a consultant with PAULAR Entertainment, specialized in sales and marketing, both domestically and internationally, to all forms of media. Before forming PAULAR Entertainment with Larry Friedricks, Ms. Fierman served as Senior Vice President International with Jones Entertainment Group ("JEG"), a division of Jones Intercable, where she was responsible for marketing campaigns, public relations and promotion, as well as direct sales of JEG television, home video and feature films worldwide. Prior to JEG, Ms. Fierman served as Senior Vice President International at Kushner-Locke. Between 1987 and 1991, Ms. Fierman was Senior Vice President International at Fries Entertainment. Ms. Fierman is married to Mr. Friedricks. Timothy A. Hill has been Senior Vice President, Chief Financial Officer and Secretary since August 18, 1998. Prior to joining the Company, Mr. Hill served as Controller for Spelling Films, Inc. From 1994 to 1996, Mr. Hill was a Manager for Price Waterhouse LLP, where he worked with entertainment, media and communications clients. From 1989 to 1994, he was Manager with Arthur Andersen LLP. Mr. Hill is a certified public accountant. He received a Bachelor's of Science Degree in Accounting from Pepperdine University. Mr. Hill is a member of the American Film Market Association, where he serves as Chairman of the Finance Committee. Eric Elias has served in the capacity as Senior Vice President, Business and Legal Affairs since our formation in 1995. Mr. Elias has previously served as corporate counsel and general manager for a retail and wholesale leisure electronics firm and, for the past twelve years, has been in general private practice of law, providing business and legal affairs services for television production entities similar to the Company. Declan O'Brien has been Senior Vice President, Development since April 13, 1998. For the past 5 years, Mr. O'Brien has worked for several television and motion picture companies located at The Walt Disney Company Studios. From 1996 to 1998, Mr. O'Brien served as Director of Development at Goldenring Productions. Prior to 1996, he was involved in production at Touchstone Pictures. Mr. O'Brien holds a Bachelor of Arts degree from California State University, Pomona, where he was graduated with honors. Jane Sparango is Senior Vice President of Development and Production. Ms. Sparango, who joined the Company in December 1998, manages the acquisition, development and production of our reality-based and light entertainment television series. In her seventeen-year career in broadcasting, Ms. Sparango has produced over 550 hours of television. Before joining the Company, Ms. Sparango was a producer on "Unsolved Mysteries" for CBS Television and Cosgrove/Muerer Productions. Prior to that, Ms. Sparango produced "Zooventure", a children's game show for the Discovery Network and Pearson/All American Television. In 1988 she was appointed coordinating producer on the news magazine program "Inside Edition" for King World Productions. Ms. Sparango worked on the hit series "Lifestyles of the Rich and Famous" for over ten years at Television Program Enterprises (TPE) in New York and was named producer in February 1990 -- a position she also held on another spin-off show -- "Runaway with the Rich and Famous". 38 41 Our executive officer and directors can be reached at our principal executive offices at 12300 Wilshire Boulevard, Suite 400, Los Angeles, CA 90025, U.S.A. INVOLVEMENT IN CERTAIN LEGAL PROCEEDINGS In January 1997, CST Entertainment, Inc., a publicly held company primarily involved in the colorization of old "black and white" film material, filed for federal bankruptcy protection in the Southern District of California. From 1993 to December 1996, Mr. Shapiro, our current President, Chief Operating Officer and a director, was president, chief executive officer and a director of CST Entertainment, Inc. AGGREGATE COMPENSATION OF ALL EXECUTIVE OFFICERS The aggregate compensation paid to the Company's executive officers in 1998, including individuals who are no longer with the Company, was $1,169,115. COMPENSATION OF DIRECTORS Under the 1996 Directors Plan, which plan has been incorporated into the 1999 Stock Option, Deferred Stock and Restricted Stock Plan, Mr. Solomon and Mr. Barry, who are non-employee directors, each received an option to purchase 30,000 shares of our common stock at the then effective exercise price of $2.50 per share and $2.00 per share, respectively. Non-employee directors received no other compensation from the Company in fiscal year 1998. EMPLOYMENT CONTRACTS AND TERMINATION OF EMPLOYMENT, AND CHANGE IN CONTROL AGREEMENTS Drew Levin. The Board of Directors approved, as of October 8, 1999, which was subsequently amended as of October 29, 1999, a new 5 year employment agreement with Mr. Levin (the "Levin Agreement") providing for his services as Chairman of the Board of Directors and Chief Executive Officer. The Levin Agreement, which is effective as of August 1, 1999, provides for the payment to Mr. Levin of a base salary of $550,000 per year, with annual increases of 4% on each anniversary date of the Levin Agreement (the "Annual Salary"). Mr. Levin is to receive a one time bonus of $250,000, $100,000 of which was paid to him on October 29, 1999, the remaining $150,000 to be paid on January 2, 2000. Mr. Levin has also agreed to repay any outstanding loans he has from the Company with the first to occur of his proceeds as a selling shareholder in this offering or the remainder of his January 2, 2000 bonus. Mr. Levin will also receive an annual bonus calculated for each fiscal year as follows: if we have net pre-tax earnings of up to $2,000,000, Mr. Levin will receive 5% of such net pre-tax earnings and if we have net pre-tax earnings of greater than $2,000,000, Mr. Levin will receive 7.5% of such net pre-tax earnings. Mr. Levin will also receive options to purchase an aggregate of 1,115,000 shares of our common stock pursuant to the 1999 Stock Option, Deferred Stock and Restricted Stock Plan. 250,000 of such options were granted as of the date of the Levin Agreement, vesting as of that date and are exercisable at $6.063 per share (the closing bid price of our common stock on September 24, 1999, the last business date preceding the date the Board of Directors initially considered Mr. Levin's employment agreement). 865,000 of such options are to be granted on the date this offering closes, vesting at the time of grant and are exercisable at the market price of our common stock on the date the offering closes. All options being granted to Mr. Levin have a 5 year term. Mr. Levin shall also receive a monthly car allowance of $1,500. The Levin Agreement also provides that if Mr. Levin dies or becomes unable to perform his duties, functions and responsibilities for a period of 3 consecutive months or shorter periods aggregating 4 months within any 12 month period, the Company may terminate Mr. Levin, in which case Mr. Levin or his beneficiary shall be entitled to receive all of Mr. Levin's base salary, accrued share of bonus for that fiscal year and thereafter for an additional one year period. If the Company were to terminate Mr. Levin without cause, Mr. Levin would be entitled to receive (i) a lump sum payment equal to the Annual Salary, as well as unpaid vacation pay, unreimbursed business expenses and any other monies payable to Mr. Levin under any employee benefit plan; (ii) the right to obtain a transfer of any life insurance policy existing for the benefit of Mr. Levin; and (iii) 120% of the balance of the Annual Salary payable through the end of term of the Levin Agreement, as due and scheduled under the Levin Agreement as if Mr. Levin had not been terminated. If Mr. Levin is terminated for cause, as defined in the Levin Agreement, Mr. Levin shall be entitled to receive the amount of his Annual Salary accrued up to the date of termination, his accrued bonus for that fiscal year, if any, and all fringe benefits which have accrued up till that date. Jonathan D. (Jody) Shapiro. We have entered into a new employment agreement with Mr. Shapiro (the "Shapiro Agreement") providing for his services as President and Chief Operating Officer, effective as of 39 42 October 29, 1999. The term of the Shapiro Agreement continues until December 31, 2000. Pursuant to the terms of the Shapiro Agreement, Mr. Shapiro will be paid an annual salary of $220,000 through December 31, 1999. Additionally, Mr. Shapiro has received a bonus of $80,000 which was paid on October 29, 1999. Mr. Shapiro will also receive an additional bonus of $170,000 upon completion of this offering. Mr. Shapiro shall be paid a base salary of $350,000 for the calendar year 2000. At any time after January 1, 2000, either we or Mr. Shapiro has the option of converting the Shapiro Agreement into a non-exclusive consulting agreement. If either party exercises such option, Mr. Shapiro shall be paid a lump sum of $250,000, less any compensation received by Mr. Shapiro for such calendar year. Mr. Shapiro has been granted 90,000 stock options at an exercise price of $1.65 per share, such options are fully vested. Larry Friedricks. We have entered into an employment agreement with Larry Friedricks (the "Friedricks Agreement") to serve as Co-President of Team International, a to be formed wholly owned subsidiary of the Company dated as of November 1, 1999. The term of the Friedricks Agreement is for 3 years, commencing on November 15, 1999 and ending on December 31, 2002, subject to Mr. Friedricks' right to terminate his employment upon 60 days prior written notice should Mr. Drew Levin no longer be the Company's Chairman of the Board and Chief Executive Officer. Mr. Friedricks is to be paid an annual salary of $220,000, with 4 percent increases on each anniversary date of the Friedricks Agreement. Mr. Friedricks shall be eligible to participate in all bonus and profit sharing plans adopted by the Company. Mr. Friedricks is to be granted 60,000 stock options at an exercise price equal to the average of the bid and asking price of the Company's common stock on the date immediately preceding the date of the Friedricks Agreement. The options vest as follows: 20,000 after the end of the first year of employment; 20,000 after the end of the second year of employment; and 20,000 after the end of the third year of employment. All options expire 90 days after the termination of Mr. Friedricks' employment with the Company. Paula Fierman. We have entered into an employment agreement with Paula Fierman (the "Fierman Agreement") to serve as Co-President of Team International, a to be formed wholly owned subsidiary of the Company dated as of November 15, 1999. The term of the Fierman Agreement is for 3 years, commencing on November 15, 1999 and ending on December 31, 2002, subject to Ms. Fierman's right to terminate her employment upon 60 days prior written notice should Mr. Drew Levin no longer be the Company's Chairman of the Board and Chief Executive Officer. Ms. Fierman is to be paid an annual salary of $180,000, with 4 percent increases on each anniversary date of the Fierman Agreement. Ms. Fierman shall be eligible to participate in all bonus and profit sharing plans adopted by the Company. Ms. Fierman is to be granted 30,000 stock options at an exercise price equal to the average of the bid and asking price of the Company's common stock on the date immediately preceding the date of the Fierman Agreement. The options vest as follows: 10,000 after the end of the first year of employment; 10,000 after the end of the second year of employment; and 10,000 after the end of the third year of employment. All options expire 90 days after the termination of Ms. Fierman's employment with the Company. Timothy A. Hill. We have entered into an employment agreement with Timothy A. Hill (the "Hill Agreement") providing for his services as Senior Vice President/Chief Financial Officer effective August 17, 1999. The term of the Hill Agreement is for 2 years. Mr. Hill is to be paid a salary of $150,000 for the first year and $175,000 for the second year. Mr. Hill shall be entitled to a minimum annual bonus of $15,000. Mr. Hill is to be granted 40,000 stock options at the exercise price equal to the price of our common stock on the grant date, to vest equally on a monthly basis over the term of the Hill Agreement. EXECUTIVE COMPENSATION The following table provides certain summary information concerning the compensation earned for services rendered in all capacities to us for the fiscal years ended December 31, 1998, 1997 and 1996 by our Chief Executive Officer (the "Named Executive Officer"): SUMMARY COMPENSATION TABLE
STOCK ALL OTHER NAME AND PRINCIPAL POSITION(1) YEAR SALARY BONUS OPTIONS COMPENSATION ------------------------------ ---- -------- -------- ------- ------------ Drew S. Levin(5)........................ 1998 $220,000 $145,000 $13,400(4) Chairman of the Board 1997 $220,000 $145,000 and Chief Executive Officer 1996 $350,000 $ 45,000(2) (3)
- --------------- (1) Other than salary described herein, the Company did not pay the Named Executive Officer any compensation, including incidental personal benefits in excess of 10% of the Named Executive Officer's salary. 40 43 (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 Tails. During such period Mr. Levin received $45,000 and, pursuant to the terms of his new employment agreement (which became effective upon the closing of the public offering in August 1998), has agreed to apply the balance of such accrued but unpaid bonus ($175,000) to repay certain loans made to him by the Company. This amount ($175,000) was reflected in Mr. Levin's compensation for fiscal 1998. Mr. Levin will no longer receive production bonuses. The loan balance is $179,400 as of the date hereof. Such amount is net of amounts owed to Mr. Levin for accrued producer fees and the bonus effective April 1, 1998. See "Certain Relationships and Related Transactions." (3) Pursuant to the terms of Mr. Levin's prior employment agreement, Mr. Levin was granted options to acquire 85,000 shares of our common stock at $5.50 per share, exercisable upon our initial public offering. These options are fully vested. (4) Mr. Levin was entitled to receive a car allowance of $1,250 per month for 8 months and $850 per month for 4 months. (5) For the fiscal year ending December 31, 1998, the Company has granted Mr. Levin a bonus, effective as of April 1, 1998, of $70,000 in respect of his services for 1997. This amount is in addition to his agreed upon contractual compensation. In addition, Mr. Levin received a bonus of $30,000 pursuant to the terms of his prior employment agreement for the fiscal year ended December 31, 1998. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Short Term Borrowings by Mr. Levin. The Company has currently due from officer a balance of $170,400. The Company had due from officer balances of $145,400, $195,500 and $11,300 at December 31, 1998, December 31, 1997 and December 31, 1996, 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 December 31, 1998, December 31, 1997 and December 31, 1996, the amount of such loans owed by Mr. Levin to the Company (which also represents the highest amount borrowed during such periods) was $145,400, $195,500 and $11,300, respectively. As of September 30, 1999, the amount of such loans is $170,400, with a majority of the disinterested members of the Board of Directors having approved the additional $25,000 loan. Such amount is net of amounts owed to Mr. Levin for accrued producer fees and bonus effective April 1, 1998. Borrowings by any officer of the Company require the approval of a majority of the disinterested members of the Board. There is no interest being charged on the amount Mr. Levin owes the Company and there is no interest accruing on the producer fees previously owed by the Company to Mr. Levin. Mr. Levin has agreed to repay the outstanding balance with the first to occur of his receipt of the proceeds of the sale of his common stock offered hereunder, or the remainder of his January 2, 2000 bonus. Transactions With Eric Elias. Mr. Elias, who serves as Senior Vice President, Business and Legal Affairs, is paid through his private law firm. In 1997 Mr. Elias received approximately $125,000, including expense reimbursements, for such legal services. In 1998, Mr. Elias received approximately $170,000, including expense reimbursements, for such legal services. On June 30, 1997, Mr. Elias was granted an option to purchase 12,500 shares of common stock at the Company's initial public offering price of $5.50 per share. On October 8, 1999, Mr. Elias was granted an option to purchase an additional 50,000 shares of our common stock, exercisable at $6.25 per share. Mr. Elias' option has a 5 year term and vests ratably on a monthly basis over a 2 year period. Transactions With Renown Pictures, Ltd.; Transactions with Noel Cronin. As of November 15, 1999, the Company was owed $2,220,000 in respect of a receivable from Renown Pictures, Ltd., a United Kingdom corporation ("Renown"), pursuant to the acquisition of a five year license for 20 movies-of-the-week. Prior to such date, $1,125,000 had been paid by Renown. Renown is owned by Noel Cronin, formerly the owner of 100% of the stock of Dandelion Distribution Ltd, which was acquired by us in October 1999. Mr. Cronin currently owns 386,847 shares of the Company's common stock (approximately 5%). So as to avoid any conflicts, Mr. Cronin has assigned the rights to the programming and the obligation to pay the balance of the receivable to Doljac Television Limited. Mr. Cronin, on behalf of the Company, has retained the right to act as a subdistributor of the product acquired by Renown. In effectuating the acquisition of the 20 movies-of-the-week, Renown acted on behalf of a group of investors (the "Investors") who treated the transaction as a sale-leaseback through Renown, thus entitling them to certain tax deductions under UK law. The Investors have confirmed that they will complete all additional funding with Doljac so as to complete the acquisition. Noel Cronin is also a director of String of Pearls Plc. In September 1999, the Company entered into a 10 year license agreement for certain European territories including Germany, France and Italy, of 20 made-for-television 41 44 movies with String of Pearls Plc. At September 30, 1999, the receivable due from String of Pearls Plc was $5,375,000. Mr. Cronin has personally guaranteed the obligation to pay the license fee from String of Pearls to us. Subsequent to such date the Company received a payment of $290,000 per the terms of agreement. In August 1999, the Company acquired the "Victory 1" library from DD Video for $3,400,000. Mr. Cronin sold DD Video to its current owners in April 1998. Mr. Cronin is a director of DD Video, although he received no compensation, either directly or indirectly, in respect of this action. Transactions with Underwriter. Gontard & MetallBank, the underwriter of this offering, owns 500,000 shares of our outstanding common stock. This represents 7.2% of our outstanding stock. These shares were purchased at a price of $4.00, a discount of approximately $2.00 per share from the then current market price. In connection with this offering, Gontard & MetallBank will receive commissions and fees, including the reallowance for members of the underwriting syndicate, of 10%. Transactions with Joseph Cayre. 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 these loans accrued at the prime rate established by Republic National Bank, New York, New York, plus 2% per year and 14% per year, respectively. Mr. Cayre has waived the interest that accrued on these loans prior to December 31, 1996. This interest expense, at fair value, was recorded as either a corresponding credit to paid in capital (in fiscal 1996), or accrued liabilities (in fiscal 1997 and in fiscal 1995), which will be offset against paid in capital upon settlement of the obligations. Mr. Cayre's loans were secured by Mr. Levin's shares and all of the assets of the Company. 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, which options are exercisable at the time of the Company's initial public offering. Mr. Cayre and Mr. Levin agreed that as of the closing of the Company's initial public offering, Mr. Cayre would receive payment of $250,000 in respect of the amounts owed to him, and the remaining debt, if the Company's initial public offering was consummated on or before July 30, 1998, would be extended until thirteen months from the closing date of the Company's initial public offering. Subject to the foregoing, Mr. Levin and Mr. Cayre also agreed to restructure Mr. Cayre's investment in the Company. Mr. Cayre agreed that upon the closing of the Company's initial public 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 also entered into a consulting agreement with the Company pursuant to which he was paid $260,000 for his consulting services to the Company through September 30, 1998. As of the date hereof, all indebtedness to Mr. Cayre has been repaid, and the transfer of stock from Mr. Cayre to Mr. Levin was effectuated. Transactions with Morris Wolfson and Others. In January 1996, the Company entered into a transaction with AMAE Ventures, an affiliate of Mr. Morris Wolfson, formerly a 5% shareholder of the Company, 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% per year. This note was due on the earlier to occur of July 15, 1998 or the closing of the Company's initial public offering, and was subject to certain anti-dilutive provisions. Interest on this line accrued at 10% per year. The holder of such note had 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 Company's initial public offering, and has in fact converted such note. An April 1996 loan by South Ferry #2 L.P., a Delaware limited partnership (which may be deemed an affiliate of Mr. Wolfson), in the principal amount of $500,000 was used for the pre-production of "LoCoMoTioN." This loan bore interest at 10% per year and was due on the earlier to occur of July 15, 1998 or upon the closing of the Company's initial public offering. In connection with such loan, South Ferry #2 L.P. received 29,905 warrants exercisable at $.43 per share upon the closing of the Company's initial public offering and a 5% net profit participation from the series. 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 in consideration for such extension of credit. 42 45 The terms of AMAE Ventures' original agreement with the Company, as indicated above, enabled such entity (or its investors) to receive up to an additional 199,748 shares of Common Stock upon the completion of the Company's initial public 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 were secured by the Company's underlying rights to the "Total Recall" series, bore interest at 10% per year. 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 upon the closing of the Company's initial public offering and a 15% net profit participation in the Company's interest in the series. This loan was repaid through an advance from Alliance Atlantis. As of the date hereof, all of the indebtedness to Morris Wolfson and related parties has been repaid. We believe that the foregoing transactions were on terms no less favorable to us than those available from unaffiliated parties. It is our 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 us than could be obtained from unaffiliated parties and are reasonably expected to benefit us. STOCK OPTION PLANS As of May 26, 1999, our Board of Directors approved, and recommended for adoption by the shareholders, who adopted such plan on June 11, 1999, the 1999 Stock Option, Deferred Stock and Restricted Stock Plan (the "1999 Stock Plan"). As part of the 1999 Stock Plan, we incorporated into it our 1996 Stock Awards Plan and our 1996 Directors' Stock Option Plan. All outstanding awards under those plans have been converted into equivalent awards under the 1999 Stock Plan. Such awards will continue to have the same terms, conditions and exercise prices as they had under the prior plans. The 1999 Stock Plan increases the aggregate number of shares available for the grant of options to an amount equal to 20% of then current outstanding shares of our common stock, such figure to be adjusted as and when we increase our outstanding shares of common stock. The initial number of shares shall be approximately 1,100,000. The 1999 Stock Plan provides for the grant of qualified incentive stock options ("ISOs") that meet the requirements of Section 422 of the Internal Revenue Code of 1986, as amended, stock options not so qualified ("NQSOs"), deferred stock and restricted stock awards ("Grants"). The 1999 Stock Plan is administered by a committee of directors appointed by the Board of Directors (the "Committee"). ISOs may be granted to our officers and key employees or any of our subsidiaries. The exercise price for any ISO granted under the 1999 Stock Plan may not be less than 100% (or 110% in the case of ISOs granted to an employee who is deemed to own in excess of 10.0% of the outstanding common stock) of the fair market value of the shares of common stock at the time the option is granted. The exercise price for any NQSO granted under the 1999 Stock Plan may not be less than 85.0% of the fair market value of the shares of common stock at the time the option is granted. The purpose of the 1999 Stock Plan is to provide a means of performance-based compensation in order to attract and retain qualified personnel and to provide an incentive to those whose job performance affects us. The number of shares reserved for issuance under the 1999 Stock Plan is subject to anti-dilution provisions for stock splits, stock dividends and similar events. If an option granted under the 1999 Stock Plan expires or terminates, or a Grant is forfeited, the shares subject to any unexercised portion of such option or Grant will again become available for the issuance of further options or Grants under the 1999 Stock Plan. Under the 1999 Stock Plan, we may make loans available to stock option holders, subject to the Committee's approval, in connection with the exercise of stock options granted under the 1999 Stock Plan. If shares of common stock are pledged as collateral for such indebtedness, such shares may be returned to us in satisfaction of such indebtedness. If so returned, such shares shall again be available for issuance in connection with future stock options and Grants under the 1999 Stock Plan. Unless previously terminated by the Board of Directors, no options or grants may be granted under the 1999 Stock Plan after May 25, 2009. Options granted under the 1999 Stock Plan will become exercisable according to the terms of the grant made by the Committee. Grants will be subject to the terms and restrictions of the award made by the Committee. The Committee has discretionary authority to select participants from among eligible persons and to determine at the time an option or Grant is granted and in the case of options, whether it is intended to be an ISO or a NQSO, and when and in what increments shares covered by the option may be purchased. Under 43 46 current law, ISOs may not be granted to any individual who is not also an officer or employee of ours or any of our subsidiaries. The exercise price of any option granted under the 1999 Stock Plan is payable in full: - in cash; - by surrender of shares of our common stock already owned by the option holder having a market value equal to the aggregate exercise price of all shares to be purchased including, in the case of the exercise of NQSOs, restricted stock subject to a Grant under the 1999 Stock Plan; - by cancellation of indebtedness owed by us to the option holder; - by a full recourse promissory note executed by the option holder; or - by any combination of the foregoing. The terms of any promissory note may be changed from time to time by the Board of Directors to comply with applicable Internal Revenue Service or Securities and Exchange Commission regulations or other relevant pronouncements. The Board of Directors may from time to time revise or amend the 1999 Stock Plan and may suspend or discontinue it at any time. However, no such revision or amendment may impair the rights of any participant under any outstanding option or Grant without such participant's consent or may, without shareholder approval, increase the number of shares subject to the 1999 Stock Plan or decrease the exercise price of a stock option to less than 100% of fair market value on the date of grant (with the exception of adjustments resulting from changes in capitalization), materially modify the class of participants eligible to receive options or Grants under the 1999 Stock Plan, materially increase the benefits accruing to participants under the 1999 Stock Plan or extend the maximum option term under the 1999 Stock Plan. 44 47 PRINCIPAL AND SELLING SHAREHOLDERS The following table sets forth information known to us with respect to the beneficial ownership of our shares of common stock as of November 10, 1999, and as adjusted to reflect the sale of shares of common stock offered hereby by (1) each shareholder known by us to own beneficially more than 5% of our shares of common stock, (2) each of the Named Executive Officers, (3) each director, (4) all our directors and executive officers as a group, and (5) the selling shareholder.
SHARES OF COMMON SHARES OF COMMON STOCK BENEFICIALLY STOCK BENEFICIALLY OWNED BEFORE SALE OWNED AFTER SALE UNDER THIS UNDER THIS PROSPECTUS(2) PROSPECTUS(2) NAME AND ADDRESSES OF ---------------------- SHARES TO ---------------------- BENEFICIAL OWNERS(1) NUMBER PERCENTAGE BE SOLD(3) NUMBER PERCENTAGE --------------------- --------- ---------- ---------- --------- ---------- OFFICERS AND DIRECTORS: Drew S. Levin(2)(3)......................... 860,123 11.8% 150,000 710,123 5.3% Noel D. Cronin(4)........................... 386,847 5.5% -- 386,847 3.0% Michael J. Solomon(5)....................... 50,000 * -- 50,000 * W. Russell Barry(6)......................... 30,000 * -- 30,000 * Jonathan D. Shapiro(7)...................... 90,000 1.3% -- 90,000 * All Officers and Directors as a group(8).... 1,416,970 18.8% 150,000 1,266,970 9.3% 5% SHAREHOLDERS: Gontard & MetallBank AG..................... 500,000 7.2% -- 500,000 3.9%
- --------------- * Less than 1% of the outstanding shares of Common Stock. (1) Unless otherwise indicated, the address of each listed stockholder is c/o TEAM Communications, Inc., 12300 Wilshire Boulevard, Suite 400, Los Angeles, California 90025. (2) Beneficial ownership is determined in accordance with the rules of the Securities and Exchange Commission. In computing the number of shares beneficially owned by a person and the percentage ownership of that person, shares of common stock subject to options or warrants held by that person that are currently exercisable or will become exercisable within 60 days after November 10, 1999, are deemed outstanding, while such shares are not deemed outstanding for purposes of computing percentage ownership of any other person. Unless otherwise indicated in the footnotes below, the persons and entities named in the table have sole voting and investment power with respect to all shares beneficially owned, subject to community property laws where applicable. The number and percentage of shares beneficially owned are based on the aggregate of (i) 6,979,138 shares of Common Stock outstanding as of November 10, 1999, and (ii) 12,979,138 shares of Common Stock outstanding after the completion of this offering. (3) Includes options to acquire 85,000 shares of common stock at an exercise price of $5.50 per share which the Company granted to Mr. Levin concurrently with the execution of his prior employment agreement. Also includes options to purchase 250,000 shares of common stock issued pursuant to Mr. Levin's new employment agreement, which are exercisable at $6.063 per share. Does not include options to purchase 865,000 shares which are issuable contingent on the closing of this offering. (4) Does not include an option to purchase 75,000 shares of common stock at an exercise price of $6.063 per share, none of which have yet vested. (5) Includes an option to purchase 30,000 shares of common stock at an exercise price $2.50 per share. (6) Includes an option to purchase 30,000 shares of common stock at an exercise price $2.00 per share. (7) Includes an option to purchase 90,000 shares of common stock at an exercise price of $1.65 per share. 45 48 DESCRIPTION OF CAPITAL STOCK AND OTHER SECURITIES COMMON STOCK We are authorized to issue up to 40,000,000 shares of common stock, no par value. As of November 10, 1999, there were 6,979,138 shares of common stock outstanding which were held of record by 87 shareholders. 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. Under cumulative voting, a shareholder is entitled, in electing directors, to cumulate his votes and give one candidate a number of votes equal to the number of directors to be elected, multiplied by the number of votes to which the shareholder's shares are normally entitled, or to distribute his votes on the same principle among other candidates. In other words, if there are 5 directors to be elected, and the shareholder has 10 voting shares, he has 10 votes for each director or a total of 50 votes, and he may cast them all for one director. The purpose of cumulative voting is to permit minority shareholders to combine and secure some representation on the board. For this reason, it is necessary that the directors be elected as a board, i.e., all at the same time; and in the removal of directors, the right to cumulate votes is likewise protected. Cumulative voting is not permitted (1) for any candidate whose name has not been placed in nomination or (2) without prior notice of intention to cumulate. If one shareholder gives such notice, all shareholders may cumulate their votes for candidates in nomination. 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. Accordingly, if we decide to issue new shares from our authorized capital, existing shareholders may be severely diluted. See "Risk Factors -- Need for additional capital, dilution and need of future financings." The outstanding shares of common stock are validly authorized and issued, fully paid, and nonassessable. PREFERRED STOCK We are authorized to issue up to 10,000,000 shares of preferred stock. As of November 10, 1999, there were no shares of preferred stock outstanding. 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. Holders of shares of common stock will have no pre-emptive rights to purchase newly issued shares of preferred stock. We have no present plans for the issuance of shares of preferred stock. 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. See "Risk Factors -- Preferred Stock; Possible Anti-Takeover Effects of Certain Charter Provisions." WARRANTS At November 10, 1999, there were warrants outstanding to purchase a total of 1,307,384 shares of common stock. These warrants will remain outstanding after the completion of this offering. PRE-IPO WARRANTS In connection with the issuance of prior secured notes, we have issued an aggregate of 427,354 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, 193,870 warrants are exercisable at $0.97 per share, 20,000 warrants are exercisable at $2.45 and 10,000 warrants are exercisable at $2.00, subject to adjustment as hereinafter provided. The warrants may be exercised, at the option of the holder at any time. To date, 288,113 of such warrants have been exercised. Unless exercised during their term, the right to exercise the warrants terminates on their expiration date. 46 49 CONSULTANT'S WARRANTS Prior to 1998, we issued 147,924 warrants to other consultants and investors in connection with prior financings. Of these warrants, 21,362 are exercisable at $1.07 per share and 126,562 are exercisable at $0.43 per share, all of which are currently exercisable. During 1998 and 1999, we granted warrants to purchase our common stock to the following individuals and entities for services provided to us: (i) 22,000 and 10,000 warrants, respectively, to Mansion House International and Danny Chan, respectively, exercisable at $2.75 per share, (ii) 5,000 warrants to Hedblom Partners, exercisable at $3.50 per share, (iii) 200,000 warrants to Glen Michael Financial; 100,000 exercisable at $1.62 per share, 75,000 exercisable at $3.00 per share and 25,000 exercisable at $3.25 per share, and (iv) 10,000 warrants to Ralph Olsen, exercisable at $2.00 per share. In addition, we granted (x) 121,000 and 10,000 warrants, respectively, to Chase Financing Ltd., and Robert Herskowitz, respectively, exercisable at $1.62 per share and (y) an aggregate of 20,000 warrants, 5,000 each to Investor Relations Services, Aurora Holdings, Amber Capital and Affiliated Services, respectively, exercisable at $2.45 per share, in connection with debt that was raised. Century City Securities, Inc., was issued 100,000 warrants exercisable at $2.20 per share, for consulting services. NATIONAL SECURITIES CORPORATION'S WARRANT As part of our initial public offering, we issued to National Securities Corporation a warrant to purchase for investment a maximum of 150,000 shares of common stock. This warrant is exercisable for a four-year period commencing one year from July 29, 1999. The exercise price is $7.425 per share (that being 135% of the initial public offering price per share). The warrant is not saleable, transferable, assignable or hypothecatable prior to its exercise date except to officers of National Securities Corporation and members of their selling group and officers and partners thereof. The warrant contains anti-dilution provisions. The warrant does not entitle National Securities Corporation to any rights as a shareholder until it is exercised and shares are purchased thereunder. The 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. We have agreed that, if we shall cause to be filed with the Securities and Exchange Commission either an amendment to the Registration Statement from our initial public offering or a separate registration statement, National Securities Corporation shall have the right during the seven-year period commencing on July 29, 1999 to include in such amendment or Registration Statement the shares of common stock issuable upon exercise of the warrant at no expense to National Securities Corporation. Additionally, we have agreed that for a period of 5 years from the closing of the initial public offering, upon written demand by a holder or holders of a majority of the warrant, we will, on one occasion, register the shares of common stock issuable upon exercise of the warrant at our expense. In addition, we have agreed, that during the same 5 year period, upon the written demand of any holder of the warrant, to promptly register the shares of common stock underlying such holder's warrant at the expense of such holder. POST-IPO BRIDGE WARRANTS In connection with the sale of debentures made between January and March 1999, we also issued warrants to purchase 185,000 shares of common stock. The warrants are exercisable at a price equal to 110% of the per share market value as of the last trading day prior to the date of the issuance of the warrants. The price is $2.16 per share for 85,000 of the warrants and $2.20 per share for 100,000 of the warrants. In connection with the $350,000 bridge financing, we issued 35,000 warrants which are exercisable at $7.61 per share. Finally, in connection with the $4,000,000 bridge financing, we issued 340,000 warrants which are exercisable at $7.00 per share which was subsequently reduced to $6.50 per share. WARRANT TERMS The warrant holders 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 we 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 we 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, including voting rights and rights to receive dividends, prior to exercise of the warrants. We reserve out of its authorized but 47 50 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 Securities and Exchange 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 our counsel that there is an exemption from registration or qualification. ANTIDILUTION. In the event that we shall at any time: - declare a dividend, or make a distribution, on the outstanding common stock payable in shares of our capital stock; - subdivide the outstanding common stock into a greater number of shares of common stock; - combine the outstanding common stock into a smaller number of shares; or - 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 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 us at our executive offices. The exercise price will be payable by cash or by certified or official bank check payable in U.S. 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. BRIDGE NOTES At November 10, 1999, there was a $4,000,000 convertible note outstanding with conversion rights into shares of common stock. The unpaid balance on this note as of November 30, 1999 may be converted into common shares at the holders' option. The conversion price is the lesser of 120% of the average per share market price for five consecutive trading days prior to August 5, 1999 or 88% of the per share market price for the three days with the lowest per share market price during the twenty-five days prior to conversion. We anticipate paying off these instruments after the completion of this offering. 48 51 PRE-IPO BRIDGE NOTES To finance our working capital needs, we have issued a series of bridge notes. In February 1997, we 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. We sold an aggregate of $969,350 principal amount of the February 1997 Notes. The principal amount of, and interest on, the February 1997 Notes were due and payable on our initial public offering. The February 1997 Notes were convertible into shares of common stock during the period commencing 60 days after the closing date and continuing through the effective date of the initial public offering. Substantially all of the notes holders have waived their right to convert. In June 1996 we 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. We sold an aggregate of $975,000 principal amount of the June 1996 Notes. The principal amount of, and interest on, the June 1996 Notes were due and payable, if the holders thereof do not otherwise notify us that they were converting their notes, on the completion of our initial public offering. The June 1996 Notes are secured by substantially all of our assets. To the extent not otherwise repaid, the June 1996 Notes became convertible into shares of common stock, beginning 12 months after the completion of our initial public offering, at a conversion price of $2.50 per share, subject to an adjustment in certain events. Substantially all the holders of these notes have waived their right to so convert. In February 1996, we 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. We sold an aggregate of $900,000 principal amount of the February 1996 Notes. The principal amount of, and interest on, the February 1996 Notes were due and payable on the second anniversary of the initial closing date thereof, and were secured by substantially all of our assets. These notes were not convertible. All but $588,750 of the February 1997 Notes, the June 1996 Notes and the February 1996 Notes were repaid from the proceeds of our initial public offering, other working capital, or subsequent conversions into our common stock. In December 1997, we obtained a loan in the amount of $315,000 from Venture Management Consultants, LLC ("VMC"), affiliates of shareholders of the Company, which accrues interest at 12% per year, and matured upon the earlier of the closing of the initial public offering or July 15, 1998. As the loan was not repaid by February 15, 1998, we were required to pay VMC an additional fee of $15,000. Included in the principal to be repaid is a $15,000 loan origination fee. This note has been repaid in full. Between March 1998 and May 1998, we arranged for short term loans (the "Interim Financing") of an aggregate of $1,642,000. A majority of such loans were made by present shareholders and their affiliates. These loans matured as follows: (i) $642,000 on July 15, 1998; (ii) $235,000 on June 15, 1998; (iii) $115,000 on November 15, 1998; (iv) $150,000 on March 16, 1999; (v) $250,000 on April 1, 1999; and (vi) $250,000 on April 18, 1999. These loans, other than the $642,000, $115,000 and $235,000 loans accrue interest at 12% per year. The $235,000 loan includes a $35,000 origination fee, and a $10,000 late fee as the note was not paid at June 15, 1998. The note did not accrue interest. The $642,000 loan has a fixed interest amount of $78,000 (which has not been paid and is due upon the maturity of the loan) and includes a $42,000 loan origination fee. The $115,000 loan includes a $15,000 loan origination fee. In May, June and July 1998, we arranged for loans from 10 parties of an aggregate of $715,000 for specific production financing. These loans mature as follows: (i) $375,000 on January 10, 2000; and (ii) $340,000 on August 1, 1999. The $375,000 loans accrue interest as 12% per year and the $340,000 loan accrues interest at 16% per year. Of the $375,000, there are two loan origination fees, one for $8,000 and one for $8,500. If any payments under the $340,000 loan are not paid within three days of being due, a late fee of 8% of the delinquent amount will be assessed for each month the payment is delinquent. In addition, if the loan is in default, at the lender's option, the unpaid principal and accrued interest shall thereafter bear interest at the lesser of 25% per year or the maximum legal rate. The loan may be prepaid, however, in order to prepay the loan, we will have to pay the lender the lesser of all of the interest which would have accrued through the maturity of the loan or $42,000. As of November 10, 1999, $75,000 remains outstanding and matures on January 10, 2000. POST IPO SECURITIES PLACEMENTS Between January and March 1999, the Company sold to 5 investors an aggregate principal amount of $1,850,000 of 8% convertible debentures and warrants to purchase up to 185,000 shares of common stock. The 49 52 holders of these debentures have converted their debentures into common stock. In June 1999, four of the debenture holders purchased an additional 175,000 shares of common stock for an aggregate of $700,000. In July 1999, we arranged for a short term loan of $1,200,000 for production and distribution activities. The loan matures on November 30, 1999 and accrues interest at 12% per year. If the loan is not repaid by November 30, 1999, the principal and all accrued and unpaid interest convert into shares of our common stock at the lesser of 85% of the market price on the date of issuance or 110% of the current market price when converted. As of this date we have repaid $1,000,000 of this note. On July 29, 1999, the Company sold 64,800 shares of common stock to Arab Commerce Bank for $162,000. On August 5, 1995 we completed a $4,000,000 bridge financing with Hudson Investors, LLC. The note matures on November 30, 2002 and accrues interest at 12% per year. All or part of the unpaid principal amount may be converted into shares of common stock at the holder's option any time after November 30, 1999. The conversion price is the lesser of 120% of the average per share market price for five consecutive trading days prior to August 5, 1999 or 88% of the per share market price for the three days with the lowest per share market price during the twenty-five days prior to conversion. Connected with this financing, we issued 340,000 warrants to purchase our common stock at 105% of the five-day average closing price prior to the closing of the financing, which equals $7.00. On August 5, 1999, we sold 500,000 shares of common stock for $2,000,000 to Gontard & MetallBank AG. On October 5, 1999 we completed a $4,000,000 bridge financing with Gontard & MetallBank AG. Their note bears interest at 10% per year and matures on the earlier of the completion of this offering or December 31, 1999. On September 27, 1999, the Company, pursuant to court order, issued 30,000 shares of common stock to Venture Management Consultants, LLC. On October 20, 1999, the Company sold 10,000 shares of common stock to Ivonne Altagracia Medrano Gongalez for $30,000 and 20,000 shares of common stock to Cantor GbR for $60,000. On October 29, 1999, the Board of Directors approved the issuance to Ocean Management of warrants to purchase 100,000 of common stock; 50,000 at an exercise price of $3.50 per share and 50,000 at an exercise price of $4.00 per share, for consulting services. On November 12, 1999, we sold to Arbora Vermogensverwaltungen AG, 175,000 shares of common stock for $700,000. TRANSFER AGENT The transfer agent for our common stock is U.S. Stock Transfer Corporation, 1745 Gardena Avenue, Glendale, California 91204, telephone number (818) 502-1404, which also is responsible for record keeping functions in connection with the same. SHARES ELIGIBLE FOR FUTURE SALE Our common stock trades on the NASDAQ SmallCap Market under the symbol "TMTV." Sales of substantial amounts of our common stock in the public market or the perception that such sales could occur could materially adversely affect the prevailing market price and our ability to raise equity capital in the future. On November 10, 1999, we had 6,979,138 shares outstanding and have applied to have such shares listed on The NASDAQ SmallCap Market. This amount does not include shares which, in the future, may be issued under options or warrants. Upon completion of the offering, we will have issued and outstanding 12,979,138 shares of common stock. The shares that have been registered are freely tradeable without restriction under the Securities Act of 1933, unless purchased by "affiliates" as that term is defined in Rule 144 under the Securities Act of 1933. The remaining shares of unregistered common stock outstanding upon completion of this offering, determined as if all outstanding warrants have been exercised, will be held by approximately holders and will be "restricted securities" as that term is defined in Rule 144 as promulgated 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 Rule 701 as promulgated under the Securities Act, which 50 53 rules are summarized below, or pursuant to another exemption from registration. 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, beginning 90 days after the date of the final prospectus from our initial public offering, 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 us. Under Rule 144(k), a person who is not deemed to have been an affiliate of ours 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 ours) is entitled to sell such shares without complying with the manner of sale, public information, volume limitation or notice provisions of Rule 144. Any employee, officer or director of or consultant to us who purchased his or her shares of common stock 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 ours to sell their Rule 701 shares under Rule 144 without complying with the holding period requirements of Rule 144, as described above. 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 was required to wait until 90 days after the date of the final prospectus from our initial public offering before selling his shares. We have filed a registration statement on Form S-8 under the Securities Act of 1933 covering shares of common stock reserved for issuance under the 1999 Stock Plan. Based on the number of shares reserved for issuance under the 1999 Stock Plan, such registration statement covers approximately 1,100,000 shares. Such registration statement automatically became effective upon filing. Accordingly, shares registered under such registration statement are, subject to Rule 144 volume limitations applicable to our affiliates, available for sale in the open market, subject to vesting restrictions. We, our officers, our directors and the selling shareholder and certain significant shareholders have warranted to the Deutsche Borse AG and have agreed with the Underwriters not to dispose of or hedge any of their common stock or securities convertible into or exchangeable for shares of common stock during the six months after the date of admission of the shares of common stock to the Regulated Market (Geregelter Markt) with trading on the Neuer Markt of the Frankfurt Stock Exchange, except with the prior written consent of the Deutsche Borse AG and Gontard & MetallBank AG acting on behalf of the Underwriters. In addition, the selling shareholder has agreed not to sell or otherwise transfer any of his shares remaining after the offer for an additional seven months directly following the preceding six months period. In connection with the lock-up agreements, with the consent of the officers, directors and stockholders subject to such lock-up agreements, we have instructed the Registrar and Transfer Agent not to effect any share transfers without our consent. As a consequence thereof, shares that are subject to the lock-up agreements may not be recorded in the name of Cede & Co., and may therefore not be introduced to clearing through The Depository Trust Company for the time the Registrar and Transfer Agent remain so instructed. THE GERMAN EQUITY MARKET GERMAN SECURITIES LAWS As a United States company offering securities on a German stock exchange, we are subject to various laws and regulations in both jurisdictions. Some of these laws and regulations, in turn, can affect the ability of holders of our securities to transfer or sell such securities. At present, Germany does not restrict the export or import of capital, except for investments in Iraq and Libya in accordance with applicable resolutions adopted by the United Nations and the European Union. However, for statistical purposes only, every individual or corporation residing in Germany (hereinafter, a "Resident") must report to the German Central Bank (Deutsche Bundesbank), subject only to certain immaterial exceptions, any payment received from or made to an individual or a corporation resident outside Germany (hereinafter, a "Non-resident") if such payment exceeds DM 5,000 (2,550 Euros, or the equivalent in a foreign currency). In addition, Residents must report any claims against or any liabilities payable to Non- 51 54 residents if such claims or liabilities, in the aggregate, exceed DM 3 million (1.53 million Euros, or the equivalent in a foreign currency) during any one month. Residents must also report any direct investment outside Germany if such investment exceeds DM 100,000 (51,000 Euros, or the equivalent in a foreign currency). There are no limitations on the right of Non-resident owners to hold or vote the shares imposed by German law or the Amended and Restated Articles of Incorporation or the Amended and Restated Bylaws. THE FRANKFURT STOCK EXCHANGE AND THE NEUER MARKT The Frankfurt Stock Exchange is the most significant of the eight German stock exchanges and accounted for approximately 78% of the turnover in traded shares in Germany in 1998. The aggregate annual turnover of the Frankfurt Stock Exchange in 1998 of approximately DM 8,338 billion, based on the Frankfurt Stock Exchange's practice of separately recording the sale and purchase components involved in any trade, for both equity and debt instruments, made it the fourth largest stock exchange in the world behind the New York Stock Exchange, London and Tokyo in terms of turnover. The Neuer Markt segment of the Frankfurt Stock Exchange is a trading segment that was launched in March 1997. It is designed for innovative, small to mid-size companies in high growth industries or in traditional industries that have an international orientation and that are willing to provide active investor relations. Issuers are requested to provide investors on an ongoing basis with information such as annual and quarterly reports, including cash flow statements, and a corporate action timetable. This information is required to be submitted in English and German as well as in electronic form, thus enabling the stock exchange to disseminate corporate information via the Internet. GERMAN TAX MATTERS The following is a summary of certain tax matters arising under German tax law in force at the date of this prospectus. The summary does not purport to be a comprehensive description of all of the tax considerations which may be relevant as to the decision to acquire shares of common stock. The summary is based on the tax laws of Germany in effect on the date of this prospectus, which may be subject to changes, possibly with retroactive effect. The summary does not address aspects of German taxation other than taxation of dividends, capital gains taxation and gift and inheritance taxation, and does not address all aspects of such German taxation. The summary does not consider any specific facts or circumstances that may apply to a particular purchaser. The summary assumes that the shareholder is subject to unlimited German income taxation and is referred to as a "German Holder." Prospective investors should consult their professional advisors as to the tax consequences of the acquisition, holding and disposal of the shares of common stock, including in particular, the effect of tax laws of any other jurisdiction. INCOME TAXATION OF DIVIDENDS Any dividends distributed to German Holders are, in principle, fully subject to German income tax (Einkommensteuer) including a solidarity surcharge (Solidaritatszuschlag) and possibly church tax (Kirchensteuer). An individual German Holder will be entitled to a deduction of income-related expenses (Werbungskosten) to be proved to the tax authorities or alternatively to a fixed allowance of DM 100 per calendar year, and a tax exemption known as a savers exemption of DM 6,000 per calendar year in relation to his or her total income from capital investments including dividends. This savers exemption is reduced to DM 3,000 per calendar year effective January 1, 2000. Dividend withholding tax levied in the United States in accordance with the U.S./German Double Taxation Treaty of August 29, 1989 can be credited against the German income tax liability of the German Holder. Alternatively, a German Holder may deduct the total amount of U.S. withholding tax from his or her German taxable income. This tax credit or deduction is not available if the savers exemption mentioned above is available to the German Holder. A German corporation that has beneficial title to at least 10% of the shares in a U.S. corporation, is entitled to a reduction or refund of U.S. tax in excess of 5%, and all other German Holders are entitled to a refund or reduction of U.S. tax in excess of 15% if the Treaty applies. If the shares are held by German Holders through a partnership, the dividends, including the withholding tax credit are allocated to the partners according to their interest in the partnership. German Holders that are corporate investors, or a German Corporate Holder, holding at least 10% of the outstanding shares of common stock, and to whom the Treaty applies, are exempt from German corporation 52 55 tax in relation to dividends received, and cannot claim any credit for, or deduction of, foreign withholding taxes in Germany. Such dividends will be placed in the so-called "EKO1" equity basket of the corporate investor. Upon distribution of dividends out of the EKO1 equity basket to its stockholders, the German Corporate Holder does not need to establish the corporation tax distribution burden (which presently is 30% plus the solidarity surcharge at a rate of 5.5% of the corporation tax distribution burden). In addition, distributions to a German Holder are subject to German withholding tax at a rate of 25%, plus solidarity surcharge at a rate of 5.5% thereon (resulting in an effective tax rate of 26.37%). German Holders that are corporate investors holding less than 10% of the shares in the Company will be entitled to a tax credit for U.S. withholding taxes. CAPITAL GAINS TAX Capital gains on the disposal of shares held as a private asset of a German Holder are only taxable if the disposal is (i) effected within a twelve-month period after their acquisition or (ii) upon expiration of this speculation period, if the shareholder at any time during the five years preceding the disposal, directly or indirectly, held an interest of 10% or above in a company. Capital gains resulting from the disposal of shares of common stock by a stockholder who is not a tax resident in Germany are not subject to German capital gains tax unless the shares of common stock are part of the business property of a permanent establishment or a fixed place of business of the stockholder located in Germany. GIFT AND INHERITANCE TAXES Shares held by a person resident in Germany are subject to German inheritance and gift tax upon transfer by reason of death or as a gift, based on the market value at the time of the death or donation, respectively. Transfers of shares of common stock held by a person who is not a tax resident in Germany are not subject to German inheritance and gift tax, unless: (i) the shares of common stock are part of the business property of a permanent establishment or a fixed place of business of the stockholder located in Germany; or (ii) the heir, donee or beneficiary is tax resident in Germany or, if of German nationality, has been resident in Germany within the five-year period prior to the death or the gift (certain public officials resident abroad are also covered). TRADE TAX A holder who is not a tax resident in Germany will not be subject to German trade tax with respect to the shares of common stock, unless the shares of common stock are part of the business property of a permanent establishment or a fixed place of business of the stockholder located in Germany. If a German resident taxpayer elects to deduct the foreign withholding taxes from his taxable income in Germany such deduction would not be accepted for computing his taxable income for trade tax purposes. The trade tax on income is levied at rates varying from 13-20%. Trade tax qualifies for a deductible business expense for income tax purposes in Germany. OTHER GERMAN TAXES There are no German transfer, stamp or other similar taxes which would apply to the sale or transfer of the shares of common stock. CERTAIN UNITED STATES FEDERAL INCOME TAX CONSEQUENCES TO NON-UNITED STATES HOLDERS The following is a general discussion of the principal U.S. federal income and estate tax considerations of the acquisition, ownership and disposition of common stock by a non-U.S. holder. As used herein, the term "non-U.S. holder" is defined as any person or entity that is, for U.S. federal income tax purposes, a foreign corporation, a non-resident alien individual, a foreign partnership, or other entities created or organized in or under the laws other than the U.S. or of any political subdivision of the U.S. or a non-resident fiduciary of a foreign estate or trust. This discussion is based on currently existing provisions of the Internal Revenue Code of 1986, as amended (the "Code"), existing, final, temporary, and proposed treasury regulations promulgated thereunder, and administrative and judicial interpretations thereof, all as in effect or proposed on the date hereof and all of which are subject to change, possibly with retroactive effect, or different interpretations. This 53 56 discussion is limited to non-U.S. holders who hold shares of common stock as capital assets within the meaning of Section 1221 of the Code. Moreover, this discussion is for general information only and does not address all of the tax consequences that may be relevant to particular non-U.S. holders in light of their personal circumstances, nor does it discuss certain tax provisions which may apply to individuals who relinquish their U.S. citizenship or residence. Furthermore, this summary does not address all of the U.S. federal income and estate tax considerations that may be relevant to you in light of your particular circumstances or if you are a holder subject to special treatment under U.S. income tax laws (such as insurance companies, tax-exempt organizations, financial institutions, brokers, dealers in securities, and certain U.S. expatriates). This summary does not discuss any aspects of state, local or non-U.S. taxation. An individual may, subject to certain exemptions, be deemed to be a resident alien (as opposed to a non-resident alien) by virtue of being present in the U.S. for at least 31 days in the calendar year and for an aggregate of at least 183 days during a three-year period ending in the current calendar year (counting for such purposes, all of the days present in the current year, one-third of the days present in the immediately preceding year, and one-sixth of the days present in the second preceding year). Resident aliens are subject to U.S. federal income taxes as if they were U.S. citizens. Each prospective purchaser of common stock should consult with a tax advisor with respect to current and possible future tax consequences of acquiring, holding, and disposing of common stock, as well as any tax consequences that may arise under the laws of any U.S. state, municipality, or other taxing jurisdiction. We urge prospective non-U.S. investors to consult their tax advisors regarding the U.S. federal, state, local, and non-U.S. income and other tax considerations of acquiring, holding and disposing of shares of common stock. Dividends. If dividends are paid on shares of common stock to a non-U.S. holder, they will be subject to withholding of U.S. federal income taxes at a 30% rate of the gross amount or such lower rate as may be specified by an applicable income tax treaty. However, if (a) dividends are effectively connected with the conduct of a trade or business by the non-U.S. holder within the U.S. and, where a tax treaty applies, are attributable to a U.S. permanent establishment of the non-U.S. holder, and (b) an Internal Revenue Service ("IRS") Form 4224 or successor form is filed with the payor, then the dividends are not subject to withholding tax, but instead are subject to U.S. federal income taxes on a net basis at the applicable graduated individual or corporate rate. Any such effectively connected dividends received by a foreign corporation may, under certain circumstances, be subject to an additional "branch profits tax" at a rate of 30% or such lower rate as may be specified by an applicable income tax treaty. You should consult any applicable income tax treaties that may provide for a lower rate of tax or other rules different from those described above. You may be required to satisfy certification requirements in order to claim treaty benefits or otherwise claim a reduction of, or exemption from, withholding under these rules. Dividends paid to an address outside the U.S. are presumed to be paid to a resident of such country (unless the payor has knowledge to the contrary) for purposes of the withholding discussed above and for purposes of determining the applicability of the tax treaty rate. However, recently finalized treasury regulations pertaining to U.S. federal withholding tax, scheduled to take effect for payments made after December 31, 2000 (the "Final Withholding Tax Regulations"), provide that a non-U.S. holder must comply with certain certification procedures (or, in the case of payments made outside the U.S. with respect to an offshore account, certain documentary evidence procedures), directly or through an intermediary to obtain the benefits of a reduced rate under an income tax treaty. In addition, the Final Withholding Tax Regulations will require a non-U.S. holder who provides an IRS form 4224 or successor form (as discussed above) also to provide its U.S. taxpayer identification number. A non-U.S. holder of common stock eligible for a reduced rate of U.S. withholding taxes pursuant to an income tax treaty may obtain a refund of any excess amount withheld by filing an appropriate claim for refund with the IRS. Gain on Disposition of Common Stock. A non-U.S. holder generally will not be subject to U.S. federal income taxes with respect to any gain recognized on the sale or other disposition of common stock unless (a) the gain is effectively connected with the conduct of a trade or business of the non-U.S. holder in the U.S. and, where a tax treaty applies, is attributable to a U.S. permanent establishment of the non-U.S. holder, (b) in the case of a non-U.S. holder who is an individual and holds common stock as a capital asset, such holder is present in U.S. for 183 or more days in the taxable year of the sale or other disposition and certain other conditions are met, (c) you are subject to tax pursuant to the provisions of the Code regarding the taxation of expatriates, or (d) the Company is or has been a U.S. Real Property Holding Corporation" (a "USRPHC") for U.S. federal income tax purposes, as discussed below. 54 57 An individual non-U.S. holder who falls within clause (a) above will, unless an applicable treaty provides otherwise, be taxed on his or her net gain derived from the sale under regular graduated U.S. federal income tax rates. An individual non-U.S. holder who falls under clause (b) above will be subject to a flat 30% tax on the gain derived from the sale which may be offset by certain U.S. capital losses. A non-U.S. holder that is a foreign corporation falling under clause (a) above will be taxed on its gain under regular graduated U.S. federal income tax rates and may be subject to an additional branch profits tax equal to 30% of its effectively connected earnings and profits within the meaning of the Code for the taxable year, as adjusted for certain items, unless it qualifies for a lower rate under an applicable income tax treaty. A corporation is a USRPHC if the fair market value of the U.S. real property interests held by the corporation is 50% or more of the aggregate fair market value of its U.S. and foreign real property interests and any other assets used or held for use by the corporation in a trade or business. Based on its current and anticipated assets, the Company believes that it currently is not and is not likely to become a USRPHC. However, since the determination of USRPHC status is based upon the composition of the assets of the Company from time to time, and because there are uncertainties in the application of certain relevant rules, there can be no assurance that the Company will not become a USRPHC. If the Company were to become a USRPHC, then gains on the sale or other disposition of common stock by a non-U.S. holder generally would be subject to U.S. federal income taxes unless both (a) the common stock was "regularly traded" on an established securities market within the meaning of the applicable treasury regulations, and (b) the non-U.S. holder actually or constructively owned 5% or less of the common stock. Non-U.S. holders should consult their tax advisors concerning any U.S. tax consequences that may arise if the Company were to become a USRPHC. Federal Estate Tax. Common stock held by an individual non-U.S. holder at the time of death will be included in such holder's gross estate for U.S. federal estate tax purposes, unless an applicable estate tax treaty provides otherwise and therefore, may be subject to U.S. federal laws. Information Reporting and Back Up Withholding Tax. Under treasury regulations, the Company must report annually to the IRS and to each non-U.S. holder the amount of dividends paid to such holder and the amount of any tax withheld with respect to such dividends, regardless of whether withholding was required. Copies of the information returns reporting such dividends and withholding also may be made available to the tax authorities in the country in which the non-U.S. holder resides under the provisions of an applicable income tax treaty. A back-up withholding tax is imposed at the rate of 31% on certain payments to persons that fail to furnish certain identifying information to the payor. Back-up withholding generally will not apply to dividends paid to a non-U.S. holder at an address outside the U.S. (unless the payor has knowledge that the payee is a U.S. person). However, in the case of dividends paid after December 31, 2000, the Final Withholding Tax Regulations provide that a non-U.S. holder generally will be subject to withholding tax at a 31% rate unless certain certification procedures (or, in the case of payments made outside the U.S. with respect to an offshore account, certain documentary evidence procedures) are complied with, directly or through an intermediary. Back-up withholding and information reporting generally will also apply to dividends paid on common stock at addresses inside the U.S. to non-U.S. holders that fail to provide certain identifying information in the manner required. The Final Withholding Tax Regulations provide certain presumptions under which a non-U.S. holder would be subject to back-up withholding and information reporting unless the Company receives certification from the holder of its non-U.S. status. You should consult your tax advisor concerning the effect of this regulation on an investment in the common stock. Payment of the proceeds of the sale of common stock by or through a U.S. office of a broker is subject to both back-up withholding and information reporting unless the beneficial owner provides the payor with its name and address and certifies under penalties of perjury that it is a non-U.S. holder, or otherwise establishes an exemption. In general, back-up withholding and information reporting will not apply to a payment of the proceeds of a sale of common stock by or through a foreign office of a broker. If, however, such broker is, for U.S. federal income tax purposes, a U.S. person, a controlled foreign corporation, or a foreign person that derives 50% or more of its gross income for certain periods from the conduct of a trade or business in the U.S. (or, for periods after December 31, 2000, a foreign partnership that at any time during its fiscal year either (a) is engaged in the conduct of a trade or business in the U.S., or (b) has as partners one or more U.S. persons that, in the aggregate, hold more than 50% of the income or capital interest in the partnership), such payments will be subject to information reporting, but no back-up withholding, unless (aa) such broker has documentary evidence in its records that the beneficial owner is a non-U.S. holder and certain other conditions are met, or (bb) the beneficial owner otherwise establishes an exemption. 55 58 A holder generally will be allowed a refund or a credit against such holder's U.S. federal income tax liability for any amounts withheld under the back-up withholding rules, provided the required information is furnished in a timely manner to the IRS. STATUTORY INFORMATION We were incorporated as a corporation under the laws of the State of California on February 1995 as DSL Entertainment Group, Inc. Our incorporator was Anita Sobol. Our formation became effective on February 27, 1995, the date our Articles of Incorporation were filed with the Secretary of State of the State of California. We changed our corporate name to TEAM Communications Group, Inc., effective January 22, 1997. Our statutory corporate purpose is to engage in any lawful act or activity for which a corporation may be organized under the General Corporation Law of the State of California, other than the banking business, the trust company business or the practice of a profession permitted to be incorporated by the California Corporation Code. We own all of the capital stock of the following companies: Long Form Entertainment, Inc., Simply Style Productions, Inc., Amazing Tails, Inc. Mary Lou's Flip Flop Shop, Inc., Team Dandelion, and Team Germany GmbH. None of our subsidiaries represent 10% of our revenue or 10% of our share capital in 1999. There are no other entities which we have a stock ownership interest in. Other than Team Dandelion and Team Entertainment Germany GmbH, our 4 other subsidiaries are sole purpose corporations formed for the production of a specific project. Sole purpose corporations are used for individual projects to insulate the parent company from any liability associated with the project. As all six of these entities are wholly owned subsidiaries, their financial information is consolidated in our financial statements. Team Dandelion Ltd. is headquartered at 5 Churchill Court, Station Road, North Harrow, Middlesex HA275A, United Kingdom. Team Entertainment Germany GmbH is headquartered at Munchner Strasse 12-16, 85774 Munchen-Unterhohring, Germany. LEGAL MATTERS Certain legal matters in connection with the validity of the shares of common stock being offered hereby will be passed upon for us 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 the beneficial owner of 4,273 shares of common stock and options to acquire an additional 10,000 shares of common stock. EXPERTS The consolidated financial statements as of December 31, 1998, 1997 and 1996 included in this prospectus have been so included in reliance on the report of Stonefield Josephson, Inc., independent accountants, and are so included in reliance upon their reports given on their authority as experts in auditing and accounting. Stonefield Josephson, Inc. is located at 1620 26th Street, Suite 400, Santa Monica, California 90404-4041. The financial statements of Dandelion Distribution Ltd., as of July 31, 1999 and 1998 included in this prospectus have been so included in reliance on the report of Barnes Roffe, independent accountants, and are so included in reliance upon their reports given on their authority as experts in auditing and accounting. 56 59 UNDERWRITING We, the selling shareholder, as well as Gontard & MetallBank AG, Delbruck & Co. Privatbankiers, Furst Fugger Privatbank KG and VEM Virtuelles Emissionshaus AG (the "Underwriters") have entered into an underwriting agreement with respect to the shares being offered. Subject to certain conditions, each Underwriter has severally agreed to purchase the number of shares indicated in the following table.
