<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 28, 1998
REGISTRATION NUMBER 333-26307
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
AMENDMENT NO. 9
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)
<TABLE>
<S> <C> <C>
CALIFORNIA 3652 95-5419215
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (IRS EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NO.)
</TABLE>
------------------------
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:
<TABLE>
<S> <C>
BRUCE P. VANN, ESQ. JAMES M. JENKINS, ESQ.
KELLY LYTTON MINTZ & VANN LLP CRAIG S. WITTLIN, ESQ.
1900 AVENUE OF THE STARS, SUITE 1450 HARTER, SECREST & EMERY LLP
LOS ANGELES, CALIFORNIA 90067 700 MIDTOWN TOWER
TELEPHONE NO: (310) 277-5333 ROCHESTER, NEW YORK 14604-2070
FACSIMILE NO: (310) 277-5953 TELEPHONE NO: (716) 232-6500
FACSIMILE NO: (716) 232-2152
</TABLE>
------------------------
APPROXIMATE DATE OF PROPOSED SALE TO THE PUBLIC: as soon as practicable after
the effective date of this registration statement.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, as amended, check the following box. [X]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
===========================================================================================================================
PROPOSED MAXIMUM PROPOSED MAXIMUM AMOUNT OF
TITLE OF EACH CLASS OF AMOUNT OFFERING PRICE AGGREGATE REGISTRATION
SECURITIES TO BE REGISTERED TO BE REGISTERED PER SHARE(1) OFFERING PRICE(1) FEE
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, no par value................ 1,725,000(2) $ 7.00 $12,075,000 $3,659.09
Common Stock Underlying Warrants.......... 595,278 $ 1.00 $ 595,278 $ 175.61
Representatives' Warrant.................. 1 $15.00 $ 15 $ 0.00
Common Stock Underlying Representatives'
Warrant................................. 150,000 $ 8.40 $ 1,260,000 $ 371.70
TOTAL..................................... $4,206.40*
===========================================================================================================================
</TABLE>
* $4,168 Previously paid.
(1) Estimated pursuant to Rule 457(a) solely for the purpose of calculating the
registration fee.
(2) Includes 225,000 shares which may be purchased by the Underwriters to cover
over-allotments, if any.
THE REGISTRANT HEREBY AMENDS THE REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(a), MAY DETERMINE.
================================================================================
<PAGE> 2
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
PRELIMINARY PROSPECTUS DATED MAY 28, 1998
TEAM COMMUNICATIONS GROUP, INC.
1,500,000 SHARES
Team Communications Group, Inc. (the "Company") hereby offers 1,500,000
shares of its Common Stock, no par value, ("Common Stock"). Prior to this
offering (the "Offering"), there has been no public market for the Common Stock
of the Company, and there can be no assurance that an active market will
develop. The offering price is expected to be between $5.50 and $7.00 per share.
The offering price of the Common Stock has been determined by negotiation
between the Company and National Securities Corporation ("NSC") and Coleman &
Company Securities, Inc., the representatives (the "Representatives") of the
several underwriters (the "Underwriters") and is not necessarily related to the
Company's asset value or any other established criteria of value. For the method
of determining the initial offering price of the Common Stock, see "Risk
Factors" and "Underwriting." Application has been made to have the Common Stock
approved for listing on the NASDAQ SmallCap Market under the symbol "TMTV."
The Company is also registering 595,278 shares of Common Stock issuable upon
exercise of certain outstanding warrants that may be resold from time to time in
the future by certain securityholders (the "Selling Securityholders"). The
595,278 shares of Common Stock underlying such warrants are subject to a 12
month lock-up beginning on the date of this Prospectus. The Company has
covenanted to use its best efforts to keep the Registration Statement of which
this Prospectus is a part effective with the Securities and Exchange Commission
in order to permit such resales, and it is expected that such resales will be
made from time to time on the Nasdaq SmallCap Market, or otherwise. Such resales
are subject to prospectus delivery and other requirements of the Securities Act
of 1933, as amended (the "Securities Act"). The Company will not receive any
proceeds from the market sales of the shares of Common Stock issuable upon
exercise of such warrants other than proceeds relating to the exercise price of
such warrants. The Company is paying all costs and expenses of registering these
shares of Common Stock. See "Offering by Selling Securityholders."
------------------------
THE SHARES OF COMMON STOCK OFFERED HEREBY ARE HIGHLY SPECULATIVE, INVOLVE A HIGH
DEGREE OF RISK AND IMMEDIATE AND SUBSTANTIAL DILUTION AND SHOULD BE CONSIDERED
ONLY BY INVESTORS WHO CAN AFFORD THE LOSS OF THEIR ENTIRE INVESTMENT. SEE "RISK
FACTORS" BEGINNING ON PAGE 8.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
================================================================================================================
UNDERWRITING
DISCOUNTS AND PROCEEDS TO
PRICE TO PUBLIC COMMISSIONS(1) COMPANY(2)
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Share...................................... $ $ $
- ----------------------------------------------------------------------------------------------------------------
Total(3)....................................... $ $ $
================================================================================================================
</TABLE>
(1) Does not include additional compensation to be received by the
Representatives in the form of (i) a non-accountable expense allowance of
$ (or $ if the Underwriters' over-allotment option described in
footnote (3) is exercised in full) and (ii) a warrant to purchase up to
150,000 shares of Common Stock at $ per share (that being 120% of the
assumed initial public offering price of $ per share), exercisable over a
period of four years, commencing one year from the date of this Prospectus
(the "Representatives' Warrant"). In addition, the Company has agreed to
indemnify the Underwriters against certain civil liabilities under the
Securities Act. See "Underwriting."
(2) Before deducting expenses of the Offering payable by the Company, estimated
at $ , including the Representatives' non-accountable expense
allowance.
(3) The Company and Joseph Cayre (the "Selling Shareholder") have granted to the
Underwriters an option (together, the "Underwriters' over-allotment
option"), exercisable within 45 days of the date of this Prospectus, to
purchase up to 225,000 additional shares of Common Stock on the same terms
and conditions as set forth above solely to cover over-allotments, if any.
If all such additional shares of Common Stock are purchased, the total Price
to Public, Underwriting Discounts and Commissions and Proceeds to Company
will be increased to $ , $ and $ , respectively, and the proceeds to the
Selling Shareholder will be $ . See "Underwriting" and "Principal
Shareholders."
The 1,500,000 shares of Common Stock offered hereby are offered on a "firm
commitment" basis by the Underwriters, subject to prior sale when, as and if
delivered to and accepted by the Underwriters, and subject to the right of the
Underwriters to reject any order in whole or in part. It is expected that
delivery of the certificates representing the shares of Common Stock will be
made at the offices of National Securities Corporation, 1001 Fourth Avenue,
Suite 2200, Seattle, Washington 98154 on or about , 1998.
------------------------
NATIONAL SECURITIES CORPORATION COLEMAN & COMPANY SECURITIES, INC.
The date of this Prospectus is May , 1998.
<PAGE> 3
PICTURES
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS THAT
STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK.
SPECIFICALLY, THE UNDERWRITER MAY OVERALLOT IN CONNECTION WITH THE OFFERING AND
MAY BID FOR AND PURCHASE SHARES OF THE COMMON STOCK IN THE OPEN MARKET. FOR A
DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING."
------------------------
The Company intends to furnish its shareholders with annual reports containing
audited financial statements with a report thereon by independent accountants
and quarterly reports containing unaudited financial information for each of the
first three quarters of each fiscal year.
<PAGE> 4
PROSPECTUS SUMMARY
The following summary does not purport to be complete and is qualified in
its entirety by, and should be read in conjunction with, the more detailed
information and financial data appearing elsewhere in this Prospectus. Each
prospective investor is urged to read this Prospectus in its entirety. This
Prospectus contains forward-looking statements that involve risks and
uncertainties. The Company's actual results could differ materially from those
anticipated in these forward-looking statements as a result of certain factors,
including those set forth under "Risk Factors" and elsewhere in this Prospectus.
THE COMPANY
Since its formation in February 1995, Team Communications Group, Inc. (the
"Company") has focused its efforts on the development, production and
distribution of a variety of television programming, including series, specials
and made-for-television movies for exploitation in the domestic and
international television market. The Company derives substantially all of its
revenues from production fees earned in connection with Company-originated
productions, distribution fees from the exploitation of product acquired from
others, and the exploitation of Company-owned programming.
The Company's production activities have focused on (i) family programming
produced for U.S. cable and network television channels such as The Discovery
Channel, The Family Channel, USA Network, and the Public Broadcasting System
("PBS"), and (ii) "how-to" instructional series, such as "Simply Style," a
60-episode series which debuted during the third quarter of 1995 on The Learning
Channel. In addition, the Company co-developed and 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. The Company has also completed
the production of a series of 22 half hour episodes entitled "Amazing Tails," a
reality based series focusing on extraordinary pets, which has been financed in
conjunction with Friskies Pet Foods, a division of Nestles Food, and advertising
leader The Interpublic Group of Companies ("Interpublic"). All episodes of
Amazing Tales have been produced and delivered to Interpublic, and the series is
currently airing on Discovery Communications' newest channel, Animal Planet. The
Company has also entered into an agreement with Discovery Communications for a
second season of 26 new episodes of "Amazing Tails", which is currently
completing production. Additionally, the Company is party to a joint venture
agreement with Interpublic for the production, subject to certain criteria, of a
minimum of four pilots over the next year for non-fiction and light
entertainment programming. The Company maintains a dramatic development and
production department which is developing and will produce movies-of-the-week
and drama series for exhibition on network television, cable or ad hoc networks
of independent stations which sometimes form to air special programming. The
Company also maintains an international sales force and currently has
distribution rights to approximately 335 half-hours of family and documentary
series and specials, and 190 hours of dramatic series and films.
In July 1996, the Company acquired the rights to produce a weekly dramatic
television series based on the motion picture "Total Recall," which in 1990
grossed over $320 million in worldwide box office receipts. The Company has
entered into an agreement with Alliance Productions, Ltd. ("Alliance"), a
leading Canadian production company, pursuant to which Alliance will co-produce
and finance an initial 22 episodes of the series with the Company. The Company
has also entered into an agreement with Polygram Television, L.L.C.
("PolyGram"), pursuant to which PolyGram will co-finance and acquire television
distribution rights to the series in the United States. Miramax Film Corp.
("Miramax"), which acquired the theatrical sequel rights to "Total Recall," has
also acquired worldwide home video rights to the series from the Company. "Total
Recall" has recently been pre-sold by PolyGram to the U.S. pay television
service, Showtime Network. The series is scheduled to debut in late 1998 on the
Showtime Network, with "first run" domestic syndication to be handled by
PolyGram in 1999. In addition to reducing the Company's financial exposure, the
Company anticipates that by co-producing the series with Alliance, the series
will qualify for certain Canadian co-production and tax benefits. It is the
intention of the parties that each episode will be produced for
3
<PAGE> 5
approximately $1,100,000, with the Company receiving 40% of the profits derived
from the worldwide exploitation of television and home video, as well as
merchandising tie-ins.
The Company is also developing a wide variety of family, dramatic,
reality-based and children's programing including a new pre-school series,
tentatively entitled "LoCoMoTioN," which the Company hopes to place on domestic
and international television in fall 1998. Although no assurance can be given
that the Company will obtain a domestic timeslot, the Company is currently
interviewing potential female celebrities to co-host this series, which will
introduce toddlers to dance and exercise through contemporary urban music.
The global television market has experienced substantial growth since 1985
and the Company believes this market will continue to experience substantial
growth during the foreseeable future as 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.
The Company's operating strategy is to fulfill the demand for programming
by: (i) expanding the activities of its three operating departments, development
and production, distribution and licensing and merchandising and
direct-marketing; (ii) implementing strategic acquisitions of film, television
and video libraries and smaller production companies; and (iii) entering into
joint ventures with, or acquisitions of, unaffiliated third parties, with the
intention that such acquisitions or joint ventures would lower the Company's
financial risk should it expand, as anticipated, into related activities, such
as direct marketing and interactive programming. The Company intends to acquire,
co-produce and co-finance other series, movies and specials from third party
producers in order to increase its programming library and self distribute such
product on an worldwide basis.
The Company believes that there are business opportunities to acquire other
emerging companies, as well as more established production and distribution
entities, which are engaged in programming development, production, distribution
and other related media investments. While the number of distribution channels
has been increasing, the Company believes there are economic incentives,
including economies of scale and depth of financial and programming capability,
for programmers and distribution entities to consolidate. No assurance can be
given that the Company will be successful in obtaining the financing necessary
for these acquisitions or that, if consummated, such acquisitions would prove
financially successful.
The Company was incorporated under the laws of the State of California in
February 1995. The Company's executive offices are located at 12300 Wilshire
Boulevard, Suite 400, Los Angeles, California 90025, and its telephone number is
(310) 442-3500.
------------------------
NOTICE TO CALIFORNIA, MISSOURI, OREGON AND SOUTH CAROLINA INVESTORS
Each purchaser of shares of Common Stock in California, Missouri, Oregon
and South Carolina must meet one of the following suitability standards: (i) a
liquid net worth (excluding home, furnishings and automobiles) of $250,000 or
more and gross annual income during 1997, and estimated during 1998, of $65,000
or more from all sources or (ii) a liquid net worth (excluding home, furnishing
and automobiles) of $500,000 or more. Each California, Missouri, Oregon and
South Carolina resident purchasing shares of Common Stock offered hereby will be
required to execute a representation letter that it comes within one of the
aforementioned categories.
4
<PAGE> 6
SUMMARY OF FINANCIAL INFORMATION
<TABLE>
<CAPTION>
FOR THE
FOR THE FOR THE PERIOD FROM
THREE THREE FEBRUARY 27,
MONTHS MONTHS FOR THE FOR THE 1995
ENDED ENDED YEAR ENDED YEAR ENDED TO
MARCH 31, MARCH 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1998 1997 1997 1996 1995
----------- ----------- ------------ ------------ ------------
STATEMENT OF OPERATIONS DATA: (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues........................... $1,573,400 $ 708,400 $6,875,600 $5,749,800 $ 1,245,300
Cost of revenues................... 379,000 415,300 2,355,300 2,895,900 946,900
---------- --------- ---------- ---------- -----------
Gross profit....................... 1,194,400 293,100 4,520,300 2,853,900 298,400
General and administrative
expenses......................... 541,500 601,500 2,129,300 2,323,800 1,288,200
Allowance for doubtful accounts.... -- -- 1,115,600 -- --
---------- --------- ---------- ---------- -----------
Net income from operations......... 652,900 (308,400) 1,275,400 530,100 (989,800)
Interest expense................... 263,000 271,800 1,040,100 677,700 42,700
Interest income.................... 48,000 72,000 211,800 58,300 --
Other income....................... -- -- -- 90,100 --
---------- --------- ---------- ---------- -----------
Net income (loss) before income
taxes............................ 437,900 (508,200) 447,100 800 (1,032,500)
Provision for income taxes......... -- -- -- -- --
---------- --------- ---------- ---------- -----------
Net income (loss).................. $ 437,900 $(508,200) $ 447,100 $ 800 $(1,032,500)
========== ========= ========== ========== ===========
Net income (loss) per common share
basic(1)......................... $ 0.39 $ (0.45) $ 0.40 $ -- $ (0.91)
========== ========= ========== ========== ===========
Weighted average number of shares
outstanding basic(1)............. 1,131,344 1,131,344 1,131,344 1,131,344 1,131,344
========== ========= ========== ========== ===========
Net income (loss) per common share
diluted(1)....................... $ 0.24 $ (0.28) $ 0.25 $ -- $ (0.57)
========== ========= ========== ========== ===========
Weighted average number of shares
outstanding diluted(1)........... 1,821,800 1,821,800 1,821,800 1,821,800 1,821,800
========== ========= ========== ========== ===========
</TABLE>
<TABLE>
<CAPTION>
MARCH 31, 1998
---------------------------------------------
ACTUAL PRO-FORMA(2) AS ADJUSTED(3)
BALANCE SHEET DATA: ----------- ------------ --------------
<S> <C> <C> <C>
Liquidity capital (deficit)(4)..................... $(4,541,600) $(4,676,600) $ 2,991,400
Total assets....................................... 13,620,500 14,570,500 17,939,700
Notes payable(5)(6)................................ 5,487,700 6,572,700 2,976,900
Accrued interest(5)(6)............................. 1,061,700 1,061,700 598,700
Shareholder loan and note payable(5)(6)............ 740,000 740,000 500,000
Accumulated deficit(6)............................. (146,700) (146,700) (262,900)
Shareholders' equity............................... 1,084,400 1,084,400 8,570,800
</TABLE>
- ---------------
(1) See Note 2 of Notes to Consolidated Financial Statements for information
regarding the calculation of net income (loss) per share.
(2) Pro-forma amounts reflect the addition of $1,107,000 in interim financing
that occurred in April and May 1998, less $100,000 of principal amount that
was repaid with respect to prior indebtedness. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations -- Liquidity
and Capital Reserves" for a discussion of Company borrowings between
December 1997 and May 1998.
(3) As adjusted to reflect: (i) the estimated net proceeds of the Offering,
based upon an assumed initial public offering price of $6.25 per share,
after deducting Underwriters' discounts and commissions and estimated
offering expenses; (ii) the conversion of a note (the "Conversion Note"), in
the principal amount of $322,000 into approximately 105,000 shares of Common
Stock upon the closing of the
5
<PAGE> 7
Offering; (iii) the accrual of interest expense of approximately $56,000
from March 31, 1998 through May 31, 1998 from the debt to be repaid from the
Offering; (iv) the pro-forma amount; and (v) the Extraordinary Loss (see
footnote 6 below). See "Use of Proceeds," "Capitalization" and "Description
of Securities."
(4) Represents (i) cash and cash equivalents plus accounts receivable (net), and
the amount due from an officer of the Company, less (ii) accounts payable,
accrued expenses and other liabilities, deferred revenue, accrued
participations, notes payable, shareholder loan and note payable, and
accrued interest.
(5) See Notes 5 and 7 of Notes to Consolidated Financial Statements.
(6) An aggregate of $4,014,400 principal amount of indebtedness outstanding as
of March 31, 1998 will be repaid with the proceeds of the Offering. Of this
amount, $2,819,000 was issued concurrently with warrants, and therefore, the
notes are recorded on the Company's financial statements at a lesser value
and a value is ascribed to the warrants which management believes reflects
the market value of the warrants; this value is reflected as a debt issuance
discount and is amortized over the term of all such notes resulting in an
effective interest rate of approximately 25%. Upon repayment of such debt,
the Company will recognize an extraordinary loss equal to the value ascribed
to such warrants. While the entire $2,819,000 principal amount of
indebtedness will actually be repaid from the Offering, as adjusted reflects
the repayment of the recorded value of such debt as of May 31, 1998 -- a
value of $2,702,800 will be ascribed to said debt and a value of $116,200
will be ascribed to the warrants, resulting in the recognition of
extraordinary loss of $116,200 (the "Extraordinary Loss") which becomes part
of accumulated deficit.
6
<PAGE> 8
THE OFFERING
Common Stock Offered by the
Company............................. 1,500,000 shares
Common Stock Outstanding after the
Offering............................ 2,831,092 shares(1)
Use of Proceeds..................... Repayment of loans, accrued interest on
loans, acquisition of foreign
distribution rights to made for
television movies, acquisition of
foreign distribution rights to existing
television series and corporate
overhead and working capital, including
salaries and wages.
Proposed Nasdaq SmallCap Market
Symbol.............................. "TMTV"
- ---------------
(1) Includes up to 199,748 shares which will be issued to a shareholder to
satisfy certain contractual anti-dilution rights. See "Certain
Transactions -- Transactions with Morris Wolfson and Others."
------------------------
RISK FACTORS
THE SHARES OF COMMON STOCK OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK AND
SHOULD BE CONSIDERED ONLY BY PERSONS WHO CAN AFFORD THE LOSS OF THEIR ENTIRE
INVESTMENT. SEE "RISK FACTORS" BELOW.
------------------------
Except as otherwise specified, all information in this Prospectus: (i)
assumes no exercise of the Underwriters' over-allotment option, the
Representatives' Warrant, outstanding warrants to purchase 595,278 shares of
Common Stock, 206,750 stock options outstanding or 130,750 stock options
reserved for issuance under the Company's stock option plans; (ii) assumes no
conversion of outstanding convertible notes except the Conversion Note; and
(iii) gives effect to a 2.2776-for-1 reverse stock split which occurred in
January 1997 and a 1.0277-for-1 reverse stock split which occurred in April
1997. See "Management," "Description of Securities" and "Underwriting."
7
<PAGE> 9
RISK FACTORS
An investment in the Common Stock offered hereby is speculative, involves a
high degree of risk and should only be made by persons who can afford the loss
of their entire investment. In addition to the other information in this
Prospectus, each prospective investor should carefully consider the following
factors in evaluating the Company and its business before purchasing any shares
of Common Stock offered hereby. No investor should participate in the Offering
unless such investor can afford a complete loss of his or her investment. This
Prospectus contains forward-looking statements that involve risks and
uncertainties. The Company's actual results could differ materially from those
anticipated in these forward-looking statements as a result of certain factors,
including those set forth in the following risk factors and discussed elsewhere
in this Prospectus.
GOING CONCERN ASSUMPTION. The Company's independent accountants' report on
the Company's financial statements for the fiscal years ended December 31, 1995,
December 31, 1996 and December 31, 1997 contains an explanatory paragraph
indicating that the Company's financial condition raises substantial doubt as to
the Company's ability to continue as a going concern. There can be no assurance
that future financial statements will not include a similar explanatory
paragraph if the Company is unable to raise sufficient funds or generate
sufficient cash flow from operations to cover the cost of its operations. The
existence of such an explanatory paragraph, which states that there exists doubt
as to the Company's ability to operate as a going concern, may have a material
adverse effect on the Company's relationship with third parties who are
concerned about the ability of the Company to complete projects that it is
contractually required to develop or produce, and could also impact the ability
of the Company to complete future financings.
LIMITED OPERATING HISTORY; LIQUIDITY DEFICIT. The Company, which was formed
in February 1995, has a limited operating history. Accordingly, prospective
purchasers hereunder have limited information upon which an evaluation of the
Company's business and prospects can be based. Although the Company has
generated profitable operations during the fiscal years ended December 31, 1996
and 1997 and the first quarter of 1998, it has experienced a negative cash flow
from operations during such periods. No assurance can be given that the Company
will continue to be profitable in the foreseeable future or that it will be able
to generate positive cash flow from its operations. The Company will be unable
to implement its business plan without the proceeds of the Offering.
Implementation of the Company's business plan is subject to all the risks
inherent in the establishment of a new business enterprise, including potential
operating losses. In addition, the Company will be subject to certain factors
affecting the entertainment industry generally, such as sensitivity to general
economic conditions, critical acceptance of its products and intense
competition. The likelihood of the success of the Company must be considered in
light of the problems, expenses, difficulties, complications and delays
frequently encountered in connection with the formation of a new business.
Accordingly a purchase of the shares of Common Stock offered hereby should be
considered to be a highly speculative investment.
As of March 31, 1998, the Company had an accumulated deficit of ($146,700)
and a liquidity deficit of $(4,541,600), such deficit being defined as (i) cash
and cash equivalents plus accounts receivable (net), and the amount due from
officer less (ii) accounts payable, accrued expenses and other liabilities,
deferred revenue, accrued participations, notes payable, shareholder loan and
note payable, and accrued interest.
ADDITIONAL CAPITAL REQUIREMENTS; ENCUMBRANCE OF ASSETS; NO ASSURANCE OF
FUTURE FINANCINGS. The entertainment industry is highly capital intensive.
Management believes that if the Offering is completed, the net proceeds thereof,
together with projected cash flow from operations, will be sufficient to permit
the Company to conduct its operations as currently contemplated for only the
next 12 months. Such belief is based upon certain assumptions, including
assumptions regarding: (i) anticipated level of operations of the Company; (ii)
the anticipated sales of the Company's original and acquired programming; and
(iii) anticipated expenditures required by the Company for the development and
production of additional programming, including "Total Recall." However, if
anticipated operations require additional financing, or the anticipated level of
sales does not materialize, the Company will be forced to seek additional
financing during this 12 month period. There can be no assurance that any
additional financing will be available on acceptable terms, or at all, when
required by the Company. Moreover, if additional financing is not available, the
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<PAGE> 10
Company could be required to reduce or suspend its operations, seek an
acquisition partner or sell securities on terms that may be highly dilutive or
otherwise disadvantageous to investors purchasing the shares of Common Stock
offered hereby. Certain of these transactions would require the approval of the
Representatives if they occurred within 13 months from the effective date of the
Offering. The Company has in the past, and may continue to experience,
operational difficulties or delays in development or production due to working
capital constraints. Any such difficulties or delays could have a material
adverse effect on the Company's business, financial condition and results of
operations. See "Risk Factors -- Going Concern Assumption," "Capitalization,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources" and Note 11 of Notes to
Consolidated Financial Statements.
At the conclusion of the Offering, and after giving effect to the Company's
planned use of the proceeds of the Offering, the Company will have approximately
$3,477,000 of indebtedness, which indebtedness is secured by substantially all
of the assets of the Company. The Company intends to enter into multiple lines
of credit with Mercantile National Bank (the "Proposed Bank Facility"), which
lines of credit would permit borrowings pursuant to specified borrowing bases
made up of the value of the Company's library, accounts receivable and other
assets, including cash. The Company currently intends to repay and replace up to
$3,477,000 of indebtedness remaining after the Offering with proceeds from the
Proposed Bank Facility. No assurance can be given that the Proposed Bank
Facility will be entered into or that the Company will be able to use proceeds
from such facility as indicated herein.
COMPETITION. The entertainment industry is highly competitive. The Company
competes with, and will compete with, many organizations, including major film
studios, independent production companies, individual producers, and others,
including networks, who are seeking the rights to literary properties, the
services of creative and technical personnel, the financing for production of
film and television projects, and favorable arrangements for the distribution of
completed films. Many of the Company's present and future competitors are
organizations of substantially larger size and capacity, with far greater
financial, human and other resources and longer operating histories than the
Company. Moreover, the entertainment industry is currently evolving into an
industry in which certain multi-national, multi-media entities, including
Viacom/Paramount Pictures, The News Corporation, The Walt Disney Company/Cap
Cities-ABC, Time Warner/Turner Broadcasting and Westinghouse/CBS are anticipated
to be in a position, by virtue of their control over key film, magazine, and/or
television content, and their control of key network and cable outlets, to
dominate certain communications industries activities. These competitors have
numerous competitive advantages, including the ability to acquire and attract
superior properties, personnel, actors and/or celebrity hosts and financing.
DEPENDENCE ON EMERGING MARKETS; DEPENDENCE ON FOREIGN SALES. A substantial
portion of the Company's revenues to date have been, and for the foreseeable
future may be, derived from the sale or license of its products to recently
established domestic television or cable networks such as the WB Network, UPN,
The Discovery Channel and The Learning Channel, (i.e., not the traditional free
network markets of CBS, NBC, ABC and Fox), and the growing specialized pay
market, as well as the foreign television networks. The Company's success will
depend in large part upon the development and expansion of these markets. The
Company cannot predict the size of such markets or the rate at which they will
grow. If the television market serviced by the Company fails to grow, grows more
slowly than anticipated, or becomes saturated with competitors, the Company's
business, financial condition, and results of operations would be materially
adversely affected.
In addition to the foregoing, a substantial portion of the Company's
revenues are dependent on sales to sub-licensees and sub-distributors not
domiciled in the U.S. The marketing and distribution efforts of these entities
could impact the ability of the Company to realize overages with respect to its
product. Moreover, the collectibility of receivables from these customers is
subject to all of the risks associated with doing business with foreign
companies including rapid changes in the political and economic climates of such
countries. Should the Company be involved in a protracted dispute with respect
to the manner in which its product is distributed, or should the Company be
forced to initiate collection activities in order to enforce the terms of the
applicable sub-license or sub-distributor agreement, the potential profitability
of any particular product may be adversely effected.
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<PAGE> 11
The recent and ongoing economic crisis in Southeast Asia may impact the
Company's future sales for South Korea, Thailand and Indonesia.
RELIANCE ON SIGNIFICANT CUSTOMERS. Revenues for the fiscal year ended
December 31, 1997 included approximately $3,156,500 from Beyond Distribution
Pty., Ltd. ("Beyond Distribution"), which accounted for 46% of the Company's
revenues for the year ended December 31, 1997. Revenues in the year ended
December 31, 1996 included approximately $680,000 recognized from the license
and related guaranty from The Gemini Corporation and Mel Giniger and Associates
(collectively, the "Giniger Entities"), relating to the Company's current
library and certain future product for Latin America and Europe. The revenues
attributable to the guaranty (the "Giniger Guaranty") were 12% of the applicable
revenues for the year ended December 31, 1996. Alliance, which licenses a
variety of product from the Company's library for Canada, and King Records
Company, Ltd., which acquired various library products for Japan, were obligated
to pay the Company the sums of $764,100 and $996,300 respectively, or 13% and
17% of revenues, respectively, for the year ended December 31, 1996.
Revenues in the year ended December 31, 1996 also included a license fee
from Interpublic of $1,441,700 and a license fee from Eurolink of $618,400. Both
such licenses relate to the series "Amazing Tails." Revenues attributed to the
Interpublic and Eurolink agreements respecting "Amazing Tails" constituted 25%
and 11%, respectively, of revenues during the year ended December 31, 1996.
Neither the revenues relating to the Giniger Guaranty nor the revenues
related to the production of "Amazing Tails" should be considered to be
recurring revenues. If the Company does not produce a series in fiscal 1998, or
obtain other significant foreign sales, the Company's revenues will be
materially reduced.
ALLOWANCE FOR DOUBTFUL ACCOUNTS. In the year ended December 31, 1997, the
Company wrote off as an allowance for doubtful accounts the aggregate sum of
$1,115,600, which amount consisted of: (i) $660,000 relating to a license
agreement with Eurolink, a Middle Eastern entity; (ii) $170,600 relating to the
Giniger Guaranty (for a discussion of the significance of each of those
agreements, see "Risk-Factors -- Reliance on Significant Customers"); and (iii)
$285,000 relating to the license of certain of the Company's product to
Alliance. When the Company is required to discontinue a licensee who has
defaulted under a license agreement, the Company has the right to cancel the
defaulted agreement and re-license the product. With respect to the Eurolink
reserve, the Company was able to make an alternative license arrangement with
another third party distributor requiring the payment to the Company of an
identical $660,000 license fee. The Alliance reserve relates to an overall
restructuring of the Company's agreements with Alliance, including extensions on
the Company's obligation to repay certain amounts which have been advanced by
Alliance in connection with the pre-production financing of "Total Recall". See
"Management Discussion and Analysis of Financial Condition and Results of
Operations -- year ended December 31, 1997 verses year ended December 31, 1996."
As of March 31, 1998, the Company had $7,690,700 in receivables; 32%, 29%
and 17% of which relates to Beyond Distribution, Latin American
Programming -- TV and an affiliate of Micro Entertainment, a Canadian
distribution company, respectively. Should the Company be required to make an
additional allowance for doubtful accounts with respect to these receivables,
the Company's results of operations and financial condition in future periods
could be adversely affected.
PRODUCTION RISKS. There can be no assurance that once the Company commits
to fund the production of a series licensed to a network, that such network will
order and exhibit a sufficient number of episodes to enable the Company to
syndicate the series. Typically, at least 65 episodes of a series must be
produced for it to be "stripped" or syndicated in the daily re-run market.
Networks generally can cancel a series at stated intervals and, accordingly, do
not commit in advance to exhibit a series for more than a limited period. If a
series is cancelled (or not carried for the period necessary to create enough
episodes for syndication purposes), there is a significant chance that the
production costs of the project will not be fully recovered. In that event, the
financial condition of the Company could be materially and adversely affected.
Similar risks apply even if a series is produced for a non-network medium. See
"Business -- Operations" for a discussion of the financing of series and how
deficits are potentially recouped. In addition, for the three month periods
ended March 31, 1998 and 1997, respectively, the Company had approximately
$1,553,500 and $2,040,800, respectively, in
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<PAGE> 12
development costs associated with projects for which the Company is actively
pursuing production commitments, but which have not been set for principal
photography. See "Risk Factors -- Development Costs" for a discussion of the
potential impact if such costs were to be written off or otherwise amortized on
an accelerated basis.
FLUCTUATIONS IN OPERATING RESULTS. The Company's revenues and results of
operations are significantly dependent upon the timing and success of the
television programming it distributes, which cannot be predicted with certainty.
Revenues may not be recognized for any particular program until such program has
been delivered to the licensee and is available (i.e., there are no contractural
restrictions (otherwise referred to as "holdbacks") requiring the delays in the
release of programming for a particular market) for exploitation in the market
in which it has been licensed. Production delays may impact the timing of when
revenues may be recognized under generally accepted accounting principles. The
majority of the Company's product is sold 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. Finally, production
commitments are typically obtained from networks in the spring (second) quarter,
although production activity and delivery may not occur until subsequent
periods. As a result of the foregoing, the Company may experience significant
quarterly variations in its operations, and results in any particular quarter
may not be indicative of results in subsequent periods.
The Company's results will also be affected by the allocation of revenue
between Company-owned product as compared to product owned by third party
producers but distributed by the Company, for which the Company receives a sales
commission. In the latter instance, the Company's expenses as a percentage of
revenue will typically be higher, because the Company records, as an expense,
the participations owing to the copyright owners. In instances where the Company
is exploiting product which it has either produced or acquired on an outright
basis, the Company does not record such expenses, and its margins will typically
be higher than margins on product it is distributing on an agency basis.
SPECULATIVE NATURE OF ENTERTAINMENT BUSINESS. Substantially all of the
Company's revenues are derived from the production and distribution of its
television series and made-for-television features. The entertainment industry
in general, and the development, production and distribution of television
programs, in particular, is highly speculative and involves a substantial degree
of risk. Since each project is an individual artistic work and its commercial
success is primarily determined by audience reaction, which is volatile and
unpredictable, there can be no assurance as to the economic success of any
entertainment property. Even if a production is a critical or artistic success,
there is no assurance that it will generate sufficient audience acceptance to
become profitable.
DEPENDENCE UPON KEY PERSONNEL. The Company is, and will be, heavily
dependent on the services of Drew S. Levin, its Chairman of the Board, President
and Chief Executive Officer. The loss of the services of Mr. Levin for any
substantial length of time would materially adversely affect the Company's
results of operations and financial condition. Mr. Levin is party to an
employment agreement with the Company which expires in the year 2002. See
"Management -- Employment Agreements." The Company has also obtained a "key-man"
insurance policy covering Mr. Levin in the amount of $1,000,000.
In addition, the Company is highly dependent upon its ability to attract
and retain highly qualified personnel. Competition for such personnel is
intense. There can be no assurance that persons having the requisite skills and
experience will be available on terms acceptable to the Company or at all.
ABILITY TO MANAGE GROWTH. Subject to obtaining sufficient financing, the
Company intends to pursue a strategy which management believes may result in
rapid growth. As the Company's anticipated development, production and
distribution activities increase, it is essential that the Company maintain
effective controls and procedures regarding critical accounting and budgeting
areas, as well as obtain and/or retain experienced personnel. There can be no
assurance that rapid growth will occur or that, if such growth does occur, that
the Company will be able to attract qualified personnel or successfully manage
such expanded operations.
DEVELOPMENT COSTS. Included in the Company's assets as of March 31, 1998
and March 31, 1997, are approximately $1,553,500 and $2,040,800, respectively,
in television program costs in respect of projects for
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<PAGE> 13
which the Company is actively pursuing production commitments, but which have
not been set for principal photography. As of March 31, 1998, approximately
$789,300 of this amount relates to the acquisition of the rights to produce a
television series based on the feature film "Total Recall" and approximately
$451,000 relates to expenditures in respect of "LoCoMoTioN." The Company
intends, consistent with the standards set by the Financial Accounting Standards
Board, including Statement of Financial Accounting Standards ("SFAS") No. 53, to
write off the costs of all development projects when they are abandoned or, even
if still being developed, if they have not been set for principal photography
within three years of their initial development activity. In the event the
Company is unable to produce either "Total Recall" or "LoCoMoTioN," the Company
would incur a significant write-down with respect to the development costs of
such projects, which, in turn, may adversely affect ongoing financing
activities.
REPAYMENT OF INSIDER DEBT; PROCEEDS OF OFFERING TO BENEFIT AFFILIATES OR
SHAREHOLDERS. Upon the closing of the Offering, a non-management shareholder of
the Company will receive approximately $240,000 for repayment of indebtedness.
Concurrently with, or shortly after the closing of the Offering, other
shareholders are also anticipated to receive approximately $3,477,000, which
payment would eliminate all other shareholder debt. It is anticipated that such
amounts will be obtained from the Proposed Bank Facility. See "Use of Proceeds"
and "Certain Transactions."
PREFERRED STOCK; POSSIBLE ANTI-TAKEOVER EFFECTS OF CERTAIN CHARTER
PROVISIONS. Certain provisions of the Company's Articles of Incorporation and
Bylaws and certain other contractual provisions could have the effect of making
it more difficult for a third party to acquire, or of discouraging a third party
from attempting to acquire control of the Company. Such provisions could limit
the price that certain investors might be willing to pay in the future for
shares of the Company's Common Stock. Certain of these provisions allow the
Company to issue preferred stock with rights senior to those of the Common Stock
without any further vote or action by the shareholders, and impose various
procedural and other requirements which could make it more difficult for
shareholders to affect certain corporate actions. These provisions could also
have the effect of delaying or preventing a change in control of the Company.
The issuance of preferred stock could decrease the amount of earnings and assets
available for distribution to the holders of Common Stock or could adversely
affect the rights and powers, including voting rights, of the holders of the
Common Stock. In certain circumstances, such issuance could have the effect of
decreasing the market price of the Common Stock. The Company has agreed that for
a 13 month period following the closing of the Offering it will not, without the
prior written consent of the Representatives, issue any equity securities.
VOLATILITY OF SHARE PRICE; LACK OF ACTIVE TRADING MARKET. The trading price
of the Common Stock could be subject to significant fluctuations in response to
variations in quarterly operating results, general trends in the entertainment
industry and other factors. Although the Company has applied to list the Common
Stock on the Nasdaq SmallCap Market, there can be no assurance that such listing
application will be approved. Furthermore, should such application be approved,
there can be no assurance that an active trading market will develop in the
Common Stock or that purchasers of the shares of Common Stock will be able to
resell their shares at prices equal to or greater than the initial public
offering price. The market for the Common Stock will depend upon, among other
things, the number of holders thereof, the interest of securities dealers in
maintaining a market for the Common Stock and other factors beyond the control
of the Company. The limited number of freely tradeable shares available in the
Offering may have a negative impact in the development of an active trading
market. The Company has been advised by the Representatives that they intend to
seek market makers for the Common Stock, as the Company understands commonly is
the practice of managing underwriters in connection with initial public
offerings. There can be no assurance that the Representatives will be able to
find any market makers for the Company's Common Stock or that such market
makers, once found, will continue to make a market in the Company's Common
Stock. See "Underwriting."
ARBITRARY DETERMINATION OF OFFERING PRICE. The initial public offering
price of the Common Stock has been arbitrarily determined by negotiations
between the Company and the Representatives and bears no relationship to such
established valuation criteria such as assets, book value or prospective
earnings of the Company. No assurance can be given that the initial offering
price will be sustained or that, in the absence of an active trading market,
that shareholders will have sufficient liquidity to readily dispose of their
shares. The trading price of the Common Stock could be subject to significant
fluctuations in response to variations in
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<PAGE> 14
quarterly operating results, changes in earnings estimates by analysts following
the Company, if any, and general factors affecting the entertainment industry,
as well as general economic, political and market conditions, and other factors
and such factors could cause the market price of the Common Stock to fluctuate
substantially. Due to analysts' expectations of continued growth, if any, and
the high price/earnings ratio at which the Common Stock may trade, any shortfall
in expectations could have an immediate and significant adverse effect on the
trading price of the Common Stock. In addition the stock markets of the U.S.
have, from time to time, experienced significant price and volume fluctuations
that are unrelated or disproportionate to the operating performance of any
individual company. Such fluctuations could adversely affect the price of the
Company's Common Stock. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations," "Description of Securities" and
"Underwriting."
IMMEDIATE SUBSTANTIAL DILUTION; DISPARITY OF SHARE CONSIDERATION; NO
DIVIDENDS ANTICIPATED. Assuming an initial public offering price of $6.25 per
share, purchasers of the shares of Common Stock offered hereby will experience
immediate substantial dilution of $3.22 per share, or 52% of their investment,
based upon the net tangible book value of the Company at March 31, 1998. As a
result, the purchasers of the shares of Common Stock offered hereby will bear a
disproportionate part of the financial risk associated with the Company's
business while effective control will remain with the existing shareholders and
management. Also, based upon an assumed initial public offering price of $6.25
per share, there will be a substantial disparity between the total consideration
and the average price per share paid by the Company's existing shareholders
($1,231,000 and $0.92, respectively), and that paid by new investors in the
Offering ($9,375,000 and $6.25, respectively). See "Dilution."
The Company has not paid dividends since its inception and does not intend
to pay any dividends to its shareholders in the foreseeable future. No assurance
can be given that it will pay dividends at any time. The Company presently
intends to retain future earnings, if any, for the development and expansion of
its business. See "Dividend Policy."
SHARES ELIGIBLE FOR ADDITIONAL SALE; EXERCISE OF REGISTRATION RIGHTS. Sale
of substantial amounts of the Company's Common Stock in the public market or the
prospect of such sales could materially adversely affect the market price of the
Common Stock. Upon completion of the Offering, the Company will have outstanding
approximately 2,831,092 shares of Common Stock. Of these shares, approximately
1,331,092 shares are restricted shares ("Restricted Shares") under the
Securities Act. The 1,500,000 shares of Common Stock offered hereby will be
immediately eligible for sale in the public market without restriction on the
date of this Prospectus, subject to the lockup agreements described below. In
addition, the Company has issued options and warrants which entitle the holders
thereof to purchase 768,278 shares of Common Stock (collectively referred to
herein as the "Warrant Shares") 595,728 shares of which are being currently
registered (the "Registered Warrant Shares"), pursuant to the Registration
Statement of which this Prospectus is a part. Holders of substantially all of
the Restricted Shares and the Warrant Shares have entered, or are expected to
enter, into lockup agreements under which the holders of such shares agree not
to sell or otherwise hypothecate or dispose of any of their shares for 12 months
after the date of this Prospectus without the prior written consent of the
Representatives. The Representatives may release some or all of the shares from
the lockup at their discretion from time to time without notice to the public.
The Representatives have no formal policy with respect to such determinations,
and may elect to release such shares or decline to release such shares as they
may determine in their sole and absolute discretion. Additionally, the
Representatives' Warrant may be exercised at any time during the four year
period beginning 12 months after the closing of the Offering, in which case up
to 150,000 shares of Common Stock would be eligible for sale in the public
markets. The Company also intends to file a registration statement on Form S-8
under the Securities Act to register the sale of approximately 337,500 shares of
Common Stock reserved for issuance under its 1995 and 1996 Stock Plans. Shares
of Common Stock issued upon exercise of options after the effective date of the
registration statement on Form S-8 will be available for sale in the public
market, subject in some cases to volume and other limitations, including
limitations imposed by the lockup agreements referred to above. Sales in the
public market of substantial amounts of Common Stock (including sales in
connection with an exercise of certain registration rights by one or more
holders) or the perception that such sales could occur could depress
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<PAGE> 15
prevailing market prices for the Common Stock. See "Shares Eligible for Future
Sale," "Underwriting" and "Description of Securities."
No prediction can be made as to the effect, if any, that future sales of
shares, or the availability of shares for future sales, will have on the market
price of the Common Stock prevailing from time to time, should the Company
complete the Offering and a market price for its securities be established.
Should a market in the Company's securities develop, sales of substantial
amounts of Common Stock, or the perception that such sales may occur, could
adversely affect prevailing market prices for the Common Stock in the event a
market does develop.
BROAD DISCRETION OF MANAGEMENT TO ALLOCATE OFFERING PROCEEDS. The Company
expects that the proceeds of the Offering will be used for repayment of loans,
accrued interest on loans, acquisition of foreign distribution rights to made
for television movies and television series, corporate overhead and general
working capital. The Company is not currently able to estimate precisely the
allocation of the proceeds among such uses, and the timing and amount of
expenditures will vary depending upon numerous factors. The Company's management
will have broad discretion to allocate the proceeds of the Offering and to
determine the timing of expenditures. See "Use of Proceeds."
FORWARD-LOOKING STATEMENTS. Although not applicable as a safe harbor to
limit the Company's liability for sales made in the Offering, this Prospectus
contains forward-looking statements within the meaning of Section 27A of the
Securities Act and Section 21E of the Securities Exchange Act of 1934 (the
"Exchange Act"). Such forward-looking statements may be deemed to include, among
other things, the Company's plans to produce "Total Recall" and "LoCoMoTioN" in
1998 or 1999, and establish new strategic alliances and business relationships
and acquire additional libraries of films and television series or companies.
Such forward-looking statements also may include the Company's planned uses of
the proceeds of the Offering. Actual results could differ from those projected
in any forward-looking statements for the reasons detailed in the other sections
of this "Risk Factors" portion of this Prospectus, as well as elsewhere in this
Prospectus. The forward-looking statements are made as of the date of this
Prospectus and the Company assumes no obligation to update the forward-looking
statements, or to update the reasons why actual results could differ from those
projected in the forward-looking statements.
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<PAGE> 16
USE OF PROCEEDS
The net proceeds to the Company from the sale of the 1,500,000 shares
offered by the Company hereby at an assumed initial public offering price of
$6.25 per share, are estimated to be approximately $7,602,000, after deducting
underwriting discounts and commissions and estimated offering expenses. The
Company currently intends to use the estimated net proceeds of the Offering as
follows:
<TABLE>
<CAPTION>
APPROXIMATE PERCENTAGE
NET PROCEEDS OF NET PROCEEDS
------------- ---------------
<S> <C> <C>
Repayment of loans(1)......................... $4,014,000 53%
Accrued interest on loans..................... 519,000 7%
Acquisition of foreign distribution rights to
made for television movies and existing
television series........................... $1,750,000 23%
Corporate overhead and general working
capital, including salaries and wages....... $1,319,000 17%
</TABLE>
- ---------------
(1) The Company currently has outstanding approximately $6,573,000 of
indebtedness (excluding $740,000 of shareholder loans and notes payable).
Approximately $4,014,000 of such indebtedness will be repaid from the
proceeds of the Offering as follows: (i) $964,000 for repayment of the 10%
convertible secured notes issued between February and April 1997 (the
"February 1997 Notes"); (ii) $880,000 for repayment of the 12% secured notes
issued between February and June 1996 (the "February 1996 Notes"); (iii)
$975,000 for repayment of the 10% convertible secured notes issued between
June and October 1996 (the "June 1996 Notes"); (iv) $240,000 for repayment
of indebtedness owed to Joseph Cayre, a shareholder of the Company; and (v)
$955,000 for the repayment of $235,000 in principal and fees from a secured
note issued in March, and $720,000 of principal, interest and fees from a
12% secured note issued in April of 1998. The February 1997 Notes, the
February 1996 Notes and the June 1996 Notes are referred to herein as the
"Bridge Notes." The maturity date on the February 1996 Notes has been
extended until the earlier of June 30, 1998 or the completion of an initial
public offering. Prior to effectiveness of the Offering, the balance of
Company indebtedness (or approximately $3,477,000) will be extended through
June 30, 1998, although it is anticipated that up to the amount of such
indebtedness will be repaid from and replaced with the proceeds of the
Proposed Bank Facility. If the Proposed Bank Facility is not in place by
June 30, 1998, the Company may need to allocate a greater percentage of the
proceeds of the Offering to repay the debt obligations that would have been
repaid by virtue of such facility. As described in footnote (2) to
"Capitalization," the ascribed value of the indebtedness to be repaid from
the proceeds of the Offering on the Company's financial statements is less
than the outstanding principal balance of said indebtedness. The foregoing
repayment schedule assumes conversion of the Conversion Note as well as the
waiver of all conversion rights by the holders of the Bridge Notes which
have convertibility rights. See "Risk Factors -- Additional Capital
Requirements; Encumbrance of Assets; No Assurance of Future Financings" and
"Certain Transactions." The loan proceeds which are being repaid through the
funds being raised hereby were used primarily by the Company for working
capital, the acquisition of library product and the acquisition of the right
to produce television product based on the feature film "Total Recall."
The Company believes that there are a number of libraries and single or
multiple television series, movies or special programming owned by unrelated
third parties of which the Company may be able to acquire either ownership of,
or long-term distribution rights to. At this date, the Company has not entered
into any discussions with respect to any such acquisition with any such third
party.
The Company anticipates that the net proceeds of the Offering, together
with projected cash flow from operations will be sufficient to permit the
Company to conduct its operations as currently contemplated for only the next 12
months. Such belief is based upon certain assumptions, including assumptions
regarding the sales of the Company's original programming and anticipated
expenditures required for the development and production of additional
programming, and there can be no assurance that such resources will be
sufficient for such purpose. The Company will be required to raise substantial
additional capital in the future in order to further expand its production and
distribution capabilities. There can be no assurances that additional
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<PAGE> 17
financing will be available, or if available, that it will be on acceptable
terms. In addition, contingencies may arise which may require the Company to
obtain additional capital prior to such planned expansion.
The foregoing uses of proceeds are estimates only, and there may be
significant variations in the use of proceeds due to changes in current economic
and industry conditions, as well as changes in the Company's business and
financial condition. The amount and timing of expenditures will vary depending
on a number of factors, including changes in the Company's contemplated
operations and industry conditions. In addition, to the extent that favorable
acquisition opportunities present themselves, both with respect to the
acquisition of product or entities in allied fields, the use of proceeds
contemplated hereunder may be varied significantly.
These contingencies could also include a changing environment for the
production of syndicated television series and a deterioration in the
anticipated pricing structure with respect to the sales of the Company's product
in certain foreign territories. Alternative uses of the proceeds could include
increasing development of Company-owned product, increasing the number of
co-productions with other entities, and financing movies of the week or new
television series, to the extent that the budgets for such programing are not
otherwise covered by distribution commitments.
Pending use of the proceeds from the Offering as set forth above, the
Company intends to invest all or a portion of such proceeds in short-term
certificates of deposit, U.S. government obligations, money market investments
and short-term investment grade securities.
DIVIDEND POLICY
The Company has not paid any dividends on its Common Stock since its
inception and does not intend to pay any dividends in the foreseeable future.
The Company currently intends to retain earnings, if any, in the development and
expansion of its business. The declaration of dividends in the future will be at
the election of the Board of Directors and will depend upon the earnings,
capital requirements, cash flow and financial condition, general economic
conditions, and other pertinent factors, including contractual prohibitions with
respect to the payment of dividends, which are expected to be included in the
Proposed Bank Facility.
16
<PAGE> 18
CAPITALIZATION
The following table sets forth the short-term debt and capitalization of
the Company (i) at March 31, 1998, and (ii) as adjusted to reflect: (a) the sale
of 1,500,000 shares of Common Stock pursuant to the Offering at an assumed
initial public offering price of $6.25 and the application of the estimated net
proceeds therefrom; (b) the issuance through May 1, 1998 of 1,107,000 in loans
by security holders of the Company or their affiliates; and (c) the conversion
of the Conversion Note and the Extraordinary Loss. See "Use of Proceeds."
<TABLE>
<CAPTION>
MARCH 31, 1998
-------------------------
ACTUAL AS ADJUSTED
---------- -----------
<S> <C> <C>
Short-term debt(1).......................................... $6,227,700 $ 3,011,900
========== ===========
Long-term debt(2)........................................... 0 465,000
---------- -----------
Shareholders' equity:
Preferred stock, $.01 par value; 2,000,000 shares
authorized; no shares issued and outstanding actual,
pro forma and as adjusted.............................. -- --
Common stock, no par value; 18,000,000 shares authorized,
1,131,344 issued and outstanding actual, and 2,831,092
issued and outstanding as adjusted..................... 1,000 1,000
Paid-in capital(2)..................................... 1,230,100 8,832,700
Accumulated deficit(2)................................. (146,700) (262,900)
---------- -----------
Total shareholders' equity........................ 1,084,400 8,570,800
---------- -----------
Total capitalization........................................ $7,312,100 $12,047,700
========== ===========
</TABLE>
- ---------------
(1) See Notes 5 and 7 of Notes to Consolidated Financial Statements.
(2) An aggregate of $4,014,400 principal amount of indebtedness outstanding as
of March 31, 1998 will be repaid with the proceeds of the Offering. Of this
amount, $2,819,000 was issued concurrently with warrants and therefore, the
notes are recorded on the Company's financial statements at a lesser value
and a value is ascribed to the warrants which management believes reflects
the market value of the warrants. This value is reflected as a debt issuance
discount and is amortized over the term of all such notes resulting in an
effective interest rate of approximately 25%. Upon repayment of such debt,
the Company will recognize an extraordinary loss equal to the value ascribed
to such warrants. While this entire $2,819,000 principal amount of
indebtedness will actually be repaid from the Offering, the "as adjusted"
column reflects the repayment of the recorded value of such debt as of May
31, 1998 -- a value of $2,702,800 will be ascribed to said debt and a value
of $116,200 will be ascribed to the warrants, resulting in the recognition
of the Extraordinary Loss of $116,200 which becomes part of accumulated
deficit.
17
<PAGE> 19
DILUTION
At March 31, 1998, the Company had an adjusted net tangible book value of
$1,084,400, or $0.96 per share of Common Stock. After giving effect: (i) to the
sale by the Company of 1,500,000 shares of Common Stock offered hereby at an
assumed initial public offering price of $6.25 per share, and the initial
application of the estimated net proceeds therefrom; (ii) the issuance of an
additional 199,748 shares to an investor upon satisfaction of certain
contractual anti-dilution rights (See "Certain Transactions -- Transactions with
Morris Wolfson and Others"); (iii) the conversion of the Conversion Note; and
(iv) the Extraordinary Loss, the net tangible book value of the Company at such
date would have been approximately $8,570,800 or $3.03 per share. This
represents an immediate increase in net tangible book value of $2.07 per share
to the current shareholders and an immediate dilution of $3.22 per share to new
shareholders. Dilution represents the difference between the initial public
offering price paid by purchasers in the Offering and the net tangible book
value per share immediately after completion of the Offering. The following
table illustrates this per share dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share............. $6.25
Pro forma net tangible book value per share before the
Offering............................................... $0.96
Increase in net tangible book value per share
attributable to the sale of the Common Stock offered
hereby................................................ 2.07
-----
Adjusted net tangible book value per share after the
Offering.................................................. 3.03
-----
Dilution per share to new shareholders(1)................... $3.22
-----
</TABLE>
- ---------------
(1) Represents dilution of approximately 52% to purchasers of Common Stock
offered hereby.