NUMBER OF UNDERWRITERS SHARES ------------ --------- Gontard & MetallBank AG..................................... 5,350,500 Delbruck & Co. Privatbankiers............................... 307,500 Furst Fugger Privatbank KG.................................. 307,500 VEM Virtuelles Emissionshaus AG............................. 184,500 --------- Total............................................. 6,150,000 =========
The purchase price per share payable by the Underwriters to us will be equal to the public offering price less underwriting discounts and fees payable to our financial advisors of 10% in the aggregate. The following table shows the per share and total underwriting discounts and commissions to be paid to the Underwriters and financial advisors by us and the selling shareholder.
PAID BY THE COMPANY ------------------------------ Per Share................................................. $ Total..................................................... $
PAID BY THE SELLING SHAREHOLDER -------------------------------- Per Share................................................. $ Total..................................................... $
We estimate that the total expenses of the offering to the Company, excluding underwriting discounts and commissions, will be approximately $1,115,840. Shares sold by the Underwriters to the public will initially be offered at the public offering price. See "Prospectus Summary -- The Offering -- Public Offering Price and Number of Shares Allotted." If all the shares are not sold at the offering price, the Underwriters may change the offering price and the other selling terms. The public offering price will be based on the average closing share price of our shares of common stock on The NASDAQ SmallCap Market and on the over-the-counter markets Freiverkehr in Frankfurt am Main, Berlin and Munich of the ten trading days immediately prior to and including November 22, 1999. However, among the factors to be considered in determining the public offering price of the shares, in addition to the common stock's market price prevailing at the time of the pricing and prevailing market conditions, will be our historical performance, estimates of our business potential and earnings prospectus, an assessment of our management and the consideration of the above factors in relation to market valuation of companies in related businesses. We, our officers, our directors, and the selling shareholder and certain significant shareholders have warranted to the Deutsche Borse AG and have agreed with the Underwriters not to dispose of or hedge any of their common stock or securities convertible into or exchangeable for shares of common stock during the six months from the date of this prospectus continuing through the first six months after the date of admission of the shares of common stock to the Regulated Market (Geregelter Markt) with trading on the Neuer Markt of the Frankfurt Stock Exchange, except with the prior written consent of the Deutsche Borse AG and Gontard & MetallBank AG acting on behalf of the Underwriters. In addition, the selling shareholder has agreed with the Underwriters not to dispose of or hedge any common stock or securities convertible into or exchangeable for shares of common stock during the seven-month period from the end of the first six-month lock-up period, except with the prior written consent of Gontard & MetallBank AG acting on behalf of the underwriters. See "Shares Available for Future Sale" for a discussion of certain transfer restrictions. At our request, the Underwriters have reserved at the initial public offering price up to 10 percent of the shares of common stock for sale to directors, officers, employees, business associates and related persons. The number of shares of common stock available for sale to other investors will be reduced to the extent these individuals purchase such reserved shares. Any reserved shares which are not so purchased will be offered by the Underwriters to other investors on the same basis as the other shares offered by this prospectus. 57 60 In connection with the offering, the Underwriters may purchase and sell shares of common stock in the open market. These transactions may include short sales, stabilizing transactions and purchases to cover positions created by short sales. Short sales involve the sale by the Underwriters of a greater number of shares than they are required to purchase in the offering. Stabilizing transactions consist of certain bids or purchases made for the purpose of preventing or retarding a decline in the market price of the common stock after the offering. These activities by the Underwriters may stabilize, maintain or otherwise affect the market price of the common stock. As a result, the price of the common stock may be higher than the price that otherwise might exist in the open market. If these activities are commenced, they may be discontinued by the Underwriters at any time. These transactions may be effected on the Neuer Markt, in the over-the-counter market or otherwise. We have applied for the listing of all of our outstanding shares of common stock after the issuance of the shares offered by us hereunder as well as for 3,042,384 shares of common stock reserved for issuance upon the exercise of options and the conversion of debt instruments to the Regulated Market (Geregelter Markt) with trading on the Neuer Markt of the Frankfurt Stock Exchange. We, and the selling shareholder, have agreed to indemnify the several Underwriters against certain liabilities. 58 61 INDEX TO CONSOLIDATED FINANCIAL STATEMENTS OF TEAM COMMUNICATIONS GROUP, INC.
PAGE ---- Report of Independent Auditors.............................. F-2 Consolidated Balance Sheets at September 30, 1999 (unaudited), December 31, 1998 and December 31, 1997........ F-3 Consolidated Statements of Income for the nine months ended September 30, 1999 (unaudited) and for the nine months ended September 30, 1998 (unaudited) and for the years ended December 31, 1998, December 31, 1997 and December 31, 1996.................................................. F-4 Consolidated Statements of Cash Flows for the nine months ended September 30, 1999 (unaudited) and for the nine months ended September 30, 1998 (unaudited) and for the years ended December 31, 1998, December 31, 1997 and December 31, 1996......................................... F-5 Consolidated Statements of Cash Flows and Supplemental Schedule of Non Cash Activities for the nine months ended September 30, 1999 (unaudited) and for the nine months ended September 30, 1998 (unaudited) and for the years ended December 31, 1998, December 31, 1997 and December 31, 1996.................................................. F-6 Consolidated Statements of Shareholders' Equity (Deficit) for the nine months ended September 30, 1999 (unaudited) and for the years ended December 31, 1998, December 31, 1997 and December 31, 1996................................ F-7 Notes to Consolidated Financial Statements.................. F-8
F-1 62 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, 1998, 1997 and 1996 and the related consolidated statements of income, shareholders' equity and cash flows for the three years 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 required 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 financial position of Team Communications Group, Inc. and subsidiaries at December 31, 1998, 1997 and 1996 and the consolidated results of its operations and its cash flows for the years ended December 31, 1998, 1997, and 1996, 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 cash used by its operating activities, and has been dependent on outside equity investors and lenders to finance those operations, and certain notes payable are past due. Continuation as a going concern will be dependent upon continued outside financing. 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. /s/ STONEFIELD JOSEPHSON, INC. STONEFIELD JOSEPHSON, INC. CERTIFIED PUBLIC ACCOUNTANTS Santa Monica, California April 15, 1999 F-2 63 TEAM COMMUNICATIONS GROUP, INC. CONSOLIDATED BALANCE SHEETS ASSETS
SEPTEMBER 30, DECEMBER 31, DECEMBER 31, DECEMBER 31, 1999 1998 1997 1996 ------------- ------------- ------------ ------------ (UNAUDITED) Cash and cash equivalents................... $ 2,173,200 $ 1,027,700 $ 174,400 214,300 Trade receivables, including $8,275,000 due from related parties at September 30, 1999 less allowance for doubtful accounts of $837,000, $337,000, $63,800 and $63,800, respectively................................ 10,936,700 4,736,700 6,740,800 3,342,100 Television programming costs, less accumulated amortization of $14,043,500, $6,952,100, $2,846,600 and $1,599,700, respectively.............................. 20,697,100 11,018,800 4,287,000 3,555,900 Due from officer............................ 170,400 145,400 195,500 11,300 Fixed assets, net........................... 55,200 16,400 29,000 42,100 Organizational costs and other assets....... 1,085,100 82,700 578,000 144,900 ----------- ----------- ----------- ---------- Total Assets...................... $35,117,700 $17,027,700 $12,004,700 $7,310,600 =========== =========== =========== ========== LIABILITIES AND SHAREHOLDERS' EQUITY Accounts payable, accrued expenses and other liabilities............................... $ 8,410,900 $ 1,679,400 $ 3,270,500 $1,220,200 Deferred revenue............................ 85,600 472,900 575,000 4,500 Accrued participations...................... 3,771,500 3,025,800 984,800 1,428,400 Line of credit -- Bank...................... 697,000 1,114,000 -- -- Notes payable............................... 4,387,200 2,305,000 4,889,600 3,762,900 Accrued interest............................ 324,200 530,900 898,300 242,000 Shareholder note payable.................... -- 500,000 740,000 740,000 ----------- ----------- ----------- ---------- Total Liabilities................. 17,676,400 9,628,000 11,358,200 7,398,000 ----------- ----------- ----------- ---------- Commitments and contingencies Shareholders' equity: Preferred stock, no par value; 10,000,000 shares authorized; no shares issued and outstanding............................ -- -- -- -- Common stock, no par value; 40,000,000 shares authorized; 5,983,757, 2,816,135, 1,131,344 and 1,131,344, respectively, issued and outstanding... 1,000 1,000 1,000 1,000 Paid in capital........................... 16,146,800 7,612,700 1,230,100 943,300 Treasury Stock............................ -- (34,600) -- -- Retained Earnings (Accumulated Deficit)... 1,293,500 (179,400) (584,600) (1,031,700) ----------- ----------- ----------- ---------- Total shareholders' equity........ 17,441,300 7,399,700 646,500 (87,400) ----------- ----------- ----------- ---------- Total liabilities and shareholders' equity............ $35,117,700 $17,027,700 $12,004,700 $7,310,600 =========== =========== =========== ==========
The accompanying notes are an integral part of these consolidated financial statements. F-3 64 TEAM COMMUNICATIONS GROUP, INC. CONSOLIDATED STATEMENTS OF INCOME
FOR THE FOR THE NINE MONTHS NINE MONTHS FOR THE YEAR FOR THE YEAR FOR THE YEAR ENDED ENDED ENDED ENDED ENDED SEPTEMBER 30, SEPTEMBER 30, DECEMBER 31, DECEMBER 31, DECEMBER 31, 1999 1998 1998 1997 1996 ------------- ------------- ------------ ------------ ------------ (UNAUDITED) (UNAUDITED) Revenues, including $8,675,000 for the nine months ended September 30, 1999, from, as a result of the Dandelion acquisition, related parties, see Note 5..................... $13,273,300 $9,466,800 $13,581,900 $6,875,600 $5,749,800 Cost of Revenues, including $2,170,000 for the nine months ended September 30, 1999 attributable to sales to related parties, see Note 5.............. 6,056,300 5,884,500 9,076,000 2,355,300 2,895,900 General and administrative expense........................ 3,771,700 2,234,100 3,274,000 3,244,900 2,323,800 ----------- ---------- ----------- ---------- ---------- Earnings from operations......... 3,445,300 1,348,200 1,231,900 1,275,400 530,100 Interest expense................. 477,900 768,400 902,600 1,040,100 677,700 Interest income.................. 87,300 136,000 202,900 211,800 58,300 Other income -- -- 90,100 ----------- ---------- ----------- ---------- ---------- Earnings before income taxes..... 3,054,700 715,800 532,200 447,100 800 Provision for income taxes, all current........................ 1,149,900 60,500 57,500 -- -- ----------- ---------- ----------- ---------- ---------- Earnings before extraordinary item........................... $ 1,904,800 $ 655,300 $ 474,700 $ 447,100 $ 800 Extraordinary loss from early extinguishment of debt......... 431,900 -- 69,500 -- -- ----------- ---------- ----------- ---------- ---------- Net Earnings..................... $ 1,472,900 $ 655,300 $ 405,200 $ 447,100 $ 800 =========== ========== =========== ========== ========== Basic earnings per common share.......................... Earnings before extraordinary item........................... $ 0.45 $ 0.43 $ 0.26 $ 0.40 $ -- Extraordinary (loss)............. (0.10) -- (0.04) -- -- ----------- ---------- ----------- ---------- ---------- Net Earnings -- Basic............ $ 0.35 $ 0.43 $ 0.22 $ 0.40 $ -- =========== ========== =========== ========== ========== Weighted average number of shares outstanding basic.............. 4,198,176 1,506,672 1,833,340 1,131,344 1,131,344 =========== ========== =========== ========== ========== Diluted earnings per share Earnings before extraordinary item........................... $ 0.38 $ 0.30 $ 0.20 $ 0.25 -- Extraordinary (loss)............. (0.09) -- (0.03) -- -- ----------- ---------- ----------- ---------- ---------- Net Earnings -- Diluted.......... $ 0.29 $ 0.30 $ 0.17 $ 0.25 -- =========== ========== =========== ========== ========== Weighted average number of shares outstanding diluted............ 4,986,711 2,197,128 2,434,017 1,821,800 1,821,800 =========== ========== =========== ========== ==========
The accompanying notes are an integral part of these consolidated financial statements. F-4 65 TEAM COMMUNICATIONS GROUP, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE FOR THE NINE FOR THE YEAR FOR THE YEAR FOR THE YEAR MONTHS ENDED MONTHS ENDED ENDED ENDED ENDED SEPTEMBER 30, SEPTEMBER 30, DECEMBER 31, DECEMBER 31, DECEMBER 31, 1999 1998 1998 1997 1996 ------------- ------------- ------------ ------------ ------------ (UNAUDITED) (UNAUDITED) OPERATING ACTIVITIES: Net income........................................... $ 1,472,900 $ 655,300 $ 405,200 $ 447,100 $ 800 Adjustments to reconcile net income to cash used for operating activities: Depreciation and amortization.................. 10,200 10,200 12,600 13,100 15,600 Amortization of television programming costs... 6,056,300 1,205,600 8,980,300 1,455,000 1,100,800 Allowance for doubtful accounts................ 500,000 -- 664,000 1,115,600 63,800 Amortization of notes payable discount......... 30,800 131,000 -- 372,000 353,300 Changes in assets and liabilities: Decrease (increase) in trade receivables....... (6,700,000) 393,000 1,340,100 (4,514,300) (3,352,900) Additions to television programming costs...... (15,734,600) (6,515,400) (15,712,000) (2,186,200) (4,060,600) Decrease (increase) in other assets............ (1,002,400) (1,131,400) 495,300 (433,100) (123,000) Increase (decrease) in accounts payable, accrued expenses and other liabilities....... 6,731,500 (474,100) (1,553,700) 2,050,300 939,500 Increase (decrease) in deferred revenue........ (387,300) 197,900 (102,100) 570,500 (343,500) Increase (decrease) in accrued participations............................... 745,700 825,600 2,041,000 (443,600) 1,302,300 Increase (decrease) in accrued interest........ (206,700) (449,400) (367,400) 284,300 201,800 ------------ ----------- ------------ ----------- ------------ Net cash used for operating activities....... (8,483,600) (5,151,700) (3,796,700) (1,269,300) (3,902,100) ------------ ----------- ------------ ----------- ------------ INVESTING ACTIVITIES: Purchase of fixed assets........................... (49,000) -- -- -- (36,900) Decrease (increase) in due from officer............ (25,000) 50,100 50,100 (184,100) 30,900 ------------ ----------- ------------ ----------- ------------ Net cash provided (used) for investing activities................................. (74,000) 50,100 50,100 (184,100) (6,000) ------------ ----------- ------------ ----------- ------------ FINANCING ACTIVITIES: Proceeds from shareholder loan and notes payable... -- -- -- 1,423,500 -- Proceeds from issuance of note payable and warrants......................................... 7,120,100 2,359,500 2,681,000 -- 4,747,00 Payments on bank line of credit.................... (417,000) -- -- -- -- Proceeds from bank line of credit.................. 1,114,000 -- -- Principal payment on loan due to shareholder....... (500,000) (240,000) (240,000) -- (10,000) Purchase treasury stocks........................... -- -- (34,600) -- -- Sale treasury stocks............................... 34,600 -- -- -- -- Extraordinary charge for early retirement of debt.......................................... 431,900 -- 69,500 -- -- Principal payment of notes payable................. (5,500,600) (4,065,300) (5,372,600) (10,000) (748,600) Waiver of interest on loan due to shareholder...... -- -- -- -- 95,000 Issuance of common stock........................... 8,534,100 7,713,500 6,382,600 -- -- ------------ ----------- ------------ ----------- ------------ Net cash provided by financing activities................................. 9,703,100 5,767,700 4,599,900 1,413,500 4,083,400 ------------ ----------- ------------ ----------- ------------ Net change in cash................................. 1,145,500 666,100 853,300 (39,900) 175,300 Cash at beginning of period........................ 1,027,700 174,400 174,400 214,300 39,000 ------------ ----------- ------------ ----------- ------------ Cash at end of period.............................. $ 2,173,200 $ 840,500 $ 1,027,700 $ 174,400 $ 214,300 ============ =========== ============ =========== ============ Supplemental disclosure of cash flow information: Interest paid...................................... $ 175,200 $ 86,000 $ 1,270,000 $ -- $ 15,100 ============ =========== ============ =========== ============ Income taxes paid.................................. $ 17,400 $ 19,000 $ 93,200 $ 26,300 $ 4,000 ============ =========== ============ =========== ============
The accompanying notes are an integral part of these consolidated financial statements. F-5 66 TEAM COMMUNICATIONS GROUP, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS SUPPLEMENTAL SCHEDULE OF NON CASH ACTIVITIES
FOR THE FOR THE NINE MONTHS NINE MONTHS FOR THE FOR THE FOR THE ENDED ENDED YEAR ENDED YEAR ENDED YEAR ENDED SEPTEMBER 30, SEPTEMBER 30, DECEMBER 31, DECEMBER 31, DECEMBER 31, 1999 1998 1998 1997 1996 ------------- ------------- ------------ ------------ ------------ (UNAUDITED) (UNAUDITED) Extinguishment of TPEG settlement payable by assignment of the treasury stock receivable....... -- -- -- 178,000 178,000 Issuance of warrants in conjunction with notes payable.... -- -- 62,500 286,600 602,700 Issuance of shares in connection with conversion of notes payable......................... -- -- 53,600 -- -- Issuance of shares and warrants in connection with services provided to the Company......... 1,435,900 -- 58,000 -- 24,700 Issuance of shares in connection with extinguishment of debt..... 2,299,600 -- 458,000 -- -- Transfer of shares by principal shareholder to notes payable holder.......................... -- -- -- -- 45,700 Issuance of shares in connection with notes payable.............. -- -- -- -- 84,200
The accompanying notes are an integral part of these consolidated financial statements. F-6 67 TEAM COMMUNICATIONS GROUP, INC. CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
COMMON STOCK RETAINED ---------------------- EARNINGS NUMBER PAID IN TREASURY ACCUMULATED/ OF SHARES PAR VALUE CAPITAL STOCK (DEFICIT) ---------- --------- ----------- -------- ------------ Balance at December 31, 1995........... $1,024,059 $1,000 $ -- $(87,000) $(1,032,500) Transfer of shares by principal shareholder to notes payable holder............................... -- -- 45,700 -- -- Exchange of treasury stock receivable with related party for extinguishment of TPEG settlement payable........... -- -- 91,000 87,000 -- Issuance of shares in connection with notes payable........................ 79,708 -- 84,200 -- -- Issuance of warrants in connection with private placements................... -- -- 602,700 -- -- Issuance of shares in connection with anti-dilution provisions of convertible promissory note.......... 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 December 31, 1996........... 1,131,344 $1,000 $ 943,300 $ -- $(1,031,700) Net Income for the Year ended December 31, 1997.............. -- -- -- -- 447,100 Issuance of warrants in connection with private placement.................... -- -- 286,800 -- -- ---------- ------ ----------- -------- ----------- Balance at December 31, 1997........... 1,131,344 $1,000 $ 1,230,100 $ -- $ (584,600) Net Income for the Year ended December 31, 1998.............. -- -- -- -- 405,200 Issuance of shares in connection with the initial public offering.......... 1,500,000 -- 5,744,700 -- -- Issuance of shares in connection with the extinguishment of debt........... 188,974 -- 458,000 -- -- Purchase of Treasury Stock............. (17,000) -- -- (34,600) -- Issuance of debt with beneficial conversion feature................... -- -- 66,100 -- -- Conversion of debt to equity........... -- -- 50,000 -- -- Issuance of warrants for services...... -- -- 58,000 -- -- Exercise of warrants................... 12,817 -- 5,800 -- -- ---------- ------ ----------- -------- ----------- Balance at December 31, 1998........... 2,816,135 $1,000 $ 7,612,700 $(34,600) $ (179,400) Net income for the nine months ended September 30, 1999................... -- -- -- -- 1,472,900 Sale of Treasury Stock................. 17,000 -- -- 34,600 -- Issuance of shares in connection with conversion of debt................... 1,219,974 -- 2,299,600 Issuance of stock for services......... 464,000 -- 1,032,400 -- -- Issuance of warrants -- services....... -- -- 403,500 -- -- Issuance of warrants -- debt........... -- -- 240,000 -- -- Issuance of debt with beneficial conversion feature................... -- -- 730,000 -- -- Private placement of common stock...... 1,013,334 -- 3,465,300 -- -- Exercise of warrants................... 453,314 -- 363,300 -- -- ---------- ------ ----------- -------- ----------- Balance at September 30, 1999.......... 5,983,757 $1,000 $16,146,800 $ -- $ 1,293,500 ========== ====== =========== ======== ===========
The accompanying notes are an integral part of these consolidated financial statements F-7 68 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 dramatic and reality-based television series, mini-series, animated series, programs, specials, and made-for-television movies for telecast, exhibition or distribution in the domestic and foreign television and home video markets. The Company's primary focus is on developing and producing family drama and children programming and reality based programming for both domestic and international broadcast networks and cable channels such as Discovery's Animal Planet, The Learning Channel, The Showtime Networks, Fox Family 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 four major customers accounted for approximately 82% of the Company's total operating revenue for the nine months ended September 30, 1999. Sales to four major customers accounted for approximately 69% of the Company's total operating revenue for the year ended December 31, 1998. Sales to four major customers accounted for approximately 88% of the Company's total operating revenue for the year ended December 31, 1997. Sales to six major customers accounted for approximately 81% of the Company's total operating revenue for the year ended December 31, 1996. 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. Cash equivalents consist of interest-bearing securities with original maturities of less than 90 days. Included in cash and cash equivalents as of September 30, 1999 and December 31, 1998, is an $860,000 certificate of deposit. This certificate of deposit is restricted as it secures the Company's revolving line of credit of $850,000 with Mercantile National Bank. 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 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. F-8 69 TEAM COMMUNICATIONS GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) During the nine months ended September 30, 1999, as the Company increased its activities related to film cost production, overhead was capitalized in accordance with SFAS No. 53 based upon estimates of production related activities as a percentage of anticipated film cost expenditures during 1999. Management reviews the overhead rate throughout the year and will adjust the overhead rate on a quarterly basis, if necessary. During the nine months ended September 30, 1999, overhead in the amount of approximately $1,740,700 was capitalized to film production costs. 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 $55,500, $41,800, $30,000 and $16,700 in accumulated depreciation at September 30, 1999, December 31, 1998, December 31, 1997 and December 31, 1996, 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. Debt with Stock Purchase Warrants and Beneficial Conversion Features The proceeds received from debt issued with stock purchase warrants is allocated between the debt and the warrants, based upon the relative fair values of the two securities and/or beneficial conversion features. Fair value of the debt element of the financial instrument is determined by discounting the future payments of principal and interest, based upon management's estimate of its borrowing rate for similar financial instruments of this risk (generally 25%), and the balance of the proceeds is accounted for as additional paid in capital. The resulting debt discount is amortized to expense over the term of the debt instrument, using the effective interest method. In the event of settlement of such debt in advance of the maturity date, a loss is recognized based upon the difference between the then carrying amount (i.e., face amount less unamortized discount) and amount of payment. 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 September 30, 1999, December 31, 1998, December 31, 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 September 30, 1999, December 31, 1998, December 31, 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 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 reverse stock split for all periods presented. F-9 70 TEAM COMMUNICATIONS GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Concentration of Credit Risk Three customers represented approximately 88% of the trade receivable balance at September 30, 1999. Three customers represented approximately 83% of the trade receivable balance at December 31, 1998. Five customers represented approximately 95% of the trade receivable balance at December 31, 1997. Included in Accounts Receivable as of September 30, 1999, is $900,000 which is held as security by a third-party for certain programming rights acquired by the Company. Upon collection of this receivable the amounts will be placed in escrow and recorded as cash, although the cash will be restricted as to withdrawal. Net Earnings Per Common Share For the nine months ended September 30, 1999 and the years ended December 31, 1998, December 31, 1997 and December 31, 1996, the per share data is based on the weighted average number of common and common equivalent shares outstanding. For 1997, per share data is calculated in accordance with Staff Accounting Bulletin of the Securities and Exchange Commission (SAB) No. 98 whereby common stock, options or warrants to purchase common stock or other potentially dilutive instruments issued for nominal consideration must be reflected in basic and diluted per share calculations for all periods in a manner similar to a stock split, even if anti-dilutive. Accordingly, in computing basic earnings per share, nominal issuances of common stock are reflected in a manner similar to a stock split or dividend. In computing diluted earnings per share, nominal issuances of common stock and potential common stock are reflected in a manner similar to a stock split or dividend. A portion of convertible debt was not included in the calculation of weighted average shares for the years ended December 31, 1997 and December 31, 1996, because the Chairman and CEO had personally guaranteed to the Company that, on certain debt, 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 this 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 SFAS 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. Year 2000 Compliance As has been widely reported, many computer systems process dates based on two digits for the year of a transaction and are unable to process dates in the year 2000 and beyond. Since the Company's formation in 1995, the Company has installed new information systems which are year 2000 compliant. Although the Company does not expect Year 2000 to have a material adverse effect on its internal operations, it is possible that Year 2000 problems could have a significant adverse effect on the Company's suppliers and their ability to service the Company and to accurately process payments received. New Accounting Pronouncements The Company has adopted SFAS No. 130 "Reporting Comprehensive Income" and SFAS No. 131 "Disclosures About Segments of an Enterprise and Related Information". Adoption of these pronouncements did not materially affect the financial statements. Recent Pronouncements Effective Subsequent to 1998 In April 1998, Statement of Position 98-5 "Reporting on the Costs of Start-Up Activities" ("SOP 98-5") was issued. SOP 98-5 provides guidance on the financial reporting of start-up costs and organization costs. The SOP is effective for financial statements for fiscal years beginning after December 15, 1998. The Company does not anticipate that the adoption of this statement will have a material effect on its financial statements. F-10 71 TEAM COMMUNICATIONS GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities", effective for fiscal years beginning after June 15, 1999. The Company anticipates that due to its limited use of derivative instruments, the adoption of SFAS No. 133 will not have a material effect on its financial statements. In October 1998, the FASB released an exposure draft of the proposed statement on "Rescission of FASB Statement No. 53, Financial Reporting by Producers and Distributors of Motion Picture Films". An entity that previously was subject to the requirements of SFAS No. 53 would follow the guidance in a proposed Statement of Position, "Accounting by Producers and Distributors of Films." This proposed Statement of Position would be effective for financial statements for fiscal years beginning after December 15, 1999 and could have a significant impact on the Company's results of operations and financial position depending on its final outcome. The Company has not concluded on its impact given the preliminary stages of the proposed Statement of Position. Unaudited Interim Consolidated Financial Statement In the opinion of the Company's management, all adjustments (consisting of normal recurring accruals) necessary to present fairly the Company's financial position as of September 30, 1999, and the results of operations and cash flows for the nine month period ended September 30, 1999 have been included. The results of operations for the nine month period ended September 30, 1999, are not necessarily indicative of the results to be expected for the full fiscal year. For further information, refer to the financial statements and footnotes thereto included in the Company's 10-KSB filed for the year ended December 31, 1998. NOTE 3 -- TELEVISION PROGRAM COSTS: Television program costs consist of the following:
SEPTEMBER 30, DECEMBER 31, DECEMBER 31, DECEMBER 31, 1999 1998 1997 1996 ------------- ------------ ------------ ------------ (UNAUDITED) In process and development............ $ 2,242,000 $ 1,017,400 $1,502,000 $1,977,000 Released, less accumulated amortization.......................... 18,455,100 10,001,400 2,785,000 1,578,900 ----------- ----------- ---------- ---------- Total television program costs..................... $20,697,100 $11,018,800 $4,287,000 $3,555,900 =========== =========== ========== ==========
Based on management's estimates of future gross revenue as of September 30, 1999, approximately 60% of the $20,697,100 in unamortized released television program costs will be amortized during the three years ending September 30, 2002 and 80% will be amortized during the five years ending September 30, 2004. NOTE 4 -- INCOME TAXES: Deferred taxes result 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:
DECEMBER 31, DECEMBER 31, DECEMBER 31, 1998 1997 1996 ------------ ------------ ------------ Statutory federal tax rate........................ 34% 34% 34% State income tax provision........................ 3% 0% 0% Benefits of operating loss carryforward........... (26)% (34)% (34)% --- --- --- Effective tax rate................................ 11% 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. F-11 72 TEAM COMMUNICATIONS GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) The components of the net deferred tax asset are as follows:
DECEMBER 31, DECEMBER 31, DECEMBER 31, 1998 1997 1996 ------------ ------------ ------------ Net operating loss (carryforward)................. $ 61,156 $ 184,605 $ 336,620 Valuation allowance............................... $(61,156) $(184,605) (336,620) -------- --------- --------- Net deferred tax asset.......................... $ -- $ -- $ -- -------- --------- --------- Total current and deferred taxes payable.......... $ -- $ -- $ -- ======== ========= =========
At December 31, 1998 and December 31, 1997, the Company has a federal net operating loss carryforward of $180,000 and $542,958, respectively. NOTE 5 -- RELATED PARTY TRANSACTIONS: As a consequence of the Company's October 1999 acquisition of Dandelion Distribution Ltd. (Dandelion), certain receivables resulting from sales made prior to the acquisition are now considered due from related parties for financial reporting purposes. In June 1999 the Company entered into a five year license agreement for certain territories including the UK of 20 made-for-television movies with Renown Pictures, Ltd., a UK company owned by Noel Cronin, formerly the owner of Dandelion. At September 30, 1999 the receivable due from Renown was $2,900,000. Subsequent to such date the Company received a payment of $725,000 per the terms of the agreement. Noel Cronin is also a director of String of Pearls Plc. In September 1999, the Company entered into a 10 year license agreement for certain European territories including Germany, France and Italy, of 20 made-for-television movies with String of Pearls Plc. At September 30, 1999, the receivable due from String of Pearls Plc was $5,375,000. Mr. Cronin has personally guaranteed the obligation of String of Pearls. Subsequent to such date the Company received a payment of $290,000 per the terms of agreement. The due from officer balance of $170,400, $145,400 and $195,500 at September 30, 1999, December 31, 1998 and December 31, 1997, represents payments made by the Company on behalf of and short-term interest free loans made to the Chairman and CEO, less producer's fees earned by the Chairman and CEO for services on a company production. The shareholder loan and note payable balance are comprised of the following:
SEPTEMBER 30, DECEMBER 31, DECEMBER 31, DECEMBER 31, 1999 1998 1997 1996 ------------- ------------ ------------ ------------ (UNAUDITED) Promissory note: 14% secured promissory note due July 15, 1998(i)............................ $-- $ -- $240,000 $240,000 12% secured promissory note due August 31, 1999(ii)............... -- 500,000 500,000 500,000 --- -------- -------- -------- $-- $500,000 $740,000 $740,000 === ======== ======== ========
(i) In August 1995, the Company entered into a $250,000 promissory note with a shareholder. The note accrues interest at 12% through November 1, 1995 and at 14% thereafter. The note and all unpaid interest are due July 15, 1998, 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 $79,000 through March 31, 1998. This interest expense, at fair value, was recorded as either a corresponding credit to paid-in capital (1996) or accrued liabilities (1997) 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. This promissory note was paid in full in August 1998. (ii) In April 1995, the Company entered into a $500,000 promissory note with a shareholder. The note accrues interest at 10% through December 31, 1995 and at 12% thereafter. The note and all unpaid interest is due August 31, 1999, as amended. The note is secured by all of the Chairman and CEO's shares and the assets of the Company. The shareholder has waived all accrued interest relating to this F-12 73 TEAM COMMUNICATIONS GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) note totaling $165,000 through March 31, 1998. Interest subsequent to March 31, 1998 is accruing at prime plus two percent, currently 9.5%. The promissory note was paid in full in August 1999 (unaudited). NOTE 6 -- COMMITMENTS AND CONTINGENCIES: In January 1999, the Company was served with a complaint in a matter styled Mel Giniger & Associates vs. Team Communications Group, Inc. et al. filed in the Superior Court of the County of Los Angeles. In the complaint, the Plaintiff, an individual who served as a sales agent for the Company, alleges that he is owed commissions for sales of certain of the Company's programming and that the Company has failed to pay in full the amounts Plaintiff alleges are owed to him. The complaint seeks damages for breach of contract, services rendered, account stated and for payment of value for services rendered. The Company has filed an answer in this action and intends to vigorously defend itself. The Plaintiff recently obtained a writ of attachment in the amount of $100,000 and we have posted a bond with the Superior Court of the County of Los Angeles with respect to this obligation. On October 24, 1999, the Company was served with a complaint from Beyond Entertainment, the licensee of Water Rats Seasons I & II. The complaint, which seeks an accounting and termination of the license agreement, seeks $3,000,000 in contractual damages and $6,000,000 for negligence and fraud. The Company believes the complaint to be totally without merit and intends to vigorously contest the matter. At this time, the outcome of any of the above matters cannot be determined by the Company with any certainty. The Company is subject to the above mentioned litigation and other various claims and lawsuits in the ordinary course of business. In the opinion of management, the ultimate resolution of these matters will not have a material adverse effect on the Company's financial condition, results of operations or cash flows. The Company leases office space and certain office equipment. The total lease expense was $93,450, $78,000, $118,400, 96,300 and $113,700, respectively, for the periods ended September 30, 1999, September 30, 1998, December 31, 1998, December 31, 1997 and December 31, 1996, respectively. The various operating leases to which the Company is presently subject require minimum lease payments for the years ending December 31, as follows: 1999....................................................... 54,700 2000....................................................... 6,400 2001....................................................... 6,400 2002....................................................... 6,400 2003....................................................... 5,800 ------- $79,700 =======
NOTE 7 -- LINE OF CREDIT -- BANK The Company currently has a $850,000 line of credit with its bank, secured by a certificate of deposit and certain receivables, which accrues interest on the outstanding balance at 1.75% over Mercantile Bank's certificate of deposit rate. The agreement expires June 15, 2000. As of September 30, 1999, December 31, 1998, December 31, 1997 and December 31, 1996, the outstanding balance of the line credit was $697,000, $1,114,000, $0 and $0, respectively. F-13 74 TEAM COMMUNICATIONS GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 8 -- NOTE PAYABLE: Notes payable consists of the following:
SEPTEMBER 30, DECEMBER 31, DECEMBER 31, DECEMBER 31, 1999 1998 1997 1996 ------------- ------------ ------------ ------------ (UNAUDITED) Private placements: 12% secured notes due August 1999(i)......... $ -- $ 225,000 $ 900,000 $ 900,000 10% secured convertible notes due August 1999(ii)............... -- 296,000 839,000 657,000 10% secured notes due August 1999(iii)....... 75,000 80,000 788,700 -- Promissory notes: 10% secured promissory note due August 1999(iv)............... 125,000 250,000 500,000 500,000 11% unsecured promissory note past due(v)....... 124,900 124,900 124,900 134,900 12% secured note due April 1999, past due(vi)..... -- 150,000 -- -- 12% secured note due March 1999, past due(vii).... 150,000 150,000 -- -- 12% secured note due April 1999(viii)............. -- 350,000 -- -- 18% secured note past due(ix)................ -- 115,000 -- -- 12% secured note due January 2000(x)........ 100,000 284,100 -- -- 16% secured note due August 1999(xi)........ -- 30,000 -- -- 10% secured note due March 1999, past due(xii).... -- 250,000 -- -- 12% secured notes due November 1999(xiii).... 350,000 -- -- -- 12% convertible secured promissory note due July 1998(xiv)......... -- -- 322,000 322,000 8% secured note due July 1998(xv)............... -- -- 300,000 239,900 10% secured note due July 1998(xvi).............. -- -- 150,000 124,100 10% secured note due July 1998(xvii)............. -- -- 650,000 -- 12% secured note due July 1998(xviii)............ -- -- 315,000 -- 10% secured promissory note due June 1997(xix).............. -- -- -- 885,000 12% secured convertible note due November 1999(xx)............... 200,000 -- -- -- 12% secured convertible note due November 2002(xxi).............. 3,262,300 -- -- -- ---------- ---------- ---------- ---------- $4,387,200 $2,305,000 $4,889,600 $3,762,900 ========== ========== ========== ==========
On January 30, 1999, the Company sold $850,000 principal amount of 8% convertible debentures and 85,000 warrants. On March 16, 1999, the Company sold $500,000 principal amount of 8% convertible debentures and 50,000 warrants. These convertible debentures have the same terms for conversion. The conversion price for each debenture will be the lesser of a) 90% of the average per share market value for five consecutive days prior to the Initial Closing date or b) 85% of the per share market value for the trading day F-14 75 TEAM COMMUNICATIONS GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) having the lowest per share market value during the five trading days prior to the conversion date. If not otherwise converted, the debentures mature on January 27, 2002, and March 15, 2002, respectively. These beneficial conversion features are included in additional paid in capital. The related discount is amortized over the life of the note using the effective interest method. Debentures representing $850,000 principal amount were converted to equity in May 1999. The Company recognized a $248,200 extraordinary loss as a result of the conversion of these notes. The extraordinary loss consisted of the write-off of the associated debt discount. On April 7, 1999, the Company sold an additional $500,000 principal amount of 8% convertible debentures and 50,000 warrants. These debentures have the same terms as described above and mature, unless converted prior, on March 30, 2002. In 1998, the Company recognized a $69,500 extraordinary loss as a result of the early redemption of certain notes. The extraordinary loss consisted of the write-off of the associated debt discount, net of income tax benefits of $37,500. These beneficial conversion features are included in additional paid in capital. The related discount is amortized over the life of the note using the effective interest method. (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 $122,900 at December 31, 1998. 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, July 29, 1998, and terminating on the July 29, 2001. Through this private placement, the Company raised $900,000 and issued 115,351 warrants. Principal and interest were due no later than July 15, 1998, $675,000 was redeemed at the initial public offering. The remainder of the noteholders extended the maturity date to August 1999. 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 $162,000 and is included in paid in capital. In August 1999, the Company repaid the principal and interest (unaudited). (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, Von Graffenried AG, 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, July 29, 1998, 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, July 29, 1998, and terminating on July 29, 2001. As of December 31, 1996, the Company raised $975,000 and issued 83,308 warrants. Principal and interest were due no later than July 15, 1998 and $679,000 was redeemed at the initial public offering. The remainder of the noteholders extended the maturity date to August 1999. The accrued interest balance was $108,500 at December 31, 1998. 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 $381,928 and is included in paid in capital. These notes were repaid in August 1999 (unaudited). F-15 76 TEAM COMMUNICATIONS GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (iii) During January 1997, the Company participated in a third private placement offering. The Company sold 19.4 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 note payable with interest of 10% per annum, payable at six month intervals, and 10,000 Common Stock Purchase warrants. In 1998 $889,000 was repaid. The maturity date of the notes is August 1999. Each warrant entitles the holder to buy one share of common stock at an exercise price of $0.97. 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 September 30, 1997, the Company raised $969,000 and issued 193,870 warrants. The accrued interest balance was $41,100 at December 31, 1998. 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 $286,797 and is included in paid-in capital. (iv) 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 August 20, 1999, as amended. At the initial public offering, $250,000 was repaid. The accrued interest balance was $124,200 at December 31, 1998. 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. In August 1999, the Company repaid $125,000 of the principal and extended the remaining $125,000 to November 23, 1999 (unaudited). (v) 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, 1998, there was $29,700 of accrued interest. During 1997, the Company made a $10,000 principal payment. 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. (vi) In March 1998, the Company obtained a loan in the amount of $150,000 from Arab Commerce Bank, which carries interest at 12% per annum and matured on April 1, 1999. As of December 31, 1998 there was accrued interest of $13,800. The note is secured by substantially all the assets of the Company. This note was paid in full in June 1999 (unaudited). (vii) In March 1998, the Company obtained a loan in the amount of $150,000 from Nick Kahla, which carries interest at 12% per annum and matures on March 16, 1999. As of December 31, 1998, there was accrued interest of $14,100. The note is secured by substantially all the assets of the Company. The Company is currently negotiating with Nick Kahala to pay off this note. (viii) Between March 1998 and May 1998, the Company arranged $650,000 in short-term loans. $300,000 was repaid at the initial public offering. These loans bear an interest rate of 12%, and $100,000 matured in March 1999 and $250,000 matured in April 1999. At December 31, 1998, the accrued interest was $29,400. These notes have been paid in full in June 1999 (unaudited). (ix) In May 1998, the Company obtained a loan in the amount of $115,000 from the High Bridge Fund. The loan includes a $15,000 loan origination fee and begins to accrue interest at 18% per year if the loan goes into default. At December 31, 1998, the accrued interest was $2,000. The loan was repaid in August 1999 (unaudited). (x) In May and June 1998, the Company arranged with nine parties for $375,000 of long term loans. The loans mature January 2000. Of the $375,000, there are two loan origination fees, one for $8,000 and one for $8,500. Two notes are convertible at their principal and interest amount into common stock of the Company at any time through maturity at the conversion price of 50% of the current per share market value. One note is convertible at its principal and interest amount into common stock of the F-16 77 TEAM COMMUNICATIONS GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Company at the conversion price of 75% of the current per share market value. These conversion features were valued at $62,500 and included in paid in capital. The resulting discount on the notes payable is amortized over the life of the note using the effective interest method. At December 31, 1998, $284,100 principal amount remained outstanding. The loans accrue interest at 12% per annum. As of December 31, 1998, there was accrued interest of $22,700. This loan was repaid in full in July 1999 (unaudited). (xi) In July 1998, the Company arranged a loan for $340,000. The loan matures August 1999. The loan bears an interest rate of 16% per annum. At December 31, 1998, $30,000 principal amount remained outstanding. As of December 31, 1998, there was accrued interest of $11,100. The loan was repaid in August 1999 (unaudited). (xii) On December 29, 1998, the Company arranged a loan for $250,000. The loan accrues interest at 10% per annum. The loan matured on March 31, 1999. This note has been paid in full in August 1999 (unaudited). (xiii) In May, June and July 1999, the Company sold notes for $350,000. These notes mature in November 1999 and bear an interest rate of 12% (unaudited). (xiv) 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, 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 July 15, 1998. The accrued interest balance was $121,000, $93,000 and $36,200 at March 31, 1998, December 31, 1997 and December 31, 1996, respectively. 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. This note was converted to equity in August 1998. (xv) 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 July 15, 1998. The accrued interest balance was $34,200, $8,500, $27,700, and $2,800 at March 31, 1998, December 31, 1997 and December 31, 1996, respectively. 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. This note was paid in full in August 1998. (xvi) 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 was due the sooner of an initial public offering or July 15, 1998. The accrued interest balance was $20,100, $16,050, and $400 at March 31, 1998, December 31, 1997 and December 31, 1996, respectively. 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. This note was paid in full in August 1998. (xvii) 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 July 15, 1998. As of March 31, 1998 and December 31, 1997 there was $50,800 and $34,500, respectively of accrued interest. The note is secured by all the television rights and interest owned with regards to the "Total Recall" project. This note was paid in full in August 1998. (xviii) In December 1997, the Company obtained a loan in the amount of $315,000 from Venture Management Consultants LLC ("VMC"), which carries interest at 12% per annum, and matures at the F-17 78 TEAM COMMUNICATIONS GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) earlier of the closing of the offering or July 15, 1998. As the loan was not repaid in full by February 15, 1998, the Company is required to pay VMC an additional $15,000. Included in the principal balance is a $15,000 loan origination fee. As of December 31, 1997 there was accrued interest of $2,000. As of March 31, 1998, $50,000 of the principal under this note has been repaid. The note is secured substantially by all the assets of the Company. This note was paid in full in August 1998. (xix) 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 accrued interest at 10% per annum. As of March 31, 1998 and December 31, 1997, there had been $1,200,000 repaid in respect to this debt. As of December 31, 1996 there had been $315,000 repaid in respect to this debt. The accrued interest balance was $83,100 at March 31, 1998 and December 31, 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. These notes were paid off in 1997. (xx) In July 1999, we arranged for a short term loan of $1,200,000 for production and distribution activities. The loan matures on November 30, 1999 and accrues interest at 12% per year. If the loan is not repaid by November 30, 1999, the principal and all accrued and unpaid interest convert into shares of our common stock at the lesser of 85% of the market price on the date of issuance or 110% of the current market price when converted. As of November 10, 1999 we have repaid the full $1,200,000 of this note (unaudited). (xxi) On August 5, 1999, the Company completed a $4,000,000 financing in anticipation of the Company's public offering in Germany this fall. The Note bears interest at 12% per annum and matures November 30, 2002. The Note is subordinate to any of the Company's bank financing or senior debt. All or part of the unpaid principal amount may be converted into shares of Common Stock at the holder's option any time after November 30, 1999. The conversion price is the lesser of 120% of the average per share market price for five consecutive trading days prior to August 5, 1999 or 88% of the per share market price for the three days with the lowest per share market price during the twenty-five days prior to conversion. Connected with this financing, the Company sold 340,000 warrants to purchase Team common stock at $6.50, which is 105% of the five-day average closing price prior to the closing of the financing (unaudited). NOTE 9 -- 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:
SEPTEMBER 30, SEPTEMBER 30, DECEMBER 31, DECEMBER 31, DECEMBER 31, 1999 1998 1998 1997 1996 ------------- ------------- ------------ ------------ ------------ (UNAUDITED) (UNAUDITED) North America............. $ 3,504,400 $6,336,900 $ 9,844,500 $1,483,600 $2,221,900 Europe.................... 8,675,000 -- -- 307,100 1,332,900 South America............. 645,900 1,705,000 1,351,800 3,798,900 732,400 Asia...................... 448,000 1,424,900 1,412,900 136,000 1,306,500 Australia and Africa...... -- -- 972,700 1,250,000 156,100 ----------- ---------- ----------- ---------- ---------- Total..................... $13,273,300 $9,466,800 $13,581,900 $6,975,600 $5,749,800 =========== ========== =========== ========== ==========
NOTE 10 -- 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"). F-18 79 TEAM COMMUNICATIONS GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 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 year ended December 31, 1998. A summary of the Key Employee Plan as of and for the periods December 31, 1998, December 31, 1997 and December 31, 1996, is presented below:
WEIGHTED AVERAGE KEY EMPLOYEE PLAN SHARES EXERCISED PRICE ----------------- ------- ---------------- Outstanding as of January 1, 1996.................... -- $ -- Granted.............................................. 35,000 1.14 Exercised.......................................... -- -- Forfeited/Expired.................................. -- -- ------- Outstanding as of December 31, 1998, December 31, 1997 and December 31, 1996......................... 35,000 ======= Weighted-average fair value of options outstanding... $ 1.14 =======
The following table summarizes information about options outstanding at December 31, 1998, 1997 and 1996:
SHARES EXERCISABLE AT DECEMBER 31, 1998, DECEMBER 31, 1997, DATE TOTAL SHARES EXERCISE PRICE AND 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 SFAS No. 123, "Accounting for Stock Based Compensation", to account for its stock compensation arrangements under the provisions of APB No. 25, "Accounting for Stock Issued to Employees". 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 SFAS 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 pro forma net income nor earnings per share are presented. 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 fair market value on the date of grant. Such options shall be exercisable immediately on the date of grant by F-19 80 TEAM COMMUNICATIONS GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 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 11 -- SUBSEQUENT EVENTS (UNAUDITED): On October 1, 1999, the Company completed the purchase of Dandelion Distribution Ltd., a 20 year old United Kingdom based television production and distribution company, for $2,500,000 in cash and 386,847 shares of the Company's common stock for an aggregate value of $5,000,000. The Company may also be required to pay an additional $250,000 if the shares of common stock delivered as part of the purchase price do not have a market value of at least $3,000,000 on October 1, 2001. On October 5, 1999, the Company completed a $4,000,000 financing with Gontard & MetallBank AG. The Note bears interest at 10% per annum and matures on the earlier of the completion of this offering or December 31, 1999. NOTE 12 -- GOING CONCERN: The Company's financial statements for the nine months ended September 30, 1999 and 1998 and the years ended December 31, 1998, December 31, 1997 and 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. 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 81 INDEX TO FINANCIAL STATEMENTS OF DANDELION DISTRIBUTION LIMITED
PAGE ---- Directors' Report for the year ended 31 July 1999........... F-22 Report of Independent Auditors.............................. F-23 Profit and Loss Account for the year ended 31 July 1999..... F-24 Balance sheet at 31 July 1999............................... F-25 Notes to the Financial Statements........................... F-26 Directors' Report for the year ended 31 July 1998........... F-32 Report of Independent Auditors.............................. F-33 Profit and Loss Account for the year ended 31 July 1998..... F-34 Balance sheet at 31 July 1998............................... F-35 Notes to the Financial Statements........................... F-36
F-21 82 DANDELION DISTRIBUTION LIMITED DIRECTORS' REPORT FOR THE YEAR ENDED 31 JULY 1999 The directors present their report and the financial statements for the year ended 31 July 1999. STATEMENT OF DIRECTORS' RESPONSIBILITIES Company law requires the directors to prepare financial statements for each financial year which give a true and fair view of the state of affairs of the company and of the profit or loss of the company for that period. In preparing those financial statements, the directors are required to: - select suitable accounting policies and then apply them consistently; - make judgements and estimates that are reasonable and prudent; - follow applicable accounting standards, subject to any material departures disclosed and explained in the accounts; - prepare the financial statements on the going concern basis unless it is inappropriate to presume that the company will continue in business. The directors are responsible for keeping proper accounting records which disclose with reasonable accuracy at any time the financial position of the company and to enable them to ensure that the financial statements comply with the Companies Act 1985. They are also responsible for safeguarding the assets of the company and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities. DONATIONS During the year the company made charitable donations of L1,170 (1998: L1,523). PRINCIPAL ACTIVITIES The principal activities of the company are those of film distribution and film production. DIRECTORS The directors who served during the year and their beneficial interests in the company's issued share capital were:
ORDINARY SHARES OF L1 EACH -------------------------- 1999 1998 ------- ------- N D Cronin Esq........................................ 198 198 Mrs J M Cronin........................................ 2 2
AUDITORS The auditors, Messrs. Barnes Roffe, will be proposed for reappointment in accordance with section 385 of the Companies Act 1985. SMALL COMPANY EXEMPTIONS The report of the directors has been prepared in accordance with the special provisions of Part VII of the Companies Act 1985 relating to small companies. This report was approved by the Board and signed on its behalf: N D Cronin Esq Director Date: 14 October 1999 F-22 83 DANDELION DISTRIBUTION LIMITED AUDITORS' REPORT TO THE SHAREHOLDERS OF DANDELION DISTRIBUTION LIMITED We have audited the financial statements on pages F-26 to F-33 which have been prepared in accordance with the Financial Reporting Standard for Smaller Entities (effective March 1999) under the historical cost convention and the accounting policies set out on pages F-28 and F-29. RESPECTIVE RESPONSIBILITIES OF DIRECTORS AND AUDITORS As described on page F-24 the company's directors are responsible for the preparation of financial statements. It is our responsibility to form an independent opinion, based on our audit, on those statements and to report our opinion to you. BASIS OF OPINION We conducted our audit in accordance with Auditing Standards issued by the Auditing Practices Board. An audit includes examination, on a test basis, of evidence relevant to the amounts and disclosures in the financial statements. It also includes an assessment of the significant estimates and judgements made by the directors in the preparation of the financial statements, and of whether the accounting policies are appropriate to the company's circumstances, consistently applied and adequately disclosed. We planned and performed our audit so as to obtain all the information and explanations which we considered necessary in order to provide us with sufficient evidence to give reasonable assurance that the financial statements are free from material misstatement, whether caused by fraud or other irregularity or error. In forming our opinion we also evaluated the overall adequacy of the presentation of information in the financial statements. OPINION In our opinion, the financial statements give a true and fair view of the state of the company's affairs as at 31 July 1999 and of its profit for the year then ended and have been properly prepared in accordance with the Companies Act 1985. BARNES ROFFE Registered Auditors 16-19 Copperfields Spital Street Dartford Kent DA1 2DE Date: 15 October 1999 F-23 84 DANDELION DISTRIBUTION LIMITED PROFIT AND LOSS ACCOUNT FOR THE YEAR ENDED 31 JULY 1999
1999 1998 NOTE L L ---- ---------- ---------- TURNOVER.................................................... 1, 2 1,904,997 2,115,128 Cost of sales............................................... (1,049,786) (1,346,783) ---------- ---------- GROSS PROFIT................................................ 855,211 768,345 Selling and distribution costs.............................. (122,589) (135,362) Administrative expenses..................................... (658,360) (453,314) Other operating income...................................... 21,105 19,600 ---------- ---------- OPERATING PROFIT............................................ 3 95,367 199,269 Loss on disposal of tangible fixed assets................... -- (4,664) ---------- ---------- 95,367 194,605 Interest receivable and similar income...................... 22,978 22,730 Interest payable and similar charges........................ (35,977) (51,050) ---------- ---------- PROFIT ON ORDINARY ACTIVITIES BEFORE TAXATION............... 82,368 166,285 TAXATION ON PROFIT ON ORDINARY ACTIVITIES................... 5 (25,907) (38,369) ---------- ---------- PROFIT ON ORDINARY ACTIVITIES AFTER TAXATION................ 56,461 127,916 DIVIDENDS................................................... 6 -- (50,000) ---------- ---------- RETAINED PROFIT FOR THE YEAR................................ 56,461 77,916 RETAINED PROFIT BROUGHT FORWARD............................. 890,312 812,396 ---------- ---------- RETAINED PROFIT CARRIED FORWARD............................. 946,773 890,312 ========== ==========
The notes on pages F-28 to F-33 form part of these financial statements. F-24 85 DANDELION DISTRIBUTION LIMITED BALANCE SHEET AS AT 31 JULY 1999
1999 1998 ---------------------- ---------------------- NOTE L L L L ---- ---------- --------- ---------- --------- FIXED ASSETS Intangible fixed assets..................... 7 -- -- Tangible fixed assets..................... 8 441,714 452,758 Investments............................... 9 100 256,562 --------- --------- 441,814 709,320 CURRENT ASSETS Stocks.................................... 1,038,406 1,267,583 Debtors................................... 10 650,986 563,008 Investments............................... 11 42,105 -- Cash at bank and in hand.................. 253,204 137,415 ---------- ---------- 1,984,701 1,968,006 CREDITORS: amounts falling due within one year.................................. 12 (1,322,142) (1,593,505) ---------- ---------- NET CURRENT ASSETS.......................... 662,559 374,501 --------- --------- TOTAL ASSETS LESS CURRENT LIABILITIES....... 1,104,373 1,083,821 CREDITORS: amounts falling due after more than one year............................. 13 (154,964) (190,873) PROVISIONS FOR LIABILITIES AND CHARGES...... 14 (2,436) (2,436) --------- --------- NET ASSETS.................................. 946,973 890,512 ========= ========= CAPITAL AND RESERVES Called up share capital................... 15 200 200 Profit and loss account................... 946,773 890,312 --------- --------- SHAREHOLDERS' FUNDS......................... 946,973 890,512 ========= =========
The financial statements have been prepared in accordance with the special provisions of Part VII of the Companies Act 1985 relating to small companies and in accordance with the Financial Reporting Standard for Smaller Entities (effective March 1999). The financial statements were approved by the Board and signed on its behalf: N D Cronin Esq Director Date: 14 October 1999 The notes on pages F-28 to F-33 form part of these financial statements. F-25 86 DANDELION DISTRIBUTION LIMITED NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 JULY 1999 1. ACCOUNTING POLICIES 1.1 BASIS OF PREPARATION OF FINANCIAL STATEMENTS The financial statements have been prepared under the historical cost convention. The company is exempt from the requirements to prepare group accounts by virtue of section 248 of the Companies Act 1985. These financial statements therefore present information about the company as an individual undertaking and not about its group. 1.2 TURNOVER Turnover comprises the invoiced value of goods and services supplied by the company, exclusive of Value Added Tax and trade discounts. 1.3 TANGIBLE FIXED ASSETS AND DEPRECIATION Tangible fixed assets are stated at cost less depreciation. Depreciation is provided at rates calculated to write off the cost of fixed assets, less their estimated residual value, over their expected useful lives on the following bases: Freehold buildings............................. 2% p.a. straight line Plant & machinery etc.......................... 15/25% p.a. reducing balance
1.4 LEASING AND HIRE PURCHASE Assets obtained under hire purchase contracts and finance leases are capitalised as tangible fixed assets. Assets acquired by finance lease are depreciated over the shorter of the lease term and their useful lives. Assets acquired by hire purchase are depreciated over their useful lives. Finance leases are those where substantially all of the benefits and risks of ownership are assumed by the company. Obligations under such agreements are included in creditors net of the finance charge allocated to future periods. The finance element of rental payments is charged to the profit and loss account on a sum of digits basis, so as to produce a constant periodic rate of charge on the net obligation outstanding in each period. 1.5 OPERATING LEASES Rentals applicable to operating leases where substantially all of the benefits and risks of ownership remain with the lessor are charged to profit and loss account on a straight line basis over the lease term. 1.6 STOCKS Stocks of films rights are valued at the lower cost or net realisable value. Costs are carried forward in proportion to the directors' estimate of future revenue receivable. Where total costs exceed total estimated revenue, the value carried forward is limited to the value of estimated future revenue. The directors' projections for future revenues extend over the next three years and revenue streams are based both on contracts secured and under negotiation, anticipating that similar repeat business will be available. In cases where contracts have yet to be secured the directors have used estimates based on experience. In formulating projections, the directors consider that they have taken in to account all information that could reasonably be expected to be available, although there can be no certainty in respect of contracts being negotiated in future of a similar value to those currently secured. The financial statements do not include any adjustments that would result if future revenues were not realised in line with directors' expectations. 1.7 FOREIGN CURRENCIES Monetary assets and liabilities denominated in foreign currencies are translated into sterling at the rates of exchange ruling at the balance sheet date. Transactions denominated in foreign currencies are translated into sterling at the rate ruling on the date of the transaction. Exchange differences are taken into account in arriving at the operating profit. F-26 87 DANDELION DISTRIBUTION LIMITED NOTES TO THE FINANCIAL STATEMENTS (CONTINUED) FOR THE YEAR ENDED 31 JULY 1999 1.8 DEFERRED TAXATION Provision is made for deferred taxation as a result of material timing differences between the incidence of income and expenditure for taxation and accounts purposes, using the liability method, only to the extent that, in the opinion of the directors, there is a reasonable probability that a liability or asset will crystallise in the near future. 1.9 PENSIONS The company operates a defined contribution (money purchase) pension scheme. The assets of the scheme are held separately from those of the company in an independently administered fund. Contributions are charged to the profit and loss account as they become payable in accordance with the rules of the scheme. 2. TURNOVER 43% of the company's turnover (1998: 57%) is attributable to geographical markets outside the United Kingdom. 3. OPERATING PROFIT The operating profit is stated after charging:
1999 1998 L L ------ ------ Depreciation of tangible fixed assets....................... 13,832 14,985 Auditors' remuneration...................................... 8,000 8,000 Pension costs............................................... 500 500 ====== ======
4. DIRECTORS' REMUNERATION
1999 1998 L L ------- ------ Fees, salaries, benefits in kind and pension contributions............................................. 393,542 125,538 ------- ------ 393,542 125,538 ======= ======
During the year, retirement benefits were accruing to two (1998: two) directors in respect of money purchase pension schemes. 5. TAXATION
1999 1998 L L ------ ------ CURRENT YEAR TAXATION UK corporation tax.......................................... 23,464 38,619 Transfer from deferred taxation............................. -- (250) ------ ------ 23,464 38,369 PRIOR YEARS UK corporation tax.......................................... 2,443 -- ------ ------ 25,907 38,369 ====== ======
6. DIVIDENDS
1999 1998 L L ------ ------ Interim ordinary dividends paid............................. -- 50,000 ====== ======
F-27 88 DANDELION DISTRIBUTION LIMITED NOTES TO THE FINANCIAL STATEMENTS (CONTINUED) FOR THE YEAR ENDED 31 JULY 1999 7. INTANGIBLE FIXED ASSETS
GOODWILL L -------- COST: At 1 August 1998............................................ 15,000 ------ At 31 July 1999............................................. 15,000 ------ AMORTIZATION At 1 August 1998............................................ 15,000 ====== At 31 July 1999............................................. 15,000 ====== NET BOOK VALUE At 31 July 1999 and 31 July 1998............................ -- ======
8. TANGIBLE FIXED ASSETS
FREEHOLD LAND PLANT & & BUILDINGS MACHINERY ETC TOTAL L L L ------------- ------------- ------- COST At 1 August 1998................................... 452,682 95,429 548,111 Additions.......................................... -- 2,788 2,788 ------- ------ ------- At 31 July 1999.................................... 452,682 98,217 550,899 ------- ------ ------- DEPRECIATION At 1 August 1998................................... 37,861 57,492 95,353 Charge for year.................................... 7,696 6,136 13,832 ------- ------ ------- At 31 July 1999.................................... 45,557 63,628 109,185 ------- ------ ------- NET BOOK VALUE At 31 July 1999.................................... 407,125 34,589 441,714 ======= ====== ======= At 31 July 1998.................................... 414,821 37,937 452,758 ======= ====== =======
Included in land and buildings is freehold land valued at L67,900 (1998: L67,900) which is not depreciated. During the year, the freehold property was independently valued for the purpose of securing bank borrowings at a figure materially lower than the carrying value in the financial statements. However, in the opinion of the directors, the open market value of this property is not significantly lower than its carrying value in the financial statements. F-28 89 DANDELION DISTRIBUTION LIMITED NOTES TO THE FINANCIAL STATEMENTS (CONTINUED) FOR THE YEAR ENDED 31 JULY 1999 9. FIXED ASSET INVESTMENTS
SHARES IN GROUP OTHER UNDERTAKINGS INVESTMENTS TOTAL L L L ------------ ----------- -------- COST At 1 August 1998.................................. 100 256,462 256,562 Additions......................................... -- 17,955 17,955 Disposals......................................... -- (232,312) (232,312) Transfer to Current Asset Investments............. -- (42,105) (42,105) --- -------- -------- At 31 July 1999................................... 100 -- 100 --- -------- -------- NET BOOK VALUE At 31 July 1999................................... 100 -- 100 === ======== ======== At 31 July 1998................................... 100 256,462 256,562 === ======== ========
The company owns 100% of the ordinary share capital of its dormant subsidiary Baserem Limited, a company incorporated in England and Wales. The aggregate capital and reserves as of 31st July 1999 is L100 (1998: L100). 10. DEBTORS
1999 1998 L L -------- -------- DUE WITHIN ONE YEAR Trade debtors............................................... 579,110 463,977 Other debtors............................................... 71,876 99,031 -------- -------- 650,986 563,008 ======== ========
Included in trade debtors is a balance of L83,335 (1998: L112,500) which is due after more than one year. 11. CURRENT ASSET INVESTMENTS
1999 1998 L L ------- ------- Other investments at cost................................... 42,105 -- ======= =======
12. CREDITORS AMOUNTS FALLING DUE WITHIN ONE YEAR
1999 1998 L L --------- --------- Bank loans and overdrafts (secured)......................... 208,460 534,604 Net obligations under finance lease and hire purchase contracts................................................... -- 12,135 Trade creditors............................................. 869,597 839,700 Amounts owed to group undertakings.......................... 100 100 Corporation tax............................................. 23,464 52,497 Other taxation and social security.......................... 52,751 38,458 Directors' current accounts................................. 98,174 19,991 Other creditors and accruals................................ 69,596 96,020 --------- --------- 1,322,142 1,593,505 ========= =========
F-29 90 DANDELION DISTRIBUTION LIMITED NOTES TO THE FINANCIAL STATEMENTS (CONTINUED) FOR THE YEAR ENDED 31 JULY 1999 13. CREDITORS AMOUNTS FALLING DUE AFTER MORE THAN ONE YEAR
1999 1998 L L --------- --------- Bank loans and overdrafts (secured)......................... 154,964 160,873 Other creditors and accruals................................ -- 30,000 --------- --------- 154,964 190,873 ========= =========
Included within the above are amounts falling due as follows: IN MORE THAN 5 YEARS: Loan instalments............................................ 112,763 87,373 ========= =========
14. PROVISIONS FOR LIABILITIES AND CHARGES
1999 1998 L L --------- --------- DEFERRED TAXATION At 1 August 1998............................................ 2,436 2,686 Credit for the year....................................... -- (250) --------- --------- At 31 July 1999........................................... 2,436 2,436 ========= =========
The deferred tax balance above represents the maximum liability for deferred tax in respect of accelerated capital allowances. 15. CALLED UP SHARE CAPITAL
1999 1998 L L ----- ----- AUTHORISED 1,000 ordinary shares of L1 each............................ 1,000 1,000 ===== ===== ALLOTTED, ISSUED AND FULLY PAID 200 ordinary shares of L1 each.............................. 200 200 ===== =====
16. RELATED PARTIES The company trades with String Of Pearls plc and String Of Pearls II plc, companies in which N D Cronin Esq is a director and shareholder. No reportable related party transactions with these companies took place during the year and the balances outstanding as at 31 July 1999 are L83,335 debit (1998: L131,523 debit) and L39,964 debit (1998: L40,186 debit) respectively. The company trades with Dande Racing, a business in which N D Cronin Esq is a proprietor. During the year the company received rent from the business of L4,000 (1998: L4,000) and paid for goods and services to the value of L42,598 (1998: L28,000). The company also purchased from Dande Racing a current asset investment of L17,955. The amount owed from Dande Racing as at 31 July 1999 is L85 (1998: Lnil). N D Cronin Esq is a director of Leisureview Limited. During the year, Dandelion Distribution Limited made sales to Leisureview Limited of L62,401 (1998: L44,468) and purchased goods and services to the value of L59,667 (1998: L14,374). The amount owed to Leisureview Limited as at 31 July 1999 is L68,698 (1998: L8,623). The amount owed by Leisureview Limited at 31 July 1999 was L19,248 (1998: L6,883). N D Cronin Esq and Mrs J M Cronin are trustees of the Dandelion Distribution Executive Pension Scheme. Contributions to the scheme amounted to L500 (1998: L500). At 31 July 1999 the company owed the scheme L50,000 (1998: L50,000). All transactions took place at arms length. F-30 91 DANDELION DISTRIBUTION LIMITED NOTES TO THE FINANCIAL STATEMENTS (CONTINUED) FOR THE YEAR ENDED 31 JULY 1999 17. TRANSACTIONS WITH DIRECTORS The company transferred its ownership in its investment properties to director N D Cronin in reward for his services to the company in the year. 18. ULTIMATE CONTROL Ultimate control of the company lies with N D Cronin Esq. F-31 92 DANDELION DISTRIBUTION LIMITED DIRECTORS' REPORT FOR THE YEAR ENDED 31 JULY 1998 The directors present their report and the financial statements for the year ended 31 July 1998. STATEMENT OF DIRECTORS' RESPONSIBILITIES Company law requires the directors to prepare financial statements for each financial year which give a true and fair view of the state of affairs of the company and of the profit or loss of the company for that period. In preparing those financial statements, the directors are required to: - select suitable accounting policies and then apply them consistently; - make judgements and estimates that are reasonable and prudent; - prepare the financial statements on the going concern basis unless it is inappropriate to presume that the company will continue in business. The directors are responsible for keeping proper accounting records which disclose with reasonable accuracy at any time the financial position of the company and to enable them to ensure that the financial statements comply with the Companies Act 1985. They are also responsible for safeguarding the assets of the company and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities. PRINCIPAL ACTIVITY The principal activities of the company are those of film distribution and film production. CHARITABLE DONATIONS During the year, the company made charitable donations of L1,523 (1997 - L2,000). THE YEAR 2000 ISSUE In preparing these financial statements, the directors have considered the impact of the year 2000 issue. The directors have reviewed software packages and certain items of plant and machinery for millennium compliance. The directors have not quantified the costs of modifications to non millennium compliant software and plant because they do not consider that material liabilities will crystallise. Any costs that do crystallise will be charged to the profit and loss account in the period in which they are incurred. DIRECTORS The directors who served during the year and their beneficial interests in the company's issued share capital were:
ORDINARY SHARES OF L1 EACH -------------------------- 1998 1997 ------- ------- N D Cronin Esq........................................ 198 198 Mrs J M Cronin........................................ 2 2
AUDITORS In accordance with Section 385 of the Companies Act 1985, the auditors, Messrs Barnes Roffe, will be proposed for re-appointment for the ensuing year at the general meeting. SMALL COMPANY EXEMPTIONS Advantage has been taken in the preparation of this report of the exemptions applicable to small companies conferred by Part VII of the Companies Act 1985. This report was approved by the Board and signed on its behalf: Mrs J M Cronin Secretary Date: 30 November 1998 F-32 93 DANDELION DISTRIBUTION LIMITED AUDITORS' REPORT TO THE SHAREHOLDERS OF DANDELION DISTRIBUTION LIMITED We have audited the financial statements on pages F-36 to F-43 which have been prepared under the historical cost convention and the accounting policies set out on pages F-38 and F-39. RESPECTIVE RESPONSIBILITIES OF DIRECTORS AND AUDITORS As described on page F-34 the company's directors are responsible for the preparation of the financial statements. It is our responsibility to form an independent opinion, based on our audit, on those statements and to report our opinion to you. BASIS OF OPINION We conducted our audit in accordance with Auditing Standards issued by the Auditing Practices Board. An audit includes examination, on a test basis, of evidence relevant to the amounts and disclosures in the financial statements. It also includes an assessment of the significant estimates and judgements made by the directors in the preparation of the financial statements, and of whether the accounting policies are appropriate to the company's circumstances, consistently applied and adequately disclosed. We planned and performed our audit so as to obtain all the information and explanations which we considered necessary in order to provide us with sufficient evidence to give reasonable assurance that the financial statements are free from material misstatement, whether caused by fraud or other irregularity or error. In forming our opinion we also evaluated the overall adequacy of the presentation of information in the financial statements. OPINION In our opinion, the financial statements give a true and fair view of the state of the company's affairs as at 31 July 1998 and of its profit for the year then ended and have been properly prepared in accordance with the provisions of the Companies Act 1985. BARNES ROFFE Registered Auditors 16/17 Copperfields Spital Street Dartford Kent DA1 2DE Date: 7 December 1998 F-33 94 DANDELION DISTRIBUTION LIMITED PROFIT AND LOSS ACCOUNT FOR THE YEAR ENDED 31 JULY 1998
1998 1997 NOTE L L ---- ---------- ---------- TURNOVER.................................................... 1, 2 2,115,128 2,688,960 Cost of sales............................................... (1,346,784) (1,679,037) ---------- ---------- GROSS PROFIT................................................ 768,344 1,009,923 Distribution costs.......................................... (94,729) (180,182) Administrative expenses..................................... (504,197) (494,846) Other operating income...................................... 47,917 28,146 ---------- ---------- OPERATING PROFIT............................................ 3 217,335 363,041 Interest payable and similar charges........................ 5 (51,050) (52,868) ---------- ---------- PROFIT ON ORDINARY ACTIVITIES BEFORE TAXATION............... 166,285 310,173 TAXATION.................................................... (38,369) (88,956) ---------- ---------- PROFIT ON ORDINARY ACTIVITIES AFTER TAXATION................ 127,916 221,217 DIVIDENDS................................................... 6 (50,000) (50,000) ---------- ---------- RETAINED PROFIT FOR THE YEAR................................ 77,916 171,217 RETAINED PROFIT BROUGHT FORWARD............................. 812,396 641,179 ---------- ---------- RETAINED PROFIT CARRIED FORWARD............................. 890,312 812,396 ========== ==========
CONTINUING OPERATIONS None of the company's activities was acquired or discontinued in the above two financial years. STATEMENT OF TOTAL RECOGNIZED GAINS AND LOSSES There were no recognized gains and losses for the above two financial periods other than those included in the profit and loss account. The notes on pages F-38 to F-43 form part of these financial statements. F-34 95 DANDELION DISTRIBUTION LIMITED BALANCE SHEET AS AT 31 JULY 1998
1998 1997 ---------------------- ---------------------- NOTE L L L L ---- ---------- --------- ---------- --------- FIXED ASSETS Intangible fixed assets..................... 7 -- -- Tangible fixed assets..................... 8 452,757 479,129 Investments............................... 9 256,562 232,412 --------- --------- 709,319 711,541 CURRENT ASSETS Stocks.................................... 1,267,583 1,366,441 Debtors................................... 10 563,008 708,052 Cash at bank and in hand.................. 137,415 144,563 ---------- ---------- 1,968,006 2,219,056 CREDITORS: amounts falling due within one year.................................. 11 (1,593,504) (1,890,815) ---------- ---------- NET CURRENT ASSETS.......................... 374,502 328,241 --------- --------- TOTAL ASSETS LESS CURRENT LIABILITIES....... 1,083,821 1,039,782 CREDITORS: amounts falling due after more than one year............................. 12 (190,873) (224,500) PROVISIONS FOR LIABILITIES AND CHARGES...... 13 (2,436) (2,686) --------- --------- NET ASSETS.................................. 890,512 812,596 ========= ========= CAPITAL AND RESERVES Called up share capital................... 14 200 200 Profit and loss account................... 890,312 812,396 --------- --------- SHAREHOLDERS' FUNDS......................... 15 890,512 812,596 ========= =========
The directors have taken advantage of special exemptions conferred by Part VII of the Companies Act 1985 applicable to small companies. The financial statements were approved by the Board and signed on its behalf: N D Cronin Esq Director Date: 30 November 1998 The notes on pages F-38 to F-43 form part of these financial statements. F-35 96 DANDELION DISTRIBUTION LIMITED NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 JULY 1998 1. ACCOUNTING POLICIES 1.1 BASIS OF PREPARATION OF FINANCIAL STATEMENTS The financial statements have been prepared under the historical cost convention and include the results of the company's operations which are described in the Directors' Report and all of which are continuing. The company is exempt from the requirement to prepare group accounts by virtue of section 248 of the Companies Act 1985. These financial statements therefore present information about the company as an individual undertaking and not about its group. The company has taken advantage of the exemption in Financial Reporting Standard No. 1 from the requirement to produce a cash flow statement on the grounds that it is a small company. 1.2 TURNOVER Turnover comprises the invoiced value of goods and services supplied by the company, net of Value Added Tax. 1.3 TANGIBLE FIXED ASSETS AND DEPRECIATION Tangible fixed assets are stated at cost less depreciation. Depreciation is provided at rates calculated to write off the cost of fixed assets, less their estimated residual value, over their expected useful lives on the following bases: Land & buildings................................. 2% p.a. straight line Plant & machinery etc............................ 15/25% p.a. reducing balance
1.4 INVESTMENT PROPERTIES In accordance with SSAP 19, investment properties are revalued annually and no depreciation is provided in respect of freehold or leasehold investment properties with over 20 years to run. This conflicts with the Companies Act 1985 which requires all properties to be depreciated. The directors consider that, because these properties are not held for consumption, but for their investment potential, to depreciate them would not give a true and fair view. 1.5 HIRE PURCHASE Assets obtained under hire purchase contracts are capitalised as tangible fixed assets, and are depreciated over their useful lives. Hire purchase interest is charged to the profit and loss account on the basis of a sum of the digits calculation. 1.6 STOCKS Stock of film rights and production costs are valued on the basis of estimated income profile from each particular title in order to match costs in proportion to income over the expected revenue life of each title or library. 1.7 FOREIGN CURRENCIES Assets and liabilities in foreign currencies are translated into sterling at rates of exchange ruling at the balance sheet date. Transactions in foreign currencies are translated into sterling at the rate ruling on the date of the transaction. Exchange differences are taken into account in arriving at the operating profit. 1.8 DEFERRED TAXATION Provision is made for deferred taxation as a result of material timing differences between the incidence of income and expenditure for taxation and accounts purposes, using the full liability method, only to the extent that, in the opinion of the directors, there is a reasonable probability that a liability or asset will crystallise in the near future. F-36 97 DANDELION DISTRIBUTION LIMITED NOTES TO THE FINANCIAL STATEMENTS (CONTINUED) FOR THE YEAR ENDED 31 JULY 1998 1.9 PENSION SCHEME The company operates a defined contribution pension scheme for the directors. The accounting policy is to charge all contributions to the profit and loss account in the year in which they are paid. 2. TURNOVER 57% of the company's turnover (1997 -- 29%) is attributable to geographical markets outside the United Kingdom. 3. OPERATING PROFIT The operating profit is stated after charging:
1998 1997 L L ------ ------ Depreciation of tangible fixed assets - -- Owned by the company..................................... 12,152 14,489 - -- Held under hire purchase contracts....................... 2,833 7,015 Auditors' remuneration...................................... 8,000 7,900 Pension costs............................................... 500 -- ====== ======
4. DIRECTORS' REMUNERATION
1998 1997 L L ------- ------- Fees, salaries, benefits and pension contributions.......... 125,538 154,137 ======= =======
The number of directors to whom benefits accrue under money purchase pension schemes is two (1997 -- two). 5. INTEREST PAYABLE Included in interest payable is interest on hire purchase contracts amounting to L2,353 (1997 -- L4,857). 6. DIVIDENDS
1998 1997 L L ------ ------ Interim dividends paid...................................... 50,000 50,000 ====== ======
7. INTANGIBLE FIXED ASSETS
GOODWILL TOTAL L L -------- ------ COST At 1 August 1997 and 31 July 1998........................... 15,000 15,000 ------ ------ AMORTISATION At 1 August 1997 and 31 July 1998........................... 15,000 15,000 ------ ------ NET BOOK VALUE At 31 July 1997 and 31 July 1998............................ -- -- ====== ======
F-37 98 DANDELION DISTRIBUTION LIMITED NOTES TO THE FINANCIAL STATEMENTS (CONTINUED) FOR THE YEAR ENDED 31 JULY 1998 8. TANGIBLE FIXED ASSETS
LAND & PLANT & BUILDINGS MACHINERY ETC TOTAL L L L --------- ------------- ------- COST At 1 August 1997....................................... 452,682 111,153 563,835 Additions.............................................. -- 927 927 Disposals.............................................. -- (16,650) (16,650) ------- ------- ------- At 31 July 1998........................................ 452,682 95,430 548,112 ------- ------- ------- DEPRECIATION At 1 August 1997....................................... 30,782 53,924 84,706 Charge for year........................................ 7,080 7,905 14,985 On disposals........................................... -- (4,336) (4,336) ------- ------- ------- At 31 July 1998........................................ 37,862 57,493 95,355 ------- ------- ------- NET BOOK VALUE At 31 July 1998........................................ 414,820 37,937 452,757 ======= ======= ======= At 31 July 1997........................................ 421,900 57,229 479,129 ======= ======= =======
Included within land and buildings is land of L67,900 which has not been depreciated. The cost of assets held under hire purchase agreements at 31st July 1998 is L12,950 (1997 -- L32,550) and accumulated depreciation is L11,101 (1997 -- L11,506). The total depreciation charged in the year is L2,833 (1997 -- L7,014). 9. FIXED ASSET INVESTMENTS
LAND & SHARES IN BUILDINGS OTHERS OTHERS TOTAL(1) --------- --------- ------ -------- COST At 1 August 1997............................. 232,312 100 -- 232,412 Additions.................................... -- -- 24,150 24,150 ------- --- ------ ------- At 31 July 1998.............................. 232,312 100 24,150 256,562 ------- --- ------ ------- NET BOOK VALUE At 31 July 1998.............................. 232,312 100 24,150 256,562 ======= === ====== ======= At 31 July 1998.............................. 232,312 100 -- 232,412 ======= === ====== =======
The company owns 100% of the ordinary share capital of its dormant subsidiary Baserem Limited, a company incorporated in England and Wales. The aggregate capital and reserves as at 31st July 1998 is L100 (1997 -- L100). Investment properties were valued on 31 July 1998 by the directors on the basis of open market value. 10. DEBTORS
1998 1997 L L ------- ------- DUE WITHIN ONE YEAR Trade debtors............................................... 463,977 622,955 Other debtors and prepayments............................... 99,031 85,097 ------- ------- 563,008 708,052 ======= =======
Included within trade debtors is a balance of L112,500 (1997 -- L112,500) and included within other debtors is an amount of L30,000 (1997 -- L40,000) which are due after more than one year. F-38 99 DANDELION DISTRIBUTION LIMITED NOTES TO THE FINANCIAL STATEMENTS (CONTINUED) FOR THE YEAR ENDED 31 JULY 1998 11. CREDITORS AMOUNTS FALLING DUE WITHIN ONE YEAR
1988 1997 L L --------- --------- Bank loans and overdrafts................................... 534,603 512,563 Net obligations under hire purchase contracts............... 12,135 6,674 Trade creditors............................................. 839,703 967,919 Amounts owed to group undertakings.......................... 100 100 Corporation tax............................................. 52,497 102,500 Other taxes and social security............................. 38,457 102,653 Directors' current accounts................................. 19,991 37,315 Other creditors and accruals................................ 96,018 161,091 --------- --------- 1,593,504 1,890,815 ========= =========
Bank borrowings of L695,476 (1997 -- L679,943) are secured. 12. CREDITORS AMOUNTS FALLING DUE AFTER MORE THAN ONE YEAR
1998 1997 L L ------- ------- Loans....................................................... 160,873 167,379 Net obligations under hire purchase contracts............... -- 17,121 Other creditors............................................. 30,000 40,000 ------- ------- 190,873 224,500 ======= =======
Included within the above are amounts falling due as follows: IN 1 - 2 YEARS: Loan instalments............................................ 9,750 9,000 Hire purchase obligations................................... 7,458 17,121 ======= ======= IN 2 - 5 YEARS: Loan instalments............................................ 33,750 -- Other creditors............................................. 30,000 40,000 ======= ======= IN MORE THAN 5 YEARS: Loan instalments............................................ 117,373 123,879 ======= =======
13. PROVISIONS FOR LIABILITIES AND CHARGES
1998 1997 L L ----- ----- DEFERRED TAX At 1 August 1997............................................ 2,686 3,300 Credit for the year......................................... (250) (614) ----- ----- At 31 July 1998............................................. 2,436 2,686 ===== =====
The above represents the maximum potential liability to deferred tax in respect of accelerated capital allowances. F-39 100 DANDELION DISTRIBUTION LIMITED NOTES TO THE FINANCIAL STATEMENTS (CONTINUED) FOR THE YEAR ENDED 31 JULY 1998 14. CALLED UP SHARE CAPITAL
1998 1997 L L ----- ----- AUTHORISED 1,000 Ordinary shares of L1 each............................ 1,000 1,000 ===== ===== ALLOTTED, ISSUED AND FULLY PAID 200 Ordinary shares of L1 each.............................. 200 200 ===== =====
15. SHAREHOLDERS' FUNDS RECONCILIATION OF MOVEMENTS ON SHAREHOLDERS' FUNDS
1998 1997 L L ------- ------- Profit for the year......................................... 127,916 221,217 Dividends................................................... (50,000) (50,000) ------- ------- 77,916 171,217 Opening shareholders' funds................................. 812,596 641,379 ------- ------- Closing shareholders' funds................................. 890,512 812,596 ======= =======
16. RELATED PARTY TRANSACTIONS The company trades with Leisureview Limited, a company in which N D Cronin Esq is a director and shareholder. During the year the company made net sales of L44,468 (1997 -- L21,934) to Leisureview Limited and was recharged for goods and services to the value of L14,374 (1997 -- L1,000). The amount owed to the company as at 31 July 1998 was L8,623 (1997 -- L16,785). N D Cronin Esq is also a director and shareholder of String Of Pearls I PLC and String of Pearls II PLC. No transaction took place during the year and as at 31 July 1998 the net amount owed to the company by String Of Pearls I PLC was L131,523 (1997 -- L131,523) and by String Of Pearls II PLC L40,186 (1997 -- L26,436). N D Cronin Esq and Mrs. J M Cronin are trustees of the Dandelion Distribution Limited Executive Pension Scheme. The company trades with Dande Racing, a business in which N D Cronin Esq is the proprietor. During the year the company received rent from the business of L4,000 (1997 -- L4,000) and paid L28,000 (1999 -- L36,000) in respect of leasing fees. All the above transactions took place at arms length. F-40 101 Pursuant to the above Company Report (Unternchmensbericht), application has been made to admit the 12,979,138 SHARES OF COMMON STOCK, NO PAR VALUE, (ENTIRE SHARE CAPITAL CURRENTLY ISSUED) and the 3,042,384 SHARES OF COMMON STOCK, NO PAR VALUE, (SHARES RESERVED FOR ISSUANCE UPON THE EXERCISE OF OPTIONS AND CONVERSION OF DEBT INSTRUMENTS INTO SHARES OF COMMON STOCK) GERMAN SECURITIES IDENTIFICATION NO. (WKN): 917002 of TEAM COMMUNICATIONS GROUP, INC., Los Angeles, California, USA to the Regulated Market (Geregelter Markt) with trading on the Neuer Markt of the Frankfurt Stock Exchange. Los Angeles, Frankfurt am Main, November 1999 GONTARD & METALLBANK DELBRUCK & CO. FURST FUGGER VEM VIRTUELLES PRIVATBANKIERS KG PRIVATBANKIERS KG EMISSIONSHAUS AG
102 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........................................ $ 8,340 NASDAQ filing fee (estimate)................................ 7,500 Printing and engraving expenses (estimate).................. 250,000 Legal fees and expenses (estimate).......................... 200,000 Accounting fees and expenses (estimate)..................... 100,000 Miscellaneous............................................... 550,000 ----------- Total............................................. $ 1,115,840 ===========
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 July 15, 1998 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 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 July 15, 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 II-1 103 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 July 15, 1998 or 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, 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 the motion picture "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, bore interest at 10%. 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 upon the earlier to occur of the closing of the Offering or July 15, 1998. 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. Between June and November 1996, the Company sold to 22 accredited investors $975,000 in principal amount of secured notes which bear interest at 10% and are due at the earlier of this Offering or July 15, 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, Von Graffenried AG, 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 private placements. The holders of these notes have waived all conversion rights with respect thereto. 7. During 1996, the Company issued 21,362 warrants (10,681 to William Nesmith and 10,681 to Michael Sposato) exercisable at $1.07, 20,934 warrants exercisable at $0.43 to Bristol Capital, 33,000 warrants, 13,000 of which were issued at $1.00 and 20,000 of which were issued at $2.50, to Joseph Farber and 2,349 warrants exercisable at $0.43 to Robert Dorfman. The Company also issued to Bristol Capital 2,777 shares of Common Stock. The warrants and shares were issued in connection with consulting services provided to the Company, such services relating primarily to advice regarding obtaining additional financing and the structuring of securities issued by the Company, none of which were directly or indirectly related to the Offering. The Company recognized $5,000 in compensation related to these warrants during the year ended December 31, 1996. In 1995, the Company issued 10,000 warrants exercisable at $1.00 to Bruce P. Vann, Esq., for his services as legal counsel to the Company. 8. 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. 9. 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 as promulgated under the Securities Act. 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 II-2 104 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. 10. In March, April and May, 1998 the Company arranged for short term loans of $1,642,000 from eight accredited investors. The notes issued pursuant to such loans were sold to the following investors: HighBridge Fund Ltd., Nick Kahla, David Tresley, Arab Commerce Bank, Charles Santerre, Philippe de Cock de Rameyen, Anders Ulegard and Kevodrew Realty Inc. 11. In May, June and July 1998, the Company arranged for loans from 10 parties of an aggregate of $715,000 for specific production financing. The notes pursuant to such loans were sold to the following investors: Charles E. and Ada M. Miller Trust, Donald E. Stuck and Phyllis T. Stuck, Ryo & Jean S. Komae Marital Trust U/A dated 11/14/91, Claudio Nessi, Carter Family Trust, MacAlister Credit Trust U/A/D 11/25/88, Miyamoto Investment, Dr. Richard Bardowell, Sandel Products and Chase Financing, Ltd. 12. Between September 1998 and January 1999 we issued 483,000 shares of our common stock to the following individuals and entities: (i) 59,000 shares to Delbert Reedy pursuant to the conversion of a certain promissory note, dated May 29, 1998, in the amount of Fifty Thousand Dollars ($50,000); (ii) 59,000 shares to the Carter Family Trust, pursuant to the conversion of a certain promissory note, dated May 29, 1998, in the amount of Fifty Thousand Dollars ($50,000); (iii) 31,000 shares to Claudio Nessi pursuant to a certain promissory note, dated June 18, 1998, in the amount of Fifty Thousand Dollars ($50,000); (iv) 1,000 shares for Dr. Michael Berlin in connection with certain accommodations made by Dr. Michael Berlin; and (v) 80,000 shares to Marathon Consulting, Inc., 30,000 of which were issued in connection with a consulting agreement dated May 1, 1999, and 50,000 of which were assigned by an affiliate, Investor Relations Services, Inc., who had the right to receive such shares pursuant to a consulting agreement dated as of November 17, 1998 and (vi) 283,000 shares to Infusion Capital Investment Corporation, in connection with a consulting agreement, dated as of November 17, 1998. 13. During 1998, we granted warrants to purchase our common stock to the following individuals and entities for services provided to us: (i) 22,000 and 10,000 warrants, respectively, to Mansion House International and Danny Chan, respectively, exercisable at $2.75 per share, (ii) 5,000 warrants to Hedblom Partners, exercisable at $3.50 per share, (iii) 200,000 warrants to Glen Michael Financial; 100,000 exercisable at $1.62 per share, 75,000 exercisable at $3.00 per share and 25,000 exercisable at $3.25 per share, and (iv) 10,000 warrants to Ralph Olsen, exercisable at $2.00 per share. In addition, we granted (x) 121,000 and 10,000 warrants, respectively, to Chase Financial Limited and Robert Herskowitz, respectively, exercisable at $1.62 per share and (y) an aggregate of 20,000 warrants, 5,000 each to Investor Resource Services, Aurora Holdings, Amber Capital and Affiliated Services, respectively, in connection with debt that was raised. 14. In January and March 1999, the Company sold to the following 5 investors: Austinvest Anstalt Balzers, Esquire Trade & Finance Inc., Amro International, S.A., Nesher Inc., and VMR Luxembourg, S.A., 1,850,000 of 8% convertible debentures and warrants to purchase up to 185,000 shares of common stock. The holders of $1,000,000 of the debentures have indicated they intend to convert their debentures into common stock. All of the debentures are convertible into shares of common stock at the option of the holder at any time after their purchase. The conversion price for each debenture in effect on any conversion date will be the lesser of (A) an amount equal to 90% of the average per share market value for five consecutive trading days immediately prior to the initial closing date or (B) an amount equal to 85% of the per share market value for the trading day having the lowest per share market value during the five trading days prior to the conversion date. Purchasers effect conversions by surrendering the debentures to be converted to the Company, together with the form of conversion notice attached thereto. If not otherwise converted, the debentures mature three years from their original issue date. The warrants are exercisable at an exercise price equal to 110% of the per share market value as of the last trading day prior to the date of the issuance of the warrants. This price, which is subject to adjustment in the event of certain dilutive events, was $1.96 and $2.56, respectively, at the closing dates. The warrants expire three years after their date of issuance. Pursuant to the terms of purchase agreements and the related registration rights agreements, the Company is obligated to file a registration statement with respect to the shares issuable upon conversion of the debentures and the shares issuable upon exercise of the warrants within 75 days of the initial closing date. In June 1999, four of the debenture holders purchased an additional 175,000 shares of common stock for an aggregate of $700,000. II-3 105 15. In July 1999, the Company arranged for a short term loan from VMR Luxembourg, S.A., of $1,200,000 for production and development. 16. In May and July 1999 we sold to three investors: Stellar Group Inc., Chun Sing Investment Limited and Dr. Michael Berlin, $350,000 of 12% debentures and warrants to purchase up to 35,000 shares of common stock at $7.61 per share. 17. On June 30, 1999, we sold 57,000 shares of common stock to Anders Ulegard for $114,000 and 112,534 shares of common stock to Van Moer Santerre & Cie for $281,335. 18. On August 5, 1999, we sold to Hudson Investors, LLC, $4,000,000 of 12% convertible debentures and warrants to purchase 340,000 shares of common stock at $7.00 per share, which was subsequently reduced to $6.50 per share. 19. On August 9, 1999, we sold 500,000 shares of common stock to Gontard & MetallBank AG for $2,000,000. 20. On August 18, 1999, we issued to Program Power Entertainment and Swan Alley Limited, respectively, 1,000 and 20,000 shares of common stock, respectively, pursuant to the settlement of their respective lawsuits. Also on August 18, 1999, we issued to Premier Acquisition Corp., and DMT Technologies, Inc., respectively, 97,000 and 3,000 shares of common stock, respectively, pursuant to the settlement of certain disputes they had with us. We also sold to Investor Resource Services, Inc., 104,000 of common stock for $208,000. 21. On July 29, 1999, the Company sold 64,800 shares of common stock to Arab Commerce Bank for $162,000. 22. On September 27, 1999, the Company, pursuant to court order, issued 30,000 shares to Venture Management Consultants LLC. 23. On September 29, 1999 we arranged for a $4,000,000 bridge loan from Gontard & MetallBank AG. 24. On October 20, 1999, the Company sold 10,000 shares of common stock to Ivonne Altagracia Medrano Gongalez for $30,000 and 20,000 shares of common stock to Cantor GbR for $60,000. 25. On November 12, 1999, the Company sold 175,000 shares of common stock to Arbora Vermogensverwaltungen AG for $700,000. 26. On October 29, 1999, the Board of Directors approved the issuance of warrants to Ocean Marketing to purchase 100,000 of common stock; 50,000 at an exercise price of $3.50 per share and 50,000 at an exercise price of $4.00 per share, for consulting services. 27. We have granted to Michael Jay Solomon and Seth Wellenson, 30,000 options to purchase common stock at an exercise price of $2.50 per share for agreeing to serve as members of our Board of Directors. Mr. Wellenson's options were cancelled when he resigned as a director. On March 9, 1999, W. Russell Barry was granted 30,000 options to purchase common stock at an exercise price of $2.00 per share for agreeing to serve as a member of the Board of Directors. 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. ITEM 27. (A) EXHIBITS 3.1 Amended and Restated Articles of Incorporation, as amended(9) 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 Gontard & MetallBank AG Promissory Note, dated as of September 29, 1999(9) 4.11 Agreements re LoCoMoTioN Financing with South Ferry #2, L.P.(1) 4.14 Form of Financial Advisory Agreement between National Securities Corporation and the Company(1)