The following table sets forth: (i) the number of shares of Common Stock
purchased from the Company by new shareholders pursuant to the Offering and
acquired from the Company by the current shareholders of the Company (including
the shares to be obtained upon conversion of the Conversion Note); (ii) the
total consideration paid to the Company; and (iii) the respective average
purchase price per share.
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
-------------------- ---------------------- AVERAGE
NUMBER PERCENT AMOUNT PERCENT PRICE PER SHARE
--------- ------- ----------- ------- ---------------
<S> <C> <C> <C> <C> <C>
Current shareholders.............. 1,331,092 47.0% $ 1,231,100 11.6% $0.92
New shareholders.................. 1,500,000 53.0% 9,375,000 88.4% 6.25
--------- ----- ----------- -----
Total................... 2,831,092 100% $10,606,100 100%
========= ===== =========== =====
</TABLE>
- ---------------
(1) The information set forth above does not reflect 337,500 shares of Common
Stock reserved for issuance under the Company's 1995 and 1996 Stock Option
Plans (of which approximately 206,750 shares are issuable upon exercise of
stock options outstanding as of the date of this Prospectus) and 150,000
shares of Common Stock issuable upon exercise of the Representatives'
Warrant. See "Management -- Stock Option Plans" and "Underwriting."
18
<PAGE> 20
SELECTED CONSOLIDATED FINANCIAL DATA
The selected consolidated statement of operations data for the period ended
December 31, 1995, the years ended December 31, 1996 and December 31, 1997, the
three months ended March 31, 1997 and March 31, 1998 and the consolidated
balance sheet data at such dates are derived from the Company's Consolidated
Financial Statements included elsewhere in this Prospectus that have been
audited by Stonefield Josephson, Inc., for 1996 and 1997, indicated in their
respective reports which are also included elsewhere in this Prospectus. Such
selected consolidated financial data should be read in conjunction with those
Consolidated Financial Statements and Notes thereto. For a discussion of the
appointment of Stonefield Josephson, Inc., see "Experts."
<TABLE>
<CAPTION>
FOR THE FOR THE FOR THE
THREE THREE PERIOD FROM
MONTHS MONTHS FOR THE FOR THE FEBRUARY 1995
ENDED ENDED YEAR ENDED YEAR ENDED THROUGH
MARCH 31, MARCH 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1998 1997 1997 1996 1995
----------- ----------- ------------ ------------ -------------
STATEMENT OF OPERATIONS DATA: (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues........................... $1,573,400 $ 708,400 $6,875,600 $5,749,800 $ 1,245,300
Cost of revenues................... 379,000 415,300 2,355,300 2,895,900 946,900
---------- --------- ---------- ---------- -----------
Gross profits...................... 1,194,400 293,100 4,520,300 2,853,900 298,400
General and administrative
expenses......................... 541,500 601,500 2,129,300 2,323,800 1,288,200
Allowance for doubtful accounts.... -- -- 1,115,600 -- --
---------- --------- ---------- ---------- -----------
Net income from operations......... 652,900 (308,400) 1,275,400 530,100 (989,800)
Interest expense................... 263,000 271,800 1,040,100 677,700 42,700
Interest income.................... 48,000 72,000 211,800 58,300 --
Other income....................... -- -- -- 90,100 --
---------- --------- ---------- ---------- -----------
Net income (loss) before income
taxes............................ $ 437,900 $(508,200) 447,100 800 (1,032,500)
---------- --------- ---------- ---------- -----------
Net income (loss).................. $ 437,900 $(508,200) $ 447,100 $ 800 $(1,032,500)
========== ========= ========== ========== ===========
Net income (loss) per common share
basic(1)......................... $ 0.39 $ (0.45) $ 0.40 $ -- $ (0.91)
========== ========= ========== ========== ===========
Weighted average number of shares
outstanding basic(1)............. 1,131,344 1,131,344 1,131,344 1,131,344 1,131,344
========== ========= ========== ========== ===========
Net income (loss) per common share
diluted(1)....................... $ 0.24 $ (0.28) $ 0.25 $ -- $ (0.57)
========== ========= ========== ========== ===========
Weighted average number of shares
outstanding diluted.............. 1,821,800 1,821,800 1,821,800 1,821,800 1,821,800
========== ========= ========== ========== ===========
</TABLE>
19
<PAGE> 21
<TABLE>
<CAPTION>
MARCH 31, 1998
--------------------------------------------
ACTUAL PROFORMA(2) AS ADJUSTED(3)
BALANCE SHEET DATA: ----------- ----------- --------------
<S> <C> <C> <C>
Liquidity capital (deficit)(4)..................... $(4,541,600) $(4,676,600) $ 2,991,400
Total assets....................................... 13,620,500 14,570,500 17,939,700
Notes payable(5)(6)................................ 5,487,700 6,572,700 2,976,900
Accrued interest(5)(6)............................. 1,061,700 1,061,700 598,700
Shareholder loan and note payable.................. 740,000 740,000 500,000
Accumulated deficit(6)............................. (146,700) (146,700) (262,900)
Shareholders' equity............................... 1,084,400 1,084,400 8,570,800
</TABLE>
- ---------------
(1) See Note 2 of Notes to Consolidated Financial Statements for information
regarding the calculation of net income (loss) per share.
(2) Pro-forma amounts reflect the addition of $1,107,000 in interim financing
that occurred in April and May 1998, less $100,000 that was repaid in
respect of prior indebtedness. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Liquidity and Capital
Reserves" for a discussion of Company borrowings between December 1997 and
April 1998.
(3) As adjusted to reflect: (i) the estimated net proceeds of the Offering,
based upon an assumed initial public offering price of $6.25 per share,
after deducting Underwriter's discounts and commissions and estimated
offering expenses; (ii) the conversion of a note (the "Conversion Note"), in
the principal amount of $322,000 into approximately 105,000 shares of Common
Stock upon the closing of the Offering; (iii) interest of approximately
$56,000 which accrued from March 31, 1998 through May 31, 1998 from the debt
to be repaid from the Offering; (iv) the pro-forma amounts; and (v) the
Extraordinary Loss (see footnote 6 below). See "Use of Proceeds,"
"Capitalization" and "Description of Securities."
(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, shareholder loan and note payable, and accrued interest.
(5) See Notes 5 and 7 of Notes to Consolidated Financial Statements.
(6) An aggregate of $4,014,400 principal amount of indebtedness outstanding as
of March 31, 1998 will be repaid with the proceeds of the Offering. Of this
amount, $2,819,000 was issued concurrently with warrants, and therefore, the
notes are recorded on the Company's financial statements at a lesser value
and a value is ascribed to the warrants which management believes reflects
the market value of the warrants; this value is reflected as a debt issuance
discount and is amortized over the term of all such notes resulting in an
effective interest rate of approximately 25%. Upon repayment of such debt,
the Company will recognize an extraordinary loss equal to the value ascribed
to such warrants. While the entire $2,819,000 principal amount of
indebtedness will actually be repaid from the Offering, as adjusted reflects
the repayment of the recorded value of such debt as of May 31, 1998 -- a
value of $2,702,800 will be ascribed to said debt and a value of $116,200
will be ascribed to the warrants, resulting in the recognition of
extraordinary loss of $116,200 (the "Extraordinary Loss") which becomes part
of accumulated deficit.
20
<PAGE> 22
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
This Prospectus contains forward-looking statements that involve risks and
uncertainties. The Company's actual results could differ materially from those
anticipated in these forward-looking statements as a result of certain factors,
including those set forth in the following discussion in "Risk Factors" and
elsewhere in this Prospectus. The following discussion should be read in
conjunction with the Consolidated Financial Statements and Notes thereto
appearing elsewhere in this Prospectus.
GENERAL
The Company derives substantially all of its revenues from production fees
earned in connection with Company originated productions, distribution fees from
the exploitation of product acquired from others, and the exploitation of
Company-owned programming. The Company was incorporated in February 1995 and
commenced operations in March 1995.
The Company is engaged in developing concepts and acquiring literary and
other story properties, the most promising of which serve as the basis for the
production of series, pilot films, or made-for-television features. If a script
is accepted for production as a television feature or pilot, or if a pilot is
accepted for production as a series, the Company and the network or distributor
negotiate a license fee or distribution advance. This fee is a flat sum payment
through which the Company generally attempts to cover a significant portion of
its production costs and overhead. If programming is produced for an entity like
PBS, which does not pay significant license fees or distribution advances (and
in fact, may not pay any fee), the Company attempts to provide corporate
sponsors or agreements for the license of ancillary rights such as foreign or
home video distribution.
With respect to series for the networks or pay cable channels, the Company
generally attempts to negotiate significant license fees for both series and
movies of the week. In many cases, the Company may invest additional sums in
excess of network license fees to produce the best possible made-for-television
features, as such features are an essential sales tool in gaining network
acceptance of a projected series, if applicable. In these cases, the Company
will attempt to cover the excess of production costs from working capital,
third-party financing, sales of the episodes in the foreign marketplace, or a
combination of these financing techniques. Where necessary or desirable, the
Company may seek to obtain funding in excess of network license fees from a
studio or a third party who will provide such financing in return for a share of
the profits from the syndication of such programming. Similarly, for television
series, the Company may invest amounts in excess of network license fees in
order to gain audience acceptance for the series and to enhance the potential
value of future syndication rights.
The Company recognizes revenues from licensing agreements covering
entertainment product when the product is available to the licensee for
telecast, exhibition or distribution, and other conditions of the licensing
agreements have been met in accordance with Statement of Financial Accounting
Standards ("SFAS") No. 53 "Financial Reporting by Producers and Distributors of
Motion Picture Films."
The Company, as required by SFAS No. 53, values its film cost at the lower
of unamortized cost or net realizable value on an individual title basis. Film
costs represent those costs incurred in the development, production and
distribution of television projects. These costs have been capitalized in
accordance with SFAS No. 53. Amortization of film cost is charged to expense and
third party participations are accrued using the individual film forecast method
whereby expense is recognized in the proportion that current year revenues bear
to an estimate of ultimate revenues. These estimates of revenues are prepared
and reviewed by management. The Company anticipates that a majority of its
production or acquisition costs for its projects will be amortized within three
years from the completion or acquisition of such project, with the balance
amortized over an additional two years.
The Company's trade receivables historically increase as revenue increases.
The Company, in accordance with SFAS No. 5, records an allowance for doubtful
accounts based, in part, on historical bad debt experience. In 1997, the Company
recorded as an allowance for doubtful accounts, $1,115,600. See "Risk Factors --
Allowance for Doubtful Accounts" and "Results of Operations -- The year ended
December 31, 1997 versus the year ended December 31, 1996"). Typically, when the
Company makes a sale of a product, the purchaser
21
<PAGE> 23
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, the
Company's license agreements provide that the Company 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, the Company's trade receivables
balance will increase accordingly. The Company believes it has adequate
resources to collect its trade receivables.
RESULTS OF OPERATIONS
The three months ended March 31, 1998 versus the three months ended March
31, 1997. Revenues for the three months ended March 31, 1998 were $1,573,400
compared with $708,400 for the three months ended March 31, 1997. Revenues for
the three months ended March 31, 1998 were comprised of $825,000 from the sale
of an acquired library which was resold to certain territories in Latin America
and $748,400 from the recognition of revenue from the sale of the second season
of "Amazing Tails" to both the Discovery Channel's Animal Planet Network and
1291873 Ontario Limited, a Canadian distribution company. Revenues for the three
months ended March 31, 1997 included: (i) $510,000 from the distribution of the
Company's acquired library, 97% of which were derived from sales to Beyond
Distribution; (ii) $140,000 from the sale of the first season of "Amazing
Tails", 87% of which were derived from sales to Beyond Distribution; and (iii)
$60,000 as royalty revenue from the series "Strange Universe". For the three
months ended March 31, 1997 approximately 92% of revenues were attributable to
the exploitation of product outside the domestic (i.e., U.S. and Canadian)
market. The concentration of sales in the foreign market is attributable to the
absence of any programming being produced by the Company directly for the
domestic market in such period. Within the foreign market, allocations among the
four principal geographic regions in which the Company does business, Europe,
South America, Asia and Australia and Africa, vary from period to period. The
variations in revenue relate to the type of product being offered, as well as
local economic trends and conditions, and the emergence of multiple broadcasting
channels in the applicable territory. See Note 8 to the Consolidated Financial
Statements for a breakdown of the geographic distribution of sales of the
Company's product.
Cost of revenues was $379,000 for the three months ended March 31, 1998, as
compared to $415,300 for the three months ended March 31, 1997, such slight
decrease attributable to the Company deriving more of its revenue from
distribution activity relating to its own product (or products acquired on an
outright basis), 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% are paid to the producers of the product.
However, amortization expense, as calculated under FASB 53 has comparatively
lower rates. For the period ended March 31, 1997, the Company's revenue
attributable to product produced by others, for which producers are allocated a
higher percentage of revenue as a participation expense, was more than similar
product in the comparable period in 1998, when the Company distributed more
product which it either owned outright or which was produced by the Company. For
this product, the Company's margins are typically higher as no participation
expenses need to 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 margins improved from 41% for the three months ended March 31,
1997 to 76% for the three months ended March 31, 1998, primarily because of
increased margins attributable to product produced by the Company.
General and administrative expenses were $541,500 for the three months
ended March 31, 1998, as compared to $601,500 for the three months ended March
31, 1997. The decrease was primarily due to the amortization expense relating to
the capitalized costs of the February 1996 loan having been fully amortized by
year end 1997, and as such no related amortization expense was taken in 1998.
Interest expense was $263,000 for the three months ended March 31, 1998, as
compared to $271,000 for the three months ended March 31, 1997.
Interest income was $48,000 for the three months ended March 31, 1998, as
compared to $72,000 for the three months ended March 31, 1997. The decrease is
due to more interest income derived from amortization
22
<PAGE> 24
of the discount taken under the guidelines of APB 21. Less income was taken in
1998 because a majority of discount has already been amortized.
Net income was $437,900 for the three months ended March 31, 1998 as
compared to a net loss of $(508,200) for the three months ended March 31, 1997.
The increase is attributable to an increase in sales and significantly higher
gross margin on product sold during 1998.
Trade receivables increased by $950,000 for the three months ended March
31, 1998 due to increased revenues. For a description of the Company's treatment
of its trade receivables, see "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- General." The Company believes its
existing allowance for doubtful accounts reserve is adequate and that it has
adequate resources to collect its 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% 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 a license of a certain portion of the
Company's film library to the Giniger Entities, with respect to the sale of a
certain portion of the Company's library in certain Latin America countries and
Europe. These revenues were 12% of all revenues in such period. Finally,
revenues in the period included $618,000 from Eurolink respecting additional
sales of "Amazing Tails", which was approximately 11% of the Company's revenue
during such period. For the twelve month period ended December 31, 1997,
approximately 80% of the Company's revenues were attributed to the exploitation
of product outside the domestic (i.e. U.S. and Canadian) market. The
concentration relative to the foreign market is attributable to less programming
being produced by the Company directly for the domestic market in such period.
In prior periods, revenues were generated approximately 40% from the domestic
market and 60% from the foreign market. Within the foreign market, allocations
among the four principal geographic regions in which the Company does 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 8 to the
Consolidated Financial Statements for a breakdown of the geographic distribution
of sales of the Company's product.
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% of revenue for the
twelve months ended December 31, 1997 compared to 50% of revenue to the
comparable period in 1996. This decrease is attributable to the Company deriving
more of its revenue from distribution activity relating to its 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% 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, the Company's revenue attributable to product
produced by others, for which producers are allocated a higher percentage of
revenue as a participation expense, was less than similar product in the
comparable period in 1997, when the Company distributed more product which it
either owned outright or which was produced by the Company. For this product,
the Company's margins are typically higher as no participation expenses need be
paid to the product's copyright owners. For a discussion in how the product mix
may affect quarterly results, see "Risk Factors -- Fluctuations in Operating
Results."
Gross profit margin improved from 50% for the twelve months ended December
31, 1996 to 66% for the twelve months ended December 31, 1997, primarily because
of higher profit margins on produced and acquired product.
General and administrative expenses were $2,129,300 for the twelve months
ended December 31, 1997, as compared to $2,323,800 for the twelve months ended
December 31, 1996. The decrease was principally
23
<PAGE> 25
attributable to the Company having more debt issuance costs associated with two
bridge notes in 1996, as compared to debt issuance costs associated with only
one bridge note in 1997.
Allowance for doubtful accounts was $1,115,600 for the twelve months ended
December 31, 1997, as compared to no allowance for doubtful accounts for the
twelve months ended December 31, 1996. The allowance for doubtful accounts
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 the Company under the contract for "Amazing Tails." The Company therefore
reasserted its rights to "Amazing Tails" and wrote off the entire receivable
under the Eurolink contract. Eurolink and the Company are unrelated entities and
had an arms length relationship. The write down of the Alliance receivable
occurred as a result of a restructuring of the Company's obligations to
Alliance. Pursuant to such agreements, Alliance and the Company agreed to: (i)
extend the "Total Recall" promissory note; and convert the minimum guarantee to
a profit sharing arrangement, which allows Alliance to recoups its advance of
$225,000, plus entitles Alliance to receive a 30% distribution fee and actual
distribution materials costs prior to the Company and Alliance splitting the
remaining receipts. Although the Company believes that it will receive more than
the $225,000 that it has already received from licensing such programing,
because of this new structure, the Company will be unable to recognize any more
revenue with respect to its license agreements with Alliance until Alliance
recoups its advance and costs. The write down of the Giniger Guaranty was due to
the Company 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, and the expenses associated with the discount of long term
receivables calculated under the guidelines of APB 21.
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.
Net income for the twelve months ended December 31, 1997 was $447,100, as
compared with net income of $800 for the twelve months ended December 31, 1996.
This increase relates to an increase in sales and a decrease in debt issuance
costs as described above.
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 the Company's treatment of its trade receivables, see
"Management's Discussion and Analysis of Financial Conditions and Results of
Operations -- General." The Company believes its existing bad debt reserve is
adequate and that it has adequate resources to collect its trade receivables.
Year ended December 31, 1996 versus the period from inception (February 27,
1995) to December 31, 1995. Revenues for the year ended December 31, 1996 were
$5,749,800 compared with $1,245,300 in the period from inception (February 27,
1995) through December 31, 1995 (the "95 Period"). The revenues from the 95
Period were primarily attributable to the completion and delivery of the series
"Simply Style." Revenues for the year ended December 31, 1996 included
$1,441,700 from the recognition of revenues from Interpublic for the completion
of the series "Amazing Tails," which revenues accounted for 25% of revenues
during such period, a revenue guarantee received from the sale of certain
library rights and revenue from the sales generated by the existing library.
Included in this amount are revenues of approximately $680,000 arising from a
license of a certain portion of the Company's film library to the Giniger
Entities, with respect to the sale of a certain portion of the Company's library
in certain Latin America countries and Europe. These revenues were 12% of
revenues in that period. Finally, revenues in the period included $618,400 from
Eurolink respecting additional sales of "Amazing Tails." This sale was
approximately 11% of the Company's revenue during the period. Revenue from the
Giniger Entities, Eurolink, and the production of "Amazing Tails" should not be
considered to be recurring. See "Risk Factors -- Accounts Receivable; Reliance
on Significant
24
<PAGE> 26
Customers" for a further discussion of the non-recurring nature of these
revenues, and recognition of future revenues from the Giniger Entities.
Cost of revenues was $2,895,900 for the year ended December 31, 1996, as
compared to $946,900 for the 95 Period, such increase being principally
attributable to the increase in amortization of the product produced and
acquired by the Company.
Gross profit margin improved from 24% for the 95 Period to 50% for the year
ended December 31, 1996 primarily because the profit margin on "Amazing Tails"
and revenues recognized from the Giniger Entities was greater than the profit
margin on "Simply Style."
General and administrative expenses were $2,323,800 for the year ended
December 31, 1996, as compared to $1,288,200 for the 95 Period, resulting
primarily from increased personnel costs. As a percentage of revenues, however,
general and administrative expenses decreased from 103% to 40%. The debt
issuance costs were treated as an expense and not capitalized because the
expected maturity dates were within one year. See "-- Liquidity and Capital
Resources."
Interest expense for the year ended December 31, 1996 was $677,700, as
compared to $42,700 for the 95 Period reflecting the issuance of Bridge Notes in
the period.
Net income for the year ended December 31, 1996 was $800 compared with a
net loss of ($1,032,500) incurred during the 95 Period, resulting primarily from
an increase in sales activity in 1996. The 95 Period had limited sales activity,
as the Company was in a start-up phase, but it included the costs associated
with the Company's initial exhibition at trade shows, acquisition costs for
programming and distribution, professional costs, and increases in personnel to
accommodate future production activities and distribution.
LIQUIDITY AND CAPITAL RESOURCES
The entertainment industry is highly capital intensive. As of March 31,
1998, the Company had a liquidity deficit of ($4,541,600). Liquidity deficit is
defined as (i) cash and cash equivalents, accounts receivable (net), and the
amount due from officer less (ii) accounts payable, accrued expenses and other
liabilities, deferred revenues, accrued participations, notes payable,
shareholder loan and note payable and accrued interest.
Included in the Company's assets as of March 31, 1998, are approximately
$1,553,500 relating to projects under development but which have not been set
for principal photography. As of March 31, 1998, approximately $789,000 of this
amount relates to the acquisition of the rights to produce a television series
based on the feature film "Total Recall" and approximately $451,000 relates to
expenditures for "LoCoMoTioN."
Included in the Company's assets as of December 31, 1997, are approximately
$1,502,100 relating to projects under development but which have not been set
for principal photography. As of December 31, 1997, approximately $789,000 of
this amount relates to the acquisition of the rights to produce a television
series based on the feature film "Total Recall" and approximately $451,000
relates to expenditures for "LoCoMoTioN."
The Company intends, consistent with the standards set by the Financial
Accounting Standards Board, including SFAS No. 53, to write off the costs of all
development projects when they are abandoned or, even if not abandoned, if they
have not been set for principal photography within three years of their initial
development activity. Development activity with respect to LoCoMoTioN began in
September 1995 and with respect to Total Recall in July 1996. In the event the
Company is unable to produce either "Total Recall" or "LoCoMoTioN," the Company
would incur a significant write-down with respect to the development costs of
such projects, which, in turn, may effect ongoing financing activities.
The Company has received a commitment letter from Mercantile National Bank
for multiple lines of credit of up to $8,175,000 (the "Proposed Bank Facility"),
which lines of credit would permit borrowings pursuant to specified borrowing
bases made up of the value of the library (including a value for "Total
Recall"), accounts receivable and other assets, including cash. The Company
currently intends to repay the $3,476,900 of indebtedness remaining after the
Offering with proceeds from the Proposed Bank Facility. The Proposed Bank
Facility will contain covenants relating to the Company's tangible net worth,
debt to equity
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ratio and profitability. No assurance can be given that the Proposed Bank
Facility will be entered into or that the Company will be able to use proceeds
from such facility as indicated herein.
The Company has financed its operations from its own sales and production
activities, loans from its shareholders aggregating $3,771,900, the sale of the
Bridge Notes aggregating $2,844,350, the special financing obtained with respect
to "Total Recall" (the "Total Recall Financing") in the principal amount of
$650,000, and interim financing (the "Interim Financing") discussed below of
$1,107,000 which financing was required as a result of delays in completing the
Offering.
A portion of the shareholder loans are from: (i) Joseph Cayre (two loans
aggregating $740,000); (ii) Morris Wolfson, entities which may be affiliates of
Mr. Wolfson and other parties to which Mr. Wolfson disclaims a beneficial
ownership interest in or control of (two loans aggregating $822,000, as more
fully described below); and (iii) Affida Bank (one loan in the amount of
$300,000). The Cayre loans, which were made in February and August 1995, bear
interest at 14% per year and 12% per year, respectively, and are subject to an
agreement requiring the payment of $240,000 from the net proceeds of the
Offering and the pledge of certain assets to cover the unpaid amount due
thereunder. Mr. Cayre has extended the maturity date until June 30, 1998. See
"Certain Transactions -- Transactions with Joseph Cayre."
A loan in the principal amount of $322,000 was made in January 1996 by AMAE
Ventures, an affiliate of Mr. Wolfson, which was used by the Company for general
overhead purposes and bears interest at 12% per year. This note is due on the
earlier to occur of June 30, 1998 or the closing of the Offering. The holder of
such note has the right to convert the principal amount into approximately
105,000 shares of the Company's Common Stock on a fully diluted basis through
the completion of the Offering, and has indicated that it intends to convert
such note. An April 1996 loan by South Ferry #2 L.P., a Delaware limited
partnership, in the principal amount of $500,000 was used for the pre-production
of "LoCoMoTioN." This loan bears interest at 10% per year and is currently due
on June 30, 1998. Finally, the Chana Sasha Foundation, an entity controlled by
Mr. Wolfson, extended the Company a $400,000 line of credit on a secured basis
in November 1996, which credit line has been used and subsequently repaid by
funds from the Company's operations. This line of credit bore interest at 10%
per year. See "Certain Transactions" for additional information regarding these
transactions.
The July 1996 proceeds from the sale of the note in the Total Recall
Financing were used to acquire the rights to produce a television series based
on "Total Recall." This note, which was secured by the Company's underlying
rights to the "Total Recall" series bore interest at 10% per year. The principal
amount of this note has been repaid. In addition, the holders of this note
received an aggregate of 53,403 shares of Common Stock, warrants to acquire
21,362 shares of Common Stock at an exercise price of $.43 per share and a 15%
net profit participation in the Company's interest in the series. See "Certain
Transactions" for a description of the consideration paid to the Morris Wolfson
Family Limited Partnership in connection with this transaction.
In November 1996, the Company obtained a $300,000 loan from Affida Bank,
which loan carries interest at 8% per year, and matures upon the earlier to
occur of the closing of the Offering or June 30, 1998. Affida Bank also received
warrants to acquire 25,634 shares of the Company's Common Stock at an exercise
price of $.43 per share in connection with this loan. The proceeds of this loan
were used for working capital.
In February 1996, the Company commenced a private placement of its secured
notes and sold to accredited investors $900,000 in principal amount of secured
promissory notes which bear interest at 12% per year and are due at the earlier
to occur of the closing of the Offering or June 30, 1998. This offering was
changed pursuant to its original terms with respect to subsequent investors in
June 1996 when the Company completed the sale to accredited investors of
$975,000 principal amount of secured notes which bear interest at 10% per year
and are due at the earlier to occur of the closing of the Offering or June 30,
1998. In December 1996, the Company obtained a $150,000 loan from an outside
investor, which loan carries interest at 10% per year and matures upon the
earlier to occur of the closing of the Offering or June 30, 1998. The proceeds
of this loan were used for working capital. In February and March 1997, the
Company completed the sale of $969,350 of convertible secured notes to
accredited investors (the "February 1997 Notes"). Each of the foregoing notes
are secured, pro-rata and pari passu, by liens on substantially all of the
Company's assets, except that the February 1997 Notes are junior to the other
bridge notes.
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In December 1997, the Company obtained a loan in the amount of $315,000
from Venture Management Consultants, LLC ("VMC"), which loan carries interest at
12% per year, and matures upon the earlier to occur of the closing of the
Offering or June 30, 1998. Because the loan was not repaid in full by February
15, 1998, the Company is required to pay VMC an additional fee of $15,000.
Included in the principal to be repaid is a $15,000 loan origination fee. As of
the date hereof, $150,000 has been repaid on this note.
Between March 1998 and May 1998, the Company arranged for short term loans
(the "Interim Financing") of an aggregate of $1,642,000. A majority of such
loans were made by present security holders of the Company and their affiliates.
These loans mature as follows: (i) $642,000 on June 30, 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 does not
accrue interest. The $642,000 loan has a fixed interest amount of $78,000 and
includes a $42,000 loan origination fee. The $115,000 loan includes a $15,000
loan origination fee and begins to accrue interest at 18% per year if the loan
goes into default. The Company intends to repay the $235,000 and $642,000 loans
upon the closing of the Offering. The Company currently does not intend to repay
any other amounts owing in respect of the Interim Financing at the conclusion of
the Offering. Rather, the Company intends to negotiate with the Interim
Financing noteholders terms pursuant to which the Interim Financing will be
replaced or exchanged for permanent subordinated debt. No such arrangements have
been negotiated. If such negotiations are unsuccessful, the Company will pay all
such indebtedness at their respective maturities.
Assuming the repayment of short-term indebtedness as specified under the
caption "Use of Proceeds," at the conclusion of the Offering, the Company will
have approximately $3,477,000 of indebtedness, which indebtedness is due between
June 30, 1998 and April 18, 1999 and is secured by substantially all of the
assets of the Company.
Management believes that if the Offering is completed, the net proceeds
thereof, together with projected cash flow from operations, will be sufficient
to permit the Company to conduct its operations as currently contemplated for
only the next 12 months. Such belief is based upon certain assumptions,
including assumptions regarding (i) the sales of the Company's original and
acquired programming and (ii) anticipated expenditures required for the
development and production of additional programming, including "Total Recall."
After such time period, the Company has assumed that its operations will be
financed by cash flow from operations, proceeds from the Proposed Bank Facility
(if obtained) and/or additional financings. See "Risk Factors -- Going Concern
Assumption," "-- Additional Capital Requirements; Encumbrance of Existing
Assets; No Assurance of Future Financing," "Capitalization" and "Description of
Securities."
The Company's management believes that the Company's management information
systems will not be affected by the "Year 2000" issue. The Company's management
also believes that inflation has not had any significant effect on the Company's
operations since inception.
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BUSINESS
The following Business section contains forward-looking statements that
involve risks and uncertainties. The Company's actual results could differ
materially from those anticipated in these forward-looking statements as a
result of certain factors, including those set forth under "Risk Factors" as
well as elsewhere in this Prospectus.
GENERAL
Since its formation in February 1995, the Company has focused its efforts
on the development, production and distribution of a variety of television
programming, including series, specials and made-for-television movies for
exploitation in the domestic and international television market. The Company
derives substantially all of its revenues from production fees earned in
connection with Company-originated productions, distribution fees from the
exploitation of product acquired from others, and the exploitation of
Company-owned programming. References to the Company after December 1995 refers
to Team Communications Group, Inc. (formerly known as DSL Entertainment, Inc.)
and its wholly-owned subsidiaries. In December 1995, two companies under common
control of the shareholders of the Company were contributed to the Company
without additional consideration. References to the Company prior to December
1995 refer to those three entities on a combined basis.
The Company's development and production activities have focused on: (i)
family programming produced for U.S. cable and network television channels such
as The Discovery Channel, The Family Channel, USA Network, and PBS; (ii)
"how-to" instructional series, such as "Simply Style," a 60-episode series which
debuted during the third quarter of 1995 on The Learning Channel; and (iii)
reality based weekly and five-day per week ("strip") syndicated programming,
such as "Strange Universe," a reality based series exploring abnormal
occurrences which the Company co-produced with the 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 and has been completed. The Company has also
completed production of a series of 22 half hour episodes entitled "Amazing
Tails," a reality based series focusing on extraordinary pets, which has been
financed in conjunction with Friskies Pet Foods, a division of Nestles Food, and
advertising leader Interpublic. All episodes of "Amazing Tails" have been
produced and delivered to Interpublic, and the series is airing on Discovery
Communications' newest channel, Animal Planet. The Company has recently entered
into an agreement with Discovery Communications for a second season of 26 new
episodes of Amazing Tails, which is currently completing production.
Additionally, the Company is party to a joint venture agreement with Interpublic
for the production, subject to certain criteria, of a minimum of four pilots
over the next year for non-fiction and light entertainment programming. The
Company also maintains a dramatic development and production unit which is
developing and will produce movies of the week and drama series for exhibition
on network television, cable or ad hoc networks of independent stations which
sometimes form to air special programming.
In July 1996, the Company acquired the rights to produce a weekly dramatic
television series based on the motion picture "Total Recall," which in 1990
grossed over $320 million in worldwide box office receipts. The Company has
entered into an agreement with Alliance, a leading Canadian production company,
pursuant to which Alliance will co-produce and co-finance an initial 22 episodes
of the series with the Company. The Company has also entered into an agreement
with PolyGram Television, L.L.C. ("PolyGram"), pursuant to which PolyGram will
acquire television distribution rights to the series in the United States.
Miramax Film Corp. ("Miramax"), which acquired the theatrical sequel rights to
"Total Recall," has also acquired worldwide home video rights to the series from
the Company.
The Company is also developing a wide variety of family, dramatic,
reality-based and children's programming including a new pre-school series,
tentatively entitled "LoCoMoTioN," which the Company hopes to place on domestic
and international television in the fall of 1998. Although no assurance can be
given that the Company will obtain a domestic timeslot, the Company is currently
interviewing for female celebrities to co-host the series, which will introduce
toddlers to dance and exercise through contemporary urban music.
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The Company also maintains an international sales force and currently has
distribution rights to approximately 335 half-hours of family and documentary
series and specials, and 190 hours of dramatic series and films.
The global television market has experienced substantial growth since 1985
and the Company believes this market will continue to experience substantial
growth during the foreseeable future as foreign state television monopolies end
and commercial broadcast outlets expand to provide increasingly varied and
specialized content to the consumer. In the U.S. alone, 60 new television
channels 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.
The Company's operating strategy is to fulfill the demand for programming
by: (i) expanding the activities of each of its operating departments; (ii)
implementing strategic acquisitions of video libraries and smaller production
companies; and (iii) entering into joint ventures with, or acquisitions of,
unaffiliated third parties with the intention that such acquisitions or joint
ventures would lower the Company's financial risk should it expand, as
anticipated, into related activities, such as direct marketing and interactive
programming. The Company intends to acquire, co-produce and co-finance other
series, movies and specials from third party producers in order to increase its
programming library and self distribute such product on a worldwide basis.
The Company believes that there are unique business opportunities to
acquire other emerging companies, as well as more established production and
distribution entities, which are engaged in programming development, production,
distribution and other related media investments. While the number of
distribution channels has been increasing, the Company believes there are
powerful economic incentives, including economies of scale and depth of
financial and programming capability, for programmers and distribution entities
to consolidate. No assurance can be given that the Company will be successful in
obtaining the financing necessary for these acquisitions or that any such
acquisitions will prove financially successful. No specific acquisitions have
been identified and no assurance can be given that any transactions will be
affected or if such acquisitions are consummated that they will be successful.
In addition, a significant acquisition of product or another company could
require the Company to obtain additional financing. No assurance can be given
that such financing will be available at all, or that it will be on terms that
are favorable to the Company.
The Company anticipates that the net proceeds of the Offering, together
with projected cash flows from operations, will be sufficient to permit the
Company to conduct its operations as currently contemplated for only the next 12
months. Such belief is based upon certain assumptions, including assumptions
regarding, (i) the sales of the Company's original and acquired programming, and
(ii) anticipated expenditures required for the development and production of
additional programming, including "Total Recall." After such time period, the
Company has assumed that its operations will be financed by internally generated
funds and proceeds from additional financings. See "Risk Factors -- Going
Concern Assumption," "-- Additional Capital Requirements, Encumbrance of
Existing Assets; No Assurance of Future Financing," "Capitalization,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources" and "Description of
Securities -- Notes."
OPERATIONS
The Company currently operates three principal departments: (i) development
and production; (ii) distribution; and (iii) licensing, merchandising, and
direct-marketing.
PRODUCTION
The production of television programming involves the development of a
creative concept into a television script or teleplay, the selection of talent
(including actors, directors, and other creative personnel), and the filming,
technical, and post-production work necessary to create a finished product ready
for exhibition. Such programming is generally produced for initial prime-time
exhibition on one of the major U.S. networks, which include CBS, NBC, ABC and
Fox. Such programming may also be produced for new networks such as United
Paramount ("UPN"), and Warner Bros. ("WB"), first-run pay television exhibition
or directly for syndication (i.e., independent or non-network) television,
including PBS, as well as a number of basic and pay cable
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channels or services, including HBO, Showtime, the Disney Channel, The Learning
Channel, The Discovery Channel, Arts and Entertainment Network and the History
Channel.
The Company is engaged in developing concepts and acquiring literary and
other story properties, the most promising of which serve as the basis for the
production of series, pilot films, or made-for-television features. Once an idea
has been commissioned by the Company, 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, the Company and the network or distributor negotiate a license fee or
distribution advance. This fee is a flat sum payment through which the Company
generally attempts to cover a significant portion of its production costs and
overhead.
Entertainment companies in general attempt to finance the development costs
for television programming from their working capital and seek to cover a
substantial portion of their production costs, including overhead, through
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), the Company attempts to provide corporate sponsors or
agreements for the license of ancillary rights such as foreign or home video
distribution. Even without a fee or advance, the Company believes that it can
defray a significant portion of the production costs of PBS programming using
these alternative financing methods, thus availing itself of the key
demographics of PBS viewership, particularly in children's programming.
With respect to series for the networks or pay cable channels, the Company
generally attempts to negotiate significant license fees for both series and
movies of the week. In many cases, the Company may invest additional sums in
excess of network license fees to produce the best possible made-for-television
feature, as such features are an essential sales tool in gaining network
acceptance of a projected series, if applicable. In these cases, the Company
will attempt to cover the excess of production costs from working capital,
third-party financing, sales of the episodes in the foreign marketplace, or a
combination of these financing techniques. Where necessary or desirable, the
Company may seek to obtain funding in excess of network license fees from a
studio or a third party who will provide such financing in return for a share of
the profits from the syndication of such programming. Similarly, for television
series, the Company may invest amounts in excess of network license fees in
order to gain audience acceptance for the series and to enhance the potential
value of future syndication rights.
There can be no assurance, however, that once the Company commits to fund
production of a series licensed to a network, the network will order and exhibit
sufficient episodes to enable the Company to syndicate the series. Typically, at
least 65 episodes of a series must be produced for it to be "stripped" or
syndicated in the daily re-run market. Generally, networks can cancel a series
at stated intervals and, accordingly, do not commit in advance to exhibit a
series for more than a limited period. If a series is canceled (or not carried
for the period necessary to create enough episodes for syndication purposes),
there is a significant chance that the production costs of the project will not
be fully recovered. Similar risks apply even if the series is produced for a
non-network medium. The Company believes, however, that foreign pre-sales and
international co-production opportunities will provide sufficient options to
obtain production financing and additional revenue potential. Moreover, basic
cable channels continue to provide outlets of series of between 13 to 26
episodes per season.
The Company intends to focus its production activity in the following areas
or genres:
Movies of the Week and Mini-Series; Drama Series. It is the Company's
intention to expand the production of dramatic programming, over the next 24
months. Such programming, if any, will be licensed in foreign markets through
the Company's sales personnel where the Company does not have foreign partners.
The Company has acquired the rights to produce a weekly dramatic television
series based on the motion picture "Total Recall," which generated over $320
million in world-wide box office receipts in 1990. The Company has entered into
an agreement with Alliance, a leading Canadian production company, pursuant to
which Alliance will co-produce and co-finance an initial 22 episodes of the
series with the Company. The Company has also entered into an agreement with
PolyGram, pursuant to which PolyGram will co-finance and acquire television
distribution rights to the series in the U.S. only. The domestic deal with
PolyGram includes a 22 episode commitment in exchange for a license fee and a
percentage of the net profits of the series. PolyGram has recently pre-sold the
series to the U.S. pay television network, ShowTime Network. The
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series is scheduled to debut late 1998 with "first run" domestic syndication to
be handled by PolyGram in 1999. Miramax, which acquired the theatrical sequel
rights to "Total Recall," has also acquired worldwide home video rights to the
series from the Company. Based upon the initial pre-sales of the series with
Polygram, Miramax and various international broadcasters, the financial
conditions contained in the co-production agreement with Alliance have been
satisfied. In addition to reducing the Company's financial exposure, the Company
anticipates that by co-producing the series with Alliance, the series will
qualify for certain Canadian co-production and tax benefits. The proceeds from
the foreign distribution of the series, after recoupment of production costs,
will be allocated 40% to the Company and 60% to Alliance. It is the intention of
the parties that each episode will be produced for approximately $1,100,000 per
episode, with the Company receiving 40% of the profits derived from the
exploitation of the series on worldwide television, home video and merchandising
rights to the series.
As of the date hereof, television and home video pre-sales of approximately
$15 million have been made with respect to "Total Recall" for the U.S.
(Polygram), all of Asia and the Middle East, and parts of Europe, Latin America
and Canada. Still remaining for licensing, among other areas, are most of the
European territories, and parts of Latin America. "Total Recall" has recently
been pre-sold to the U.S. pay television service, Showtime Network. The series
is scheduled to debut in July 1998 with domestic syndication to be handled by
PolyGram in 1999. As a result of the Showtime Network sale, the Company
anticipates that its U.S. revenues should be significantly higher for 1999
versus 1998.
The Company has entered into agreements with the Family Channel for the
development of two movies of the week. The first, "Quake" is a story about an
earthquake in New York City. The script for "Quake" has been approved and paid
for by the Family Channel, and is currently in production by Northquake
Productions, Inc., a special purpose production company established to produce
this project. The Company will receive an advance against its ownership interest
in the profit participation in this project, and an executive producing fee.
This movie of the week is scheduled to air on the Family Channel in August 1998.
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 Family Channel. "Down Fall" is in the final stages of development and
the Company anticipates that it will commence preproduction on this project in
time to utilize some of the production staff from "Quake" as it concludes
production. The Company has advanced approximately $90,000 for the "Quake"
production, and expects to recoup a majority of these costs. No funds have been
advanced for the "Down Fall" production as of this date.
The acquisition of the one hour dramatic series "Water Rats", a high
suspense police action drama set in Sydney, Australia (52 episodes delivered for
the first and second season), and the one hour dramatic series "Cover Story",
which takes place on the set of a television entertainment magazine program (26
episodes delivered), both of which were acquired from the Australian production
company Southern Star, are examples of the Company's strategy to acquire
programming from third parties. The Company has the rights for distribution in
all Latin American countries, including Mexico and Puerto Rico, and has
cumulative sales of approximately $1.0 million for Mexican broadcast television
and pan-Latin American satellite broadcast television with the majority of
terrestrial broadcast rights remaining available for sale.
The Company has also recently acquired Latin American home video and
television distribution rights to 78 hours of dramatic series from Beyond
Distribution PTY Ltd., a leading Australian production company. Such acquisition
brings the total hours of dramatic programming licensed by the Company in Latin
America to 156.
Live Action and Animated Children's Programming. To take advantage of what
it believes is a significant television market for children's programming, the
Company intends to develop and produce inventive and original shows, including
both animated series and live-action series. The Company has commenced
pre-production of "LoCoMoTioN," a program which incorporates, songs, games and
exercise to stimulate both the bodies and the minds of preschool children, and
hopes to sell the show to domestic and international television markets in the
fall of 1998. If the show is successful, it is anticipated that it will provide
the Company with licensing and merchandising opportunities.
The Company continues to acquire programming on an ongoing basis. In
October 1996, the Company acquired certain additional foreign distribution
rights to three family movies from Feature Films for Families.
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In December 19, 1996, the Company acquired thirteen half-hour episodes for
international distribution of the series "Jelly Bean Jungle," a children's
series featuring live action and puppets.
Non-Fiction/Light Entertainment Programming. With the rapid expansion of
national cable and network programming outlets, consumer demand for non-fiction,
reality based "docudrama" programming has increased. Channels such as Fox,
United Paramount, the Warners' Brothers Network, TBS, The Discovery Channel, The
Learning Channel and Lifetime have found quality non-fiction programming to be a
mainstay of their programming portfolio. The Company intends to capitalize upon
the programming expertise developed by management prior to the formation of the
Company, including the work by Mr. Levin in the production and distribution of
"Future Quest," a 22 episode, half-hour PBS-TV series which explores technology,
science and pop culture, to develop innovative programming of this genre.
"Future Quest" is hosted by film actor Jeff Goldblum and presents, on a weekly
basis, a gallery of futurists, scientists and social commentators. The show was
underwritten with a corporate grant from AT&T Corp. Other programming previously
produced by Mr. Levin and previously distributed by the Company in this genre
includes "Hollywood Stuntmakers," "FX Masters," "Legends of Hollywood" and
"Mysterious Forces Beyond."
The Company has an extensive development slate of new series which are
currently being pre-sold in the international marketplace. Such new programs
include "Strange Universe," a 130 half-hour 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 22 half hours featuring people and their pets, was initially financed by a
presale for approximately $1,441,700 to Interpublic for domestic distribution
and broadcast. To date, the Company has also licensed "Amazing Tails" in Japan
for $300,000 and in the United Kingdom, France, Italy, Spain, Portugal and
Greece for an aggregate of $595,000. The Company has entered into an agreement
with Discovery Communications for a second season of 26 new episodes of "Amazing
Tails," which is currently completing production.
The Company has entered into a "first look" arrangement with Interpublic
pursuant to which the Company and Interpublic have agreed to fund, subject to
the conditions contained therein, a minimum of four non-fiction or light
entertainment pilots. Series which are developed from the pilots will be
co-financed by each entity, and Interpublic will use its best efforts to seek an
advertising sponsor for each series.
Current co-productions include "America's Scenic Railway Journeys," a six
hour documentary mini-series devoted to famous railway journeys. The Company has
co-produced this series with Oregon Public Television for the PBS Network and
has paid Oregon Public Television an advance for the international distribution
rights to the mini-series.
Syndicated Strip Shows. The Company is making a significant creative and
development effort to provide syndicated daily programming, especially talk
shows and reality series. The Company is currently developing a talk show
"strip" anticipated for the fall 1998 season entitled "Chrystal Rose." Ms. Rose
is a noted British talk show personality whose series was aired on the United
Kingdom's ITV Network. No assurance can be given that the Company will be able
to obtain sufficient station clearances to produce this show in the U.S. The
Company has also successfully licensed formats for such game shows as "Young
Matchmakers,"which has been successfully launched on Holland's RTL4 channel, and
is now being presented to domestic broadcasters.
"How To" and Instructional Programming. From gardening and style to cooking
and home repair, "how to" and instructional programming is an expanding market
in which the Company has strived to develop, produce, and distribute a variety
of programs which both entertain and educate. "Simply Style," a 60 episode
"strip" created by the Company for The Discovery Channel and hosted by fashion
expert Leah Feldon, is the first such series produced by the Company. Within the
"how to" genre, Mr. Levin previously produced "Laurie Cooks Light and Easy,"
which consists of 65 one-half hour episodes previously distributed by the
Company. Hosted by Laurie Burrows Grad, this daily strip presented simple
recipes prepared in a healthy manner. The show attracted celebrities such as
Jill St. John, Steve Sax, Dom Deluise, Wolfgang Puck, Michael Tucker and Jill
Eikenberry.
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DISTRIBUTION
An active part of the Company's business is the presentation of its own
product and product acquired from third-party producers to the international
marketplace. The Company's current library includes 335 half hours of reality
based series, mini-series and specials and 190 hours of dramatic series and film
programming. This includes drama and non-fiction programming as well as movies
of the week, and children's animation. With the rapid increase of networks and
channels, there is an expanding demand for top-quality programming. To access
these markets, the Company's distribution personnel attend such major
international trade shows as MIPCOM-TV, Monte Carlo Television Festival, MIP-TV
and NATPE.
In territories such as Latin America, the Company uses subdistributors such
as the Giniger Entities. The Company uses agents in such territories because it
believes that these agents typically have long-standing relationships in those
territories where the Company might have difficulty accessing purchasers or in
obtaining favorable prices from such purchasers.
The Company has also entered into an agreement with Australia's Southern
Star to distribute its successful drama series "Water Rats" in Latin America,
including Mexico and Puerto Rico, through the Giniger Entities.
In addition, the Company has an active "format" business overseas, where it
represents and "reformats" successful foreign shows for the domestic marketplace
and vice versa. The Company also currently represents several other custom
formats which are under consideration in numerous territories.
LICENSING, MERCHANDISING AND DIRECT MARKETING
The Company's strategic objectives encompass the exploitation of additional
revenue streams through licensing and merchandising efforts. The Company hopes
to generate new profit centers from toy, publishing, CD-ROM, housewares,
stationary, video, apparel, and other product category licenses. Although no
assurance can be given that this strategy can be successfully implemented, the
Company and Alliance, the co-producer of "Total Recall," have begun to focus on
the marketing and merchandising rights that are available with respect to the
"Total Recall" series.
The Company also intends to focus on certain types of instructional or "how
to" programming that can be translated into direct marketing opportunities. By
their design, aspects of each how to, or instructional program can be extended
into a continuity club, infomercial, and retail products. For example, should it
have sufficient financing, the Company intends to develop from the series
"Amazing Tails" a pet "fan" club, with commercial tie-ins with its sponsors.
POSSIBLE ACQUISITIONS; JOINT VENTURES
The Company believes that there are numerous opportunities to acquire other
production and distribution companies, as well as existing programming
libraries. The Company believes that these acquisitions, if successful, will
result in synergistic opportunities, and may increase the Company's revenue and
income growth. No specific acquisition candidates have been identified, and no
assurance can be given that any transactions will be effected, or if effected,
will be successful.
The Company is also committed to establishing joint ventures with strategic
partners in order to expand the Company's operations without significantly
increasing its costs. For example, the Company has completed a "first
negotiation" arrangement with Interpublic which would give Interpublic the first
opportunity to provide sponsorship, commercial underwriting, and financing of
the Company's children's and "how to" series.
COMPETITION
The entertainment industry is highly competitive. The Company competes
with, and will compete with, many organizations, including major film studios,
independent production companies, individual producers and others, including
networks, who are seeking the rights to attractive literary properties, the
services of creative and technical personnel, the financing for production of
film and television projects and favorable arrangements for the distribution of
completed films. Many of the Company's present and future competitors are
organizations of substantially larger size and capacity, with far greater
financial and personnel resources and longer operating history than the Company.
Moreover, the entertainment industry is currently evolving
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into an industry in which certain multinational, multi-media entities, including
Viacom/Paramount Pictures, The News Corporation/Twentieth Century Fox, The Walt
Disney Company/Cap Cities-ABC, Time Warner/Turner Broadcasting and
Westinghouse/CBS are anticipated to be in a position, by virtue of their control
over key film, magazine, and/or television content and their control of key
network and cable outlets, to dominate certain communications industries
activities. These competitors have numerous competitive advantages, including
the ability to acquire and attract superior properties, personnel, actors and/or
celebrity hosts and financing.
EMPLOYEES
The Company currently employs 12 full-time employees, six of whom are
members of senior management. From time to time, as projects go into production,
temporary employees are also employed by the Company.
PROPERTIES
The Company currently rents its office space at 12300 Wilshire Boulevard,
Los Angeles, California from an unaffiliated third party, pursuant to a 36 month
lease that commenced on May 15, 1995 which was recently extended for an
additional 12 months. The lease terminates on May 14, 1999. The Company rents
approximately 4,600 square feet at a monthly rate of $2.10 per square foot. Mr.
Levin has personally guaranteed the obligations under the lease. The Company
believes that its current offices are adequate for its requirements, and that
additional space, if required, is available throughout the Los Angeles area at
commercially reasonable rates.
LEGAL PROCEEDINGS AND OTHER MATTERS
In May 1997, the Company filed and served a complaint in a matter styled
Team Communications Group, Inc. vs. Michael Jacobs. This action is against a
former employee for, inter alia, unfair competition and breach of fiduciary
duty. Mr. Jacobs filed a complaint on the same day, styled Jacobs vs. Team
Communications Group, Inc. alleging breach of employment contract, fraud, and
also seeking an accounting. The Company intends to vigorously pursue its action,
and to defend itself in the counter-suit. The two actions have been consolidated
by the Court. In respect to the foregoing claim, the Company notes that the
claim is in the early phases of discovery and, accordingly, no reserves have
been taken. The Company's preliminary assessment of the merits of the claim,
even assuming that the allegations therein were to be determined against the
Company, is that this matter is not expected to have a material adverse impact
on the Company's results of operations or liquidity and capital resources.
In April 1998, the Company was served with a complaint in a matter styled
Program Power Entertainment, Inc. vs. Team Communications Group, Inc., filed in
Superior Court for the County of Los Angeles. In the complaint, the plaintiff, a
producer of four hours of programming (the "Programs") distributed
internationally by the Company, alleges, inter alia, that the Company failed to
use its best efforts to maximize income from the distribution of the Programs by
licensing the Programs in conjunction with other producers' programs, allocating
revenues from such licenses among the producers to the detriment of the
plaintiff, and that the Company failed to properly account to the plaintiff for
such revenue. The complaint seeks an accounting and damages according to proof.
The Company intends to file an answer and to vigorously defend itself.
At this time the outcome of any of the above matters cannot be determined
by the Company with any certainty.
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<PAGE> 36
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The directors and executive officers of the Company, together with their
respective ages and positions with the Company, are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Drew S. Levin 43 President, Chief Executive Officer and Chairman of the Board
Paul Yamamoto 44 Executive Vice President and Director
Eric Elias 43 Senior Vice President, Business and Legal Affairs
Michael Latiner 28 Senior Vice President, Finance and Secretary
Declan O'Brien 32 Vice President, Development
Robert Morhaim 40 Vice President, Development and Production
Bruce P. Vann 42 Nominated Director(1)(2)
Seth M. Willenson 50 Nominated Director(1)(2)
Michael Jay Solomon 60 Nominated Director(1)(2)
</TABLE>
- ---------------
(1) Proposed member of the Compensation Committee.
(2) Proposed member of the Audit Committee.
Drew S. Levin has been President and Chairman of the Board of the Company
since its formation in 1995. From 1987 through 1994, he was President of DSL
Productions, Inc. ("DSP"), a privately held company that was sold to The
Producer's Entertainment Group, Inc. ("TPEG") in 1994. Through February 1995, he
continued to act as president of DSP, which operated as a subsidiary of TPEG.
Mr. Levin has produced and co-produced hundreds of hours of programming,
including "Pop Culture Meets Pure Science," for which Mr. Levin received an Emmy
Award, "Laurie Cooks Light & Easy," "Future Quest" and "Simply Style." Mr. Levin
has extensive experience in international co-productions, including co-producing
a domestic and international version of "Top of the Pops" with the British
Broadcasting Company for the CBS television network.
Paul Yamamoto has been Executive Vice President since September 1996 and a
Director since December 1996. Mr. Yamamoto was a managing partner of the Favored
Artists Agency from 1989 through 1992. From 1992 through July 1995, Mr. Yamamoto
was self employed and ran his own management and production company. In August
1995, Mr. Yamamoto became the executive vice president of the Larry Thompson
Organization, where he served until September 1996. Mr. Yamamoto intends to
resign from the Board of Directors upon effectiveness of the Offering and the
reconstitution of the Board of Directors, as described herein.
Eric Elias has served in the capacity as Senior Vice President, Business
and Legal Affairs since the Company's 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.
Michael Latiner has been Senior Vice President, Finance and Secretary since
August 1997. From 1991 to 1994 Mr. Latiner was with Deloitte & Touche LLP where
he was a member of the Audit Group. From 1994 to 1995 Mr. Latiner was with Price
Waterhouse LLP where he was a member of the Entertainment, Media, and
Communications Group. From 1995 to 1997 Mr. Latiner was with 20th Century Fox
where he served as the Manager of Financial Reporting.
Declan O'Brien has been 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.
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<PAGE> 37
Robert Morhaim has been Vice President, Production since February 1997.
From 1991 until 1994, Mr. Morhaim was Director of Development at Arnold Shapiro
Productions in Los Angeles. From 1994 to February 1997, Mr. Morhaim produced the
one-hour syndicated series, "Sightings," for Paramount Domestic Television.
Bruce P. Vann, who has agreed to become a member of the Board of Directors
upon the conclusion of the Offering and the completion of certain other matters
(including the appointment of a Chief Financial Officer and the acquisition of
directors and officers insurance), is a 1980 graduate of Duke Law School. Mr.
Vann is an attorney who has been in private practice of law in Los Angeles for
over 16 years. From 1989 to 1994, Mr. Vann was a partner in the Los Angeles
office of Keck, Mahin & Cate. He is currently a partner in the firm of Kelly
Lytton Mintz & Vann LLP, counsel to the Company. Mr. Vann also serves as Senior
Vice President, Business and Legal Affairs of Largo Entertainment, Inc., a
subsidiary of The Victor Company of Japan. Mr. Vann is a member of the Board of
Directors of J2 Communications, a company listed on the Nasdaq SmallCap Market.
Seth Willenson, who has agreed to become a member of the Board of Directors
upon the conclusion of the Offering and the completion of certain other matters
(including the appointment of a Chief Financial Officer and the acquisition of
directors and officers insurance), has over 25 years experience in the
entertainment business. For the past seven years, he has been the President of
Seth Willenson, Inc., a marketing and management consulting firm in Los Angeles,
California. Mr. Willenson has produced nine films, including; "Jezebel's Kiss,"
"Delusion," "Gas, Food and Lodging," "Top Dog" and "Pocahontas: The Legend." He
has lectured extensively on the entertainment business, including speaking at
The Sundance Film Festival, the Sundance Producer's Workshop, the University of
California at Los Angeles, the University of Southern California and The Aspen
Institute. Mr. Willenson was graduated from Cornell University in 1968 and
attended the Annenburg School of Communications at the University of
Pennsylvania.
Michael Jay Solomon, who has agreed to become a member of the Board of
Directors upon the conclusion of the Offering and the completion of certain
other matters (including the appointment of a Chief Financial Officer and the
acquisition of directors and officers insurance), 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.
Directors are elected for one year terms at the Company's annual meeting of
shareholders and serve until the due election and qualification of their
successors. Officers are appointed by the Board of Directors and serve at the
discretion of the Board of Directors.
Although the Company's directors do not receive any compensation for their
services as directors, it is anticipated that, following the Offering,
non-management directors will receive a fee for each Board of Directors meeting
attended, plus reimbursement for expenses. Additionally, certain non-management
members of the Board of Directors will receive mandatory stock option grants
pursuant to the Company's 1996 Directors Plan.
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<PAGE> 38
EXECUTIVE COMPENSATION
The following table provides certain summary information concerning the
compensation earned for services rendered in all capacities to the Company for
the fiscal years ended December 31, 1995, 1996 and 1997 by the Company's Chief
Executive Officer and the Company's other executive officer whose salary and
bonus exceeded $100,000 (the "Named Executive Officers"):
SUMMARY COMPENSATION TABLE
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
STOCK ALL OTHER
NAME AND PRINCIPAL POSITION(1) YEAR SALARY BONUS OPTIONS COMPENSATION
------------------------------ ---- -------- -------- ------- ------------
<S> <C> <C> <C> <C> <C>
Drew S. Levin(5) 1997 $240,000 $125,000
Chairman of the Board, President 1996 $350,000 $ 45,000(2) (3) $15,000(4)
and Chief Executive Officer 1995 $350,000 $ -- $13,750(4)
Paul Yamamoto 1997 $164,397 $ 20,000
Executive Vice-President
</TABLE>
- ---------------
(1) Other than salary described herein, the Company did not pay the Named
Executive Officers any compensation, including incidental personal benefits
in excess of 10% of such individual Named Executive Officer's salary.
(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 will be effective upon the closing of the Offering), has
agreed to apply the balance of such accrued but unpaid bonus ($175,000) to
repay certain loans made to him by the Company. See "Certain Transactions."
This amount ($175,000) will be reflected in Mr. Levin's compensation for
fiscal 1998. In the future, Mr. Levin will not receive production bonuses.
The loan balance is $147,241 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 Transactions."
(3) Pursuant to the terms of Mr. Levin's restated employment agreement, Mr.
Levin will be granted options to acquire 85,000 shares of the Company's
Common Stock, exercisable at the Company's initial public offering price.
These options shall be deemed fully vested.
(4) Mr. Levin was entitled to receive a car allowance of $1,250 each month for
all or a portion of the year. In lieu of these payments, Mr. Levin applied
such amounts to reduce his loan balance.
(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.
EMPLOYMENT AGREEMENTS
Mr. Levin has entered into an employment agreement with the Company (the
"Levin Agreement") providing for his services to the Company as President and
Chief Executive Officer effective January 1, 1997 through December 31, 2001.
Pursuant to the Levin Agreement, Mr. Levin will receive a salary of $240,000,
plus $125,000 per annum as an advance against a pro-rata portion of producer's
fees earned by Mr. Levin. Producer's fees in excess of $125,000 will be retained
by the Company. Mr. Levin has agreed that any producer's fees relating to
Company produced programming shall be allocated to the Company. Pursuant to the
Levin Agreement, Mr. Levin will receive: (i) from 5% to 7.5% of the Company's
pre-tax profit beginning in 1997 pursuant to a formula based on specified
earnings levels (no such payments were made in 1997); and (ii) options to
acquire an aggregate of 85,000 shares of the Company's Common Stock at a per
share exercise price equal to the initial public offering price, which options
shall be deemed fully vested. The Levin Agreement also provides that certain
unpaid bonus compensation owing to Mr. Levin will be applied to his loan from
the Company. See "Certain Transactions."
Mr. Paul Yamamoto has entered into an employment agreement with the
Company, providing for his services as an Executive Vice President from January
20, 1997 to June 20, 1999, which agreement was
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<PAGE> 39
amended as of October 4, 1997 (the "Yamamoto Agreement"). Pursuant to the
Yamamoto Agreement, Mr. Yamamoto's compensation is as follows: (i) from January
20, 1997 to June 30, 1997, such compensation was based on an annual rate of
$125,000, plus a performance bonus based on an annual rate of up to $25,000 to
be paid weekly; (ii) from July 1, 1997 to December 31, 1997, such compensation
was based on an annual rate of $125,000 plus a performance bonus at a rate of up
to $50,000 to be paid weekly; and (iii) from January 1, 1998 to June 20, 1999,
his base compensation will be at the annual rate of $200,000. This is in
addition to an additional bonus of 2 1/2% of the Company's pre-tax profits up to
$3,000,000 and then 4% thereafter pursuant to a formula based upon specified
earnings levels, payable annually at the end of each calendar year. Mr. Yamamoto
will also receive options to acquire 20,000 shares of Common Stock per year at
$1.00 per share, such options to vest over the course of his employment on terms
no less favorable than granted to other employees of the Company.
STOCK OPTION PLANS
On December 14, 1995, the Company's Board of Directors approved, and
recommended for adoption by the shareholders, who adopted such plans in March
1996, the 1995 Stock Option Plan and the 1995 Stock Option Plan for Non-Employee
Directors (collectively, the "1995 Plans"). As of the date hereof, 78,000
options were outstanding under the 1995 Plans. In January 1997, the Company's
shareholders voted to freeze the 1995 Plans and adopt two new plans, the Team
Communications Group, Inc. Stock Awards Plan (the "1996 Employee Plan") and the
Team Communications Group, Inc. Directors' Stock Option Plan (the "1996
Directors Plan," and together with the 1996 Employee Plan, (the "1996 Option
Plans").
The following summary is qualified in its entirety by reference to the full
text of the 1996 Option Plans. Unless otherwise indicated, the summary is
applicable to each plan, as well as to the 1995 Plans.
The 1996 Plans. The 1996 Option Plans provide for the granting of awards of
incentive stock options ("ISOs") within the meaning of Section 422 of the
Internal Revenue Code of 1986, as amended (the "Code"), nonqualified stock
options ("NSOs"), and stock appreciation rights ("SARs") (awards of ISOs, NSOs,
and SARs are sometimes hereinafter collectively referred to herein as "Awards").
Purpose. The purpose of the 1996 Option Plans is to provide key employees,
officers, and directors with an additional incentive to promote the success of
the Company's business and to encourage employees to remain in the employ of the
Company.
Administration-Employee Plan. The 1996 Employee Plan is to be administered
by a committee of two or more directors of the Company; provided however, that
if the Company becomes subject to Section 12 of the Exchange Act, such directors
shall be "non-employee directors" as such term is used in Rule 16b-3 and, if
feasible, such directors shall be "Outside Directors;" and provided further that
if there are not at least two such "non-employee directors," any grants or
awards hereunder to an individual subject to Section 16 of the Exchange Act
shall also be approved by the Board of Directors of the Company. "Outside
Director" shall have the meaning set forth in Treasury Regulation
sec. 1.162-27(e)(3) as amended from time to time and as interpreted by the
Internal Revenue Service.
1996 Directors Plan. Directors who are not employees of the Company will,
on the effective date of this offering and each annual anniversary thereof,
receive options to purchase 2,500 shares of Common Stock. The option price per
share of Common Stock purchasable upon exercise of such stock options shall be
100% of the fair market value on the date of grant. Such options shall be
exercisable immediately on the date of grant by payment in full of the purchase
price in cash. The aggregate number of shares of Common Stock that may be
granted pursuant to the 1996 Directors Plan is 20,000.
1996 Employee Stock Plan. The aggregate number of shares of Common Stock
that may be granted under the 1996 Employee Plan is 180,000. The Employee Plan
provides for the authority by the Employee Plan Committee to grant ISOs to any
key employee of the Company or any affiliate of the Company and to determine the
terms and conditions of each grant, including without limitation, the number of
shares subject to each ISO. The ISO exercise price will also be determined by
the Committee and will not be less than the fair market value of the Common
Stock on the date of grant. The exercise price will not be less than 110% of
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<PAGE> 40
such fair market value and the exercise period will not exceed five years if the
participant was the holder of more than 10% of the Company's outstanding voting
securities.
The Manner of Exercise. The exercise price for options granted under the
1996 Option Plans may be paid in cash or shares of Common Stock, including
shares of Common Stock which the participants received upon the exercise of one
or more options provided that, with respect to ISOs, such shares have been held
by the participant for at least the greater of two years from the date the
option was granted or one year after the shares of Common Stock were transferred
to the participant.
The option exercise price may also be paid by the participant's delivery of
an election directing the Company to withhold shares of Common Stock from the
Common Stock otherwise due upon exercise of the option.
CERTAIN TRANSACTIONS
EMPLOYMENT AGREEMENT WITH DREW LEVIN; SHORT TERM BORROWINGS BY MR. LEVIN
See "Management -- Employment Agreements" for a description of the
arrangements between the Company and Mr. Levin relevant to his employment
agreement and the amendment thereof.
The Company had due from officer balances of $214,400, $195,500 and $11,300
at March 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 March 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 $214,400, $195,500 and $11,300, respectively. As of the
date hereof, the amount of such loans is $147,241. Such amount is net of amounts
owed to Mr. Levin for accrued producer fees and bonus effective April 1, 1998.
Mr. Levin was owed producer's fees in the aggregate amount of $175,000 at March
31, 1998, the year ended December 31, 1997 and the year ended December 31, 1996,
respectively. Any future borrowings by any officer of the Company will 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 owed by the Company to Mr. Levin.
In connection with the Company's facilities, Mr. Levin has personally
guaranteed the obligations under the Company's lease. See
"Business -- Properties."
TRANSACTIONS WITH JOSEPH CAYRE
As of the date hereof, the Company was indebted to Joseph Cayre, one of its
original shareholders, in respect of loans made in April and August 1995 in the
amount of $500,000 and $240,000, respectively. Interest on these loans currently
accrues at the rate of 12% 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 are currently secured by Mr.
Levin's shares and all of the assets of the Company.
Mr. Cayre and Mr. Levin have agreed, subject to documentation, that as of
the closing of the Offering, Mr. Cayre will receive payment of $240,000 in
respect of the amounts owed to him, and the remaining debt, subject to adequate
collateralization (which may include cash collateral) shall be extended until
June 30, 1998. Mr. Cayre also has the right to sell up to 30,000 shares of
Common Stock in the Underwriters' over-allotment option, if such option is
exercised by the Representatives. Subject to the foregoing, Mr. Levin and Mr.
Cayre have also agreed, to restructure Mr. Cayre's investment in the Company.
Mr. Cayre agreed that upon the closing of the Offering, Mr. Cayre's interest in
the Company would be reduced to 214,874 shares of the Company's Common Stock by
transferring to Mr. Levin 195,774 shares of the Company's common stock held by
Mr. Cayre. Mr. Cayre will also enter into a consulting agreement with the
Company pursuant to which he will be paid $200,000 through September 30, 1998.
In February 1996, in connection with a prior
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<PAGE> 41
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.
TRANSACTIONS WITH MORRIS WOLFSON AND OTHERS
In January 1996, the Company entered into a transaction with AMAE Ventures,
an affiliate of Mr. Wolfson, pursuant to which AMAE Ventures acquired 4% of the
Company's outstanding Common Stock and lent to the Company the sum of $322,000,
which amount was used by the Company for general overhead purposes and bears
interest at 12% per year. This note is due on the earlier to occur of June 30,
1998 or the closing of the Offering, and will be subject to certain
anti-dilutive provisions. Interest on this line accrues at 10% per year. The
holder of such note has the right to convert the principal amount into 3% of the
Company's Common Stock on a fully diluted basis through the completion of the
Offering, and has indicated that it intends to convert such note. An April 1996
loan by South Ferry #2 L.P., a Delaware limited partnership, in the principal
amount of $500,000 was used for the pre-production of "LoCoMoTioN." This loan
bears interest at 10% per year and is due on the earlier to occur of June 30,
1998 or upon the closing of the Offering. In connection with such loan, South
Ferry #2 L.P. received 29,905 warrants exercisable at $.43 per share upon the
closing of the Offering. 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.
The terms of AMAE Ventures' original agreement with the Company, as
indicated above, enables such entity (or its investors) to receive up to an
additional 199,748 shares of Common Stock upon the completion of the Offering.
The July 1996 proceeds from the sale of the notes in the Total Recall
Financing were used to acquire the rights to produce a television series based
on "Total Recall." These notes, which are secured by the Company's underlying
rights to the "Total Recall" series, bear interest at 10% per year and are due
at the first to occur of June 30, 1997 or the closing of the Offering. The
holders of these notes, ACA Equities, D&M Investments and Gilbert Karsenty, have
agreed to extend the maturity date thereto through June 30, 1998. In addition,
the holders of these notes received an aggregate of 53,403 shares of common
stock, warrants to acquire 21,361 shares of Common Stock at an exercise price of
$.43 upon the closing of the Offering and a 15% net profit participation in the
Company's interest in the series. This loan was repaid through an advance from
Alliance.
TPEG AGREEMENTS
Beginning in early 1995, The Producer's Entertainment Group, Inc. ("TPEG")
and Mr. Levin entered into a series of agreements (the "TPEG Agreements") which
provided for, among other things: (i) for the formation of the Company and the
retention by TPEG of a 19.9% ownership interest in the Company; (ii) the grant
to the Company of distribution rights to certain product produced by DSP
Productions, Inc. ("DSP"), (DSP was sold by Mr. Levin and other shareholders to
TPEG in 1994); (iii) the assignment to the Company of certain of DSP's entire
new production and development distribution portfolio; and (iv) production
financing for the series "Simply Style." Certain disputes arose between Mr.
Levin and Mr. Cayre, on the one hand, and TPEG on the other hand, which resulted
in the execution of a settlement agreement (the "TPEG Settlement Agreement")
with TPEG pursuant to which TPEG was obligated to complete the transfer of
"Simply Style" to the Company. The Company also agreed to repurchase from TPEG,
for $178,000, a sufficient number of Company shares to reduce TPEG's holding in
the Company to 5%, on a fully diluted basis through the completion of the
Offering. On June 28, 1996, the Company's Board of Directors determined that, in
light of the Company's liquidity position at that time and its inability to
complete the TPEG Settlement Agreement pursuant to its terms, it was advisable
to assign the obligation to effectuate the TPEG Settlement Agreement to Mr.
Levin. Consequently, Mr. Levin and a group of investors repurchased the entire
holdings of TPEG in the Company.
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<PAGE> 42
LOAN FROM AFFIDA BANK
In November 1996, the Company obtained a $300,000 loan from Affida Bank,
which loan carries interest at 8% per year, and matures upon the earlier of the
closing of the Offering or June 30, 1998. Affida Bank also received warrants to
acquire 25,634 shares of the Company's Common Stock at an exercise price of
$0.43 per share in connection with this loan, which warrants are exercisable
upon the closing of the Offering. The proceeds of this loan were used for
working capital. Affida Bank, domiciled in Switzerland, is a merchant bank and
has an arms length relationship with the Company.
TRANSACTIONS WITH BRUCE P. VANN
Mr. Vann, who has agreed to become a member of the Board of Directors upon
the consummation of the Offering and upon the completion of certain other
matters, including the appointment of a Chief Financial Officer and the
acquisition of directors and officers insurance, acquired in October of 1996
options to purchase 10,000 shares of Common Stock at a price of $1.00 per share,
plus 4,273 shares of Common Stock which he received in lieu of fees relating to
the acquisition of "Total Recall." Kelly Lytton Mintz & Vann LLP, where Mr. Vann
is a partner, is counsel to the Company, and has received fees from the Company
through December 31, 1996 of approximately $46,000, and has received
approximately $78,000 during the fiscal year ended December 31, 1997. As of
April 15, 1998, the Company owes Kelly Lytton Mintz & Vann LLP approximately
$131,000 in legal fees.
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.
The Company believes that the foregoing transactions were on terms no less
favorable to the Company than those available from unaffiliated parties. It is
the Company's current policy that all transactions with officers, directors, 5%
shareholders and their affiliates will be entered into only if such transactions
are approved by a majority of the disinterested independent directors, and on
terms no less favorable to the Company than could be obtained from unaffiliated
parties and are reasonably expected to benefit the Company.
PRINCIPAL SHAREHOLDERS
The following table sets forth, as of April 15, 1998, as adjusted to
reflect the sale of the shares of Common Stock offered hereby and the conversion
of the Conversion Note, the ownership of the Common Stock by: (i) each person
who is known by the Company to own of record or beneficially more than 5% of the
outstanding Common Stock; (ii) each of the Company's directors; and (iii) all
directors and executive officers of the Company as a group. Except as otherwise
indicated, the shareholders listed in the table have sole voting and investment
power with respect to the shares indicated.
<TABLE>
<CAPTION>
PERCENTAGE BENEFICIALLY OWNED
NAME AND ADDRESS NUMBER ---------------------------------
OF BENEFICIAL OWNER(1) OF SHARES(2) BEFORE OFFERING AFTER OFFERING
---------------------- ------------ --------------- --------------
<S> <C> <C> <C>
Drew S. Levin(3).................................. 685,123 48.4% 23.5%
Joe Cayre(4)...................................... 263,617 19.1% 9.2%
Morris Wolfson(5)................................. 110,777 8.3% 4.0%
Aaron Wolfson(6).................................. 108,642 8.1% 3.8%
Abraham Wolfson(7)................................ 102,233 7.7% 3.6%
Affida Bank(8).................................... 82,305 6.2% 2.9%
Bruce P. Vann(9).................................. 14,273 1.1% *
Paul Yamamoto(10)................................. 20,000 1.5% 1%
All officers and directors as a group (six
persons, including nominee directors)........... 743,146 51% 25%
</TABLE>
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<PAGE> 43
- ---------------
* Less than 1%
(1) Address is c/o Team Communications Group, Inc., 12300 Wilshire Boulevard,
Suite 400, Los Angeles, California 90025.
(2) Gives effect to the anti-dilution provisions of the sale of 2.5% of the
Company's Common Stock from Mr. Drew Levin to Mr. Morris Wolfson, Mr.
Abraham Wolfson, Mr. Aaron Wolfson and Mr. Edward Nagel and the conversion
of the Conversion Note computed on a fully diluted basis.
(3) Includes 249,488 shares which Mr. Cayre has agreed to transfer to Mr. Levin
pursuant to Mr. Levin's arrangements with Mr. Cayre. Mr. Levin has pledged
his shares and his options to Mr. Cayre pursuant to Mr. Cayre's loan
transaction with the Company. Includes options to acquire 85,000 shares of
Common Stock which the Company has agreed to grant to Mr. Levin
concurrently with the execution of his new Employment Agreement. See
"Certain Transactions" and "Employment Agreements."
(4) Includes options, which are exercisable upon the closing of the Offering,
to purchase 48,743 shares of the Company's Common Stock at an exercise
price of $0.43 per share. Mr. Cayre has granted the Underwriters a 45-day
option to purchase up to 30,000 additional shares to cover over-allotments,
if any. If the Underwriters' over-allotment option is exercised in full,
Mr. Cayre will own 7.6% of the outstanding shares of Common Stock of the
Company after the Offering.
(5) Includes 59,966 shares to be issued upon conversion of certain convertible
debt upon the closing of the Offering. Does not include 210,875 shares
owned by Abraham and Aaron Wolfson, Mr. Morris Wolfson's brothers, of which
Morris Wolfson disclaims beneficial ownership. Also does not include 20,506
shares owned by Chana Sasha Foundation, of which Mr. Wolfson is the
President, and of which Mr. Wolfson disclaims beneficial ownership.
(6) Includes 59,966 shares to be issued upon conversion of certain convertible
debt upon the closing of the Offering. Does not include 213,010 shares
owned by Morris or Abraham Wolfson, Aaron Wolfson's brothers, of which
Aaron Wolfson disclaims beneficial ownership.
(7) Includes 59,966 shares to be issued upon conversion of certain convertible
debt upon the closing of the Offering. Does not include 219,419 shares
owned by Morris or Aaron Wolfson, Abraham Wolfson's brothers, of which
Abraham Wolfson disclaims beneficial ownership.
(8) Includes options to purchase 3,268 shares of Common Stock at an exercise
price of $0.43 per share, which are exercisable upon the closing of the
Offering.
(9) Includes options to purchase 10,000 shares of Common Stock at an exercise
price of $1.00 per share, which are exercisable upon the closing of the
Offering.
(10) Includes options to purchase 10,000 shares of Common Stock at an exercise
price of $1.00 per share, which are exercisable upon the closing of the
Offering.
OFFERING BY SELLING SECURITYHOLDERS
An additional 595,278 outstanding shares (the "Securityholder Shares") of
Common Stock issuable upon exercise of warrants held by the Selling
Securityholders have been registered pursuant to the registration statement
under the Securities Act, of which this Prospectus forms a part, for sale by
such holders. The Securityholder Shares may be sold subsequent to the effective
date of the Offering if a current prospectus relating to the Securityholder
Shares is in effect and the Securityholder Shares are qualified for sale. None
of the shares being registered by the Selling Securityholders pursuant to this
registration statement are being offered for sale in connection with the
Offering. The shares of Common Stock underlying any such warrants are subject to
a 12 month lock-up beginning on the date of this Prospectus. The Company will
not receive any proceeds from the market sales of the Securityholder Shares,
although it will receive the proceeds from the exercise of the warrants held by
the Selling Securityholders. The Company is paying all costs and expenses of
registering the Securityholder Shares. Sales of the Securityholder Shares or the
potential of such sales could
42
<PAGE> 44
have an adverse effect on the market price of the Company's Common Stock. See
"Risk Factors -- Shares Eligible for Future Sale."
The Selling Securityholders and the number of Securityholder Shares held by
each are as listed below.
<TABLE>
<CAPTION>
SECURITYHOLDER
SELLING SECURITYHOLDERS SHARES
----------------------- --------------
<S> <C>
Alan Parnes................................................. 5,000
Arab International Trust Co................................. 10,000
Duck Partners, LP........................................... 20,000
Gary & Paula Wayton......................................... 10,000
Michael Rosenbaum........................................... 20,000
RMK Financial LLC........................................... 15,000
Robert Bain................................................. 20,000
Robert Frankel.............................................. 7,470
Roger Triemstra............................................. 10,000
Roland McAbee............................................... 6,400
Swan Alley (Nominees) Limited............................... 20,000
Van Moer Santerre & Cie..................................... 50,000
Mathew & Barbara Geisser.................................... 3,204
Central Scale Co............................................ 9,613
Vijaya Rani Rekhala/Vijay-Kumar Rekhala, M.D................ 6,408
United Congregation Mesorah................................. 6,408
Samuel F. Marinelli......................................... 3,204
Mildred J. Geiss............................................ 3,204
Jon G. Kastnendieck......................................... 6,408
Cooperative Holding Corporation............................. 12,817
Aaron Wolfson............................................... 12,817
Abraham Wolfson............................................. 6,408
Arielle Wolfson............................................. 6,408
Levpol...................................................... 6,408
Wellington Corporation, N.V................................. 4,272
Crescent Capital Company, LLC............................... 8,544
Arthur Steinberg IRA Rollover............................... 2,136
Robert Steinberg IRA Rollover............................... 2,136
Robert Sam Steinberg -- A Partnership....................... 2,136
Heiko Thieme................................................ 4,272
Third World Trust Company LTD............................... 4,272
Alpha Ventures.............................................. 8,544
Tuch Family Trust........................................... 2,136
Alfred Ross................................................. 4,272
Fred Chanowski.............................................. 2,136
Allen Goodman............................................... 4,272
Felix D. Paige.............................................. 8,544
Andrew G. Rogal............................................. 4,272
Mark J. Levine.............................................. 2,136
Joseph Sullivan............................................. 4,272
Robert Gopen................................................ 2,136
Colony Financial Services................................... 2,136
John Carberry............................................... 2,136
</TABLE>
43
<PAGE> 45
<TABLE>
<CAPTION>
SECURITYHOLDER
SELLING SECURITYHOLDERS SHARES
----------------------- --------------
<S> <C>
Daniel & Thalia Federbush................................... 4,272
Michael S. Berlin, M.D...................................... 4,272
Phillip Tewel............................................... 29,191
Joe Cayre................................................... 48,743
South Ferry #2.............................................. 29,906
ACA Equities................................................ 4,700
D&M Investment Corp......................................... 8,545
Gilbert Karsenty............................................ 1,709
Chana Sasha................................................. 6,408
Affida Bank................................................. 60,950
Bill Nesmith................................................ 10,681
Mike Sposato................................................ 10,681
Bob Dorfman................................................. 2,349
Bristol Capital............................................. 20,934
-------
Total............................................. 595,278
=======
</TABLE>
There are no other material relationships between any of the Selling
Securityholders and the Company, nor have any such material relationships
existed within the past three years. The Company has been informed by the
Representatives that there are no agreements between the Representatives and any
Selling Securityholder regarding the distribution of any Securityholder Shares.
The sale of the Securityholder Shares by the Selling Securityholders may be
effected from time to time in transactions (which may include block transactions
by or for the account of the Selling Securityholders) in the over-the-counter
market or in negotiated transactions, a combination of such methods of sale or
otherwise. Sales may be made at fixed prices which may be changed, at market
prices prevailing at the time of sale, or at negotiated prices.
Selling Securityholders may effect such transactions by selling their
securities directly to purchasers, through broker-dealers acting as agents for
the Selling Securityholders or to broker-dealers who may purchase shares as
principals and thereafter sell the securities from time to time in the Nasdaq
SmallCap Market in negotiated transactions or otherwise. Such broker-dealers, if
any, may receive compensation in the form of discounts, concessions or
commissions from the Selling Securityholders and/or the purchasers from whom
such broker-dealer may act as agents or to whom they may sell as principals or
otherwise (which compensation as to a particular broker-dealer may exceed
customary commissions).
At the time a particular offer of Securityholder Shares is made by or on
behalf of a Selling Securityholder, to the extent required, a prospectus will be
distributed which will set forth the number of Securityholder Shares being
offered and the terms of the offering, including the name or names of any
underwriters, dealers or agents, if any, the purchase price paid by any
underwriter for any Securityholder Shares purchased from the Selling
Securityholder and any discounts, commissions or concessions allowed or
reallowed or paid to dealers, and the proposed selling price to the public.
If any of the following events occurs, this Prospectus will be amended to
include additional disclosure before offers and sales of the Securityholder
Shares are made: (i) to the extent such securities are sold at a fixed price or
by option at a price other than the prevailing market price, such price would be
set forth in this Prospectus; (ii) if the securities are sold in block
transactions and the purchaser wishes to resell, such arrangements would be
described in this Prospectus; and (iii) if the compensation paid to
broker-dealers is other than usual and customary discounts, concessions or
commissions, disclosure of the terms of the transaction would be included in
this Prospectus. This Prospectus would also disclose if there are other changes
to the stated plan of distribution, including arrangements that either
individually or as a group would constitute an orchestrated distribution of the
Securityholder Shares.
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<PAGE> 46
Under applicable rules and regulations under the Exchange Act, any person
engaged in the distribution of Securityholder Shares may not simultaneously
engage in market making activities with respect to any securities of the Company
for a period of at least two (and up to nine) business days prior to the
commencement of such distribution. Accordingly, in the event that the
Representatives are engaged in a distribution of the Securityholder Shares, they
will not be able to make a market in the Company's securities during the
applicable restrictive period. However, the Representatives have not agreed to
nor are they obligated to act as broker-dealer in the sale of the Securityholder
Shares and the Selling Securityholders may be required, and in the event that
the Representative is a market maker, will likely be required, to sell such
securities through another broker-dealer. In addition, each Selling
Securityholder desiring to sell Securityholder Shares will be subject to the
applicable provisions of the Exchange Act and the rules and regulations
thereunder, including without limitation Rules 10b-6 and 10b-7, which provisions
may limit the timing of the purchases and sales of shares of the Company's
securities by such Selling Securityholders.
The Selling Securityholders and broker-dealers, if any, acting in
connection with such sales might be deemed to be "underwriters" within the
meaning of Section 2(11) of the Securities Act and any commission received by
them and any profit on the resale of the securities may be deemed underwriting
discounts and commissions under the Securities Act.
DESCRIPTION OF SECURITIES
COMMON STOCK
The Company is authorized to issue up to 18,000,000 shares of Common Stock,
no par value. Holders of Common Stock are entitled to one vote for each share
held of record on each matter submitted to a vote of shareholders. There is
cumulative voting for election of directors. Subject to the prior rights of any
series of preferred stock which may from time to time be outstanding, if any,
holders of Common Stock are entitled to receive ratably, dividends when, as and
if declared by the Board of Directors out of funds legally available therefor
and, upon the liquidation, dissolution, or winding up of the Company, are
entitled to share ratably in all assets remaining after payment of liabilities
and payment of accrued dividends and liquidation preferences on the preferred
stock, if any. Holders of Common Stock have no preemptive rights and have no
rights to convert their Common Stock into any other securities. The outstanding
shares of Common Stock are validly authorized and issued, fully paid, and
nonassessable.
PREFERRED STOCK
The Company is authorized to issue up to 2,000,000 shares of Preferred
Stock. The Preferred Stock may be issued in one or more series, the terms of
which may be determined at the time of issuance by the Board of Directors,
without further action by shareholders and may include voting rights (including
the right to vote as a series on particular matters), preferences as to
dividends and liquidation, conversion rights, redemption rights and sinking fund
provisions. The Company has no present plans for the issuance of shares of
Preferred Stock and any issuance of such Preferred Stock for a period of
thirteen months from the date of this Prospectus will require the consent of the
Representatives prior to such issuance. The issuance of any Preferred Stock
could adversely affect the rights of the holders of Common Stock and therefore,
reduce the value of the Common Stock. The ability of the Board of Directors to
issue Preferred Stock could also discourage, delay or prevent a takeover of the
Company. See "Risk Factors -- Preferred Stock; Possible Anti-Takeover Effects of
Certain Charter Provisions."
WARRANTS
In connection with the issuance of its prior secured notes, the Company
issued an aggregate of 447,354 warrants, each warrant entitling the holder
thereof to acquire one share of Common Stock; 224,293 warrants are exercisable
at an exercise price equal to $0.43 per share, 29,191 warrants are exercisable
at an exercise price equal to $0.97 per share and 193,870 warrants are
exercisable at $0.97 per share, subject to adjustment as hereinafter provided.
The warrants may be exercised, at the option of the holder thereof, at any
45
<PAGE> 47
time from the date of this Prospectus and terminating on the earlier to occur of
the third anniversary of the effective date of the Offering or June 30, 2000,
whichever is earlier (the "Termination Date"). Unless previously exercised, the
right to exercise the warrants will terminate on the Termination Date.
The Company has also issued 147,924 warrants to other consultants and
investors in connection with prior financings of the Company. Of these warrants,
21,362 are exercisable at $1.07 per share and 126,562 are exercisable at $0.43
per share, all of which are exercisable upon the closing of the Offering.
The warrantholders have the opportunity to profit from a rise in the market
price of the Common Stock without assuming the risk of ownership of the shares
of Common Stock issuable upon the exercise of the warrants, with a resulting
dilution in the interests of the Company's shareholders by reason of exercise of
warrants at a time when the exercise price is less than the market price for the
Common Stock. Further, the terms on which the Company could obtain additional
capital during the life of the warrants may be adversely affected. The warrant
holders may be expected to exercise their warrants at a time when the Company
would, in all likelihood, be able to obtain any needed capital by an offering of
Common Stock on terms more favorable than those provided for by the warrants.
The holders of the warrants will not have any of the rights or privileges
of shareholders of the Company, including voting rights and rights to receive
dividends, prior to exercise of the warrants. The Company will reserve out of
its authorized but unissued shares a sufficient number of shares of Common Stock
for issuance on exercise of the warrants. The Common Stock issuable on exercise
of the warrants will be, when issued, duly authorized and validly issued, fully
paid, and nonassessable.
For a holder to exercise the warrants, there must be a current registration
statement in effect with the Commission and registration or qualification with,
or approval from, various state securities agencies with respect to the shares
or other securities underlying the warrants, or an opinion of counsel for the
Company that there is an exemption from registration or qualification.
Antidilution. In the event that the Company shall at any time: (i) declare
a dividend, or make a distribution, on the outstanding Common Stock payable in
shares of its capital stock; (ii) subdivide the outstanding Common Stock into a
greater number of shares of Common Stock; (iii) combine the outstanding Common
Stock into a smaller number of shares; or (iv) issue any shares of its capital
stock by reclassification of the Common Stock (including any such
reclassification in connection with a consolidation or merger in which the
Company is the continuing corporation), then, in each case, the exercise price
per warrant share in effect at the time of the record date for the determination
of shareholders entitled to receive such dividend or 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.
46
<PAGE> 48
Depending upon the terms of such cash merger or transaction, the aggregate
amount of cash so received could be more or less than the exercise price of the
warrant.
Exercise Procedure. Each holder of a warrant may exercise such warrant by
surrendering the certificate evidencing such warrant, with the subscription form
on the reverse side of such certificate properly completed and executed,
together with payment of the exercise price, to the Company at its executive
offices. Such offices will initially be located at 12300 Wilshire Blvd., Los
Angeles, California 90025. The exercise price will be payable by cash or by
certified or official bank check payable in 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.
REPRESENTATIVES' WARRANT
At the closing of the Offering, the Company will issue to the
Representatives the Representatives' Warrant to purchase for investment a
maximum of 150,000 shares of Common Stock. The Representatives' Warrant will be
exercisable for a four-year period commencing one year from the date of this
Prospectus. The exercise price of the Representative's Warrant will be $ per
share (that being 120% of the initial public offering price per share). The
Representatives' Warrant will not be saleable, transferable, assignable or
hypothecatable prior to its exercise date except to officers of the
Representatives and members of the selling group and officers and partners
thereof. The Representatives' Warrant will contain anti-dilution provisions. The
Representatives' Warrant does not entitle the Representatives to any rights as
shareholders of the Company until such warrant is exercised and shares are
purchased thereunder. The Representatives' Warrant and the shares of Common
Stock thereunder may not be offered for sale except in compliance with the
applicable provisions of the Securities Act. The Company has agreed that, if it
shall cause to be filed with the Securities and Exchange Commission either an
amendment to the Registration Statement of which this Prospectus is part or a
separate registration statement (other than a Form S-8, S-4 or comparable
registration statement), the Representatives shall have the right during the
seven-year period commencing on the date of this Prospectus to include in such
amendment or Registration Statement the shares of Common Stock issuable upon
exercise of the Representatives' Warrant at no expense to the Representatives.
Additionally, the Company has agreed that for a period of 5 years from the
closing of the Offering, upon written demand by a holder or holders of a
majority of the Representatives' Warrant, the Company will, on one occasion,
register the shares of Common Stock issuable upon exercise of the
Representatives' Warrant at the expense of the Company. In addition, the Company
has agreed, that during the same 5 year period, upon the written demand of any
holder of the Representatives' Warrant, to promptly register the shares of
Common Stock underlying such holder's warrant at the expense of such holder.
BRIDGE NOTES
To finance its working capital needs, the Company has issued a series of
bridge notes. In February 1997, the Company commenced the placement of Units
consisting off $50,000 principal amount of 10% Convertible Notes (the "February
1997 Notes") and 10,000 common stock purchase warrants. The Company sold an
aggregate of $969,350 principal amount of the February 1997 Notes. The principal
amount of, and interest on, the February 1997 Notes shall be due and payable on
the earlier to occur of (i) five business days after the completion of either an
initial public offering of the Company's Common Stock (the "Initial Public
Offering"), or (ii) the public or private placement of debt or equity securities
with gross proceeds to the Company in excess of $5,000,000 (together with an
Initial Public Offering, a "Financing Event") or the second anniversary of the
Closing Date (as defined therein). The February 1997 Notes are convertible into
shares of Common Stock (the "Conversion Shares") of the Company during the
period commencing 60 days after the Closing Date and continuing through the
effective date of the initial public offering, at which time any February 1997
Notes not so converted will be repaid. The conversion price (the "Conversion
Price") is $5.00 per share, subject to an adjustment in certain events.
Substantially all of the holders of these notes have waived their right to so
convert.
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<PAGE> 49
In June 1996 the Company commenced the placement of Units consisting of
$50,000 principal amount of 10% Secured Convertible Notes (the "June 1996
Notes") and 10,000 Common Stock purchase warrants. The Company sold an aggregate
of $975,000 principal amount of the June 1996 Notes. The principal amount of,
and interest on, the June 1996 Notes shall be due and payable, if the holders
thereof do not otherwise notify the Company that they wish to redeem their
conversion feature, on the completion of the Offering. The June 1996 Notes are
secured by substantially all of the assets of the Company. To the extent not
otherwise repaid, the June 1996 Notes are convertible into shares of Common
Stock of the Company, beginning 12 months after the completion of an initial
public offering, at a conversion price of $5.00 per share, subject to an
adjustment in certain events. Substantially all the holders of these notes will
waive, prior to the effective date of the Offering, their right to so convert.
In February 1996, the Company commenced the placement of Units consisting
of $50,000 principal amount of 12% Secured Notes (the "February 1996 Notes") and
10,000 Common Stock purchase warrants. The Company sold an aggregate of $900,000
principal amount of the February 1996 Notes. The principal amount of, and
interest on, the February 1996 Notes shall be due and payable on the second
anniversary of the initial closing date thereof, and were secured by
substantially all of the assets of the Company. These notes were not
convertible.
In December 1997, the Company 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 matures upon the
earlier of the closing of the Offering or June 30, 1998. As the loan was not
repaid by February 15, 1998, the Company is required to pay VMC an additional
fee of $15,000. Included in the principal to be repaid is a $15,000 loan
origination fee. As of the date hereof, $150,000 of principal has been repaid on
this Note.
Between March 1998 and May 1998 the Company arranged for short term loans
(the "Interim Financing") of an aggregate of $1,642,000. A majority of such
loans were made by present security holders of the Company and their affiliates.
These loans mature as follows: (i) $642,000 on June 30, 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 does not
accrue interest. The $642,000 loan has a fixed interest amount of $78,000 and
includes a $42,000 loan origination fee. The $115,000 loan includes a $15,000
loan origination fee and begins to accrue interest at 18% per year if the loan
goes into default. The Company currently intends to repay the $235,000 and
$642,000 loans at the closing of the Offering. The Company currently does not
intend to repay any other amounts owing in respect of the Interim Financing at
the conclusion of the Offering. Rather, the Company intends to negotiate with
the Interim Financing noteholders terms pursuant to which the Interim Financing
will be replaced or exchanged for permanent subordinated debt. No such
arrangements have been negotiated. If such negotiations are unsuccessful, the
Company will pay all such indebtedness at their respective maturities.
TRANSFER AGENT
The transfer agent for the Company's 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
Prior to the Offering, there has been no public market for the Common Stock
of the Company. Sales of substantial amounts of Common Stock of the Company in
the public market or the perception that such sales could occur could materially
adversely affect the prevailing market price and the ability of the Company to
raise equity capital in the future.
Upon completion of the Offering, the Company will have outstanding
approximately 2,831,092 shares of Common Stock. Of these shares, 1,331,092 are
Restricted Shares. The 1,500,000 shares of Common stock
48
<PAGE> 50
that are sold by the Company to the public in the Offering will be freely
tradeable without restriction under the Securities Act, unless purchased by
"affiliates" of the Company as that term is defined in Rule 144 under the
Securities Act.
The remaining shares of Common Stock outstanding upon completion of the
Offering, determined as if all outstanding warrants have been exercised, will be
held by approximately 60 holders and will be "restricted securities" as that
term is defined in Rule 144 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 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 this Prospectus, a person
(or persons whose shares are aggregated) who has beneficially owned Restricted
Stock for at least one year (including the holding period of any prior owner
other than an affiliate of the Company) would be entitled to sell within any
three month period a number of shares that does not exceed the greater of (i)
one percent of the number of shares of Common Stock then outstanding or (ii) the
average weekly trading volume of the Common Stock during the four calendar weeks
preceding the filing of notice of such sale. Sales under Rule 144 are also
subject to certain manner of sale provisions and notice requirements and to the
availability of current public information about the Company. Under Rule 144(k),
a person who is not deemed to have been an affiliate of the Company at any time
during the three months preceding a sale, and who has beneficially owned the
shares proposed to be sold for at least two years (including the holding period
of any prior owner except an affiliate of the Company) is entitled to sell such
shares without complying with the manner of sale, public information, volume
limitation or notice provisions of Rule 144. Unless otherwise restricted, such
shares of Restricted Stock may therefore be sold immediately upon the completion
of the Offering.
Any employee, officer or director of or consultant to the Company 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 the Company 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 is required to wait until 90 days after the
date of this Prospectus before selling such shares.
The holders of substantially all of the Company's capital stock have
entered, or are anticipated to enter, into contractual "lock-up" agreements
providing that they will not offer, sell, contract to sell or grant any option
to purchase or otherwise dispose of the shares of stock owned by them or that
could be purchased by them through the exercise of options to purchase stock of
the Company for 13 months as to the Restricted Shares and 12 months as to the
Warrant Shares after the date of this Prospectus without the prior written
consent of the Representatives.
Taking into account the lock-up agreements and the restrictions of Rule 144
and Rule 701 described above, no Restricted Shares or Warrant Shares will be
eligible for sale immediately after the Offering and approximately all
Restricted Shares will be eligible for sale beginning 13 months after the date
of this Prospectus, subject, in some cases, to the volume restrictions of Rule
144.
The Company has agreed that for a period of 13 months from the date of this
Prospectus, it will not sell any securities, with the exception of the shares of
Common Stock issued upon exercise of currently outstanding options, without the
Representatives' prior written consent, which consent shall not be unreasonably
withheld.
The Company intends to file a registration statement on Form S-8 under the
Securities Act covering shares of Common Stock reserved for issuance under the
1995 Plans and the 1996 Option Plans. Based on the number of shares reserved for
issuance under such plans, such registration statement would cover approximately
337,500 shares. Such registration statement will automatically become effective
upon filing. Accordingly, shares registered under such registration statement
will, subject to Rule 144 volume limitations applicable to affiliates of the
Company, be available for sale in the open market, subject to vesting
restrictions and the lock-up agreements described above.
49
<PAGE> 51
UNDERWRITING
The Underwriters named below (the "Underwriters"), for whom National
Securities Corporation ("NSC") and Coleman & Company Securities, Inc., are
acting as representatives (in such capacity, the "Representatives"), have
severally agreed, subject to the terms and conditions of the Underwriting
Agreement (the "Underwriting Agreement"), to purchase from the Company and the
Company has agreed to sell to the Underwriters on a firm commitment basis, the
respective number of shares of Common Stock set forth opposite their names:
<TABLE>
<CAPTION>
UNDERWRITERS NUMBER OF SHARES
------------ ----------------
<S> <C>
National Securities Corporation..............
Coleman & Company Securities, Inc............
---------
Total.............................. 1,500,000
=========
</TABLE>
The Underwriters are committed to purchase all the shares of Common Stock
offered hereby, if any of such shares of Common Stock are purchased. The
Underwriting Agreement between the Company and the Representatives provides that
the obligations of the several Underwriters are subject to conditions precedent
specified therein.
The Company has been advised by the Representatives that the Underwriters
propose initially to offer the Common Stock to the public at the initial public
offering price of between $5.50 and $7.00 per share, as set forth on the cover
page of this Prospectus and to certain dealers at such price less concessions
not in excess of $ per share of Common Stock. Such dealers may reallow a
concession not in excess of $ per share of Common Stock to certain other
dealers who are members of the National Association of Securities Dealers, Inc.
After the commencement of the Offering, the public offering price, concession
and reallowance may be changed.
The Representatives have informed the Company that they do not intend to
confirm sales to any account over which they exercise discretionary authority.
The Company has agreed to enter into a one year consulting agreement with
NSC, pursuant to which NSC will act as financial consultant to the Company,
commencing upon the closing date of this Offering. Under the terms of this
agreement, NSC, to the extent reasonably required in the conduct of the business
of the Company and at the prior written request of the President of the Company,
has agreed to evaluate the Company's managerial and financial requirements,
assist in the preparation of budgets and business plans, advise with regard to
sales planning and sales activities, and assist in financial arrangements. NSC
will make available qualified personnel for this purpose. The non-refundable
consulting fee of $6,000 per month for 12 months will be payable, in full, on
the closing date of the Offering.
For a period of 5 years from the closing of the Offering, NSC shall have
the right to select a person to act as an observer to attend all meetings of the
Company's Board of Directors. The Company has agreed to reimburse such observer
for all out-of-pocket expenses incurred in connection with such observer's
attendance at the meetings of the Company's Board of Directors.
The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act, or to contribute to
payments that Underwriters may be required to make. The Company has also agreed
to pay to the Representatives a non-accountable expense allowance equal to 2% of
the gross proceeds derived from the sale of the Common Stock being underwritten
hereby, of which $10,000 has been paid to date.
The Company has granted to the Underwriters an over-allotment option (the
"Underwriters' over-allotment option"), exercisable during the 45-day period
from the date of this Prospectus, to purchase from the Company up to an
additional 225,000 shares of Common Stock (that being 15% of the total number of
shares of Common Stock being offered to the public hereby) at the initial public
offering price per share, less underwriting discounts. Such option may be
exercised only for the purpose of covering over-allotments, if any, incurred in
the sale of the Common Stock offered hereby. The Underwriters have agreed, if
such over-
50
<PAGE> 52
allotment option is exercised, to purchase, on a pro rata basis, the first
30,000 shares subject to the Underwriters' over-allotment option from Joe Cayre,
an existing shareholder of the Company. To the extent the Underwriters'
over-allotment option is exercised in whole or in part, each Underwriter will
have a firm commitment, subject to certain conditions, to purchase the number of
the additional shares of Common Stock proportionate to its initial commitment.
In connection with the Offering, the Company has agreed to sell to the
Representatives, for $.0001 per warrant, warrants to purchase from the Company
up to 150,000 shares of Common Stock (the "Representatives' Warrant"). The
Representatives' Warrant is initially exercisable at a price of $ per share
(that being 120% of the initial public offering price per share of Common Stock)
for a period of four years, commencing one year after the date of this
Prospectus and the Representatives' Warrant is restricted from being sold,
transferred, assigned or hypothecated for a period of 12 months from the date of
this Prospectus, except to officers of the Representatives. The Representatives'
Warrant provides for adjustment in the number of securities issuable upon the
exercise thereof as a result of certain subdivisions and combinations of the
Common Stock. The Representatives' Warrant grants to the holders thereof certain
rights of registration for the securities issuable upon exercise thereof.
For the period during which the Representatives' Warrant is exercisable,
the holder(s) will have the opportunity to profit from a rise in the market
value of the Company's Common Stock, with a resulting dilution in the interests
of the other shareholders of the Company. The holder(s) of the Representatives'
Warrant can be expected to exercise the warrants at a time when the Company
would, in all likelihood, be able to obtain any needed capital from an offering
of its unissued Common Stock on terms more favorable to the Company than those
provided for in the Representatives' Warrant. Such facts may materially
adversely affect the terms on which the Company can obtain additional financing.
The Company's directors, executive officers and shareholders have agreed
not to offer, sell, or otherwise dispose of any shares of Common Stock for a
period of 13 months following the date of this Prospectus without the prior
written consent of the Representatives. An appropriate legend shall be placed on
the certificates of such persons representing such securities. The holders of
the Warrant Shares have also agreed not to offer, sell, or otherwise dispose of
any shares of the Common Stock underlying the Warrant Shares for a period of 12
months following the date of this Prospectus.
In connection with the Offering, certain Underwriters and selling group
members and their respective affiliates may engage in transactions that
stabilize, maintain or otherwise affect the market price of the Common Stock.
Such transactions may include stabilization transactions effected in accordance
with Rule 104 of Regulation M as promulgated under the Securities Act, pursuant
to which such persons may bid for or purchase the Common Stock for the purpose
of stabilizing its market price. The Underwriters also may create a short
position for the account of the Underwriters by selling more Common Stock in
connection with the Offering than they are committed to purchase from the
Company, and in such case may purchase Common Stock in the open market following
completion of the Offering to cover all or a portion of such short position. The
Underwriters may also cover all or a portion of such short position, up to
225,000 Shares of Common Stock, by exercising the Underwriters' over-allotment
option referred to above. In addition, the Representatives may impose "penalty
bids" under contractual arrangements with the Underwriters whereby it may
reclaim from an Underwriter (or dealer participating in the Offering) for the
account of other Underwriters, the selling concession with respect to the Common
Stock that are distributed in the Offering but subsequently purchased for the
account of the Underwriters in the open market. Any of the transactions
described in this paragraph may result in the maintenance of the prices of the
Common Stock at a level above that which might otherwise prevail in the open
market. None of the transactions described in this paragraph is required, and,
if any such transactions are undertaken, they may be discontinued at any time.
Prior to the Offering, there has been no public market for the Common
Stock. Consequently, the initial public offering price of the Common Stock has
been determined by negotiation between the Company and the Representatives and
does not necessarily bear any relationship to the Company's asset value, net
worth or other established criteria of value. The factors considered in such
negotiations, in addition to prevailing market conditions, included the history
of and prospects for the industry in which the Company competes, an
51
<PAGE> 53
assessment of the Company's management, the prospects of the Company, its
capital structure, the market for initial public offerings and certain other
factors as were deemed relevant.
The foregoing is a summary of the principal terms of the agreement
described above and does not purport to be complete. Reference is made to a copy
of each such agreement which are filed as exhibits to the Registration Statement
of which this Prospectus is a part. For a more complete description thereof, see
"Additional Information."
LEGAL MATTERS
Certain legal matters in connection with the validity of the shares of
Common Stock being offered hereby will be passed upon for the Company by Kelly
Lytton Mintz & Vann LLP, 1900 Avenue of the Stars, Suite 1450, Los Angeles,
California 90067. Bruce P. Vann, a member of Kelly Lytton Mintz & Vann LLP, is a
nominee director of the Company and the beneficial owner of 4,273 shares of the
Company's Common Stock and options to acquire an additional 10,000 shares of the
Company's Common Stock. Certain legal matters will be passed upon for the
Underwriters by Harter, Secrest & Emery LLP, 700 Midtown Tower, Rochester, New
York 14604-2070 and Freshman, Marantz, Orlanski, Cooper & Klein, a law
corporation, 9100 Wilshire Boulevard, Beverly Hills, California 90212 with
respect to certain state securities law matters.
EXPERTS
The consolidated financial statements as of December 31, 1996 and December
31, 1997 included in the 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.
On July 1, 1997, Price Waterhouse LLP (the "Prior Accountants") resigned as
the Company's independent accountants and withdrew their report on the Company's
Financial Statements for the year ended December 31, 1996. On or about August 7,
1997, the Company agreed to accept the resignation of the Prior Accountants. In
connection with such decision, the Company appointed Stonefield Josephson, Inc.
(the "the Stonefield Firm" or "New Accountants") to audit the year ended
December 31, 1996, and review and audit subsequent periods on a going forward
basis. The decision to accept the resignation of the Prior Accountants was
approved by the Board of Directors of the Company. The Company further decided
to restate its financial results for the year ended December 31, 1996, as more
fully described below. There were no disagreements with Prior Accountants on any
matters of accounting principle or practices, financial statement disclosure or
auditing scope or procedure which if not resolved to the Prior Accountant's
satisfaction would have caused it to make reference to the subject matter of the
disagreement in connection with its report.