II-4 106 4.15 Specimen Certificate(1) 4.16 Form of National Securities Corporation's Warrant(1) 4.18 Form of Promissory Notes(1) 4.19 Securities Purchase Agreement between the Company and Austinvest Anstalt Balzers; Esquire Trade & Finance Inc.; Amro International, S.A. and Nesher Inc., dated as of March 19, 1999(3) 4.20 Form of Debenture re: Austinvest Anstalt Balzers, dated as of March 19, 1999(3) 4.21 Form of Warrant re: Austinvest Anstalt Balzers, dated as of March 19, 1999(3) 4.22 Form of Registration Rights Agreement between the Company and Austinvest Anstalt Balzers; Esquire Trade & Finance Inc.; Amro International, S.A. and Nesher Inc., dated as of March 19, 1999(3) 4.23 Amendment to Securities Purchase Agreement with Austinvest Anstalt Balzers; Esquire Trade & Finance Inc.; Amro International, S.A. and Nesher Inc., dated June 28, 1999 (amends 4.19)(6) 4.24 Securities Purchase Agreement between the Company and VMR Luxembourg, S.A., dated as of February 25, 1999(6) 4.25 VMR Debenture, dated as of February 25, 1999(6) 4.26 VMR Warrant, dated as of February 25, 1999(6) 4.27 VMR Registration Rights Agreement, dated as of February 25, 1999(6) 4.28 Securities Purchase Agreement between the Company and VMR Luxembourg S.A., dated July 26, 1999(6) 4.29 VMR Debenture, dated as of July 26, 1999(6) 4.30 VMR Security Agreement, dated as of July 26, 1999(6) 4.31 VMR Registration Rights Agreement, dated as of July 26, 1999(6) 4.32 Securities Purchase Agreement between the Company and Hudson Investors LLC, dated as of August 5, 1999(6) 4.33 Hudson Investors LLC Registration Rights Agreement, dated as of August 5, 1999(6) 4.34 Hudson Investors LLC Debenture, dated as of August 5, 1999(6) 4.35 Hudson Investors LLC Warrant, dated as of August 5, 1999(6) 4.36 1999 Stock Option, Deferred Stock and Restricted Stock Plan(7) 5.1 Opinion and Consent of Kelly Lytton Mintz & Vann LLP(10) 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 August 1, 1999, between the Company and Drew Levin, as amended as of October 29, 1999(10) 10.5 Lease between the Company and TCW, amended as of March 20, 1998(1) 10.6 Agreement with Alliance Production Ltd. re Total Recall(1) 10.7 Interpublic -- Team Co-financing Agreement(1) 10.8 Miramax Term Sheet(1) 10.9 Agreement with Leucadia Film Corp.(1) 10.10 Agreement with DD Video, dated August 2, 1999(9) 10.11 Dandelion Distribution Ltd., Share Purchase Agreement dated as of October 1, 1999(9) 10.12 Dandelion Distribution Ltd., Escrow Agreements dated as of October 1, 1999(11) 10.13 Employment Agreement, dated as of October 1, 1999, between Dandelion Distribution Ltd., and Noel Cronin(9) 10.14 Employment Agreement, dated as of October 11, 1999, between Dandelion Distribution Ltd., and John Clutton(9) 10.16 Agreement between the Company and Gontard & MetallBank AG re: secondary listing and public offering of the Company's common stock in Germany(9)
II-5 107 10.18 Employment Agreement, dated as of August 17, 1999 between the Company and Timothy A. Hill(8) 10.19 Restated Employment Agreement dated as October 29, 1999, between the Company and Jonathan D. Shapiro(10) 10.21 Investment Banking Agreement by and between the Company and Glen Michael Financial(8) 10.22 Consulting Agreement, dated November 17, 1999 between the Company, Investor Relations Services, Inc., and Infusion Capital Investment Corporation(8) 10.23 Agreement with Film Libraries, Inc. dated June 25, 1999 and Agreement with Film Brokers, Inc., dated June 25, 1999, re: commission for purchase(6) 10.24 Agreement with Renown Pictures, Ltd., dated as of June 28, 1999(6) 10.25 Financial Consulting Agreement, dated March 15, 1999, between the Company and Century City Securities, Inc., and Letter from Company dated July 29, 1999 re: payment under Financial Consulting Agreement(8) 10.26 Form of Consultants' Warrant for Ralph Olson, Investor Resource Services, Inc., Aurora Holdings, Inc., Affiliated Services, Inc., Amber Capital, Inc., and Hedblom Partners, Ltd.(8) 10.27 Consulting Agreement, dated May 3, 1999 between the Company and Marathon Consulting Corporation(8) 10.28 Employment Agreement dated as of November 15, 1999, between the Company and Paula Fierman(10) 10.29 Employment Agreement dated as of November 1, 1999, between the Company and Larry Friedricks(10) 10.30 Lease between the Company and The Marcel George Family Trust of September 2, 1982, dated November 3, 1999(10) 10.31 License Agreement with String of Pearls Plc, dated as of September 10, 1999(10) 21 Subsidiaries of the Registrant(10) 23.1 Consent of experts and named counsel(10) (consent of Kelly Lytton Mintz & Vann LLP included in Exhibit 5.1) 23.2 Consent of Barnes Roffe(10) 27 Financial Data Schedule(10)
- --------------- (1) Incorporated by reference to the Registrant's Registration Statement on Form SB-2, file No. 333-26307, effective July 29, 1998. (2) Incorporated by reference to the Registrant's Current Report on Form 8-K dated March 29, 1999. (3) Incorporated by reference to the Registrant's Current Report on Form 8-K dated February 5, 1999. (4) Incorporated by reference to the Registrant's Annual Report on Form 10-KSB dated April 15, 1999. (5) Incorporated by reference to the Registrant's Current Report on Form 8-K dated June 8, 1999. (6) Incorporated by reference to the Registrant's Quarterly Report on Form 10-QSB dated August 19, 1999. (7) Incorporated by reference to the Registrant's Definitive Proxy Statement on Form 14A dated May 28, 1999. (8) Incorporated by reference to the Registrant's Registration Statement on Form SB-2, File No. 333-83217, effective August 27, 1999. (9) Previously filed. (10) Filed herewith. (11) To be filed by amendment. ITEM 28. UNDERTAKINGS 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, 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 Securities 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 II-6 108 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 Securities 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 Securities 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 Securities 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, 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; (ii) To reflect in the prospectus any facts or events arising after the effective date of this 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, 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-7 109 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 First Amendment to 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 19th day of November, 1999. TEAM COMMUNICATIONS GROUP, INC. By: /s/ DREW S. LEVIN ------------------------------------ Drew S. Levin Chairman of the Board and Chief Executive Officer Pursuant to the requirements of the Securities Act of 1933, this First Amendment to Registration Statement has been signed by the following persons in the capacities and on the dates indicated.
SIGNATURE CAPACITY DATE --------- -------- ---- /s/ DREW S. LEVIN Chairman of the Board and Chief November 19, 1999 - ------------------------------------ Executive Officer Drew S. Levin /s/ JONATHAN D. SHAPIRO President, Chief Operating Officer November 19, 1999 - ------------------------------------ and Director Jonathan D. Shapiro /s/ TIMOTHY A. HILL Senior Vice President, Chief November 19, 1999 - ------------------------------------ Financial Officer and Secretary Timothy A. Hill /s/ MICHAEL JAY SOLOMON Director November 19, 1999 - ------------------------------------ Michael Jay Solomon /s/ W. RUSSELL BARRY Director November 19, 1999 - ------------------------------------ W. Russell Barry
II-8 110 TEAM COMMUNICATIONS GROUP, INC. SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
1998 ------------------------------------------------------------------ BALANCE ADDITIONS DEDUCTIONS BALANCE AT AT BEGINNING CHARGED FROM OTHER END OF DESCRIPTION OF YEAR TO INCOME RESERVE ADJUSTMENTS YEAR ----------- ------------ ---------- ----------- ----------- ---------- Deducted from accounts receivable for doubtful accounts and returns.......... $63,800 $ 664,000 $ (390,800) $-- $337,000
1997 ------------------------------------------------------------------ Deducted from accounts receivable for doubtful accounts and returns.......... $63,800 $1,115,600 $(1,115,600) $-- $ 63,800
1996 ------------------------------------------------------------------ Deducted from accounts receivable for doubtful accounts and returns.......... $ -- $ 71,300 $ (7,500) $-- $ 63,800
S-1 111 EXHIBIT INDEX
SEQUENTIALLY EXHIBIT NUMBERED NUMBER DESCRIPTION PAGE ------- ----------- ------------ 3.1 Amended and Restated Articles of Incorporation, as amended(9) 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 Gontard & MetallBank AG Promissory Note, dated as of September 29, 1999(9) 4.11 Agreements re LoCoMoTioN Financing with South Ferry #2, L.P.(1) 4.14 Form of Financial Advisory Agreement between National Securities Corporation and the Company(1) 4.15 Specimen Certificate(1) 4.16 Form of National Securities Corporation's Warrant(1) 4.18 Form of Promissory Notes(1) 4.19 Securities Purchase Agreement between the Company and Austinvest Anstalt Balzers; Esquire Trade & Finance Inc.; Amro International, S.A. and Nesher Inc., dated as of March 19, 1999(3) 4.20 Form of Debenture re: Austinvest Anstalt Balzers, dated as of March 19, 1999(3) 4.21 Form of Warrant re: Austinvest Anstalt Balzers, dated as of March 19, 1999(3) 4.22 Form of Registration Rights Agreement between the Company and Austinvest Anstalt Balzers; Esquire Trade & Finance Inc.; Amro International, S.A. and Nesher Inc., dated as of March 19, 1999(3) 4.23 Amendment to Securities Purchase Agreement with Austinvest Anstalt Balzers; Esquire Trade & Finance Inc.; Amro International, S.A. and Nesher Inc., dated June 28, 1999 (amends 4.19)(6) 4.24 Securities Purchase Agreement between the Company and VMR Luxembourg, S.A., dated as of February 25, 1999(6) 4.25 VMR Debenture, dated as of February 25, 1999(6) 4.26 VMR Warrant, dated as of February 25, 1999(6) 4.27 VMR Registration Rights Agreement, dated as of February 25, 1999(6) 4.28 Securities Purchase Agreement between the Company and VMR Luxembourg S.A., dated July 26, 1999(6) 4.29 VMR Debenture, dated as of July 26, 1999(6) 4.30 VMR Security Agreement, dated as of July 26, 1999(6) 4.31 VMR Registration Rights Agreement, dated as of July 26, 1999(6) 4.32 Securities Purchase Agreement between the Company and Hudson Investors LLC, dated as of August 5, 1999(6) 4.33 Hudson Investors LLC Registration Rights Agreement, dated as of August 5, 1999(6) 4.34 Hudson Investors LLC Debenture, dated as of August 5, 1999(6) 4.35 Hudson Investors LLC Warrant, dated as of August 5, 1999(6) 4.36 1999 Stock Option, Deferred Stock and Restricted Stock Plan(7) 5.1 Opinion and Consent of Kelly Lytton Mintz & Vann LLP(10) 10.1 Agreement with Mel Giniger(1) 10.2 Agreement with Beyond Distribution PTY. Limited(1) 10.3 Interpublic Group of Companies Contract(1)
112
SEQUENTIALLY EXHIBIT NUMBERED NUMBER DESCRIPTION PAGE ------- ----------- ------------ 10.4 Employment Agreement, dated as of August 1, 1999, between the Company and Drew Levin as amended as of October 29, 1999(10) 10.5 Lease between the Company and TCW, amended as of March 20, 1998(1) 10.6 Agreement with Alliance Production Ltd. re Total Recall(1) 10.7 Interpublic -- Team Co-financing Agreement(1) 10.8 Miramax Term Sheet(1) 10.9 Agreement with Leucadia Film Corp.(1) 10.10 Agreement with DD Video, dated August 2, 1999(9) 10.11 Dandelion Distribution Ltd., Share Purchase Agreement dated as of October 1, 1999(9) 10.12 Dandelion Distribution Ltd., Escrow Agreements dated as of October 1, 1999(11) 10.13 Employment Agreement, dated as of October 1, 1999, between Dandelion Distribution Ltd., and Noel Cronin(9) 10.14 Employment Agreement, dated as of October 11, 1999, between Dandelion Distribution Ltd., and John Clutton(9) 10.16 Agreement between the Company and Gontard & MetallBank AG re: secondary listing and public offering of the Company's common stock in Germany(9) 10.18 Employment Agreement, dated as of August 17, 1999 between the Company and Timothy A. Hill(8) 10.19 Restated Employment Agreement dated as October 29, 1999, between the Company and Jonathan D. Shapiro(10) 10.21 Investment Banking Agreement by and between the Company and Glen Michael Financial(8) 10.22 Consulting Agreement, dated November 17, 1999 between the Company, Investor Relations Services, Inc., and Infusion Capital Investment Corporation(8) 10.23 Agreement with Film Libraries, Inc. dated June 25, 1999 and Agreement with Film Brokers, Inc., dated June 25, 1999, re: commission for purchase(6) 10.24 Agreement with Renown Pictures, Ltd., dated as of June 28, 1999(6) 10.25 Financial Consulting Agreement, dated March 15, 1999, between the Company and Century City Securities, Inc., and Letter from Company dated July 29, 1999 re: payment under Financial Consulting Agreement(8) 10.26 Form of Consultants' Warrant for Ralph Olson, Investor Resource Services, Inc., Aurora Holdings, Inc., Affiliated Services, Inc., Amber Capital, Inc., and Hedblom Partners, Ltd.(8) 10.27 Consulting Agreement, dated May 3, 1999 between the Company and Marathon Consulting Corporation(8) 10.28 Employment Agreement dated as of November 15, 1999, between the Company and Paula Fierman(10) 10.29 Employment Agreement dated as of November 1, 1999, between the Company and Larry Friedricks(10) 10.30 Lease between the Company and The Marcel George Family Trust of September 2, 1982, dated November 3, 1999(10) 10.31 License Agreement with String of Pearls Plc, dated as of September 10, 1999(10) 21 Subsidiaries of the Registrant(10)
113
SEQUENTIALLY EXHIBIT NUMBERED NUMBER DESCRIPTION PAGE ------- ----------- ------------ 23.1 Consent of experts and named counsel(10) (consent of Kelly Lytton Mintz & Vann LLP included in Exhibit 5.1) 23.2 Consent of Barnes Roffe(10) 27 Financial Data Schedule(10)
- --------------- (1) Incorporated by reference to the Registrant's Registration Statement on Form SB-2, file No. 333-26307, effective July 29, 1998. (2) Incorporated by reference to the Registrant's Current Report on Form 8-K dated March 29, 1999. (3) Incorporated by reference to the Registrant's Current Report on Form 8-K dated February 5, 1999. (4) Incorporated by reference to the Registrant's Annual Report on Form 10-KSB dated April 15, 1999. (5) Incorporated by reference to the Registrant's Current Report on Form 8-K dated June 8, 1999. (6) Incorporated by reference to the Registrant's Quarterly Report on Form 10-QB dated August 19, 1999. (7) Incorporated by reference to the Registrant's Definitive Proxy Statement on Form 14A dated May 28, 1999. (8) Incorporated by reference to the Registrant's Registration Statement on Form SB-2, File No. 333-83217, effective August 27, 1999. (9) Previously filed. (10) Filed herewith. (11) To be filed by amendment. EX-5.1 2 EXHIBIT 5.1 1 EXHIBIT 5.1 [KELLY LYTTON MINTZ & VANN LLP LETTERHEAD] November 18, 1999 Team Communications Group, Inc. 12300 Wilshire Blvd. Suite 400 Los Angeles, CA 90025 Ladies and Gentlemen: We have acted as special counsel to Team Communications Group, Inc., a California corporation (the "Company"), in connection with the Company's Registration Statement on Form SB-2, as amended (the "Registration Statement"), File No. 333-89323, covering an aggregate of 6,150,000 shares of the Company's common stock, no par value, to be sold by the Company and the Selling Shareholder identified therein (the "Shares"). We have examined the originals, or certified, conformed or reproduction copies, of all such records, agreements, instruments and documents as we have deemed necessary as the basis for the opinions hereinafter expressed. In all such examinations, we have assumed the genuineness of all signatures on original or certified copies of all copies submitted to us as conformed or reproduction copies. As to various questions of fact relevant to our opinions, we have relied upon certificates of public officials and certificates of officers or representatives of the Company. Based upon the foregoing, it is our opinion that, subject to effectiveness of the Registration Statement with the Securities and Exchange Commission ("SEC") and to registration or qualification of the Shares under the laws of the jurisdiction where the Shares may be sold, upon the sale and issuance of the Shares in the manner referred to in the Registration Statement, and upon payment therefore, the Shares will be legally issued, fully paid and nonassessable, and will be binding obligations of the Company. We hereby consent to the filing of this opinion as an exhibit to the Registration Statement and to the reference to this firm under the caption "Legal Matters" in the Prospectus forming a part of the Registration Statement. By giving you this opinion and consent, we do not admit that we are experts with respect to any part of the Registration Statement or Prospectus within the meaning of the term "expert" as used in Section 11 of the Securities Act of 1933, as amended, or the rules and regulations promulgated thereunder by the SEC, nor do we admit that we are in the category of persons whose consent is required under Section 7 of the Securities Act of 1933, as amended. 2 Team Communications Group, Inc. November 18, 1999 Page 2 We are members of the Bar of the State of California and do not hold ourselves out as being conversant with, and do not express an opinion on, the laws of any jurisdiction other than those of the United States of America and State of California. Further, the opinion contained in the third paragraph of this letter is limited solely to the matters discussed therein, and is based solely upon existing laws, rules and regulations. We undertake no obligation to advise you of any changes that may be brought to our attention after the date hereof. Very truly yours, EX-10.4 3 EXHIBIT 10.4 1 EXHIBIT 10.4 EMPLOYMENT AGREEMENT This Employment Agreement ("Agreement") is entered into as of the 1st day of August, 1999 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 Chairman of the Board of Directors and Chief Executive Officer 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 Chairman of the Board of Directors and Chief Executive Officer 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 August 1, 1999 and ending on July 31, 2004 (the "Term") unless sooner terminated pursuant to Section 7 hereof ("Termination Sections"). 3. COMPENSATION AND BENEFITS: (a) Salary. 1 2 During the Term, Executive shall receive a salary (the "Annual Salary") at the rate of five hundred fifty thousand Dollars ($550,000.00) per annum. Executive's Annual Salary shall be payable in equal installments on the Company's normally scheduled pay cycle. 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 Annual Salary will increase by four per cent (4%) annually, on the anniversary date of this agreement. (b) Bonus. (i) Executive will receive a one time special bonus of $250,000 payable on January 2, 2000. (ii) Beginning with the fiscal year for the period ending December 31, 1999 (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 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. (iii) 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. (iv) 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. (c) The Company shall be further obligated to cause to be granted to Executive 250,000 options to purchase shares of the Companies 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. The Company will also issue 865,000 options to purchase shares of the 2 3 Companies common stock at the then current market price concurrently with the closing of the offering in Germany of the Company's common stock that Gontard & Metallbank is underwriting. Provided however that this grant is subject to reduction in the event that it exceeds the maximum number of options available under the plan. All such options will have a term of five (5) years. (d) Executive will receive on screen credit as Executive Producer in productions produced or co-produced by the Company, or its affiliates on which Executive renders such or similar services. 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. 3 4 (ii) Company shall pay all business related operating expenses of Executive's automobile, pursuant to Company policy, and shall further provide Executive with a monthly automobile allowance of $1500.00. 5. CERTAIN COVENANTS OF EXECUTIVE: 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 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, 4 5 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). (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. 5 6 (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 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. 6 7 (b) Termination for Cause. 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 hundred twenty per cent (120%) of the balance of the Annual Salary payable through the end of the then current term. (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 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 8 9 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 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 9 10 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/ JONATHAN D. SHAPIRO --------------------------------- Jonathan D. Shapiro Agreed to and Accepted: /s/ DREW S. LEVIN - ------------------------ Drew S. Levin 10 11 AMENDMENT TO EMPLOYMENT AGREEMENT This Amendment (this "Amendment") is entered into as of October 29,1 999, by and between TEAM COMMUNICATIONS GROUP, INC, a California company ("Company") and DREW S. LEVIN ("Executive"). R E C I T A L S A. The Company and Executive entered into a five (5) year employment agreement, dated as of August 1, 1999, for Executive's employment by the Company as it's Chief Executive Officer and the Chairman of it's Board of Directors (the "Employment Agreement"). B. The Company and Executive desire to amend the Employment Agreement as set forth below. NOW, THEREFORE, in consideration of the mutual covenants and agreements contained herein and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties agree as follows: 1. Amendment of Section 3 (b) (i). Section 3 (b) (i) of the Employment Agreement is hereby deleted in its entirety and replaced with the following: "3. COMPENSATION AND BENEFITS: (b) Bonus. (i) Executive will receive a one time special bonus of $250,000, $150,000 of which is payable on January 2, 2000, and $100,000 of which payable, at Executive's option, anytime after October 29, 1999. 2. Addition of Section 15. The following section is added to the Employment Agreement as Section 15, entitled "Repayment of Loans from Company." "15. Repayment of Loans from Company: Executive agrees to repay the loans the Company has made to him with the first to occur of the his receipt of the proceeds of the German offering or the remainder of his January 2, 2000 bonus. 3. Full Force and Effect. Except as expressly amended hereby, all other terms and conditions of the Employment Agreement shall remain unmodified and in full force and effect. 4. Counterparts. This Amendment may be executed in any number of counterparts, each of which when so executed and delivered shall be deemed to be an original and that all of which taken together shall constitute one and the same instrument, respectively. 1 12 IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be duly executed by their duly authorized officers, all as of the date first above written. TEAM COMMUNICATIONS GROUP, INC. By: /s/ DREW S. LEVIN -------------------------------- Agreed to and Accepted: /s/ DREW S. LEVIN - ------------------------ Drew S. Levin 2 EX-10.19 4 EXHIBIT 10.19 1 EXHIBIT 10.19 RESTATED EMPLOYMENT AGREEMENT This Employment Agreement ("Agreement") is entered into as of this 29th day of October, 1999 by and between Team Communications Group, Inc. ("Company") and Jonathan D. Shapiro ("Executive"), in connection with Company's engagement of Executive's personal services as President and Chief Operating Officer of the Company. 1. EMPLOYMENT; DUTIES AND ACCEPTANCE: (a) Employment by Company. Company hereby engages Executive and Executive hereby agrees to provide to Company services as the President and Chief Operating Office of the Company on the terms and conditions of this Agreement. In such capacity Executive will report to, and serve under the direct direction and subject to express supervision of the Company's Chairman of the Board and Chief Executive Officer. Throughout the Term of this Agreement Executive shall, subject to the provisions contained herein, devote 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) Duties. Executive shall be the primarily responsible for assisting the Chief Executive Officer in implementing the Company's business plan, including assisting the Chief Executive Officer in the acquisition and development of new programming, supporting the Chief Executive Officer in domestic sales activities, and providing assistance to the Chief Executive Officer as requested in respect of overseeing strategic acquisitions. Executive shall attend meetings of senior management of the Company, and shall assist the Company in formulating the Company's long term strategy. (c) Location of Employment. Executive shall render his services at the Company's principal offices is in Southern California. Executive need not render his duties away from the Company's officer (in Southern California) other than for customary trade shows and sales trips. 1 2 2. TERM: (a) Basic Term. The term of Executive's employment hereunder shall commence as of the date hereof and shall extend through December 31, 2000 unless sooner terminated pursuant to Section 2(b) or 7 hereof ("Termination Sections"). (b) Consultancy Arrangement. (i) On or after January 1, 2000, and upon fifteen (15) days' prior written notice by either party, either party may elect, with cause of any kind, to convert this Agreement into a non-exclusive consulting arrangement (the "Consulting Relationship"). Pursuant to the consultancy, the Company may call upon Executive to render up to forty (40) hours per month of service. (ii) Upon the occurrence (if at all) of the conversion of the employment relationship to the Consulting Relationship, the $350,000 annual base compensation amount set forth below shall no longer pertain, and the Company shall immediately pay Executive, in one lump sum, the difference between $250,000 and the aggregate amount of payments of base compensation (pursuant to Section 3(a) below) already made to Executive during the Term. 3. COMPENSATION AND BENEFITS: (a) Base Compensation. Notwithstanding anything expressly or impliedly to the contrary herein, Executive will be paid at the annualized rate of $220,000 per year through December 31, 1999 and, subject to Section 2(b) above, $350,000 from January 1, 2000 through December 31,2000. (b) Provisions For Payment. Executive's compensation shall be payable, at the rate set forth in Section 2(a) in 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. (c) Non Guaranteed Bonus. Employee shall be eligible to participate in all bonus and profit sharing plans as may be adopted by the Company from time to time. 2 3 (d) Guaranteed Bonus. (i) Upon execution of this Restated Employment Agreement, Executive shall receive a gross payment of $80,000, less applicable taxes. (ii) Upon the closing of the sale of the Company's equity securities on the German Neuer Market (the "German Offering"), Executive shall receive a bonus of $170,000. (e) Legal Fees. Concurrently with the execution of this Agreement, the Company will reimburse Mr. Shapiro the sum of $5,000 to in respect of his legal fees in negotiating this agreement. (f) YPO Dues. On or after January 1, 2000, but in any event no later than January 10, 2000, the Company shall reimburse Executive $5,000 for his dues for membership in the Young Presidents Organization (YPO). 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 such benefits are maintained by the 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"). (b) Vacation Policy. Executive shall have the right during each year of the term to take an aggregate of four (4) weeks of paid vacation time at such time as may be mutually agreed by the Company and Executive. Notwithstanding anything in any Company manual or policy to the contrary, any unused vacation shall accumulate and Company shall be required to reimburse Executive for such time, at the applicable rate, at the conclusion of the Term. (c) Expenses. On a monthly basis, 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 3 4 receipt of reasonable and appropriate documentation by Company. If Executive shall undertake any travel on behalf of the Company, Executive shall be furnished first class airfare on international flights, and business class on domestic or continental flights; provided however, in the event that the travel is for less than two hours, Executive shall be furnished with coach air travel. When traveling, Executive shall be furnished with commensurate living accommodations and expenses. (d) Car Expense. The Company will reimburse Executive $750 per month during the term of the agreement for a car allowance. (e) Consulting Relationship Benefits. Notwithstanding anything in this Section 4 or elsewhere to the contrary, in the event that Executive elects to covert this arrangement to the Consultancy Relationship, Executive shall no longer be afforded any fringe benefits other than medical and dental benefits, which can continue during the remainder of the term. For the avoidance of doubt, Executive will receive these benefits if Company elects to convert this Agreement into a consulting arrangement. 5. OPTIONS: (a) Vesting. The prior grant to Executive of options to acquire 90,000 shares of the Company's common stock, at an exercise price of $1.65, is hereby ratified. All options shall be deemed vested as of the date of this Agreement. Executive shall have 36 months after the termination of this Agreement to exercise any unexercised options. (b) Lock-Up. In the event that Executive's relationship with the Company is converted from employment to consulting, the Company shall forthwith use reasonable efforts to cause Executive's shares to be released from such "lock up" provisions. 6. CERTAIN COVENANTS OF EXECUTIVE: 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) 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 the Company or its affiliates or subsidiaries (a "Protected Company") or not engaged to 4 5 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 6(a) by or on behalf of the Executive). (b) Property of Company. Any interest in trademarks, servicemarks, 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. (c) Conduct after the Term. For a period of two years after the expiration of this Agreement, Executive shall not induce any Employee of the Company to leave or terminate their employment relationship. 7. TERMINATION: (a) Termination Upon Death or Disability. If during the Term, Executive should (i) die or (ii) become 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 30 days written notice to Executive, terminate Executive's employment hereunder. Executive agrees to submit to reasonable medical examinations upon the reasonable 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 5 6 be entitled to receive Executive's salary, accruing at the rate set forth in Section 2(a), accrued share of any bonus for that Fiscal Year (if any such plan shall have been adopted and earned through the date of Executive's termination) and continuing thereafter for an additional period of two (2) months. (b) By Resignation, or By Company for Cause. If Executive=s employment with Company terminates due to his voluntary resignation or if the Company terminates Executive's employment due to Cause (as defined below), Company shall pay Executive all accrued Base Compensation (with no Bonus for the year in which the termination of employment took place), but no other compensation or reimbursement of any kind, including without limitation, severance compensation, and thereafter Company's obligations hereunder shall terminate. "Cause" means (i) willful failure by the Executive to substantially perform his duties hereunder, other than a failure resulting from the Executive's complete or partial incapacity due to physical or mental illness or impairment; (ii) a willful act by the Executive which constitutes misconduct and which is materially injurious to the Company; (iii) a willful breach by the Executive of a material provision of this Agreement after written notice and such breach has not been cured for 10 days; or (iv) a felony conviction or a material and willful violation of a federal or state law or regulation applicable to the business of the Company. As of and through the date hereof, the Company acknowledges that no "cause" exists to terminate this Agreement. (c) Termination Without Cause. Subject to paragraph 7(d) below, If Executive's employment is terminated without Cause, the Company shall continue to pay Executive the remaining compensation owing to him, as well as the executive benefits set forth in Section 3(b) and 3(d), all in accordance with the Company's normal payroll policies. (d) Effect of Mitigation. In the event that Executive's services to Company are terminated for any reason 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, any compensation earned by Executive in a salaried position after the date of such termination shall reduce or mitigate the amounts payable by the Company hereunder; provided however, in no event shall this provision be construed as establishing an affirmative duty of Executive to mitigate such amounts. 6 7 (e) Designation of Beneficiary. The parties hereto agree that Executive shall designate, by written notice to the Company, a beneficiary to receive the payments described in Section 7(a) in the event of his death and the designation of any such beneficiary may be changed by 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 Executive's designated beneficiary under Section 7(a) shall be made to the Executive's widow, if any, during his lifetime. If 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. (c) Services Rendered Deemed Special, Etc. Executive acknowledges and agrees that the services to be rendered by him hereunder are of a special, unique, extraordinary and intellectual character which gives them peculiar value, the loss of which cannot be adequately compensated for in an action at law and that a breach of any term, condition or covenant hereof will cause irreparable harm and injury to Company and in addition to any other available remedy Company will be entitled to seek injunctive relief. 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. 7 8 10. ARBITRATION: 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 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: 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 three (3) days after the date of deposit in the United States or Canada 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): To Company: Team Communications Group, Inc. 12300 Wilshire Boulevard Los Angeles, California 90025 Att. Chief Executive Officer Tel: 310\ 442-3500 Fax: 310\ 442-3501 To Executive: Jonathan D. (Jody) Shapiro 25439 Colette Way Calabasas, California 91312 Tel: 818\ 880-9109 Fax: 818\ 880-9109 8 9 With a copy to: Joel Fishman, Esq. Law Offices of Joel Fishman 12100 Wilshire Blvd., Suite 780 Los Angeles, California 90025 Tel: 310\ 979-9233 Fax: 310\ 979-9133 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, supersedes all existing agreement 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 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. 9 10 WHEREFORE, the parties hereto have executed this Agreement as of this 29th day of October, 1999. Team Communications Group, Inc. By: /s/ DREW S. LEVIN ------------------------------------------------ Drew Levin, Chairman and Chief Executive Officer Agreed and Accepted: /s/ JONATHAN D. SHAPIRO - ---------------------------------- Jonathan D. Shapiro 10 EX-10.28 5 EXHIBIT 10.28 1 EXHIBIT 10.28 October 26, 1999 EMPLOYMENT AGREEMENT This Employment Agreement ("Agreement") is entered into as of this 15th day of November, 1999 by and Team Communications Group, Inc. ("Company") and Paula Fierman ("Executive"), in connection with Company's engagement of Executive's personal services as Co-President of Team International, a to be formed subsidiary of the Company. 1. EMPLOYMENT; DUTIES AND ACCEPTANCE: (a) Employment by Company. Company hereby engages Executive and Executive hereby agrees to provide to Company services as Co-President of the Company on the terms and conditions of this Agreement. In such capacity Executive will report to, and serve under the direction and subject to the supervision of the Company's Chairman on the Board and Chief Executive Officer. Throughout the Term of this Agreement Executive shall, subject to the provisions contained herein, devote all of her 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) Duties. Executive shall be the primarily responsible for the exploitation of the Company's product in markets outside of the United States and the supervision of all Company subsidiaries and affiliates engaged in the exploitation of product in the international market. (c) Location of Employment. Executive shall render her services at the Company's principal offices is in Southern California. Executive need not render her duties away from the Company's officer (in Southern California) other than for customary trade shows and sales trips. - 1 - 2 2. TERM: The term of Executive's employment hereunder shall be for a period of three (3) years commencing as of November 1, 1999 and ending on December 31, 2002 (the "Term") unless sooner terminated pursuant to Section 7 hereof ("Termination Sections"). 3. COMPENSATION AND BENEFITS: (a) Basic Rate. Executive shall be compensated at the annualized rate of $180,000 per annum (the "Base Rate"). The Base Rate will be increased by 4% per annum on the yearly anniversary of this agreement. (b) Provisions For Payment. Executive's compensation shall be payable in twenty-six (26) bi-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. (c) Bonus. Employee shall be eligible to participate in all bonus and profit sharing plans as may be adopted by the Company from time to time. 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 such benefits are maintained by the 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"). - 2 - 3 (b) Vacation Policy. Executive shall have the right during each year of the term to take an aggregate of three weeks of paid vacation time at such time as may be mutually agreed by the Company and Executive. Notwithstanding anything in any Company manual or policy to the contrary, any unused vacation shall accumulate and Company shall be required to reimburse Executive for such time, at the applicable rate, at the conclusion of the Term. (c) Expenses. On a monthly basis, 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. If Executive shall undertake any travel on behalf of the Company, Executive shall be furnished first class airfare on international flights, and business class on transcontinental flights (whether domestic or overseas); provided however, in the event that the travel is for less than two hours, Executive shall be furnished with coach air travel. When traveling, Executive shall be furnished with commensurate living accommodations and expenses. (d) Car Expense. The Company will reimburse Executive $600 per month during the term of the agreement for a car allowance. 5. OPTIONS: (a) Grant. As soon as practicable, Employee will be granted options to acquire 30,000 shares of the Company's Common Stock at an exercise price of $ [Insert Current Market Price] per share (the "Options"). The options will be issued pursuant to a standard employee stock option plan, and the options will be subject to dilution upon the issuance of additional shares of common stock pursuant to customary dilution provisions. (b) Vesting. The Options shall vest as follows: 10,000 after the end of the first year of employment, 10,000 after the end of the second full year of employment, and the final 10,000 options after the end of the third year of employment. All options will expire 90 days after the termination of Executive's employment with the Company. - 3 - 4 6. CERTAIN COVENANTS OF EXECUTIVE: 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) 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 the Company or its affiliates or subsidiaries (a "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(a). by or on behalf of the Executive). (b) Property of Company. Any interest in trademarks, servicemarks, 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. (c) Conduct after the Term. For a period of two years after the expiration of this Agreement, Executive shall not induce any Employee of the Company to leave or terminate their employment relationship. - 4 - 5 7. TERMINATION: (a) Termination Upon Death or Disability. If during the Term, Executive should (i) die or (ii) become 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 30 days written notice to Executive, terminate Executive's employment hereunder. Executive agrees to submit to reasonable medical examinations upon the reasonable 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 salary, accruing as provided herein, accrued share of any bonus for that Fiscal Year (if any such plan shall have been adopted and earned through the date of Executive's termination) and continuing thereafter for an additional period of two (2) months. (b) By Resignation, or By Company for Cause. If Executive's employment with Company terminates due to her voluntary resignation or if the Company terminates Executive's employment due to Cause (as defined below), Company shall pay Executive all accrued Base Compensation (with no Bonus for the year in which the termination of employment took place), but no other compensation or reimbursement of any kind, including without limitation, severance compensation or the vesting of any unvested Stock Options, and thereafter Company's obligations hereunder shall terminate. "Cause" means (i) willful failure by the Executive to substantially perform her duties hereunder, other than a failure resulting from the Executive's complete or partial incapacity due to physical or mental illness or impairment; (ii) a willful act by the Executive which constitutes misconduct and which is materially injurious to the Company; (iii) a willful breach by the Executive of a material provision of this Agreement after written notice and such breach has not been cured for 10 days; or (iv) a felony conviction or a material and willful violation of a federal or state law or regulation applicable to the business of the Company. - 5 - 6 (c) Termination Without Cause. If Executive's employment is terminated without Cause, subject to Section 7(d) below, the Company shall continue to pay Executive her basic compensation, as well as the executive benefits set forth in Section 3(b) and 3(d), all in accordance with the Company's normal payroll policies, but no other compensation or reimbursement of any kind, including without limitation, severance compensation or the vesting of any unvested stock options, shall be deemed owing. (d) Duty to Mitigate. In the event that Executive's services to Company are terminated for any reason 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 a duty to mitigate any damages hereunder and any compensation earned by Executive in any capacity after the date of such termination shall reduce or mitigate the amounts payable by the Company hereunder. (e) Designation of Beneficiary. The parties hereto agree that Executive shall designate, by written notice to the Company, a beneficiary to receive the payments described in Section 5(a) in the event of her death and the designation of any such beneficiary may be changed by 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 Executive's designated beneficiary under Section 7(a) shall be made to the Executive's widow, if any, during her lifetime. If 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 her obligations hereunder will constitute a - 6 - 7 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. (c) Services Rendered Deemed Special, Etc. Executive acknowledges and agrees that the services to be rendered by him hereunder are of a special, unique, extraordinary and intellectual character which gives them peculiar value, the loss of which cannot be adequately compensated for in an action at law and that a breach of any term, condition or covenant hereof will cause irreparable harm and injury to Company and in addition to any other available remedy Company will be entitled to seek injunctive relief. 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: 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 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 her reasonable attorneys' fees incurred in connection therewith. 11. NOTICES: 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, - 7 - 8 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 or Canada 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): To Company: Team Communications Group, Inc. 12300 Wilshire Boulevard Los Angeles, California 90025 Att. Chief Executive Officer Tel: 310-442-3500 Fax: 310-442-3501. To Executive: 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, supersedes all existing agreement 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 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. - 8 - 9 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 this 2nd day of November, 1999 TEAM COMMUNICATIONS GROUP, INC. By: /s/ DREW S. LEVIN ------------------------------------------------- Drew Levin, Chairman and Chief Executive Officer Agreed to and Accepted: /s/ PAULA FIERMAN - ---------------------------------------------- Paula Fierman - 9 - EX-10.29 6 EXHIBIT 10.29 1 EXHIBIT 10.29 EMPLOYMENT AGREEMENT This Employment Agreement ("Agreement") is entered into as of this 1st day of November, 1999 by and Team Communications Group, Inc. ("Company") and Larry Friedricks ("Executive"), in connection with Company's engagement of Executive's personal services as Co-President of Team International, a to be formed subsidiary of the Company. 1. EMPLOYMENT; DUTIES AND ACCEPTANCE: (a) Employment by Company. Company hereby engages Executive and Executive hereby agrees to provide to Company services as Co-President of the Company on the terms and conditions of this Agreement. In such capacity Executive will report to, and serve under the direction and subject to the supervision of the Company's Chairman of the Board and Chief Executive Officer. Throughout the Term of this Agreement Executive shall, subject to the provisions contained herein, devote 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. Should Drew S. Levin cease to serve as the Company's Chairman of the Board and Chief Executive Officer, Executive shall be entitled to terminate this agreement upon 60 days written notice to the Company. (b) Duties. Executive shall be the primarily responsible for the exploitation of the Company's product in markets outside of the United States and the supervision of all Company subsidiaries and affiliates engaged in the exploitation of product in the international market. (c) Location of Employment: Executive shall render his services at the Company's principal offices is in Southern California. Executive need not render his duties away from the Company's officer (in Southern California) other than for customary trade shows and sales trips. - 1 - 2 2. TERM: The term of Executive's employment hereunder shall be for a period of three (3) years commencing as of November 15, 1999 and ending on December 31, 2002 (the "Term") unless sooner terminated pursuant to Section 7 hereof ("Termination Sections"). 3. COMPENSATION AND BENEFITS: (a) Basic Rate. Executive shall be compensated at the annualized rate of $220,000 per annum (the "Base Rate"). The Base Rate will be increased by 4% per annum on the yearly anniversary of this agreement. (b) Provisions For Payment. Executive's compensation shall be payable in equal installments on the Company's normal payroll schedule. 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. (c) Bonus. Employee shall be eligible to participate in all bonus and profit sharing plans as may be adopted by the Company from time to time. 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 such benefits are maintained by the 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"). - 2 - 3 (b) Vacation Policy. Executive shall have the right during each year of the term to take an aggregate of three weeks of paid vacation time at such time as may be mutually agreed by the Company and Executive. Notwithstanding anything in any Company manual or policy to the contrary, any unused vacation shall accumulate and Company shall be required to reimburse Executive for such time, at the applicable rate, at the conclusion of the Term. (c) Expenses. On a monthly basis, 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. If Executive shall undertake any travel on behalf of the Company, Executive shall be furnished first class airfare on international flights, and business class on transcontinental flights (whether domestic or overseas); provided however, in the event that the travel is for less than two hours, Executive shall be furnished with coach air travel. When traveling, Executive shall be furnished with commensurate living accommodations and expenses. (d) Car Expense. The Company will reimburse Executive $600 per month during the term of the agreement for a car allowance. 5. OPTIONS: (a) Grant. As soon as practicable, Employee will be granted options to acquire 60,000 shares of the Company's Common Stock at an exercise price equal to the average of the bid and asking price for the Company's common stock on the date immediately preceding the date hereof (the "Options"). The options will be issued pursuant to a standard employee stock option plan, and the options will be subject to dilution upon the issuance of additional shares of common stock pursuant to customary dilution provisions. - 3 - 4 (b) Vesting. The Options shall vest as follows: 20,000 after the end of the first year of employment, 20,000 after the end of the second full year of employment, and the final 20,000 options after the end of the third year of employment. All options will expire 90 days after the termination of Executive's employment with the Company. 6. CERTAIN COVENANTS OF EXECUTIVE: 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) 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 the Company or its affiliates or subsidiaries (a "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(a). by or on behalf of the Executive). (b) Property of Company. Any interest in trademarks, servicemarks, 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 - 4 - 5 the Company promptly upon the termination of the Executive's employment with Company or at any other time on request. (c) Conduct after the Term. For a period of two years after the expiration of this Agreement, Executive shall not induce any Employee of the Company to leave or terminate their employment relationship. 7. TERMINATION: (a) Termination Upon Death or Disability. If during the Term, Executive should (i) die or (ii) become 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 30 days written notice to Executive, terminate Executive's employment hereunder. Executive agrees to submit to reasonable medical examinations upon the reasonable 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 salary, accruing as provided herein, accrued share of any bonus for that Fiscal Year (if any such plan shall have been adopted and earned through the date of Executive's termination) and continuing thereafter for an additional period of two (2) months. (b) By Resignation, or By Company for Cause. If Executive's employment with Company terminates due to his voluntary resignation or if the Company terminates Executive's employment due to Cause (as defined below), Company shall pay Executive all accrued base compensation (with no Bonus for the year in which the termination of employment took place), but no other compensation or reimbursement of any kind, including without limitation, severance compensation or the vesting of any unvested Stock Options, and thereafter Company's obligations hereunder shall terminate. "Cause" means (i) willful failure by the Executive to substantially perform his duties hereunder, other than a failure resulting from the Executive's complete or partial incapacity due to physical or mental illness or impairment; (ii) a willful act by the Executive which constitutes misconduct and which is - 5 - 6 materially injurious to the Company; (iii) a willful breach by the Executive of a material provision of this Agreement after written notice and such breach has not been cured for 10 days; or (iv) a felony conviction or a material and willful violation of a federal or state law or regulation applicable to the business of the Company. (c) Termination Without Cause. If Executive's employment is terminated without Cause, subject to Section 7(d) below, the Company shall continue to pay Executive his basic compensation, as well as the executive benefits set forth in Section 3(b) and 3(d), all in accordance with the Company's normal payroll policies, but no other compensation or reimbursement of any kind, including without limitation, severance compensation or the vesting of any unvested stock options, shall be deemed owing. (d) Duty to Mitigate. In the event that Executive's services to Company are terminated for any reason 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 a duty to mitigate any damages hereunder and any compensation earned by Executive in any capacity after the date of such termination shall reduce or mitigate the amounts payable by the Company hereunder. (e) Designation of Beneficiary. The parties hereto agree that Executive shall designate, by written notice to the Company, a beneficiary to receive the payments described in Section 5(a) in the event of his death and the designation of any such beneficiary may be changed by 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 Executive's designated beneficiary under Section 7(a) shall be made to the Executive's widow, if any, during his lifetime. If 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. - 6 - 7 (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. (c) Services Rendered Deemed Special, Etc. Executive acknowledges and agrees that the services to be rendered by him hereunder are of a special, unique, extraordinary and intellectual character which gives them peculiar value, the loss of which cannot be adequately compensated for in an action at law and that a breach of any term, condition or covenant hereof will cause irreparable harm and injury to Company and in addition to any other available remedy Company will be entitled to seek injunctive relief. 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: 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 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. - 7 - 8 11. NOTICES: 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 or Canada 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): To Company: Team Communications Group, Inc. 12300 Wilshire Boulevard Los Angeles, California 90025 Att. Chief Executive Officer Tel: 310\442-3500 Fax: 310\442-3501 To Executive: Larry Friedricks 10724 Wilshire Boulevard Suite 904 Los Angeles, California 90024 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, supersedes all existing agreement 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 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. - 8 - 9 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 this 2nd day of November, 1999 TEAM COMMUNICATIONS GROUP, INC. By: /s/ DREW S. LEVIN --------------------------------- Drew Levin, Chairman and Chief Executive Officer Agreed to and Accepted: /s/ LARRY FRIEDRICKS - ------------------------------------ Larry Friedricks - 9 - EX-10.30 7 EXHIBIT 10.30 1 EXHIBIT 10.30 OFFICE LEASE 11818 WILSHIRE BOULEVARD THE MARCEL GEORGE FAMILY TRUSTS OF SEPTEMBER 2, 1982, as Landlord, and TEAM COMMUNICATIONS GROUP, a California corporation, as Tenant. 2 TABLE OF CONTENTS