The Company's decision to restate its results relates to the existence of a
provision of a clause in a security agreement relating to certain licenses to
"Amazing Tales" and "Total Recall" which was provided to the Prior Accountants
subsequent to the date of their audit opinion. The clause related to the
Company's agreements with Miramax, and had the effect of allowing Miramax to
cancel its agreement to pay the minimum guarantee with respect to "Amazing
Tails" if "Total Recall" was not produced. As this cross collateralization was
contained in ancillary documentation, the Company did not realize that the
import of such construction, notwithstanding the fact that all of the conditions
precedent to the financing and production of "Total Recall" under the Alliance,
Polygram and Miramax financing agreements had been fulfilled, could create a
contingency with respect to the revenue recognition under the Miramax-Amazing
Tails agreement. The Company had previously included this income in its
financial statements for the year ended December 31, 1996, and the restatement
had the effect of reducing revenues by $367,000, cost of revenues by $125,800
and net income by $241,200 or $.13 per share. See Note 2 to the Consolidated
Financial Statements. In light of the Company's intention to restate its results
for the year ended December 31, 1996, the Company determined to appoint the New
Accountants to complete such audit as well as to audit subsequent periods. The
contingency will have no impact on future earnings or operations.
52
<PAGE> 54
The Prior Accountants' opinion for the period ended December 31, 1995
contained an explanatory paragraph relating to the ability of the Company to
function as a going concern.
The engagement of the Stonefield Firm is effective as of August 7, 1997. No
discussion was made with the Stonefield Firm as to application of any specific
accounting principle. The Company has authorized the Prior Accountants to
respond fully to any inquiries of the New Accountants. A copy of the letter from
the Prior Accountants relating to this disclosure is attached as Exhibit 23.2 to
the Registration Statement of which this Prospectus is a part.
ADDITIONAL INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission"), Washington D.C. 20549 a Registration Statement on Form SB-2
(including all amendments and exhibits thereto, the "Registration Statement")
under the Securities Act with respect to the Common Stock offered hereby. This
Prospectus, which constitutes part of the Registration Statement, does not
contain all of the information set forth in the Registration Statement and the
exhibits and schedules thereto, certain parts of which are omitted in accordance
with the rules and regulations of the Commission. For further information with
respect to the Company and the Common Stock, reference is hereby made to the
Registration Statement, including exhibits, schedules and reports filed as a
part thereof. Statements contained in this Prospectus as to the contents of any
contract or other document filed as an exhibit to the Registration Statement
referred to herein set forth the material terms of such contract or other
document but are not necessarily complete, and in each instance reference is
made to the copy of such document filed as an exhibit to the Registration
Statement, each such statement being qualified in all respects by such
reference. The Registration Statement, including the exhibits and schedules
thereto, may be inspected without charge at the principal office of the public
reference facilities maintained by the Commission at Room 1024, 450 Fifth
Street, N.W., Washington D.C. 20549, and at the Commission's Regional Offices
located at The Northwestern Atrium Center, 500 West Madison Street, Suite 1400,
Chicago, Illinois 60661 and 7 World Trade Center, 13th Floor, New York, New York
10048. Copies of such material can also be obtained at prescribed rates by mail
from the Public Reference Section of the Commission at 450 Fifth Street, N.W.,
Washington, D.C. 20549. The Registration Statement, including the exhibits and
schedules thereto, can also be accessed through the EDGAR terminals in the
Commission's Public Reference Rooms in Washington, Chicago and New York or
through the World Wide Web at http://www.sec.gov.
53
<PAGE> 55
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Stonefield Josephson, Inc., Independent
Auditors.................................................. F-2
Consolidated Balance Sheet at December 31, 1996, December
31, 1997 and March 31, 1998............................... F-3
Consolidated Statement of Operations for the years ended
December 31, 1996, and December 31, 1997 and, for the
three months ended March 31, 1997 and for the three months
ended March 31, 1998...................................... F-4
Consolidated Statement of Cash Flows for the years ended
December 31, 1996, and December 31, 1997 and, for the
three months ended March 31, 1997 and for the three months
ended March 31, 1998...................................... F-5
Consolidated Statement of Cash Flows Supplemental Schedule
of Non Cash Activities for the years ended December 31,
1996, and December 31, 1997 and, for the three months
ended March 31, 1997 and for the three months ended March
31, 1998.................................................. F-6
Consolidated Statement of Shareholders' Equity (Deficit) for
the years ended December 31, 1996 and December 31, 1997,
and for the three months ended March 31, 1998............. F-7
Notes to Consolidated Financial Statements.................. F-8
</TABLE>
F-1
<PAGE> 56
REPORT OF INDEPENDENT ACCOUNTANTS
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, 1997 and 1996, and the related
consolidated statements of operations, shareholders' equity and cash flows for
the two 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 require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statements presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated results of its
operations and it cash flows for the two years ended December 31, 1997 and 1996,
respectively, in conformity with generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 11, the Company
has had significant losses in the past, has been dependent on outside equity
investors to finance its operations, and certain notes payable are past due.
These factors raise substantial doubt about the Company's ability to continue as
a going concern. Management's plans with respect to these matters are described
in Note 11 to the financial statements. The financial statements do not include
any adjustments that might result from the outcome of these uncertainties.
STONEFIELD JOSEPHSON, INC.
CERTIFIED PUBLIC ACCOUNTANTS
Santa Monica, California
April 12, 1998
F-2
<PAGE> 57
TEAM COMMUNICATIONS GROUP, INC.
CONSOLIDATED BALANCE SHEET
ASSETS
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31, DECEMBER 31,
1998 1997 1996
------------- ------------ -------------
(UNAUDITED)
<S> <C> <C> <C>
Cash and cash equivalents.............................. $ 89,400 $ 174,400 $ 214,300
Trade receivables, less allowance for doubtful accounts
of $63,800, 63,800 and 63,800, respectively (Note
2)................................................... 7,690,700 6,740,800 3,342,100
Television program costs, less accumulated amortization
of $3,255,900, 2,846,600 and $1,599,700, respectively
(Note 3)............................................. 4,872,300 4,287,000 3,555,900
Due from officer (Note 5).............................. 214,400 195,500 11,300
Fixed assets, net (Note 2)............................. 25,400 29,000 42,100
Organizational costs and other assets (Note 2)......... 728,300 578,000 144,900
------------- ----------- -----------
Total assets................................. $ 13,620,500 $12,004,700 $ 7,310,600
============= =========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Accounts payable, accrued expenses and other
liabilities (Note 2)................................. $ 3,654,400 $ 3,270,500 $ 1,220,200
Deferred revenue (Note 2).............................. 624,000 575,000 4,500
Accrued participations (Note 2)........................ 968,300 984,800 1,428,400
Notes payable (Note 7)................................. 5,487,700 4,889,600 3,762,900
Accrued interest (Note 5 and 7)........................ 1,061,700 898,300 242,000
Shareholder loan and note payable (Note 5)............. 740,000 740,000 740,000
------------- ----------- -----------
Total liabilities............................ 12,536,100 11,358,200 7,398,000
------------- ----------- -----------
Commitments and contingencies (Notes 6 and 10)
Shareholders' deficit:
Preferred stock, no par value; 2,000,000 shares
authorized; no shares issued and outstanding
(Note 10)....................................... 0 0 0
Common stock, no par value; 18,000,000 shares
authorized; 1,131,344, 1,131,344 and 1,131,344
shares issued and outstanding (Note 2).......... 1,000 1,000 1,000
Paid in capital................................... 1,230,100 1,230,100 943,300
Accumulated deficit............................... (146,700) (584,600) (1,031,700)
------------- ----------- -----------
Total shareholders' equity (deficit)......... 1,084,400 646,500 (87,400)
------------- ----------- -----------
Total liabilities and shareholders' equity
(deficit).................................. $ 13,620,500 $12,004,700 $ 7,310,600
============= =========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
<PAGE> 58
TEAM COMMUNICATIONS GROUP, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE FOR THE FOR THE FOR THE
THREE MONTHS ENDED THREE MONTHS ENDED YEAR ENDED YEAR ENDED
MARCH 31, 1998 MARCH 31, 1997 DECEMBER 31, 1997 DECEMBER 31, 1996
------------------ ------------------ ----------------- -----------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Revenues (Note 2)........... $1,573,400 $ 708,400 $6,875,600 $5,749,800
Cost of revenues............ 379,000 415,300 2,355,300 2,895,900
---------- --------- ---------- ----------
Gross profit................ 1,194,400 293,100 4,520,300 2,853,900
General and administrative
expense................... 541,500 601,500 2,129,300 2,323,800
Allowance for doubtful
accounts.................. -- -- 1,115,600 --
---------- --------- ---------- ----------
Net income from
operations................ 652,900 (308,400) 1,275,400 530,100
Interest expense (Note 5)... 263,000 271,800 1,040,100 677,700
Interest income............. 48,000 72,000 211,800 58,300
Other income................ -- -- -- 90,100
---------- --------- ---------- ----------
Net income (loss) before
income taxes.............. 437,900 (508,200) 447,100 800
---------- --------- ---------- ----------
Net income (loss)........... $ 437,900 $(508,200) $ 447,100 $ 800
========== ========= ========== ==========
Net income (loss) per common
share basic (Note 2)...... $ 0.39 $ (0.45) $ 0.40 $ --
========== ========= ========== ==========
Weighted average number of
shares outstanding basic
(Note 2).................. 1,131,344 1,131,344 1,131,344 1,131,344
========== ========= ========== ==========
Net income (loss) per common
share diluted (Note 2).... $ 0.24 $ (0.28) $ 0.25 --
========== ========= ========== ==========
Weighted average number of
shares outstanding diluted
(Note 2).................. 1,821,800 1,821,800 1,821,800 1,821,800
========== ========= ========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE> 59
TEAM COMMUNICATIONS GROUP, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE FOR THE
THREE MONTHS THREE MONTHS FOR THE FOR THE
ENDED ENDED YEAR ENDED YEAR ENDED
MARCH 31, MARCH 31, DECEMBER 31, DECEMBER 31,
1998 1997 1997 1996
------------ ------------ ------------ ------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
OPERATING ACTIVITIES:
Net income (loss)................................ $ 437,900 $(508,200) $ 447,100 $ 800
Adjustments to reconcile net income to cash used
for operating activities:
Depreciation and amortization.................. 3,600 3,300 13,100 15,600
Amortization of television program costs....... 409,300 142,400 1,455,000 1,100,800
Allowance for doubtful accounts receivable..... -- -- 1,115,600 63,800
Additions to television program costs.......... (994,600) (196,800) (2,186,200) (4,060,600)
Amortization of notes payable discount......... 93,000 93,000 372,000 353,300
Changes in assets and liabilities:
Increase in trade receivables................ (949,900) (530,400) (4,514,300) (3,352,900)
Decrease (increase) in organization costs and
other assets.............................. (150,300) 15,300 (433,100) (123,000)
Increase in accounts payable, accrued expense
and other liabilities..................... 383,900 405,000 2,050,300 939,500
Increase (decrease) in deferred revenue...... 49,000 23,400 570,500 (343,500)
Increase (decrease) in accrued
participations............................ (16,500) 208,200 (443,600) 1,302,300
Increase in accrued interest................. 70,400 55,100 284,300 201,800
--------- --------- ----------- -----------
Net cash used for operating activities.... (664,200) (289,700) (1,269,300) (3,902,100)
--------- --------- ----------- -----------
INVESTING ACTIVITIES -- -- --
purchase of fixed assets......................... -- -- (36,900)
--------- --------- ----------- -----------
Net cash used for investing activities.... -- -- -- -- (36,900)
--------- --------- ----------- -----------
FINANCING ACTIVITIES:
Proceeds from shareholder loan and notes
payable........................................ -- -- -- --
Proceeds from issuance of note payable and
warrants....................................... 658,100 401,000 1,423,500 4,747,000
Principal payment on loan due to stockholder..... -- -- -- (10,000)
Principal payment of notes payable............... (60,000) 0 (10,000) (748,600)
Decrease (increase) in due from officer.......... (18,900) (51,800) (184,100) 30,900
Waiver of interest on loan due to stockholder.... -- -- -- 95,000
--------- --------- ----------- -----------
Net cash provided by financing
activities.............................. 579,200 349,200 1,229,400 4,114,300
--------- --------- ----------- -----------
Net change in cash................................. (85,000) 59,500 (39,900) 175,300
Cash at beginning of period........................ 174,400 214,300 214,300 39,000
--------- --------- ----------- -----------
Cash at end of period.............................. $ 89,400 $ 273,800 $ 174,400 $ 214,300
========= ========= =========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid.................................... $ $ $ -- $ 15,100
========= ========= =========== ===========
Income taxes paid................................ $ $ $ 4,000 $ 4,000
========= ========= =========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE> 60
TEAM COMMUNICATIONS GROUP, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
SUPPLEMENTAL SCHEDULE OF NON CASH ACTIVITIES
<TABLE>
<CAPTION>
FOR THE FOR THE FOR THE FOR THE
THREE MONTHS ENDED THREE MONTHS ENDED YEAR ENDED YEAR ENDED
MARCH 31, 1998 MARCH 31, 1997 DECEMBER 31, 1997 DECEMBER 31, 1996
------------------ ------------------ ----------------- -----------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Extinguishment of TPEG
settlement payable by
assignment of the treasury
stock receivable........... -- 178,000 178,000 178,000
Issuance of warrants in
conjunction with notes
payable (Note 7):.......... -- -- 286,600 602,700
Transfer of shares by
principal shareholder to
notes payable holder (Note
7)......................... -- -- -- 45,700
Issuance of shares in
connection with notes
payable (Note 7)........... -- -- -- 84,200
Issuance of shares in
connection with services
provided to Company........ -- -- -- 24,700
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
<PAGE> 61
TEAM COMMUNICATIONS GROUP, INC.
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
PREFERRED STOCK COMMON STOCK
------------------ ------------------ TREASURY
NUMBER NUMBER PAID IN STOCK ACCUMULATED
OF SHARES AMOUNT OF SHARES AMOUNT CAPITAL RECEIVABLE DEFICIT
--------- ------ --------- ------ ---------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at February 27,
1995....................... 0 $ 0 0 $ 0 $ 0 $ 0 $ 0
Common stock issued.......... 1,024,059 1,000
TPEG settlement (Note 10).... (87,000)
Net loss for period from
February 27, 1995 to
December 31, 1995.......... (1,032,500)
---- ----- --------- ------ ---------- -------- -----------
Balance at December 31,
1995....................... 0 0 1,024,059 1,000 0 (87,000) (1,032,500)
Transfer of shares by
principal shareholder to
notes payable holder (Note
7)......................... 45,700
Exchange of treasury stock
receivable with related
party for extinguishment of
TPEG settlement payable
(Note 10).................. 91,000 87,000
Issuance of shares in
connection with notes
payable (Note 7)........... 79,708 0 84,200
Issuance of warrants in
connection with private
placements (Note 7)........ 602,700
Issuance of shares in
connection with
anti-dilution provisions of
convertible promissory note
(Note 7)................... 4,292
Issuance of shares in
connection with services
provided to the Company.... 23,285 24,700
Waiver of interest on loan
due to shareholder......... 95,000
Net income for year ended
December 31, 1996.......... 800
---- ----- --------- ------ ---------- -------- -----------
Balance at 12/31/96.......... 1,131,344 1,000 943,300 0 (1,031,700)
Issuance of warrants in
connection with private
placement.................. 286,800
Net income for year ended
December 31, 1997.......... 447,100
---- ----- --------- ------ ---------- -------- -----------
Balance at December 31,
1997....................... 0 $ 0 1,131,344 $1,000 $1,230,100 $ 0 $ (584,600)
Net income for the three
months ended March 31, 1998
(unaudited)................ 437,900
---- ----- --------- ------ ---------- -------- -----------
Balance at March 31, 1998.... 0 $ 0 1,131,344 $1,000 $1,230,100 $ 0 $ (146,700)
==== ===== ========= ====== ========== ======== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-7
<PAGE> 62
TEAM COMMUNICATIONS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 -- DESCRIPTION OF THE COMPANY:
Team Communications Group, Inc. (formerly known as DSL Entertainment Group,
Inc.) and its wholly owned subsidiaries (collectively, the "Company") are
primarily engaged in developing, producing, and distributing television series,
programs and specials, and made-for-television movies for telecast, exhibition
or distribution in the domestic and foreign television markets. The Company's
focus is on developing and producing children's programming and reality based
programming for alternative cable channels such as the Learning Channel and the
Discovery Channel as well as for channels such as PBS.
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 three customers accounted for 100% of the Company's total
operating revenue for the three months ended March 31, 1998, and sales to two
major customers accounted for 90% of the Company's total operating revenue for
the three months ended March 31, 1997.
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.
During 1997, the Company became aware of a clause of a security agreement,
which had the potential of creating a contingency with respect to revenue from a
related licensing agreement which the Company had included in its 1996 financial
statements. The clause related to the Company's agreements with Miramax, and had
the effect of allowing Miramax to cancel its agreement to pay the minimum
guarantee with respect to "Amazing Tails" if "Total Recall" was not produced.
Accordingly, the previously issued financial statements for 1996 were restated,
having the effect of reducing revenues by $367,000, cost of revenues by $125,800
and net income of $241,000 ($.13 per share). The contingency will have no impact
on future earnings or operations.
CASH
The Company maintains its cash in bank deposit accounts which, at times,
may exceed federally insured limits. The Company has not experienced any losses
in such accounts.
TELEVISION PROGRAM COSTS
Television program costs are valued at the lower of unamortized cost or net
realizable value on an individual title basis. Television program costs
represent those costs incurred in the development, production
F-8
<PAGE> 63
TEAM COMMUNICATIONS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
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.
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 $33,600, $30,000 and $16,700 in
accumulated depreciation at March 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 and capitalized costs in connection with the Company's initial public
offering. Such capitalized costs were $530,600 and $374,600 at March 31, 1998
and December 31, 1997, respectively.
DEBT WITH STOCK PURCHASE WARRANTS
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. 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
interest method. In the event of settlement of such debt in advance of the
maturity date, an expense 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 March 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 March 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
F-9
<PAGE> 64
TEAM COMMUNICATIONS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
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.
Included in television program costs in development are two projects with
aggregate capitalized costs of $789,000, the development of which commenced in
September of 1995 and July of 1996. In the event the Company is unable to
produce either of these projects, the Company may incur significant write downs
in the future.
COMMON STOCK
In January 1996 the Company effected a 2,397.004 for one stock split for
shareholders of record on February 23, 1996. In addition, authorized shares were
increased from 1,000 to 18,000,000. In January and April of 1997, the Company
effected a 2.2776 and 1.0277 for one share reverse stock splits, respectively.
All share and per share data in the financial statements reflect the stock split
and subsequent reverse stock split for all periods presented.
CONCENTRATION OF CREDIT RISK
Approximately 96%, 95% and 72% of the trade receivable balance at March 31,
1998, December 31, 1997 and December 31, 1996, respectively, were represented by
the same five customers.
NET (LOSS) PER COMMON SHARE
The Company has adopted Statement of Financial Accounting Standard No. 128,
Earnings Per Share ("SFAS No. 128"), which is effective for annual and interim
financial statements issued for periods ending after December 15, 1997. In
accordance with SFAS No. 128, prior years per share amounts have been restated.
SFAS No. 128 was issued to simplify the standards for calculating earnings per
share ("EPS") previously in APB No. 15, Earnings Per Share. SFAS No. 128
replaces the presentation of primary EPS with a presentation of basic EPS. The
new rules also require dual presentation of basic and diluted EPS on the face of
the statement of operations.
For the three months ended March 31, 1998, and the years ended 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, and are 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.
The convertible debt was not included in the calculation of weighted
average shares because the President and principal shareholder has personally
guaranteed to the Company that he will assume any convertible debt where the
debt holder wishes to convert in exchange for his own personal shares. The total
number of shares that the convertible debt may convert into is approximately
199,748.
IMPAIRMENT OF LONG-LIVED ASSETS AND LONG-LIVED ASSETS TO BE DISPOSED OF:
On April 1, 1997, the Company adopted the provision of FASB No. 121,
Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed Of. This statement requires that long-lived
F-10
<PAGE> 65
TEAM COMMUNICATIONS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
assets and certain identifiable intangibles be reviewed for impairment whenever
events or changes in circumstances indicate that the carrying amount of an asset
may not be recoverable. Recoverability of assets to be held and used is measured
by a comparison of the carrying amount of an asset to future net cash flows
expected to be generated by the asset. If such assets are considered to be
impaired, the impairment to be recognized is measured by the amount by which the
carrying amounts of the assets exceed the fair values of the assets. Assets to
be disposed of are reported at the lower of the carrying amount or fair value
less costs to sell. Adoption of this statement did not have a material impact on
the Company's financial position, results of operations, or liquidity.
NOTE 3 -- TELEVISION PROGRAM COSTS:
Television program costs consist of the following:
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31, DECEMBER 31,
1998 1997 1996
---------- ------------ ------------
<S> <C> <C> <C>
In process and development................................ $1,553,500 $1,502,000 $1,977,000
Released, less accumulated amortization................... 3,318,800 2,785,000 1,578,900
---------- ---------- ----------
Total television program costs.................. $4,872,300 $4,287,000 $3,555,900
========== ========== ==========
</TABLE>
Based on management's estimates of future gross revenue as of March 31,
1998, approximately 60% of the $3,318,800 in unamortized released television
program costs will be amortized during the three years ending March 31, 2001 and
80% will be amortized during the four years ending March 31, 2002.
NOTE 4 -- INCOME TAXES:
During the period ended December 31, 1995, the Company generated a net loss
before taxes on a consolidated basis, however, since the individual subsidiaries
were not eligible for consolidation until December 31, 1995, the tax provision
is calculated on the individual companies, separately. One company's loss does
not offset another company's income, as the companies are not consolidated for
tax purposes. For the period ended March 31, 1998, March 31, 1997, December 31,
1997 and December 31, 1996, the tax provision is calculated on the consolidated
basis.
Deferred tax expense results from temporary differences in the recognition
of expense for tax and financial statement reporting purposes.
A reconciliation of the difference between the statutory federal income tax
rate and the Company's effective income tax rate applied to income (loss) before
income taxes are as follows for the periods ending:
<TABLE>
<CAPTION>
MARCH 31, MARCH 31, DECEMBER 31, DECEMBER 31,
1998 1997 1997 1996
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Statutory federal tax (benefit) rate.......... 34% 34% 34% 34%
State income tax provision, net of federal
benefit..................................... 0% 0% 0% 0%
Benefits of operating loss carryforward....... (34)% (34)% (34)% (34)%
Increase in valuation reserve against deferred
tax asset................................... 0% 0% 0% 0%
--- --- --- ---
Effective tax rate............................ 0% 0% 0% 0%
=== === === ===
</TABLE>
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
F-11
<PAGE> 66
TEAM COMMUNICATIONS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 4 -- INCOME TAXES: (CONTINUED)
difference between the financial statement and tax basis of assets and
liabilities using enacted tax rates in effect for the year in which the
differences are expected to reverse.
The components of the net deferred tax asset are as follows:
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31, DECEMBER 31,
1998 1997 1996
------------- ------------- ------------
<S> <C> <C> <C>
Net operating loss (carryforward)........................ $ 35,700 $ 184,605 $ 336,620
Valuation allowance...................................... $ (35,700) $(184,605) (336,620)
--------- --------- ---------
Net deferred tax asset......................... $ 0 $ 0 $ 0
========= ========= =========
Total current and deferred taxes payable................. $ 0 $ 0 $ 0
========= ========= =========
</TABLE>
At March 31, 1998, December 31, 1997, and December 31, 1996, the Company
has a federal net operating loss carryforward of $105,000, $542,958, and
$990,058, respectively, which will begin to expire in 2010.
NOTE 5 -- RELATED PARTY TRANSACTIONS:
The due from officer balances of $214,400, $195,500 and $11,300 at March
31, 1998, December 31, 1997 and December 31, 1996, respectively, represent
payments made by the Company on behalf of and short-term interest free loans
made to the President and principal shareholder, less producer's fees earned by
the president and principal shareholder for services on a company production.
The shareholder loan and note payable balance are comprised of the
following:
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31, DECEMBER 31,
1998 1997 1996
--------- ------------ ------------
<S> <C> <C> <C>
Promissory notes:
12% secured promissory note due June 30, 1998(i)...... $500,000 $500,000 $500,000
14% secured promissory note due June 30, 1998(ii)..... 240,000 240,000 240,000
-------- -------- --------
$740,000 $740,000 $740,000
======== ======== ========
</TABLE>
- ---------------
(i) In April 1995, the Company entered into a $500,000 promissory note with a
shareholder. The notes accrued interest at 10% through December 31, 1995
and at 12% thereafter. The note and all unpaid interest are due June 30,
1998, as amended. The note is secured by all of the President and principal
shareholders' shares and the assets of the Company. The shareholder has
waived all accrued interest relating to this note totaling $165,000,
$150,000 and $90,000 as of March 31, 1998, December 31, 1997 and as of
December 31, 1996, respectively. This interest expense, at fair value, was
recorded as either a corresponding credit to paid-in capital (1996) or
accrued liabilities (1997) which will be offset against paid-in capital
upon settlement of the obligations.
(ii) In August 1995, the Company entered into a $250,000 promissory note with a
shareholder. The note accrues interest at 12% through November 1, 1995 and
at 14% thereafter. The note and all unpaid interest are due June 30, 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, $70,000
and $35,000 as of March 31, 1998, December 31, 1997 and December 31, 1996,
respectively. This interest expense, at fair value, was recorded as either
a corresponding credit to paid-in capital (1996) or accrued liabilities
(1997) 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.
F-12
<PAGE> 67
TEAM COMMUNICATIONS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 6 -- COMMITMENTS AND CONTINGENCIES:
The Company has entered into a new employment agreement with the president
of the Company requiring payment, effective January 1, 1997 through December 31,
2001, of annual compensation of $240,000 plus $125,000 per annum as an advance
against a pro-rata portion of producer's fees earned by Mr. Levin.
The Company has obtained a distribution guarantee from Mel Giniger &
Associates for the Latin American territories and The Gemini Corporation for the
European territories (collectively the "Giniger Entities"). This guarantee
relates to the Company's current library and certain future product planned for
distribution in Latin America and Europe. For the year ended December 31, 1996,
revenue of $680,000, was recognized against this guarantee, which represents 11%
of revenue for 1996. The Company believes that the Giniger Entities ability to
deliver on this distribution guarantee is predicate on its licensing the
Company's product to unaffiliated third parties. As such, at December 31, 1996,
the Company only recognized the portion of the guarantee for which the Giniger
Entities have entered into sales agreements with unaffiliated third parties for
such rights and for which program materials were available to the Giniger
Entities. As of March 31, 1998, all rights held by the Giniger Entities have
been conveyed back to the Company, and no revenue was recognized through this
transaction for the three months then ended.
The Company leases office space and certain office equipment. The total
lease expense was $24,000, $28,000, $96,300 and $113,700 for the periods ended
March 31, 1998, March 31, 1997, 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:
<TABLE>
<S> <C>
1998.............................................. 44,600
1999.............................................. 5,600
2000.............................................. 4,600
2001.............................................. 0
--------
$ 54,800
========
</TABLE>
F-13
<PAGE> 68
TEAM COMMUNICATIONS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 7 -- NOTE PAYABLE:
Notes payable consists of the following at March 31, 1998, December 31,
1997 and December 31, 1996:
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31, DECEMBER 31,
1998 1997 1996
---------- ------------ ------------
<S> <C> <C> <C>
Private placements:
12% secured notes due June 1998(i)...................... $ 880,000 $ 900,000 $ 900,000
10% secured convertible notes due June 1998(ii)......... 938,400 839,000 657,000
10% secured convertible notes due February 1999(iii).... 827,400 788,700
Promissory notes:
12% convertible secured promissory note due June
1998(iv)............................................. 322,000 322,000 322,000
10% secured promissory note due June 1998(v)............ 500,000 500,000 500,000
10% secured promissory note due June 1997(vi)........... 0 0 885,000
8% secured note due June 1998(vii)...................... 300,000 300,000 239,900
10% secured note due June 1998(viii).................... 150,000 150,000 124,100
11% unsecured promissory note past due(ix).............. 124,900 124,900 134,900
10% secured note due on June 1998(x).................... 650,000 650,000 --
12% secured note due June 1998(xi)...................... 265,000 315,000 --
12% secured note due April 1, 1999(xii)................. 145,000 -- --
12% secured note due March 16, 1999(xiii)............... 150,000 -- --
Secured note due June 15, 1998(xiv)..................... 235,000 -- --
---------- ---------- ----------
$5,487,700 $4,889,600 $3,762,900
========== ========== ==========
</TABLE>
- ---------------
(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 $229,600, $202,600 and
$88,400 at March 31, 1998, December 31, 1997 and December 31, 1996
respectively. Each warrant entitles the holder to buy one share of common
stock at an exercise price of $0.43. The warrants are exercisable
commencing two business days following the effective date of the
registration statement relating to an initial public offering and
terminating on the third anniversary of that date. Through this private
placement, the Company raised $900,000 and issued 115,351 warrants.
Principal and interest are due no later than June 30, 1998, as amended.
The notes are secured by substantially all of the assets of the Company.
The fair value of the notes and the carrying amount and fair value of the
associated warrants were determined by the market rate, approximately 25%,
based upon management's estimate of its borrowing rate in an arm's length
transaction for a financial instrument of this risk. The notes were
discounted at this market rate. The value of the warrants amounted to
$128,272 and is included in paid in capital.
(ii) During June - October 1996, the Company participated in a second private
placement offering. The Company sold 19.5 placement units to the following
investors: Wellington Corporation, Crescent Capital Company, LLC, Arthur
Steinberg IRA Rollover, Robert Steinberg IRA Rollover, Robert Ram
Steinberg, A Partnership, Heiko Theime, Alpha Ventures, Tuch Family Trust,
Third World Trust Company LTD., Alfred Ross, Fred Chanowski, Allen
Goodman, Felix Paige, Rogal America, Mark Levine, Joseph Sullivan, Robert
Gopen, Colony Financial Services, John Carberry, Daniel and Thalia
Federbush, and Michael Berlin. Each unit consisted of a $50,000 senior
convertible note payable with interest of 10% per annum, compounded
quarterly, and 4,272 Common Stock Purchase warrants. The
F-14
<PAGE> 69
TEAM COMMUNICATIONS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 7 -- NOTE PAYABLE: (CONTINUED)
notes are convertible at their principal amount into common stock of the
Company at any time one year after the initial public offering through
maturity at the conversion price of $5.00 per share subject to adjustment
in certain circumstances. Each warrant entitles the holder to buy one
share of common stock at an exercise price of $0.43. The warrants are
exercisable commencing two business days following the effective date of
the registration statement relating to an initial public offering and
terminating on the third anniversary of that date. As of December 31,
1996, the Company raised $975,000 and issued 83,308 warrants. Principal
and interest are due no later than May 31, 1998. The accrued interest
balance was $184,400, $160,200 and $36,800 at March 31, 1998, December 31,
1997 and December 31, 1996, respectively. 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.
(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
convertible note payable with interest of 10% per annum, payable at six
month intervals, and 10,000 Common Stock Purchase warrants. The notes are
convertible at their principal amount into common stock of the Company at
any time before the initial public offering at the conversion price of
$5.00 per share subject to adjustment in certain circumstances. The
maturity date of the notes will be no later than two years. Each warrant
entitles the holder to buy one share of common stock at an exercise price
of $.97. The warrants are exercisable commencing two business days
following the effective date of the registration statement relating to an
initial public offering and terminating on the third anniversary of that
date. As of September 30, 1997, the Company raised $969,000 and issued
193,870 warrants. Principal and interest are due no later than February
1999. The accrued interest balance was $105,000 and $80,800, at March 31,
1998, December 31, 1997, respectively. 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 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 June 30, 1998, as amended. The note is secured by certain
receivables and television distribution rights. 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.
(v) In April 1996, the Company entered into a $500,000 promissory note with
South Ferry #2, L.P., an outside investor, to finance a television
program. The note accrues interest at 10% per annum and is due on June 30,
1998, as amended. The accrued interest balance was $96,800, $84,300, and
$29,600 at March 31, 1998, December 31, 1997 and December 31, 1996,
respectively. 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
F-15
<PAGE> 70
TEAM COMMUNICATIONS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 7 -- NOTE PAYABLE: (CONTINUED)
using discounted cash flow methods based on the Company's borrowing rates,
approximately 25%, for similar types of borrowing arrangements with
comparable terms and maturities.
(vi) In July 1996, the Company entered into a $1,200,000 promissory note with 3
outside investors, ACA Equities, D&M Investments and Gilbert Karsenty, to
acquire the television rights to "Total Recall." The note accrues interest
at 10% per annum and was due on June 30, 1997, as amended. 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.
(vii) In November 1996, the Company entered into a $300,000 promissory note
with Affida Bank. The note bears interest at 8% per annum, compounding
quarterly, and is due the sooner of an initial public Offering or June
30, 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.
(viii) In December 1996, the Company entered into a $150,000 promissory note
with Phillip Tewel. The note bears interest at 10% per annum, compounding
quarterly, and is due the sooner of an initial public offering or June
30, 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.
(ix) In September 1996, the Company entered into a $150,000 unsecured
promissory note with Time Life to repay an advance provided to the Company
in October 1995. The note bears interest at 11% per annum from October
1995 and required payments such that the note would be repaid by March 31,
1997. As of March 31, 1998, December 31, 1997 and December 31, 1996, there
was $18,500, $14,800 and $6,810, respectively, 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.
(x) In June 1997, the Company entered into a $650,000 secured promissory note
with Alliance. The note bears interest at the prime rate plus one per cent
per annum from June 1996 and required payments such that the note, as
amended, would be repaid by June 30, 1998. As of March 31, 1998 and
F-16
<PAGE> 71
TEAM COMMUNICATIONS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 7 -- NOTE PAYABLE: (CONTINUED)
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. The Company intends to
enter into a line of credit with Mercantile National Bank in order to repay
this outstanding note.
(xi) 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 earlier of the closing of the offering
or June 30, 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.
(xii) 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 matures
on April 1, 1999. As of March 31, 1998 there was accrued interest of
$750. The note is secured substantially by all the assets of the Company.
(xiii) 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 March 31, 1998 there was accrued interest of $750. The
note is secured substantially by all the assets of the Company.
(xiv) In March 1998, the Company obtained a loan in the amount of $235,000 from
David Tresley, which matures on June 15, 1998. Included in the principal
balance is a $35,000 loan origination fee.
NOTE 8 -- GEOGRAPHIC INFORMATION:
The Company operates in a single industry segment, the development,
production and distribution of television programming. All of the Company's
operations are conducted in the United States.
A summary of the Company's revenues by geographic area is presented below:
<TABLE>
<CAPTION>
MARCH 31, MARCH 31, DECEMBER 31, DECEMBER 31,
1998 1997 1997 1996
---------- --------- ------------ ------------
<S> <C> <C> <C> <C>
North America.................... $ 748,000 $ 60,000 $1,383,600 $2,221,900
Europe........................... 307,100 1,332,900
South America.................... 825,000 3,798,900 732,400
Asia............................. 136,000 1,306,500
Australia and Africa............. 648,400 1,250,000 156,100
---------- -------- ---------- ----------
Total.................. $1,573,400 $708,400 $6,875,600 $5,749,800
========== ======== ========== ==========
</TABLE>
NOTE 9 -- STOCK OPTION PLANS:
The Company has established stock option plans for its employees and
consultants (the "1995 Stock Option Plan") and for its non-employee directors
(the "1995 Stock Option Plan for Non-Employee Directors").
The 1995 Stock Option Plan allows for options (including Incentive Stock
Options) to be granted to employees and consultants at less than fair market
value at date of grant. These options may be immediately exercisable and expire
over a period determined by the Stock Option Committee of the Board of Directors
(the "Committee"). The Committee is comprised of two members of the Board of
Directors. The total number of options available to grant under this plan is
270,000.
F-17
<PAGE> 72
TEAM COMMUNICATIONS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 9 -- STOCK OPTION PLANS: (CONTINUED)
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 nine months ended September 30, 1997 and the year ended December 31, 1996.
A summary of the Key Employee Plan as of and for the three months ended
March 31, 1998 and the years ended December 31, 1997 and December 31, 1996 is
presented below:
<TABLE>
<CAPTION>
WEIGHTED AVERAGE
KEY EMPLOYEE PLAN SHARES EXERCISE PRICE
----------------- ------- ----------------
<S> <C> <C>
Outstanding as of January 1, 1996.................... -- --
Granted............................................ 35,000 $1.14
Exercised.......................................... -- --
Forfeited/Expired.................................. -- --
-------
Outstanding as of March 31, 1998, December 31, 1997
and December 31, 1996.............................. 35,000
=======
Weighted-average fair value of options granted during
the year........................................... $ 1.14
=======
</TABLE>
The following table summarizes information about options outstanding at
March 31, 1998, December 31, 1997 and December 31, 1996:
<TABLE>
<CAPTION>
SHARES EXERCISABLE AT
MARCH 31, 1998,
DECEMBER 31, 1997
AND DATE
TOTAL SHARES EXERCISE PRICE DECEMBER 31, 1996 OPTIONS EXPIRE
- ------------ -------------- --------------------- --------------
<S> <C> <C> <C>
30,000 $1.00 10,000 July 1, 2006
5,000 $2.00 5,000 June 6, 2006
------ ------
35,000 15,000
====== ======
</TABLE>
The Company has elected, as permitted by FASB Statement No. 123,
"Accounting for Stock Based Compensation" ("FASB 123"), to account for its stock
compensation arrangements under the provisions of Accounting Principles Board
No. 25, "Accounting for Stock Issued to Employees" ("APB 25"). Accordingly,
because the exercise price of the Company's employee stock options equals or
exceeds the market price of the underlying stock on the date of grant, no
compensation expense is recognized.
Pro forma information regarding net income and earnings per share is
required by FASB 123 and has been determined as if the Company had accounted for
its employee stock options under the fair value method of such pronouncement.
The fair value for these options was estimated at the date of grant using the
binomial option pricing model with the following weighted average assumptions:
risk-free interest rate of 6.33%, no dividend yield, expected lives of two and a
half years, and volatility of 0%.
For purposes of pro forma disclosure, the estimated fair value of the
options is zero, hence neither pro forma net income nor earnings per share are
presented.
During the period, the Company issued 21,362 warrants exercisable at $1.07
and 23,283 warrants exercisable at $0.43 and 2,777 shares of Common Stock to
four outside parties for services provided in raising outside debt. The Company
also issued 23,000 warrants exercisable at $1.00 and 20,000 warrants exercisable
at $2.50 to two outside parties for services rendered to the Company, one of
such parties assisted in raising capital for the Company by introducing Morris
Wolfson and entities affiliated therewith to invest in the
F-18
<PAGE> 73
TEAM COMMUNICATIONS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 9 -- STOCK OPTION PLANS: (CONTINUED)
Company, none of whom were in any way involved with this Offering and the other
serves as legal counsel to the Company. The Company recognized $5,000 in
compensation related to these warrants during the year ended December 31, 1996.
In January 1997, the Company's shareholders voted to freeze the 1995 Stock
Option Plans and adopt two new plans, the Team Communications Group, Inc. Stock
Awards plan (the "1996 Employee Plan") and the Team Communications Group, Inc.
Directors' Stock Option Plan (the "1996 Director's Plan").
The 1996 Directors Plan allows Directors who are not employees of the
Company, on the effective date of an initial public offering and each annual
anniversary thereof, to receive options to purchase 2,500 shares. The option
price per share of Common Stock purchasable upon exercise of such stock options
shall be 100% of the fair market value on the date of grant. Such options shall
be exercisable immediately on the date of grant by payment in full of the
purchase price in cash. The aggregate number of shares of Common Stock that may
be granted pursuant to the 1996 Directors Plan is 20,000.
The aggregate number of shares of Common Stock that may be granted under
the 1996 Employee Plan is 180,000. The Employee Plan provides for the authority
by the Employee Plan Committee to grant ISO's to any key employee of the Company
or any affiliate of the Company and to determine the terms and conditions of
each grant, including without limitation, the number of shares subject to each
ISO. The ISO exercise price will also be determined by the Committee and will
not be less than the fair market value of the Common Stock on the date of grant.
The exercise price will not be less than 110% of such fair market value and the
exercise period will not exceed five years if the participant was the holder of
more than 10% of the Company's outstanding voting securities.
NOTE 10 -- SUBSEQUENT EVENTS:
In January 1997, the Board of Directors reduced the authorized common stock
shares from 20,000,000 to 18,000,000 and authorized 2,000,000 shares of
preferred stock. All references in the financial statements to number of shares
of the Company's common stock and preferred stock have been retroactively
restated.
The Company has signed a letter of intent with an underwriter for the sale
of its common stock to the public. The underwriter expects to sell 1,500,000
shares of common stock at $5.50 to $7.00 per share.
The Company has received a commitment letter from Mercantile National Bank
for multiple lines of credit of up to $8,175,000 (the "Proposed Bank Facility"),
which lines of credit would permit borrowings pursuant to specified borrowing
bases made up of the value of the library (including a value for "Total
Recall"), accounts receivable and other assets, including cash. The Company
currently intends to repay the $3,611,950 of indebtedness remaining after the
Offering with proceeds from the Proposed Bank Facility. The Proposed Bank
Facility will contain covenants relating to the Company's tangible net worth,
debt to equity ratio and profitability. No assurance can be given that the
Proposed Bank Facility will be entered into or that the Company will be able to
use proceeds from such facility as indicated herein.
NOTE 11 -- GOING CONCERN:
The Company's financial statements for the years ended 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.
F-19
<PAGE> 74
TEAM COMMUNICATIONS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 12 -- GOING CONCERN: (CONTINUED)
Management recognizes that the Company must generate additional resources
to enable it to continue operations. Management's plans include the sale of
additional equity securities. Towards this goal management has engaged an
underwriter to assist in the initial public offering of the Company's common
stock. However, no assurance can be given that the Company will be successful in
raising additional capital. Further, there can be no assurance, assuming the
Company successfully raises additional equity, that the Company will achieve
profitability or positive cash flow.
F-20
<PAGE> 75
======================================================
NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATION IN CONNECTION WITH THE OFFERING OTHER
THAN THOSE CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR MADE, SUCH INFORMATION
OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE
COMPANY OR THE UNDERWRITERS. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO
SELL OR A SOLICITATION OF AN OFFER TO BUY ANY OF THE SECURITIES OFFERED HEREBY
IN ANY JURISDICTION TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH AN OFFER
IN SUCH JURISDICTION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE
HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THE
INFORMATION HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF OR
THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE SUCH DATE.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary.................... 3
Risk Factors.......................... 8
Use of Proceeds....................... 15
Dividend Policy....................... 16
Capitalization........................ 17
Dilution.............................. 18
Selected Consolidated Financial
Data................................ 19
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 21
Business.............................. 28
Management............................ 35
Certain Transactions.................. 39
Principal Shareholders................ 41
Offering by Selling Securityholders... 42
Description of Securities............. 45
Shares Eligible for Future Sale....... 48
Underwriting.......................... 50
Legal Matters......................... 52
Experts............................... 52
Additional Information................ 53
Index to Consolidated Financial
Statements.......................... F-1
</TABLE>
<TABLE>
<S> <C>
- --------------------------------------------
UNTIL , 1998 (25 CALENDAR DAYS
AFTER THE DATE OF THIS PROSPECTUS), ALL
DEALERS EFFECTING TRANSACTIONS IN THE COMMON
STOCK, WHETHER OR NOT PARTICIPATING IN THIS
DISTRIBUTION, MAY BE REQUIRED TO DELIVER A
PROSPECTUS. THIS DELIVERY REQUIREMENT IS IN
ADDITION TO THE OBLIGATION OF DEALERS TO
DELIVER A PROSPECTUS WHEN ACTING AS
UNDERWRITERS AND WITH RESPECT TO THEIR
UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
============================================
</TABLE>
======================================================
1,500,000 SHARES
COMMON STOCK
TEAM COMMUNICATIONS GROUP, INC.
------------------------------
PROSPECTUS
------------------------------
NATIONAL SECURITIES
CORPORATION
COLEMAN & COMPANY
SECURITIES, INC.
, 1998
======================================================
<PAGE> 76
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):
<TABLE>
<S> <C>
SEC registration fee (actual)............................... $ 4,206.40
NASD filing fee (actual).................................... 1,874.00
Nasdaq SmallCap Market listing fee (actual)................. 20,000.00
Printing and engraving expenses............................. 275,000.00
Legal fees and expenses..................................... 255,000.00
Accounting fees and expenses................................ 125,000.00
Transfer agent and registration fees and expenses........... 10,000.00
Representatives' non-accountable expense allowance(1)....... 187,500.00
Blue sky qualification fees and expenses.................... 35,000.00
Miscellaneous............................................... 14,708.00
-----------
Total............................................. $928,288.40
===========
</TABLE>
- ---------------
(1) $215,625, if the Underwriters exercise the over-allotment option in full.
II-1
<PAGE> 77
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 June 30, 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 $240,000 in
respect of the amounts owed to him, and the remaining debt, subject to adequate
collateralization (which may include cash collateral) shall be extended until
June 30, 1998. Subject to the foregoing, Mr. Levin and Mr. Cayre have also
agreed to restructure Mr. Cayre's investment in the Company. Mr. Cayre agreed
that upon the closing of the Offering, Mr. Cayre's interest in the Company would
be reduced to 164,874 shares of the Company's Common Stock by transferring to
Mr. Levin 195,774 shares of the Company's Common Stock held by Mr. Cayre. In
February 1996, in connection with a prior restructuring of this indebtedness,
Mr. Cayre received options to purchase 48,743 shares of Common Stock of $.43 per
share.
3. In June 1996, South Ferry #2, L.P., an entity controlled by Mr.
Wolfson's brother, advanced to the Company the sum of $500,000 in respect of
"LoCoMoTioN" in consideration of which such entity received options to acquire
29,906 shares of Common Stock at $.43 per share. This loan bears interest at 10%
and is due on the earlier to occur of June 30, 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, bears interest at 10% and is due on the
earlier to occur of June 30, 1997 or the closing of the Offering. The holders of
this note have agreed to extend the maturity date through June 30, 1998. In
addition, the holders of this note received an aggregate of 53,403 shares of
common stock, warrants to acquire 14,954 shares of Common Stock at an exercise
price of $.43 and a 13% net profit participation in the Company's interest in
the series. As of the date hereof, $1,200,000 has been repaid in respect to this
obligation. Mr. Wolfson received 8,544 shares of the Company's Common Stock and
2% of the net profits of the series with respect to the Total Recall Financing.
6. The Company commenced two private placements under Rule 506 of
Regulation D of its Secured Notes in February and in May, 1996. In February
1996, the Company sold to 14 accredited investors $900,000 in principal amount
of secured promissory notes which bear interest at 12% and are due upon the
earlier to occur of the closing of the Offering or June 30, 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 June 30, 1998.
These notes were sold to the following investors: Wellington Corporation,
Crescent Capital Company, LLC, Arthur Steinberg IRA Rollover, Robert Steinberg
IRA Rollover, Robert Ram Steinberg, A Partnership, Heiko Theime, Alpha Ventures,
Tuch Family Trust, Third World Trust Company LTD, Alfred Ross, Fred Chanowski,
Allen Goodman, Felix Paige, Rogal America, Mark Levine, Joseph Sullivan, Robert
Gopen, Colony Financial Services, John Carberry, Daniel and Thalia Federbush,
and Michael Berlin. An aggregate of 198,659 warrants to purchase a like number
of shares of Common Stock at an exercise price of $.43 per share were issued in
connection with such private placements. The holders of these notes have waived
all conversion rights with respect thereto.
II-2
<PAGE> 78
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
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.
The above securities were offered by the Registrant in reliance upon an
exemption from registration under either (i) Section 4(2) of the Securities Act
as transactions not involving any public offering, or (ii) Rule 701 under the
Securities Act. No underwriters were involved in connection with the sales of
securities referred to in this Item 15.
II-3
<PAGE> 79
ITEM 27. (a) EXHIBITS
<TABLE>
<S> <C>
1.0 Form of Underwriting Agreement(2)
3.1 Articles of Incorporation(1)
3.2 By-laws of the Company(1)
4.1 Form of Warrant Agreement March 1996(1)
4.2 Form of Warrant Agreement May 1996(1)
4.3 Form of Warrant Agreement February 1997(1)
4.4 Form of Convertible Note March 1996 and related Security
Agreement(1)
4.5 Form of Convertible Note May 1996 and related Security
Agreement(1)
4.6 Form of Convertible Note February 1997(1)
4.7.1 Extensions relating to South Ferry #2, L.P. Indebtedness(1)
4.7.2 Extensions relating to Certain February 1996 Convertible
Notes(1)
4.8 Restated Joe Cayre Agreement(1)
4.9 Agreement with AMAE Ventures, related note and Security
Agreement(1)
4.10 Agreements re Total Recall Financing July 1996(1)
4.11 Agreements re LoCoMoTioN Financing with South Ferry #2,
L.P.(1)
4.12 1996 Employee Stock Option Plan(1)
4.13 1996 Directors Stock Option Plan(1)
4.14 Form of Financial Advisory Agreement between National
Securities Corporation and the Company(2)
4.15 Specimen Certificate(1)
4.16 Form of Representatives' Warrant(2)
4.17 Venture Management Consultants LLC, December 1997 Promissory
Note(2)
4.18 March, April and May Promissory Notes(2)
5.1 Opinion and Consent of Kelly Lytton Mintz & Vann LLP(1)
10.1 Agreement with Mel Giniger(1)
10.2 Agreement with Beyond Distribution PTY. Limited(1)
10.3 Interpublic Group of Companies Contract(1)
10.4 Employment Agreement, dated as of January 1, 1997, between
the Company and Drew Levin(1)
10.5 Lease between the Company and TCW, amended as of March 20,
1998(2)
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 Agreements with the Family Channel re Quake and Down Fall(1)
10.11 Agreements with Discovery Communications, Inc., re Amazing
Tails II(1)
10.13 Employment Agreement, dated as of January 20, 1997, amended
as of October 4, 1997, between the Company and Paul
Yamamoto(1)
10.14 Consulting Agreement, dated October 9, 1997, between the
Company and Joseph Cayre(1)
11 Statement re: Computation of per share earnings(1)
21 Subsidiaries of the Registrant(1)
23.1 Consent of experts and named counsel(3) (consent of Kelly
Lytton Mintz & Vann LLP included in Exhibit 5.1)
23.3 Consent of Bruce P. Vann, Esq. (Nominated Director)(1)
23.4 Consent of Seth M. Willenson (Nominated Director)(1)
24.4 Consent of Michael Jay Solomon (Nominated Director)(3)
24 Power of Attorney(1)
</TABLE>
- ---------------
(1) Previously filed.
(2) Filed herewith.
(3) To be filed by amendment.
II-4
<PAGE> 80
ITEM 28. UNDERTAKINGS
The Registrant hereby undertakes to provide to the Underwriters at the
closing specified in the underwriting Agreement certificates in such
denominations and registered in such names as required by the Underwriters to
permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers, and controlling persons of the
Registrant pursuant to the California General Corporation Law, the Articles of
Incorporation of the Registrant, the Underwriting Agreement, or otherwise, the
Registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
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 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-5
<PAGE> 81
SIGNATURES
In accordance with the requirement of the Securities Act of 1933, the
Registrant certifies that it has reasonable ground to believe that it meets all
of the requirements for filing on Form SB-2 and authorized this Amendment No. 9
to the Registration Statement to be signed on its behalf by the undersigned,
thereunto duly authorized in the City of Los Angeles, State of California, on
this 28th day of May, 1998.
Team Communications Group, Inc.
By: /s/ DREW LEVIN
------------------------------------
DREW LEVIN
Chairman of the Board, President,
and Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 9 to the Registration Statement has been signed by the following persons in
the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE CAPACITY DATE
--------- -------- ----
<S> <C> <C>
/s/ DREW LEVIN Chairman of the Board, May 28, 1998
- ----------------------------------------------------- President, Chief Executive
DREW LEVIN Officer and Director
* Director May 28, 1998
- -----------------------------------------------------
PAUL YAMAMOTO
/s/ MICHAEL LATINER Senior Vice President, May 28, 1998
- ----------------------------------------------------- Finance and Secretary
MICHAEL LATINER
</TABLE>
*By: /s/ DREW LEVIN
---------------------------------
DREW LEVIN
Attorney-in-Fact
II-6
<PAGE> 82
TEAM COMMUNICATIONS GROUP, INC.
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
FOR THE PERIOD FROM FEBRUARY 27, 1995 TO DECEMBER 31, 1995,
THE YEAR ENDED DECEMBER 31, 1996
AND THE PERIOD ENDED MARCH 31, 1998
<TABLE>
<CAPTION>
1998
-----------------------------------------------------------------
OTHER
BALANCE ADDITIONS DEDUCTIONS ADJUSTMENTS BALANCE AT
AT BEGINNING CHARGED FROM DURING END OF
DESCRIPTION OF PERIOD TO INCOME RESERVE PERIOD PERIOD
----------- ------------ ---------- ---------- ----------- ----------
<S> <C> <C> <C> <C> <C>
Deducted from accounts receivable for
doubtful accounts and returns......... $63,800 $ 0 $ 0 $ 0 $63,800
</TABLE>
<TABLE>
<CAPTION>
1997
-----------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Deducted from accounts receivable for
doubtful accounts and returns......... $63,800 $1,115,600 $1,115,600 $ 0 $63,800
</TABLE>
<TABLE>
<CAPTION>
1996
-----------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Deducted from accounts receivable for
doubtful accounts and returns......... $ 0 $ 71,300 $ (7,500) $ 0 $63,800
</TABLE>
<TABLE>
<CAPTION>
1995
-----------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Deducted from accounts receivable for
doubtful accounts and returns......... $ 0 $ 10,600 $ (10,600) $ 0 $ 0
</TABLE>
S-1
<PAGE> 83
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION PAGE
- ------- ----------- ------------
<C> <S> <C>
1.0 Form of Underwriting Agreement(2)...........................
3.1 Articles of Incorporation(1)................................
3.2 By-laws of the Company(1)...................................
4.1 Form of Warrant Agreement March 1996(1).....................
4.2 Form of Warrant Agreement May 1996(1).......................
4.3 Form of Warrant Agreement February 1997(1)..................
4.4 Form of Convertible Note March 1996 and related Security
Agreement(1)................................................
4.5 Form of Convertible Note May 1996 and related Security
Agreement(1)................................................
4.6 Form of Convertible Note February 1997(1)...................
4.7.1 Extensions relating to South Ferry #2, L.P.
Indebtedness(1).............................................
4.7.2 Extensions relating to Certain February 1996 Convertible
Notes(1)....................................................
4.8 Restated Joe Cayre Agreement(1).............................
4.9 Agreement with AMAE Ventures, related note and Security
Agreement(1)................................................
4.10 Agreements re Total Recall Financing July 1996(1)...........
4.11 Agreements re LoCoMoTioN Financing with South Ferry #2,
L.P.(1).....................................................
4.12 1996 Employee Stock Option Plan(1)..........................
4.13 1996 Directors Stock Option Plan(1).........................
4.14 Form of Financial Advisory Agreement between National
Securities Corporation and the Company(2)...................
4.15 Specimen Certificate(1).....................................
4.16 Form of Representatives' Warrant(2).........................
4.17 Venture Management Consultants LLC, December 1997 Promissory
Note(2).....................................................
4.18 March, April and May Promissory Notes(2)....................
5.1 Opinion and Consent of Kelly Lytton Mintz & Vann LLP(1).....
10.1 Agreement with Mel Giniger(1)...............................
10.2 Agreement with Beyond Distribution PTY. Limited(1)..........
10.3 Interpublic Group of Companies Contract(1)..................
10.4 Employment Agreement, dated as of January 1, 1997, between
the Company and Drew Levin(1)...............................
10.5 Lease between the Company and TCW, amended as of March 20,
1998(2).....................................................
10.6 Agreement with Alliance Production Ltd. re Total
Recall(1)...................................................
10.7 Interpublic -- Term Co-financing Agreement(1)...............
10.8 Miramax Term Sheet(1).......................................
10.9 Agreement with Leucadia Film Corp.(1).......................
10.10 Agreements with the Family Channel re Quake and Down
Fall(1).....................................................
10.11 Agreements with Discovery Communications, Inc., re Amazing
Tails II(1).................................................
</TABLE>
<PAGE> 84
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION PAGE
- ------- ----------- ------------
<C> <S> <C>
10.13 Employment Agreement, dated as of January 20, 1997, amended
as of October 4, 1997, between the Company and Paul
Yamamoto(1).................................................
10.14 Consulting Agreement, dated October 9, 1997 between the
Company and Joseph Cayre(1).................................
11 Statement re: Computation of per share earnings(1)..........
21 Subsidiaries of the Registrant(1)...........................
23.1 Consent of experts and named counsel(3) (consent of Kelly
Lytton Mintz & Vann LLP included in Exhibit 5.1)............
23.3 Consent of Bruce P. Vann, Esq. (Nominated Director)(1)......
23.4 Consent of Seth M. Willenson (Nominated Director)(1)........
24.4 Consent of Michael Jay Solomon (Nominated Director)(3)......
24 Power of Attorney(1)........................................
</TABLE>
- ---------------
(1) Previously filed.
(2) Filed herewith.
(3) To be filed by amendment.
<PAGE> 1
EXHIBIT 1.0
1,500,000 SHARES OF COMMON STOCK
TEAM COMMUNICATIONS GROUP, INC.
UNDERWRITING AGREEMENT
June ___, 1998
National Securities Corporation
Representatives of the Several Underwriters
on Schedule A hereto
1001 Fourth Avenue
Suite 2200
Seattle, Washington 98154
Ladies and Gentlemen:
TEAM COMMUNICATIONS GROUP, INC., a California corporation (the "Company"),
hereby agrees with National Securities Corporation ("National") and Coleman and
Company Securities, Inc. ("Coleman") and each of the underwriters named in
Schedule A hereto (collectively, the "Underwriters," which term shall also
include any underwriter substituted as hereinafter provided in Section 11), for
whom National and Coleman are acting as representatives (in such capacity,
National and Coleman shall hereinafter be referred to as "you" or the
"Representatives") with respect to the sale by the Company and the purchase by
the Underwriters, acting severally and not jointly, of the respective amount of
shares set forth in said Schedule A of the Company's common stock, no par value
per share (the "Common Stock") which aggregate 1,500,000 shares (the "Shares").
Upon your request, as provided in Section 2(b) of this Agreement, the Company
shall also issue and sell to the Underwriters, acting severally and not jointly,
up to an additional aggregate of 225,000 shares of Common Stock for the purpose
of covering over-allotments, if any. Such shares of Common Stock are hereinafter
referred to as the "Option Shares." Notwithstanding the foregoing, the
Underwriters shall purchase the first 30,000 Option Shares on a pro rata basis
from Joe Cayre, an existing shareholder of the Company (such Shares are
hereinafter referred to as the "Cayre Over- Allotment Shares"). The Company also
proposes to issue and sell to you warrants (the "Representatives' Warrants")
pursuant to that certain Representatives' Warrant Agreement dated June __, 1998
between the Company and you (the "Representatives' Warrant Agreement") for the
purchase of an additional 150,000 shares of Common Stock. The shares of Common
Stock issuable upon exercise of the Representatives' Warrants are hereinafter
referred to as the "Representatives' Shares." The Shares, Option Shares, the
Representatives' Warrants, and the
<PAGE> 2
Representatives' Shares are more fully described in the Registration Statement
and the Prospectus referred to below.
1. Representations and Warranties of the Company. The Company
represents and warrants to, and agrees with, each of the Underwriters as of the
date hereof, as follows:
(a) The Company has prepared and filed with the Securities and
Exchange Commission (the "Commission") a registration statement, and an
amendment or amendments thereto, on Form SB-2 (Registration No. 333-26307)
including related preliminary prospectuses ("Preliminary Prospectuses"), for the
registration of the Shares, the Option Shares, the Cayre Over-Allotment Shares,
the Representatives' Warrants, the Representatives' Shares and 800,000 Shares of
Common Stock issuable upon exercise of currently outstanding warrants
("Warrants") issued by the Company as described in the Preliminary Prospectus
(the "Warrant Shares") (collectively, hereinafter referred to as the "Registered
Securities") under the Securities Act of 1933, as amended (the "Act"), which
registration statement and amendment or amendments have been prepared by the
Company in conformity with the requirements of the Act, and the Regulations (as
defined below) of the Commission under the Act. The Warrants and Warrants shares
will not be purchased by the Underwriters. Except as the context may otherwise
require, such registration statement, as amended, on file with the Commission at
the time the registration statement becomes effective (including the prospectus,
financial statements, schedules, exhibits and all other documents filed as a
part thereof or incorporated therein and all information deemed to be a part
thereof as of such time pursuant to paragraph (b) of Rule 430(A) of the
Regulations), is hereinafter called the "Registration Statement," and the form
of prospectus in the form first filed with the Commission pursuant to Rule
424(b) of the Regulations, is hereinafter called the "Prospectus." For purposes
hereof, "Regulations" mean the rules and regulations adopted by the Commission
under either the Act or the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), as applicable.
(b) Neither the Commission nor any state regulatory authority, to
the best of the Company's knowledge, has issued any order preventing or
suspending the use of any Preliminary Prospectus, the Registration Statement or
the Prospectus and no proceedings for a stop order suspending the effectiveness
of the Registration Statement have been instituted, or, to the Company's
knowledge, are threatened. Each of the Preliminary Prospectuses (see above), the
Registration Statement and the Prospectus at the time of filing thereof
conformed in all material respects with the requirements of the Act and
Regulations, and neither the Preliminary Prospectuses, the Registration
Statement nor the Prospectus at the time of filing thereof contained an untrue
statement of a material fact or omitted to state a material fact required to be
stated therein and necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading, except that this
representation and warranty does not apply to statements made in reliance upon
and in conformity with written information furnished to the Company with respect
to the Underwriters by or on behalf of the Underwriters expressly for use in
such Preliminary Prospectuses, Registration Statement or Prospectus. The
2
<PAGE> 3
Company agrees that the only such information supplied by the Underwriters is
included in the "Underwriting" Section and the "Legal Matters" Section with
respect to the identity of the Underwriters' legal counsel of Prospectus,
Registration Statement and Preliminary Prospectuses.
(c) When the Registration Statement becomes effective and at all
times subsequent thereto up to the Closing Date (as defined in Section 2(c)
hereof) and each Option Closing Date (as defined in Section 2(b) hereof), if
any, and during such longer period as the Prospectus may be required to be
delivered in connection with sales by the Underwriters or a dealer, the
Registration Statement and the Prospectus, as amended or supplemented as
required, will contain all statements which are required to be stated therein in
accordance with the Act and the Regulations, and will conform in all material
respects to the requirements of the Act and the Regulations; neither the
Registration Statement nor the Prospectus, nor any amendment or supplement
thereto, will contain any untrue statement of a material fact or omit to state
any material fact required to be stated therein or necessary to make the
statements therein, in light of the circumstances under which they were made,
not misleading, provided, however, that this representation and warranty does
not apply to statements made or statements omitted in reliance upon and in
conformity with information furnished to the Company in writing by or on behalf
of any Underwriter expressly for use in the Registration Statement or the
Prospectus or any amendment thereof or supplement thereto.
(d) The Company has been duly organized and is validly existing as
a corporation in good standing under the laws of the state of California. The
Company does not own or control, directly or indirectly, any corporation,
partnership, trust, joint venture or other business entity other than the
subsidiaries listed in Exhibit 2.1 of the Registration Statement, if any. The
Company is duly qualified and licensed and in good standing as a foreign
corporation in each jurisdiction in which its ownership or leasing of any
properties or the character of its operations require such qualification or
licensing and where the failure to do so qualify or be licensed could have a
material adverse effect on the financial condition, results of operations or
business of the Company. The Company has all requisite power and authority
(corporate and other), and has obtained any and all necessary authorizations,
approvals, orders, licenses, certificates, franchises and permits of and from
all governmental or regulatory officials and bodies (including, without
limitation, those having jurisdiction over environmental or similar matters), to
own or lease its properties and conduct its business as described in the
Prospectus, except where the failure to do so would not have a material adverse
effect on the financial condition, results of operations or business of the
Company; to the best of the Company's knowledge, the Company has been doing
business in compliance with all such authorizations, approvals, orders,
licenses, certificates, franchises and permits and all federal, state, local and
foreign laws, rules and regulations; and the Company has not received any notice
of proceedings relating to the revocation or modification of any such
authorization, approval, order, license, certificate, franchise, or permit
which, singly or in the aggregate, if the subject of an unfavorable decision,
ruling or finding, would materially and adversely affect the condition,
financial or otherwise, or the business affairs, operations, properties, or
results of operations of the Company. The
3
<PAGE> 4
disclosures in the Registration Statement concerning the effects of federal,
state, local, and foreign laws, rules and regulations on the Company's business
as currently conducted and as contemplated are correct in all material respects
and do not omit to state a material fact necessary to make the statements
contained therein not misleading in light of the circumstances in which they
were made.
(e) The Company has a duly authorized, issued and outstanding
capitalization as set forth in the Prospectus under the headings
"Capitalization" and "Description of Securities" and will have the adjusted
capitalization set forth therein on the Closing Date and the Option Closing
Date, if any, based upon the assumptions set forth therein, and the Company is
not a party to or bound by any instrument, agreement or other arrangement
providing for it to issue any capital stock, rights, warrants, options or other
securities, except for this Agreement and as described in the Prospectus. The
Registered Securities and all other securities issued or issuable by the Company
conform or, when issued and paid for, will conform, in all material respects to
all statements with respect thereto contained in the Registration Statement and
the Prospectus. Except as disclosed in or contemplated by the Prospectus and the
financial statements of the Company and the related notes thereto included in
the Prospectus, the Company does not have outstanding any options to purchase,
or any preemptive rights or other rights to subscribe for or to purchase, any
securities or obligations convertible into, or any contracts or commitments to
issue or sell, shares of its capital stock or any such options, rights,
convertible securities or obligations. The description of the Company's stock
option, stock bonus and other stock plans or arrangements and the options or
other rights granted and exercised thereunder as set forth in the Prospectus
conforms in all material respects with the requirements of the Act. All issued
and outstanding securities of the Company have been duly authorized and validly
issued and are fully paid and non-assessable, and the holders thereof have no
rights of rescission with respect thereto and are not subject to personal
liability by reason of being such holders; and none of such securities were
issued in violation of the preemptive rights of any holders of any security of
the Company or similar contractual rights granted by the Company.
(f) The Registered Securities are not and will not be subject to
any preemptive or other similar rights of any shareholder, have been duly
authorized and, when issued, paid for and delivered in accordance with the terms
hereof, will be validly issued, fully paid and non-assessable and will conform
in all material respects to the description thereof contained in the Prospectus;
the holders thereof will not be subject to any liability solely by reason of
being holders; all corporate action required to be taken for the authorization,
issue and sale of the Registered Securities has been duly and validly taken; and
the certificates representing the Registered Securities will be in due and
proper form. Upon the issuance and delivery of the Registered Securities to be
sold by the Company hereunder, pursuant to the terms hereof, the Underwriters or
the Representatives (assuming they are bona fide purchasers within the meaning
of the Uniform Commercial Code), as the case may be, will acquire good and
marketable title to such Registered Securities free and clear of any lien,
charge, claim, encumbrance, pledge, security interest, defect, or other
restriction or equity of any kind whatsoever. No shareholder
4
<PAGE> 5
of the Company has any right which has not been waived in writing to require the
Company to register the sale of any shares owned by such shareholder under the
Act in the public offering contemplated by this Agreement. No further approval
or authority of the shareholders or the Board of Directors of the Company will
be required for the issuance and sale of the Shares, the Option Shares and the
Representatives' Warrants to be sold by the Company as contemplated herein.
(g) The financial statements of the Company, together with the
related notes and schedules thereto, included in the Registration Statement,
each Preliminary Prospectus and the Prospectus fairly present the financial
position, changes in shareholders' equity and the results of operations of the
Company at the respective dates and for the respective periods to which they
apply and such financial statements have been prepared in conformity with
generally accepted accounting principles and the Regulations, consistently
applied throughout the periods involved. Except as otherwise set forth in or
contemplated by the Prospectus, there has been no material adverse change or
development involving a material prospective change in the condition, financial
or otherwise, or in the business, affairs, operations, properties, or results of
operation of the Company whether or not arising in the ordinary course of
business since the date of the financial statements included in the Registration
Statement and the Prospectus and the outstanding debt, the property, both
tangible and intangible, and the business of the Company conform in all material
respects to the descriptions thereof contained in the Registration Statement and
the Prospectus. Financial information set forth in the Prospectus under the
headings "Prospectus Summary - Selected Financial Data," "Capitalization," and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," fairly present, on the basis stated in the Prospectus, the
information set forth therein and have been derived from or compiled on a basis
consistent with that of the audited financial statements included in the
Prospectus.
(h) The Company (i) has paid all federal, state, local, franchise,
and foreign taxes for which it is liable, including, but not limited to,
withholding taxes and amounts payable under of the Internal Revenue Code of
1986, as amended (the "Code"), and has furnished all information returns it is
required to furnish pursuant to the Code, (ii) has established adequate reserves
for such taxes which are not due and payable, and (iii) does not have any tax
deficiency or claims outstanding, proposed or assessed against it.
(i) No transfer tax, stamp duty or other similar tax is payable by
or on behalf of the Underwriters in connection with (i) the issuance by the
Company of the Registered Securities to be sold by the Company, (ii) the
purchase by the Underwriters of the Registered Securities from the Company and
the purchase by the Representatives of the Representatives' Warrants from the
Company, (iii) the consummation by the Company of any of its obligations under
this Agreement, or (iv) resales of the Registered Securities in connection with
the initial distribution contemplated hereby.
5
<PAGE> 6
(j) There is no action, suit, proceeding, inquiry, arbitration,
mediation, investigation, litigation or governmental proceeding (including,
without limitation, those having jurisdiction over environmental or similar
matters), domestic or foreign, pending or, to the best of the Company's
knowledge, threatened against (or circumstances that may give rise to the same),
or involving the properties or businesses of, the Company which (i) questions
the validity of the capital stock of the Company, this Agreement, the Financial
Advisory Agreement or the Representatives' Warrant Agreement, or any action
taken or to be taken by the Company pursuant to or in connection with this
Agreement, the Financial Advisory Agreement or the Representatives' Warrant
Agreement, (ii) is required to be disclosed in the Registration Statement which
is not so disclosed (and such proceedings as are summarized in the Registration
Statement are accurately summarized in all material respects), or (iii) might
materially and adversely affect the condition, financial or otherwise, or the
business, affairs, position, shareholders' equity, operation, properties, or
results of operations of the Company and its subsidiaries taken as a whole.
(k) The Company has the corporate power and authority to enter
into this Agreement, the Financial Advisory Agreement and the Representatives'
Warrant Agreement, and to consummate the transactions provided for in such
agreements; and this Agreement, the Financial Advisory Agreement and the
Representatives' Warrant Agreement have each been duly and properly authorized,
executed, and delivered by the Company. Each of this Agreement, the Financial
Advisory Agreement and the Representatives' Warrant Agreement constitutes a
legal, valid and binding agreement of the Company enforceable against the
Company in accordance with its respective terms (except as such enforceability
may be limited by applicable bankruptcy, insolvency, reorganization, moratorium,
fraudulent conveyance or other laws of general application relating to or
affecting enforcement of creditors' rights and the application of equitable
principles in any action, legal or equitable, and except as rights to indemnity
or contribution may be limited by applicable law), and none of the Company's
issue and sale of the Registered Securities (except for the Warrants and Warrant
Shares, which will not be purchased by the Underwriters pursuant to this
Agreement or distributed in connection with the Company's initial public
offering), execution, delivery or performance of this Agreement, the Financial
Advisory Agreement and the Representatives' Warrant Agreement, its consummation
of the transactions contemplated herein and therein, or the conduct of its
businesses as described in the Registration Statement, the Prospectus, and any
amendments or supplements thereto, conflicts with or will conflict with or
results or will result in any breach or violation of any of the terms or
provisions of, or constitutes or will constitute a default under, or result in
the creation or imposition of any lien, charge, claim, encumbrance, pledge,
security interest, defect or other restriction or equity of any kind whatsoever
upon, any property or assets (tangible or intangible) of the Company pursuant to
the terms of: (i) the articles of incorporation or by-laws of the Company, as
amended and restated: (ii) any license, contract, indenture, mortgage, deed of
trust, voting trust agreement, shareholders agreement, note, loan or credit
agreement or any other agreement or instrument to which the Company is a party
or by which it is or may be bound or to which its properties or assets (tangible
or intangible) is or may be subject, or any
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<PAGE> 7
indebtedness, except for any such breach, violation or default which would not
have a material adverse effect on the Company; or (iii) any statute, judgment,
decree, order, rule or regulation applicable to the Company of any arbitrator,
court, regulatory body or administrative agency or other governmental agency or
body (including, without limitation, those having jurisdiction over
environmental or similar matters), domestic or foreign, having jurisdiction over
the Company of any of their activities or properties.
(l) No consent, approval, authorization or order of, and no filing
with, any court, regulatory body, government agency or other body, domestic or
foreign, is required for the issuance of the Registered Securities pursuant to
the Prospectus and the Registration Statement, the performance of this
Agreement, the Representatives' Warrant Agreement, and the transactions
contemplated hereby and thereby, including without limitation, any waiver of any
preemptive, first refusal or other rights that any entity or person may have for
the issue and/or sale of any of the Registered Securities, except such as have
been or may be obtained under the Act and the regulations, may be required under
state securities or Blue Sky laws or may be required by the NASD in connection
with the Underwriters' purchase and distribution of the Registered Securities to
be sold by the Company hereunder (except for the Warrants and Warrant Shares,
which will not be purchased by the Underwriters pursuant to this Agreement or
distributed in connection with the Company's initial public offering).
(m) All executed agreements, contracts or other documents or
copies of executed agreements, contracts or other documents filed as exhibits to
the Registration Statement to which the Company is a party or by which it may be
bound or to which its assets, properties or businesses may be subject have been
duly and validly authorized, executed and delivered by the Company and
constitute the legal, valid and binding agreements of the Company enforceable
against the Company in accordance with their respective terms (except as such
enforceability may be limited by applicable bankruptcy, insolvency,
reorganization, moratorium, fraudulent conveyance or other laws of general
application relating to or affecting enforcement of creditors' rights and the
application of equitable principles in any action, legal or equitable, and
except as rights to indemnity or contribution may be limited by applicable law).
The descriptions in the Registration Statement of such agreements, contracts and
other documents are accurate in all material respects and fairly present the
information required to be shown with respect thereto by Form SB-2, and there
are no contracts or other documents which are required by the Act to be
described in the Registration Statement or filed as exhibits to the Registration
Statement which are not described or filed as required, and the exhibits which
have been filed are complete and correct copies of the documents of which they
purport to be copies.
(n) Since the respective dates as of which information is given in the
Registration Statement and Prospectus, and except as described in or
specifically contemplated by the Prospectus (i) the Company has not incurred any
material liabilities or obligations, indirect, direct or contingent, or entered
into any material verbal or written agreement or other transaction which is not
in the ordinary course of business or which could result in a material
7
<PAGE> 8
reduction in the future earnings of the Company; (ii) the Company has not
sustained any material loss or interference with its business or properties from
fire, flood, windstorm, earthquake, accident or other calamity, whether or not
covered by insurance; (iii) the Company has not paid or declared any dividends
or other distributions with respect to its capital stock, and the Company is not
in default in the payment of principal or interest on any outstanding debt
obligations; (iv) there has not been any change in the capital stock (other than
upon the sale of the Shares, the Option Shares, the Representatives' Shares
hereunder and the exercise of the Warrant shares by the holders thereof and upon
the exercise of options and warrants described in the Registration Statement)
of, or indebtedness material to, the Company (other than in the ordinary course
of business); (v) the Company has not issued any securities or incurred any
liability or obligation (which is not in the ordinary course of business),
primary or contingent, for borrowed money; and (vi) there has not been any
material adverse change in the condition (financial or otherwise), business,
properties, results of operations, or prospects of the Company.
(o) Except as disclosed in or specifically contemplated by the
Prospectus, (i) the Company has sufficient trademarks, trade names, patent
rights, copyrights, licenses, approvals and governmental authorizations to
conduct its business as now conducted; (ii) the expiration of any trademarks,
trade names, patent rights, copyrights, licenses, approvals or governmental
authorizations would not have a material adverse effect on the condition
(financial or otherwise), business, results of operations or prospects of the
Company; (iii) the Company has no knowledge of any infringement by it or its
subsidiaries of trademark, trade name rights, patent rights, copyrights,
licenses, trade secret or other similar rights of others; and (iv) the Company
has no notice of any claim being made against the Company regarding trademark,
trade name, patent, copyright, license, trade secret or other infringement which
could have a material adverse effect on the condition (financial or otherwise),
business, results of operations or prospects of the Company.
(p) The Company is not, nor has the Company received notice that
another party is, in default of the due performance and observance of any term,
covenant or condition of any license, contract, indenture, mortgage, installment
sale agreement, lease, deed of trust, voting trust agreement, shareholders
agreement, note, loan or credit agreement, or any other material agreement or
instrument evidencing an obligation for borrowed money, or any other material
agreement or instrument to which the Company is a party or by which the Company
may be bound or to which the property or assets (tangible or intangible) of the
Company is subject or affected, other than any defaults which would not have a
material adverse effect on the Company.
(q) To the Company's knowledge, there are no pending
investigations involving the Company by the U.S. Department of Labor, or any
other governmental agency responsible for the enforcement of such federal,
state, local, or foreign laws and regulations. There is no unfair labor practice
charge or complaint against the Company pending before the National Labor
Relations Board or any strike, picketing, boycott, dispute, slowdown or stoppage
pending or to
8
<PAGE> 9
its knowledge threatened against or involving the Company. To the Company's
knowledge, no representation question exists respecting the employees of the
Company. No collective bargaining agreement, or modification thereof is
currently being negotiated by the Company. No grievance or arbitration
proceeding is pending under any expired or existing collective bargaining
agreements of the Company. No labor dispute with the employees of the Company
exists or to its knowledge is imminent.
(r) Except as described in the Prospectus, the Company does not
maintain, sponsor or contribute to any program or arrangement that is an
"employee pension benefit plan," an "employee welfare benefit plan," or a
"multiemployer plan" as such terms are defined in Sections 3(2), 3(1) and 3(37),
respectively, of the Employee Retirement Income Security Act of 1974, as amended
("ERISA") ("ERISA Plans"). The Company does not maintain or contribute to a
defined benefit plan, as defined in Section 3(35) of ERISA.
(s) None of the Company, nor any of its employees, directors,
shareholders, or affiliates (within the meaning of the Regulations) of any of
the foregoing has taken or will take directly or indirectly, any action designed
to or which has constituted or which might be expected to cause or result in
stabilization or manipulation of the price of any security of the Company to
facilitate the sale or resale of the Registered Securities.
(t) The Company does not own any real property. The Company has
good title to all items of personal property stated in the Prospectus to be
owned or leased by it, free and clear of all liens, charges, claims,
encumbrances, pledges, security interests, or other restrictions or equities of
any kind whatsoever other than those referred to in the Prospectus, those which
do not materially affect the value or transferability of such property and do
not interfere with the use of such property by the Company and liens for taxes
not yet due and payable.
(u) Each of Stonefield Josephson, Inc. ("Stonefield"), and Price
Waterhouse LLP ("Price"), whose reports are filed with the Commission as a part
of the Registration Statement, are independent certified public accountants as
required by the Act and the Regulations.
(v) The Company has caused to be duly executed legally binding and
enforceable agreements pursuant to which all persons or entities that directly
or beneficially own Common Stock, as of the effective date of the Registration
Statement, have agreed not to, directly or indirectly, offer, offer to sell,
sell, grant any option for the sale of, transfer, assign, pledge, hypothecate or
otherwise encumber or dispose of any shares of Common Stock or securities
convertible into Common Stock, exercisable or exchangeable for or evidencing any
right to purchase or subscribe for any shares of Common Stock (either pursuant
to Rule 144 of the Regulations or otherwise) or dispose of any interest therein
for a period from the date of the Prospectus until thirteen (13) months
following the date that the Registration Statement becomes effective, without
the prior written consent of National (the "Lock-up Agreements"); provided,
however, that such restriction shall not apply to the Cayre Over-Allotment
Shares. The
9
<PAGE> 10
Company has caused to be duly executed legally binding and enforceable
agreements pursuant to which all persons or entities that directly or
beneficially own Warrants, as of the effective date of the Registration
Statement, have agreed not to, directly or indirectly, offer, offer to sell,
sell, grant any option for the sale of, transfer, assign, pledge, hypothecate or
otherwise encumber or dispose of any Warrant Shares (either pursuant to Rule 144
of the Regulations or otherwise) or dispose of any interest therein for a period
from the date of the Prospectus until twelve (12) months following the date that
the Registration Statement becomes effective, without the prior written consent
of National (the "Warrant Lock-up Agreements").The Company will cause the
Transfer Agent (as defined herein) to place "stop transfer" orders on the
Company's stock ledgers in order to effect the Lock-up Agreements and the
Warrant Lock-up Agreements.
(w) Neither the Company nor any of the its officers, directors,
shareholders, employees or affiliates are a party to any claims, arrangements or
understandings, whether oral or written, nor has the Company or any such person
made any payments, for services in the nature of a finder's or origination fee
with respect to the sale of the Registered Securities hereunder that may affect
the Underwriters' compensation as determined by the National Association of
Securities Dealers, Inc. (the "NASD").
(x) The Common Stock has been approved for quotation on the Nasdaq
Small-Cap Market System.
(y) Neither the Company nor any of its officers, employees, agents
or any other person acting on behalf of the Company has, directly or indirectly,
given or agreed to give any money, gift or similar benefit to any customer,
supplier, employee or agent of a customer or supplier, or official or employee
of any governmental agency (domestic or foreign) or instrumentality of any
government (domestic or foreign) or any political party or candidate for office
(domestic or foreign) or other person who was, is, or may be in a position to
help or hinder the business of the Company (or assist the Company in connection
with any actual or proposed transaction) which might subject the Company or any
other such person to any damage or penalty in any civil, criminal or
governmental litigation or proceeding (domestic or foreign). The Company's
internal accounting controls are sufficient to cause the Company to comply with
the Foreign Corrupt Practices Act of 1977, as amended.
(z) Except as set forth in the Prospectus, no officer, director or
shareholder of the Company, or any "affiliate" or "associate" (as these terms
are defined in Rule 405 promulgated under the Regulations) of any of the
foregoing persons or entities has or has had, either directly or indirectly, (i)
an interest in any person or entity which (A) furnishes or sells services or
products which are furnished or sold or are proposed to be furnished or sold by
the Company, or (B) purchases from or sells or furnishes to the Company any
goods or services, or (ii) a beneficial interest in any contract or agreement to
which the Company is a party or by which it may be bound or affected. Except as
set forth in the Prospectus there are no existing agreements, arrangements,
understandings or transactions, or proposed agreements,
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<PAGE> 11
arrangements, understandings or transactions, between or among the Company, and
any officer, director, principal shareholder (as such term is used in the
Prospectus) of the Company, or any affiliate or associate of any of the
foregoing persons or entities which is required to be disclosed in accordance
with Regulation S-B promulgated under the Act.
(aa) The Company is not, and does not intend to conduct its
business in a manner in which it would become an "investment company" within the
meaning of the Investment Company Act of 1940, as amended.
(ab) Any certificate signed by any officer of the Company and
delivered to the Underwriters or to the Representatives' Counsel (as defined in
Section 4(d) herein) shall be deemed a representation and warranty by the
Company to the Underwriters as to the matters covered thereby.
(ac) The minute books of the Company have been made available to
the Underwriters and contain a complete summary of all meetings and actions of
the directors and shareholders of the Company, since the time of its
incorporation, and reflect all transactions referred to in such minutes
accurately in all material respects.
(ad) The Company has not distributed and will not distribute prior
to the Closing Date any offering material in connection with the offering and
sale of the Shares in this offering other than the Prospectus, the Registration
Statement and the other materials permitted by the Act. Except as described in
the Prospectus, no holders of any securities of the Company or of any options,
warrants or other convertible or exchangeable securities of the Company have the
right to include any securities issued by the Company as part of the
Registration Statement or to require the Company to file a registration
statement under the Act and no person or entity holds any anti-dilution rights
with respect to any securities of the Company.
(ae) The Company maintains insurance, directly or indirectly, by
insurers of recognized financial responsibility of the types and in the amounts
as are prudent, customary and adequate for the business in which it is engaged,
including, but not limited to, insurance covering real and personal property
owned or leased by the Company against theft, damage, destruction, acts of
vandalism and all other risks customarily insured against, all of which
insurance is in full force and effect. The Company has no reason to believe that
it will not be able to renew existing insurance coverage with respect to the
Company as and when such coverage expires or to obtain similar coverage from
similar insurers as may be necessary to continue its business, in either case,
at a cost that would not have a material adverse effect on the financial
condition, operations, business, assets or properties of the Company. The
Company has not failed to file any material claims, has no material disputes
with its insurance companies regarding any material claims submitted under its
insurance policies, and has complied with all material provisions contained in
its insurance policies.
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<PAGE> 12
2. Purchase, Sale and Delivery of the Shares.
(a) On the basis of the representations, warranties, covenants and
agreements herein contained, but subject to the terms and conditions herein set
forth, the Company agrees to sell to each Underwriter, and each Underwriter,
severally and not jointly agrees to purchase from the Company, at a price equal
to $_________ per share (that being the initial public offering price per Share
minus an underwriting discount to the Underwriters of 9% per Share), that number
of Shares set forth in Schedule A opposite the name of such Underwriter, subject
to such adjustment as the Representatives in their discretion shall make to
eliminate any sales or purchases of fractional shares, plus any additional
numbers of Shares which such Underwriter may become obligated to purchase
pursuant to the provisions of Section 11 hereof.
(b) In addition, on the basis of the representations, warranties,
covenants and agreements, herein contained, but subject to the terms and
conditions herein set forth, the Underwriters, severally and not jointly, are
hereby granted an option to purchase all or any part of the Option Shares at a
price equal to $________ per share (that being the initial public offering price
per Share minus and underwriting discount to the Underwriters of 9% per Share).
The option granted hereby will expire 45 days after (i) the date the
Registration Statement becomes effective, if the Company has elected not to rely
on Rule 430A under the Regulations, or (ii) the date of this Agreement if the
Company has elected to rely upon Rule 430A under the Regulations, and may be
exercised in whole or in part from time to time (but not on more than two (2)
occasions) only for the purpose of covering over-allotments which may be made in
connection with the offering and distribution of the Shares upon notice by the
Representatives to counsel for the Company (at the address for copies of notices
as set forth in Section 13 below), setting forth the number of Option Shares as
to which the several Underwriters are then exercising the option and the time
and date of payment and delivery for any such Option Shares. Any such time and
date of delivery (an "Option Closing Date") shall be determined by the
Representatives, but shall not be sooner than three (3) business days, nor later
than five (5) business days, after the exercise of said option, nor in any event
prior to the Closing Date, as hereinafter defined, unless otherwise agreed upon
by the Representatives and the Company. Notwithstanding the foregoing, the
Underwriters shall purchase the first 30,000 Option Shares from Joseph Cayre, an
existing shareholder of the Company, and Cayre, by signing this Agreement,
hereby grants the Underwriters option to purchase such shares on the same terms
as described above. Nothing herein contained shall obligate the Underwriters to
exercise the over-allotment option described above. No Option Shares shall be
delivered unless the Shares shall be simultaneously delivered or shall
theretofore have been delivered as herein provided.
(c) Payment of the purchase price for, and delivery of
certificates for, the Shares shall be made at the offices of Harter, Secrest &
Emery LLP ("Representative's Counsel") at 700 Midtown Tower, Rochester, New York
14604 or at such other place as shall be agreed upon by the Representatives and
the Company. Such delivery and payment shall be made at 10:00 a.m. (New York
time) on _________, 1998, or at such other time and date as shall be agreed upon
12
<PAGE> 13
by Representatives and the Company, but no more than five (5) business days
after the date hereof (such time and date of payment and delivery being herein
called the "Closing Date"). In addition, in the event that any or all of the
Option Shares are purchased by the Underwriters, payment of the purchase price
for, and delivery of certificates for, such Option Shares shall be made at the
above mentioned offices of Representative's Counsel or at such other place as
shall be agreed upon by the Representatives and the Company on each Option
Closing Date as specified in the notice from the Representatives to the Company.
Delivery of the certificates for the Shares and the Option Shares, if any, shall
be made to the Underwriters against payment by the Underwriters, of the purchase
price for the Shares to the order of the Company and of the Option Shares, if
any, to the order of the Company, by wire transfer of same day funds. In the
event such option is exercised, each of the Underwriters, acting severally and
not jointly, shall purchase that proportion of the total number of Option Shares
then being purchased which the number of Shares set forth in Schedule A hereto
opposite the name of such Underwriter bears to the total number of Shares,
subject in each case to such adjustments as the Representatives in their
discretion shall make to eliminate any sales or purchases of fractional shares,
provided that the first 30,000 of such Shares shall be purchased by the
Underwriters from Joseph Cayre on a pro rata basis, an existing shareholder of
the Company. Certificates for the Shares and the Option Shares, if any, shall be
in definitive, fully registered form, shall bear no restrictive legends and
shall be in such denominations and registered in such names as the Underwriters
may request in writing at least three (3) business days prior to Closing Date or
the relevant Option Closing Date, as the case may be. The certificates for the
Shares and the Option Shares, if any, shall be made available to the
Representatives at such office or such other place as the Representatives may
designate for inspection, checking and packaging no later than 9:30 a.m. on the
last business day prior to Closing Date or the relevant Option Closing Date, as
the case may be.
(d) On the Closing Date, the Company shall issue and sell to the
Representatives Representatives' Warrants at a purchase price of $0.001 per
warrant, which warrants shall entitle the holders thereof to purchase an
aggregate of 150,000 shares of Common Stock. The aggregate purchase price of the
Representative's Warrants shall be $15. The Representatives' Warrants shall
expire five (5) years after the effective date of the Registration Statement and
shall be exercisable for a period of four (4) years commencing one (1) year from
the effective date of the Registration Statement at a price equaling 120% of the
initial public offering price of the Shares. The Representatives' Warrant
Agreement and form of Warrant Certificate shall be substantially in the form
filed as Exhibit 4.2 to the Registration Statement. Payment for the
Representatives' Warrants shall be made on the Closing Date.
3. Public Offering of the Shares. As soon after the Registration
Statement becomes effective as the Representatives deem advisable, the
Underwriters shall make a public offering of the Shares (other than to residents
of or in any jurisdiction in which qualification of the Shares is required and
has not become effective) at the price and upon the other terms set forth in the
Prospectus. The Representatives may from time to time, after the initial public
offering,
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<PAGE> 14
increase or decrease the public offering price after distribution of the Shares
has been completed to such extent as the Representatives, in their sole
discretion deem advisable; provided, however, that the foregoing shall not
effect the per share purchase price from the Company set forth in Section 2(a)
above. The Underwriters may enter into one or more agreements as the
Underwriters, in each of their sole discretion, deem advisable with one or more
broker-dealers who shall act as dealers in connection with such public offering.
4. Covenants of the Company. The Company covenants and agrees with each
of the Underwriters as follows:
(a) The Company shall use its best efforts to cause the
Registration Statement and any amendments thereto to become effective as
promptly as practicable and will not at any time, whether before or after the
effective date of the Registration Statement, file any amendment to the
Registration Statement or supplement to the Prospectus or file any document
under the Act or Exchange Act before completion of the initial distribution of
the offering of the Shares by the Underwriters of which the Representatives
shall not previously have been advised and furnished with a copy, or to which
the Representatives shall have objected or which is not in compliance with the
Act, the Exchange Act or the Regulations.
(b) As soon as the Company is advised or obtains knowledge
thereof, the Company will advise the Representatives and confirm the notice in
writing, (i) when the Registration Statement becomes effective, if the
provisions of Rule 430A promulgated under the Act will be relied upon, when the
Prospectus has been filed in accordance with said Rule 430A and when any
post-effective amendment to the Registration Statement becomes effective, (ii)
of the issuance by the Commission of any stop order or of the initiation, or the
threatening, of any proceeding, suspending the effectiveness of the Registration
Statement or any order preventing or suspending the use of the Prospectus, or
any amendment or supplement thereto, or the institution of proceedings for that
purpose, (iii) of the issuance by the Commission or by any state securities
commission of any proceedings for the suspension of the qualification of any of
the Registered Securities for offering or sale in any jurisdiction or of the
initiation, or the threatening, of any proceeding for that purpose, (iv) of the
receipt of any comments from the Commission; and (v) of any request by the
Commission for any amendment to the Registration Statement or any amendment or
supplement to the Prospectus or for additional information. If the Commission or
any state securities commission authority shall enter a stop order or suspend
such qualification at any time, the Company will use its best efforts to obtain
promptly the lifting of such order.
(c) The Company shall file the Prospectus (in form and substance
satisfactory to the Representatives) in accordance with the requirements of the
Act.
(d) The Company will give the Representatives notice of its
intention to file or prepare any amendment to the Registration Statement
(including any post-effective amendment) or any amendment or supplement to the
Prospectus (including any revised prospectus which the
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<PAGE> 15
Company proposes for use by the Underwriters in connection with the offering of
the Registered Securities (except for the Warrants and Warrant Shares, which
will not be purchased by the Underwriters pursuant to this Agreement or
distributed in connection with the Company's initial public offering) which
differs from the corresponding prospectus on file with the Commission at the
time the Registration Statement becomes effective, whether or not such revised
prospectus is required to be filed pursuant to Rule 424(b) of the Regulations),
and will furnish the Representatives with copies of any such amendment or
supplement a reasonable amount of time prior to such proposed filing or use, as
the case may be, and will not file any such amendment or supplement to which the
Representatives or Representatives' Counsel shall reasonably object.
(e) The Company shall endeavor in good faith, in cooperation with
the Representatives, at or prior to the time the Registration Statement becomes
effective, to qualify the Registered Securities for offering and sale under the
securities laws of such jurisdictions as the Representatives may reasonably
designate to permit the continuance of sales and dealings therein for as long as
may be necessary to complete the distribution, and shall make such applications,
file such documents and furnish such information as may be required for such
purpose; provided, however, the Company shall not be required to qualify as a
foreign corporation or become subject to service of process in any such
jurisdiction. In each jurisdiction where such qualification shall be effected,
the Company will, unless the Representatives agree that such action is not at
the time necessary or advisable, use all reasonable efforts to file and make
such statements or reports at such times as are or may reasonably be required by
the laws of such jurisdiction to continue such qualification.
(f) During the time when a prospectus is required to be delivered
under the Act, the Company shall use its best efforts to comply with all
requirements imposed upon it by the Act, as now and hereafter amended, and by
the Regulations, as from time to time in force, so far as necessary to permit
the continuance of sales of or dealings in the Registered Securities in
accordance with the provisions hereof and the Prospectus, or any amendments or
supplements thereto. If at any time when a prospectus relating to the Registered
Securities is required to be delivered under the Act, any event shall have
occurred as a result of which, in the opinion of counsel for the Company or
Representatives' Counsel, the Prospectus, as then amended or supplemented,
includes an untrue statement of a material fact or omits to state any material
fact required to be stated therein or necessary to make the statements therein,
in the light of the circumstances under which they were made, not misleading, or
if it is necessary at any time to amend or supplement the Prospectus to comply
with the Act, the Company will notify the Representatives promptly and prepare
and, subject to Section 4(a) hereof, file with the Commission an appropriate
amendment or supplement in accordance with Section 10 of the Act, each such
amendment or supplement to be satisfactory to Representatives' Counsel, and the
Company will furnish to the Underwriters copies of such amendment or supplement
as soon as available and in such quantities as the Underwriters may request.
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<PAGE> 16
(g) As soon as practicable, but in any event not later than 45
days after the end of the 12-month period beginning on the day after the end of
the fiscal quarter of the Company during which the effective date of the
Registration Statement occurs (90 days in the event that the end of such fiscal
quarter is the end of the Company's fiscal year), the Company shall make
generally available to its security holders, in the manner specified in Rule
158(b) of the Regulations, and to the Representatives, an earnings statement
which will be in the detail required by, and will otherwise comply with, the
provisions of Section 11(a) of the Act and Rule 158(a) of the Regulations, which
statement need not be audited unless required by the Act, covering a period of
at least 12 consecutive months after the effective date of the Registration
Statement.
(h) During a period of three (3) years after the date hereof, the
Company will furnish to its shareholders, as soon as practicable, annual reports
(including financial statements audited by independent public accountants) and
will make available to its shareholders unaudited quarterly reports of earnings,
and will deliver to the Representatives:
(i) concurrently with furnishing such quarterly reports to
its shareholders, statements of income of the Company for each
quarter in the form furnished to the Company's shareholders;
(ii) concurrently with furnishing such annual reports to its
shareholders, a copy of such annual report;
(iii) as soon as they are available, copies of all reports
(financial or other) mailed to shareholders;
(iv) as soon as they are available, copies of all reports and
financial statements furnished to or filed with the Commission, the
Nasdaq Small-Cap Market or any securities exchange on which the
Shares are listed;
(v) every press release and every material news item or
article of interest to the financial community in respect of the
Company or its affairs which was released or prepared by or on
behalf of the Company; and
(vi) any additional information of a public nature concerning
the Company (and any future subsidiaries) or its businesses which
the Representatives may reasonably request.
During such three-year period, if the Company has active subsidiaries, the
foregoing financial statements will be on a consolidated basis to the extent
that the accounts of the Company and its subsidiaries are consolidated.
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(i) The Company will maintain a transfer agent (the "Transfer
Agent") and, if necessary under the jurisdiction of incorporation of the
Company, a registrar (which may be the same entity as the transfer agent) for
the Common Stock.
(j) The Company will furnish to the Representatives or on the
Representatives' order, without charge, at such place as the Representatives may
designate, copies of each Preliminary Prospectus, the Registration Statement and
any pre-effective or post-effective amendments thereto, each Preliminary
Prospectus, the Prospectus, and all amendments and supplements thereto,
including any prospectus prepared after the effective date of the Registration
Statement, in each case as soon as available and in such quantities as the
Representatives may reasonably request.
(k) On or before the effective date of the Registration Statement,
the Company shall provide the Representatives with true copies of duly executed
Lock-up Agreements and Warrant Lock-up Agreements. On or before the Closing
Date, the Company shall deliver instructions to the Transfer Agent authorizing
it to place appropriate stop transfer orders on the Company's ledgers.
(l) The Company shall use its best efforts to cause its officers,
directors, shareholders or affiliates (within the meaning of the Regulations)
not to take, directly or indirectly, any action designed to, or which might in
the future reasonably be expected to cause or result in, stabilization or
manipulation of the price of any securities of the Company during the initial
distribution of the offering of the Shares.
(m) The Company shall apply the net proceeds from the sale of the
Shares substantially in the manner, and subject to the conditions, set forth
under "Use of Proceeds" in the Prospectus.
(n) The Company shall timely file all such reports, forms or other
documents as may be required from time to time, under the Act, the Exchange Act,
and the Regulations, and all such reports, forms and documents filed will comply
as to form and substance with the applicable requirements under the Act, the
Exchange Act, and the Regulations.
(o) The Company shall cause the Common Stock to be quoted on the
Nasdaq Small-Cap Market, and for a period of five (5) years from the date hereof
shall use its best efforts to maintain the quotation of the Common Stock on the
Nasdaq Small-Cap Market to the extent outstanding and to the extent so
qualified.
(p) For a period of two (2) years from the Closing Date, the
Company shall cause its transfer agent to furnish to the Representatives, if so
requested in writing, at the Company's sole expense, daily consolidated transfer
sheets relating to the Common Stock.
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(q) For a period of five (5) years after the effective date of the
Registration Statement the Company shall, at the Company's sole expense, take
all necessary and appropriate actions to further qualify the Company's
securities in all jurisdictions of the United States in order to permit
secondary sales of such securities pursuant to the Blue-Sky laws of those
jurisdictions which do not require the Company to qualify as a foreign
corporation or to file a general consent to service of process.
(r) The Company (i) prior to the effective date of the
Registration Statement, has filed a Form 8-A with the Commission providing for
the registration of the Common Stock under the Exchange Act and (ii) as soon as
practicable, will use its best efforts to take all necessary and appropriate
actions to be included in Standard and Poor's Corporation Descriptions and
Moody's OTC Manual and to continue such inclusion for a period of not less than
five (5) years.
(s) The Company agrees that for a period of thirteen (13) months
following the effective date of the Registration Statement it will not, without
the prior written consent of National, offer, issue, sell, contract to sell,
grant any option for the sale of or otherwise dispose of any Common Stock, or
securities convertible into Common Stock, except for Common Stock issuable upon
exercise of the Representatives' Warrants, and shares of Common Stock issued
upon the exercise of currently outstanding Warrants or options issued under any
stock option plan in effect on the Closing Date, shares of Common Stock
automatically granted pursuant to any stock option plan in effect on the Closing
Date, shares of Common Stock issued pursuant to any employee stock purchase plan
in effect on the Closing Date or the Conversion Shares.
(t) For a period of twenty-five (25) days from the effective date
of the Registration Statement, the Company shall not without the prior written
consent of National or Representatives' Counsel, issue, directly or indirectly
any press release or other communication or hold any press conference with
respect to the Company or its activities or the offering contemplated hereby,
other than trade releases issued in the Company's business consistent with past
practices with respect to the Company's operations.
(u) For a period equal to the lesser of (i) seven (7) years from
the date hereof, and (ii) the sale to the public of the Representatives' Shares,
the Company will not take any action or actions which may prevent or disqualify
the Company's use of Form SB-2 (or other appropriate form) for the registration
under the Act of the Representatives' Shares.
(v) The Company agrees to allow one (1) designee of National to
attend all meetings of the Company's Board of Directors for a period of five (5)
years following the Closing. Such person shall receive all notices and other
correspondence and communications sent by the Company to members of the Board of
Directors. The Company shall reimburse such person for his/her out-of-pocket
expenses incurred in connection with his/her attendance at such meetings.
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<PAGE> 19
(w) The Company agrees that within one hundred twenty (120) days
after the Closing it shall retain a public relations firm which is reasonably
acceptable to the Representatives. The Company shall keep such public relations
firm, or any replacement, for a period of two (2) years from the Closing. Any
replacement public relations firm shall be retained only with the consent of the
Representatives.
(x) The Company agrees that any and all future transactions
between the Company and its officers, directors, principal shareholders and the
affiliates of the foregoing persons will be on terms no less favorable to the
Company than could reasonably be obtained in arm's length transactions with
independent third parties, and that any such transactions requiring a payment of
more than $10,000 will be approved by a majority of the Company's outside
independent directors disinterested in the transaction.
(y) The Company shall prepare and deliver to the Representatives,
at the Company's sole expense, four bound volumes containing all correspondence
with regulatory officials, agreements, documents and all other materials
prepared in connection with this offering.
5. Payment of Expenses.
(a) The Company hereby agrees to pay on each of the Closing Date
and each Option Closing Date (to the extent not previously paid) all expenses
and fees (other than fees of Representatives' Counsel, except as provided in
(iv) below) incident to the performance of the obligations of the Company under
this Agreement, the Financial Advisory Agreement and the Representatives'
Warrant Agreement, including, without limitation, (i) the fees and expenses of
accountants and counsel for the Company, (ii) all costs and expenses incurred in
connection with the preparation, duplication, printing, filing, delivery and
mailing (including the payment of postage with respect thereto) of the
Registration Statement and the Prospectus and any amendments and supplements
thereto and the duplication, mailing (including the payment of postage with
respect thereto) and delivery of this Agreement, the Agreement Among
Underwriters, the Selected Dealers Agreements, the Powers of Attorney, and
related documents, including the cost of all copies thereof and of the
Preliminary Prospectuses and of the Prospectus and any amendments thereof or
supplements thereto supplied to the Underwriters and such dealers as the
Underwriters may request, in quantities as hereinabove stated, (iii) the
printing, engraving, issuance and delivery of the certificates representing the
Registered Securities, (iv) the qualification of the Registered Securities under
state or foreign securities or "Blue Sky" laws and determination of the status
of such securities under legal investment laws, including the costs of printing
and mailing the "Preliminary Blue Sky Memorandum," the "Supplemental Blue Sky
Memorandum," the "Final Blue Sky Memorandum" and "Legal Investments Survey," if
any, and including reasonable disbursements and fees of counsel in connection
therewith, (v) expense of tombstone advertisements and other advertising costs
and expenses (not to exceed $10,000 in the aggregate), (vi) costs and expenses
in connection with the "road show," (limited to $10,000 for domestic road show
expenses and $3,000 for European road show expenses), (vii)
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<PAGE> 20
costs and expenses of any independent counsel or consultant retained (provided
that the Company approves in writing of the retention of such independent
counsel or consultants in advance), (viii) fees and expenses of the transfer
agent and registrar, (ix) the fees payable to the Commission and the NASD and
(x) the fees and expenses incurred in connection with the listing of the
Registered Securities on the Nasdaq Stock Market and any other market or
exchange.
(b) If this Agreement is terminated by the Underwriters in
accordance with the provisions of Section 6, Section 10(a) or Section 12, the
Company shall reimburse and indemnify the Representatives for all of their
actual out-of-pocket expenses including the fees and disbursements of
Representatives' Counsel, less any amounts already paid pursuant to Section 5(c)
hereof. In no event, however, will the Representatives, in the event the
offering is terminated, be entitled to retain or receive more than an amount
equal to their actual accountable out-of-pocket expenditures.
(c) The Company further agrees that, in addition to the expenses
payable pursuant to subsection (a) of this Section 5, it will pay to the
Representatives on the Closing Date by certified or bank cashier's check or, at
the election of the Representatives, by deduction from the proceeds of the
offering contemplated herein a non-accountable expense allowance equal to two
percent (2%) of the gross proceeds received by the Company from the sale of the
Shares, less $____ which has been paid to date. In the event the Representatives
elect to exercise the over-allotment option described in Section 2(b) hereof,
the Company further agrees to pay to the Representatives on the Option Closing
Date (by certified or bank cashier's check or, at the Representatives' election,
by deduction from the proceeds of the offering of the Option Shares) a
non-accountable expense allowance equal to two percent (2%) of the gross
proceeds received by the Company from the sale of the Option Shares.
6. Conditions of the Underwriters' Obligations. The obligations of the
Underwriters hereunder shall be subject to the continuing accuracy of the
representations and warranties of the Company herein as of the date hereof and
as of the Closing Date and each Option Closing Date, if any, as if they had been
made on and as of the Closing Date or each Option Closing Date, as the case may
be; the accuracy on and as of the Closing Date or Option Closing Date, as the
case may be, if any, of the statements of officers of the Company made pursuant
to the provisions hereof; and the performance by the Company on and as of the
Closing Date and each Option Closing Date, if any, of its covenants and
obligations hereunder and to the following further conditions:
(a) The Registration Statement shall have become effective not
later than 5:00 p.m., New York City time, on the date prior to the date of this
Agreement or such later date and time as shall be consented to in writing by the
Representatives, and, at Closing Date and each Option Closing Date, if any, no
stop order suspending the effectiveness of the Registration Statement shall have
been issued and no proceedings for that purpose shall have been instituted or
shall be pending or contemplated by the Commission and any request on the part
of the Commission for
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<PAGE> 21
additional information shall have been complied with to the reasonable
satisfaction of Representatives' Counsel. If the Company has elected to rely
upon Rule 430A of the Regulations, the price of the Shares and any price-related
information previously omitted from the effective Registration Statement
pursuant to such Rule 430A shall have been transmitted to the Commission for
filing pursuant to Rule 424(b) of the Regulations within the prescribed time
period, and prior to Closing Date the Company shall have provided evidence
satisfactory to the Representatives of such timely filing, or a post-effective
amendment providing such information shall have been promptly filed and declared
effective in accordance with the requirements of Rule 430A of the Regulations.
(b) The Representatives shall not have advised the Company that
the Registration Statement, or any amendment thereto, contains an untrue
statement of fact which, in the opinion of Representatives' Counsel, is
material, or omits to state a fact which, in the opinion of Representatives'
Counsel, is material and is required to be stated therein or is necessary to
make the statements therein not misleading, or that the Prospectus, or any
supplement thereto, contains an untrue statement of fact which, in the
reasonable opinion of Representatives' Counsel, is material, or omits to state a
fact which, in the reasonable opinion of Representatives' Counsel, is material
and is required to be stated therein or is necessary to make the statements
therein, in light of the circumstances under which they were made, not
misleading.