Page ---- ARTICLE 1 PREMISES, BUILDING, PROJECT, AND COMMON AREAS.............................................3 ARTICLE 2 LEASE TERM; OPTION TERM...................................................................4 ARTICLE 3 BASE RENT.................................................................................5 ARTICLE 4 ADDITIONAL RENT...........................................................................5 ARTICLE 5 USE OF PREMISES..........................................................................11 ARTICLE 6 SERVICES AND UTILITIES...................................................................11 ARTICLE 7 REPAIRS..................................................................................12 ARTICLE 8 ADDITIONS AND ALTERATIONS................................................................13 ARTICLE 9 COVENANT AGAINST LIENS...................................................................14 ARTICLE 10 INSURANCE................................................................................15 ARTICLE 11 DAMAGE AND DESTRUCTION...................................................................16 ARTICLE 12 NONWAIVER................................................................................18 ARTICLE 13 CONDEMNATION.............................................................................18 ARTICLE 14 ASSIGNMENT AND SUBLETTING................................................................18 ARTICLE 15 SURRENDER OF PREMISES; OWNERSHIP AND REMOVAL OF TRADE FIXTURES...........................22 ARTICLE 16 HOLDING OVER.............................................................................22 ARTICLE 17 ESTOPPEL CERTIFICATES....................................................................22 ARTICLE 18 SUBORDINATION............................................................................23 ARTICLE 19 DEFAULTS; REMEDIES.......................................................................23 ARTICLE 20 COVENANT OF QUIET ENJOYMENT..............................................................26 ARTICLE 21 SECURITY DEPOSIT.........................................................................26 ARTICLE 22 SUBSTITUTION OF OTHER PREMISES...........................................................26 ARTICLE 23 SIGNS....................................................................................26 ARTICLE 24 COMPLIANCE WITH LAW......................................................................27 ARTICLE 25 LATE CHARGES.............................................................................28 ARTICLE 26 LANDLORD'S RIGHT TO CURE DEFAULT; PAYMENTS BY TENANT.....................................28 ARTICLE 27 ENTRY BY LANDLORD........................................................................28 ARTICLE 28 TENANT PARKING...........................................................................29 ARTICLE 29 MISCELLANEOUS PROVISIONS.................................................................29 EXHIBITS A OUTLINE OF PREMISES B TENANT WORK LETTER C FORM OF NOTICE OF LEASE TERM DATES D RULES AND REGULATIONS E FORM OF TENANT'S ESTOPPEL CERTIFICATE F APPROXIMATE LOCATION OF TENANT'S SIGN
(ii) 3 INDEX
Page(s) ------ 11818 Wilshire Boulevard........................................................................................3 Abatement Event................................................................................................25 Accountant.....................................................................................................10 Adjacent Building...............................................................................................3 Alterations....................................................................................................13 Applicable Laws................................................................................................27 Bank Prime Loan................................................................................................28 Base Building..................................................................................................13 Brokers........................................................................................................32 Builder's All Risk.............................................................................................14 Building........................................................................................................3 Building Common Areas,..........................................................................................3 Building Hours.................................................................................................11 Common Areas....................................................................................................3 Eligibility Period.............................................................................................25 Estimate........................................................................................................9 Estimate Statement..............................................................................................9 Estimated Excess...............................................................................................10 Excess..........................................................................................................9 Force Majeure..................................................................................................31 Holidays.......................................................................................................11 HVAC...........................................................................................................11 Improvement Overhead Fee.......................................................................................14 Landlord........................................................................................................1 Landlord Parties...............................................................................................15 Landlord Repair Notice.........................................................................................17 Lease...........................................................................................................1 Lease Commencement Date.........................................................................................4 Lease Expiration Date...........................................................................................4 Lease Term......................................................................................................4 Lease Year......................................................................................................4 Lines..........................................................................................................34 Mail...........................................................................................................31 Notices........................................................................................................31 Option Rent.....................................................................................................4 Option Term.....................................................................................................4 Original Improvements..........................................................................................16 Original Tenant.................................................................................................4 Premises........................................................................................................3 Project Common Areas,...........................................................................................3 Project,........................................................................................................3 Renovations....................................................................................................33 Security Deposit...............................................................................................26 Statement.......................................................................................................9 Subject Space..................................................................................................19 Summary.........................................................................................................1 Tenant..........................................................................................................1 Tenant Work Letter..............................................................................................3 Tenant's Share..................................................................................................9 Transfer Notice................................................................................................19 Transfer Premium...............................................................................................20 Transferee.....................................................................................................19 Transfers......................................................................................................19
(iii) 4 11818 WILSHIRE BOULEVARD OFFICE LEASE This Office Lease (the "Lease"), dated as of the date set forth in Section 1 of the Summary of Basic Lease Information (the "Summary"), below, is made by and between THE MARCEL GEORGE FAMILY TRUSTS OF SEPTEMBER 2, 1982 ("Landlord"), and TEAM COMMUNICATIONS GROUP, a California corporation ("Tenant"). SUMMARY OF BASIC LEASE INFORMATION
TERMS OF LEASE DESCRIPTION - -------------- ----------- 1. Date: November 3, 1999 2. Premises(Article 1). 2.1 Building: 11818 Wilshire Boulevard, Los Angeles, California 2.2 Premises: Approximately 10,965 rentable (9,338 usable) square feet of space located on the second (2nd) floor of the Building, as further set forth in Exhibit A to the Office Lease. 3. Lease Term(Article 2). 3.1 Length of Term: Five (5) years. 3.2 Lease Commencement Date: The earlier to occur of (i) the date upon which Tenant first commences to conduct business in the Premises, and (ii) February 15, 2000. 3.3 Lease Expiration Date: The date immediately preceding the fifth (5th) anniversary of the Lease Commencement Date. 4. Base Rent (Article 3):
Monthly Installment Monthly Rental Rate per Lease Year Annual Base Rent of Base Rent Rentable Square Foot ---------- ---------------- ------------ -------------------- 1 $375,003.00 $31,250.25 $2.85 2 $386,845.20 $32,237.10 $2.94 3 $398,687.40 $33,223.95 $3.03 4 $410,529.60 $34,210.80 $3.12 5 $422,371.80 $35,197.65 $3.21
5. Base Year (Article 4): Calendar year 2000. 6. Tenant's Share(Article 4): Approximately 52.36%. 7. Permitted Use(Article 5): General office use and post production video tape editing and duplication, all consistent with a first-class office building, provided that in no event shall any post production of pornographic materials be permitted.
5 8. Security Deposit(Article 21): $35,197.65. 9. Parking Pass Ratio(Article 28): Three (3) unreserved parking passes for every 1,000 rentable square feet of the Premises. 10. Address of Tenant(Section 29.18): 12300 Wilshire Boulevard Suite 400 Los Angeles, California 90025 Attention: Mr. Eric Elias (Prior to Lease Commencement Date) and Team Communications Group 11818 Wilshire Boulevard Second Floor Los Angeles, California 90025 Attention: Mr. Eric Elias (After Lease Commencement Date) 11. Address of Landlord(Section 29.18): See Section 29.18 of the Lease. 12. Broker(s)(Section 29.24): Tooley & Company 2040 Century Park East Suite 2650 Los Angeles, California 90067 and Equis Corporation 515 South Figueroa Street Suite 1960 Los Angeles, California 90071
-2- 6 ARTICLE 1 PREMISES, BUILDING, PROJECT, AND COMMON AREAS 1.1 PREMISES, BUILDING, PROJECT AND COMMON AREAS. 1.1.1 THE PREMISES. Landlord hereby leases to Tenant and Tenant hereby leases from Landlord the premises set forth in Section 2.2 of the Summary (the "Premises"). The outline of the Premises is set forth in Exhibit A attached hereto and each floor or floors of the Premises has the number of rentable square feet as set forth in Section 2.2 of the Summary. Landlord and Tenant hereby acknowledge and agree that the rentable and usable square footage of the Premises, as set forth in the Summary, shall be conclusive for all purposes under this Lease and shall not be subject to remeasurement or modification. The parties hereto agree that the lease of the Premises is upon and subject to the terms, covenants and conditions herein set forth, and Tenant covenants as a material part of the consideration for this Lease to keep and perform each and all of such terms, covenants and conditions by it to be kept and performed and that this Lease is made upon the condition of such performance. The parties hereto hereby acknowledge that the purpose of Exhibit A is to show the approximate location of the Premises in the "Building," as that term is defined in Section 1.1.2, below, only, and such Exhibit is not meant to constitute an agreement, representation or warranty as to the construction of the Premises, the precise area thereof or the specific location of the "Common Areas," as that term is defined in Section 1.1.3, below, or the elements thereof or of the accessways to the Premises or the "Project," as that term is defined in Section 1.1.2, below. Except as specifically set forth in this Lease and in the Tenant Work Letter attached hereto as Exhibit B (the "Tenant Work Letter"), Landlord shall not be obligated to provide or pay for any improvement work or services related to the improvement of the Premises. Tenant also acknowledges that neither Landlord nor any agent of Landlord has made any representation or warranty regarding the condition of the Premises, the Building or the Project or with respect to the suitability of any of the foregoing for the conduct of Tenant's business, except as specifically set forth in this Lease and the Tenant Work Letter. The taking of possession of the Premises by Tenant shall conclusively establish that the Premises and the Building were at such time in good and sanitary order, condition and repair. 1.1.2 THE BUILDING AND THE PROJECT. The Premises are a part of the building set forth in Section 2.1 of the Summary (the "Building"). The Building is part of an office project known as "11818 Wilshire Boulevard." The term "Project," as used in this Lease, shall mean (i) the Building and the Common Areas, (ii) the land (which is improved with landscaping, subterranean parking facilities and other improvements) upon which the Building and the Common Areas are located, (iii) the office building located at 11800 Wilshire Boulevard which is physically connected to the Building and the land upon which such office building is located (the "Adjacent Building"), and (iv) at Landlord's discretion, any additional real property, areas, land, buildings or other improvements added thereto outside of the Project. 1.1.3 COMMON AREAS. Tenant shall have the non-exclusive right to use in common with other tenants in the Project, and subject to the rules and regulations referred to in Article 5 of this Lease, those portions of the Project which are provided, from time to time, for use in common by Landlord, Tenant and any other tenants of the Project (such areas, together with such other portions of the Project designated by Landlord, in its discretion, including certain areas designated for the exclusive use of certain tenants, or to be shared by Landlord and certain tenants, are collectively referred to herein as the "Common Areas"). The Common Areas shall consist of the "Project Common Areas" and the "Building Common Areas." The term "Project Common Areas," as used in this Lease, shall mean the portion of the Project designated as such by Landlord. The term "Building Common Areas," as used in this Lease, shall mean the portions of the Common Areas located within the Building designated as such by Landlord. The manner in which the Common Areas are maintained and operated shall be at the sole discretion of Landlord and the use thereof shall be subject to such rules, regulations and restrictions as Landlord may make from time to time. Landlord reserves the right to close temporarily, make alterations or additions to, or change the location of elements of the Project and the Common Areas. -3- 7 ARTICLE 2 LEASE TERM; OPTION TERM 2.1 IN GENERAL. The terms and provisions of this Lease shall be effective as of the date of this Lease. The term of this Lease (the "Lease Term") shall be as set forth in Section 3.1 of the Summary, shall commence on the date set forth in Section 3.2 of the Summary (the "Lease Commencement Date"), and shall terminate on the date set forth in Section 3.3 of the Summary (the "Lease Expiration Date") unless this Lease is sooner terminated as hereinafter provided. For purposes of this Lease, the term "Lease Year" shall mean each consecutive twelve (12) month period during the Lease Term; provided, however, that the first Lease Year shall commence on the Lease Commencement Date and end on the last day of the eleventh month thereafter and the second and each succeeding Lease Year shall commence on the first day of the next calendar month; and further provided that the last Lease Year shall end on the Lease Expiration Date. At any time during the Lease Term, Landlord may deliver to Tenant a notice in the form as set forth in Exhibit C, attached hereto, as a confirmation only of the information set forth therein, which Tenant shall execute and return to Landlord within five (5) days of receipt thereof. 2.2 OPTION TERM. 2.2.1 OPTION RIGHT. Landlord hereby grants the Tenant named in this Lease (the "Original Tenant"), one (1) option to extend the Lease Term for a period of five (5) years (the "Option Term"), which option shall be exercisable only by written notice delivered by Tenant to Landlord as provided below, provided that, as of the date of delivery of such notice, Tenant is not in default under this Lease and Tenant has not previously been in default under this Lease more than once. Upon the proper exercise of such option to extend the initial Lease Term, and provided that, at Landlord's option, as of the end of the initial Lease Term, Tenant is not in default under this Lease and Tenant has not previously been in default under this Lease more than once, the Lease Term, as it applies to the Premises, shall be extended for a period of five (5) years. The rights contained in this Section 2.2 shall be personal to the Original Tenant and may only be exercised by the Original Tenant (and not any assignee, sublessee or other transferee of Tenant's interest in this Lease) if the Original Tenant occupies the entire Premises. 2.2.2 OPTION RENT. The "Rent," as that term is defined in Section 4.1 of this Lease, payable by Tenant during the Option Term (the "Option Rent") shall be equal to the Market Rent," as that term is defined, below, provided that the base rent component of the Option Rent, on an annual, per rentable square foot basis, shall in no event be less than the sum of (i) Thirty-Eight and 52/100 Dollars (38.52), and (ii) the amount of "Tenant's Share of Direct Expenses," as that term is defined in Section 4.2, below, payable by Tenant on an annual, per rentable square foot basis for the Premises immediately prior to the commencement of the Option Term (the "Prior Base Rent"). In the event that the base rent component for the Option Term is the Prior Base Rent, then (A) the new Base Year for the Option Term shall be the calendar year 2005, and (B) the concessions provided to Tenant shall be the "Concessions," as that term is defined, below. For purposes of this Lease, the term "Market Rent" shall mean the rent, including all escalations, at which tenants, as of the commencement of the Option Term, are leasing non-sublease, non-encumbered, non-equity space comparable in size, location and quality to the Premises for a term of five (5) years, which comparable space is located in the Building and in the "Comparable Buildings," as that term is defined in Section 2.2.4, below, in either event, taking into consideration the following concessions: (the "Concessions") (a) rental abatement concessions, if any, being granted such tenants in connection with such comparable space, and (b) tenant improvements or allowances provided or to be provided for such comparable space, taking into account, and deducting the value of, the existing improvements in the Premises, such value to be based upon the age, quality and layout of the improvements and the extent to which the same could be utilized by Tenant based upon the fact that the precise tenant improvements existing in the Premises are specifically suitable to Tenant. 2.2.3 EXERCISE OF OPTIONS. The option contained in this Section 2.2 shall be exercised by Tenant, if at all, and only in the following manner: (i) Tenant shall deliver written notice to Landlord not more than fifteen (15) months nor less than twelve (12) months prior to the expiration of the initial Lease Term, stating that Tenant may be interested in exercising its option; (ii) Landlord, after receipt of Tenant's notice, shall deliver notice (the "Option Rent Notice") to Tenant not less than ten (10) months prior to the expiration of the initial Lease Term, setting forth the Option Rent; and (iii) if Tenant wishes to exercise such option, Tenant shall, on -4- 8 or before the earlier of (A) the date occurring nine (9) months prior to the expiration of the initial Lease Term, and (B) the date occurring thirty (30) days after Tenant's receipt of the Option Rent Notice, exercise the option by delivering written notice thereof to Landlord. 2.2.4 COMPARABLE BUILDINGS. The term "COMPARABLE BUILDINGS," as used in this Lease, shall mean the buildings located in the "West Los Angeles Area," as that term is defined below, which are comparable in terms of size, location, quality of construction and service and amenities to the Building. The "WEST LOS ANGELES AREA" shall be defined as the area of Los Angeles, California which has as its Northern boundary the southernmost boundary of Sunset Boulevard, as its Southern boundary the northernmost boundary of Olympic Boulevard, as its Western boundary the easternmost boundary of Ocean Avenue, and as its Eastern boundary the 405 Freeway. ARTICLE 3 BASE RENT Tenant shall pay, without prior notice or demand, to Landlord or Landlord's agent at the management office of the Project, or, at Landlord's option, at such other place as Landlord may from time to time designate in writing, by a check for currency which, at the time of payment, is legal tender for private or public debts in the United States of America, base rent ("Base Rent") as set forth in Section 4 of the Summary, payable in equal monthly installments as set forth in Section 4 of the Summary in advance on or before the first day of each and every calendar month during the Lease Term, without any setoff or deduction whatsoever. The Base Rent for the first full month of the Lease Term which occurs after the expiration of any free rent period shall be paid at the time of Tenant's execution of this Lease. If any Rent payment date (including the Lease Commencement Date) falls on a day of the month other than the first day of such month or if any payment of Rent is for a period which is shorter than one month, the Rent for any fractional month shall accrue on a daily basis for the period from the date such payment is due to the end of such calendar month or to the end of the Lease Term at a rate per day which is equal to 1/365 of the applicable annual Rent. All other payments or adjustments required to be made under the terms of this Lease that require proration on a time basis shall be prorated on the same basis. ARTICLE 4 ADDITIONAL RENT 4.1 GENERAL TERMS. In addition to paying the Base Rent specified in Article 3 of this Lease, Tenant shall pay "Tenant's Share" of the annual "Direct Expenses," as those terms are defined in Sections 4.2.6 and 4.2.2 of this Lease, respectively, which are in excess of the amount of Direct Expenses applicable to the "Base Year," as that term is defined in Section 4.2.1, below; provided, however, that in no event shall any decrease in Direct Expenses for any Expense Year below Direct Expenses for the Base Year entitle Tenant to any decrease in Base Rent or any credit against sums due under this Lease. Such payments by Tenant, together with any and all other amounts payable by Tenant to Landlord pursuant to the terms of this Lease, are hereinafter collectively referred to as the "ADDITIONAL RENT", and the Base Rent and the Additional Rent are herein collectively referred to as "RENT." All amounts due under this Article 4 as Additional Rent shall be payable for the same periods and in the same manner as the Base Rent. Without limitation on other obligations of Tenant which survive the expiration of the Lease Term, the obligations of Tenant to pay the Additional Rent provided for in this Article 4 shall survive the expiration of the Lease Term. 4.2 DEFINITIONS OF KEY TERMS RELATING TO ADDITIONAL RENT. As used in this Article 4, the following terms shall have the meanings hereinafter set forth: 4.2.1 "BASE YEAR" shall mean the period set forth in Section 5 of the Summary. 4.2.2 "DIRECT EXPENSES" shall mean "Operating Expenses" and "Tax Expenses." 4.2.3 "EXPENSE YEAR" shall mean each calendar year in which any portion of the Lease Term falls, through and including the calendar year in which the Lease Term expires, provided that Landlord, upon notice to Tenant, may change the Expense Year from time to time -5- 9 to any other twelve (12) consecutive month period, and, in the event of any such change, Tenant's Share of Direct Expenses shall be equitably adjusted for any Expense Year involved in any such change. 4.2.4 "OPERATING EXPENSES" shall mean all expenses, costs and amounts of every kind and nature which Landlord pays or accrues during any Expense Year because of or in connection with the ownership, management, maintenance, security, repair, replacement, restoration or operation of the Project, or any portion thereof. Without limiting the generality of the foregoing, Operating Expenses shall specifically include any and all of the following: (i) the cost of supplying all utilities, the cost of operating, repairing, maintaining, and renovating the utility, telephone, mechanical, sanitary, storm drainage, and elevator systems, and the cost of maintenance and service contracts in connection therewith; (ii) the cost of licenses, certificates, permits and inspections and the cost of contesting any governmental enactments which may affect Operating Expenses, and the costs incurred in connection with a transportation system management program or similar program; (iii) the cost of all insurance carried by Landlord in connection with the Project; (iv) the cost of landscaping, relamping, and all supplies, tools, equipment and materials used in the operation, repair and maintenance of the Project, or any portion thereof; (v) costs incurred in connection with the parking areas servicing the Project; (vi) fees and other costs, including management fees, consulting fees, legal fees and accounting fees, of all contractors and consultants in connection with the management, operation, maintenance and repair of the Project; (vii) payments under any equipment rental agreements and the fair rental value of any management office space; (viii) wages, salaries and other compensation and benefits, including taxes levied thereon, of all persons engaged in the operation, maintenance and security of the Project; (ix) costs under any instrument pertaining to the sharing of costs by the Project; (x) operation, repair, maintenance and replacement of all systems and equipment and components thereof of the Building; (xi) the cost of janitorial, alarm, security and other services, replacement of wall and floor coverings, ceiling tiles and fixtures in common areas, maintenance and replacement of curbs and walkways, repair to roofs and re-roofing; (xii) amortization (including interest on the unamortized cost) of the cost of acquiring or the rental expense of personal property used in the maintenance, operation and repair of the Project, or any portion thereof; (xiii) the cost of capital improvements or other costs incurred in connection with the Project (A) which are intended to effect economies in the operation or maintenance of the Project, or any portion thereof, or (B) that are required under any governmental law or regulation; provided, however, that any capital expenditure shall be amortized with interest over its useful life as Landlord shall reasonably determine; (xiv) costs, fees, charges or assessments imposed by, or resulting from any mandate imposed on Landlord by, any federal, state or local government for fire and police protection, trash removal, community services, or other services which do not constitute "Tax Expenses" as that term is defined in Section 4.2.5, below; and (xv) payments under any easement, license, operating agreement, declaration, restrictive covenant, or instrument pertaining to the sharing of costs by the Building. Notwithstanding the foregoing, for purposes of this Lease, Operating Expenses shall not, however, include: (a) costs, including marketing costs, legal fees, space planners' fees, advertising and promotional expenses, and brokerage fees incurred in connection with the original construction or development, or original or future leasing of the Project, and costs, including permit, license and inspection costs, incurred with respect to the installation of tenant improvements made for new tenants in the Project or incurred in renovating or otherwise improving, decorating, painting or redecorating vacant space for tenants or other occupants of the Project (excluding, however, such costs relating to any common areas of the Project or parking facilities); (b) except as set forth in items (xii) and (xiii) above, depreciation, interest and principal payments on mortgages and other debt costs, if any, penalties and interest, costs of capital repairs and alterations, and costs of capital improvements and equipment; (c) costs for which the Landlord is reimbursed by any tenant or occupant of the Project or by insurance by its carrier or any tenant's carrier or by anyone else, and electric power costs for which any tenant directly contracts with the local public service company; (d) any bad debt loss, rent loss, or reserves for bad debts or rent loss; -6- 10 (e) costs associated with the operation of the business of the partnership or entity which constitutes the Landlord, as the same are distinguished from the costs of operation of the Project (which shall specifically include, but not be limited to, accounting costs associated with the operation of the Project). Costs associated with the operation of the business of the partnership or entity which constitutes the Landlord include costs of partnership accounting and legal matters, costs of defending any lawsuits with any mortgagee (except as the actions of the Tenant may be in issue), costs of selling, syndicating, financing, mortgaging or hypothecating any of the Landlord's interest in the Project, and costs incurred in connection with any disputes between Landlord and its employees, between Landlord and Project management, or between Landlord and other tenants or occupants, and Landlord's general corporate overhead and general and administrative expenses; (f) the wages and benefits of any employee who does not devote substantially all of his or her employed time to the Project unless such wages and benefits are prorated to reflect time spent on operating and managing the Project vis-a-vis time spent on matters unrelated to operating and managing the Project; provided, that in no event shall Operating Expenses for purposes of this Lease include wages and/or benefits attributable to personnel above the level of Project manager or Project engineer; (g) amount paid as ground rental for the Project by the Landlord; (h) except for a Project management fee, overhead and profit increment paid to the Landlord or to subsidiaries or affiliates of the Landlord for services in the Project to the extent the same exceeds the costs of such services rendered by qualified, first-class unaffiliated third parties on a competitive basis; (i) any compensation paid to clerks, attendants or other persons in commercial concessions operated by the Landlord; (j) costs resulting from Landlord's failure to timely cause the Building systems to account for the "year 2000 problem;" (k) all items and services for which Tenant or any other tenant in the Project reimburses Landlord or which Landlord provides selectively to one or more tenants (other than Tenant) without reimbursement; (l) costs, other than those incurred in ordinary maintenance and repair, for sculpture, paintings, fountains or other objects of art; (m) any costs expressly excluded from Operating Expenses elsewhere in this Lease; (n) rent for any office space occupied by Project management personnel to the extent the size or rental rate of such office space exceeds the size or fair market rental value of office space occupied by management personnel of the buildings comparable to and in the vicinity of the Building, with adjustment where appropriate for the size of the applicable project; (o) costs incurred to comply with laws relating to the removal of hazardous material (as defined under applicable law) which was in existence in the Building or on the Project prior to the Lease Commencement Date, and was of such a nature that a federal, State or municipal governmental authority, if it had then had knowledge of the presence of such hazardous material, in the state, and under the conditions that it then existed in the Building or on the Project, would have then required the removal of such hazardous material or other remedial or containment action with respect thereto; and costs incurred to remove, remedy, contain, or treat hazardous material, which hazardous material is brought into the Building or onto the Project after the date hereof by Landlord or any other tenant of the Project and is of such a nature, at that time, that a federal, State or municipal governmental authority, if it had then had knowledge of the presence of such hazardous material, in the state, and under the conditions, that it then exists in the Building or on the Project, would have then required the removal of such hazardous material or other remedial or containment action with respect thereto; -7- 11 (p) costs arising from Landlord's charitable or political contributions; and (q) tax penalties resulting from Landlord's negligence, inability or unwillingness to make payments and/or to file returns when due. If Landlord is not furnishing any particular work or service (the cost of which, if performed by Landlord, would be included in Operating Expenses) to a tenant who has undertaken to perform such work or service in lieu of the performance thereof by Landlord, Operating Expenses shall be deemed to be increased by an amount equal to the additional Operating Expenses which would reasonably have been incurred during such period by Landlord if it had at its own expense furnished such work or service to such tenant. If the Project is not at least ninety-five percent (95%) occupied during all or a portion of the Base Year or any Expense Year, Landlord may elect to make an appropriate adjustment to the components of Operating Expenses for such year to determine the amount of Operating Expenses that would have been incurred had the Project been ninety-five percent (95%) occupied; and the amount so determined shall be deemed to have been the amount of Operating Expenses for such year. Operating Expenses for the Base Year shall not include market-wide labor-rate increases due to extraordinary circumstances, including, but not limited to, boycotts and strikes, and utility rate increases due to extraordinary circumstances including, but not limited to, conservation surcharges, boycotts, embargoes or other shortages, or amortized costs relating to capital improvements. In no event shall the components of Direct Expenses for any Expense Year related to electrical costs be less than the components of Direct Expenses related to electrical costs in the Base Year. 4.2.5 TAXES. 4.2.5.1 "TAX EXPENSES" shall mean all federal, state, county, or local governmental or municipal taxes, fees, charges or other impositions of every kind and nature, whether general, special, ordinary or extraordinary, (including, without limitation, real estate taxes, general and special assessments, transit taxes, leasehold taxes or taxes based upon the receipt of rent, including gross receipts or sales taxes applicable to the receipt of rent, unless required to be paid by Tenant, personal property taxes imposed upon the fixtures, machinery, equipment, apparatus, systems and equipment, appurtenances, furniture and other personal property used in connection with the Project, or any portion thereof), which shall be paid or accrued during any Expense Year (without regard to any different fiscal year used by such governmental or municipal authority) because of or in connection with the ownership, leasing and operation of the Project, or any portion thereof. 4.2.5.2 Tax Expenses shall include, without limitation: (i) Any tax on the rent, right to rent or other income from the Project, or any portion thereof, or as against the business of leasing the Project, or any portion thereof; (ii) Any assessment, tax, fee, levy or charge in addition to, or in substitution, partially or totally, of any assessment, tax, fee, levy or charge previously included within the definition of real property tax, it being acknowledged by Tenant and Landlord that Proposition 13 was adopted by the voters of the State of California in the June 1978 election ("PROPOSITION 13") and that assessments, taxes, fees, levies and charges may be imposed by governmental agencies for such services as fire protection, street, sidewalk and road maintenance, refuse removal and for other governmental services formerly provided without charge to property owners or occupants, and, in further recognition of the decrease in the level and quality of governmental services and amenities as a result of Proposition 13, Tax Expenses shall also include any governmental or private assessments or the Project's contribution towards a governmental or private cost-sharing agreement for the purpose of augmenting or improving the quality of services and amenities normally provided by governmental agencies; (iii) Any assessment, tax, fee, levy, or charge allocable to or measured by the area of the Premises or the Rent payable hereunder, including, without limitation, any business or gross income tax or excise tax with respect to the receipt of such rent, or upon or with respect to the possession, leasing, operating, management, maintenance, alteration, repair, use or occupancy by Tenant of the Premises, or any portion thereof; and (iv) Any assessment, tax, fee, levy or charge, upon this transaction or any document to which Tenant is a party, creating or transferring an interest or an estate in the Premises. 4.2.5.3 Any costs and expenses (including, without limitation, reasonable attorneys' fees) incurred in attempting to protest, reduce or minimize Tax Expenses shall be included in Tax Expenses in the Expense Year such expenses are paid. Tax refunds shall be -8- 12 credited against Tax Expenses and refunded to Tenant regardless of when received, based on the Expense Year to which the refund is applicable, provided that in no event shall the amount to be refunded to Tenant for any such Expense Year exceed the total amount paid by Tenant as Additional Rent under this Article 4 for such Expense Year. If Tax Expenses for any period during the Lease Term or any extension thereof are increased after payment thereof for any reason, including, without limitation, error or reassessment by applicable governmental or municipal authorities, Tenant shall pay Landlord upon demand Tenant's Share of any such increased Tax Expenses included by Landlord as Building Tax Expenses pursuant to the terms of this Lease. Notwithstanding anything to the contrary contained in this Section 4.2.5 (except as set forth in Section 4.2.5.1, above), there shall be excluded from Tax Expenses (i) all excess profits taxes, franchise taxes, gift taxes, capital stock taxes, inheritance and succession taxes, estate taxes, federal and state income taxes, and other taxes to the extent applicable to Landlord's general or net income (as opposed to rents, receipts or income attributable to operations at the Project), (ii) any items included as Operating Expenses, and (iii) any items paid by Tenant under Section 4.5 of this Lease. 4.2.5.4 The amount of Tax Expenses for the Base Year attributable to the valuation of the Project, inclusive of tenant improvements, shall be known as the "Base Taxes". If in any comparison year subsequent to the Base Year, the amount of Tax Expenses decreases below the amount of Base Taxes, then for purposes of all subsequent comparison years, including the comparison year in which such decrease in Tax Expenses occurred, the Base Taxes, and therefore the Base Year, shall be decreased by an amount equal to the decrease in Tax Expenses. 4.2.6 "Tenant's Share" shall mean the percentage set forth in Section 6 of the Summary. 4.3 ALLOCATION OF DIRECT EXPENSES. The parties acknowledge that the Building is a part of a multi-building project and that the costs and expenses incurred in connection with the Project (i.e. the Direct Expenses) should be shared between the tenants of the Building and the tenants of the other buildings in the Project. Accordingly, as set forth in Section 4.2 above, Direct Expenses (which consists of Operating Expenses and Tax Expenses) are determined annually for the Project as a whole, and a portion of the Direct Expenses, which portion shall be determined by Landlord on an equitable basis, shall be allocated to the tenants of the Building (as opposed to the tenants of any other buildings in the Project) and such portion shall be the Direct Expenses for purposes of this Lease. Such portion of Direct Expenses allocated to the tenants of the Building shall include all Direct Expenses attributable solely to the Building and an equitable portion of the Direct Expenses attributable to the Project as a whole. 4.4 CALCULATION AND PAYMENT OF ADDITIONAL RENT. If for any Expense Year ending or commencing within the Lease Term, Tenant's Share of Direct Expenses for such Expense Year exceeds Tenant's Share of Direct Expenses applicable to the Base Year, then Tenant shall pay to Landlord, in the manner set forth in Section 4.4.1, below, and as Additional Rent, an amount equal to the excess (the "Excess"). 4.4.1 STATEMENT OF ACTUAL DIRECT EXPENSES AND PAYMENT BY TENANT. Landlord shall endeavor to give to Tenant following the end of each Expense Year, a statement (the "Statement") which shall state the Direct Expenses incurred or accrued for such preceding Expense Year, and which shall indicate the amount of the Excess. Upon receipt of the Statement for each Expense Year commencing or ending during the Lease Term, if an Excess is present, Tenant shall pay, with its next installment of Base Rent due, the full amount of the Excess for such Expense Year, less the amounts, if any, paid during such Expense Year as "Estimated Excess," as that term is defined in Section 4.4.2, below. The failure of Landlord to timely furnish the Statement for any Expense Year shall not prejudice Landlord or Tenant from enforcing its rights under this Article 4. Even though the Lease Term has expired and Tenant has vacated the Premises, when the final determination is made of Tenant's Share of Direct Expenses for the Expense Year in which this Lease terminates, if an Excess if present, Tenant shall immediately pay to Landlord such amount. The provisions of this Section 4.4.1 shall survive the expiration or earlier termination of the Lease Term. 4.4.2 STATEMENT OF ESTIMATED DIRECT EXPENSES. In addition, Landlord shall endeavor to give Tenant a yearly expense estimate statement (the "Estimate Statement") which shall set forth Landlord's reasonable estimate (the "Estimate") of what the total amount of Direct -9- 13 Expenses for the then-current Expense Year shall be and the estimated excess (the "Estimated Excess") as calculated by comparing the Direct Expenses for such Expense Year, which shall be based upon the Estimate, to the amount of Direct Expenses for the Base Year. The failure of Landlord to timely furnish the Estimate Statement for any Expense Year shall not preclude Landlord from enforcing its rights to collect any Estimated Excess under this Article 4, nor shall Landlord be prohibited from revising any Estimate Statement or Estimated Excess theretofore delivered to the extent necessary. Thereafter, Tenant shall pay, with its next installment of Base Rent due, a fraction of the Estimated Excess for the then-current Expense Year (reduced by any amounts paid pursuant to the next to last sentence of this Section 4.4.2). Such fraction shall have as its numerator the number of months which have elapsed in such current Expense Year, including the month of such payment, and twelve (12) as its denominator. Until a new Estimate Statement is furnished (which Landlord shall have the right to deliver to Tenant at any time), Tenant shall pay monthly, with the monthly Base Rent installments, an amount equal to one-twelfth (1/12) of the total Estimated Excess set forth in the previous Estimate Statement delivered by Landlord to Tenant. 4.5 TAXES AND OTHER CHARGES FOR WHICH TENANT IS DIRECTLY RESPONSIBLE. 4.5.1 Tenant shall be liable for and shall pay ten (10) days before delinquency, taxes levied against Tenant's equipment, furniture, fixtures and any other personal property located in or about the Premises. If any such taxes on Tenant's equipment, furniture, fixtures and any other personal property are levied against Landlord or Landlord's property or if the assessed value of Landlord's property is increased by the inclusion therein of a value placed upon such equipment, furniture, fixtures or any other personal property and if Landlord pays the taxes based upon such increased assessment, which Landlord shall have the right to do regardless of the validity thereof but only under proper protest if requested by Tenant, Tenant shall upon demand repay to Landlord the taxes so levied against Landlord or the proportion of such taxes resulting from such increase in the assessment, as the case may be. 4.5.2 If the tenant improvements in the Premises, whether installed and/or paid for by Landlord or Tenant and whether or not affixed to the real property so as to become a part thereof, are assessed for real property tax purposes at a valuation higher than the valuation at which tenant improvements conforming to Landlord's "building standard" in other space in the Building are assessed, then the Tax Expenses levied against Landlord or the property by reason of such excess assessed valuation shall be deemed to be taxes levied against personal property of Tenant and shall be governed by the provisions of Section 4.5.1, above. 4.5.3 Notwithstanding any contrary provision herein, Tenant shall pay prior to delinquency any (i) rent tax or sales tax, service tax, transfer tax or value added tax, or any other applicable tax on the rent or services herein or otherwise respecting this Lease, (ii) taxes assessed upon or with respect to the possession, leasing, operation, management, maintenance, alteration, repair, use or occupancy by Tenant of the Premises or any portion of the Project, including the Project parking facility; or (iii) taxes assessed upon this transaction or any document to which Tenant is a party creating or transferring an interest or an estate in the Premises. 4.6 LANDLORD'S BOOKS AND RECORDS. Within one ninety (90) days after receipt of a Statement by Tenant, if Tenant disputes the amount of Additional Rent set forth in the Statement, an independent certified public accountant (which accountant is a member of a nationally recognized accounting firm and is not working on a contingency fee basis), designated and paid for by Tenant, may, after reasonable notice to Landlord and at reasonable times, inspect Landlord's records with respect to the Statement at Landlord's offices, provided that Tenant is not then in default under this Lease and Tenant has paid all amounts required to be paid under the applicable Estimate Statement and Statement, as the case may be. In connection with such inspection, Tenant and Tenant's agents must agree in advance to follow Landlord's reasonable rules and procedures regarding inspections of Landlord's records, and shall execute a commercially reasonable confidentiality agreement regarding such inspection. Tenant's failure to dispute the amount of Additional Rent set forth in any Statement within ninety (90) days of Tenant's receipt of such Statement shall be deemed to be Tenant's approval of such Statement and Tenant, thereafter, waives the right or ability to dispute the amounts set forth in such Statement. If after such inspection, Tenant still disputes such Additional Rent, a determination as to the proper amount shall be made, at Tenant's expense, by an independent certified public accountant (the "ACCOUNTANT") selected by Landlord and subject to Tenant's reasonable approval; provided that if such determination by the Accountant proves that Direct Expenses -10- 14 were overstated by more than five percent (5%), then the cost of the Accountant and the cost of such determination shall be paid for by Landlord. Tenant hereby acknowledges that Tenant's sole right to inspect Landlord's books and records and to contest the amount of Direct Expenses payable by Tenant shall be as set forth in this Section 4.6, and Tenant hereby waives any and all other rights pursuant to applicable law to inspect such books and records and/or to contest the amount of Direct Expenses payable by Tenant. ARTICLE 5 USE OF PREMISES 5.1 PERMITTED USE. Tenant shall use the Premises solely for the Permitted Use set forth in Section 7 of the Summary and Tenant shall not use or permit the Premises or the Project to be used for any other purpose or purposes whatsoever without the prior written consent of Landlord, which may be withheld in Landlord's sole discretion. 5.2 PROHIBITED USES. The uses prohibited under this Lease shall include, without limitation, use of the Premises or a portion thereof for (i) offices of any agency or bureau of the United States or any state or political subdivision thereof; (ii) offices or agencies of any foreign governmental or political subdivision thereof; (iii) offices of any health care professionals or service organization; (iv) schools or other training facilities which are not ancillary to corporate, executive or professional office use; (v) retail or restaurant uses; or (vi) communications firms such as radio and/or television stations. Tenant further covenants and agrees that Tenant shall not use, or suffer or permit any person or persons to use, the Premises or any part thereof for any use or purpose contrary to the provisions of the Rules and Regulations set forth in Exhibit D, attached hereto, or in violation of the laws of the United States of America, the State of California, or the ordinances, regulations or requirements of the local municipal or county governing body or other lawful authorities having jurisdiction over the Project) including, without limitation, any such laws, ordinances, regulations or requirements relating to hazardous materials or substances, as those terms are defined by applicable laws now or hereafter in effect. Notwithstanding anything in this Section 5.2 to the contrary, Landlord hereby agrees that the Rules and Regulations shall not be discriminatorily enforced against Tenant and Tenant shall be provided prior notice of any changes thereto. Tenant shall not do or permit anything to be done in or about the Premises which will in any way damage the reputation of the Project or obstruct or interfere with the rights of other tenants or occupants of the Building, or injure or annoy them or use or allow the Premises to be used for any improper, unlawful or objectionable purpose, nor shall Tenant cause, maintain or permit any nuisance in, on or about the Premises. Tenant shall comply with all recorded covenants, conditions, and restrictions now or hereafter affecting the Project. ARTICLE 6 SERVICES AND UTILITIES 6.1 STANDARD TENANT SERVICES. Landlord shall provide the following services on all days (unless otherwise stated below) during the Lease Term. 6.1.1 Subject to limitations imposed by all governmental rules, regulations and guidelines applicable thereto, Landlord shall provide heating and air conditioning ("HVAC") when necessary for normal comfort for normal office use in the Premises from 8:00 A.M. to 6:00 P.M. Monday through Friday, and on Saturdays from 9:00 A.M. to 1:00 P.M. (collectively, the "Building Hours"), except for the date of observation of New Year's Day, Memorial Day, Independence Day, Labor Day, Thanksgiving Day, Christmas Day and, at Landlord's discretion, other locally or nationally recognized holidays (collectively, the "Holidays"). 6.1.2 Landlord shall provide adequate electrical wiring, and facilities and power for normal general office use as determined by Landlord. Tenant shall bear the cost of replacement of lamps, starters and ballasts for non-Building standard lighting fixtures within the Premises. 6.1.3 Landlord shall provide city water from the regular Building outlets for drinking, lavatory and toilet purposes in the Building Common Areas. -11- 15 6.1.4 Landlord shall provide janitorial services to the Premises, except the date of observation of the Holidays, in and about the Premises. 6.1.5 Landlord shall provide nonexclusive, non-attended automatic passenger elevator service during the Building Hours, shall have one elevator available at all other times. 6.2 OVERSTANDARD TENANT USE. Tenant shall not, without Landlord's prior written consent, use heat-generating machines, machines other than normal fractional horsepower office machines, or equipment or lighting other than Building standard lights in the Premises, which may affect the temperature otherwise maintained by the air conditioning system or increase the water normally furnished for the Premises by Landlord pursuant to the terms of Section 6.1 of this Lease. If such consent is given, Landlord shall have the right to install supplementary air conditioning units or other facilities in the Premises, including supplementary or additional metering devices, and the cost thereof, including the cost of installation, operation and maintenance, increased wear and tear on existing equipment and other similar charges, shall be paid by Tenant to Landlord upon billing by Landlord. If Tenant uses water, electricity, heat or air conditioning in excess of that supplied by Landlord pursuant to Section 6.1 of this Lease, Tenant shall pay to Landlord, upon billing, the cost of such excess consumption, the cost of the installation, operation, and maintenance of equipment which is installed in order to supply such excess consumption, and the cost of the increased wear and tear on existing equipment caused by such excess consumption; and Landlord may install devices to separately meter any increased use and in such event Tenant shall pay the increased cost directly to Landlord, on demand, at the rates charged by the public utility company furnishing the same, including the cost of such additional metering devices. Tenant's use of electricity shall never exceed the capacity of the feeders to the Project or the risers or wiring installation. If Tenant desires to use heat, ventilation or air conditioning during hours other than those for which Landlord is obligated to supply such utilities pursuant to the terms of Section 6.1 of this Lease, Tenant shall give Landlord such prior notice, if any, as Landlord shall from time to time establish as appropriate, of Tenant's desired use in order to supply such utilities, and Landlord shall supply such utilities to Tenant at such hourly cost to Tenant (which shall be treated as Additional Rent) as Landlord shall from time to time establish. As of the date of this Lease, the charge for after-hours HVAC service is $22.00 per hour per floor. 