(c) On or prior to the Closing Date, the Underwriters shall have
received from Representatives' Counsel such opinion or opinions with respect to
the organization of the Company, the validity of the Registered Securities, the
Registration Statement, the Prospectus and other related matters as the
Representatives may request.
(d) At the Closing Date, the Underwriters shall have received the
opinions of Kelly, Lytton, Mintz & Vann ("KLMV"), counsel to the Company, dated
the Closing Date, addressed to the Underwriters and in form and substance
satisfactory to Representatives' Counsel, to the effect that:
(i) the Company (A) has been duly organized and is validly
existing as a corporation in good standing under the laws of
California, (B) is duly qualified and licensed and in good standing
as a foreign corporation in each jurisdiction in which its ownership
or leasing of any properties or the character of its operations
requires such qualification or licensing, and (C) to the best of
such counsel's knowledge, has all requisite corporate power and
authority and has obtained any and all necessary authorizations,
approvals, orders, licenses, certificates, franchises and permits of
and from all governmental or regulatory officials and bodies
(including, without limitation, those having jurisdiction over
environmental or similar matters), to own or lease its properties
and conduct its business as described in the Prospectus.
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<PAGE> 22
(ii) except as described in the Prospectus, and to such
counsel's knowledge after reasonable investigation, the Company does
not own an interest in any corporation, limited liability company,
partnership, joint venture, trust or other business entity;
(iii) the Company has a duly authorized, issued and
outstanding capitalization as set forth in the Prospectus, and any
amendment or supplement thereto, under "Capitalization" and
"Description of Securities," and to the best knowledge of such
counsel, the Company is not a party to or bound by any instrument,
agreement or other arrangement providing for it to issue any capital
stock, rights, warrants, options or other securities, except for
this Agreement, the Representatives' Warrant Agreement, the Warrants
and as described in the Prospectus. The Registered Securities and
all other securities issued or issuable by the Company conform in
all material respects to the statements with respect thereto
contained in the Registration Statement and the Prospectus. All
issued and outstanding securities of the Company have been duly
authorized and validly issued and are fully paid and non-assessable;
the holders thereof are not subject to personal liability by reason
of being such holders; and none of such securities were issued in
violation of the preemptive rights of any holders of any security of
the Company. The Registered Securities to be sold by the Company
hereunder and under the Representatives' Warrant Agreement are not
and will not be subject to any preemptive or other similar rights of
any shareholder, have been duly authorized and, when issued, paid
for and delivered in accordance with their terms, will be validly
issued, fully paid and non-assessable and conform in all material
respects to the description thereof contained in the Prospectus; the
holders thereof will not be subject to any liability solely as such
holders; all corporate action required to be taken for the
authorization, issue and sale of the Registered Securities has been
duly and validly taken; and the certificates representing the
Registered Securities are in due and proper form. The
Representatives' Warrants constitute valid and binding obligations
of the Company to issue and sell, upon exercise thereof and payment
therefor, the number and type of securities of the Company called
for thereby (except as such enforceability may be limited by
applicable bankruptcy, insolvency, reorganization, moratorium or
other laws of general application relating to or affecting
enforcement of creditors' rights and the application of equitable
principles in any action, legal or equitable, and except as rights
to indemnity or contribution may be limited by applicable law). Upon
the issuance and delivery pursuant to this Agreement of the
Registered Securities to be sold by the Company, the Company will
convey, against payment therefor as provided herein, to the
Underwriters and the Representatives, respectively, good and
marketable title to the Registered Securities to be purchased by the
Representatives free and clear of all liens and other encumbrances;
(iv) the Registration Statement is effective under the Act,
and, if applicable, filing of all pricing information has been
timely made in the appropriate form under Rule 430A, and no stop
order suspending the use of the Preliminary Prospectus, the
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<PAGE> 23
Registration Statement or Prospectus or any part of any thereof or
suspending the effectiveness of the Registration Statement has been
issued and no proceedings for that purpose have been instituted or
are pending or, to the best of such counsel's knowledge, threatened
or contemplated under the Act;
(v) each of the Preliminary Prospectus, the Registration
Statement, and the Prospectus and any amendments or supplements
thereto (other than the financial statements and other financial and
statistical data included therein as to which no opinion need be
rendered) comply as to form in all material respects with the
requirements of the Act and the Regulations. Such counsel shall
state that such counsel has participated in conferences with
officers and other representatives of the Company and the
Representatives and representatives of the independent public
accountants for the Company, at which conferences the contents of
the Preliminary Prospectus, the Registration Statement, the
Prospectus, and any amendments or supplements thereto were
discussed, and, although such counsel is not passing upon and does
not assume any responsibility for the accuracy, completeness or
fairness of the statements contained in the Preliminary Prospectus,
the Registration Statement and Prospectus, and any amendments or
supplements thereto, on the basis of the foregoing, no facts have
come to the attention of such counsel which lead them to believe
that either the Registration Statement or any amendment thereto, at
the time such Registration Statement or amendment became effective
or the Preliminary Prospectus or Prospectus or amendment or
supplement thereto as of the date of such opinion contained any
untrue statement of a material fact or omitted to state a material
fact required to be stated therein or necessary to make the
statements therein not misleading (it being understood that such
counsel need express no opinion with respect to the financial
statements and schedules and other financial and statistical data
included in the Preliminary Prospectus, the Registration Statement
or Prospectus, and any amendments or supplements thereto);
(vi) to the best of such counsel's knowledge after reasonable
investigation, (A) there are no agreements, contracts or other
documents required by the Act to be described in the Registration
Statement and the Prospectus and filed as exhibits to the
Registration Statement other than those described in the
Registration Statement and the Prospectus and filed as exhibits
thereto; (B) the descriptions in the Registration Statement and the
Prospectus and any supplement or amendment thereto of contracts and
other documents to which the Company is a party or by which it is
bound are accurate in all material respects and fairly represent the
information required to be shown by Form SB-2; (C) there is not
pending or threatened against the Company any action, arbitration,
suit, proceeding, litigation, governmental or other proceeding
(including, without limitation, those having jurisdiction over
environmental or similar matters), domestic or foreign, pending or
threatened against the Company which (x) is required to be disclosed
in the Registration Statement which is not so disclosed (and such
proceedings as are summarized in the Registration Statement are
accurately
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summarized in all material respects), (y) questions the validity of
the capital stock of the Company or this Agreement, the Financial
Advisory Agreement or the Representatives' Warrant Agreement, or of
any action taken or to be taken by the Company pursuant to or in
connection with any of the foregoing; and (D) there is no action,
suit or proceeding pending or threatened against the Company before
any court or arbitrator or governmental body, agency or official in
which there is a reasonable possibility of an adverse decision which
may result in a material adverse change in the financial condition,
business, affairs, shareholders' equity, operations, properties,
business or results of operations of the Company, which could
adversely affect the present or prospective ability of the Company
to perform its obligations under this Agreement, the Financial
Advisory Agreement or the Representatives' Warrant Agreement or
which in any manner draws into question the validity or
enforceability of this Agreement, the Financial Advisory Agreement
or the Representatives' Warrant Agreement;
(vii) the Company has the corporate power and authority to
enter into each of this Agreement, the Financial Advisory Agreement
and the Representatives' Warrant Agreement and to consummate the
transactions provided for therein; and each of this Agreement, the
Financial Advisory Agreement and the Representatives' Warrant
Agreement has been duly authorized, executed and delivered by the
Company. Each of this Agreement, the Financial Advisory Agreement
and the Representatives' Warrant Agreement, assuming due
authorization, execution and delivery by each other party thereto,
constitutes a legal, valid and binding agreement of the Company
enforceable against the Company in accordance with its terms (except
as such enforceability may be limited by applicable bankruptcy,
insolvency, reorganization, moratorium or other laws of general
application relating to or affecting enforcement of creditors'
rights and the application of equitable principles in any action,
legal or equitable, and except as rights to indemnity or
contribution may be limited by applicable law), and none of the
Company's execution, delivery or performance of this Agreement, the
Financial Advisory Agreement and the Representatives' Warrant
Agreement, its consummation of the transactions contemplated herein
or therein, or the conduct of its business as described in the
Registration Statement, the Prospectus, and any amendments or
supplements thereto conflicts with or results in any breach or
violation of any of the terms or provisions of, or constitutes a
default under, or result in the creation or imposition of any lien,
charge, claim, encumbrance, pledge, security interest, defect or
other restriction or equity of any kind whatsoever upon, any
property or assets (tangible or intangible) of the Company pursuant
to the terms of (A) the Articles of Incorporation or By-laws of the
Company, as amended, (B) any license, contract, indenture, mortgage,
deed of trust, voting trust agreement, shareholders' agreement,
note, loan or credit agreement or any other agreement or instrument
known to such counsel to which the Company is a party or by which it
is bound, or (C) any federal, state or local statute, rule or
regulation applicable to the Company or any judgment, decree or
order
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<PAGE> 25
known to such counsel of any arbitrator, court, regulatory body or
administrative agency or other governmental agency or body
(including, without limitation, those having jurisdiction over
environmental or similar matters), domestic or foreign, having
jurisdiction over the Company or any of its activities or
properties;
(viii) no consent, approval, authorization or order, and no
filing with, any court, regulatory body, government agency or other
body (other than such as may be required under federal securities or
Blue Sky laws, as to which no opinion need be rendered) is required
in connection with the issuance of the Registered Securities
pursuant to the Prospectus, and the Registration Statement, the
performance of this Agreement and the Representatives' Warrant
Agreement, and the transactions contemplated hereby and thereby;
(ix) to the best of such counsel's knowledge after reasonable
investigation, the properties and business of the Company conform in
all material respects to the description thereof contained in the
Registration Statement and the Prospectus;
(x) to the best knowledge of such counsel, and except as
disclosed in Registration Statement and the Prospectus, the Company
is not in breach of, or in default under, any term or provision of
any license, contract, indenture, mortgage, installment sale
agreement, deed of trust, lease, voting trust agreement,
shareholders' agreement, note, loan or credit agreement or any other
agreement or instrument evidencing an obligation for borrowed money,
or any other agreement or instrument to which the Company is a party
or by which the Company is bound or to which the property or assets
(tangible or intangible) of the Company is subject; and the Company
is not in violation of any term or provision of its Articles of
Incorporation or By-laws, as amended, and to the best of such
counsel's knowledge after reasonable investigation, not in violation
of any franchise, license, permit, judgment, decree, order, statute,
rule or regulation;
(xi) the statements in the Prospectus under "Dividend
Policy," "Description of Securities," and "Shares Eligible for
Future Sale" have been reviewed by such counsel, and insofar as they
refer to statements of law, descriptions of statutes, licenses,
rules or regulations or legal conclusions, are correct in all
material respects;
(xii) the Common Stock has been accepted for quotation on the
Nasdaq Small-Cap Market;
(xiii) to the best of such counsel's knowledge and based upon
a review of the outstanding securities and the contracts furnished
to such counsel by the Company, no person, corporation, trust,
partnership, association or other entity has the right to include
and/or register any securities of the Company in the Registration
Statement,
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<PAGE> 26
require the Company to file any registration statement or, if filed,
to include any security in such registration statement;
(xiv) assuming due execution by the parties thereto other than
the Company, each Lock-up Agreement and Warrant Lock-up Agreement is
a legal, valid and binding obligation of the party thereto,
enforceable against the party and any subsequent holder of the
securities subject thereto in accordance with its terms (except as
such enforceability may be limited by applicable bankruptcy,
insolvency, reorganization, moratorium or other laws of general
application relating to or affecting enforcement of creditors'
rights and the application of equitable principles in any action,
legal or equitable, and except as rights to indemnity or
contribution may be limited by applicable law);
In rendering such opinion, such counsel may rely (A) as to matters
involving the application of laws other than the laws, rules and regulations of
the United States and the laws, rules and regulations of the State of
California, to the extent such counsel deems proper and to the extent specified
in such opinion, if at all, upon an opinion or opinions (in form and substance
satisfactory to Representatives' Counsel) of other counsel acceptable to
Representatives' Counsel, familiar with the applicable laws; (B) as to matters
of fact, to the extent they deem proper, on certificates and written statements
of responsible officers of the Company and certificates or other written
statements of officers of departments of various jurisdictions having custody of
documents respecting the corporate existence or good standing of the Company,
provided that copies of any such statements or certificates shall be delivered
to Representatives' Counsel and be reasonably acceptable to Representatives'
Counsel, if requested. The opinion of such counsel shall state that knowledge
shall not include the knowledge of a director or officer of the Company who is
affiliated with such firm in his or her capacity as an officer or director of
the Company. The opinion of such counsel for the Company shall state that the
opinion of any such other counsel is in form satisfactory to such counsel.
At each Option Closing Date, if any, the Underwriters shall have received
the favorable opinion of KLMV, counsel to the Company, dated the Option Closing
Date, addressed to the Underwriters and in form and substance satisfactory to
Representatives' Counsel confirming as of such Option Closing Date the
statements made by KLMV in their opinion delivered on the Closing Date.
(e) On or prior to each of the Closing Date and the Option Closing
Date, if any, Representatives' Counsel shall have been furnished such documents,
certificates and opinions as they may reasonably require for the purpose of
enabling them to review or pass upon the matters referred to in subsection (c)
of this Section 6, or in order to evidence the accuracy, completeness or
satisfaction of any of the representations, warranties or conditions of the
Company or herein contained.
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(f) Prior to each of the Closing Date and each Option Closing
Date, if any, (i) there shall have been no material adverse change nor
development involving a prospective change in the condition, financial or
otherwise, prospects, shareholders' equity or the business activities of the
Company, whether or not in the business, from the latest dates as of which such
condition is set forth in the Registration Statement and Prospectus; (ii) there
shall have been no transaction, not in the ordinary course of its business,
entered into by the Company, from the latest date as of which the financial
condition of the Company is set forth in the Registration Statement and
Prospectus which is adverse to the Company; (iii) the Company shall not be in
default under any provision of any instrument relating to any outstanding
indebtedness which default has not been waived or which would not have a
material adverse effect on the Company; (iv) the Company shall not have issued
any securities (other than the Registered Securities and the Conversion Shares)
or declared or paid any dividend or made any distribution in respect of its
capital stock of any class and there has not been any change in the capital
stock, or any material increase in the debt (long or short term) or liabilities
or obligations (other than any increase in its short-term borrowings in the
ordinary course of business) of the Company (contingent or otherwise); (v) no
material amount of the assets of the Company shall have been pledged or
mortgaged, except as set forth in the Registration Statement and Prospectus;
(vi) no action, suit or proceeding, at law or in equity, shall have been pending
or threatened (or circumstances giving rise to same) against the Company, or
affecting any of its respective properties or businesses before or by any court
or federal, state or foreign commission, board or other administrative agency
wherein an unfavorable decision, ruling or finding may materially adversely
affect the business, operations, prospects or financial condition or income of
the Company, except as set forth in the Registration Statement and Prospectus;
and (vii) no stop order shall have been issued under the Act and no proceedings
therefor shall have been initiated, threatened or contemplated by the
Commission.
(g) At each of the Closing Date and each Option Closing Date, if
any, the Underwriters shall have received a certificate of the Company signed on
behalf of the Company by the principal executive officer of the Company, dated
the Closing Date or Option Closing Date, as the case may be, to the effect that
such executive has carefully examined the Registration Statement, the Prospectus
and this Agreement, and that:
(i) The representations and warranties of the Company in
this Agreement are true and correct, as if made on and as of the
Closing Date or the Option Closing Date, as the case may be, and the
Company has complied with all agreements and covenants and satisfied
all conditions (unless waived) contained in this Agreement on its
part to be performed or satisfied at or prior to such Closing Date
or Option Closing Date, as the case may be;
(ii) No stop order suspending the effectiveness of the
Registration Statement or any part thereof has been issued, and no
proceedings for that purpose have been
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<PAGE> 28
instituted or are pending or, to the best of each of such person's
knowledge after due inquiry, are contemplated or threatened under
the Act;
(iii) The Registration Statement and the Prospectus and, if
any, each amendment and each supplement thereto, contain all
statements and information required by the Act to be included
therein, and none of the Registration Statement, the Prospectus nor
any post-effective amendment or supplement thereto includes any
untrue statement of a material fact or omits to state any material
fact required to be stated therein or necessary to make the
statements therein not misleading and neither the Preliminary
Prospectus or any supplement thereto, as of their respective dates,
included any untrue statement of a material fact or omitted to state
any material fact required to be stated therein or necessary to make
the statements therein, in light of the circumstances under which
they were made, not misleading; and
(iv) Subsequent to the respective dates as of which
information is given in the Registration Statement and the
Prospectus, (a) the Company has not incurred up to and including the
Closing Date or the Option Closing Date, as the case may be, other
than in the ordinary course of its business, any material
liabilities or obligations, direct or contingent; (b) the Company
has not paid or declared any dividends or other distributions on its
capital stock; (c) the Company has not entered into any transactions
not in the ordinary course of its business; (d) there has not been
any change in the capital stock or material increase in long-term
debt or any increase in the short-term borrowings (other than any
increase in the short-term borrowings in the ordinary course of
business) of the Company, (e) the Company has not sustained any
material loss or damage to its property or assets, whether or not
insured, (f) there is no litigation which is pending or, to the best
of each of such person's knowledge, threatened (or circumstances
giving rise to same) against the Company or any affiliated party of
any of the foregoing which is required to be set forth in an amended
or supplemented Prospectus which has not been set forth, and (g)
there has occurred no event required to be set forth in an amended
or supplemented Prospectus which has not been set forth.
(h) By the Closing Date, the Underwriters will have received
clearance from the NASD as to the amount of compensation allowable or payable to
the Underwriters.
(i) At the time this Agreement is executed, the Underwriters shall
have received a letter, dated such date, addressed to the Underwriters in form
and substance satisfactory in all respects (including the non-material nature of
the changes or decreases, if any, referred to in clause (iii) below) to the
Underwriters and Representatives' Counsel, from Stonefield:
(i) confirming that they are independent certified public
accountants with respect to the Company within the meaning of the
Act and the applicable Rules and Regulations;
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<PAGE> 29
(ii) stating that it is their opinion that the financial
statements (and supporting schedules, if any) of the Company
included in the Registration Statement comply as to form in all
material respects with the applicable accounting requirements of the
Act and the Regulations thereunder and that the Representatives may
rely upon the opinion of Stonefield with respect to the financial
statements (and supporting schedules, if any) included in the
Registration Statement;
(iii) stating that, on the basis of a limited review which
included a reading of the latest available unaudited interim
financial statements of the Company (with an indication of the date
of the latest available unaudited interim financial statements), a
reading of the latest available minutes of the shareholders and
Board of Directors and the various committees of the Board of
Directors of the Company, consultations with officers and other
employees of the Company responsible for financial and accounting
matters and other specified procedures and inquiries, nothing has
come to their attention which would lead them to believe that (A)
the unaudited financial statements and supporting schedules of the
Company included in the Registration Statement, if any, do not
comply as to form in all material respects with the applicable
accounting requirements of the Act and the Regulations or are not
fairly presented in conformity with generally accepted accounting
principles applied on a basis substantially consistent with that of
the audited financial statements of the Company included in the
Registration Statement, or (B) at a specified date not more than
five (5) days prior to the effective date of the Registration
Statement, there has been any change in the capital stock or
material increase in long-term debt of the Company, or any material
decrease in the shareholders' equity or net current assets or net
assets of the Company as compared with amounts shown in the March
31, 1998, balance sheet included in the Registration Statement,
other than as set forth in or contemplated by the Registration
Statement, or, if there was any change or decrease, setting forth
the amount of such change or decrease.
(iv) stating that they have compared specific dollar amounts,
numbers of shares, percentages of revenues and earnings, statements
and other financial information pertaining to the Company set forth
in the Prospectus in each case to the extent that such amounts,
numbers, percentages, statements and information may be derived from
the general accounting records, including work sheets, of the
Company and excluding any questions requiring an interpretation by
legal counsel, with the results obtained from the application of
specified readings, inquiries and other appropriate procedures
(which procedures do not constitute an examination in accordance
with generally accepted auditing standards) set forth in the letter
and found them to be in agreement; and
(v) statements as to such other material matters incident to
the transaction contemplated hereby as the Representatives may
reasonably request.
29
<PAGE> 30
(j) At the Closing Date and each Option Closing Date, if any, the
Underwriters shall have received from Stonefield a letter, dated as of the
Closing Date or the Option Closing Date, as the case may be, to the effect that
they reaffirm that statements made in the letter furnished pursuant to
Subsection (i) of this Section 6, except that the specified date referred to
shall be a date not more than five (5) days prior to Closing Date or the Option
Closing Date, as the case may be, and, if the Company has elected to rely on
Rule 430A of the Rules and Regulations, to the further effect that they have
carried out procedures as specified in clause (v) of Subsection (i) of this
Section 6 with respect to certain amounts, percentages and financial information
as specified by the Representatives and deemed to be a part of the Registration
Statement pursuant to Rule 430A(b) and have found such amounts, percentages and
financial information to be in agreement with the records specified in such
clause (v).
(k) On each of Closing Date and Option Closing Date, if any, there
shall have been duly tendered to the Representatives for the several
Underwriters' accounts the appropriate number of Shares.
(l) No order suspending the sale of the Shares in any jurisdiction
designated by the Representatives pursuant to subsection (e) of Section 4 hereof
shall have been issued on either the Closing Date or the Option Closing Date, if
any, and no proceedings for that purpose shall have been instituted or shall be
contemplated.
(m) On or before the Closing Date, the Company shall have executed
and delivered to the Representatives, (i) the Representatives' Warrant
Agreement, substantially in the form filed as Exhibit 4.2, to the Registration
Statement, in final form and substance satisfactory to the Representatives, and
(ii) the Representatives' Warrants in such denominations and to such designees
as shall have been provided to the Company in writing.
(n) On or before Closing Date, the Common Stock shall have been
duly approved for quotation on the Nasdaq Small-Cap Market.
(o) On or before Closing Date, there shall have been delivered to
the Representatives all of the Lock-up Agreements and Warrant Lock-up Agreements
in final form and substance satisfactory to Representatives' Counsel.
If any condition to the Underwriters' obligations hereunder to be
fulfilled prior to or at the Closing Date or the relevant Option Closing Date,
as the case may be, is not so fulfilled, the Representatives may terminate this
Agreement or, if the Representatives so elect, they may waive any such
conditions which have not been fulfilled or extend the time for their
fulfillment.
30
<PAGE> 31
7. Indemnification.
(a) The Company agrees to indemnify and hold harmless each of the
Underwriters (for purposes of this Section 7 "Underwriters" shall include the
officers, directors, partners, employees, agents and counsel of the
Underwriters, including specifically each person who may be substituted for an
Underwriter as provided in Section 11 hereof), and each person, if any, who
controls the Underwriter ("controlling person") within the meaning of Section 15
of the Act or Section 20(a) of the Exchange Act, from and against any and all
loss, liability, claim, damage, and expense whatsoever (including, but not
limited to, reasonable attorneys' fees and any and all reasonable expense
whatsoever incurred in investigating, preparing or defending against any
litigation, commenced or threatened, or any claim whatsoever and any and all
amounts paid in settlement of any claim or litigation provided that the
indemnified persons may not agree to any such settlement without the prior
written consent of the Company), as and when incurred, arising out of, based
upon or in connection with (i) any untrue statement or alleged untrue statement
of a material fact contained (A) in any Preliminary Prospectus, the Registration
Statement or the Prospectus (as from time to time amended and supplemented); or
(B) in any application or other document or communication (in this Section 7
collectively called "application") executed by or on behalf of the Company or
based upon written information furnished by or on behalf of the Company in any
jurisdiction in order to qualify the Registered Securities under the securities
laws thereof or filed with the Commission, any state securities commission or
agency, the Nasdaq Small-Cap Market or any securities exchange; or any omission
or alleged omission to state a material fact required to be stated therein or
necessary to make the statements therein not misleading (in the case of the
Prospectus, in the light of the circumstances under which they were made),
unless such statement or omission was made in reliance upon and in conformity
with written information furnished to the Company with respect to any
Underwriter by or on behalf of such Underwriter expressly for use in any
Preliminary Prospectus, the Registration Statement or Prospectus, or any
amendment thereof or supplement thereto, or in any application, as the case may
be; or (ii) any breach of any material representation, warranty, covenant or
agreement of the Company contained in this Agreement. The indemnity agreement in
this subsection (a) shall be in addition to any liability which the Company may
have at common law or otherwise.
(b) Each of the Underwriters agrees severally, but not jointly, to
indemnify and hold harmless the Company, each of its directors, each of its
officers who has signed the Registration Statement, and each other person, if
any, who controls the Company, within the meaning of the Act, to the same extent
as the foregoing indemnity from the Company to the Underwriters but only with
respect to statements or omissions, if any, made in any Preliminary Prospectus,
the Registration Statement or Prospectus or any amendment thereof or supplement
thereto or in any application made in reliance upon, and in strict conformity
with, written information furnished to the Company with respect to any
Underwriter by such Underwriter or the Representatives expressly for use in such
Preliminary Prospectus, the Registration Statement or Prospectus or any
amendment thereof or supplement thereto or in any such application, provided
that such
31
<PAGE> 32
written information or omissions only pertain to disclosures in the Preliminary
Prospectus, the Registration Statement or Prospectus directly relating to the
transactions effected by the Underwriters in connection with this Offering. The
Company acknowledges that the statements with respect to the public offering of
the Registered Securities set forth under the heading "Underwriting" and the
stabilization legend in the Prospectus have been furnished by the Underwriters
expressly for use therein and constitute the only information furnished in
writing by or on behalf of the Underwriters or the Representatives for inclusion
in the Prospectus. Notwithstanding the foregoing, the liability of any
Underwriter in this Section 7(b) shall not exceed the amount paid to such
Underwriter in the form of selling commissions.
(c) Promptly after receipt by an indemnified party under this
Section 7 of notice of the commencement of any action, suit or proceeding, such
indemnified party shall, if a claim in respect thereof is to be made against one
or more indemnifying parties under this Section 7, notify each party against
whom indemnification is to be sought in writing of the commencement thereof (but
the failure to so notify an indemnifying party shall not relieve it from any
liability which it may have otherwise or which it may have under this Section 7,
except to the extent that it has been prejudiced in any material respect by such
failure). In case any such action is brought against any indemnified party, and
it notifies an indemnifying party or parties of the commencement thereof, the
indemnifying party or parties will be entitled to participate therein, and to
the extent it may elect by written notice delivered to the indemnified party
promptly after receiving the aforesaid notice from such indemnified party, to
assume the defense thereof with counsel reasonably satisfactory to such
indemnified party. Notwithstanding the foregoing, the indemnified party or
parties shall have the right to employ its or their own counsel in any such
case, but the fees and expenses of such counsel shall be at the expense of such
indemnified party or parties unless (i) the employment of such counsel shall
have been authorized in writing by the indemnifying parties in connection with
the defense of such action at the expense of the indemnifying party, (ii) the
indemnifying parties shall not have employed counsel reasonably satisfactory to
such indemnified party to have charge of the defense of such action within a
reasonable time after notice of commencement of the action, or (iii) such
indemnified party or parties shall have reasonably concluded that there may be
defenses available to it or them which are different from or additional to those
available to one or all of the indemnifying parties and that it is a conflict of
interest for the indemnified party or parties to be represented by such counsel
(in which case the indemnifying parties shall not have the right to direct the
defense of such action on behalf of the indemnified party or parties), in any of
which events the reasonable fees and expenses of one additional counsel shall be
borne by the indemnifying parties. In no event shall the indemnifying parties be
liable for fees and expenses of more than one counsel (in addition to any local
counsel) separate from their own counsel for all indemnified parties in
connection with any one action or separate but similar or related actions in the
same jurisdiction arising out of the same general allegations or circumstances.
Anything in this Section 7 to the contrary notwithstanding, an indemnifying
party shall not be liable for any settlement of any claim or action effected
without its written consent; provided, however, that such consent was not
unreasonably withheld.
32
<PAGE> 33
(d) In order to provide for just and equitable contribution in any
case in which (i) an indemnified party makes claim for indemnification pursuant
to this Section 7, but it is judicially determined (by the entry of a final
judgment or decree by a court of competent jurisdiction and the expiration of
time to appeal or the denial of the last right of appeal) that such
indemnification may not be enforced in such case notwithstanding the fact that
the express provisions of this Section 7 provide for indemnification in such
case, or (ii) contribution under the Act may be required on the part of any
indemnified party, then each indemnifying party shall contribute to the amount
paid as a result of such losses, claims, damages, expenses or liabilities (or
actions in respect thereof) (A) in such proportion as is appropriate to reflect
the relative benefits received by each of the contributing parties, on the one
hand, and the party to be indemnified on the other hand, from the offering of
the Registered Securities or (B) if the allocation provided by clause (A) above
is not permitted by applicable law, in such proportion as is appropriate to
reflect not only the relative benefits referred to in clause (i) above but also
the relative fault of each of the contributing parties, on the one hand, and the
party to be indemnified on the other hand in connection with the statements or
omissions that resulted in such losses, claims, damages, expenses or
liabilities, as well as any other relevant equitable considerations. In any case
where the Company is a contributing party and the Underwriters are the
indemnified party, the relative benefits received by the Company on the one
hand, and the Underwriters, on the other, shall be deemed to be in the same
proportion as the total net proceeds from the offering of the Registered
Securities (before deducting expenses other than underwriting discounts and
commissions) bear to the total underwriting discounts received by the
Underwriters hereunder, in each case as set forth in the table on the Cover Page
of the Prospectus. Relative fault shall be determined by reference to, among
other things, whether the untrue or alleged untrue statement of a material fact
or the omission or alleged omission to state a material fact relates to
information supplied by the Company or by the Underwriters, and the parties'
relative intent, knowledge, access to information and opportunity to correct or
prevent such untrue statement or omission. The amount paid or payable by an
indemnified party as a result of the losses, claims, damages, expenses or
liabilities (or actions in respect thereof) referred to above in this
subdivision (d) shall be deemed to include any legal or other expenses
reasonably incurred by such indemnified party in connection with investigating
or defending any such action or claim. Notwithstanding the provisions of this
subdivision (d) the Underwriters shall not be required to contribute any amount
in excess of the underwriting discount applicable to the Registered Securities
purchased by the Underwriters hereunder. No person guilty of fraudulent
misrepresentation (within the meaning of Section 12(f) of the Act) shall be
entitled to contribution from any person who was not guilty of such fraudulent
misrepresentation. For purposes of this Section 7, each person, if any, who
controls the Company within the meaning of the Act, each officer of the Company
who has signed the Registration Statement, and each director of the Company
shall have the same rights to contribution as the Company, subject in each case
to this subparagraph (d). Any party entitled to contribution will, promptly
after receipt of notice of commencement of any action, suit or proceeding
against such party in respect to which a claim for contribution may be made
against another party or parties under this subparagraph (d), notify such party
or parties from whom contribution may be sought, but the
33
<PAGE> 34
omission so to notify such party or parties shall not relieve the party or
parties from whom contribution may be sought from any obligation it or they may
have hereunder or otherwise than under this subparagraph (d), or to the extent
that such party or parties were not adversely affected by such omission. The
contribution agreement set forth above shall be in addition to any liabilities
which any indemnifying party may have at common law or otherwise.
8. Representations and Agreements to Survive Delivery. All
representations, warranties and agreements contained in this Agreement or
contained in certificates of officers of the Company submitted pursuant hereto,
shall be deemed to be representations, warranties and agreements of the Company
at the Closing Date and the Option Closing Date, as the case may be, and such
representations, warranties and agreements of the Company and the respective
indemnity and contribution agreements contained in Section 7 hereof shall remain
operative and in full force and effect regardless of any investigation made by
or on behalf of any Underwriter, the Company, any controlling person of any of
the Underwriters or the Company, and shall survive termination of this Agreement
or the issuance and delivery of the Registered Securities to the Underwriters
and the Representatives, as the case may be.
9. Effective Date.
(a) This Agreement shall become effective at 10:00 a.m., New York
City time, on the date hereof. For purposes of this Section 9, the Shares to be
purchased hereunder shall be deemed to have been so released upon the earlier of
dispatch by the Representatives of telegrams to securities dealers releasing
such shares for offering or the release by the Representatives for publication
of the first newspaper advertisement which is subsequently published relating to
the Shares.
10. Termination.
(a) Subject to subsection (b) of this Section 10, the
Representatives shall have the right to terminate this Agreement, (i) if any
domestic or international event or act or occurrence has disrupted, or in the
Representatives' reasonable opinion will in the immediate future disrupt the
financial markets; or (ii) any material adverse change in the financial markets
shall have occurred; or (iii) if trading on the New York Stock Exchange, the
Nasdaq Small-Cap Market, or in the over-the-counter market shall have been
suspended, or minimum or maximum prices for trading shall have been fixed, or
maximum ranges for prices for securities shall have been required on the
over-the-counter market by the NASD or by order of the Commission or any other
government authority having jurisdiction; or (iv) if the United States shall
have become involved in a war or major hostilities, or if there shall have been
an escalation in an existing war or major hostilities or a national emergency
shall have been declared in the United States; or (v) if a banking moratorium
has been declared by a state or federal authority; or (vi) if the Company shall
have sustained a loss material or substantial to the Company by fire, flood,
accident, hurricane, earthquake, theft, sabotage or other calamity or malicious
act which, whether or not
34
<PAGE> 35
such loss shall have been insured, will, in the Representatives' reasonable
opinion, make it inadvisable to proceed with the delivery of the Shares; or
(vii) if there shall have been such a material adverse change in the prospects
or conditions of the Company, or such material adverse change in the general
market, political or economic conditions, in the United States or elsewhere as
in the Representatives' reasonable judgment would make it inadvisable to proceed
with the offering, sale and/or delivery of the Shares.
(b) If this Agreement is terminated by the Representatives in
accordance with any of the provisions of Section 6, Section 10(a), or Section
12, the Company shall promptly reimburse and indemnify the Underwriters pursuant
to Section 5(b) hereof. Notwithstanding any contrary provision contained in this
Agreement, any election hereunder or any termination of this Agreement
(including, without limitation, pursuant to Sections 6, 10, 11 and 12 hereof),
and whether or not this Agreement is otherwise carried out, the provisions of
Section 5 and Section 7 shall not be in any way affected by such election or
termination or failure to carry out the terms of this Agreement or any part
hereof.
11. Substitution of the Underwriters. If one or more of the Underwriters
shall fail (otherwise than for a reason sufficient to justify the termination of
this Agreement under the provisions of Section 6, Section 10 or Section 12
hereof) to purchase the Registered Securities which it or they are obligated to
purchase on such date under this Agreement (the "Defaulted Securities"), the
Representatives shall have the right, within 24 hours thereafter, to make
arrangement for one or more of the non-defaulting Underwriters, or any other
underwriters, to purchase all, but not less than all, of the Defaulted
Securities in such amounts as may be agreed upon and upon the terms herein set
forth. If, however, the Representatives shall not have completed such
arrangements within such 24-hour period, then:
(a) if the number of Defaulted Securities does not exceed 5% of
the total number of Shares to be purchased on such date, the non-defaulting
Underwriters shall be obligated to purchase the full amount thereof in the
proportions that their respective underwriting obligations hereunder bear to the
underwriting obligations of all non-defaulting Underwriters, or
(b) if the number of Defaulted Securities exceeds 5% of the total
number of Shares, this Agreement shall terminate without liability on the part
of any nondefaulting Underwriters.
No action taken pursuant to this Section shall relieve any
defaulting Underwriter from liability in respect of any default by such
Underwriter under this Agreement.
In the event of any such default which does not result in a
termination of this Agreement, the Representatives shall have the right to
postpone the Closing Date for a period not exceeding seven days in order to
effect any required changes in the Registration Statement or Prospectus or in
any other documents or arrangements.
35
<PAGE> 36
12. Default by the Company. If the Company shall fail at the Closing
Date or any Option Closing Date, as applicable, to sell and deliver the number
of Registered Securities which it is obligated to sell hereunder on such date,
then this Agreement shall terminate (or, if such default shall occur with
respect to any Option Shares to be purchased on an Option Closing Date, the
Underwriters may at the Representatives' option, by notice from the
Representatives to the Company, terminate the Underwriters' obligation to
purchase Option Shares from the Company on such date) without any liability on
the part of any non-defaulting party other than pursuant to Section 5, Section 7
and Section 10 hereof. No action taken pursuant to this Section shall relieve
the Company from liability, if any, in respect of such default.
13. Notices. All notices and communications hereunder, except as herein
otherwise specifically provided, shall be in writing and shall be deemed to have
been duly given if mailed or transmitted by any standard form of
telecommunication. Notices to the Underwriters shall be directed to the
Representatives, c/o National Securities Corporation, 1001 Fourth Avenue, Suite
2200, Seattle Washington 98154, Attention: President, with a copy, to Harter,
Secrest & Emery LLP, 700 Midtown Tower, Rochester, New York, New York 14604,
Attention: James M. Jenkins, Esq. Notices to the Company shall be directed to
the Company at 12300 Wilshire Blvd., Suite 400, Los Angeles, California,
Attention: CEO, with a copy, to Kelly, Lytton, Mintz & Vann, 1900 Avenue of the
Stars, Suite 1450, Los Angeles, California, Attention: Bruce P. Vann, Esq.
14. Parties. This Agreement shall inure solely to the benefit of and
shall be binding upon the Underwriters, the Company and the controlling persons,
directors and officers referred to in Section 7 hereof and their respective
successors, legal representatives and assigns, and no other person shall have or
be construed to have any legal or equitable right, remedy or claim under or in
respect of or by virtue of this Agreement or any provisions herein contained. No
purchaser of Registered Securities from any Underwriter shall be deemed to be a
successor by reason merely of such purchase.
15. Construction. This Agreement shall be governed by and construed and
enforced in accordance with the laws of the State of New York without giving
effect to the choice of law or conflict of laws principles.
16. Counterparts. This Agreement may be executed in any number of
counterparts, each of which shall be deemed to be an original, and all of which
taken together shall be deemed to be one and the same instrument.
17. Entire Agreement; Amendments. This Agreement, the Financial Advisory
Agreement and the Representatives' Warrant Agreement constitute the entire
agreement of the parties hereto and supersede all prior written or oral
agreements, understandings and negotiations with respect to the subject matter
hereof. This Agreement may not be amended except in a writing, signed by the
Representatives and the Company.
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<PAGE> 37
If the foregoing correctly sets forth the understanding between the
Underwriters and the Company, please so indicate in the space provided below for
that purpose, whereupon this letter shall constitute a binding agreement among
us.
Very truly yours,
TEAM COMMUNICATIONS GROUP, INC.
By:______________________________________
Name:
Title:
CONFIRMED AND ACCEPTED AS OF THE DATE FIRST ABOVE WRITTEN:
NATIONAL SECURITIES CORPORATION
By:__________________________________________________
Name:
Title:
By:__________________________________________________
Name:
Title:
For themselves and as Representatives of the Underwriters named in Schedule A
hereto.
FOR PURPOSES OF SECTION 2(b) ONLY:
________________________________
Joseph Cayre
37
<PAGE> 38
SCHEDULE A
<TABLE>
<CAPTION>
Number of
Shares to be
Name of Underwriters Purchased
- -------------------- ------------
<S> <C>
National Securities Corporation
Coleman and Company, Inc.
TOTAL........................................ ____________
1,500,000
</TABLE>
<PAGE> 1
EXHIBIT 4.14
FINANCIAL ADVISORY AGREEMENT
This Agreement is made on [Closing Date], by and between TEAM
COMMUNICATIONS GROUP, INC., a California corporation having its principal office
at 12300 Wilshire Blvd., Suite 400, Los Angeles, California 90025 (the
"Company"), and a NATIONAL SECURITIES CORPORATION, having an office at 1001
Fourth Avenue, Suite 2200, Seattle, Washington 98154 ("the Consultant").
In consideration of the mutual premises contained herein and on the terms
and conditions hereinafter set forth, the Company and Consultant agree as
follows:
1. PROVISION OF SERVICES.
(a) Consultant shall, to the extent reasonably required in the
conduct of the business of the Company, place at the disposal of the Company its
judgment and experience and, to such extent and at the prior written request of
the President of the Company to the Consultant's Managing Director of Corporate
Finance, provide business development and corporate finance services to the
Company, including the following:
(i) evaluation of the Company's managerial and financial
requirements;
(ii) assistance in recruiting, screening, evaluating and
recommending key personnel, directors, accountants, commercial and
investment bankers, underwriters, attorneys and other professional
consultants;
(iii) assistance in the preparation of budgets and business
plans;
(iv) advice with regard to sales planning and sales
activities;
(v) advice with regard to stockholder relations and public
relations matters; and
(vi) evaluation of financial requirements and assistance in
financial arrangements.
Notwithstanding the foregoing, Consultant shall not provide services to the
Company hereunder in connection with mergers, acquisitions, consolidations,
joint ventures and similar corporate finance transactions, which transactions
are instead the subject of a certain letter agreement dated this date between
Consultant and the Company.
(b) In addition to the foregoing, for a period of thirty-six (36)
months, the Consultant shall have the option to select an observer designated by
the Consultant and reasonably acceptable to the Company, to receive notice of
and to attend all meetings of the Board of Directors of the Company (the
"Observer"). Such Observer shall have no voting rights, and shall be reimbursed
for all out-of-pocket expenses incurred in attending meetings
<PAGE> 2
of the Board of Directors. The Company shall hold at least four (4) meetings of
the Board of Directors per year. The Observer will be indemnified by the Company
against any claims arising out of his participation at Board meetings.
Additionally, the Company shall provide the Observer with the same expense
reimbursement and cash allowance in connection with meetings of the Board of
Directors as it provides to non-employee Directors of the Company.
(c) Consultant shall use reasonable efforts in the furnishing of
advice and recommendations, and for this purpose Consultant shall at all times
maintain or keep and make available qualified personnel or a network of
qualified outside professionals for the performance of its obligations under
this Agreement. To the extent reasonably practicable, Consultant shall so use
its own personnel rather than outside professionals.
2. COMPENSATION. In consideration of Consultant's services hereunder,
the Company shall pay Consultant a non-refundable consulting fee of $6,000 per
month, one year in advance on the date hereof (that being the closing date of
the sale of the Company's securities pursuant to a Registration Statement on
Form SB-2 filed with the Securities and Exchange Commission). Consultant hereby
accepts such compensation.
3. EXPENSES. The Company shall reimburse Consultant for reasonable
expenses incurred by Consultant in connection with its services rendered
hereunder. All expenses in excess of $500 shall be approved in writing by the
Company in advance. Consultant shall invoice the Company for its expenses
incurred. Payment of invoices shall be due upon receipt.
4. LIABILITY; INDEMNIFICATION.
(a) It is expressly understood and agreed that, in furnishing the
Company with management advice and other services as herein provided, neither
Consultant nor any of its officers, directors, employees or agents (including
without limitation the Observer) shall be liable to the Company, its
stockholders, its creditors or any other person or entity for errors of judgment
or for any act or omission except willful malfeasance, bad faith or gross
negligence in the performance of its duties hereunder. It is further understood
and agreed that Consultant may rely upon information furnished to it and
reasonably believed by it to be accurate and reliable and that, except as herein
provided, Consultant shall not be liable for any loss suffered by the Company,
or by any officer, director, employee, stockholder or creditor of the Company,
by reason of the Company's action or non-action on the basis of any advice,
recommendation or approval of Consultant or any of its officers, directors,
employees or agents.
(b) The Company shall indemnify, save harmless and defend
Consultant and its officers, directors, employees and agents (including without
limitation the Observer) from, against and in respect of any loss, damage,
liability, judgment, cost or expense whatsoever, including counsel fees,
suffered or incurred by it or him by reason of, or on account of, its status or
activities as a consultant to the Company hereunder (and, in the case of the
Observer, his participation in meetings of the Board of Directors of the
Company).
- 2 -
<PAGE> 3
(c) Consultant shall indemnify, save harmless and defend the
Company and its officers, directors, employees and agents from, against and in
respect of any loss, damage, liability, judgment, cost or expense whatsoever,
including counsel fees, suffered or incurred by it or him by reason of, or on
account of, willful malfeasance, bad faith or gross negligence in the
performance of Consultant's duties hereunder.
(d) In the event that the Consultant is held liable under this
Section 4, the Consultant's liability is limited to the total compensation
received by Consultant pursuant to Section 2 of this Agreement. In no event
shall Consultant be liable for any incidental or consequential damages to the
Company, its stockholders, creditors or any other person or entity even if
advised of the possibility thereof.
5. STATUS OF CONSULTANT. Consultant shall at all times be an
independent contractor of the Company and, except as expressly provided or
authorized by this Agreement, shall have no authority to act for or represent
the Company.
6. OTHER ACTIVITIES OF CONSULTANT. The Company recognizes that
Consultant now renders and may continue to render management and other services
to other companies which may or may not have policies and conduct activities
similar to those of the Company. Consultant shall be free to render such advice
and other services and the Company hereby consents thereto. Consultant shall not
be required to devote its full time and attention to the performance of its
duties under this Agreement, but shall devote only so much of its time and
attention as Consultant deems reasonable or necessary for such purposes.
7. CONTROL. Nothing contained herein shall be deemed to require the
Company to take any action contrary to its Articles of Association or Memorandum
of Association, or any applicable statute or regulation, or to deprive its Board
of Directors of its responsibility for and control of the conduct of the affairs
of the Company.
8. TERM. Except as provided by Section 1(b) hereof, Consultant's
performance of services hereunder shall be for a term of one year commencing on
the date hereof.
9. IN GENERAL.
(a) This Agreement sets forth the entire agreement and
understanding between the parties with respect to its subject matter and
supersedes all prior discussions, agreements and understandings of every and any
nature between them with respect thereto. This Agreement may not be modified
except in a writing signed by the parties.
(b) This Agreement has been made in the State of New York and
shall be governed by and construed in accordance with the laws thereof without
regard to principles of conflict of laws.
(c) Neither this Agreement nor either party's rights hereunder
shall be assignable by any party hereto without the prior written consent of the
other party hereto.
- 3 -
<PAGE> 4
(d) This Agreement may be executed in one or more counterparts,
each of which shall be deemed an original, but all of which together shall
constitute one and the same instrument.
IN WITNESS WHEREOF, the parties have caused this Agreement to be signed by
their respective officers or representatives duly authorized on the day and year
first above written.
TEAM COMMUNICATIONS GROUP, INC.
By:______________________________________
Name:
Title:
NATIONAL SECURITIES CORPORATION
By:______________________________________
Name:
Title:
- 4 -
<PAGE> 1
EXHIBIT 4.16
-------------------------------------------
TEAM COMMUNICATIONS GROUP, INC.
AND
NATIONAL SECURITIES CORPORATION
REPRESENTATIVE'S
WARRANT AGREEMENT
DATED AS OF _____ __, 1998
-------------------------------------------
<PAGE> 2
REPRESENTATIVE'S WARRANT AGREEMENT dated as of _________, 1998,
between TEAM COMMUNICATIONS GROUP, a California corporation (the "Company"), and
NATIONAL SECURITIES CORPORATION and its assignees or designees (hereinafter
referred to variously as the "Holder" or "National").
W I T N E S S E T H :
WHEREAS, National has agreed pursuant to the underwriting
agreement (the "Underwriting Agreement") between the Company and National (the
"Representative"), to act as the representative of the several underwriters
listed therein (the "Underwriters") in connection with the Company's proposed
public offering of 1,500,000 shares of common stock of the Company, no par
value, (the "Common Stock"), at a public offering price of $_____ per share (the
"Public Offering").
WHEREAS, pursuant to the Underwriting Agreement, the Company
proposes to issue warrants to the Representative to purchase up to an aggregate
of 150,000 shares of Common Stock (the "Representative's Warrants").
WHEREAS, the Representative's Warrants to be issued pursuant to
this Agreement will be issued on the Closing Date (as such term is defined in
the Underwriting Agreement) by the Company to the Representative in
consideration for, and as part of the Underwriters' compensation in connection
with, the Representative acting as the representative pursuant to the
Underwriting Agreement.
<PAGE> 3
NOW, THEREFORE, in consideration of the premises, the payment by
the Representatives to the Company of an aggregate of Fifteen Dollars ($15.00),
the agreements herein set forth and other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, the parties hereto
agree as follows:
1. Grant. National is hereby granted the right to purchase, at
any time from _____ __, 1999 (one year from the effective date of the
registration statement and any supplement thereto), on Form SB-2, No. 333-26307
(the "Effective Date") until 5:30 p.m., New York time, on _____ __, 2003 (five
years from the Effective Date), at which time the Representative's Warrants
expire, up to an aggregate of 150,000 shares of Common Stock (subject to
adjustment as provided in Section 8 hereof), at an initial exercise price
(subject to adjustment as provided in Section 11 hereof) of $___ per share (that
being 120% of the public offering price per share) (the "Exercise Price").
2. Representative's Warrant Certificates. The Representative's
Warrant certificates (the "Warrant Certificates") delivered and to be delivered
pursuant to this Agreement shall be in the form set forth in Exhibit A, attached
hereto and made a part hereof, with such appropriate insertions, omissions,
substitutions, and other variations as required or permitted by this Agreement.
3. Registration of Warrant. The Representative's Warrants shall
be numbered and shall be registered on the books of the Company when issued.
<PAGE> 4
4. Exercise of Representative's Warrants.
4.1 Method of Exercise. The Representative's Warrants
initially are exercisable at the Exercise Price (subject to adjustment as
provided in Section 11 hereof) per Representative's Warrant set forth in Section
8 hereof payable by certified or official bank check in New York Clearing House
funds. Upon surrender of a Warrant Certificate with the annexed Form of Election
to Purchase duly executed, together with payment of the Exercise Price for the
shares of Common Stock purchased at the Company's principal offices (presently
located at 12300 Wilshire Blvd., Los Angeles, California 90025) the registered
holder of a Warrant Certificate shall be entitled to receive a certificate or
certificates for the shares of Common Stock so purchased. The purchase rights
represented by each Warrant Certificate are exercisable at the option of the
Holder thereof, in whole or in part (but not as to fractional shares of Common
Stock underlying the Representative's Warrants). In the case of the purchase of
less than all of the shares of Common Stock purchasable under any Warrant
Certificate, the Company shall cancel said Warrant Certificate upon the
surrender thereof and shall execute and deliver a new Warrant Certificate of
like tenor for the balance of the shares of Common Stock purchasable thereunder.
4.2 Exercise by Surrender of Representative's Warrant. In
addition to the method of payment set forth in Section 4.1 and in lieu of any
cash payment required thereunder, the Holder(s) of the Representative's Warrants
shall have the right at any time and from time to time while the
Representative's Warrants are exercisable to exercise the Representative's
Warrants in full or in part by surrendering the Warrant Certificate in the
manner specified in Section 4.1 in exchange for the number of shares of Common
Stock equal to the product of (x)
<PAGE> 5
the number of shares of Common Stock as to which the Representative's Warrants
are being exercised, multiplied by (y) a fraction, the numerator of which is the
Market Price (as defined in Section 9.3 (d) hereof) of the shares of Common
Stock minus the Exercise Price of the shares of Common Stock and the denominator
of which is the Exercise Price of the shares of Common Stock. Solely for the
purposes of this Section 4.2, Market Price shall be calculated either (i) on the
date on which the Form of Election to Purchase attached hereto is deemed to have
been sent to the Company pursuant to Section 15 hereof ("Notice Date") or (ii)
as the average of the Market Price for each of the five trading days immediately
preceding the Notice Date, whichever of (i) or (ii) results in a greater Market
Price.
5. Issuance of Certificates. Upon the exercise of any of the
Representative's Warrants, the issuance of certificates for shares of Common
Stock, properties or rights underlying such Representative's Warrant shall be
made forthwith (and in any event within five (5) business days thereafter)
without charge to the Holder thereof including, without limitation, any tax,
other than income taxes, which may be payable in respect of the issuance
thereof, and such certificates shall (subject to the provisions of Sections 7
and 9 hereof) be issued in the name of, or in such names as may be directed by,
the Holder thereof; provided, however, that the Company shall not be required to
pay any tax which may be payable in respect of any transfer involved in the
issuance and delivery of any such certificates in a name other than that of the
Holder and the Company shall not be required to issue or deliver such
certificates unless or until the person or persons requesting the issuance
thereof shall have paid to the Company the amount
<PAGE> 6
of such tax or shall have established to the satisfaction of the Company that
such tax has been paid.
The Warrant Certificates and the certificates representing the
shares of Common Stock or other securities, property or rights issued upon
exercise of the Representative's Warrants shall be executed on behalf of the
Company by the manual or facsimile signature of the then present President or
any Vice President of the Company under its corporate seal reproduced thereon,
attested to by the manual or facsimile signature of the then present Secretary
or any Assistant Secretary of the Company. Warrant Certificates shall be dated
the date of execution by the Company upon initial issuance, division, exchange,
substitution or transfer.
6. Transfer of Representative's Warrants. The Representative's
Warrants shall be transferable only on the books of the Company maintained at
its principal office, where its principal office may then be located, upon
delivery thereof duly endorsed by any Holder or by its duly authorized attorney
or representative accompanied by proper evidence of succession, assignment or
authority to transfer. Upon any registration of transfer, the Company shall
execute and deliver the new Warrant Certificate to the person entitled thereto.
7. Restriction On Transfer of Representative's Warrants. The
Holder of a Warrant Certificate, by its acceptance thereof, covenants and agrees
that the Representative's Warrants represented thereby are being acquired as an
investment and not with a view to the distribution thereof, and that such
Representative's Warrants may not be sold, transferred, assigned, hypothecated
or otherwise disposed of, in whole or in part, for a period of one year
following the Effective Date, except that during such one year period the
Representative's
<PAGE> 7
Warrants may be transferred to officers or partners of members of the National
Association of Securities Dealers, Inc. who participate in the Public Offering,
including the Underwriters and any selected dealers, or by operation of law.
8. Exercise Price and Number of Securities. Except as otherwise
provided in Section 10 hereof, each Representative's Warrant is exercisable to
purchase one share of Common Stock at an initial exercise price equal to the
Exercise Price. The Exercise Price and the number of shares of Common Stock for
which each Representative's Warrant may be exercised shall be the price and the
number of shares of Common Stock which shall result from time to time from any
and all adjustments in accordance with the provisions of Section 11 hereof.