6.3 INTERRUPTION OF USE. Tenant agrees that Landlord shall not be liable for damages, by abatement of Rent or otherwise, for failure to furnish or delay in furnishing any service (including telephone and telecommunication services), or for any diminution in the quality or quantity thereof, when such failure or delay or diminution is occasioned, in whole or in part, by breakage, repairs, replacements, or improvements, by any strike, lockout or other labor trouble, by inability to secure electricity, gas, water, or other fuel at the Building or Project after reasonable effort to do so, by any riot or other dangerous condition, emergency, accident or casualty whatsoever, by act or default of Tenant or other parties, or by any other cause; and such failures or delays or diminution shall never be deemed to constitute an eviction or disturbance of Tenant's use and possession of the Premises or relieve Tenant from paying Rent or performing any of its obligations under this Lease. Furthermore, Landlord shall not be liable under any circumstances for a loss of, or injury to, property or for injury to, or interference with, Tenant's business, including, without limitation, loss of profits, however occurring, through or in connection with or incidental to a failure to furnish any of the services or utilities as set forth in this Article 6. ARTICLE 7 REPAIRS Landlord shall be responsible for repairs to the exterior walls, foundation and roof of the Building, the structural portions of the floors of the Building, and the systems and equipment of the Building, except to the extent that such repairs are required due to the negligence or willful misconduct of Tenant; provided, however, that if such repairs are due to the negligence or willful misconduct of Tenant, Landlord shall nevertheless make such repairs at Tenant's expense, or, if covered by Landlord's insurance, Tenant shall only be obligated to pay any deductible in connection therewith. Tenant shall, at Tenant's own expense, pursuant to the terms of this Lease, including without limitation Article 8 hereof, keep the Premises, including all improvements, fixtures and furnishings therein, and the floor or floors of the Building on which the Premises are located, in good order, repair and condition at all times during the Lease Term. In addition, -12- 16 Tenant shall, at Tenant's own expense, but under the supervision and subject to the prior approval of Landlord, and within any reasonable period of time specified by Landlord, pursuant to the terms of this Lease, including without limitation Article 8 hereof, promptly and adequately repair all damage to the Premises and replace or repair all damaged, broken, or worn fixtures and appurtenances, except for damage caused by ordinary wear and tear or beyond the reasonable control of Tenant; provided however, that, at Landlord's option, or if Tenant fails to make such repairs, Landlord may, but need not, make such repairs and replacements, and Tenant shall pay Landlord the cost thereof, including a percentage of the cost thereof (to be uniformly established for the Building and/or the Project) sufficient to reimburse Landlord for all overhead, general conditions, fees and other costs or expenses arising from Landlord's involvement with such repairs and replacements forthwith upon being billed for same. Landlord may, but shall not be required to, enter the Premises at all reasonable times to make such repairs, alterations, improvements or additions to the Premises or to the Project or to any equipment located in the Project as Landlord shall desire or deem necessary or as Landlord may be required to do by governmental or quasi-governmental authority or court order or decree. Tenant hereby waives any and all rights under and benefits of subsection 1 of Section 1932 and Sections 1941 and 1942 of the California Civil Code or under any similar law, statute, or ordinance now or hereafter in effect. ARTICLE 8 ADDITIONS AND ALTERATIONS 8.1 LANDLORD'S CONSENT TO ALTERATIONS. Tenant may not make any improvements, alterations, additions or changes to the Premises or any mechanical, plumbing or HVAC facilities or systems pertaining to the Premises (collectively, the "Alterations") without first procuring the prior written consent of Landlord to such Alterations, which consent shall be requested by Tenant not less than thirty (30) days prior to the commencement thereof, and which consent shall not be unreasonably withheld by Landlord, provided it shall be deemed reasonable for Landlord to withhold its consent to any Alteration which adversely affects the structural portions or the systems or equipment of the Building or is visible from the exterior of the Building. Notwithstanding anything in this Article 8 to the contrary, Tenant shall have the right, without Landlord's consent but upon five (5) business days prior notice to Landlord, to make strictly cosmetic, non-structural additions and alterations to the Premises that do not (i) involve the expenditure of more than $5,000.00 in each instance, (ii) affect the exterior appearance of the Premises or Building, or (iii) affect the Building's electrical, ventilation, plumbing, elevator, mechanical, air conditioning or other similar systems. The construction of the initial improvements to the Premises shall be governed by the terms of the Tenant Work Letter and not the terms of this Article 8. 8.2 MANNER OF CONSTRUCTION. Landlord may impose, as a condition of its consent to any and all Alterations or repairs of the Premises or about the Premises, such requirements as Landlord in its sole discretion may deem desirable, including, but not limited to, the requirement that Tenant utilize for such purposes only contractors, subcontractors, materials, mechanics and materialmen selected by Tenant from a list provided and approved by Landlord, the requirement that upon Landlord's request, Tenant shall, at Tenant's expense, remove such Alterations upon the expiration or any early termination of the Lease Term. Tenant shall construct such Alterations and perform such repairs in a good and workmanlike manner, in conformance with any and all applicable federal, state, county or municipal laws, rules and regulations and pursuant to a valid building permit, issued by the City of Los Angeles, all in conformance with Landlord's construction rules and regulations. In the event Tenant performs any Alterations in the Premises which require or give rise to governmentally required changes to the "Base Building," as that term is defined below, then Landlord shall, at Tenant's expense, make such changes to the Base Building. The "Base Building" shall include the structural portions of the Building, and the public restrooms and the systems and equipment located in the internal core of the Building on the floor or floors on which the Premises are located. In performing the work of any such Alterations, Tenant shall have the work performed in such manner so as not to obstruct access to the Project or any portion thereof, by any other tenant of the Project, and so as not to obstruct the business of Landlord or other tenants in the Project. In addition to Tenant's obligations under Article 9 of this Lease, upon completion of any Alterations, Tenant agrees to cause a Notice of Completion to be recorded in the office of the Recorder of the County of Los Angeles in accordance with Section 3093 of the Civil Code of the State of California or any successor statute, and Tenant shall deliver to the Project management office a reproducible copy of the "as -13- 17 built" drawings of the Alterations as well as all permits, approvals and other documents issued by any governmental agency in connection with the Alterations. 8.3 PAYMENT FOR IMPROVEMENTS. If payment is made directly to contractors, Tenant shall comply with Landlord's requirements for final lien releases and waivers in connection with Tenant's payment for work to contractors. Whether or not Tenant orders any work directly from Landlord, Tenant shall pay to Landlord a percentage of the cost of such work sufficient to compensate Landlord for all overhead, general conditions, fees and other costs and expenses arising from Landlord's involvement with such work (the "Improvement Overhead Fee"); provided, however, in no event shall the Improvement Overhead Fee exceed three percent (3%) of the total cost of such work. 8.4 CONSTRUCTION INSURANCE. In addition to the requirements of Article 10 of this Lease, in the event that Tenant makes any Alterations, prior to the commencement of such Alterations, Tenant shall provide Landlord with evidence that Tenant carries "Builder's All Risk" insurance in an amount approved by Landlord covering the construction of such Alterations, and such other insurance as Landlord may require, it being understood and agreed that all of such Alterations shall be insured by Tenant pursuant to Article 10 of this Lease immediately upon completion thereof. In addition, Landlord may, in its discretion, require Tenant to obtain a lien and completion bond or some alternate form of security satisfactory to Landlord in an amount sufficient to ensure the lien-free completion of such Alterations and naming Landlord as a co-obligee. 8.5 LANDLORD'S PROPERTY. All Alterations, improvements, fixtures, equipment and/or appurtenances which may be installed or placed in or about the Premises, from time to time, shall be at the sole cost of Tenant and shall be and become the property of Landlord, except that Tenant may remove any Alterations, improvements, fixtures and/or equipment which Tenant can substantiate to Landlord have not been paid for with any Tenant improvement allowance funds provided to Tenant by Landlord, provided Tenant repairs any damage to the Premises and Building caused by such removal and returns the affected portion of the Premises to a building standard tenant improved condition as determined by Landlord. Furthermore, Landlord may, by written notice to Tenant prior to the end of the Lease Term, or given following any earlier termination of this Lease, require Tenant, at Tenant's expense, to remove any Alterations or improvements in the Premises, and to repair any damage to the Premises and Building caused by such removal and returns the affected portion of the Premises to a building standard tenant improved condition as determined by Landlord. If Tenant fails to complete such removal and/or to repair any damage caused by the removal of any Alterations or improvements in the Premises, and returns the affected portion of the Premises to a building standard tenant improved condition as determined by Landlord, Landlord may do so and may charge the cost thereof to Tenant. Tenant hereby protects, defends, indemnifies and holds Landlord harmless from any liability, cost, obligation, expense or claim of lien in any manner relating to the installation, placement, removal or financing of any such Alterations, improvements, fixtures and/or equipment in, on or about the Premises, which obligations of Tenant shall survive the expiration or earlier termination of this Lease. ARTICLE 9 COVENANT AGAINST LIENS Tenant shall keep the Project and Premises free from any liens or encumbrances arising out of the work performed, materials furnished or obligations incurred by or on behalf of Tenant, and shall protect, defend, indemnify and hold Landlord harmless from and against any claims, liabilities, judgments or costs (including, without limitation, reasonable attorneys' fees and costs) arising out of same or in connection therewith. Tenant shall give Landlord notice at least twenty (20) days prior to the commencement of any such work on the Premises (or such additional time as may be necessary under applicable laws) to afford Landlord the opportunity of posting and recording appropriate notices of non-responsibility. Tenant shall remove any such lien or encumbrance by bond or otherwise within five (5) days after notice by Landlord, and if Tenant shall fail to do so, Landlord may pay the amount necessary to remove such lien or encumbrance, without being responsible for investigating the validity thereof. The amount so paid shall be deemed Additional Rent under this Lease payable upon demand, without limitation as to other remedies available to Landlord under this Lease. Nothing contained in this Lease shall authorize -14- 18 Tenant to do any act which shall subject Landlord's title to the Building or Premises to any liens or encumbrances whether claimed by operation of law or express or implied contract. ARTICLE 10 INSURANCE 10.1 INDEMNIFICATION AND WAIVER. Tenant hereby assumes all risk of damage to property or injury to persons in, upon or about the Premises from any cause whatsoever and agrees that Landlord, its partners, subpartners and their respective officers, agents, servants, employees, and independent contractors (collectively, "Landlord Parties") shall not be liable for, and are hereby released from any responsibility for, any damage either to person or property or resulting from the loss of use thereof, which damage is sustained by Tenant or by other persons claiming through Tenant. Tenant shall indemnify, defend, protect, and hold harmless the Landlord Parties from any and all loss, cost, damage, expense and liability (including without limitation court costs and reasonable attorneys' fees) incurred in connection with or arising from any cause in, on or about the Premises, any acts, omissions or negligence of Tenant or of any person claiming by, through or under Tenant, or of the contractors, agents, servants, employees, invitees, guests or licensees of Tenant or any such person, in, on or about the Project or any breach of the terms of this Lease, either prior to, during, or after the expiration of the Lease Term, provided that the terms of the foregoing indemnity shall not apply to the negligence or willful misconduct of Landlord. Should Landlord be named as a defendant in any suit brought against Tenant in connection with or arising out of Tenant's occupancy of the Premises, Tenant shall pay to Landlord its costs and expenses incurred in such suit, including without limitation, its actual professional fees such as appraisers', accountants' and attorneys' fees. Further, Tenant's agreement to indemnify Landlord pursuant to this Section 10.1 is not intended and shall not relieve any insurance carrier of its obligations under policies required to be carried by Tenant pursuant to the provisions of this Lease, to the extent such policies cover the matters subject to Tenant's indemnification obligations; nor shall they supersede any inconsistent agreement of the parties set forth in any other provision of this Lease. The provisions of this Section 10.1 shall survive the expiration or sooner termination of this Lease with respect to any claims or liability arising in connection with any event occurring prior to such expiration or termination. 10.2 TENANT'S COMPLIANCE WITH LANDLORD'S FIRE AND CASUALTY INSURANCE. Tenant shall, at Tenant's expense, comply with all insurance company requirements pertaining to the use of the Premises. If Tenant's conduct or use of the Premises causes any increase in the premium for such insurance policies then Tenant shall reimburse Landlord for any such increase. Tenant, at Tenant's expense, shall comply with all rules, orders, regulations or requirements of the American Insurance Association (formerly the National Board of Fire Underwriters) and with any similar body. 10.3 TENANT'S INSURANCE. Tenant shall maintain the following coverages in the following amounts. 10.3.1 Commercial General Liability Insurance covering the insured against claims of bodily injury, personal injury and property damage (including loss of use thereof) arising out of Tenant's operations, and contractual liabilities (covering the performance by Tenant of its indemnity agreements) including a Broad Form endorsement covering the insuring provisions of this Lease and the performance by Tenant of the indemnity agreements set forth in Section 10.1 of this Lease, for limits of liability not less than: Bodily Injury and $5,000,000 each occurrence Property Damage Liability $5,000,000 annual aggregate Personal Injury Liability $5,000,000 each occurrence $5,000,000 annual aggregate 0% Insured's participation 10.3.2 Physical Damage Insurance covering (i) all office furniture, business and trade fixtures, office equipment, free-standing cabinet work, movable partitions, merchandise and all other items of Tenant's property on the Premises installed by, for, or at the expense of Tenant, (ii) the "Tenant Improvements," as that term is defined in Section 2.1 of the Tenant Work Letter, and any other improvements which exist in the Premises as of the Lease -15- 19 Commencement Date (excluding the Base Building) (the "Original Improvements"), and (iii) all other improvements, alterations and additions to the Premises. Such insurance shall be written on an "all risks" of physical loss or damage basis, for the full replacement cost value (subject to reasonable deductible amounts) new without deduction for depreciation of the covered items and in amounts that meet any co-insurance clauses of the policies of insurance and shall include coverage for damage or other loss caused by fire or other peril including, but not limited to, vandalism and malicious mischief, theft, water damage of any type, including sprinkler leakage, bursting or stoppage of pipes, and explosion, and providing business interruption coverage for a period of one year. 10.3.3 Worker's Compensation and Employer's Liability or other similar insurance pursuant to all applicable state and local statutes and regulations. 10.4 FORM OF POLICIES. The minimum limits of policies of insurance required of Tenant under this Lease shall in no event limit the liability of Tenant under this Lease. Such insurance shall (i) name Landlord, and any other party the Landlord so specifies, as an additional insured, including Landlord's managing agent, if any; (ii) specifically cover the liability assumed by Tenant under this Lease, including, but not limited to, Tenant's obligations under Section 10.1 of this Lease; (iii) be issued by an insurance company having a rating of not less than A-X in Best's Insurance Guide or which is otherwise acceptable to Landlord and licensed to do business in the State of California; (iv) be primary insurance as to all claims thereunder and provide that any insurance carried by Landlord is excess and is non-contributing with any insurance requirement of Tenant; (v) be in form and content reasonably acceptable to Landlord; and (vi) provide that said insurance shall not be canceled or coverage changed unless thirty (30) days' prior written notice shall have been given to Landlord and any mortgagee of Landlord. Tenant shall deliver said policy or policies or certificates thereof to Landlord on or before the Lease Commencement Date and at least thirty (30) days before the expiration dates thereof. In the event Tenant shall fail to procure such insurance, or to deliver such policies or certificate, Landlord may, at its option, procure such policies for the account of Tenant, and the cost thereof shall be paid to Landlord within five (5) days after delivery to Tenant of bills therefor. 10.5 SUBROGATION. Landlord and Tenant intend that their respective property loss risks shall be borne by reasonable insurance carriers to the extent above provided, and Landlord and Tenant hereby agree to look solely to, and seek recovery only from, their respective insurance carriers in the event of a property loss to the extent that such coverage is agreed to be provided hereunder. The parties each hereby waive all rights and claims against each other for such losses, and waive all rights of subrogation of their respective insurers, provided such waiver of subrogation shall not affect the right to the insured to recover thereunder. The parties agree that their respective insurance policies are now, or shall be, endorsed such that the waiver of subrogation shall not affect the right of the insured to recover thereunder, so long as no material additional premium is charged therefor. 10.6 ADDITIONAL INSURANCE OBLIGATIONS. Tenant shall carry and maintain during the entire Lease Term, at Tenant's sole cost and expense, increased amounts of the insurance required to be carried by Tenant pursuant to this Article 10 and such other reasonable types of insurance coverage and in such reasonable amounts covering the Premises and Tenant's operations therein, as may be reasonably requested by Landlord. ARTICLE 11 DAMAGE AND DESTRUCTION 11.1 REPAIR OF DAMAGE TO PREMISES BY LANDLORD. Tenant shall promptly notify Landlord of any damage to the Premises resulting from fire or any other casualty. If the Premises or any Common Areas serving or providing access to the Premises shall be damaged by fire or other casualty, Landlord shall promptly and diligently, subject to reasonable delays for insurance adjustment or other matters beyond Landlord's reasonable control, and subject to all other terms of this Article 11, restore the Base Building and such Common Areas. Such restoration shall be to substantially the same condition of the Base Building and the Common Areas prior to the casualty, except for modifications required by zoning and building codes and other laws or by the holder of a mortgage on the Building or Project or any other modifications to the Common Areas deemed desirable by Landlord, provided that access to the Premises and any common restrooms serving the Premises shall not be materially impaired. Upon the -16- 20 occurrence of any damage to the Premises, upon notice (the "Landlord Repair Notice") to Tenant from Landlord, Tenant shall assign to Landlord (or to any party designated by Landlord) all insurance proceeds payable to Tenant under Tenant's insurance required under Section 10.3 of this Lease, and Landlord shall repair any injury or damage to the Tenant Improvements and the Original Improvements installed in the Premises and shall return such Tenant Improvements and Original Improvements to their original condition; provided that if the cost of such repair by Landlord exceeds the amount of insurance proceeds received by Landlord from Tenant's insurance carrier, as assigned by Tenant, the cost of such repairs shall be paid by Tenant to Landlord prior to Landlord's commencement of repair of the damage. In the event that Landlord does not deliver the Landlord Repair Notice within forty-five (45) days following the date the casualty becomes known to Landlord, Tenant shall, at its sole cost and expense, repair any injury or damage to the Tenant Improvements and the Original Improvements installed in the Premises and shall return such Tenant Improvements and Original Improvements to their original condition. Whether or not Landlord delivers a Landlord Repair Notice, prior to the commencement of construction, Tenant shall submit to Landlord, for Landlord's review and approval, all plans, specifications and working drawings relating thereto, and Landlord shall select the contractors to perform such improvement work. Landlord shall not be liable for any inconvenience or annoyance to Tenant or its visitors, or injury to Tenant's business resulting in any way from such damage or the repair thereof; provided however, that if such fire or other casualty shall have damaged the Premises or Common Areas necessary to Tenant's occupancy, Landlord shall allow Tenant a proportionate abatement of Rent to the extent Landlord is reimbursed from the proceeds of rental interruption insurance purchased by Landlord as part of Operating Expenses, during the time and to the extent the Premises are unfit for occupancy for the purposes permitted under this Lease, and not occupied by Tenant as a result thereof; provided, further, however, that if the damage or destruction is due to the negligence or wilful misconduct of Tenant or any of its agents, employees, contractors, invitees or guests, Tenant shall be responsible for any reasonable, applicable insurance deductible (which shall be payable to Landlord upon demand) and there shall be no rent abatement. In the event that Landlord shall not deliver the Landlord Repair Notice, Tenant's right to rent abatement pursuant to the preceding sentence shall terminate as of the date which is reasonably determined by Landlord to be the date Tenant should have completed repairs to the Premises assuming Tenant used reasonable due diligence in connection therewith. 11.2 LANDLORD'S OPTION TO REPAIR. Notwithstanding the terms of Section 11.1 of this Lease, Landlord may elect not to rebuild and/or restore the Premises, Building and/or Project, and instead terminate this Lease, by notifying Tenant in writing of such termination within forty-five (45) days after the date of discovery of the damage, such notice to include a termination date giving Tenant sixty (60) days to vacate the Premises, but Landlord may so elect only if the Building or Project shall be damaged by fire or other casualty or cause, whether or not the Premises are affected, and one or more of the following conditions is present: (i) in Landlord's reasonable judgment, repairs cannot reasonably be completed within ninety (90) days after the date of discovery of the damage (when such repairs are made without the payment of overtime or other premiums); (ii) the holder of any mortgage on the Building or Project or ground lessor with respect to the Building or Project shall require that the insurance proceeds or any portion thereof be used to retire the mortgage debt, or shall terminate the ground lease, as the case may be; (iii) the damage is not fully covered by Landlord's insurance policies; (iv) Landlord decides to rebuild the Building or Common Areas so that they will be substantially different structurally or architecturally; or (v) the damage occurs during the last twelve (12) months of the Lease Term. 11.3 WAIVER OF STATUTORY PROVISIONS. The provisions of this Lease, including this Article 11, constitute an express agreement between Landlord and Tenant with respect to any and all damage to, or destruction of, all or any part of the Premises, the Building or the Project, and any statute or regulation of the State of California, including, without limitation, Sections 1932(2) and 1933(4) of the California Civil Code, with respect to any rights or obligations concerning damage or destruction in the absence of an express agreement between the parties, and any other statute or regulation, now or hereafter in effect, shall have no application to this Lease or any damage or destruction to all or any part of the Premises, the Building or the Project. -17- 21 ARTICLE 12 NONWAIVER No provision of this Lease shall be deemed waived by either party hereto unless expressly waived in a writing signed thereby. The waiver by either party hereto of any breach of any term, covenant or condition herein contained shall not be deemed to be a waiver of any subsequent breach of same or any other term, covenant or condition herein contained. The subsequent acceptance of Rent hereunder by Landlord shall not be deemed to be a waiver of any preceding breach by Tenant of any term, covenant or condition of this Lease, other than the failure of Tenant to pay the particular Rent so accepted, regardless of Landlord's knowledge of such preceding breach at the time of acceptance of such Rent. No acceptance of a lesser amount than the Rent herein stipulated shall be deemed a waiver of Landlord's right to receive the full amount due, nor shall any endorsement or statement on any check or payment or any letter accompanying such check or payment be deemed an accord and satisfaction, and Landlord may accept such check or payment without prejudice to Landlord's right to recover the full amount due. No receipt of monies by Landlord from Tenant after the termination of this Lease shall in any way alter the length of the Lease Term or of Tenant's right of possession hereunder, or after the giving of any notice shall reinstate, continue or extend the Lease Term or affect any notice given Tenant prior to the receipt of such monies, it being agreed that after the service of notice or the commencement of a suit, or after final judgment for possession of the Premises, Landlord may receive and collect any Rent due, and the payment of said Rent shall not waive or affect said notice, suit or judgment. ARTICLE 13 CONDEMNATION If the whole or any part of the Premises, Building or Project shall be taken by power of eminent domain or condemned by any competent authority for any public or quasi-public use or purpose, or if any adjacent property or street shall be so taken or condemned, or reconfigured or vacated by such authority in such manner as to require the use, reconstruction or remodeling of any part of the Premises, Building or Project, or if Landlord shall grant a deed or other instrument in lieu of such taking by eminent domain or condemnation, Landlord shall have the option to terminate this Lease effective as of the date possession is required to be surrendered to the authority. If more than twenty-five percent (25%) of the rentable square feet of the Premises is taken, or if access to the Premises is substantially impaired, in each case for a period in excess of one hundred eighty (180) days, Tenant shall have the option to terminate this Lease effective as of the date possession is required to be surrendered to the authority. Tenant shall not because of such taking assert any claim against Landlord or the authority for any compensation because of such taking and Landlord shall be entitled to the entire award or payment in connection therewith, except that Tenant shall have the right to file any separate claim available to Tenant for any taking of Tenant's personal property and fixtures belonging to Tenant and removable by Tenant upon expiration of the Lease Term pursuant to the terms of this Lease, and for moving expenses, so long as such claims do not diminish the award available to Landlord, its ground lessor with respect to the Building or Project or its mortgagee, and such claim is payable separately to Tenant. All Rent shall be apportioned as of the date of such termination. If any part of the Premises shall be taken, and this Lease shall not be so terminated, the Rent shall be proportionately abated. Tenant hereby waives any and all rights it might otherwise have pursuant to Section 1265.130 of The California Code of Civil Procedure. Notwithstanding anything to the contrary contained in this Article 13, in the event of a temporary taking of all or any portion of the Premises for a period of one hundred and eighty (180) days or less, then this Lease shall not terminate but the Base Rent and the Additional Rent shall be abated for the period of such taking in proportion to the ratio that the amount of rentable square feet of the Premises taken bears to the total rentable square feet of the Premises. Landlord shall be entitled to receive the entire award made in connection with any such temporary taking. ARTICLE 14 ASSIGNMENT AND SUBLETTING 14.1 TRANSFERS. Tenant shall not, without the prior written consent of Landlord, assign, mortgage, pledge, hypothecate, encumber, or permit any lien to attach to, or otherwise -18- 22 transfer, this Lease or any interest hereunder, permit any assignment, or other transfer of this Lease or any interest hereunder by operation of law, sublet the Premises or any part thereof, or enter into any license or concession agreements or otherwise permit the occupancy or use of the Premises or any part thereof by any persons other than Tenant and its employees and contractors (all of the foregoing are hereinafter sometimes referred to collectively as "Transfers" and any person to whom any Transfer is made or sought to be made is hereinafter sometimes referred to as a "Transferee"). If Tenant desires Landlord's consent to any Transfer, Tenant shall notify Landlord in writing, which notice (the "Transfer Notice") shall include (i) the proposed effective date of the Transfer, which shall not be less than thirty (30) days nor more than one hundred eighty (180) days after the date of delivery of the Transfer Notice, (ii) a description of the portion of the Premises to be transferred (the "Subject Space"), (iii) all of the terms of the proposed Transfer and the consideration therefor, including calculation of the "Transfer Premium", as that term is defined in Section 14.3 below, in connection with such Transfer, the name and address of the proposed Transferee, and a copy of all existing executed and/or proposed documentation pertaining to the proposed Transfer, including all existing operative documents to be executed to evidence such Transfer or the agreements incidental or related to such Transfer, provided that Landlord shall have the right to require Tenant to utilize Landlord's standard Transfer documents in connection with the documentation of such Transfer, (iv) current financial statements of the proposed Transferee certified by an officer, partner or owner thereof, business credit and personal references and history of the proposed Transferee and any other information required by Landlord which will enable Landlord to determine the financial responsibility, character, and reputation of the proposed Transferee, nature of such Transferee's business and proposed use of the Subject Space and (v) an executed estoppel certificate from Tenant in the form attached hereto as Exhibit E. Any Transfer made without Landlord's prior written consent shall, at Landlord's option, be null, void and of no effect, and shall, at Landlord's option, constitute a default by Tenant under this Lease. Whether or not Landlord consents to any proposed Transfer, Tenant shall pay Landlord's review and processing fees, as well as any reasonable professional fees (including, without limitation, attorneys', accountants', architects', engineers' and consultants' fees) incurred by Landlord, within thirty (30) days after written request by Landlord. 14.2 LANDLORD'S CONSENT. Landlord shall not unreasonably withhold its consent to any proposed Transfer of the Subject Space to the Transferee on the terms specified in the Transfer Notice. Without limitation as to other reasonable grounds for withholding consent, the parties hereby agree that it shall be reasonable under this Lease and under any applicable law for Landlord to withhold consent to any proposed Transfer where one or more of the following apply: 14.2.1 The Transferee is of a character or reputation or engaged in a business which is not consistent with the quality of the Building or the Project, or would be a significantly less prestigious occupant of the Building than Tenant; 14.2.2 The Transferee intends to use the Subject Space for purposes which are not permitted under this Lease; 14.2.3 The Transferee is either a governmental agency or instrumentality thereof; 14.2.4 Intentionally Omitted. 14.2.5 The Transferee is not a party of reasonable financial worth and/or financial stability in light of the responsibilities to be undertaken in connection with the Transfer on the date consent is requested; 14.2.6 The proposed Transfer would cause a violation of another lease for space in the Project, or would give an occupant of the Project a right to cancel its lease; or 14.2.7 Either the proposed Transferee, or any person or entity which directly or indirectly, controls, is controlled by, or is under common control with, the proposed Transferee, (i) occupies space in the Project at the time of the request for consent, or (ii) is negotiating with Landlord to lease space in the Project at such time, or (iii) has negotiated with Landlord during the twelve (12)-month period immediately preceding the Transfer Notice. If Landlord consents to any Transfer pursuant to the terms of this Section 14.2 (and does not exercise any recapture rights Landlord may have under Section 14.4 of this Lease), Tenant -19- 23 may within six (6) months after Landlord's consent, but not later than the expiration of said six-month period, enter into such Transfer of the Premises or portion thereof, upon substantially the same terms and conditions as are set forth in the Transfer Notice furnished by Tenant to Landlord pursuant to Section 14.1 of this Lease, provided that if there are any changes in the terms and conditions from those specified in the Transfer Notice (i) such that Landlord would initially have been entitled to refuse its consent to such Transfer under this Section 14.2, or (ii) which would cause the proposed Transfer to be more favorable to the Transferee than the terms set forth in Tenant's original Transfer Notice, Tenant shall again submit the Transfer to Landlord for its approval and other action under this Article 14 (including Landlord's right of recapture, if any, under Section 14.4 of this Lease). Notwithstanding anything to the contrary in this Lease, if Tenant or any proposed Transferee claims that Landlord has unreasonably withheld or delayed its consent under Section 14.2 or otherwise has breached or acted unreasonably under this Article 14, their sole remedies shall be a declaratory judgment and an injunction for the relief sought without any monetary damages, and Tenant hereby waives all other remedies, including, without limitation, any right at law or equity to terminate this Lease, on its own behalf and, to the extent permitted under all applicable laws, on behalf of the proposed Transferee. Tenant shall indemnify, defend and hold harmless Landlord from any and all liability, losses, claims, damages, costs, expenses, causes of action and proceedings involving any third party or parties (including without limitation Tenant's proposed subtenant or assignee) who claim they were damaged by Landlord's wrongful withholding or conditioning of Landlord's consent. 14.3 TRANSFER PREMIUM. If Landlord consents to a Transfer, as a condition thereto which the parties hereby agree is reasonable, Tenant shall pay to Landlord fifty percent (50%) of any "Transfer Premium," as that term is defined in this Section 14.3, received by Tenant from such Transferee. "Transfer Premium" shall mean all rent, additional rent or other consideration payable by such Transferee in connection with the Transfer in excess of the Rent and Additional Rent payable by Tenant under this Lease during the term of the Transfer on a per rentable square foot basis if less than all of the Premises is transferred, after deducting the reasonable expenses incurred by Tenant for (i) any changes, alterations and improvements to the Premises in connection with the Transfer, (ii) any free base rent reasonably provided to the Transferee, and (iii) any brokerage commissions in connection with the Transfer. "Transfer Premium" shall also include, but not be limited to, key money, bonus money or other cash consideration paid by Transferee to Tenant in connection with such Transfer, and any payment in excess of fair market value for services rendered by Tenant to Transferee or for assets, fixtures, inventory, equipment, or furniture transferred by Tenant to Transferee in connection with such Transfer. In the calculations of the Rent (as it relates to the Transfer Premium calculated under this Section 14.3), the Rent paid during each annual period for the Subject Space shall be computed after adjusting such rent to the actual effective rent to be paid, taking into consideration any and all leasehold concessions granted in connection therewith, including, but not limited to, any rent credit and tenant improvement allowance. For purposes of calculating any such effective rent all such concessions shall be amortized on a straight-line basis over the relevant term. 14.4 LANDLORD'S OPTION AS TO SUBJECT SPACE. Notwithstanding anything to the contrary contained in this Article 14, Landlord shall have the option, by giving written notice to Tenant within thirty (30) days after receipt of any Transfer Notice, to recapture the Subject Space. Such recapture notice shall cancel and terminate this Lease with respect to the Subject Space as of the date stated in the Transfer Notice as the effective date of the proposed Transfer until the last day of the term of the Transfer as set forth in the Transfer Notice (or at Landlord's option, shall cause the Transfer to be made to Landlord or its agent, in which case the parties shall execute the Transfer documentation promptly thereafter). In the event of a recapture by Landlord, if this Lease shall be canceled with respect to less than the entire Premises, the Rent reserved herein shall be prorated on the basis of the number of rentable square feet retained by Tenant in proportion to the number of rentable square feet contained in the Premises, and this Lease as so amended shall continue thereafter in full force and effect, and upon request of either party, the parties shall execute written confirmation of the same. If Landlord declines, or fails to elect in a timely manner to recapture the Subject Space under this Section 14.4, then, provided Landlord has consented to the proposed Transfer, Tenant shall be entitled to proceed to transfer the Subject Space to the proposed Transferee, subject to provisions of this Article 14. 14.5 EFFECT OF TRANSFER. If Landlord consents to a Transfer, (i) the terms and conditions of this Lease shall in no way be deemed to have been waived or modified, (ii) such consent shall not be deemed consent to any further Transfer by either Tenant or a Transferee, (iii) Tenant shall deliver to Landlord, promptly after execution, an original executed copy of all -20- 24 documentation pertaining to the Transfer in form reasonably acceptable to Landlord, (iv) Tenant shall furnish upon Landlord's request a complete statement, certified by an independent certified public accountant, or Tenant's chief financial officer, setting forth in detail the computation of any Transfer Premium Tenant has derived and shall derive from such Transfer, and (v) no Transfer relating to this Lease or agreement entered into with respect thereto, whether with or without Landlord's consent, shall relieve Tenant or any guarantor of the Lease from any liability under this Lease, including, without limitation, in connection with the Subject Space. Landlord or its authorized representatives shall have the right at all reasonable times to audit the books, records and papers of Tenant relating to any Transfer, and shall have the right to make copies thereof. If the Transfer Premium respecting any Transfer shall be found understated, Tenant shall, within thirty (30) days after demand, pay the deficiency, and if understated by more than two percent (2%), Tenant shall pay Landlord's costs of such audit. 14.6 ADDITIONAL TRANSFERS. For purposes of this Lease, the term "Transfer" shall also include (i) if Tenant is a partnership, the withdrawal or change, voluntary, involuntary or by operation of law, of fifty percent (50%) or more of the partners, or transfer of fifty percent (50%) or more of partnership interests, within a twelve (12)-month period, or the dissolution of the partnership without immediate reconstitution thereof, and (ii) if Tenant is a closely held corporation (i.e., whose stock is not publicly held and not traded through an exchange or over the counter), (A) the dissolution, merger, consolidation or other reorganization of Tenant or (B) the sale or other transfer of an aggregate of fifty percent (50%) or more of the voting shares of Tenant (other than to immediate family members by reason of gift or death), within a twelve (12)-month period, or (C) the sale, mortgage, hypothecation or pledge of an aggregate of fifty percent (50%) or more of the value of the unencumbered assets of Tenant within a twelve (12)-month period. 14.7 OCCURRENCE OF DEFAULT. Any Transfer hereunder shall be subordinate and subject to the provisions of this Lease, and if this Lease shall be terminated during the term of any Transfer, Landlord shall have the right to: (i) treat such Transfer as cancelled and repossess the Subject Space by any lawful means, or (ii) require that such Transferee attorn to and recognize Landlord as its landlord under any such Transfer. If Tenant shall be in default under this Lease, Landlord is hereby irrevocably authorized, as Tenant's agent and attorney-in-fact, to direct any Transferee to make all payments under or in connection with the Transfer directly to Landlord (which Landlord shall apply towards Tenant's obligations under this Lease) until such default is cured. Such Transferee shall rely on any representation by Landlord that Tenant is in default hereunder, without any need for confirmation thereof by Tenant. Upon any assignment, the assignee shall assume in writing all obligations and covenants of Tenant thereafter to be performed or observed under this Lease. No collection or acceptance of rent by Landlord from any Transferee shall be deemed a waiver of any provision of this Article 14 or the approval of any Transferee or a release of Tenant from any obligation under this Lease, whether theretofore or thereafter accruing. In no event shall Landlord's enforcement of any provision of this Lease against any Transferee be deemed a waiver of Landlord's right to enforce any term of this Lease against Tenant or any other person. If Tenant's obligations hereunder have been guaranteed, Landlord's consent to any Transfer shall not be effective unless the guarantor also consents to such Transfer. 14.8 NON-TRANSFERS. Notwithstanding anything to the contrary contained in this Article 14, an assignment or subletting of all or a portion of the Premises to an affiliate of Tenant (an entity which is controlled by, controls, or is under common control with, Tenant), shall not be deemed a Transfer under this Article 14, provided that Tenant notifies Landlord of any such assignment or sublease and promptly supplies Landlord with any documents or information requested by Landlord regarding such assignment or sublease or such affiliate, and further provided that such assignment or sublease is not a subterfuge by Tenant to avoid its obligations under this Lease. "CONTROL," as used in this Section 14.8, shall mean the ownership, directly or indirectly, of at least fifty-one percent (51%) of the voting securities of, or possession of the right to vote, in the ordinary direction of its affairs, of at least fifty-one percent (51%) of the voting interest in, any person or entity. -21- 25 ARTICLE 15 SURRENDER OF PREMISES; OWNERSHIP AND REMOVAL OF TRADE FIXTURES 15.1 SURRENDER OF PREMISES. No act or thing done by Landlord or any agent or employee of Landlord during the Lease Term shall be deemed to constitute an acceptance by Landlord of a surrender of the Premises unless such intent is specifically acknowledged in writing by Landlord. The delivery of keys to the Premises to Landlord or any agent or employee of Landlord shall not constitute a surrender of the Premises or effect a termination of this Lease, whether or not the keys are thereafter retained by Landlord, and notwithstanding such delivery Tenant shall be entitled to the return of such keys at any reasonable time upon request until this Lease shall have been properly terminated. The voluntary or other surrender of this Lease by Tenant, whether accepted by Landlord or not, or a mutual termination hereof, shall not work a merger, and at the option of Landlord shall operate as an assignment to Landlord of all subleases or subtenancies affecting the Premises or terminate any or all such sublessees or subtenancies. 15.2 REMOVAL OF TENANT PROPERTY BY TENANT. Upon the expiration of the Lease Term, or upon any earlier termination of this Lease, Tenant shall, subject to the provisions of this Article 15, quit and surrender possession of the Premises to Landlord in as good order and condition as when Tenant took possession and as thereafter improved by Landlord and/or Tenant, reasonable wear and tear and repairs which are specifically made the responsibility of Landlord hereunder excepted. Upon such expiration or termination, Tenant shall, without expense to Landlord, remove or cause to be removed from the Premises all debris and rubbish, and such items of furniture, equipment, business and trade fixtures, free-standing cabinet work, movable partitions and other articles of personal property owned by Tenant or installed or placed by Tenant at its expense in the Premises, and such similar articles of any other persons claiming under Tenant, as Landlord may, in its sole discretion, require to be removed, and Tenant shall repair at its own expense all damage to the Premises and Building resulting from such removal. ARTICLE 16 HOLDING OVER If Tenant holds over after the expiration of the Lease Term or earlier termination thereof, with or without the express or implied consent of Landlord, such tenancy shall be from month-to-month only, and shall not constitute a renewal hereof or an extension for any further term, and in such case Rent shall be payable at a monthly rate equal to one hundred fifty percent (150%) of the Rent applicable during the last rental period of the Lease Term under this Lease. Such month-to-month tenancy shall be subject to every other applicable term, covenant and agreement contained herein. Nothing contained in this Article 16 shall be construed as consent by Landlord to any holding over by Tenant, and Landlord expressly reserves the right to require Tenant to surrender possession of the Premises to Landlord as provided in this Lease upon the expiration or other termination of this Lease. The provisions of this Article 16 shall not be deemed to limit or constitute a waiver of any other rights or remedies of Landlord provided herein or at law. If Tenant fails to surrender the Premises upon the termination or expiration of this Lease, in addition to any other liabilities to Landlord accruing therefrom, Tenant shall protect, defend, indemnify and hold Landlord harmless from all loss, costs (including reasonable attorneys' fees) and liability resulting from such failure, including, without limiting the generality of the foregoing, any claims made by any succeeding tenant founded upon such failure to surrender and any lost profits to Landlord resulting therefrom. ARTICLE 17 ESTOPPEL CERTIFICATES Within ten (10) days following a request in writing by Landlord, Tenant shall execute, acknowledge and deliver to Landlord an estoppel certificate, which, as submitted by Landlord, shall be substantially in the form of Exhibit E, attached hereto (or such other form as may be required by any prospective mortgagee or purchaser of the Project, or any portion thereof), indicating therein any exceptions thereto that may exist at that time, and shall also contain any other information reasonably requested by Landlord or Landlord's mortgagee or prospective mortgagee. Any such certificate may be relied upon by any prospective mortgagee or purchaser -22- 26 of all or any portion of the Project. Tenant shall execute and deliver whatever other instruments may be reasonably required for such purposes. At any time during the Lease Term, Landlord may require Tenant to provide Landlord with a current financial statement and financial statements of the two (2) years prior to the current financial statement year. Such statements shall be prepared in accordance with generally accepted accounting principles and, if such is the normal practice of Tenant, shall be audited by an independent certified public accountant. Failure of Tenant to timely execute, acknowledge and deliver such estoppel certificate or other instruments shall constitute an acceptance of the Premises and an acknowledgment by Tenant that statements included in the estoppel certificate are true and correct, without exception. ARTICLE 18 SUBORDINATION This Lease shall be subject and subordinate to all present and future ground or underlying leases of the Building or Project and to the lien of any mortgage, trust deed or other encumbrances now or hereafter in force against the Building or Project or any part thereof, if any, and to all renewals, extensions, modifications, consolidations and replacements thereof, and to all advances made or hereafter to be made upon the security of such mortgages or trust deeds, unless the holders of such mortgages, trust deeds or other encumbrances, or the lessors under such ground lease or underlying leases, require in writing that this Lease be superior thereto. Upon request from Tenant, Landlord shall use commercially reasonable efforts to obtain a commercially reasonable nondisturbance agreement executed by the landlord under any future ground or underlying lease of the Building or the Project or by the holder or any future mortgage or trust deed encumbering the Building or Project, as applicable. Tenant covenants and agrees in the event any proceedings are brought for the foreclosure of any such mortgage or deed in lieu thereof (or if any ground lease is terminated), to attorn, without any deductions or set-offs whatsoever, to the lienholder or purchaser or any successors thereto upon any such foreclosure sale or deed in lieu thereof (or to the ground lessor), if so requested to do so by such purchaser or lienholder or ground lessor, and to recognize such purchaser or lienholder or ground lessor as the lessor under this Lease, provided such lienholder or purchaser or ground lessor shall agree to accept this Lease and not disturb Tenant's occupancy, so long as Tenant timely pays the rent and observes and performs the terms, covenants and conditions of this Lease to be observed and performed by Tenant. Landlord's interest herein may be assigned as security at any time to any lienholder. Tenant shall, within five (5) days of request by Landlord, execute such further instruments or assurances as Landlord may reasonably deem necessary to evidence or confirm the subordination or superiority of this Lease to any such mortgages, trust deeds, ground leases or underlying leases. Tenant waives the provisions of any current or future statute, rule or law which may give or purport to give Tenant any right or election to terminate or otherwise adversely affect this Lease and the obligations of the Tenant hereunder in the event of any foreclosure proceeding or sale. ARTICLE 19 DEFAULTS; REMEDIES 19.1 EVENTS OF DEFAULT. The occurrence of any of the following shall constitute a default of this Lease by Tenant: 19.1.1 Any failure by Tenant to pay any Rent or any other charge required to be paid under this Lease, or any part thereof, when due unless such failure is cured within five (5) business days after notice; or 19.1.2 Except where a specific time period is otherwise set forth for Tenant's performance in this Lease, in which event the failure to perform by Tenant within such time period shall be a default by Tenant under this Section 19.1.2, any failure by Tenant to observe or perform any other provision, covenant or condition of this Lease to be observed or performed by Tenant where such failure continues for thirty (30) days after written notice thereof from Landlord to Tenant; provided that if the nature of such default is such that the same cannot reasonably be cured within a thirty (30) day period, Tenant shall not be deemed to be in default if it diligently commences such cure within such period and thereafter diligently proceeds to rectify and cure such default; or -23- 27 19.1.3 Abandonment or vacation of all or a substantial portion of the Premises by Tenant; or 19.1.4 The failure by Tenant to observe or perform according to the provisions of Articles 5, 14, 17 or 18 of this Lease where such failure continues for more than two (2) business days after notice from Landlord; or 19.1.5 Tenant's failure to occupy the Premises within ten (10) business days after the Lease Commencement Date. The notice periods provided herein are in lieu of, and not in addition to, any notice periods provided by law. 19.2 REMEDIES UPON DEFAULT. Upon the occurrence of any event of default by Tenant, Landlord shall have, in addition to any other remedies available to Landlord at law or in equity (all of which remedies shall be distinct, separate and cumulative), the option to pursue any one or more of the following remedies, each and all of which shall be cumulative and nonexclusive, without any notice or demand whatsoever. 19.2.1 Terminate this Lease, in which event Tenant shall immediately surrender the Premises to Landlord, and if Tenant fails to do so, Landlord may, without prejudice to any other remedy which it may have for possession or arrearages in rent, enter upon and take possession of the Premises and expel or remove Tenant and any other person who may be occupying the Premises or any part thereof, without being liable for prosecution or any claim or damages therefor; and Landlord may recover from Tenant the following: (i) The worth at the time of any unpaid rent which has been earned at the time of such termination; plus (ii) The worth at the time of award of the amount by which the unpaid rent which would have been earned after termination until the time of award exceeds the amount of such rental loss that Tenant proves could have been reasonably avoided; plus (iii) The worth at the time of award of the amount by which the unpaid rent for the balance of the Lease Term after the time of award exceeds the amount of such rental loss that Tenant proves could have been reasonably avoided; plus (iv) Any other amount necessary to compensate Landlord for all the detriment proximately caused by Tenant's failure to perform its obligations under this Lease or which in the ordinary course of things would be likely to result therefrom, specifically including but not limited to, brokerage commissions and advertising expenses incurred, expenses of remodeling the Premises or any portion thereof for a new tenant, whether for the same or a different use, and any special concessions made to obtain a new tenant; and (v) At Landlord's election, such other amounts in addition to or in lieu of the foregoing as may be permitted from time to time by applicable law. The term "rent" as used in this Section 19.2 shall be deemed to be and to mean all sums of every nature required to be paid by Tenant pursuant to the terms of this Lease, whether to Landlord or to others. As used in Paragraphs 19.2.1(i) and (ii), above, the "worth at the time of award" shall be computed by allowing interest at the rate set forth in Article 25 of this Lease, but in no case greater than the maximum amount of such interest permitted by law. As used in Paragraph 19.2.1(iii) above, the "worth at the time of award" shall be computed by discounting such amount at the discount rate of the Federal Reserve Bank of San Francisco at the time of award plus one percent (1%). 