9. Registration Rights.
9.1 Registration Under the Securities Act of 1933. Each
Warrant Certificate and each certificate representing shares of Common Stock and
any of the other securities issuable upon exercise of the Representative's
Warrants (collectively, the "Warrant Shares") shall bear the following legend
unless (i) such Representative's Warrants or Warrant Shares are distributed to
the public or sold to underwriters for distribution to the public pursuant to
this Section 9 hereof or otherwise pursuant to a registration statement filed
under the Securities Act of 1933, as amended (the "Act"), or (ii) the Company
has received an opinion of counsel, in form and substance reasonably
satisfactory to counsel for the Company, that such legend is unnecessary for any
such certificate:
<PAGE> 8
THE REPRESENTATIVE'S WARRANTS REPRESENTED BY THIS
CERTIFICATE AND THE OTHER SECURITIES ISSUABLE UPON
EXERCISE THEREOF MAY NOT BE OFFERED OR SOLD EXCEPT
PURSUANT TO (I) AN EFFECTIVE REGISTRATION
STATEMENT UNDER THE SECURITIES ACT OF 1933, (II)
TO THE EXTENT APPLICABLE, RULE 144 UNDER SUCH ACT
(OR ANY SIMILAR RULE UNDER SUCH ACT RELATING TO
THE DISPOSITION OF SECURITIES), OR (III) AN
OPINION OF COUNSEL, IF SUCH OPINION SHALL BE
REASONABLY SATISFACTORY TO COUNSEL FOR THE ISSUER,
THAT AN EXEMPTION FROM REGISTRATION UNDER SUCH ACT
IS AVAILABLE.
THE TRANSFER OR EXCHANGE OF THE REPRESENTATIVE'S
WARRANTS REPRESENTED BY THE CERTIFICATE IS
RESTRICTED IN ACCORDANCE WITH THE REPRESENTATIVE'S
WARRANT AGREEMENT REFERRED TO HEREIN.
9.2 Piggyback Registration. If, at any time commencing after
the Effective Date of the Registration Statement and expiring seven (7) years
after the Effective Date, the Company proposes to register any of its securities
under the Act (other than on Form S-8, S-4 or a successor form thereto) it will
give written notice by registered mail, at least thirty (30) days prior to the
filing of each such registration statement, to the Holders of the
Representative's Warrants and/or Warrant Shares of its intention to do so. If
any of the Holders of the Representative's Warrants and/or Warrant Shares notify
the Company within twenty (20) days after mailing of any such notice of its or
their desire to include any such securities in such proposed registration
statement, the Company shall afford such Holders the opportunity to have any
Warrant Shares registered under such registration statement. In the event that
the managing underwriter for said offering advises the Company in writing that
in its opinion the number of securities requested to be included in such
registration exceeds the number which can be sold
<PAGE> 9
in such offering without causing a diminution in the offering price or otherwise
adversely affecting the offering, the Company will include in such registration
(a) first, the securities the Company proposes to sell, (b) second, the
securities held by the entities that made the demand for registration, (c)
third, the Warrant Shares requested to be included in such registration which in
the opinion of such underwriter can be sold, pro rata among the Holders of
Warrant Shares on the basis of the number of Warrant Shares requested to be
registered by such Holders, and (d) fourth, other securities requested to be
included in such registration.
Notwithstanding the provisions of this Section 9.2, the Company
shall have the right at any time after it shall have given written notice
pursuant to this Section 9.2 (irrespective of whether a written request for
inclusion of any such securities shall have been made) to elect not to file any
such proposed registration statement or to withdraw the same after the filing
but prior to the effective date thereof.
9.3 Demand Registration.
(a) At any time commencing one (1) year after the
Effective Date of the Registration Statement and expiring five (5) years from
the Effective Date, the Holders of the Representative's Warrants and/or Warrant
Shares representing a "Majority" (as hereinafter defined) of the
Representative's Warrants and/or Warrant Shares shall have the right (which
right is in addition to the registration rights under Section 9.2 hereof),
exercisable by written notice to the Company, to have the Company prepare and
file with the Securities and Exchange Commission (the "Commission"), on one
occasion, a registration statement and such other documents, including a
prospectus, as may be necessary in the opinion of both counsel for the
<PAGE> 10
Company and counsel for the Holders, in order to comply with the provisions of
the Act, so as to permit a public offering and sale by such Holders and any
other Holders of the Representative's Warrants and/or Warrant Shares who notify
the Company within fifteen (15) days after the Company mails notice of such
request pursuant to Section 9.3(b) hereof (collectively, the "Requesting
Holders") of their respective Warrant Shares for the earlier of (i) nine (9)
consecutive months or (ii) until the sale of all of the Warrant Shares requested
to be registered by the Requesting Holders.
(b) The Company covenants and agrees to give written
notice of any registration request under this Section 9.3 by any Holder or
Holders representing a Majority of the Representative's Warrants and/or Warrant
Shares to all other registered Holders of the Representative's Warrants and the
Warrant Shares within ten (10) days from the date of the receipt of any such
registration request.
(c) In addition to the registration rights under
Section 9.2 and subsection (a) of this Section 9.3, at any time commencing one
(1) year after the Effective Date of the Registration Statement and expiring
five (5) years from the Effective Date, the Holders of a Majority of the
Representative's Warrants and/or Warrant Shares shall have the right on one
occasion, exercisable by written request to the Company, to have the Company
prepare and file with the Commission a registration statement so as to permit a
public offering and sale by such Holders of their respective Warrant Shares for
the earlier of (i) nine (9) consecutive months or (ii) until the sale of all of
the Warrant Shares requested to be registered by such Holders; provided,
however, that the provisions of Section 9.4(b) hereof shall not apply to any
such
<PAGE> 11
registration request and registration and all costs incident thereto shall be at
the expense of the Holder or Holders making such request. If the Holders have
exercised their rights under Section 9.3(a) then the Holders may not exercise
their rights under Section 9.3(c) for a period of nine (9) months following the
effective date of any registration statement filed pursuant to Section 9.3(a).
(d) Definition of Market Price. As used herein, the
phrase "Market Price" at any date shall be deemed to be the last reported sale
price, or, in case no such reported sale takes place on such day, the average of
the last reported sale prices for the last three (3) trading days, in either
case as officially reported by the principal securities exchange on which the
Common Stock is listed or admitted to trading, or, if the Common Stock is not
listed or admitted to trading on any national securities exchange, the average
closing sale price as furnished by the Nasdaq Stock Market ("Nasdaq") (or
similar organization if Nasdaq is no longer reporting such information), or if
the Common Stock is not quoted on Nasdaq or an exchange, the average of the high
and low bid prices on the NASD Over the Counter Electronic Bulletin Board System
("OTC"), or if not traded on the OTC, as determined in good faith by resolution
of the Board of Directors of the Company, based on the best information
available to it.
9.4 Covenants of the Company With Respect to Registration.
In connection with any registration under Sections 9.2 or 9.3 hereof, the
Company covenants and agrees as follows:
<PAGE> 12
(a) The Company shall use its best efforts to file a
registration statement within forty-five (45) days of receipt of any demand
therefor, and to have any registration statements declared effective at the
earliest possible time, and shall furnish each Holder desiring to sell Warrant
Shares such number of prospectuses as shall reasonably be requested.
(b) The Company shall pay all costs, fees and expenses
in connection with all registration statements filed pursuant to Sections 9.2
and 9.3(a) hereof including, without limitation, the Company's legal and
accounting fees, printing expenses, blue sky fees and expenses (excluding fees
and expenses of Holder(s)' counsel and any underwriting or selling commissions,
and excluding roadshow expenses if the only shares to be registered in such
Registration Statement are Warrant Shares). The Holder(s) will pay all costs,
fees and expenses (including those of the Company) in connection with the
registration statement filed pursuant to Section 9.3(c).
(c) The Company will take all necessary action which
may be required in qualifying or registering the Warrant Shares included in a
registration statement for offering and sale under the securities or blue sky
laws of such states as are reasonably requested by the Holder(s), provided that
the Company shall not be obligated to execute or file any general consent to
service of process or to qualify as a foreign corporation to do business under
the laws of any such jurisdiction.
(d) The Company shall indemnify the Holder(s) of the
Warrant Shares to be sold pursuant to any registration statement and each
person, if any, who controls such
<PAGE> 13
Holders within the meaning of Section 15 of the Act or Section 20(a) of the
Securities Exchange Act of 1934, as amended ("Exchange Act"), against all loss,
claim, damage, expense or liability (including all expenses reasonably incurred
in investigating, preparing or defending against any claim whatsoever) to which
any of them may become subject under the Act, the Exchange Act or otherwise,
arising from such registration statement to the same extent and with the same
effect as the provisions pursuant to which the Company has agreed to indemnify
each of the Underwriters contained in Section 7 of the Underwriting Agreement.
(e) The Holder(s) of the Representative's Warrants to
be sold pursuant to a registration statement, and their successors and assigns,
shall, severally and not jointly, indemnify the Company, its officers and
directors and each person, if any, who controls the Company within the meaning
of Section 15 of the Act or Section 20(a) of the Exchange Act, against all loss,
claim, damage or expense or liability (including all expenses reasonably
incurred in investigating, preparing or defending against any claim whatsoever)
to which they may become subject under the Act, the Exchange Act or otherwise,
arising from information furnished by or on behalf of such Holders, or their
successors or assigns, for specific inclusion in such registration statement to
the same extent and with the same effect as the provisions contained in Section
7 of the Underwriting Agreement pursuant to which the Underwriters have agreed
to indemnify the Company.
(f) Nothing contained in this Agreement shall be
construed as requiring the Holder(s) to exercise their Representative's Warrants
prior to the initial filing of any registration statement or the effectiveness
thereof.
<PAGE> 14
(g) The Company shall not permit the inclusion of any
securities other than the Warrant Shares to be included in any registration
statement filed pursuant to Section 9.3 hereof, or permit any other registration
statement to be or remain effective during the effectiveness of a registration
statement filed pursuant to Section 9.3 hereof (other than registration
statements filed prior to an exercise of registration rights by a Holder of
Representatives Warrants and/or Warrant Shares pursuant to Section 9.3 hereof),
without the prior written consent of National or as otherwise required by the
terms of any existing registration rights granted prior to the date of this
Agreement by the Company to the holders of any of the Company's securities.
(h) The Company shall furnish to each Holder
participating in the offering and to each underwriter, if any, a signed
counterpart, addressed to such Holder or underwriter, of (i) an opinion of
counsel to the Company, dated the effective date of such registration statement
(and, if such registration includes an underwritten public offering, an opinion
dated the date of the closing under the underwriting agreement), and (ii) a
"cold comfort" letter dated the effective date of such registration statement
(and, if such registration includes an underwritten public offering, a letter
dated the date of the closing under the underwriting agreement) signed by the
independent public accountants who have issued a report on the Company's
financial statements included in such registration statement, in each case
covering substantially the same matters with respect to such registration
statement (and the prospectus included therein) and, in the case of such
accountants' letter, with respect to events subsequent to the date of such
financial statements, as are customarily covered in opinions of
<PAGE> 15
issuer's counsel and in accountants' letters delivered to underwriters in
underwritten public offerings of securities.
(i) The Company shall as soon as practicable after the
effective date of the registration statement, and in any event within 15 months
thereafter, make "generally available to its security holders" (within the
meaning of Rule 158 under the Act) an earnings statement (which need not be
audited) complying with Section 11(a) of the Act and covering a period of at
least 12 consecutive months beginning after the effective date of the
registration statement.
(j) The Company shall enter into an underwriting
agreement with the managing underwriters (in the case of registration rights
exercised pursuant to Section 9.3 hereof, selected for such underwriting by
Holders holding a Majority of the Warrant Shares requested to be included in
such underwriting, which may be the Representative). Such agreement shall be
satisfactory in form and substance to the Company, each Holder and such managing
underwriters, and shall contain such representations, warranties and covenants
by the Company and such other terms as are customarily contained in agreements
of that type used by the managing underwriter. The Holders shall be parties to
any underwriting agreement relating to an underwritten sale of their Warrant
Shares and may, at their option, require that any or all the representations,
warranties and covenants of the Company to or for the benefit of such
underwriters shall also be made to and for the benefit of such Holders. Such
Holders shall not be required to make any representations or warranties to or
agreements with the Company or
<PAGE> 16
the underwriters except as they may relate to such Holders and their intended
methods of distribution.
(k) For purposes of this Agreement, the term
"Majority" in reference to the Representative's Warrants or Warrant Shares shall
mean in excess of fifty percent (50%) of the then outstanding Representative's
Warrants or Warrant Shares, as the case may be, that (i) are not held by the
Company, an affiliate, officer, creditor, employee or agent thereof or any of
their respective affiliates, members of their family, persons acting as nominees
or in conjunction therewith or (ii) have not been resold to the public pursuant
to a registration statement filed with the Commission under the Act.
10. Obligations of Holders. It shall be a condition precedent to
the obligations of the Company to take any action pursuant to Section 9 hereof
that each of the selling Holders shall:
(a) Furnish to the Company such information regarding
themselves, the Warrant Shares held by them, the intended method of sale or
other disposition of such securities, the identity of and compensation to be
paid to any underwriters proposed to be employed in connection with such sale or
other disposition, and such other information as may reasonably be required to
effect the registration of their Warrant Shares.
(b) Notify the Company, at any time when a prospectus
relating to the Warrant Shares covered by a registration statement is required
to be delivered under the Act, of the happening of any event with respect to
such selling Holder as a result of which the prospectus included in such
registration statement, as then in effect, includes an untrue statement
<PAGE> 17
of a material fact or omits to state a material fact required to be stated
therein or necessary to make the statements therein not misleading in the light
of the circumstances then existing.
11. Adjustments to Exercise Price and Number of Securities. The
Exercise Price in effect at any time and the number and kind of securities
purchased upon the exercise of the Representative's Warrants shall be subject to
adjustment from time to time only upon the happening of the following events:
11.1 Stock Dividend, Subdivision and Combination. In case
the Company shall (i) declare a dividend or make a distribution on its
outstanding shares of Common Stock in shares of Common Stock, (ii) subdivide or
reclassify its outstanding shares of Common Stock into a greater number of
shares, or (iii) combine or reclassify its outstanding shares of Common Stock
into a smaller number of shares, the Exercise Price in effect at the time of the
record date for such dividend or distribution or of the effective date of such
subdivision, combination or reclassification shall be adjusted so that it shall
equal the price determined by multiplying the Exercise Price by a fraction, the
denominator of which shall be the number of shares of Common Stock outstanding
after giving effect to such action, and the numerator of which shall be the
number of shares of Common Stock outstanding immediately prior to such action.
Such adjustment shall be made successively whenever any event listed above shall
occur.
11.2 Adjustment in Number of Securities. Upon each
adjustment of the Exercise Price pursuant to the provisions of this Section 11,
the number of Warrant Shares issuable upon the exercise at the adjusted Exercise
Price of each Representative's Warrant shall be adjusted to the nearest number
of whole shares of Common Stock by multiplying a number
<PAGE> 18
equal to the Exercise Price in effect immediately prior to such adjustment by
the number of Warrant Shares issuable upon exercise of the Representative's
Warrant immediately prior to such adjustment and dividing the product so
obtained by the adjusted Exercise Price.
11.3 Definition of Common Stock. For the purpose of this
Agreement, the term "Common Stock" shall mean (i) the class of stock designated
as Common Stock in the Certificate of Incorporation of the Company as amended as
of the date hereof, or (ii) any other class of stock resulting from successive
changes or reclassifications of such Common Stock consisting solely of changes
in par value, or from par value to no par value, or from no par value to par
value.
11.4 Merger or Consolidation. In case of any consolidation
of the Company with, or merger of the Company into, another corporation (other
than a consolidation or merger which does not result in any reclassification or
change of the outstanding Common Stock), the corporation formed by such
consolidation or merger shall execute and deliver to the Holders of all
Representative's Warrants then outstanding a supplemental warrant agreement
providing that each of such Holders shall have the right thereafter (until the
expiration of such Representative's Warrants) to receive, upon exercise of such
Representative's Warrants, the kind and amount of shares of stock and other
securities and property receivable upon such consolidation or merger by a holder
of the number of shares of Common Stock for which such Representative's Warrants
might have been exercised immediately prior to such consolidation, merger, sale
or transfer. Such supplemental warrant agreement shall provide for adjustments
which shall be identical to
<PAGE> 19
the adjustments provided in Section 11. The above provision of this subsection
shall similarly apply to successive consolidations or mergers.
11.5 No Adjustment of Exercise Price in Certain Cases. No
adjustment of the Exercise Price shall be made if the amount of said adjustment
shall be less than two cents ($.02) per share, provided, however, that in such
case any adjustment that would otherwise be required then to be made shall be
carried forward and shall be made at the time of and together with the next
subsequent adjustment which, together with any adjustment so carried forward,
shall amount to at least two cents ($.02) per Representative's Warrant.
12. Exchange and Replacement of Warrant Certificates. Each
Warrant Certificate is exchangeable, without expense, upon the surrender thereof
by the registered Holder at the principal executive office of the Company for a
new Warrant Certificate of like tenor and date representing in the aggregate the
right to purchase the same number of Warrant Shares in such denominations as
shall be designated by the Holder thereof at the time of such surrender.
Upon receipt by the Company of evidence reasonably satisfactory
to it of the loss, theft, destruction or mutilation of any Warrant Certificate,
and, in case of loss, theft or destruction, of indemnity or security reasonably
satisfactory to it and reimbursement to the Company of all reasonable expenses
incidental thereto, and upon surrender and cancellation of the Warrant
Certificate, if mutilated, the Company will make and deliver a new Warrant
Certificate of like tenor, in lieu thereof.
<PAGE> 20
13. Elimination of Fractional Interests. The Company shall not be
required to issue certificates representing fractions of shares of Common Stock
upon the exercise of the Representative's Warrants, nor shall it be required to
issue scrip or pay cash in lieu of fractional interests, it being the intent of
the parties that all fractional interests shall be eliminated by rounding any
fraction up to the nearest whole number of shares of Common Stock or other
securities, properties or rights.
14. Reservation and Listing of Securities. The Company shall at
all times reserve and keep available out of its authorized shares of Common
Stock, solely for the purpose of issuance upon the exercise of the
Representative's Warrants, such number of shares of Common Stock or other
securities, properties or rights as shall be issuable upon the exercise thereof.
Every transfer agent ("Transfer Agent") for the Common Stock and other
securities of the Company issuable upon the exercise of the Representative's
Warrants will be irrevocably authorized and directed at all times to reserve
such number of authorized shares of Common Stock and other securities as shall
be requisite for such purpose. The Company will keep a copy of this Agreement on
file with every Transfer Agent for the Common Stock and other securities of the
Company issuable upon the exercise of the Representative's Warrants. The Company
will supply every such Transfer Agent with duly executed stock and other
certificates, as appropriate, for such purpose. The Company covenants and agrees
that, upon exercise of the Representative's Warrants and payment of the Exercise
Price therefor, all shares of Common Stock and other securities issuable upon
such exercise shall be duly and validly issued, fully paid, non-assessable and
not subject to the preemptive rights of any stockholder. As long as the
Representative's Warrants shall be outstanding, the Company shall use its best
efforts to cause
<PAGE> 21
all shares of Common Stock issuable upon the exercise of the Representative's
Warrants to be listed (subject to official notice of issuance) on all securities
exchanges on which the Common Stock issued to the public in connection herewith
may then be listed and/or quoted.
15. Notices to Holders of Representative's Warrants. Nothing
contained in this Agreement shall be construed as conferring upon the Holders
the right to vote or to consent or to receive notice as a stockholder in respect
of any meetings of stockholders for the election of directors or any other
matter, or as having any rights whatsoever as a stockholder of the Company. If,
however, at any time prior to the expiration of the Representative's Warrants
and their exercise, any of the following events shall occur:
(a) the Company shall take a record of the holders of
its shares of Common Stock for the purpose of entitling them to receive a
dividend or distribution payable otherwise than in cash, or a cash dividend or
distribution payable otherwise than out of current or retained earnings, as
indicated by the accounting treatment of such dividend or distribution on the
books of the Company; or
(b) the Company shall offer to all the holders of its
Common Stock any additional shares of capital stock of the Company or securities
convertible into or exchangeable for shares of capital stock of the Company, or
any option, right or warrant to subscribe therefor; or
<PAGE> 22
(c) a dissolution, liquidation or winding up of the
Company (other than in connection with a consolidation or merger) or a sale of
all or substantially all of its property, assets and business as an entirety
shall be proposed;
then in any one or more of said events, the Company shall give written notice of
such event at least fifteen (15) days prior to the date fixed as a record date
or the date of closing the transfer books for the determination of the
stockholders entitled to such dividend, distribution, convertible or
exchangeable securities or subscription rights, or entitled to vote on such
proposed dissolution, liquidation, winding up or sale. Such notice shall specify
such record date or the date of closing the transfer books, as the case may be.
Failure to give such notice or any defect therein shall not affect the validity
of any action taken in connection with the declaration or payment of any such
dividend, or the issuance of any convertible or exchangeable securities, or
subscription rights, options or warrants, or any proposed dissolution,
liquidation, winding up or sale.
16. Notices. All notices, requests, consents and other
communications hereunder shall be in writing and shall be deemed to have been
duly made and sent when delivered, or mailed by registered or certified mail,
return receipt requested:
(a) if to the registered Holders of the
Representative's Warrants, to the address of each such Holder as shown on the
books of the Company; or
(b) if to the Company, to the address set forth in
Section 4 hereof or to such other address as the Company may designate by notice
to the Holders.
<PAGE> 23
17. Supplements; Amendments; Entire Agreement. This Agreement
(including the Underwriting Agreement to the extent portions thereof are
referred to herein) contains the entire understanding between the parties hereto
with respect to the subject matter hereof and may not be modified or amended
except by a writing duly signed by the party against whom enforcement of the
modification or amendment is sought. The Company and National may from time to
time supplement or amend this Agreement without the approval of any other
Holders of Warrant Certificates in order to cure any ambiguity, to correct or
supplement any provision contained herein which may be defective or inconsistent
with any provisions herein, or to make any other provisions in regard to matters
or questions arising hereunder which the Company and the Representative may deem
necessary or desirable and which the Company and the Representative deem shall
not adversely affect the interests of the Holders of Representative's Warrant
Certificates.
18. Successors. All of the covenants and provisions of this
Agreement shall be binding upon and inure to the benefit of the Company, the
Holders and their respective successors and assigns hereunder.
19. Survival of Representations and Warranties. All statements in
any schedule, exhibit or certificate or other instrument delivered by or on
behalf of the parties hereto, or in connection with the transactions
contemplated by this Agreement, shall be deemed to be representations and
warranties hereunder. Notwithstanding any investigations made by or on behalf of
the parties to this Agreement, all representations, warranties and agreements
made by the parties to this Agreement or pursuant hereto shall survive.
<PAGE> 24
20. Governing Law. This Agreement and each Warrant Certificate
issued hereunder shall be deemed to be a contract made under the laws of the
State of New York and for all purposes shall be construed in accordance with the
laws of said State without giving effect to the rules of said State governing
the conflicts of laws.
21. Severability. If any provision of this Agreement shall be
held to be invalid or unenforceable, such invalidity or unenforceability shall
not affect any other provision of this Agreement.
22. Captions. The caption headings of the Sections of this
Agreement are for convenience of reference only and are not intended, nor should
they be construed as, a part of this Agreement and shall be given no substantive
effect.
23. Benefits of this Agreement. Nothing in this Agreement shall
be construed to give to any person or corporation other than the Company and the
Representative and any other registered Holder(s) of the Representative's
Warrants or Warrant Shares any legal or equitable right, remedy or claim under
this Agreement; and this Agreement shall be for the sole and exclusive benefit
of the Company and the Underwriters and any other Holder(s) of the
Representative's Warrants or Warrant Shares.
<PAGE> 25
24. Counterparts. This Agreement may be executed in any number of
counterparts and each of such counterparts shall for all purposes be deemed to
be an original, and such counterparts shall together constitute but one and the
same instrument.
IN WITNESS OF, the parties hereto have caused this Agreement to
be duly executed, as of the day and year first above written.
ATTEST: TEAM COMMUNICATIONS GROUP, INC.
___________________________ By:_____________________________________
Name:
Title:
NATIONAL SECURITIES CORPORATION
By:_____________________________________
Name:
Title:
<PAGE> 26
EXHIBIT A
[FORM OF WARRANT CERTIFICATE]
THE REPRESENTATIVE'S WARRANTS REPRESENTED BY THIS CERTIFICATE AND THE OTHER
SECURITIES ISSUABLE UPON EXERCISE THEREOF MAY NOT BE OFFERED OR SOLD EXCEPT
PURSUANT TO (i) AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF
1933, (ii) TO THE EXTENT APPLICABLE, RULE 144 UNDER SUCH ACT (OR ANY SIMILAR
RULE UNDER SUCH ACT RELATING TO THE DISPOSITION OF SECURITIES), OR (iii) AN
OPINION OF COUNSEL, IF SUCH OPINION SHALL BE REASONABLY SATISFACTORY TO COUNSEL
FOR THE ISSUER, THAT AN EXEMPTION FROM REGISTRATION UNDER SUCH ACT IS AVAILABLE.
THE TRANSFER OR EXCHANGE OF THE REPRESENTATIVE'S WARRANTS
REPRESENTED BY THIS CERTIFICATE IS RESTRICTED IN ACCORDANCE WITH THE
WARRANT AGREEMENT REFERRED TO HEREIN.
EXERCISABLE ON OR BEFORE
5:30 P.M., NEW YORK TIME, ____ ___, 2003
Representative's Warrant No. 1
150,000 Shares of Common Stock
WARRANT CERTIFICATE
This Warrant Certificate certifies that National Securities
Corporation, or registered assigns, is the registered holder of Warrants to
purchase initially, at any time from ____ ___, 1998 until 5:30 p.m., New York
time on ____ ___, 2003 ("Expiration Date"), up to 150,000 shares of fully-paid
and non-assessable common stock, no par value ("Common Stock") of Team
Communications Group, Inc., a California corporation (the "Company") at the
initial exercise price, subject to adjustment in certain events, of $_____ per
share (the "Exercise Price") upon surrender of this Warrant Certificate and
payment of the Exercise Price at an office or agency of the Company, but subject
to the conditions set forth herein and in the Representative's Warrant Agreement
dated as of _____ ___, 1998 among the Company and National (the "Warrant
Agreement"). Payment of the Exercise Price shall be made by certified or
official bank check in New York Clearing House funds payable to the order of the
Company.
EXH. A-1
<PAGE> 27
No Warrant may be exercised after 5:30 p.m., New York time, on
the Expiration Date, at which time all Representative's Warrants evidenced
hereby, unless exercised prior thereto, shall thereafter be void.
The Representative's Warrants evidenced by this Warrant
Certificate are part of a duly authorized issue of Representative's Warrants
issued pursuant to the Warrant Agreement, which Warrant Agreement is hereby
incorporated by reference in and made a part of this instrument and is hereby
referred to for a description of the rights, limitation of rights, obligations,
duties and immunities thereunder of the Company and the holders (the words
"holders" or "holder" meaning the registered holders or registered holder) of
the Representative's Warrants.
The Warrant Agreement provides that upon the occurrence of
certain events the Exercise Price and the type and/or number of the Company's
securities issuable thereupon may, subject to certain conditions, be adjusted.
In such event, the Company will, at the request of the holder, issue a new
Warrant Certificate evidencing the adjustment in the Exercise Price and the
number and/or type of securities issuable upon the exercise of the
Representative's Warrants; provided, however, that the failure of the Company to
issue such new Warrant Certificates shall not in any way change, alter, or
otherwise impair, the rights of the holder as set forth in the Warrant
Agreement.
Upon due presentment for registration of transfer of this Warrant
Certificate at an office or agency of the Company, a new Warrant Certificate or
Warrant Certificates of like tenor and evidencing in the aggregate a like number
of Representative's Warrants shall be issued to the transferee(s) in exchange
for this Warrant Certificate, subject to the limitations provided herein and in
the Warrant Agreement, without any charge except for any tax or other
governmental charge imposed in connection with such transfer.
Upon the exercise of less than all of the Representative's
Warrants evidenced by this Warrant Certificate, the Company shall forthwith
issue to the holder hereof a new Warrant Certificate representing such numbered
unexercised Representative's Warrants.
The Company may deem and treat the registered holder(s) hereof as
the absolute owner(s) of this Warrant Certificate (notwithstanding any notation
of ownership or other writing hereon made by anyone), for the purpose of any
exercise hereof, and of any distribution to the holder(s) hereof, and for all
other purposes, and the Company shall not be affected by any notice to the
contrary.
All terms used in this Warrant Certificate which are defined in
the Warrant Agreement shall have the meanings assigned to them in the Warrant
Agreement.
EXH. A-2
<PAGE> 28
This Warrant Certificate does not entitle any holder thereof to
any of the rights of a shareholder of the Company.
IN WITNESS WHEREOF, the Company has caused this Warrant
Certificate to be duly executed under its corporate seal.
Dated as of ____ ___, 1998.
ATTEST: TEAM COMMUNICATIONS GROUP, INC.
___________________________ By:_____________________________________
Name:
Title:
EXH. A-3
<PAGE> 29
FORM OF ELECTION TO PURCHASE PURSUANT TO SECTION 4
The undersigned hereby irrevocably elects to exercise the right,
represented by this Warrant Certificate, to purchase _________ Shares of Common
Stock and herewith tenders in payment for such securities a certified or
official bank check payable in New York Clearing House Funds to the order of
Team Communications Group, Inc. (the "Company") in the amount of $_____, all in
accordance with the terms of Section 4 of the Representative's Warrant Agreement
dated as of ____ __, 1998 among the Company and National Securities Corporation.
The undersigned requests that a certificate for such securities be registered in
the name of _________________________________________ , whose address is
_______________________ and that such certificate be delivered to
________________ , whose address is ______________________, and if said number
of shares shall not be all the shares purchasable hereunder, that a new Warrant
Certificate for the balance of the shares purchasable under the within Warrant
Certificate be registered in the name of the undesigned warrant holder or his
assignee as below indicated and delivered to the address stated below.
Dated:
Signature:____________________
(Signature must conform in all
respects to name of holder as
specified on the face of the
Warrant Certificate.)
Address: ______________________________
______________________________
__________________________________________
(Insert Social Security or Other
Identifying Number of Holder)
Signature Guaranteed:___________________________________________________________
(Signature must be guaranteed by a bank savings and loan association,
stockbroker, or credit union with membership in an approved signature guaranty
Medallion Program pursuant to Securities Exchange Act Rule 17Ad-15.)
EXH. A-4
<PAGE> 30
FORM OF ELECTION TO PURCHASE PURSUANT TO SECTION 4.2
The undersigned hereby irrevocably elects to exercise the right,
represented by this Warrant Certificate, to purchase __________ Shares all in
accordance with the terms of Section 4.2 of the Representative's Warrant
Agreement dated as of _________ __, 1998 between Team Communications Group, Inc.
and National Securities Corporation. The undersigned requests that certificates
for such securities be registered in the name of ________________ whose address
is ____________________________________ and that such certificates be delivered
to _______________________ whose address is __________________________________.
Dated:
Signature________________________________________
(Signature must conform in all respects to name of holder as
specified on the face of the Warrant Certificate)
Address:_________________________________________
_________________________________________________
_________________________________________________
(Insert Social Security or Other
Identifying Number of Holder)
EXH. A-5
<PAGE> 31
FORM OF ASSIGNMENT
(TO BE EXECUTED BY THE REGISTERED HOLDER IF SUCH HOLDER
DESIRES TO TRANSFER THE WARRANT CERTIFICATE.)
FOR VALUE RECEIVED ______________________ here sells, assigns and transfers unto
_________________ this Warrant Certificate, together with all right, title and
interest therein, and does hereby irrevocably constitute and appoint
_______________ Attorney, to transfer the within Warrant Certificate on the
books of the within-named Company, with full power of substitution.
Dated: ______________________
Signature:________________________________
(Signature must conform in all respects to
name of holder as specified on the face of
the Warrant Certificate.)
Address: _________________________________
_________________________________
__________________________________________
(Insert Social Security or Other
Identifying Number of Holder)
Signature Guaranteed:___________________________________________________________
(Signature must be guaranteed by a bank savings and loan association,
stockbroker, or credit union with membership in an approved signature guaranty
Medallion Program pursuant to Securities Exchange Act Rule 17Ad-15.)
EXH. A-6
<PAGE> 1
EXHIBIT 4.17
SECURED PROMISSORY NOTE
THIS PROMISSORY NOTE (THE "NOTE") HAS NOT BEEN REGISTERED UNDER THE SECURITIES
ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), OR ANY STATE SECURITIES LAWS AND
MAY NOT BE OFFERED, SOLD, PLEDGED, ASSIGNED, OR OTHERWISE TRANSFERRED UNLESS (1)
A REGISTRATION STATEMENT WITH RESPECT THERETO IS EFFECTIVE UNDER THE SECURITIES
ACT AND ANY APPLICABLE STATE SECURITIES LAWS, OR (2) THE COMPANY RECEIVES AN
OPINION OF COUNSEL TO THE HOLDER OF THIS NOTE, WHICH COUNSEL AND OPINION ARE
REASONABLY SATISFACTORY TO THE COMPANY, THAT THIS NOTE MAY BE OFFERED, SOLD,
PLEDGED, ASSIGNED, OR OTHERWISE TRANSFERRED IN THE MANNER CONTEMPLATED WITHOUT
AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OR APPLICABLE STATE
SECURITIES LAWS.
TEAM COMMUNICATIONS GROUP, INC.
AS OF DECEMBER 10, 1997
$315,000.00 PRINCIPAL AMOUNT LOS ANGELES, CALIFORNIA
TEAM COMMUNICATIONS GROUP, INC. a California corporation (the
"Company"), for value received, hereby promises to pay Venture Management
Consultants, L.L.C., with an address of: 60 Wells Avenue, Newton MA 02159 or
registered assigns (the "Holder"), the principal aggregate amount of three
hundred fifteen thousand dollars ($315,000.00) on the Maturity Date (as such
term is defined below), or such earlier date as may be provided herein, together
with interest on the unpaid principal balance hereof at the rate (calculated on
the basis of a 360-day year consisting of twelve 30-day months) of twelve per
cent (12%) per annum. In no event shall any interest to be paid hereunder exceed
the maximum rate permitted by law. In any such event, this Note shall
automatically be deemed amended to permit interest charges (including the
default rate set forth in Section 2 below) at an amount equal to, but no greater
than, the maximum rate permitted by law.
SECTION 1 PAYMENTS.
(a) (i) All unpaid principal and interest shall be due and
payable on the sooner of: five (5) business days after the completion of a
public offering of Company's common stock; or, March 15, 1998, (the "Maturity
Date").
<PAGE> 2
(b) Interest on this Note shall accrue from the date of issuance
hereof. Payments shall be applied first to any costs or expenses, then to
accrued interest and then to principal.
(c) If the Maturity Date falls on a day that is not a Business
Day (as defined below), the payment due on such date will be made on the next
succeeding Business Day with the same force and effect as if made on the
Maturity Date. "Business Day" means any day which is not a Saturday or Sunday
and is not a day on which banking institutions are generally authorized or
obligated to close in the City of Los Angeles, California.
(d) Company may, at its option, prepay all or any part of the
principal of this Note, without payment of any premium or penalty. All payments
on this Note shall be applied first to accrued and unpaid interest hereon and
the balance to the payment of principal hereof.
(e) Payments of principal of, and interest on, this Note shall be
made by check sent to the Holder's address set forth above or to such other
address as the Holder may designate for such purpose from time to time by
written notice to the Company, in such coin or currency of the United States of
America as at the time of payment shall be legal tender for the payment of
public and private debts.
(f) The obligations to make the payments provided for in this
Note are absolute and unconditional and not subject to any defense, set-off,
counterclaim, rescission, recoupment, or adjustment whatsoever. The Company
hereby expressly waives demand and presentment for payment, notice of
non-payment, notice of dishonor, protest, notice of protest, bringing of suit,
and diligence in taking any action to collect any amount called for hereunder,
and shall be directly and primarily liable for the payment of all sums owing and
to be owing hereon, regardless of, and without any notice, diligence, act or
omission with respect to, the collection of any amount called for hereunder.
(g) In the event that the accrued principal and interest have not
been paid in full on or before February 15, 1998, in addition to the principal
and all accrued interest, Company shall pay to holder an additional fee of
Fifteen Thousand Dollars ($15,000). This additional fee will be payable on the
maturity date of the loan as set forth herein, and which additional fee will not
accrue interest.
SECTION 2 EVENTS OF DEFAULT.
The occurrence of any of the following events shall constitute an
event of default (an "Event of Default"):
(a) A default in the payment of the principal on the Note, when
and as the same shall become due and payable.
<PAGE> 3
(b) A default in the payment of any interest accrued on the Note,
when and as the same shall become due and payable, which default shall continue
for five business days after the date fixed for the making of such interest
payment.
(c) A final judgment or judgments for the payment of money in
excess of $100,000 in the aggregate shall be rendered by one or more courts,
administrative or arbitral tribunals, or other bodies having jurisdiction
against the Company and the same shall not be discharged (or provision shall not
be made for such discharge), or a stay of execution thereof shall not be
procured, within 60 days from the date of entry thereof and the Company shall
not, within such 60-day period, or such longer period during which execution of
the same shall have been stayed, appeal therefrom and cause the execution
thereof to be stayed during such appeal.
(d) The entry of a decree or order by a court having jurisdiction
adjudging the Company a bankrupt or insolvent, or approving a petition seeking
reorganization, arrangement, adjustment, or composition of, or in respect of,
the Company, under federal bankruptcy law, as now or hereafter constituted, or
any other applicable federal or state bankruptcy, insolvency, or other similar
law, and the continuance of any such decree or order unstayed and in effect for
a period of 60 days; or the commencement by the Company of a voluntary case
under federal bankruptcy law, as now or hereafter constituted, or any other
applicable federal or state bankruptcy, insolvency, or other similar law, or the
consent by it to the institution of bankruptcy or insolvency proceedings against
it, or the filing by it of a petition or answer or consent seeking
reorganization or relief under federal bankruptcy law or any other applicable
federal or state law, or the consent by it to the filing of such petition or to
the appointment of a receiver, liquidator, assignee, trustee, sequestrator, or
similar official of the Company or of any substantial part of its property, or
the making by it of an assignment for the benefit of creditors, or the admission
by it in writing of its inability to pay its debts generally as they become due,
or the taking of corporate action by the Company in furtherance of any such
action.
(e) A default is declared under the terms of any collateral
security agreements.
(f) A default is declared under any other of the Company's
obligations in excess of $100,000 in the aggregate.
(g) A sale of all or substantially all of the assets of the
Company.
then, and in every such case, during the continuance of the Event of Default,
the Holder may, without presentment, demand or notice declare the principal of
this Note, together with all unpaid accrued interest thereon, to be immediately
due and payable, and upon any such declaration the same shall become and be
immediately due and payable, anything in this Note to the contrary
notwithstanding. The Holder, if not paid promptly at maturity or acceleration of
this Note, shall be entitled to, and the Borrowers covenant and agree to pay to
the Holder, such additional amount as shall be sufficient to cover the cost and
expenses of collection of this Note, including, without limitation, reasonable
attorneys' fees and costs. Upon an Event of Default, the Holder may take such
action as it deems desirable for the enforcement and collection of the principal
of,
<PAGE> 4
and unpaid accrued interest on, this Note, as well as all additional sums to
which the Holder may be entitled as aforesaid. The Holder's rights hereunder
shall be in addition to any other rights the Holder may have at law or in
equity. If an Event of Default has occurred under the Agreement, or this Note in
addition to any agreed upon charges, the principal balance of this Note shall
thereafter, at Holder's option, bear interest at five percent (5.00%) in
addition to the rate set forth in above, calculated over a year of 360 days,
however the total rate of interest will not exceed the maximum allowable legal
rate of interest.
SECTION 3 REMEDIES UPON DEFAULT.
(a) Upon the occurrence of an Event of Default, the principal
amount then outstanding of, and the accrued and unpaid interest on, this Note
shall automatically become immediately due and payable without presentment,
demand, protest, or other formalities of any kind, all of which are hereby
expressly waived by the Company.
(b) The Holder may institute such actions or proceedings in law
or equity as it shall deem expedient for the protection of its rights and may
prosecute and enforce its claims against all assets of the Company, and in
connection with any such action or proceeding shall be entitled to receive from
the Company payment of the principal amount of this Note plus accrued interest
to the date of payment plus reasonable expenses of collection, including,
without limitation, attorneys' fees and expenses.
SECTION 4 SECURITY. This note shall be secured by the Collateral
described in those certain collateral security agreements dated as of even date
hereof.
SECTION 5 LOAN ORIGINATION FEE Included in the principal of this Note is
a fee for the origination of this financing, in an amount equal to Fifteen
Thousand Dollars ($15,000).
SECTION 6 MISCELLANEOUS.
(a) Any notice or other communication required or permitted to be
given hereunder shall be in writing and shall be mailed by certified mail,
return receipt requested, or by Federal Express, Express Mail, or similar
overnight delivery or courier service or delivered (in person or by telecopy,
telex, or similar telecommunications equipment) against receipt to the party to
whom it is to be given, (i) if to the Company, at its address at 12300 Wilshire
Boulevard, Suite 400, Los Angeles, California 90025 Attention: President, (ii)
if to the Holder, at its address set forth on the first page hereof, or (iii) in
either case, to such other address as the party shall have furnished in writing
in accordance with the provisions of this Section 6(a). Any notice or other
communication given by certified mail shall be deemed given at the time of
receipt. Any notice given by other means permitted by this Section 6(a) shall be
deemed given at the time of receipt thereof.
<PAGE> 5
(b) Upon receipt of evidence satisfactory to the Company of the
loss, theft, destruction, or mutilation of this Note (and upon surrender of this
Note if mutilated), the Company shall execute and deliver to the Holder a new
Note of like date, tenor, and denomination.
(c) No course of dealing and no delay or omission on the part of
the Holder in exercising any right or remedy shall operate as a waiver thereof
or otherwise prejudice the Holder's rights, powers, or remedies. No right,
power, or remedy conferred by this Note upon the Holder shall be exclusive of
any other right, power, or remedy referred to herein or now or hereafter
available at law, in equity, by statute or otherwise, and all such remedies may
be exercised singly or concurrently.
(d) This Note may be amended only by a written instrument
executed by the Company and the Holder hereof. Any amendment shall be endorsed
upon this Note, and all future Holders shall be bound thereby.
(e) This Note has been negotiated and consummated in the
Commonwealth of Massachusetts and shall be governed by, and construed in
accordance with, the laws of the Commonwealth of Massachusetts, without giving
effect to principles governing conflicts of law.
(f) Company irrevocably consents to the jurisdiction of the
courts of the Commonwealth of Massachusetts and of any federal court located in
such Commonwealth of Massachusetts in connection with any action or proceeding
arising out of, or relating to, this Note, any document or instrument delivered
pursuant to, in connection with, or simultaneously with this Note, or a breach
of this Note or any such document or instrument. In any such action or
proceeding, the Company waives personal service of any summons, complaint, or
other process and agrees that service thereof may be made in accordance with
Section 4(a). Within 30 days after such service, or such other time as may be
mutually agreed upon in writing by the attorneys for the parties to such action
or proceeding, the Company shall appear or answer such summons, complaint, or
other process. Should the Company fail to appear or answer within such 30-day
period or such extended period, as the case may be, the Company shall be deemed
in default and judgment may be entered against the Company for the amount as
demanded in any summons, complaint, or other process so served.
(g) Company represents and warrants that: (i) the Company has the
requisite power and authority to execute, deliver and perform each of its
obligations under this Note and to consummate the transactions provided for
herein. (ii) This Note has been duly executed and delivered by the Company and
constitutes the legal, valid and binding obligation of Company, enforceable
against it in accordance with its terms.
IN WITNESS WHEREOF, the Company has caused this Note to be executed and
dated the day and year first above written.
TEAM COMMUNICATIONS GROUP, INC.
BY: /S/ DREW LEVIN
---------------------------------------
DREW LEVIN
PRESIDENT AND CHIEF EXECUTIVE OFFICER
<PAGE> 6
TEAM COMMUNICATIONS GROUP, INC.
BY: /S/ DREW LEVIN
----------------------------------------
DREW LEVIN
PRESIDENT AND CHIEF EXECUTIVE OFFICER
<PAGE> 1
EXHIBIT 4.18
PROMISSORY NOTE
THIS PROMISSORY NOTE (THE "NOTE") HAS NOT BEEN REGISTERED UNDER THE SECURITIES
ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), OR ANY STATE SECURITIES LAWS AND
MAY NOT BE OFFERED, SOLD, PLEDGED, ASSIGNED, OR OTHERWISE TRANSFERRED UNLESS (1)
A REGISTRATION STATEMENT WITH RESPECT THERETO IS EFFECTIVE UNDER THE SECURITIES
ACT AND ANY APPLICABLE STATE SECURITIES LAWS, OR (2) THE COMPANY RECEIVES AN
OPINION OF COUNSEL TO THE HOLDER OF THIS NOTE, WHICH COUNSEL AND OPINION ARE
REASONABLY SATISFACTORY TO THE COMPANY, THAT THIS NOTE MAY BE OFFERED, SOLD,
PLEDGED, ASSIGNED, OR OTHERWISE TRANSFERRED IN THE MANNER CONTEMPLATED WITHOUT
AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OR APPLICABLE STATE
SECURITIES LAWS.
TEAM COMMUNICATIONS GROUP, INC.
$100,000.00 PRINCIPAL AMOUNT AS OF MARCH 20, 1998
TEAM COMMUNICATIONS GROUP, INC. a California corporation (the
"Company"), for value received, hereby promises to pay Anders Ulegard, with an
address of 38A Route de Malagnou, CH, 1208, Geneva Switzerland, or registered
assigns (the "Holder"), the principal aggregate amount of one hundred thousand
dollars ($100,000.00) on the Maturity Date (as such term is defined below), or
such earlier date as may be provided herein, together with interest on the
unpaid principal balance hereof at the rate (calculated on the basis of a
360-day year consisting of twelve 30-day months) of twelve per cent (12%) per
annum. In no event shall any interest to be paid hereunder exceed the maximum
rate permitted by law. In any such event, this Note shall automatically be
deemed amended to permit interest charges at an amount equal to, but no greater
than, the maximum rate permitted by law.
SECTION 1 PAYMENTS.
(a) All unpaid principal and interest and fees hereunder shall be
due and payable on April 1, 1999, (the "Maturity Date").
(b) Payments shall be applied first to any costs or expenses,
then to accrued interest and then to principal.
(c) If the Maturity Date falls on a day that is not a Business
Day (as defined below), the payment due on such date will be made on the next
succeeding Business Day with the same force and effect as if made on the
Maturity Date. "Business Day" means any day which is not a Saturday or Sunday
and is not a day on which banking institutions are generally authorized or
obligated to close in the City of Los Angeles, California.
<PAGE> 2
(d) Company may, at its option, prepay all or any part of the
principal of this Note, without payment of any premium or penalty. All payments
on this Note shall be applied first to interest hereon, and the balance to the
payment of principal hereof.
(e) Payments of principal of, and interest on, this Note shall be
made by check sent to the Holder's address set forth above or to such other
address as the Holder may designate for such purpose from time to time by
written notice to the Company, in such coin or currency of the United States of
America as at the time of payment shall be legal tender for the payment of
public and private debts.
(f) The obligations to make the payments provided for in this
Note are absolute and unconditional and not subject to any defense, set-off,
counterclaim, rescission, recoupment, or adjustment whatsoever. The Company
hereby expressly waives demand and presentment for payment, notice of
non-payment, notice of dishonor, protest, notice of protest, bringing of suit,
and diligence in taking any action to collect any amount called for hereunder,
and shall be directly and primarily liable for the payment of all sums owing and
to be owing hereon, regardless of, and without any notice, diligence, act or
omission with respect to, the collection of any amount called for hereunder.
SECTION 2 EVENTS OF DEFAULT.
The occurrence of any of the following events shall constitute an
event of default (an "Event of Default"):
(a) A default in the payment of the principal on the Note, more
than fourteen (14) calendar days after the same shall become due and payable.
(b) A default in the payment of any interest accrued on the Note,
when and as the same shall become due and payable, which default shall continue
for fourteen calendar days after the date fixed for the making of such interest
payment.
(c) A final judgment or judgments for the payment of money in
excess of $250,000 in the aggregate shall be rendered by one or more courts,
administrative or arbitral tribunals, or other bodies having jurisdiction
against the Company and the same shall not be discharged (or provision shall not
be made for such discharge), or a stay of execution thereof shall not be
procured, within 60 days from the date of entry thereof and the Company shall
not, within such 60-day period, or such longer period during which execution of
the same shall have been stayed, appeal therefrom and cause the execution
thereof to be stayed during such appeal.
(d) The entry of a decree or order by a court having jurisdiction
adjudging the Company a bankrupt or insolvent, or approving a petition seeking
reorganization, arrangement, adjustment, or composition of, or in respect of,
the Company, under federal bankruptcy law, as now or hereafter constituted, or
any other applicable federal or state bankruptcy, insolvency, or other similar
law, and the continuance of any such decree or order unstayed and in effect for
a period of 60 days; or the commencement by the Company of a voluntary case
under federal
<PAGE> 3
bankruptcy law, as now or hereafter constituted, or any other applicable federal
or state bankruptcy, insolvency, or other similar law, or the consent by it to
the institution of bankruptcy or insolvency proceedings against it, or the
filing by it of a petition or answer or consent seeking reorganization or relief
under federal bankruptcy law or any other applicable federal or state law, or
the consent by it to the filing of such petition or to the appointment of a
receiver, liquidator, assignee, trustee, sequestrator, or similar official of
the Company or of any substantial part of its property, or the making by it of
an assignment for the benefit of creditors, or the admission by it in writing of
its inability to pay its debts generally as they become due, or the taking of
corporate action by the Company in furtherance of any such action.
(e) A default is declared under the terms of any collateral
security agreements.
(f) A default is declared under any other of the Company's
obligations in excess of $250,000 in the aggregate.
(g) A sale of all or substantially all of the assets of the
Company.
then, and in every such case, during the continuance of the Event of Default,
the Holder may, without presentment, demand or notice declare the principal of
this Note, together with all unpaid accrued interest thereon, to be immediately
due and payable, and upon any such declaration the same shall become and be
immediately due and payable, anything in this Note to the contrary
notwithstanding. The Holder, if not paid promptly at maturity or acceleration of
this Note, shall be entitled to, and the Company covenants and agrees to pay to
the Holder, such additional amount as shall be sufficient to cover the cost and
expenses of collection of this Note, including, without limitation, reasonable
attorneys' fees and costs. Upon an Event of Default, the Holder may take such
action as it deems desirable for the enforcement and collection of the principal
of, and unpaid accrued interest on, this Note, as well as all additional sums to
which the Holder may be entitled as aforesaid. The Holder's rights hereunder
shall be in addition to any other rights the Holder may have at law or in
equity.
SECTION 3 REMEDIES UPON DEFAULT.
(a) Upon the occurrence of an Event of Default, the principal
amount then outstanding of, and the accrued and unpaid interest on, this Note
shall automatically become immediately due and payable without presentment,
demand, protest, or other formalities of any kind, all of which are hereby
expressly waived by the Company.
(b) The Holder may institute such actions or proceedings in law
or equity as it shall deem expedient for the protection of its rights and may
prosecute and enforce its claims against all assets of the Company, and in
connection with any such action or proceeding shall be entitled to receive from
the Company payment of the principal amount of this Note plus accrued interest
to the date of payment plus reasonable expenses of collection, including,
without limitation, attorneys' fees and expenses.
<PAGE> 4
SECTION 4 MISCELLANEOUS.
(a) Any notice or other communication required or permitted to be
given hereunder shall be in writing and shall be mailed by certified mail,
return receipt requested, or by Federal Express, Express Mail, or similar
overnight delivery or courier service or delivered (in person or by telecopy,
telex, or similar telecommunications equipment) against receipt to the party to
whom it is to be given, (i) if to the Company, at its address at 12300 Wilshire
Boulevard, Suite 400, Los Angeles, California 90025 Attention: President, (ii)
if to the Holder, at its address set forth on the first page hereof, or (iii) in
either case, to such other address as the party shall have furnished in writing
in accordance with the provisions of this Section 4(a). Any notice or other
communication given by certified mail shall be deemed given at the time of
receipt. Any notice given by other means permitted by this Section 4(a) shall be
deemed given at the time of receipt thereof.
(b) Upon receipt of evidence satisfactory to the Company of the
loss, theft, destruction, or mutilation of this Note (and upon surrender of this
Note if mutilated), the Company shall execute and deliver to the Holder a new
Note of like date, tenor, and denomination.
(c) No course of dealing and no delay or omission on the part of
the Holder in exercising any right or remedy shall operate as a waiver thereof
or otherwise prejudice the Holder's rights, powers, or remedies. No right,
power, or remedy conferred by this Note upon the Holder shall be exclusive of
any other right, power, or remedy referred to herein or now or hereafter
available at law, in equity, by statute or otherwise, and all such remedies may
be exercised singly or concurrently.
(d) This Note may be amended only by a written instrument
executed by the Company and the Holder hereof. Any amendment shall be endorsed
upon this Note, and all future Holders shall be bound thereby.
(e) This Note shall be governed by, and construed in accordance
with, the laws of the State of California without giving effect to principles
governing conflicts of law.
(f) In any action or proceeding, the Company waives personal
service of any summons, complaint, or other process and agrees that service
thereof may be made in accordance with Section 6(a). Within 30 days after such
service, or such other time as may be mutually agreed upon in writing by the
attorneys for the parties to such action or proceeding, the Company shall appear
or answer such summons, complaint, or other process. Should the Company fail to
appear or answer within such 30-day period or such extended period, as the case
may be, the Company shall be deemed in default and judgment may be entered
against the Company for the amount as demanded in any summons, complaint, or
other process so served.
(g) Company represents and warrants that: (i) the Company has the
requisite power and authority to execute, deliver and perform each of its
obligations under this Note and to
<PAGE> 5
consummate the transactions provided for herein. (ii) this Note has been duly
executed and delivered by the Company and constitutes the legal, valid and
binding obligation of Company, enforceable against it in accordance with its
terms.
IN WITNESS WHEREOF, the Company has caused this Note to be executed and
dated the day and year first above written.
TEAM COMMUNICATIONS GROUP, INC.