19.2.2 Landlord shall have the remedy described in California Civil Code Section 1951.4 (lessor may continue lease in effect after lessee's breach and abandonment and recover rent as it becomes due, if lessee has the right to sublet or assign, subject only to reasonable limitations). Accordingly, if Landlord does not elect to terminate this Lease on account of any default by Tenant, Landlord may, from time to time, without terminating this Lease, enforce all of its rights and remedies under this Lease, including the right to recover all rent as it becomes due. -24- 28 19.2.3 Landlord shall at all times have the rights and remedies (which shall be cumulative with each other and cumulative and in addition to those rights and remedies available under Sections 19.2.1 and 19.2.2, above, or any law or other provision of this Lease), without prior demand or notice except as required by applicable law, to seek any declaratory, injunctive or other equitable relief, and specifically enforce this Lease, or restrain or enjoin a violation or breach of any provision hereof. 19.3 SUBLEASES OF TENANT. Whether or not Landlord elects to terminate this Lease on account of any default by Tenant, as set forth in this Article 19, Landlord shall have the right to terminate any and all subleases, licenses, concessions or other consensual arrangements for possession entered into by Tenant and affecting the Premises or may, in Landlord's sole discretion, succeed to Tenant's interest in such subleases, licenses, concessions or arrangements. In the event of Landlord's election to succeed to Tenant's interest in any such subleases, licenses, concessions or arrangements, Tenant shall, as of the date of notice by Landlord of such election, have no further right to or interest in the rent or other consideration receivable thereunder. 19.4 EFFORTS TO RELET. No re-entry or repossession, repairs, maintenance, changes, alterations and additions, reletting, appointment of a receiver to protect Landlord's interests hereunder, or any other action or omission by Landlord shall be construed as an election by Landlord to terminate this Lease or Tenant's right to possession, or to accept a surrender of the Premises, nor shall same operate to release Tenant in whole or in part from any of Tenant's obligations hereunder, unless express written notice of such intention is sent by Landlord to Tenant. Tenant hereby irrevocably waives any right otherwise available under any law to redeem or reinstate this Lease. 19.5 LANDLORD DEFAULT. 19.5.1 GENERAL. Notwithstanding anything to the contrary set forth in this Lease, Landlord shall not be in default in the performance of any obligation required to be performed by Landlord pursuant to this Lease unless Landlord fails to perform such obligation within thirty (30) days after the receipt of notice from Tenant specifying in detail Landlord's failure to perform; provided, however, if the nature of Landlord's obligation is such that more than thirty (30) days are required for its performance, then Landlord shall not be in default under this Lease if it shall commence such performance within such thirty (30) day period and thereafter diligently pursue the same to completion. Upon any such default by Landlord under this Lease, Tenant may, except as otherwise specifically provided in this Lease to the contrary, exercise any of its rights provided at law or in equity. 19.5.2 ABATEMENT OF RENT. In the event that Tenant is prevented from using, and does not use, the Premises or any portion thereof, as a result of (i) any repair, maintenance or alteration performed by Landlord, or which Landlord failed to perform, after the Lease Commencement Date and required by the Lease, which substantially interferes with Tenant's use of the Premises, or (ii) any failure to provide services, utilities or access to the Premises as required by this Lease (either such set of circumstances as set forth in items (i) or (ii), above, to be known as an "Abatement Event"), then Tenant shall give Landlord notice of such Abatement Event, and if such Abatement Event continues for five (5) consecutive business days after Landlord's receipt of any such notice (the "Eligibility Period"), then the Base Rent and Tenant's Share of Direct Expenses shall be abated or reduced, as the case may be, after expiration of the Eligibility Period for such time that Tenant continues to be so prevented from using, and does not use, the Premises or a portion thereof, in the proportion that the rentable area of the portion of the Premises that Tenant is prevented from using, and does not use, bears to the total rentable area of the Premises; provided, however, in the event that Tenant is prevented from using, and does not use, a portion of the Premises for a period of time in excess of the Eligibility Period and the remaining portion of the Premises is not sufficient to allow Tenant to effectively conduct its business therein, and if Tenant does not conduct its business from such remaining portion, then for such time after expiration of the Eligibility Period during which Tenant is so prevented from effectively conducting its business therein, the Base Rent and Tenant's Share of Direct Expenses for the entire Premises shall be abated for such time as Tenant continues to be so prevented from using, and does not use, the Premises. If, however, Tenant reoccupies any portion of the Premises during such period, the Rent allocable to such reoccupied portion, based on the proportion that the rentable area of such reoccupied portion of the Premises bears to the total rentable area of the Premises, shall be payable by Tenant from the date Tenant reoccupies such portion of the Premises. Such right to abate Base Rent and Tenant's Share of Direct Expenses -25- 29 shall be Tenant's sole and exclusive remedy at law or in equity for an Abatement Event. Except as provided in this Section 19.5.2, nothing contained herein shall be interpreted to mean that Tenant is excused from paying Rent due hereunder. ARTICLE 20 COVENANT OF QUIET ENJOYMENT Landlord covenants that Tenant, on paying the Rent, charges for services and other payments herein reserved and on keeping, observing and performing all the other terms, covenants, conditions, provisions and agreements herein contained on the part of Tenant to be kept, observed and performed, shall, during the Lease Term, peaceably and quietly have, hold and enjoy the Premises subject to the terms, covenants, conditions, provisions and agreements hereof without interference by any persons lawfully claiming by or through Landlord. The foregoing covenant is in lieu of any other covenant express or implied. ARTICLE 21 SECURITY DEPOSIT Concurrent with Tenant's execution of this Lease, Tenant shall deposit with Landlord a security deposit (the "Security Deposit") in the amount set forth in Section 8 of the Summary, as security for the faithful performance by Tenant of all of its obligations under this Lease. If Tenant defaults with respect to any provisions of this Lease, including, but not limited to, the provisions relating to the payment of Rent, the removal of property and the repair of resultant damage, Landlord may, without notice to Tenant, but shall not be required to apply all or any part of the Security Deposit for the payment of any Rent or any other sum in default and Tenant shall, upon demand therefor, restore the Security Deposit to its original amount. Any unapplied portion of the Security Deposit shall be returned to Tenant, or, at Landlord's option, to the last assignee of Tenant's interest hereunder, within sixty (60) days following the expiration of the Lease Term. Tenant shall not be entitled to any interest on the Security Deposit. Tenant hereby waives the provisions of Section 1950.7 of the California Civil Code, or any successor statute. ARTICLE 22 SUBSTITUTION OF OTHER PREMISES Landlord shall have the right to move Tenant to other space in the Project comparable to the Premises, and all terms hereof shall apply to the new space with equal force. In such event, Landlord shall give Tenant prior notice, shall provide Tenant, at Landlord's sole cost and expense, with tenant improvements at least equal in quality to those in the Premises and shall move Tenant's effects to the new space at Landlord's sole cost and expense at such time and in such manner as to inconvenience Tenant as little as reasonably practicable. Simultaneously with such relocation of the Premises, the parties shall immediately execute an amendment to this Lease stating the relocation of the Premises. ARTICLE 23 SIGNS 23.1 FULL FLOORS. Subject to Landlord's prior written approval, in its sole discretion, and provided all signs are in keeping with the quality, design and style of the Building and Project, Tenant, if the Premises comprise an entire floor of the Building, at its sole cost and expense, may install identification signage anywhere in the Premises including in the elevator lobby of the Premises, provided that such signs must not be visible from the exterior of the Building. 23.2 MULTI-TENANT FLOORS. If other tenants occupy space on the floor on which the Premises is located, Tenant's identifying signage shall be provided by Landlord, at Tenant's cost, and such signage shall be comparable to that used by Landlord for other similar floors in the Building and shall comply with Landlord's Building standard signage program. -26- 30 23.3 PROHIBITED SIGNAGE AND OTHER ITEMS. Any signs, notices, logos, pictures, names or advertisements which are installed and that have not been separately approved by Landlord may be removed without notice by Landlord at the sole expense of Tenant. Tenant may not install any signs on the exterior or roof of the Project or the Common Areas. Any signs, window coverings, or blinds (even if the same are located behind the Landlord-approved window coverings for the Building), or other items visible from the exterior of the Premises or Building, shall be subject to the prior approval of Landlord, in its sole discretion. 23.4 TENANT'S SIGNAGE. Notwithstanding any provisions to the contrary contained in this Article 23, Landlord hereby grants to the Original Tenant the right to install one (1) sign on the exterior of the Building in accordance with the terms of this Section 23.4 ("Tenant's Sign"). Tenant's Sign shall be subject to all applicable governmental laws, rules, regulations, codes and approvals. Tenant's Sign shall be in the approximate location set forth on Exhibit F, attached hereto. The exact location of Tenant's Sign shall be designated by Landlord. The exact size, design, specifications, graphics, materials and colors of Tenant's Sign shall be subject to Landlord's approval in its reasonable discretion, provided that Tenant's Sign shall (i) be materially consistent with the existing signage in favor of United Paramount Network which is located on the Adjacent Building, and (ii) be consistent with the exterior design, materials and appearance of the Building and the signage program of the Project. Tenant shall be responsible for all costs and expenses incurred in connection with the design, construction, installation, repair, operation, maintenance, and compliance with laws of Tenant's Sign. Tenant's signage rights set forth in this Section 23.4 shall be personal to the Original Tenant and may not be assigned to any assignee or sublessee or any other person or entity. In addition, Tenant's signage rights set forth in this Section 23.4 shall terminate at any time during the Lease Term during which the Original Tenant fails to physically occupy the entire Premises. Upon the expiration of the Lease Term or the earlier termination of Tenant's signage rights under this Section 23.4, Tenant shall, at its sole cost and expense, remove Tenant's Sign and repair any and all damage to the Building caused by such removal. In the event Tenant fails to comply with the terms of the proceeding sentence, Landlord shall have the right, at Tenant's sole cost and expense, to remove Tenant's Sign and to repair any and all damage to the Building caused by such removal. ARTICLE 24 COMPLIANCE WITH LAW Tenant shall not do anything or suffer anything to be done in or about the Premises or the Project which will in any way conflict with any law, statute, ordinance or other governmental rule, regulation or requirement now in force or which may hereafter be enacted or promulgated ("Applicable Laws"). At its sole cost and expense, Tenant shall promptly comply with all such governmental measures. Should any standard or regulation now or hereafter be imposed on Landlord or Tenant by a state, federal or local governmental body charged with the establishment, regulation and enforcement of occupational, health or safety standards for employers, employees, landlords or tenants, then Tenant agrees, at its sole cost and expense, to comply promptly with such standards or regulations. Tenant shall be responsible, at its sole cost and expense, to make all alterations to the Premises as are required to comply with the governmental rules, regulations, requirements or standards described in this Article 24. The judgment of any court of competent jurisdiction or the admission of Tenant in any judicial action, regardless of whether Landlord is a party thereto, that Tenant has violated any of said governmental measures, shall be conclusive of that fact as between Landlord and Tenant. Landlord shall comply with all Applicable Laws relating to the Base Building, provided that compliance with such Applicable Laws is not the responsibility of Tenant under this Lease, and provided further that Landlord's failure to comply therewith would prohibit Tenant from obtaining or maintaining a certificate of occupancy for the Premises, or would unreasonably and materially affect the safety of Tenant's employees or create a significant health hazard for Tenant's employees. Landlord shall be permitted to include in Operating Expenses any costs or expenses incurred by Landlord under this Article 24 to the extent consistent with the terms of Section 4.2.4 above. For purposes of this Article 24, Landlord and Tenant hereby acknowledge and agree that "Applicable Laws" shall include any and all laws relating to handicapped access and/or hazardous materials or substances. -27- 31 ARTICLE 25 LATE CHARGES If any installment of Rent or any other sum due from Tenant shall not be received by Landlord or Landlord's designee within five (5) days after said amount is due, then Tenant shall pay to Landlord a late charge equal to five percent (5%) of the overdue amount plus any attorneys' fees incurred by Landlord by reason of Tenant's failure to pay Rent and/or other charges when due hereunder. The late charge shall be deemed Additional Rent and the right to require it shall be in addition to all of Landlord's other rights and remedies hereunder or at law and shall not be construed as liquidated damages or as limiting Landlord's remedies in any manner. In addition to the late charge described above, any Rent or other amounts owing hereunder which are not paid within ten (10) days after the date they are due shall bear interest from the date when due until paid at a rate per annum equal to the lesser of (i) the annual "Bank Prime Loan" rate cited in the Federal Reserve Statistical Release Publication G.13(415), published on the first Tuesday of each calendar month (or such other comparable index as Landlord and Tenant shall reasonably agree upon if such rate ceases to be published) plus four (4) percentage points, and (ii) the highest rate permitted by applicable law. ARTICLE 26 LANDLORD'S RIGHT TO CURE DEFAULT; PAYMENTS BY TENANT 26.1 LANDLORD'S CURE. All covenants and agreements to be kept or performed by Tenant under this Lease shall be performed by Tenant at Tenant's sole cost and expense and without any reduction of Rent, except to the extent, if any, otherwise expressly provided herein. If Tenant shall fail to perform any obligation under this Lease, and such failure shall continue in excess of the time allowed under Section 19.1.2, above, unless a specific time period is otherwise stated in this Lease, Landlord may, but shall not be obligated to, make any such payment or perform any such act on Tenant's part without waiving its rights based upon any default of Tenant and without releasing Tenant from any obligations hereunder. 26.2 TENANT'S REIMBURSEMENT. Except as may be specifically provided to the contrary in this Lease, Tenant shall pay to Landlord, upon delivery by Landlord to Tenant of statements therefor: (i) sums equal to expenditures reasonably made and obligations incurred by Landlord in connection with the remedying by Landlord of Tenant's defaults pursuant to the provisions of Section 26.1; (ii) sums equal to all losses, costs, liabilities, damages and expenses referred to in Article 10 of this Lease; and (iii) sums equal to all expenditures made and obligations incurred by Landlord in collecting or attempting to collect the Rent or in enforcing or attempting to enforce any rights of Landlord under this Lease or pursuant to law, including, without limitation, all legal fees and other amounts so expended. Tenant's obligations under this Section 26.2 shall survive the expiration or sooner termination of the Lease Term. ARTICLE 27 ENTRY BY LANDLORD Landlord reserves the right at all reasonable times and upon reasonable notice to Tenant (except in the case of an emergency) to enter the Premises to (i) inspect them; (ii) show the Premises to prospective purchasers, mortgagees or tenants, or to current or prospective mortgagees, ground or underlying lessors or insurers; (iii) post notices of nonresponsibility; or (iv) alter, improve or repair the Premises or the Building, or for structural alterations, repairs or improvements to the Building or the Building's systems and equipment. Notwithstanding anything to the contrary contained in this Article 27, Landlord may enter the Premises at any time to (A) perform services required of Landlord, including janitorial service; (B) take possession due to any breach of this Lease in the manner provided herein; and (C) perform any covenants of Tenant which Tenant fails to perform. Landlord may make any such entries without the abatement of Rent and may take such reasonable steps as required to accomplish the stated purposes. Tenant hereby waives any claims for damages or for any injuries or inconvenience to or interference with Tenant's business, lost profits, any loss of occupancy or quiet enjoyment of the Premises, and any other loss occasioned thereby. Notwithstanding the foregoing, Landlord shall remain liable (to the extent provided for by applicable law) for personal injury and property damage resulting from Landlord's entry in the Premises pursuant to -28- 32 this Article 27 to the extent caused by Landlord's negligence or willful misconduct. For each of the above purposes, Landlord shall at all times have a key with which to unlock all the doors in the Premises, excluding Tenant's vaults, safes and special security areas designated in advance by Tenant. In an emergency, Landlord shall have the right to use any means that Landlord may deem proper to open the doors in and to the Premises. Any entry into the Premises by Landlord in the manner hereinbefore described shall not be deemed to be a forcible or unlawful entry into, or a detainer of, the Premises, or an actual or constructive eviction of Tenant from any portion of the Premises. No provision of this Lease shall be construed as obligating Landlord to perform any repairs, alterations or decorations except as otherwise expressly agreed to be performed by Landlord herein. ARTICLE 28 TENANT PARKING Prior to the first day of the seventh (7th) month of the second (2nd) Lease Year, Tenant shall have the right, but not obligation, to rent from Landlord, commencing on the Lease Commencement Date, the amount of parking passes set forth in Section 9 of the Summary, on a monthly basis, which parking passes shall pertain to the Project parking facility. Commencing on the first day of the seventh (7th) month of the second Lease Year, and continuing throughout the remainder of the Lease Term, Tenant shall be required to rent from Landlord the amount of parking passes set forth in Section 9 of the Summary. Tenant shall pay to Landlord for automobile parking passes rented by Tenant, on a monthly basis, the prevailing rate charged from time to time at the location of such parking passes. In addition, Tenant shall be responsible for the full amount of any taxes imposed by any governmental authority in connection with the renting of such parking passes by Tenant or the use of the parking facility by Tenant. Tenant's continued right to use the parking passes is conditioned upon Tenant abiding by all rules and regulations which are prescribed from time to time for the orderly operation and use of the parking facility where the parking passes are located, including any sticker or other identification system established by Landlord, Tenant's cooperation in seeing that Tenant's employees and visitors also comply with such rules and regulations and Tenant not being in default under this Lease. Landlord specifically reserves the right to change the size, configuration, design, layout and all other aspects of the Project parking facility at any time and Tenant acknowledges and agrees that Landlord may, without incurring any liability to Tenant and without any abatement of Rent under this Lease, from time to time, close-off or restrict access to the Project parking facility for purposes of permitting or facilitating any such construction, alteration or improvements. Landlord may delegate its responsibilities hereunder to a parking operator in which case such parking operator shall have all the rights of control attributed hereby to the Landlord. The parking passes rented by Tenant pursuant to this Article 28 are provided to Tenant solely for use by Tenant's own personnel and such passes may not be transferred, assigned, subleased or otherwise alienated by Tenant without Landlord's prior approval. Tenant may validate visitor parking by such method or methods as the Landlord may establish, at the validation rate from time to time generally applicable to visitor parking. ARTICLE 29 MISCELLANEOUS PROVISIONS 29.1 TERMS; CAPTIONS. The words "Landlord" and "Tenant" as used herein shall include the plural as well as the singular. The necessary grammatical changes required to make the provisions hereof apply either to corporations or partnerships or individuals, men or women, as the case may require, shall in all cases be assumed as though in each case fully expressed. The captions of Articles and Sections are for convenience only and shall not be deemed to limit, construe, affect or alter the meaning of such Articles and Sections. 29.2 BINDING EFFECT. Subject to all other provisions of this Lease, each of the covenants, conditions and provisions of this Lease shall extend to and shall, as the case may require, bind or inure to the benefit not only of Landlord and of Tenant, but also of their respective heirs, personal representatives, successors or assigns, provided this clause shall not permit any assignment by Tenant contrary to the provisions of Article 14 of this Lease. 29.3 NO AIR RIGHTS. No rights to any view or to light or air over any property, whether belonging to Landlord or any other person, are granted to Tenant by this Lease. If at -29- 33 any time any windows of the Premises are temporarily darkened or the light or view therefrom is obstructed by reason of any repairs, improvements, maintenance or cleaning in or about the Project, the same shall be without liability to Landlord and without any reduction or diminution of Tenant's obligations under this Lease. 29.4 MODIFICATION OF LEASE. Should any current or prospective mortgagee or ground lessor for the Building or Project require a modification of this Lease, which modification will not cause an increased cost or expense to Tenant or in any other way materially and adversely change the rights and obligations of Tenant hereunder, then and in such event, Tenant agrees that this Lease may be so modified and agrees to execute whatever documents are reasonably required therefor and to deliver the same to Landlord within ten (10) days following a request therefor. At the request of Landlord or any mortgagee or ground lessor, Tenant agrees to execute a short form of Lease and deliver the same to Landlord within ten (10) days following the request therefor. 29.5 TRANSFER OF LANDLORD'S INTEREST. Tenant acknowledges that Landlord has the right to transfer all or any portion of its interest in the Project or Building and in this Lease, and Tenant agrees that in the event of any such transfer, Landlord shall automatically be released from all liability under this Lease and Tenant agrees to look solely to such transferee for the performance of Landlord's obligations hereunder after the date of transfer and such transferee shall be deemed to have fully assumed and be liable for all obligations of this Lease to be performed by Landlord, including the return of any Security Deposit, and Tenant shall attorn to such transferee. Tenant further acknowledges that Landlord may assign its interest in this Lease to a mortgage lender as additional security and agrees that such an assignment shall not release Landlord from its obligations hereunder and that Tenant shall continue to look to Landlord for the performance of its obligations hereunder. 29.6 PROHIBITION AGAINST RECORDING. Except as provided in Section 29.4 of this Lease, neither this Lease, nor any memorandum, affidavit or other writing with respect thereto, shall be recorded by Tenant or by anyone acting through, under or on behalf of Tenant. 29.7 LANDLORD'S TITLE. Landlord's title is and always shall be paramount to the title of Tenant. Nothing herein contained shall empower Tenant to do any act which can, shall or may encumber the title of Landlord. 29.8 RELATIONSHIP OF PARTIES. Nothing contained in this Lease shall be deemed or construed by the parties hereto or by any third party to create the relationship of principal and agent, partnership, joint venturer or any association between Landlord and Tenant. 29.9 APPLICATION OF PAYMENTS. Landlord shall have the right to apply payments received from Tenant pursuant to this Lease, regardless of Tenant's designation of such payments, to satisfy any obligations of Tenant hereunder, in such order and amounts as Landlord, in its sole discretion, may elect. 29.10 TIME OF ESSENCE. Time is of the essence with respect to the performance of every provision of this Lease in which time of performance is a factor. 29.11 PARTIAL INVALIDITY. If any term, provision or condition contained in this Lease shall, to any extent, be invalid or unenforceable, the remainder of this Lease, or the application of such term, provision or condition to persons or circumstances other than those with respect to which it is invalid or unenforceable, shall not be affected thereby, and each and every other term, provision and condition of this Lease shall be valid and enforceable to the fullest extent possible permitted by law. 29.12 NO WARRANTY. In executing and delivering this Lease, Tenant has not relied on any representations, including, but not limited to, any representation as to the amount of any item comprising Additional Rent or the amount of the Additional Rent in the aggregate or that Landlord is furnishing the same services to other tenants, at all, on the same level or on the same basis, or any warranty or any statement of Landlord which is not set forth herein or in one or more of the exhibits attached hereto. 29.13 LANDLORD EXCULPATION. The liability of Landlord or the Landlord Parties to Tenant for any default by Landlord under this Lease or arising in connection herewith or with -30- 34 Landlord's operation, management, leasing, repair, renovation, alteration or any other matter relating to the Project or the Premises shall be limited solely and exclusively to an amount which is equal to the lesser of (a) the interest of Landlord in the Building or (b) the equity interest Landlord would have in the Building if the Building were encumbered by third-party debt in an amount equal to eighty percent (80%) of the value of the Building (as such value is determined by Landlord), provided that in no event shall such liability extend to any sales or insurance proceeds received by Landlord or the Landlord Parties in connection with the Project, Building or Premises. Neither Landlord, nor any of the Landlord Parties shall have any personal liability therefor, and Tenant hereby expressly waives and releases such personal liability on behalf of itself and all persons claiming by, through or under Tenant. The limitations of liability contained in this Section 29.13 shall inure to the benefit of Landlord's and the Landlord Parties' present and future partners, beneficiaries, officers, directors, trustees, shareholders, agents and employees, and their respective partners, heirs, successors and assigns. Under no circumstances shall any present or future partner of Landlord (if Landlord is a partnership), or trustee or beneficiary (if Landlord or any partner of Landlord is a trust), have any liability for the performance of Landlord's obligations under this Lease. Notwithstanding any contrary provision herein, neither Landlord nor the Landlord Parties shall be liable under any circumstances for injury or damage to, or interference with, Tenant's business, including but not limited to, loss of profits, loss of rents or other revenues, loss of business opportunity, loss of goodwill or loss of use, in each case, however occurring. 29.14 ENTIRE AGREEMENT. It is understood and acknowledged that there are no oral agreements between the parties hereto affecting this Lease and this Lease constitutes the parties' entire agreement with respect to the leasing of the Premises and supersedes and cancels any and all previous negotiations, arrangements, brochures, agreements and understandings, if any, between the parties hereto or displayed by Landlord to Tenant with respect to the subject matter thereof, and none thereof shall be used to interpret or construe this Lease. None of the terms, covenants, conditions or provisions of this Lease can be modified, deleted or added to except in writing signed by the parties hereto. 29.15 RIGHT TO LEASE. Landlord reserves the absolute right to effect such other tenancies in the Project as Landlord in the exercise of its sole business judgment shall determine to best promote the interests of the Building or Project. Tenant does not rely on the fact, nor does Landlord represent, that any specific tenant or type or number of tenants shall, during the Lease Term, occupy any space in the Building or Project. 29.16 FORCE MAJEURE. Any prevention, delay or stoppage due to strikes, lockouts, labor disputes, acts of God, inability to obtain services, labor, or materials or reasonable substitutes therefor, governmental actions, civil commotions, fire or other casualty, and other causes beyond the reasonable control of the party obligated to perform, except with respect to the obligations imposed with regard to Rent and other charges to be paid by Tenant pursuant to this Lease and except as to Tenant's obligations under Articles 5 and 24 of this Lease (collectively, a "Force Majeure"), notwithstanding anything to the contrary contained in this Lease, shall excuse the performance of such party for a period equal to any such prevention, delay or stoppage and, therefore, if this Lease specifies a time period for performance of an obligation of either party, that time period shall be extended by the period of any delay in such party's performance caused by a Force Majeure. 29.17 INTENTIONALLY OMITTED. 29.18 NOTICES. All notices, demands, statements, designations, approvals or other communications (collectively, "Notices") given or required to be given by either party to the other hereunder or by law shall be in writing, shall be (A) sent by United States certified or registered mail, postage prepaid, return receipt requested ("Mail"), (B) transmitted by telecopy, if such telecopy is promptly followed by a Notice sent by Mail, (C) delivered by a nationally recognized overnight courier, or (D) delivered personally. Any Notice shall be sent, transmitted, or delivered, as the case may be, to Tenant at the appropriate address set forth in Section 10 of the Summary, or to such other place as Tenant may from time to time designate in a Notice to Landlord, or to Landlord at the addresses set forth below, or to such other places as Landlord may from time to time designate in a Notice to Tenant. Any Notice will be deemed given (i) three (3) days after the date it is posted if sent by Mail, (ii) the date the telecopy is transmitted, (iii) the date the overnight courier delivery is made, or (iv) the date personal delivery is made or attempted to be made. If Tenant is notified of the identity and address of Landlord's mortgagee or ground or underlying lessor, Tenant shall give to such mortgagee -31- 35 or ground or underlying lessor written notice of any default by Landlord under the terms of this Lease by registered or certified mail, and such mortgagee or ground or underlying lessor shall be given a reasonable opportunity to cure such default prior to Tenant's exercising any remedy available to Tenant. As of the date of this Lease, any Notices to Landlord must be sent, transmitted, or delivered, as the case may be, to the following addresses: The Marcel George Family Trusts of September 2, 1982 630 Tigertail Road Los Angeles, California 90049 Attention: Mr. Marcel George and Allen, Matkins, Leck, Gamble & Mallory 1999 Avenue of the Stars, Suite 1800 Los Angeles, California 90067 Attention: Anton N. Natsis, Esq. 29.19 JOINT AND SEVERAL. If there is more than one Tenant, the obligations imposed upon Tenant under this Lease shall be joint and several. 29.20 AUTHORITY. If Tenant is a corporation, trust or partnership, each individual executing this Lease on behalf of Tenant hereby represents and warrants that Tenant is a duly formed and existing entity qualified to do business in California and that Tenant has full right and authority to execute and deliver this Lease and that each person signing on behalf of Tenant is authorized to do so. In such event, Tenant shall, within ten (10) days after execution of this Lease, deliver to Landlord satisfactory evidence of such authority and, if a corporation, upon demand by Landlord, also deliver to Landlord satisfactory evidence of (i) good standing in Tenant's state of incorporation and (ii) qualification to do business in California. 29.21 ATTORNEYS' FEES. In the event that either Landlord or Tenant should bring suit for the possession of the Premises, for the recovery of any sum due under this Lease, or because of the breach of any provision of this Lease or for any other relief against the other, then all costs and expenses, including reasonable attorneys' fees, incurred by the prevailing party therein shall be paid by the other party, which obligation on the part of the other party shall be deemed to have accrued on the date of the commencement of such action and shall be enforceable whether or not the action is prosecuted to judgment. 29.22 GOVERNING LAW; WAIVER OF TRIAL BY JURY. This Lease shall be construed and enforced in accordance with the laws of the State of California. IN ANY ACTION OR PROCEEDING ARISING HEREFROM, LANDLORD AND TENANT HEREBY CONSENT TO (I) THE JURISDICTION OF ANY COMPETENT COURT WITHIN THE STATE OF CALIFORNIA, (II) SERVICE OF PROCESS BY ANY MEANS AUTHORIZED BY CALIFORNIA LAW, AND (III) IN THE INTEREST OF SAVING TIME AND EXPENSE, TRIAL WITHOUT A JURY IN ANY ACTION, PROCEEDING OR COUNTERCLAIM BROUGHT BY EITHER OF THE PARTIES HERETO AGAINST THE OTHER OR THEIR SUCCESSORS IN RESPECT OF ANY MATTER ARISING OUT OF OR IN CONNECTION WITH THIS LEASE, THE RELATIONSHIP OF LANDLORD AND TENANT, TENANT'S USE OR OCCUPANCY OF THE PREMISES, AND/OR ANY CLAIM FOR INJURY OR DAMAGE, OR ANY EMERGENCY OR STATUTORY REMEDY. 29.23 SUBMISSION OF LEASE. Submission of this instrument for examination or signature by Tenant does not constitute a reservation of, option for or option to lease, and it is not effective as a lease or otherwise until execution and delivery by both Landlord and Tenant. 29.24 BROKERS. Landlord and Tenant hereby warrant to each other that they have had no dealings with any real estate broker or agent in connection with the negotiation of this Lease, excepting only the real estate brokers or agents specified in Section 12 of the Summary (the "Brokers"), and that they know of no other real estate broker or agent who is entitled to a commission in connection with this Lease. Each party agrees to indemnify and defend the other party against and hold the other party harmless from any and all claims, demands, losses, liabilities, lawsuits, judgments, costs and expenses (including without limitation reasonable -32- 36 attorneys' fees) with respect to any leasing commission or equivalent compensation alleged to be owing on account of any dealings with any real estate broker or agent, other than the Brokers, occurring by, through, or under the indemnifying party. 29.25 INDEPENDENT COVENANTS. This Lease shall be construed as though the covenants herein between Landlord and Tenant are independent and not dependent and Tenant hereby expressly waives the benefit of any statute to the contrary and agrees that if Landlord fails to perform its obligations set forth herein, Tenant shall not be entitled to make any repairs or perform any acts hereunder at Landlord's expense or to any setoff of the Rent or other amounts owing hereunder against Landlord. 29.26 PROJECT OR BUILDING NAME AND SIGNAGE. Landlord shall have the right at any time to change the name of the Project or Building and to install, affix and maintain any and all signs on the exterior and on the interior of the Project or Building as Landlord may, in Landlord's sole discretion, desire. Tenant shall not use the name of the Project or Building or use pictures or illustrations of the Project or Building in advertising or other publicity or for any purpose other than as the address of the business to be conducted by Tenant in the Premises, without the prior written consent of Landlord. 29.27 COUNTERPARTS. This Lease may be executed in counterparts with the same effect as if both parties hereto had executed the same document. Both counterparts shall be construed together and shall constitute a single lease. 29.28 CONFIDENTIALITY. Tenant acknowledges that the content of this Lease and any related documents are confidential information. Tenant shall keep such confidential information strictly confidential and shall not disclose such confidential information to any person or entity other than Tenant's financial, legal, and space planning consultants and except as required by law. 29.29 TRANSPORTATION MANAGEMENT. Tenant shall fully comply with all present or future programs intended to manage parking, transportation or traffic in and around the Building, and in connection therewith, Tenant shall take responsible action for the transportation planning and management of all employees located at the Premises by working directly with Landlord, any governmental transportation management organization or any other transportation-related committees or entities. 29.30 BUILDING RENOVATIONS. It is specifically understood and agreed that Landlord has made no representation or warranty to Tenant and has no obligation and has made no promises to alter, remodel, improve, renovate, repair or decorate the Premises, Building, or any part thereof and that no representations respecting the condition of the Premises or the Building have been made by Landlord to Tenant except as specifically set forth herein or in the Tenant Work Letter. However, Tenant hereby acknowledges that Landlord is currently renovating or may during the Lease Term renovate, improve, alter, or modify (collectively, the "Renovations") the Project, the Building and/or the Premises including without limitation the parking structure, common areas, systems and equipment, roof, and structural portions of the same, which Renovations may include, without limitation, (i) installing sprinklers in the Building common areas and tenant spaces, (ii) modifying the common areas and tenant spaces to comply with applicable laws and regulations, including regulations relating to the physically disabled, seismic conditions, and building safety and security, and (iii) installing new floor covering, lighting, and wall coverings in the Building common areas, and in connection with any Renovations, Landlord may, among other things, erect scaffolding or other necessary structures in the Building, limit or eliminate access to portions of the Project, including portions of the common areas, or perform work in the Building, which work may create noise, dust or leave debris in the Building. Tenant hereby agrees that such Renovations and Landlord's actions in connection with such Renovations shall in no way constitute a constructive eviction of Tenant nor entitle Tenant to any abatement of Rent. Landlord shall have no responsibility or for any reason be liable to Tenant for any direct or indirect injury to or interference with Tenant's business arising from the Renovations, nor shall Tenant be entitled to any compensation or damages from Landlord for loss of the use of the whole or any part of the Premises or of Tenant's personal property or improvements resulting from the Renovations or Landlord's actions in connection with such Renovations, or for any inconvenience or annoyance occasioned by such Renovations or Landlord's actions. -33- 37 29.31 NO VIOLATION. Tenant hereby warrants and represents that neither its execution of nor performance under this Lease shall cause Tenant to be in violation of any agreement, instrument, contract, law, rule or regulation by which Tenant is bound, and Tenant shall protect, defend, indemnify and hold Landlord harmless against any claims, demands, losses, damages, liabilities, costs and expenses, including, without limitation, reasonable attorneys' fees and costs, arising from Tenant's breach of this warranty and representation. 29.32 COMMUNICATIONS AND COMPUTER LINES. Tenant may install, maintain, replace, remove or use any communications or computer wires and cables (collectively, the "Lines") at the Project in or serving the Premises, provided that (i) Tenant shall obtain Landlord's prior written consent, use an experienced and qualified contractor approved in writing by Landlord, and comply with all of the other provisions of Articles 7 and 8 of this Lease, (ii) an acceptable number of spare Lines and space for additional Lines shall be maintained for existing and future occupants of the Project, as determined in Landlord's reasonable opinion, (iii) the Lines therefor (including riser cables) shall be appropriately insulated to prevent excessive electromagnetic fields or radiation, and shall be surrounded by a protective conduit reasonably acceptable to Landlord, (iv) any new or existing Lines servicing the Premises shall comply with all applicable governmental laws and regulations, (v) as a condition to permitting the installation of new Lines, Landlord may require that Tenant remove existing Lines located in or serving the Premises and repair any damage in connection with such removal, and (vi) Tenant shall pay all costs in connection therewith. Landlord reserves the right to require that Tenant remove any Lines located in or serving the Premises which are installed in violation of these provisions, or which are at any time in violation of any laws or represent a dangerous or potentially dangerous condition. IN WITNESS WHEREOF, Landlord and Tenant have caused this Lease to be executed the day and date first above written. "Landlord" THE MARCEL GEORGE FAMILY TRUSTS OF SEPTEMBER 2, 1982 By: /s/ MARCEL GEORGE ------------------------------------------------ Marcel George, Trustee By: /s/ JOANNE MARIE GEORGE ------------------------------------------------ Joanne Marie George, Trustee "Tenant" TEAM COMMUNICATIONS, a California corporation By: /s/ JONATHAN D. SHAPIRO ------------------------------------------------ Its: President and COO ------------------------------------------ By: /s/ TIMOTHY A. HILL ------------------------------------------------ Its: Sr. VP & CFO ------------------------------------------ -34- 38 EXHIBIT A 11818 WILSHIRE BOULEVARD OUTLINE OF PREMISES [TO BE PROVIDED] EXHIBIT A -1- 39 EXHIBIT B 11818 WILSHIRE BOULEVARD TENANT WORK LETTER This Tenant Work Letter shall set forth the terms and conditions relating to the construction of the Premises. This Tenant Work Letter is essentially organized chronologically and addresses the issues of the construction of the Premises, in sequence, as such issues will arise during the actual construction of the Premises. All references in this Tenant Work Letter to Articles or Sections of "this Lease" shall mean the relevant portions of Articles 1 through 29 of the Office Lease to which this Tenant Work Letter is attached as Exhibit B, and all references in this Tenant Work Letter to Sections of "this Tenant Work Letter" shall mean the relevant portions of Sections 1 through 6 of this Tenant Work Letter. SECTION 1 DELIVERY OF THE PREMISES AND BASE, SHELL & CORE 1.1 Base Shell & Core as Constructed by Landlord. Following the full execution and delivery of this Lease by Landlord and Tenant, Landlord shall deliver the Premises and the base, shell and core of the Premises (the "Base, Shell & Core") to Tenant, and Tenant shall accept the Premises and Base, Shell & Core from Landlord in their presently existing, "as-is" condition. SECTION 2 TENANT IMPROVEMENTS 2.1 Tenant Improvement Allowance. Tenant shall be entitled to a one-time tenant improvement allowance (the "Tenant Improvement Allowance") in the amount of $30.00 per usable square foot of the Premises for the costs relating to the initial design and construction of Tenant's improvements, which are permanently affixed to the Premises (the "Tenant Improvements"). In no event shall Landlord be obligated to make disbursements pursuant to this Tenant Work Letter in a total amount which exceeds the Tenant Improvement Allowance. 2.2 Disbursement of the Tenant Improvement Allowance. 2.2.1 Tenant Improvement Allowance Items. Except as otherwise set forth in this Tenant Work Letter, the Tenant Improvement Allowance shall be disbursed by Landlord only for the following items and costs (collectively the "Tenant Improvement Allowance Items"): 2.2.1.1 Payment of the fees of the "Architect" and the "Engineers," as those terms are defined in Section 3.1 of this Tenant Work Letter, which fees shall, notwithstanding anything to the contrary contained in this Tenant Work Letter, not exceed an aggregate amount equal to $4.50 per usable square foot of the Premises, and payment of the fees incurred by, and the cost of documents and materials supplied by, Landlord and Landlord's consultants in connection with the preparation and review of the "Construction Drawings," as that term is defined in Section 3.1 of this Tenant Work Letter; 2.2.1.2 The payment of plan check, permit and license fees relating to construction of the Tenant Improvements; 2.2.1.3 The cost of construction of the Tenant Improvements, including, without limitation, testing and inspection costs, hoisting and trash removal costs, and contractors' fees and general conditions; 2.2.1.4 The cost of any changes in the Base, Shell & Core when such changes are required by the Construction Drawings (including if such changes are due to the fact that such work is prepared on an unoccupied basis), such cost to include all direct architectural and/or engineering fees and expenses incurred in connection therewith; 2.2.1.5 The cost of any changes to the Construction Drawings or Tenant Improvements required by all applicable building codes (the "Code"); EXHIBIT B -1- 40 2.2.1.6 The cost of the "Coordination Fee," as that term is defined in Section 4.2.2 of this Tenant Work Letter; 2.2.1.7 Sales and use taxes and Title 24 fees; and 2.2.1.8 All other costs to be expended by Landlord in connection with the construction of the Tenant Improvements. 2.2.2 Disbursement of Tenant Improvement Allowance. During the construction of the Tenant Improvements, Landlord shall make monthly disbursements of the Tenant Improvement Allowance for Tenant Improvement Allowance Items for the benefit of Tenant and shall authorize the release of monies for the benefit of Tenant as follows. 2.2.2.1 Monthly Disbursements. On or before the day of each calendar month, as determined by Landlord, during the construction of the Tenant Improvements (or such other date as Landlord may designate), Tenant shall deliver to Landlord: (i) a request for payment of the "Contractor," as that term is defined in Section 4.1 of this Tenant Work Letter, approved by Tenant, in a form to be provided by Landlord, showing the schedule, by trade, of percentage of completion of the Tenant Improvements in the Premises, detailing the portion of the work completed and the portion not completed; (ii) invoices from all of "Tenant's Agents," as that term is defined in Section 4.1.2 of this Tenant Work Letter, for labor rendered and materials delivered to the Premises; (iii) executed mechanic's lien releases from all of Tenant's Agents which shall comply with the appropriate provisions, as reasonably determined by Landlord, of California Civil Code Section 3262(d); and (iv) all other information reasonably requested by Landlord. Tenant's request for payment shall be deemed Tenant's acceptance and approval of the work furnished and/or the materials supplied as set forth in Tenant's payment request. Thereafter, Landlord shall deliver a check to Tenant made jointly payable to Contractor and Tenant in payment of the lesser of: (A) the amounts so requested by Tenant, as set forth in this Section 2.2.2.1, above, less a ten percent (10%) retention (the aggregate amount of such retentions to be known as the "Final Retention"), and (B) the balance of any remaining available portion of the Tenant Improvement Allowance (not including the Final Retention), provided that Landlord does not dispute any request for payment based on non-compliance of any work with the "Approved Working Drawings," as that term is defined in Section 3.4 below, or due to any substandard work, or for any other reason. Landlord's payment of such amounts shall not be deemed Landlord's approval or acceptance of the work furnished or materials supplied as set forth in Tenant's payment request. 2.2.2.2 Final Retention. Subject to the provisions of this Tenant Work Letter, a check for the Final Retention payable jointly to Tenant and Contractor shall be delivered by Landlord to Tenant following the completion of construction of the Premises, provided that (i) Tenant delivers to Landlord properly executed mechanics lien releases in compliance with both California Civil Code Section 3262(d)(2) and either Section 3262(d)(3) or Section 3262(d)(4), (ii) Landlord has determined that no substandard work exists which adversely affects the mechanical, electrical, plumbing, heating, ventilating and air conditioning, life-safety or other systems of the Building, the curtain wall of the Building, the structure or exterior appearance of the Building, or any other tenant's use of such other tenant's leased premises in the Building and (iii) Architect delivers to Landlord a certificate, in a form reasonably acceptable to Landlord, certifying that the construction of the Tenant Improvements in the Premises has been substantially completed. 2.2.2.3 Other Terms. Landlord shall only be obligated to make disbursements from the Tenant Improvement Allowance to the extent costs are incurred by Tenant for Tenant Improvement Allowance Items. All Tenant Improvement Allowance Items for which the Tenant Improvement Allowance has been made available shall be deemed Landlord's property under the terms of this Lease. 2.3 Standard Tenant Improvement Package. Landlord has established specifications (the "Specifications") for the Building standard components to be used in the construction of the Tenant Improvements in the Premises (collectively, the "Standard Improvement Package"), which Specifications have been supplied to Tenant by Landlord. The quality of Tenant Improvements shall at a minimum comply with of the applicable Specifications, provided that the window coverings utilized in the Premises shall be designated by Landlord and Tenant shall EXHIBIT B -2- 41 cause the Tenant Improvements to comply with such designation. Landlord may make changes to the Specifications for the Standard Improvement Package from time to time. SECTION 3 CONSTRUCTION DRAWINGS 3.1 Selection of Architect/Construction Drawings. Tenant shall retain the architect/space planner approved by Landlord (the "Architect") to prepare the "Construction Drawings," as that term is defined in this Section 3.1. Landlord hereby approves Ridgway & Associates as Architect. Tenant shall retain engineering consultants approved by Landlord in Landlord's reasonable discretion (the "Engineers") to prepare all plans and engineering working drawings relating to the structural, mechanical, electrical, plumbing, HVAC, lifesafety, and sprinkler work in the Premises, which work is not part of the Base, Shell & Core. The plans and drawings to be prepared by Architect and the Engineers hereunder shall be known collectively as the "Construction Drawings." All Construction Drawings shall comply with the drawing format and specifications determined by Landlord, and shall be subject to Landlord's approval. Tenant and Architect shall verify, in the field, the dimensions and conditions as shown on the relevant portions of the base building plans, and Tenant and Architect shall be solely responsible for the same, and Landlord shall have no responsibility in connection therewith. Landlord's review of the Construction Drawings as set forth in this Section 3, shall be for its sole purpose and shall not imply Landlord's review of the same, or obligate Landlord to review the same, for quality, design, Code compliance or other like matters. Accordingly, notwithstanding that any Construction Drawings are reviewed by Landlord or its space planner, architect, engineers and consultants, and notwithstanding any advice or assistance which may be rendered to Tenant by Landlord or Landlord's space planner, architect, engineers, and consultants, Landlord shall have no liability whatsoever in connection therewith and shall not be responsible for any omissions or errors contained in the Construction Drawings, and Tenant's waiver and indemnity set forth in this Lease shall specifically apply to the Construction Drawings. 3.2 Final Space Plan. Tenant shall supply Landlord with one (1) copy signed by Tenant of its final space plan for the Premises before any architectural working drawings or engineering drawings have been commenced. The final space plan (the "Final Space Plan") shall include a layout and designation of all offices, rooms and other partitioning, their intended use, and equipment to be contained therein. Landlord may request clarification or more specific drawings for special use items not included in the Final Space Plan. Landlord shall advise Tenant within five (5) business days after Landlord's receipt of the Final Space Plan for the Premises if the same is unsatisfactory or incomplete in any respect. If Tenant is so advised, Tenant shall promptly cause the Final Space Plan to be revised to correct any deficiencies or other matters Landlord may reasonably require. 3.3 Final Working Drawings. After the Final Space Plan has been approved by Landlord, Tenant shall supply the Engineers with a complete listing of standard and non-standard equipment and specifications, including, without limitation, B.T.U. calculations, electrical requirements and special electrical receptacle requirements for the Premises, to enable the Engineers and the Architect to complete the "Final Working Drawings" (as that term is defined below) in the manner as set forth below. Upon the approval of the Final Space Plan by Landlord and Tenant, Tenant shall promptly cause the Architect and the Engineers to complete the architectural and engineering drawings for the Premises, and Architect shall compile a fully coordinated set of architectural, structural, mechanical, electrical and plumbing working drawings in a form which is complete to allow subcontractors to bid on the work and to obtain all applicable permits (collectively, the "Final Working Drawings") and shall submit the same to Landlord for Landlord's approval. Tenant shall supply Landlord with one (1) copy signed by Tenant of such Final Working Drawings. Landlord shall advise Tenant within five (5) business days after Landlord's receipt of the Final Working Drawings for the Premises if the same is unsatisfactory or incomplete in any respect. If Tenant is so advised, Tenant shall immediately revise the Final Working Drawings in accordance with such review and any disapproval of Landlord in connection therewith. 3.4 Approved Working Drawings. The Final Working Drawings shall be approved by Landlord (the "Approved Working Drawings") prior to the commencement of construction of the Premises by Tenant. After approval by Landlord of the Final Working Drawings, Tenant may submit the same to the appropriate municipal authorities for all applicable building permits. Tenant hereby agrees that neither Landlord nor Landlord's consultants shall be responsible for EXHIBIT B -3- 42 obtaining any building permit or certificate of occupancy for the Premises and that obtaining the same shall be Tenant's responsibility; provided, however, that Landlord shall cooperate with Tenant in executing permit applications and performing other ministerial acts reasonably necessary to enable Tenant to obtain any such permit or certificate of occupancy. No changes, modifications or alterations in the Approved Working Drawings may be made without the prior written consent of Landlord, which consent may not be unreasonably withheld. SECTION 4 CONSTRUCTION OF THE TENANT IMPROVEMENTS 4.1 Tenant's Selection of Contractors. 4.1.1 The Contractor. A general contractor shall be retained by Tenant to construct the Tenant Improvements. Such general contractor ("Contractor") shall be selected by Tenant and approved by Landlord in Landlord's reasonable discretion, and Tenant shall deliver to Landlord notice of its selection of the Contractor upon such selection. 4.1.2 Tenant's Agents. All subcontractors, laborers, materialmen, and suppliers used by Tenant (such subcontractors, laborers, materialmen, and suppliers, and the Contractor to be known collectively as "Tenant's Agents") must be approved in writing by Landlord, which approval shall not be unreasonably withheld or delayed. If Landlord does not approve any of Tenant's proposed subcontractors, laborers, materialmen or suppliers, Tenant shall submit other proposed subcontractors, laborers, materialmen or suppliers for Landlord's written approval. 4.2 Construction of Tenant Improvements by Tenant's Agents. 4.2.1 Construction Contract; Cost Budget. Prior to Tenant's execution of the construction contract and general conditions with Contractor (the "Contract"), Tenant shall submit the Contract to Landlord for its approval, which approval shall not be unreasonably withheld or delayed. Prior to the commencement of the construction of the Tenant Improvements, and after Tenant has accepted all bids for the Tenant Improvements, Tenant shall provide Landlord with a detailed breakdown, by trade, of the final costs to be incurred or which have been incurred, as set forth more particularly in Sections 2.2.1.1 through 2.2.1.8, above, in connection with the design and construction of the Tenant Improvements to be performed by or at the direction of Tenant or the Contractor, which costs form a basis for the amount of the Contract (the "Final Costs"). For purposes of this Lease, the "Over-Allowance Amount" shall equal the difference between the amount of the Final Costs and the amount of the Tenant Improvement Allowance (less any portion thereof already disbursed by Landlord, or in the process of being disbursed by Landlord, on or before the commencement of construction of the Tenant Improvements). Tenant shall pay, immediately upon written notice from Landlord, a percentage of each amount disbursed by Landlord to the Contractor or otherwise disbursed under the Tenant Work Letter, which percentage shall be equal to the amount of the Over-Allowance Amount divided by the amount of the Final Costs, and such payment by Tenant shall be a condition to Landlord's obligation to pay any amounts of the Tenant Improvement Allowance. In the event that, after the Final Costs have been delivered by Tenant to Landlord, the costs relating to the design and construction of the Tenant Improvements shall change, any additional costs necessary to such design and construction in excess of the Final Costs, shall be an addition to the Over-Allowance Amount for purposes of this Section 4.2.1. 4.2.2 Tenant's Agents. 4.2.2.1 4Landlord's General Conditions for Tenant's Agents and Tenant Improvement Work. Tenant's and Tenant's Agent's construction of the Tenant Improvements shall comply with the following: (i) the Tenant Improvements shall be constructed in strict accordance with the Approved Working Drawings; (ii) Tenant's Agents shall submit schedules of all work relating to the Tenant's Improvements to Contractor and Contractor shall, within five (5) business days of receipt thereof, inform Tenant's Agents of any changes which are necessary thereto, and Tenant's Agents shall adhere to such corrected schedule; and (iii) Tenant shall abide by all rules made by Landlord's Building manager with respect to the use of freight, loading dock and service elevators, storage of materials, coordination of work with the contractors of other tenants, and any other matter in connection with this Tenant Work Letter, including, without limitation, the construction of the Tenant Improvements. Tenant shall pay a logistical coordination fee (the "Coordination Fee") to Landlord in an amount equal to the product of EXHIBIT B -4- 43 (i) five percent (5%) and (ii) the "hard costs" of constructing the Tenant Improvements which Coordination Fee shall be for services relating to the coordination of the construction of the Tenant Improvements, provided that in no event shall the Coordination Fee exceed Twenty Thousand and No/100 Dollars ($20,000.00). 4.2.2.2 Indemnity. Tenant's indemnity of Landlord as set forth in this Lease shall also apply with respect to any and all costs, losses, damages, injuries and liabilities related in any way to any act or omission of Tenant or Tenant's Agents, or anyone directly or indirectly employed by any of them, or in connection with Tenant's non-payment of any amount arising out of the Tenant Improvements and/or Tenant's disapproval of all or any portion of any request for payment. 4.2.2.3 Requirements of Tenant's Agents. Each of Tenant's Agents shall guarantee to Tenant and for the benefit of Landlord that the portion of the Tenant Improvements for which it is responsible shall be free from any defects in workmanship and materials for a period of not less than one (1) year from the date of completion thereof. Each of Tenant's Agents shall be responsible for the replacement or repair, without additional charge, of all work done or furnished in accordance with its contract that shall become defective within one (1) year after the later to occur of (i) completion of the work performed by such contractor or subcontractors and (ii) the Lease Commencement Date. The correction of such work shall include, without additional charge, all additional expenses and damages incurred in connection with such removal or replacement of all or any part of the Tenant Improvements, and/or the Building and/or common areas that may be damaged or disturbed thereby. All such warranties or guarantees as to materials or workmanship of or with respect to the Tenant Improvements shall be contained in the Contract or subcontract and shall be written such that such guarantees or warranties shall inure to the benefit of both Landlord and Tenant, as their respective interests may appear, and can be directly enforced by either. Tenant covenants to give to Landlord any assignment or other assurances which may be necessary to effect such right of direct enforcement. 4.2.2.4 Insurance Requirements. 4.2.2.4.1 General Coverages. All of Tenant's Agents shall carry worker's compensation insurance covering all of their respective employees, and shall also carry public liability insurance, including property damage, all with limits, in form and with companies as are required to be carried by Tenant as set forth in this Lease. 4.2.2.4.2 Special Coverages. Tenant shall carry "Builder's All Risk" insurance in an amount approved by Landlord covering the construction of the Tenant Improvements, and such other insurance as Landlord may require, it being understood and agreed that the Tenant Improvements shall be insured by Tenant pursuant to this Lease immediately upon completion thereof. Such insurance shall be in amounts and shall include such extended coverage endorsements as may be reasonably required by Landlord including, but not limited to, the requirement that all of Tenant's Agents shall carry excess liability and Products and Completed Operation Coverage insurance, each in amounts not less than $500,000 per incident, $1,000,000 in aggregate, and in form and with companies as are required to be carried by Tenant as set forth in this Lease. 4.2.2.4.3 General Terms. Certificates for all insurance carried pursuant to this Section 4.2.2.4 shall be delivered to Landlord before the commencement of construction of the Tenant Improvements and before the Contractor's equipment is moved onto the site. All such policies of insurance must contain a provision that the company writing said policy will give Landlord thirty (30) days prior written notice of any cancellation or lapse of the effective date or any reduction in the amounts of such insurance. In the event that the Tenant Improvements are damaged by any cause during the course of the construction thereof, Tenant shall immediately repair the same at Tenant's sole cost and expense. Tenant's Agents shall maintain all of the foregoing insurance coverage in force until the Tenant Improvements are fully completed and accepted by Landlord, except for any Products and Completed Operation Coverage insurance required by Landlord, which is to be maintained for ten (10) years following completion of the work and acceptance by Landlord and Tenant. All policies carried under this Section 4.2.2.4 shall insure Landlord and Tenant, as their interests may appear, as well as Contractor and Tenant's Agents. All insurance, except Workers' Compensation, maintained by Tenant's Agents shall preclude subrogation claims by the insurer against anyone insured thereunder. Such insurance shall provide that it is primary insurance as respects the owner and EXHIBIT B -5- 44 that any other insurance maintained by owner is excess and noncontributing with the insurance required hereunder. The requirements for the foregoing insurance shall not derogate from the provisions for indemnification of Landlord by Tenant under Section 4.2.2.2 of this Tenant Work Letter. Landlord may, in its discretion, require Tenant to obtain a lien and completion bond or some alternate form of security satisfactory to Landlord in an amount sufficient to ensure the lien-free completion of the Tenant Improvements and naming Landlord as a co-obligee. 4.2.3 Governmental Compliance. The Tenant Improvements shall comply in all respects with the following: (i) the Code and other state, federal, city or quasi-governmental laws, codes, ordinances and regulations, as each may apply according to the rulings of the controlling public official, agent or other person; (ii) applicable standards of the American Insurance Association (formerly, the National Board of Fire Underwriters) and the National Electrical Code; and (iii) building material manufacturer's specifications. 4.2.4 Inspection by Landlord. Landlord shall have the right to inspect the Tenant Improvements at all times, provided however, that Landlord's failure to inspect the Tenant Improvements shall in no event constitute a waiver of any of Landlord's rights hereunder nor shall Landlord's inspection of the Tenant Improvements constitute Landlord's approval of the same. Should Landlord reasonably disapprove any portion of the Tenant Improvements, Landlord shall notify Tenant in writing of such disapproval and shall specify the items disapproved. Any defects or deviations in, and/or disapproval by Landlord of, the Tenant Improvements shall be rectified by Tenant at no expense to Landlord, provided however, that in the event that (i) Landlord determines that a defect or deviation exists or disapproves of any matter in connection with any portion of the Tenant Improvements and such defect, deviation or matter might adversely affect the mechanical, electrical, plumbing, heating, ventilating and air conditioning or life-safety systems of the Building, the structure or exterior appearance of the Building or any other tenant's use of such other tenant's leased premises, and (ii) Tenant shall fail to promptly (given the nature of the matter at issue) cure such defect, deviation or matter, then Landlord may, take such action as Landlord deems necessary, at Tenant's expense and without incurring any liability on Landlord's part, to correct any such defect, deviation and/or matter, including, without limitation, causing the cessation of performance of the construction of the Tenant Improvements until such time as the defect, deviation and/or matter is corrected to Landlord's satisfaction. 4.2.5 Meetings. Commencing upon the execution of this Lease, Tenant shall hold regular meetings at a reasonable time, with the Architect and the Contractor regarding the progress of the preparation of Construction Drawings and the construction of the Tenant Improvements, which meetings shall be held at the Project, and Landlord and/or its agents shall receive prior notice of, and shall have the right to attend, all such meetings, and, upon Landlord's request, certain of Tenant's Agents shall attend such meetings. In addition, minutes shall be taken at all such meetings, a copy of which minutes shall be promptly delivered to Landlord. One such meeting each month shall include the review of Contractor's current request for payment. 4.3 Notice of Completion; Copy of Record Set of Plans. Within ten (10) days after completion of construction of the Tenant Improvements, Tenant shall cause a Notice of Completion to be recorded in the office of the Recorder of the county in which the Building is located in accordance with Section 3093 of the Civil Code of the State of California or any successor statute, and shall furnish a copy thereof to Landlord upon such recordation. If Tenant fails to do so, Landlord may execute and file the same on behalf of Tenant as Tenant's agent for such purpose, at Tenant's sole cost and expense. At the conclusion of construction, (i) Tenant shall cause the Architect and Contractor (A) to update the Approved Working Drawings as necessary to reflect all changes made to the Approved Working Drawings during the course of construction, (B) to certify to the best of their knowledge that the "record-set" of as-built drawings are true and correct, which certification shall survive the expiration or termination of this Lease, and (C) to deliver to Landlord two (2) sets of copies of such record set of drawings within ninety (90) days following issuance of a certificate of occupancy for the Premises, and (ii) Tenant shall deliver to Landlord a copy of all warranties, guaranties, and operating manuals and information relating to the improvements, equipment, and systems in the Premises. EXHIBIT B -6- 45 SECTION 5 DELAY OF LEASE COMMENCEMENT DATE 5.1 Lease Commencement Date Delays. The Lease Commencement Date shall occur as provided in Article 2 of this Lease, provided that the Lease Commencement Date shall be delayed by the number of days of delay of the "substantial completion of the Tenant Improvements," as that term is defined below in this Section 5, in the Premises which is caused solely by a "Lease Commencement Date Delay," which shall mean only an actual delay resulting from the acts or omissions of Landlord including, but not limited to (i) failure of Landlord to timely approve or disapprove any Construction Drawings; (ii) unreasonable and material interference by Landlord, its agents or contractors with the completion of the Tenant Improvements and which objectively preclude construction of tenant improvements in the Building by any person, which interference relates to access by Tenant, its agents and contractors to the Building or any Building facilities (including loading docks and freight elevators) or service (including temporary power and parking areas as provided herein) during normal construction hours, or the use thereof during normal construction hours; and (iii) delays due to the acts or failures to act of Landlord, its agents or contractors with respect to payment of the Tenant Improvement Allowance and/or any cessation of work upon the Tenant Improvements as a result thereof. 5.2 Determination of Lease Commencement Date Delay. If Tenant contends that a Lease Commencement Date Delay has occurred, Tenant shall notify Landlord in writing within two (2) business days of each of (i) the date upon which such Lease Commencement Date Delay becomes known to Tenant, Architect, or Contractor and (ii) the date upon which such Lease Commencement Date Delay ends (the "Termination Date"). Tenant's failure to deliver either or both of such notices to Landlord within the required time period shall be deemed to be a waiver by Tenant of the contended Lease Commencement Date Delay to which such notices would have related. If such actions, inaction or circumstances described in the notice set forth in clause (i), above (the "Delay Notice") are not cured by Landlord within two (2) business day of receipt of the Delay Notice and if such actions, inaction or circumstances otherwise qualify as a Lease Commencement Date Delay, then a Lease Commencement Date Delay shall be deemed to have occurred commencing as of the date of Landlord's receipt of the Delay Notice and ending as of the Termination Date. 5.3 Definition of Substantial Completion of the Tenant Improvements. For purposes of this Section 5, "substantial completion of the Tenant Improvements" shall mean completion of construction of the Tenant Improvements in the Premises pursuant to the "Approved Working Drawings," with the exception of any punch list items, any furniture, fixtures, work-stations, built-in furniture or equipment (even if the same requires installation or electrification by Tenant's Agents), and any tenant improvement finish items and materials which are selected by Tenant but which are not available within a reasonable time (given the date of the Lease Commencement Date). SECTION 6 MISCELLANEOUS 6.1 Tenant's Representative. Tenant has designated Ms. Patti Ridgway as its sole representative with respect to the matters set forth in this Tenant Work Letter, who shall have full authority and responsibility to act on behalf of the Tenant as required in this Tenant Work Letter. 6.2 Landlord's Representative. Landlord has designated Mr. Marcel George as its sole representatives with respect to the matters set forth in this Tenant Work Letter, who, until further notice to Tenant, shall have full authority and responsibility to act on behalf of the Landlord as required in this Tenant Work Letter. 6.3 Time of the Essence in This Tenant Work Letter. Unless otherwise indicated, all references herein to a "number of days" shall mean and refer to calendar days. If any item requiring approval is timely disapproved by Landlord, the procedure for preparation of the document and approval thereof shall be repeated until the document is approved by Landlord. 6.4 Tenant's Lease Default. Notwithstanding any provision to the contrary contained in this Lease, if an event of default as described in the Lease or this Tenant Work Letter has EXHIBIT B -7- 46 occurred at any time on or before the Substantial Completion of the Premises, then (i) in addition to all other rights and remedies granted to Landlord pursuant to this Lease, Landlord shall have the right to withhold payment of all or any portion of the Tenant Improvement Allowance and/or Landlord may cause Contractor to cease the construction of the Premises (in which case, Tenant shall be responsible for any delay in the substantial completion of the Premises caused by such work stoppage), and (ii) all other obligations of Landlord under the terms of this Tenant Work Letter shall be forgiven until such time as such default is cured pursuant to the terms of this Lease (in which case, Tenant shall be responsible for any delay in the substantial completion of the Premises caused by such inaction by Landlord). 6.5 No Miscellaneous Charges. During Tenant's construction of the Tenant Improvements, Landlord shall provide, and neither Tenant nor Tenant's Agents shall be charged for, HVAC during Building Hours or for parking, freight elevators and/or to the extent utilized in connection with the construction of the Tenant Improvements. EXHIBIT B -8- 47 EXHIBIT C 11818 WILSHIRE BOULEVARD NOTICE OF LEASE TERM DATES To: __________________________________ __________________________________ __________________________________ __________________________________ Re: Office Lease dated __________, 19 between , a __________________ ("Landlord"), and , a ("Tenant") concerning Suite ______ on floor(s) ______________ of the office building located at , Los Angeles, California. Gentlemen: In accordance with the Office Lease (the "Lease"), we wish to advise you and/or confirm as follows: 1._______The Lease Term shall commence on or has commenced on ______________ for a term of __________________ ending on ------------------. 2._______Rent commenced to accrue on __________________, in the amount of ________________. 3._______If the Lease Commencement Date is other than the first day of the month, the first billing will contain a pro rata adjustment. Each billing thereafter, with the exception of the final billing, shall be for the full amount of the monthly installment as provided for in the Lease. 4._______Your rent checks should be made payable to __________________ at ___________________. 5._______The exact number of rentable/usable square feet within the Premises is ____________ square feet. 6._______Tenant's Share as adjusted based upon the exact number of usable square feet within the Premises is ________%. "Landlord" __________________________________________ a _____________________ By: _____________________________________ Its: _______________________________ EXIBIT C -1- 48 Agreed to and Accepted as of ____________, 19___. "Tenant" ________________________________________ a ____________________ By: ___________________________________ Its: _______________________________ EXHIBIT C -2- 49 EXHIBIT D 11818 WILSHIRE BOULEVARD RULES AND REGULATIONS Tenant shall faithfully observe and comply with the following Rules and Regulations. Landlord shall not be responsible to Tenant for the nonperformance of any of said Rules and Regulations by or otherwise with respect to the acts or omissions of any other tenants or occupants of the Project. In the event of any conflict between the Rules and Regulations and the other provisions of this Lease, the latter shall control. 1. Tenant shall not alter any lock or install any new or additional locks or bolts on any doors or windows of the Premises without obtaining Landlord's prior written consent. Tenant shall bear the cost of any lock changes or repairs required by Tenant. Two keys will be furnished by Landlord for the Premises, and any additional keys required by Tenant must be obtained from Landlord at a reasonable cost to be established by Landlord. Upon the termination of this Lease, Tenant shall restore to Landlord all keys of stores, offices, and toilet rooms, either furnished to, or otherwise procured by, Tenant and in the event of the loss of keys so furnished, Tenant shall pay to Landlord the cost of replacing same or of changing the lock or locks opened by such lost key if Landlord shall deem it necessary to make such changes. 2. All doors opening to public corridors shall be kept closed at all times except for normal ingress and egress to the Premises. 3. Landlord reserves the right to close and keep locked all entrance and exit doors of the Building during such hours as are customary for comparable buildings in the Los Angeles, California area. Tenant, its employees and agents must be sure that the doors to the Building are securely closed and locked when leaving the Premises if it is after the normal hours of business for the Building. Any tenant, its employees, agents or any other persons entering or leaving the Building at any time when it is so locked, or any time when it is considered to be after normal business hours for the Building, may be required to sign the Building register. Access to the Building may be refused unless the person seeking access has proper identification or has a previously arranged pass for access to the Building. Landlord will furnish passes to persons for whom Tenant requests same in writing. Tenant shall be responsible for all persons for whom Tenant requests passes and shall be liable to Landlord for all acts of such persons. The Landlord and his agents shall in no case be liable for damages for any error with regard to the admission to or exclusion from the Building of any person. In case of invasion, mob, riot, public excitement, or other commotion, Landlord reserves the right to prevent access to the Building or the Project during the continuance thereof by any means it deems appropriate for the safety and protection of life and property. 4. No furniture, freight or equipment of any kind shall be brought into the Building without prior notice to Landlord. All moving activity into or out of the Building shall be scheduled with Landlord and done only at such time and in such manner as Landlord designates. Landlord shall have the right to prescribe the weight, size and position of all safes and other heavy property brought into the Building and also the times and manner of moving the same in and out of the Building. Safes and other heavy objects shall, if considered necessary by Landlord, stand on supports of such thickness as is necessary to properly distribute the weight. Landlord will not be responsible for loss of or damage to any such safe or property in any case. Any damage to any part of the Building, its contents, occupants or visitors by moving or maintaining any such safe or other property shall be the sole responsibility and expense of Tenant. 5. No furniture, packages, supplies, equipment or merchandise will be received in the Building or carried up or down in the elevators, except between such hours, in such specific elevator and by such personnel as shall be designated by Landlord. 6. The requirements of Tenant will be attended to only upon application at the management office for the Project or at such office location designated by Landlord. Employees of Landlord shall not perform any work or do anything outside their regular duties unless under special instructions from Landlord. EXHIBIT D -1- 50 7. No sign, advertisement, notice or handbill shall be exhibited, distributed, painted or affixed by Tenant on any part of the Premises or the Building without the prior written consent of the Landlord. Tenant shall not disturb, solicit, peddle, or canvass any occupant of the Project and shall cooperate with Landlord and its agents of Landlord to prevent same. 8. The toilet rooms, urinals, wash bowls and other apparatus shall not be used for any purpose other than that for which they were constructed, and no foreign substance of any kind whatsoever shall be thrown therein. The expense of any breakage, stoppage or damage resulting from the violation of this rule shall be borne by the tenant who, or whose servants, employees, agents, visitors or licensees shall have caused same. 9. Tenant shall not overload the floor of the Premises, nor mark, drive nails or screws, or drill into the partitions, woodwork or drywall or in any way deface the Premises or any part thereof without Landlord's prior written consent. Tenant shall not purchase spring water, ice, towel, linen, maintenance or other like services from any person or persons not approved by Landlord. 10. Except for vending machines intended for the sole use of Tenant's employees and invitees, no vending machine or machines other than fractional horsepower office machines shall be installed, maintained or operated upon the Premises without the written consent of Landlord. 11. Tenant shall not use or keep in or on the Premises, the Building, or the Project any kerosene, gasoline, explosive material, corrosive material, material capable of emitting toxic fumes, or other inflammable or combustible fluid chemical, substitute or material. Tenant shall provide material safety data sheets for any Hazardous Material used or kept on the Premises. 12. Tenant shall not without the prior written consent of Landlord use any method of heating or air conditioning other than that supplied by Landlord. 13. Tenant shall not use, keep or permit to be used or kept, any foul or noxious gas or substance in or on the Premises, or permit or allow the Premises to be occupied or used in a manner offensive or objectionable to Landlord or other occupants of the Project by reason of noise, odors, or vibrations, or interfere with other tenants or those having business therein, whether by the use of any musical instrument, radio, phonograph, or in any other way. Tenant shall not throw anything out of doors, windows or skylights or down passageways. 14. Tenant shall not bring into or keep within the Project, the Building or the Premises any animals, birds, aquariums, or, except in areas designated by Landlord, bicycles or other vehicles. 15. No cooking shall be done or permitted on the Premises, nor shall the Premises be used for the storage of merchandise, for lodging or for any improper, objectionable or immoral purposes. Notwithstanding the foregoing, Underwriters' laboratory-approved equipment and microwave ovens may be used in the Premises for heating food and brewing coffee, tea, hot chocolate and similar beverages for employees and visitors, provided that such use is in accordance with all applicable federal, state, county and city laws, codes, ordinances, rules and regulations. 16. The Premises shall not be used for manufacturing or for the storage of merchandise except as such storage may be incidental to the use of the Premises provided for in the Summary. Tenant shall not occupy or permit any portion of the Premises to be occupied as an office for a messenger-type operation or dispatch office, public stenographer or typist, or for the manufacture or sale of liquor, narcotics, or tobacco in any form, or as a medical office, or as a barber or manicure shop, or as an employment bureau without the express prior written consent of Landlord. Tenant shall not engage or pay any employees on the Premises except those actually working for such tenant on the Premises nor advertise for laborers giving an address at the Premises. 17. Landlord reserves the right to exclude or expel from the Project any person who, in the judgment of Landlord, is intoxicated or under the influence of liquor or drugs, or who shall in any manner do any act in violation of any of these Rules and Regulations. EXHIBIT D -2- 51 18. Tenant, its employees and agents shall not loiter in or on the entrances, corridors, sidewalks, lobbies, courts, halls, stairways, elevators, vestibules or any Common Areas for the purpose of smoking tobacco products or for any other purpose, nor in any way obstruct such areas, and shall use them only as a means of ingress and egress for the Premises. 19. Tenant shall not waste electricity, water or air conditioning and agrees to cooperate fully with Landlord to ensure the most effective operation of the Building's heating and air conditioning system, and shall refrain from attempting to adjust any controls. Tenant shall participate in recycling programs undertaken by Landlord. 20. Tenant shall store all its trash and garbage within the interior of the Premises. No material shall be placed in the trash boxes or receptacles if such material is of such nature that it may not be disposed of in the ordinary and customary manner of removing and disposing of trash and garbage in Los Angeles, California without violation of any law or ordinance governing such disposal. All trash, garbage and refuse disposal shall be made only through entry-ways and elevators provided for such purposes at such times as Landlord shall designate. If the Premises is or becomes infested with vermin as a result of the use or any misuse or neglect of the Premises by Tenant, its agents, servants, employees, contractors, visitors or licensees, Tenant shall forthwith, at Tenant's expense, cause the Premises to be exterminated from time to time to the satisfaction of Landlord and shall employ such licensed exterminators as shall be approved in writing in advance by Landlord. 21. Tenant shall comply with all safety, fire protection and evacuation procedures and regulations established by Landlord or any governmental agency. 22. Any persons employed by Tenant to do janitorial work shall be subject to the prior written approval of Landlord, and while in the Building and outside of the Premises, shall be subject to and under the control and direction of the Building manager (but not as an agent or servant of such manager or of Landlord), and Tenant shall be responsible for all acts of such persons. 23. No awnings or other projection shall be attached to the outside walls of the Building without the prior written consent of Landlord, and no curtains, blinds, shades or screens shall be attached to or hung in, or used in connection with, any window or door of the Premises other than Landlord standard drapes. All electrical ceiling fixtures hung in the Premises or spaces along the perimeter of the Building must be fluorescent and/or of a quality, type, design and a warm white bulb color approved in advance in writing by Landlord. Neither the interior nor exterior of any windows shall be coated or otherwise sunscreened without the prior written consent of Landlord. Tenant shall be responsible for any damage to the window film on the exterior windows of the Premises and shall promptly repair any such damage at Tenant's sole cost and expense. Tenant shall keep its window coverings closed during any period of the day when the sun is shining directly on the windows of the Premises. Prior to leaving the Premises for the day, Tenant shall draw or lower window coverings and extinguish all lights. Tenant shall abide by Landlord's regulations concerning the opening and closing of window coverings which are attached to the windows in the Premises, if any, which have a view of any interior portion of the Building or Building Common Areas. 24. The sashes, sash doors, skylights, windows, and doors that reflect or admit light and air into the halls, passageways or other public places in the Building shall not be covered or obstructed by Tenant, nor shall any bottles, parcels or other articles be placed on the windowsills. 25. Tenant must comply with requests by the Landlord concerning the informing of their employees of items of importance to the Landlord. 26. Tenant must comply with all applicable "NO-SMOKING" or similar ordinances, rules, laws and regulations. 27. Tenant hereby acknowledges that Landlord shall have no obligation to provide guard service or other security measures for the benefit of the Premises, the Building or the Project. Tenant hereby assumes all responsibility for the protection of Tenant and its agents, employees, contractors, invitees and guests, and the property thereof, from acts of third parties, including keeping doors locked and other means of entry to the Premises closed, whether or not Landlord, at its option, elects to provide security protection for the Project or any portion thereof. EXHIBIT D -3- 52 Tenant further assumes the risk that any safety and security devices, services and programs which Landlord elects, in its sole discretion, to provide may not be effective, or may malfunction or be circumvented by an unauthorized third party, and Tenant shall, in addition to its other insurance obligations under this Lease, obtain its own insurance coverage to the extent Tenant desires protection against losses related to such occurrences. Tenant shall cooperate in any reasonable safety or security program developed by Landlord or required by law. 28. All office equipment of any electrical or mechanical nature shall be placed by Tenant in the Premises in settings approved by Landlord, to absorb or prevent any vibration, noise and annoyance. 29. Tenant shall not use in any space or in the public halls of the Building, any hand trucks except those equipped with rubber tires and rubber side guards. 30. No auction, liquidation, fire sale, going-out-of-business or bankruptcy sale shall be conducted in the Premises without the prior written consent of Landlord. 31. No tenant shall use or permit the use of any portion of the Premises for living quarters, sleeping apartments or lodging rooms. 32. Tenant shall not purchase spring water, towels, janitorial or maintenance or other similar services from any company or persons not approved by Landlord. Landlord shall approve a sufficient number of sources of such services to provide Tenant with a reasonable selection, but only in such instances and to such extent as Landlord in its judgment shall consider consistent with the security and proper operation of the Building. 33. Tenant shall install and maintain, at Tenant's sole cost and expense, an adequate, visibly marked and properly operational fire extinguisher next to any duplicating or photocopying machines or similar heat producing equipment, which may or may not contain combustible material, in the Premises. Landlord reserves the right at any time to change or rescind any one or more of these Rules and Regulations, or to make such other and further reasonable Rules and Regulations as in Landlord's judgment may from time to time be necessary for the management, safety, care and cleanliness of the Premises, Building, the Common Areas and the Project, and for the preservation of good order therein, as well as for the convenience of other occupants and tenants therein. Landlord may waive any one or more of these Rules and Regulations for the benefit of any particular tenants, but no such waiver by Landlord shall be construed as a waiver of such Rules and Regulations in favor of any other tenant, nor prevent Landlord from thereafter enforcing any such Rules or Regulations against any or all tenants of the Project. Tenant shall be deemed to have read these Rules and Regulations and to have agreed to abide by them as a condition of its occupancy of the Premises. EXHIBIT D -4- 53 EXHIBIT E 11818 WILSHIRE BOULEVARD FORM OF TENANT'S ESTOPPEL CERTIFICATE The undersigned as Tenant under that certain Office Lease (the "Lease") made and entered into as of ___________, 199 by and between _______________ as Landlord, and the undersigned as Tenant, for Premises on the ______________ floor(s) of the office building located at ______________, certifies as follows: 1. Attached hereto as Exhibit A is a true and correct copy of the Lease and all amendments and modifications thereto. The documents contained in Exhibit A represent the entire agreement between the parties as to the Premises. 2. The undersigned currently occupies the Premises described in the Lease, the Lease Term commenced on __________, and the Lease Term expires on ___________, and the undersigned has no option to terminate or cancel the Lease or to purchase all or any part of the Premises, the Building and/or the Project. 3. Base Rent became payable on ____________. 4. The Lease is in full force and effect and has not been modified, supplemented or amended in any way except as provided in Exhibit A. 5. Tenant has not transferred, assigned, or sublet any portion of the Premises nor entered into any license or concession agreements with respect thereto except as follows: 6. Tenant shall not modify the documents contained in Exhibit A without the prior written consent of Landlord's mortgagee. 7. All monthly installments of Base Rent, all Additional Rent and all monthly installments of estimated Additional Rent have been paid when due through ___________. The current monthly installment of Base Rent is $_____________________. 8. All conditions of the Lease to be performed by Landlord necessary to the enforceability of the Lease have been satisfied and Landlord is not in default thereunder. In addition, the undersigned has not delivered any notice to Landlord regarding a default by Landlord thereunder. 9. No rental has been paid more than thirty (30) days in advance and no security has been deposited with Landlord except as provided in the Lease. 10. As of the date hereof, there are no existing defenses or offsets, or, to the undersigned's knowledge, claims or any basis for a claim, that the undersigned has against Landlord. 11. If Tenant is a corporation or partnership, each individual executing this Estoppel Certificate on behalf of Tenant hereby represents and warrants that Tenant is a duly formed and existing entity qualified to do business in California and that Tenant has full right and authority to execute and deliver this Estoppel Certificate and that each person signing on behalf of Tenant is authorized to do so. 12. There are no actions pending against the undersigned under the bankruptcy or similar laws of the United States or any state. EXHIBIT E -1- 54 13. Other than in compliance with all applicable laws and incidental to the ordinary course of the use of the Premises, the undersigned has not used or stored any hazardous substances in the Premises. 14. To the undersigned's knowledge, all tenant improvement work to be performed by Landlord under the Lease has been completed in accordance with the Lease and has been accepted by the undersigned and all reimbursements and allowances due to the undersigned under the Lease in connection with any tenant improvement work have been paid in full. The undersigned acknowledges that this Estoppel Certificate may be delivered to Landlord or to a prospective mortgagee or prospective purchaser, and acknowledges that said prospective mortgagee or prospective purchaser will be relying upon the statements contained herein in making the loan or acquiring the property of which the Premises are a part and that receipt by it of this certificate is a condition of making such loan or acquiring such property. Executed at ______________ on the ____ day of ___________, 19 . "Tenant" _________________________________________________ a _____________________ By: ____________________________________________ Its: ______________________________________ By: _____________________________________________ Its: ______________________________________ EXHIBIT E -2- 55 EXHIBIT F APPROXIMATE LOCATION OF TENANT'S SIGN [TO BE PROVIDED] EXHIBIT F -1- EX-10.31 8 EXHIBIT 10.31 1 EXHIBIT 10.31 AFMA(R) INTERNATIONAL FREE TV LICENSE AGREEMENT This International Free TV License Agreement is made as of September 10, 1999 between TEAM Entertainment Group("Licensor") of 12300 Wilshire Boulevard, Suite 400, Los Angeles CA 90025 [tel/fax:] (310) 442-3500/(310) 442-3501 and String of Pearls PLC. - or order ("Licensee") of Bray Film Studios, Down Place, Water Oakley, Windsor, Berks SL4 5UG [tel/fax]01628- 622111/01628-770381. This Agreement is: [X] A new agreement; [ ] A long form that replaces the deal memo regarding the Programs; [ ] An amendment to an existing agreement dated ________ Subject to timely payment of all monies due Licensor and Licensee's full performance under this Agreement, Licensor licenses to Licensee, and Licensee accepts from Licensor, the Licensed Rights in the Programs throughout the Territory for the Term in the Authorized Languages subject to the Hold backs as identified below on all the terms and conditions of this Agreement. This Agreement consists of the following parts: this Cover Page; Table of Contents; Deal Terms; Standard Terms; Schedule of Definitions; and the following Attachment(s): [ ] Schedule of Programs;[ ] Access Letter;[ ] Guaranty; and ----------------------------------------------------- IN WITNESS WHEREOF, Licensor and Licensee have executed this Agreement as of the date first written above to constitute a binding contract between them. LICENSOR LICENSEE By: /s/ DREW S. LEVIN By: /s/ PETER GRAY ------------------- ---------------------------- Its: Its: ------------------ --------------------------- 2 TABLE OF CONTENTS Section Paragraph DEAL TERMS Program(s) A. Territory B. Authorized Language(s) C. Term And License Period D. Licensed Station E. Free TV Rights F. Exclusivity G. Licensor's Hold backs H. License Fee I. Payment J. Delivery Terms K. Additional Terms L. STANDARD TERMS AND CONDITIONS Definitions And Usage 1. Program And Versions 2. Licensed Rights And Reserved Rights 3. Allied Rights 4. Territory, Holdback Region And Licensed Station 5. Term And License Period 6. Payment Requirements 7. Delivery And Return 8. Telecast Obligations 9. Music 10. Suspension And Withdrawal 11. Default And Termination 12. Anti-Piracy Provisions 13. Licensor's Warranties 14. Licensee's Warranties 15. Indemnities 16. Assignment And Sublicensing 17. Miscellaneous Provisions 18. SCHEDULE OF LICENSING DEFINITIONS Free TV Rights Definitions A. Additional Definitions B.
3 AFMA(R) INTERNATIONAL FREE TV LICENSE AGREEMENT DEAL TERMS Mention in these Deal Terms of any right not specifically licensed to Licensee in the Licensed Rights Deal Terms does not grant to Licensee expressly or by implication any right not specifically licensed to Licensee in the Licensed Rights Deal Terms. A. PROGRAM(S): commercial (1/2) (hour) episodes, "_____________" [X] As set forth on attached Schedule of Programs. B. TERRITORY: Worldwide excluding U.S.; Canada; U.K.; Scandinavia; Benelux; Spain; Middle East; Africa (including South Africa) C. AUTHORIZED LANGUAGE(S): For each Program [ ] Original Language; [X] Official Language(s) in Territory; [ ]as needed to service territories [ ] Dubbed Only [ ] Subtitled Only [ ] Dubbed and Subtitled D. TERM AND LICENSE PERIOD: Subject to Paragraph 6.1. of the Standard Terms: 1. Term: The Term starts on _September 10, 1999____and ends on: a. The last Licensed Telecast of all Program(s), or b. __September 9, 2004_____, or c. [ ] years from [ ] the date of this Agreement [ ] the first Licensed Telecast of any Program. [ ] 2. License Period: The period during which Licensee may exploit the Licensed Right(s) DT-1 4 in each Program starts on the Availability Date for the Program and ends on the earlier of the last Licensed Telecast for the Program or end of the Term. E. LICENSED STATION: In accordance with Paragraph 5.4. of the Standard Terms: [ ] All broadcasters for the licensed Free TV Rights in the Territory; or [X] Licensee F. PAY AND FREE TV RIGHTS: For each Program
LICENSED RUNS PLAY DATES AVAILABILITY DATE -------- ---- ---------- ----------------- Terrestrial [X] Yes [ ]No ____ [ ] To be advised (see Standard Terms Paragraph 6.3.);or [ ] as set forth on attached Schedule of Programs Cable [X] Yes [ ]No ____ [ ] To be advised (see Standard Terms Paragraph 6.3.); or [ ] as set forth on attached Schedule of Programs Satellite [X] Yes [ ]No ____ [ ] To be advised (see Standard Terms Paragraph 6.3.); or [ ] as set forth on attached Schedule of Programs Video [X] Yes [ ]No ____ [ ] To be advised (see Standard Terms Paragraph 6.3.); or [ ] as set forth on attached Schedule of Programs
The Availability Date for each Program is subject to Availability Coordination within the Region in accordance with Paragraph 6.4. of the Standard Terms. G. EXCLUSIVITY: The Licensed Rights, as defined in Paragraph 3.1. of the Standard Terms, are: [X] Exclusive except _______________________________________ [ ] Non-Exclusive except ___________________________________ H. LICENSOR'S HOLD BACKS: In accordance with Paragraph 6.5. of the Standard Terms, the Hold backs on Licensor's exploitation of any Reserved Rights in each Program will be: [X] None. [ ] As set forth on the Schedule of Programs. [ ] All Free TV in the Authorized Languages per Paragraph 6.5.1. of the Standard Terms. [ ] All Pay TV in the Authorized Languages per Paragraph 6.5.2. of the Standard Terms. [ ] __________________________________________________________________. DT-2 5 I. LICENSE FEE: US$5,375,000.00 (Total for all Programs) The License Fee is a minimum net sum and no taxes or charges may be deducted from it. 1. ALLOCATED: [ ] As set forth on the attached Schedule of Programs, or [ ] US$_______.00 [ ] per Run\Play date or [X ] per Program 2. PAYABLE: The first payment will be made 60 days after execution of this agreement for $289,000; thereafter we will send 17 monthly payments at $283,000 starting on December 15, 1999 with one (1) additional final payment of $275,000. J. PAYMENT: Licensee will pay the License Fee and any other payments due Licensor as follows: 1. WT - WIRE TRANSFER [Check as appropriate] [X] License Fee Installments: [X]I.2.a; [ ]I.2.b; [X]I.2.c; [ ] Materials Charges (Section K.4) Licensee will pay the indicated installments of the License Fee or other payments by wire transfer of unencumbered funds, free of any transmission charges, to the following account: As indicated on invoices to follow 2. LC - LETTER OF CREDIT [Check as appropriate] [ ] License Fee Installments: [ ]I.2.a; [ ]I.2.b; [ ]I.2.c; [ ] Materials Charges (Section K.4) Issued By: ______________ Open Until:______________ Renewable For: _____________________. Licensee will pay the indicated installments of the License Fee or other payments by an irrevocable Letter of Credit which meets the requirements of Paragraph 7.2. of the Standard Terms. The Letter of Credit will be issued by and remain open until the dates indicated above. The Letter of Credit will be payable on presentation to Licensor's corresponding bank of: [Check all that apply] [ ] SIGHT DRAFT in usual commercial form indicating payment due. [ ] INVOICE for payments then due. [ ] BILL OF LADING, such as an air waybill, evidencing shipment to Licensee of the applicable Delivery Materials. [ ] ACCESS LETTER substantially in the form attached for applicable Delivery Materials. 3. OTHER: [ ] License Fee Installments: [ ]I.2.a; [ ]I.2.b; [ ]I.2.c; [ ] Materials Charges (Section K.4) Licensee will pay the indicated installments of the License Fee or other payments as follows: DT-3 6 K. DELIVERY TERMS: 1. PHYSICAL MATERIALS: For each Program Licensor will make Delivery of the Physical Materials: [ ] As specified in Licensor's Delivery Notice per Paragraph 8.1.; or [X] By Delivering the following indicated items for the original language version: Item Delivery Method (Para. 8.1., Standard Terms) FEATURE LOW CONTRAST PRINT [ ]Physical [ ]Access [ ]Loan [ ]Satellite [ ]35mm [ ]16mm TRAILER LOW CONTRAST PRINT [ ]Physical [ ]Access [ ]Loan [ ]Satellite [ ]35mm [ ]16mm PRINT MASTER (2 TRACK) [ ]Physical [ ]Access [ ]Loan [ ]Satellite [ ]35mm [ ]Stereo [ ]Mono [ ]16mm [ ]Stereo [ ]Mono NTSC (525) [ ] Physical [ ]Access [ ]Loan [ ]Satellite [X]1" [X]D1 [X]D2 [X]D3 [X]3/4" [X] Betacam SP PAL(625) [ ] Physical [ ]Access [ ]Loan [ ]Satellite [X]1" [X]D1 [X]D2 [X]D3 [X]3/4" [X] Betacam SP 2. SUPPORT MATERIALS: Foreach Program Licensor will make Delivery of the Support Materials: [X] As available [ ] As specified in Licensor's Delivery Notice per Paragraph 8.1.; or [ ] By Delivering the following items: [ ] Feature Spotting List [ ] Press Book [ ] Trailer Spotting List [ ] Electronic Press Kit [ ] Feature Continuity [ ] Synopsis [ ] Trailer Continuity [ ] Radio Spots (No.__) [ ] Main & End Credits [ ] B&W Stills (No.__) [ ] Paid Ad Credit [ ] Color Stills (No.__) [ ] Dub/Sub Restrictions [ ] Color Slides (No.__) [ ] Music Cue Sheets [ ] TV Spots (No.____) [ ] As-Broadcast Scripts 3. DATE FOR DELIVERY NOTICE: Licensor will give Licensee a Delivery Notice for each Program no later than: [X] Before its Availability Date; or [ ] ____________________________________ 4. MATERIALS PAYMENT INSTRUCTIONS: Licensee will pay for all Materials: [ ] As specified in Licensor's Delivery Notice per Paragraph 8.1.; [X] As follows: Licensee will pay US$100.00 per episode for masters [ ] Materials on loan for fourteen (14) days, to be returned thereafter DT-4 7 5. MATERIALS SHIPPING INSTRUCTIONS: Licensor will ship all Materials to Licensee: [ ] As specified in Licensor's Delivery Notice per Paragraph 8.1.; [X] As follows: Freight prepaid L. ADDITIONAL TERMS: 1. GOVERNING LAW: [X] California or [ ] _____________________________________ 2. FORUM: [X] Los Angeles County or [ ] _____________________________ 3. ADDITIONAL DEAL TERMS: None. 8 "Schedule A" Programs 1. Avenging 2. Billions for Boris 3. Confessions of a Married Man 4. Emergency Room 5. Getting It On 6. Goldrunner 7. Legs 8. New Girl 9. One Dark Night 10. Ordeal of Bill Carney 11. Private Sessions 12. Remembrance of Love 13. Sampson and Delila 14. Seduced 15. Snowballing 16. Sourdough 17. The Imposters 18. The Execution 19. This Wife for Hire 20. Valentine Magic On Love Island
EX-21 9 EXHIBIT 21 1 EXHIBIT 21 TEAM COMMUNICATIONS GROUP, INC. SUBSIDIARIES OF REGISTRANT Longform Entertainment, Inc. Simply Style Productions, Inc. Amazing Tails, Inc. Mary Lou's Flip Flop Shop, Inc. Team Entertainment Germany GmbH Team Dandelion Ltd. 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 April 15, 1999, relating to the financial statements of Team Communications Group, Inc., which appears in such Prospectus. 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 November 18, 1999 EX-23.2 11 EXHIBIT 23.2 1 EXHIBIT 23.2 [BARNES ROFFE LETTERHEAD] STRICTLY PRIVATE AND CONFIDENTIAL FOR ADDRESSEE ONLY: The Directors Our Ref: MJM/SB/1211TEAM TEAM Communications Group Inc 12300 Wilshire Boulevard Suite 400 Los Angeles California 90025 USA 12th November 1999 Dear Sirs, DANDELION DISTRIBUTION LIMITED We hereby consent to the use in the Prospectus constituting part of the Registration Statement on Form SB-2 of our reports dated 15 October 1999 and 7 December 1998 relating to the financial statements of Dandelion Distribution Limited which appear in such Prospectus, and state explicitly that the financial statements and our reports thereon were prepared only for the purpose of complying with UK statutory reporting requirements and they should not be relied upon for any other purpose. We also consent to the reference to us under the heading of "Experts" in such Prospectus. Yours faithfully /s/ BARNES ROFFE - ------------------- BARNES ROFFE EX-27 12 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS AS OF SEPTEMBER 30, 1999 AND FOR THE NINE MONTHS THEN ENDED AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 9-MOS DEC-31-1999 JAN-01-1999 SEP-30-1999 2,173,200 0 11,773,700 837,000 20,697,100 1,255,500 110,700 55,500 35,117,700 13,289,200 4,387,200 0 0 1,000 17,440,300 35,117,700 13,273,300 13,273,300 6,056,300 9,328,000 0 500,000 477,900 3,054,700 1,149,900 1,904,800 0 431,900 0 1,472,900 .35 .29
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