BY: /S/ DREW LEVIN
---------------------------------------
DREW LEVIN
PRESIDENT AND CHIEF EXECUTIVE OFFICER
<PAGE> 6
SECURED PROMISSORY NOTE
THIS PROMISSORY NOTE (THE "NOTE") HAS NOT BEEN REGISTERED UNDER THE SECURITIES
ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), OR ANY STATE SECURITIES LAWS AND
MAY NOT BE OFFERED, SOLD, PLEDGED, ASSIGNED, OR OTHERWISE TRANSFERRED UNLESS (1)
A REGISTRATION STATEMENT WITH RESPECT THERETO IS EFFECTIVE UNDER THE SECURITIES
ACT AND ANY APPLICABLE STATE SECURITIES LAWS, OR (2) THE COMPANY RECEIVES AN
OPINION OF COUNSEL TO THE HOLDER OF THIS NOTE, WHICH COUNSEL AND OPINION ARE
REASONABLY SATISFACTORY TO THE COMPANY, THAT THIS NOTE MAY BE OFFERED, SOLD,
PLEDGED, ASSIGNED, OR OTHERWISE TRANSFERRED IN THE MANNER CONTEMPLATED WITHOUT
AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OR APPLICABLE STATE
SECURITIES LAWS.
TEAM COMMUNICATIONS GROUP, INC.
AS OF MARCH 16, 1998
$150,000.00 PRINCIPAL AMOUNT LOS ANGELES, CALIFORNIA
TEAM COMMUNICATIONS GROUP, INC. a California corporation (the
"Company"), for value received, hereby promises to pay Nick Kahla, with an
address of: Chemin du Motty, 1026 Echandens, Switzerland, or registered assigns
(the "Holder"), the principal aggregate amount of one hundred fifty thousand
dollars ($150,000.00) on the Maturity Date (as such term is defined below), or
such earlier date as may be provided herein, together with interest on the
unpaid principal balance hereof at the rate (calculated on the basis of a
360-day year consisting of twelve 30-day months) of twelve per cent (12%) per
annum. In no event shall any interest to be paid hereunder exceed the maximum
rate permitted by law. In any such event, this Note shall automatically be
deemed amended to permit interest charges at an amount equal to, but no greater
than, the maximum rate permitted by law.
SECTION 1 PAYMENTS.
(a) (i) All unpaid principal and interest shall be due and
payable on March 16, 1999 (the "Maturity Date").
(b) Payments shall be applied first to any costs or expenses,
then to accrued interest and then to principal.
<PAGE> 7
(c) If the Maturity Date falls on a day that is not a Business
Day (as defined below), the payment due on such date will be made on the next
succeeding Business Day with the same force and effect as if made on the
Maturity Date. "Business Day" means any day which is not a Saturday or Sunday
and is not a day on which banking institutions are generally authorized or
obligated to close in the City of Los Angeles, California.
(d) Company may, at its option, prepay all or any part of the
principal of this Note, without payment of any premium or penalty. All payments
on this Note shall be applied first to interest hereon and the balance to the
payment of principal hereof.
(e) Payments of principal of, and interest on, this Note shall be
made by check sent to the Holder's address set forth above or to such other
address as the Holder may designate for such purpose from time to time by
written notice to the Company, in such coin or currency of the United States of
America as at the time of payment shall be legal tender for the payment of
public and private debts.
(f) The obligations to make the payments provided for in this
Note are absolute and unconditional and not subject to any defense, set-off,
counterclaim, rescission, recoupment, or adjustment whatsoever. The Company
hereby expressly waives demand and presentment for payment, notice of
non-payment, notice of dishonor, protest, notice of protest, bringing of suit,
and diligence in taking any action to collect any amount called for hereunder,
and shall be directly and primarily liable for the payment of all sums owing and
to be owing hereon, regardless of, and without any notice, diligence, act or
omission with respect to, the collection of any amount called for hereunder.
SECTION 2 EVENTS OF DEFAULT.
The occurrence of any of the following events shall constitute an
event of default (an "Event of Default"):
(a) A default in the payment of the principal on the Note, more
than fourteen (14) calendar days after the same shall become due and payable.
(b) A default in the payment of any interest accrued on the Note,
when and as the same shall become due and payable, which default shall continue
for fourteen calendar days after the date fixed for the making of such interest
payment.
(c) A final judgment or judgments for the payment of money in
excess of $250,000 in the aggregate shall be rendered by one or more courts,
administrative or arbitral tribunals, or other bodies having jurisdiction
against the Company and the same shall not be discharged (or provision shall not
be made for such discharge), or a stay of execution thereof shall not be
procured, within 60 days from the date of entry thereof and the Company shall
not, within such 60-day period, or such longer period during which execution of
the same shall have been stayed, appeal therefrom and cause the execution
thereof to be stayed during such appeal.
<PAGE> 8
(d) The entry of a decree or order by a court having jurisdiction
adjudging the Company a bankrupt or insolvent, or approving a petition seeking
reorganization, arrangement, adjustment, or composition of, or in respect of,
the Company, under federal bankruptcy law, as now or hereafter constituted, or
any other applicable federal or state bankruptcy, insolvency, or other similar
law, and the continuance of any such decree or order unstayed and in effect for
a period of 60 days; or the commencement by the Company of a voluntary case
under federal bankruptcy law, as now or hereafter constituted, or any other
applicable federal or state bankruptcy, insolvency, or other similar law, or the
consent by it to the institution of bankruptcy or insolvency proceedings against
it, or the filing by it of a petition or answer or consent seeking
reorganization or relief under federal bankruptcy law or any other applicable
federal or state law, or the consent by it to the filing of such petition or to
the appointment of a receiver, liquidator, assignee, trustee, sequestrator, or
similar official of the Company or of any substantial part of its property, or
the making by it of an assignment for the benefit of creditors, or the admission
by it in writing of its inability to pay its debts generally as they become due,
or the taking of corporate action by the Company in furtherance of any such
action.
(e) A default is declared under the terms of any collateral
security agreements.
(f) A default is declared under any other of the Company's
obligations in excess of $250,000 in the aggregate.
(g) A sale of all or substantially all of the assets of the
Company.
then, and in every such case, during the continuance of the Event of Default,
the Holder may, without presentment, demand or notice declare the principal of
this Note, together with all unpaid accrued interest thereon, to be immediately
due and payable, and upon any such declaration the same shall become and be
immediately due and payable, anything in this Note to the contrary
notwithstanding. The Holder, if not paid promptly at maturity or acceleration of
this Note, shall be entitled to, and the Borrowers covenant and agree to pay to
the Holder, such additional amount as shall be sufficient to cover the cost and
expenses of collection of this Note, including, without limitation, reasonable
attorneys' fees and costs. Upon an Event of Default, the Holder may take such
action as it deems desirable for the enforcement and collection of the principal
of, and unpaid accrued interest on, this Note, as well as all additional sums to
which the Holder may be entitled as aforesaid. The Holder's rights hereunder
shall be in addition to any other rights the Holder may have at law or in
equity. If an Event of Default has occurred under the Agreement, or this Note in
addition to any agreed upon charges, the principal balance of this Note shall
thereafter, at Holder's option, bear interest at five percent (5.00%) in
addition to the rate set forth in above, calculated over a year of 360 days,
however the total rate of interest will not exceed the maximum allowable legal
rate of interest.
SECTION 3 REMEDIES UPON DEFAULT.
(a) Upon the occurrence of an Event of Default, the principal
amount then
<PAGE> 9
outstanding of, and the accrued and unpaid interest on, this Note shall
automatically become immediately due and payable without presentment, demand,
protest, or other formalities of any kind, all of which are hereby expressly
waived by the Company.
(b) The Holder may institute such actions or proceedings in law
or equity as it shall deem expedient for the protection of its rights and may
prosecute and enforce its claims against all assets of the Company, and in
connection with any such action or proceeding shall be entitled to receive from
the Company payment of the principal amount of this Note plus accrued interest
to the date of payment plus reasonable expenses of collection, including,
without limitation, attorneys' fees and expenses.
SECTION 4 SECURITY. This note shall be secured by the assets of the
Maker, and it is expressly agreed that any such security interest shall be
subordinate to Maker's existing note holders as of the date hereof, and further,
subordinate to any subsequent obtained conventional lender financing, including
but not limited to any bank financing, to be secured by the assets of Maker.
SECTION 5 MISCELLANEOUS.
(a) Any notice or other communication required or permitted to be
given hereunder shall be in writing and shall be mailed by certified mail,
return receipt requested, or by Federal Express, Express Mail, or similar
overnight delivery or courier service or delivered (in person or by telecopy,
telex, or similar telecommunications equipment) against receipt to the party to
whom it is to be given, (i) if to the Company, at its address at 12300 Wilshire
Boulevard, Suite 400, Los Angeles, California 90025 Attention: President, (ii)
if to the Holder, at its address set forth on the first page hereof, or (iii) in
either case, to such other address as the party shall have furnished in writing
in accordance with the provisions of this Section 5(a). Any notice or other
communication given by certified mail shall be deemed given at the time of
receipt. Any notice given by other means permitted by this Section 5(a) shall be
deemed given at the time of receipt thereof.
(b) Upon receipt of evidence satisfactory to the Company of the
loss, theft, destruction, or mutilation of this Note (and upon surrender of this
Note if mutilated), the Company shall execute and deliver to the Holder a new
Note of like date, tenor, and denomination.
(c) No course of dealing and no delay or omission on the part of
the Holder in exercising any right or remedy shall operate as a waiver thereof
or otherwise prejudice the Holder's rights, powers, or remedies. No right,
power, or remedy conferred by this Note upon the Holder shall be exclusive of
any other right, power, or remedy referred to herein or now or hereafter
available at law, in equity, by statute or otherwise, and all such remedies may
be exercised singly or concurrently.
(d) This Note may be amended only by a written instrument
executed by the
<PAGE> 10
Company and the Holder hereof. Any amendment shall be endorsed upon this Note,
and all future Holders shall be bound thereby.
(e) This Note has been negotiated and consummated in the State of
California and shall be governed by, and construed in accordance with, the laws
of the State of California, without giving effect to principles governing
conflicts of law.
(f) Company irrevocably consents to the jurisdiction of the
courts of the State of California and of any federal court located in such State
of California in connection with any action or proceeding arising out of, or
relating to, this Note, any document or instrument delivered pursuant to, in
connection with, or simultaneously with this Note, or a breach of this Note or
any such document or instrument. In any such action or proceeding, the Company
waives personal service of any summons, complaint, or other process and agrees
that service thereof may be made in accordance with Section 4(a). Within 30 days
after such service, or such other time as may be mutually agreed upon in writing
by the attorneys for the parties to such action or proceeding, the Company shall
appear or answer such summons, complaint, or other process. Should the Company
fail to appear or answer within such 30-day period or such extended period, as
the case may be, the Company shall be deemed in default and judgment may be
entered against the Company for the amount as demanded in any summons,
complaint, or other process so served.
(g) Company represents and warrants that: (i) the Company has the
requisite power and authority to execute, deliver and perform each of its
obligations under this Note and to consummate the transactions provided for
herein. (ii) This Note has been duly executed and delivered by the Company and
constitutes the legal, valid and binding obligation of Company, enforceable
against it in accordance with its terms.
IN WITNESS WHEREOF, the Company has caused this Note to be executed and
dated the day and year first above written.
TEAM COMMUNICATIONS GROUP, INC.
BY: /S/ DREW LEVIN
---------------------------------------
DREW LEVIN
PRESIDENT AND CHIEF EXECUTIVE OFFICER
<PAGE> 11
SECURED PROMISSORY NOTE
THIS PROMISSORY NOTE (THE "NOTE") HAS NOT BEEN REGISTERED UNDER THE SECURITIES
ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), OR ANY STATE SECURITIES LAWS AND
MAY NOT BE OFFERED, SOLD, PLEDGED, ASSIGNED, OR OTHERWISE TRANSFERRED UNLESS (1)
A REGISTRATION STATEMENT WITH RESPECT THERETO IS EFFECTIVE UNDER THE SECURITIES
ACT AND ANY APPLICABLE STATE SECURITIES LAWS, OR (2) THE COMPANY RECEIVES AN
OPINION OF COUNSEL TO THE HOLDER OF THIS NOTE, WHICH COUNSEL AND OPINION ARE
REASONABLY SATISFACTORY TO THE COMPANY, THAT THIS NOTE MAY BE OFFERED, SOLD,
PLEDGED, ASSIGNED, OR OTHERWISE TRANSFERRED IN THE MANNER CONTEMPLATED WITHOUT
AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OR APPLICABLE STATE
SECURITIES LAWS.
TEAM COMMUNICATIONS GROUP, INC.
$235,000.00 PRINCIPAL AMOUNT AS OF MARCH 20, 1998
TEAM COMMUNICATIONS GROUP, INC. a California corporation (the
"Company"), for value received, hereby promises to pay David Tresley, with an
address of: 655 South Ridge, Lake Forest IL 60045, or registered assigns (the
"Holder"), the principal aggregate amount of two hundred thirty five thousand
dollars ($235,000.00) on the Maturity Date (as such term is defined below), or
such earlier date as may be provided herein, together with accrued interest and
the fixed loan origination fee set forth below. In no event shall any interest
to be paid hereunder exceed the maximum rate permitted by law. In any such
event, this Note shall automatically be deemed amended to permit interest
charges at an amount equal to, but no greater than, the maximum rate permitted
by law and in any such event, any excess amount of such shall be considered to
be a loan origination fee (which shall be in addition to the fee referenced
below). Company represents and warrants to Holder that the proceeds received by
Company pursuant to this Note will be used for working capital in the usual and
ordinary course of its business.
SECTION 1 PAYMENTS.
(a) All unpaid principal and interest and fees hereunder shall be
due and payable on May 31, 1998, (the "Maturity Date").
(b) Payments shall be applied first to any costs or expenses,
then to accrued interest and then to principal.
(c) If the Maturity Date falls on a day that is not a Business
Day (as defined below), the payment due on such date will be made on the next
succeeding Business Day with the same force and effect as if made on the
Maturity Date. "Business Day" means any day which
<PAGE> 12
is not a Saturday or Sunday and is not a day on which banking institutions are
generally authorized or obligated to close in the City of Los Angeles,
California.
(d) Company may, at its option, prepay all or any part of the
principal of this Note, without payment of any premium or penalty. All payments
on this Note shall be applied first to interest hereon, then to any loan
origination fees and the balance to the payment of principal hereof.
(e) Payments of principal of, and loan origination fees and
interest on, this Note shall be made by check sent to the Holder's address set
forth above or to such other address as the Holder may designate for such
purpose from time to time by written notice to the Company, in such coin or
currency of the United States of America as at the time of payment shall be
legal tender for the payment of public and private debts.
(f) The obligations to make the payments provided for in this
Note are absolute and unconditional and not subject to any defense, set-off,
counterclaim, rescission, recoupment, or adjustment whatsoever. The Company
hereby expressly waives demand and presentment for payment, notice of
non-payment, notice of dishonor, protest, notice of protest, bringing of suit,
and diligence in taking any action to collect any amount called for hereunder,
and shall be directly and primarily liable for the payment of all sums owing and
to be owing hereon, regardless of, and without any notice, diligence, act or
omission with respect to, the collection of any amount called for hereunder.
SECTION 2 EVENTS OF DEFAULT.
The occurrence of any of the following events shall constitute an
event of default (an "Event of Default"):
(a) A default in the payment of the principal on the Note, more
than fourteen (14) calendar days after the same shall become due and payable.
(b) A default in the payment of any interest accrued on the Note,
when and as the same shall become due and payable, which default shall continue
for fourteen calendar days after the date fixed for the making of such interest
payment.
(c) A final judgment or judgments for the payment of money in
excess of $250,000 in the aggregate shall be rendered by one or more courts,
administrative or arbitral tribunals, or other bodies having jurisdiction
against the Company and the same shall not be discharged (or provision shall not
be made for such discharge), or a stay of execution thereof shall not be
procured, within 60 days from the date of entry thereof and the Company shall
not, within such 60-day period, or such longer period during which execution of
the same shall have been stayed, appeal therefrom and cause the execution
thereof to be stayed during such appeal.
(d) The entry of a decree or order by a court having jurisdiction
adjudging the
<PAGE> 13
Company a bankrupt or insolvent, or approving a petition seeking reorganization,
arrangement, adjustment, or composition of, or in respect of, the Company, under
federal bankruptcy law, as now or hereafter constituted, or any other applicable
federal or state bankruptcy, insolvency, or other similar law, and the
continuance of any such decree or order unstayed and in effect for a period of
60 days; or the commencement by the Company of a voluntary case under federal
bankruptcy law, as now or hereafter constituted, or any other applicable federal
or state bankruptcy, insolvency, or other similar law, or the consent by it to
the institution of bankruptcy or insolvency proceedings against it, or the
filing by it of a petition or answer or consent seeking reorganization or relief
under federal bankruptcy law or any other applicable federal or state law, or
the consent by it to the filing of such petition or to the appointment of a
receiver, liquidator, assignee, trustee, sequestrator, or similar official of
the Company or of any substantial part of its property, or the making by it of
an assignment for the benefit of creditors, or the admission by it in writing of
its inability to pay its debts generally as they become due, or the taking of
corporate action by the Company in furtherance of any such action.
(e) A default is declared under the terms of any collateral
security agreements.
(f) A default is declared under any other of the Company's
obligations in excess of $250,000 in the aggregate.
(g) A sale of all or substantially all of the assets of the
Company.
then, and in every such case, during the continuance of the Event of Default,
the Holder may, without presentment, demand or notice declare the principal of
this Note, together with all unpaid accrued interest thereon, to be immediately
due and payable, and upon any such declaration the same shall become and be
immediately due and payable, anything in this Note to the contrary
notwithstanding. The Holder, if not paid promptly at maturity or acceleration of
this Note, shall be entitled to, and the Company covenants and agrees to pay to
the Holder, such additional amount as shall be sufficient to cover the cost and
expenses of collection of this Note, including, without limitation, reasonable
attorneys' fees and costs. Upon an Event of Default, the Holder may take such
action as it deems desirable for the enforcement and collection of the principal
of, and unpaid accrued interest on, this Note, as well as all additional sums to
which the Holder may be entitled as aforesaid. The Holder's rights hereunder
shall be in addition to any other rights the Holder may have at law or in
equity.
SECTION 3 REMEDIES UPON DEFAULT.
(a) Upon the occurrence of an Event of Default, the principal
amount then outstanding of, and the accrued and unpaid interest on, this Note
shall automatically become immediately due and payable without presentment,
demand, protest, or other formalities of any kind, all of which are hereby
expressly waived by the Company.
(b) The Holder may institute such actions or proceedings in law
or equity as it shall deem expedient for the protection of its rights and may
prosecute and enforce its claims
<PAGE> 14
against all assets of the Company, and in connection with any such action or
proceeding shall be entitled to receive from the Company payment of the
principal amount of this Note plus accrued interest to the date of payment plus
reasonable expenses of collection, including, without limitation, attorneys'
fees and expenses.
SECTION 4 SECURITY. This note shall be secured by the assets of the
Company, and it is expressly agreed that any such security interest shall be
subordinate to Company's existing note holders as of the date hereof, and any
subsequent conventional lender financing, including but not limited to any bank
financing to be secured by the assets of Company.
In accordance with the foregoing, Company grants to Holder a
security interest in all of the Company's personal property, whether now owned
or hereafter acquired, including, without limitation, all accounts, equipment,
inventory, general intangibles, instruments and all proceeds thereof. Company
agrees to execute any UCC financing statements and other instruments requested
by Lender in order to perfect the foregoing security interest of Holder.
SECTION 5 LOAN ORIGINATION FEE. Included in the principal of this Note
is a fee for the origination of this financing, in an amount equal to thirty
five thousand dollars ($35,000), which amount (along with any other fee
characterized as, or characterizable as, a loan origination fee) shall be
considered fully earned as of the date of this Note.
SECTION 6 MISCELLANEOUS.
(a) Any notice or other communication required or permitted to be
given hereunder shall be in writing and shall be mailed by certified mail,
return receipt requested, or by Federal Express, Express Mail, or similar
overnight delivery or courier service or delivered (in person or by telecopy,
telex, or similar telecommunications equipment) against receipt to the party to
whom it is to be given, (i) if to the Company, at its address at 12300 Wilshire
Boulevard, Suite 400, Los Angeles, California 90025 Attention: President, (ii)
if to the Holder, at its address set forth on the first page hereof, or (iii) in
either case, to such other address as the party shall have furnished in writing
in accordance with the provisions of this Section 6(a). Any notice or other
communication given by certified mail shall be deemed given at the time of
receipt. Any notice given by other means permitted by this Section 6(a) shall be
deemed given at the time of receipt thereof.
(b) Upon receipt of evidence satisfactory to the Company of the
loss, theft, destruction, or mutilation of this Note (and upon surrender of this
Note if mutilated), the Company shall execute and deliver to the Holder a new
Note of like date, tenor, and denomination.
(c) No course of dealing and no delay or omission on the part of
the Holder in exercising any right or remedy shall operate as a waiver thereof
or otherwise prejudice the Holder's rights, powers, or remedies. No right,
power, or remedy conferred by this Note upon
<PAGE> 15
the Holder shall be exclusive of any other right, power, or remedy referred to
herein or now or hereafter available at law, in equity, by statute or otherwise,
and all such remedies may be exercised singly or concurrently.
(d) This Note may be amended only by a written instrument
executed by the Company and the Holder hereof. Any amendment shall be endorsed
upon this Note, and all future Holders shall be bound thereby.
(e) This Note shall be governed by, and construed in accordance
with, the laws of the State of Illinois without giving effect to principles
governing conflicts of law.
(f) In any action or proceeding, the Company waives personal
service of any summons, complaint, or other process and agrees that service
thereof may be made in accordance with Section 6(a). Within 30 days after such
service, or such other time as may be mutually agreed upon in writing by the
attorneys for the parties to such action or proceeding, the Company shall appear
or answer such summons, complaint, or other process. Should the Company fail to
appear or answer within such 30-day period or such extended period, as the case
may be, the Company shall be deemed in default and judgment may be entered
against the Company for the amount as demanded in any summons, complaint, or
other process so served.
(g) Company represents and warrants that: (i) the Company has the
requisite power and authority to execute, deliver and perform each of its
obligations under this Note and to consummate the transactions provided for
herein. (ii) this Note has been duly executed and delivered by the Company and
constitutes the legal, valid and binding obligation of Company, enforceable
against it in accordance with its terms.
IN WITNESS WHEREOF, the Company has caused this Note to be executed and
dated the day and year first above written.
TEAM COMMUNICATIONS GROUP, INC.
BY: /S/ DREW LEVIN
---------------------------------------
DREW LEVIN
PRESIDENT AND CHIEF EXECUTIVE OFFICER
<PAGE> 16
PROMISSORY NOTE
THIS PROMISSORY NOTE (THE "NOTE") HAS NOT BEEN REGISTERED UNDER THE SECURITIES
ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), OR ANY STATE SECURITIES LAWS AND
MAY NOT BE OFFERED, SOLD, PLEDGED, ASSIGNED, OR OTHERWISE TRANSFERRED UNLESS (1)
A REGISTRATION STATEMENT WITH RESPECT THERETO IS EFFECTIVE UNDER THE SECURITIES
ACT AND ANY APPLICABLE STATE SECURITIES LAWS, OR (2) THE COMPANY RECEIVES AN
OPINION OF COUNSEL TO THE HOLDER OF THIS NOTE, WHICH COUNSEL AND OPINION ARE
REASONABLY SATISFACTORY TO THE COMPANY, THAT THIS NOTE MAY BE OFFERED, SOLD,
PLEDGED, ASSIGNED, OR OTHERWISE TRANSFERRED IN THE MANNER CONTEMPLATED WITHOUT
AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OR APPLICABLE STATE
SECURITIES LAWS.
TEAM COMMUNICATIONS GROUP, INC.
$150,000.00 PRINCIPAL AMOUNT AS OF MARCH 20, 1998
TEAM COMMUNICATIONS GROUP, INC. a California corporation (the
"Company"), for value received, hereby promises to pay Arab Commerce Bank, with
an address of: 6 Cork Street, London W1X1PB England, or registered assigns (the
"Holder"), the principal aggregate amount of one hundred fifty thousand dollars
($150,000.00) on the Maturity Date (as such term is defined below), or such
earlier date as may be provided herein, together with interest on the unpaid
principal balance hereof at the rate (calculated on the basis of a 360-day year
consisting of twelve 30-day months) of twelve per cent (12%) per annum. In no
event shall any interest to be paid hereunder exceed the maximum rate permitted
by law. In any such event, this Note shall automatically be deemed amended to
permit interest charges at an amount equal to, but no greater than, the maximum
rate permitted by law.
SECTION 1 PAYMENTS.
(a) All unpaid principal and interest and fees hereunder shall be
due and payable on April 1, 1999, (the "Maturity Date").
(b) Payments shall be applied first to any costs or expenses,
then to accrued interest and then to principal.
(c) If the Maturity Date falls on a day that is not a Business
Day (as defined below), the payment due on such date will be made on the next
succeeding Business Day with the same force and effect as if made on the
Maturity Date. "Business Day" means any day which is not a Saturday or Sunday
and is not a day on which banking institutions are generally authorized or
obligated to close in the City of Los Angeles, California.
(d) Company may, at its option, prepay all or any part of the
principal of this
<PAGE> 17
Note, without payment of any premium or penalty. All payments on this Note shall
be applied first to interest hereon, and the balance to the payment of principal
hereof.
(e) Payments of principal of, and interest on, this Note shall be
made by check sent to the Holder's address set forth above or to such other
address as the Holder may designate for such purpose from time to time by
written notice to the Company, in such coin or currency of the United States of
America as at the time of payment shall be legal tender for the payment of
public and private debts.
(f) The obligations to make the payments provided for in this
Note are absolute and unconditional and not subject to any defense, set-off,
counterclaim, rescission, recoupment, or adjustment whatsoever. The Company
hereby expressly waives demand and presentment for payment, notice of
non-payment, notice of dishonor, protest, notice of protest, bringing of suit,
and diligence in taking any action to collect any amount called for hereunder,
and shall be directly and primarily liable for the payment of all sums owing and
to be owing hereon, regardless of, and without any notice, diligence, act or
omission with respect to, the collection of any amount called for hereunder.
SECTION 2 EVENTS OF DEFAULT.
The occurrence of any of the following events shall constitute an
event of default (an "Event of Default"):
(a) A default in the payment of the principal on the Note, more
than fourteen (14) calendar days after the same shall become due and payable.
(b) A default in the payment of any interest accrued on the Note,
when and as the same shall become due and payable, which default shall continue
for fourteen calendar days after the date fixed for the making of such interest
payment.
(c) A final judgment or judgments for the payment of money in
excess of $250,000 in the aggregate shall be rendered by one or more courts,
administrative or arbitral tribunals, or other bodies having jurisdiction
against the Company and the same shall not be discharged (or provision shall not
be made for such discharge), or a stay of execution thereof shall not be
procured, within 60 days from the date of entry thereof and the Company shall
not, within such 60-day period, or such longer period during which execution of
the same shall have been stayed, appeal therefrom and cause the execution
thereof to be stayed during such appeal.
(d) The entry of a decree or order by a court having jurisdiction
adjudging the Company a bankrupt or insolvent, or approving a petition seeking
reorganization, arrangement, adjustment, or composition of, or in respect of,
the Company, under federal
<PAGE> 18
bankruptcy law, as now or hereafter constituted, or any other applicable federal
or state bankruptcy, insolvency, or other similar law, and the continuance of
any such decree or order unstayed and in effect for a period of 60 days; or the
commencement by the Company of a voluntary case under federal bankruptcy law, as
now or hereafter constituted, or any other applicable federal or state
bankruptcy, insolvency, or other similar law, or the consent by it to the
institution of bankruptcy or insolvency proceedings against it, or the filing by
it of a petition or answer or consent seeking reorganization or relief under
federal bankruptcy law or any other applicable federal or state law, or the
consent by it to the filing of such petition or to the appointment of a
receiver, liquidator, assignee, trustee, sequestrator, or similar official of
the Company or of any substantial part of its property, or the making by it of
an assignment for the benefit of creditors, or the admission by it in writing of
its inability to pay its debts generally as they become due, or the taking of
corporate action by the Company in furtherance of any such action.
(e) A default is declared under the terms of any collateral
security agreements.
(f) A default is declared under any other of the Company's
obligations in excess of $250,000 in the aggregate.
(g) A sale of all or substantially all of the assets of the
Company.
then, and in every such case, during the continuance of the Event of Default,
the Holder may, without presentment, demand or notice declare the principal of
this Note, together with all unpaid accrued interest thereon, to be immediately
due and payable, and upon any such declaration the same shall become and be
immediately due and payable, anything in this Note to the contrary
notwithstanding. The Holder, if not paid promptly at maturity or acceleration of
this Note, shall be entitled to, and the Company covenants and agrees to pay to
the Holder, such additional amount as shall be sufficient to cover the cost and
expenses of collection of this Note, including, without limitation, reasonable
attorneys' fees and costs. Upon an Event of Default, the Holder may take such
action as it deems desirable for the enforcement and collection of the principal
of, and unpaid accrued interest on, this Note, as well as all additional sums to
which the Holder may be entitled as aforesaid. The Holder's rights hereunder
shall be in addition to any other rights the Holder may have at law or in
equity.
SECTION 3 REMEDIES UPON DEFAULT.
(a) Upon the occurrence of an Event of Default, the principal
amount then outstanding of, and the accrued and unpaid interest on, this Note
shall automatically become immediately due and payable without presentment,
demand, protest, or other formalities of any kind, all of which are hereby
expressly waived by the Company.
(b) The Holder may institute such actions or proceedings in law
or equity as it shall deem expedient for the protection of its rights and may
prosecute and enforce its claims against all assets of the Company, and in
connection with any such action or proceeding shall be entitled to receive from
the Company payment of the principal amount of this Note plus accrued interest
to the date of payment plus reasonable expenses of collection, including,
without limitation, attorneys' fees and expenses.
<PAGE> 19
SECTION 4 MISCELLANEOUS.
(a) Any notice or other communication required or permitted to be
given hereunder shall be in writing and shall be mailed by certified mail,
return receipt requested, or by Federal Express, Express Mail, or similar
overnight delivery or courier service or delivered (in person or by telecopy,
telex, or similar telecommunications equipment) against receipt to the party to
whom it is to be given, (i) if to the Company, at its address at 12300 Wilshire
Boulevard, Suite 400, Los Angeles, California 90025 Attention: President, (ii)
if to the Holder, at its address set forth on the first page hereof, or (iii) in
either case, to such other address as the party shall have furnished in writing
in accordance with the provisions of this Section 4(a). Any notice or other
communication given by certified mail shall be deemed given at the time of
receipt. Any notice given by other means permitted by this Section 4(a) shall be
deemed given at the time of receipt thereof.
(b) Upon receipt of evidence satisfactory to the Company of the
loss, theft, destruction, or mutilation of this Note (and upon surrender of this
Note if mutilated), the Company shall execute and deliver to the Holder a new
Note of like date, tenor, and denomination.
(c) No course of dealing and no delay or omission on the part of
the Holder in exercising any right or remedy shall operate as a waiver thereof
or otherwise prejudice the Holder's rights, powers, or remedies. No right,
power, or remedy conferred by this Note upon the Holder shall be exclusive of
any other right, power, or remedy referred to herein or now or hereafter
available at law, in equity, by statute or otherwise, and all such remedies may
be exercised singly or concurrently.
(d) This Note may be amended only by a written instrument
executed by the Company and the Holder hereof. Any amendment shall be endorsed
upon this Note, and all future Holders shall be bound thereby.
(e) This Note shall be governed by, and construed in accordance
with, the laws of the State of California without giving effect to principles
governing conflicts of law.
(f) In any action or proceeding, the Company waives personal
service of any summons, complaint, or other process and agrees that service
thereof may be made in accordance with Section 6(a). Within 30 days after such
service, or such other time as may be mutually agreed upon in writing by the
attorneys for the parties to such action or proceeding, the Company shall appear
or answer such summons, complaint, or other process. Should the Company fail to
appear or answer within such 30-day period or such extended period, as the case
may be, the Company shall be deemed in default and judgment may be entered
against the Company for the amount as demanded in any summons, complaint, or
other process so served.
(g) Company represents and warrants that: (i) the Company has the
requisite power and authority to execute, deliver and perform each of its
obligations under this Note and to
<PAGE> 20
consummate the transactions provided for herein. (ii) this Note has been duly
executed and delivered by the Company and constitutes the legal, valid and
binding obligation of Company, enforceable against it in accordance with its
terms.
IN WITNESS WHEREOF, the Company has caused this Note to be executed and
dated the day and year first above written.
TEAM COMMUNICATIONS GROUP, INC.
BY: /S/ DREW LEVIN
---------------------------------------
DREW LEVIN
PRESIDENT AND CHIEF EXECUTIVE OFFICER
<PAGE> 21
PROMISSORY NOTE
THIS PROMISSORY NOTE (THE "NOTE") HAS NOT BEEN REGISTERED UNDER THE SECURITIES
ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), OR ANY STATE SECURITIES LAWS AND
MAY NOT BE OFFERED, SOLD, PLEDGED, ASSIGNED, OR OTHERWISE TRANSFERRED UNLESS (1)
A REGISTRATION STATEMENT WITH RESPECT THERETO IS EFFECTIVE UNDER THE SECURITIES
ACT AND ANY APPLICABLE STATE SECURITIES LAWS, OR (2) THE COMPANY RECEIVES AN
OPINION OF COUNSEL TO THE HOLDER OF THIS NOTE, WHICH COUNSEL AND OPINION ARE
REASONABLY SATISFACTORY TO THE COMPANY, THAT THIS NOTE MAY BE OFFERED, SOLD,
PLEDGED, ASSIGNED, OR OTHERWISE TRANSFERRED IN THE MANNER CONTEMPLATED WITHOUT
AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OR APPLICABLE STATE
SECURITIES LAWS.
TEAM COMMUNICATIONS GROUP, INC.
$200,000.00 PRINCIPAL AMOUNT AS OF APRIL 15, 1998
TEAM COMMUNICATIONS GROUP, INC. a California corporation (the
"Company"), for value received, hereby promises to pay Charles Santerre, with an
address of 111 Boulevard Anspachlaan, 1000 Bxl, Belgium, or registered assigns
(the "Holder"), the principal aggregate amount of Two Hundred Thousand Dollars
($200,000.00) on the Maturity Date (as such term is defined below), or such
earlier date as may be provided herein, together with interest on the unpaid
principal balance hereof at the rate (calculated on the basis of a 360-day year
consisting of twelve 30-day months) of twelve per cent (12%) per annum. In no
event shall any interest to be paid hereunder exceed the maximum rate permitted
by law. In any such event, this Note shall automatically be deemed amended to
permit interest charges at an amount equal to, but no greater than, the maximum
rate permitted by law.
SECTION 1 PAYMENTS.
(a) All unpaid principal and interest and fees hereunder shall be
due and payable on April 18, 1999, (the "Maturity Date").
(b) Payments shall be applied first to any costs or expenses, then
to accrued interest and then to principal.
(c) If the Maturity Date falls on a day that is not a Business Day
(as defined below), the payment due on such date will be made on the next
succeeding Business Day with the same force and effect as if made on the
Maturity Date. "Business Day" means any day which is not a Saturday or Sunday
and is not a day on which banking institutions are generally authorized or
obligated to close in the City of Los Angeles, California.
(d) Company may, at its option, prepay all or any part of the
principal of this Note, without payment of any premium or penalty. All payments
on this Note shall be applied first to interest hereon, and the balance to the
payment of principal hereof.
<PAGE> 22
(e) Payments of principal of, and interest on, this Note shall be
made by check sent to the Holder's address set forth above or to such other
address as the Holder may designate for such purpose from time to time by
written notice to the Company, in such coin or currency of the United States of
America as at the time of payment shall be legal tender for the payment of
public and private debts.
(f) The obligations to make the payments provided for in this Note
are absolute and unconditional and not subject to any defense, set-off,
counterclaim, rescission, recoupment, or adjustment whatsoever. The Company
hereby expressly waives demand and presentment for payment, notice of
non-payment, notice of dishonor, protest, notice of protest, bringing of suit,
and diligence in taking any action to collect any amount called for hereunder,
and shall be directly and primarily liable for the payment of all sums owing and
to be owing hereon, regardless of, and without any notice, diligence, act or
omission with respect to, the collection of any amount called for hereunder.
SECTION 2 EVENTS OF DEFAULT.
The occurrence of any of the following events shall constitute an
event of default (an "Event of Default"):
(a) A default in the payment of the principal on the Note, more
than fourteen (14) calendar days after the same shall become due and payable.
(b) A default in the payment of any interest accrued on the Note,
when and as the same shall become due and payable, which default shall continue
for fourteen calendar days after the date fixed for the making of such interest
payment.
(c) A final judgment or judgments for the payment of money in
excess of $250,000 in the aggregate shall be rendered by one or more courts,
administrative or arbitral tribunals, or other bodies having jurisdiction
against the Company and the same shall not be discharged (or provision shall not
be made for such discharge), or a stay of execution thereof shall not be
procured, within 60 days from the date of entry thereof and the Company shall
not, within such 60-day period, or such longer period during which execution of
the same shall have been stayed, appeal therefrom and cause the execution
thereof to be stayed during such appeal.
(d) The entry of a decree or order by a court having jurisdiction
adjudging the Company a bankrupt or insolvent, or approving a petition seeking
reorganization, arrangement, adjustment, or composition of, or in respect of,
the Company, under federal bankruptcy law, as now or hereafter constituted, or
any other applicable federal or state bankruptcy, insolvency, or other similar
law, and the continuance of any such decree or order unstayed and in effect for
a period of 60 days; or the commencement by the Company of a voluntary case
under federal bankruptcy law, as now or hereafter constituted, or any other
applicable federal or state bankruptcy, insolvency, or other similar law, or the
consent by it to the institution of bankruptcy or insolvency proceedings against
it, or the filing by it of a petition or answer or consent seeking
reorganization or relief under federal bankruptcy law or any other applicable
federal or state law, or the consent by it to the filing of such petition or to
the appointment of a receiver, liquidator, assignee, trustee, sequestrator, or
similar official of the Company or of any substantial part of its property, or
the making by it of an
- 2 -
<PAGE> 23
assignment for the benefit of creditors, or the admission by it in writing of
its inability to pay its debts generally as they become due, or the taking of
corporate action by the Company in furtherance of any such action.
(e) A default is declared under the terms of any collateral
security agreements.
(f) A default is declared under any other of the Company's
obligations in excess of $250,000 in the aggregate.
(g) A sale of all or substantially all of the assets of the
Company.
then, and in every such case, during the continuance of the Event of Default,
the Holder may, without presentment, demand or notice declare the principal of
this Note, together with all unpaid accrued interest thereon, to be immediately
due and payable, and upon any such declaration the same shall become and be
immediately due and payable, anything in this Note to the contrary
notwithstanding. The Holder, if not paid promptly at maturity or acceleration of
this Note, shall be entitled to, and the Company covenants and agrees to pay to
the Holder, such additional amount as shall be sufficient to cover the cost and
expenses of collection of this Note, including, without limitation, reasonable
attorneys' fees and costs. Upon an Event of Default, the Holder may take such
action as it deems desirable for the enforcement and collection of the principal
of, and unpaid accrued interest on, this Note, as well as all additional sums to
which the Holder may be entitled as aforesaid. The Holder's rights hereunder
shall be in addition to any other rights the Holder may have at law or in
equity.
SECTION 3 REMEDIES UPON DEFAULT.
(a) Upon the occurrence of an Event of Default, the principal
amount then outstanding of, and the accrued and unpaid interest on, this Note
shall automatically become immediately due and payable without presentment,
demand, protest, or other formalities of any kind, all of which are hereby
expressly waived by the Company.
(b) The Holder may institute such actions or proceedings in law or
equity as it shall deem expedient for the protection of its rights and may
prosecute and enforce its claims against all assets of the Company, and in
connection with any such action or proceeding shall be entitled to receive from
the Company payment of the principal amount of this Note plus accrued interest
to the date of payment plus reasonable expenses of collection, including,
without limitation, attorneys' fees and expenses.
SECTION 4 MISCELLANEOUS.
(a) Any notice or other communication required or permitted to be
given hereunder shall be in writing and shall be mailed by certified mail,
return receipt requested, or by Federal Express, Express Mail, or similar
overnight delivery or courier service or delivered (in person or by telecopy,
telex, or similar telecommunications equipment) against receipt to the party to
whom it is to be given, (i) if to the Company, at its address at 12300 Wilshire
Boulevard, Suite 400, Los Angeles, California 90025 Attention: President, (ii)
if to the Holder, at its address set forth on the first page hereof, or (iii) in
either case, to such other address as the party shall have furnished in writing
in accordance with the provisions of this Section 4(a). Any notice or other
communication
- 3 -
<PAGE> 24
given by certified mail shall be deemed given at the time of receipt. Any notice
given by other means permitted by this Section 4(a) shall be deemed given at the
time of receipt thereof.
(b) Upon receipt of evidence satisfactory to the Company of the
loss, theft, destruction, or mutilation of this Note (and upon surrender of this
Note if mutilated), the Company shall execute and deliver to the Holder a new
Note of like date, tenor, and denomination.
(c) No course of dealing and no delay or omission on the part of
the Holder in exercising any right or remedy shall operate as a waiver thereof
or otherwise prejudice the Holder's rights, powers, or remedies. No right,
power, or remedy conferred by this Note upon the Holder shall be exclusive of
any other right, power, or remedy referred to herein or now or hereafter
available at law, in equity, by statute or otherwise, and all such remedies may
be exercised singly or concurrently.
(d) This Note may be amended only by a written instrument executed
by the Company and the Holder hereof. Any amendment shall be endorsed upon this
Note, and all future Holders shall be bound thereby.
(e) This Note shall be governed by, and construed in accordance
with, the laws of the State of California without giving effect to principles
governing conflicts of law.
(f) In any action or proceeding, the Company waives personal
service of any summons, complaint, or other process and agrees that service
thereof may be made in accordance with Section 6(a). Within 30 days after such
service, or such other time as may be mutually agreed upon in writing by the
attorneys for the parties to such action or proceeding, the Company shall appear
or answer such summons, complaint, or other process. Should the Company fail to
appear or answer within such 30-day period or such extended period, as the case
may be, the Company shall be deemed in default and judgment may be entered
against the Company for the amount as demanded in any summons, complaint, or
other process so served.
(g) Company represents and warrants that: (i) the Company has the
requisite power and authority to execute, deliver and perform each of its
obligations under this Note and to consummate the transactions provided for
herein. (ii) this Note has been duly executed and delivered by the Company and
constitutes the legal, valid and binding obligation of Company, enforceable
against it in accordance with its terms.
IN WITNESS WHEREOF, the Company has caused this Note to be executed and
dated the day and year first above written.
TEAM COMMUNICATIONS GROUP, INC.
BY: /s/ DREW LEVIN
------------------------------------------
DREW LEVIN
PRESIDENT AND CHIEF EXECUTIVE OFFICER
- 4 -
<PAGE> 25
SECURED PROMISSORY NOTE
THIS PROMISSORY NOTE (THE "NOTE") HAS NOT BEEN REGISTERED UNDER THE SECURITIES
ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), OR ANY STATE SECURITIES LAWS AND
MAY NOT BE OFFERED, SOLD, PLEDGED, ASSIGNED, OR OTHERWISE TRANSFERRED UNLESS (1)
A REGISTRATION STATEMENT WITH RESPECT THERETO IS EFFECTIVE UNDER THE SECURITIES
ACT AND ANY APPLICABLE STATE SECURITIES LAWS, OR (2) THE COMPANY RECEIVES AN
OPINION OF COUNSEL TO THE HOLDER OF THIS NOTE, WHICH COUNSEL AND OPINION ARE
REASONABLY SATISFACTORY TO THE COMPANY, THAT THIS NOTE MAY BE OFFERED, SOLD,
PLEDGED, ASSIGNED, OR OTHERWISE TRANSFERRED IN THE MANNER CONTEMPLATED WITHOUT
AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OR APPLICABLE STATE
SECURITIES LAWS.
TEAM COMMUNICATIONS GROUP, INC.
$642,000.00 PRINCIPAL AMOUNT AS OF APRIL 9, 1998
TEAM COMMUNICATIONS GROUP, INC. a California corporation (the
"Company"), for value received, hereby promises to pay Kevodrew Reality Inc.,
with an address of: Maxim Group, 210 Townpark Drive, Kennesaw GA 30144, or
registered assigns (the "Holder"), the principal aggregate amount of six hundred
forty two thousand dollars ($642,000.00) on the Maturity Date (as such term is
defined below), or such earlier date as may be provided herein, together with a
fixed interest payment of seventy eight thousand dollars ($78,000.00). In no
event shall any interest to be paid hereunder exceed the maximum rate permitted
by law. In any such event, this Note shall automatically be deemed amended to
permit interest charges (including the default rate set forth in section 2
below) at an amount equal to, but no greater than, the maximum rate permitted by
law and in any such event, any excess amount of such $78,000 shall be considered
to be a loan origination fee (which shall be in addition to the fee referenced
in Section 5 of this Note)
SECTION 1 PAYMENTS.
(a) (i) All unpaid principal and interest and fees hereunder
shall be due and payable on June 12, 1998, (the "Maturity Date").
(b) Interest on this Note shall accrue in full on the date of
issuance hereof. Payments shall be applied first to any costs or expenses, then
to accrued interest and then to principal.
(c) If the Maturity Date falls on a day that is not a Business
Day (as defined below), the payment due on such date will be made on the next
succeeding Business Day with the same force and effect as if made on the
Maturity Date. "Business Day" means any day which is not a Saturday or Sunday
and is not a day on which banking institutions are generally authorized or
obligated to close in the City of Los Angeles, California.
<PAGE> 26
(d) Company may, at its option, prepay all or any part of the
principal of this Note, without payment of any premium or penalty. All payments
on this Note shall be applied first to interest hereon, then to any loan
origination fees and the balance to the payment of principal hereof.
(e) Payments of principal of, and loan origination fees and
interest on, this Note shall be made by check sent to the Holder's address set
forth above or to such other address as the Holder may designate for such
purpose from time to time by written notice to the Company, in such coin or
currency of the United States of America as at the time of payment shall be
legal tender for the payment of public and private debts.
(f) The obligations to make the payments provided for in this
Note are absolute and unconditional and not subject to any defense, set-off,
counterclaim, rescission, recoupment, or adjustment whatsoever. The Company
hereby expressly waives demand and presentment for payment, notice of
non-payment, notice of dishonor, protest, notice of protest, bringing of suit,
and diligence in taking any action to collect any amount called for hereunder,
and shall be directly and primarily liable for the payment of all sums owing and
to be owing hereon, regardless of, and without any notice, diligence, act or
omission with respect to, the collection of any amount called for hereunder.
SECTION 2 EVENTS OF DEFAULT.
The occurrence of any of the following events shall constitute an
event of default (an "Event of Default"):
(a) A default in the payment of the principal on the Note, more
than fourteen (14) calendar days after the same shall become due and payable.
(b) A default in the payment of any interest accrued on the Note,
when and as the same shall become due and payable, which default shall continue
for fourteen calendar days after the date fixed for the making of such interest
payment.
(c) A final judgment or judgments for the payment of money in
excess of $250,000 in the aggregate shall be rendered by one or more courts,
administrative or arbitral tribunals, or other bodies having jurisdiction
against the Company and the same shall not be discharged (or provision shall not
be made for such discharge), or a stay of execution thereof shall not be
procured, within 60 days from the date of entry thereof and the Company shall
not, within such 60-day period, or such longer period during which execution of
the same shall have been stayed, appeal therefrom and cause the execution
thereof to be stayed during such appeal.
(d) The entry of a decree or order by a court having jurisdiction
adjudging the Company a bankrupt or insolvent, or approving a petition seeking
reorganization, arrangement, adjustment, or composition of, or in respect of,
the Company, under federal bankruptcy law, as now or hereafter constituted, or
any other applicable federal or state bankruptcy, insolvency, or other similar
law, and the continuance of any such decree or order unstayed and in effect for
a period of 60 days; or the commencement by the Company of a voluntary case
under federal bankruptcy law,
- 2 -
<PAGE> 27
as now or hereafter constituted, or any other applicable federal or state
bankruptcy, insolvency, or other similar law, or the consent by it to the
institution of bankruptcy or insolvency proceedings against it, or the filing by
it of a petition or answer or consent seeking reorganization or relief under
federal bankruptcy law or any other applicable federal or state law, or the
consent by it to the filing of such petition or to the appointment of a
receiver, liquidator, assignee, trustee, sequestrator, or similar official of
the Company or of any substantial part of its property, or the making by it of
an assignment for the benefit of creditors, or the admission by it in writing of
its inability to pay its debts generally as they become due, or the taking of
corporate action by the Company in furtherance of any such action.
(e) A default is declared under the terms of any collateral
security agreements.
(f) A default is declared under any other of the Company's
obligations in excess of $250,000 in the aggregate.
(g) A sale of all or substantially all of the assets of the
Company.
then, and in every such case, during the continuance of the Event of Default,
the Holder may, without presentment, demand or notice declare the principal of
this Note, together with all unpaid accrued interest thereon, to be immediately
due and payable, and upon any such declaration the same shall become and be
immediately due and payable, anything in this Note to the contrary
notwithstanding. The Holder, if not paid promptly at maturity or acceleration of
this Note, shall be entitled to, and the Company covenants and agrees to pay to
the Holder, such additional amount as shall be sufficient to cover the cost and
expenses of collection of this Note, including, without limitation, reasonable
attorneys' fees and costs. Upon an Event of Default, the Holder may take such
action as it deems desirable for the enforcement and collection of the principal
of, and unpaid accrued interest on, this Note, as well as all additional sums to
which the Holder may be entitled as aforesaid. The Holder's rights hereunder
shall be in addition to any other rights the Holder may have at law or in
equity. If an Event of Default has occurred under the Agreement, or this Note in
addition to any agreed upon charges, the principal balance of this Note shall
thereafter, at Holder's option, bear interest at five percent (5.00%) in excess
of the rate set forth above, calculated over a year of 360 days, however the
total rate of interest will not exceed the maximum allowable legal rate of
interest.
SECTION 3 REMEDIES UPON DEFAULT.
(a) Upon the occurrence of an Event of Default, the principal
amount then outstanding of, and the accrued and unpaid interest on, this Note
shall automatically become immediately due and payable without presentment,
demand, protest, or other formalities of any kind, all of which are hereby
expressly waived by the Company.
(b) The Holder may institute such actions or proceedings in law
or equity as it shall deem expedient for the protection of its rights and may
prosecute and enforce its claims against all assets of the Company, and in
connection with any such action or proceeding shall be entitled to receive from
the Company payment of the principal amount of this Note plus accrued interest
to the date of payment plus reasonable expenses of collection, including,
without limitation, attorneys' fees and expenses.
- 3 -
<PAGE> 28
SECTION 4 SECURITY. This note shall be secured by the assets of the
Company, and it is expressly agreed that any such security interest shall be
subordinate to Company's existing note holders as of the date hereof, and any
subsequent conventional lender financing, including but not limited to any bank
financing to be secured by the assets of Company.
In accordance with the foregoing, Company grants to Holder s
security interest in all of the Company's personal property, whether now owned
or hereafter acquired, including, without limitation, all accounts, equipment,
inventory, general intangibles, instruments and all proceeds thereof. Company
agrees to execute any UCC financing statements and other instruments requested
by Lender in order to perfect the foregoing security interest of Holder.
SECTION 5 LOAN ORIGINATION FEE Included in the principal of this Note is
a fee for the origination of this financing, in an amount equal to forty two
thousand dollars ($42,000), which amount (along with any other fee characterized
as, or characterizable as, a loan origination fee) shall be considered fully
earned as of the date of this Note.
SECTION 6 MISCELLANEOUS.
(a) Any notice or other communication required or permitted to be
given hereunder shall be in writing and shall be mailed by certified mail,
return receipt requested, or by Federal Express, Express Mail, or similar
overnight delivery or courier service or delivered (in person or by telecopy,
telex, or similar telecommunications equipment) against receipt to the party to
whom it is to be given, (i) if to the Company, at its address at 12300 Wilshire
Boulevard, Suite 400, Los Angeles, California 90025 Attention: President, (ii)
if to the Holder, at its address set forth on the first page hereof, or (iii) in
either case, to such other address as the party shall have furnished in writing
in accordance with the provisions of this Section 6(a). Any notice or other
communication given by certified mail shall be deemed given at the time of
receipt. Any notice given by other means permitted by this Section 6(a) shall be
deemed given at the time of receipt thereof.
(b) Upon receipt of evidence satisfactory to the Company of the
loss, theft, destruction, or mutilation of this Note (and upon surrender of this
Note if mutilated), the Company shall execute and deliver to the Holder a new
Note of like date, tenor, and denomination.
(c) No course of dealing and no delay or omission on the part of
the Holder in exercising any right or remedy shall operate as a waiver thereof
or otherwise prejudice the Holder's rights, powers, or remedies. No right,
power, or remedy conferred by this Note upon the Holder shall be exclusive of
any other right, power, or remedy referred to herein or now or hereafter
available at law, in equity, by statute or otherwise, and all such remedies may
be exercised singly or concurrently.
(d) This Note may be amended only by a written instrument
executed by the Company and the Holder hereof. Any amendment shall be endorsed
upon this Note, and all future Holders shall be bound thereby.
(e) This Note shall be governed by, and construed in accordance
with, the laws of the State of Georgia without giving effect to principles
governing conflicts of law.
- 4 -
<PAGE> 29
(f) Company irrevocably consents to the jurisdiction of the
courts of the State of Georgia and of any federal court located in such State of
Georgia in connection with any action or proceeding arising out of, or relating
to, this Note, any document or instrument delivered pursuant to, in connection
with, or simultaneously with this Note, or a breach of this Note or any such
document or instrument. In any such action or proceeding, the Company waives
personal service of any summons, complaint, or other process and agrees that
service thereof may be made in accordance with Section 6(a). Within 30 days
after such service, or such other time as may be mutually agreed upon in writing
by the attorneys for the parties to such action or proceeding, the Company shall
appear or answer such summons, complaint, or other process. Should the Company
fail to appear or answer within such 30-day period or such extended period, as
the case may be, the Company shall be deemed in default and judgment may be
entered against the Company for the amount as demanded in any summons,
complaint, or other process so served.
(g) Company represents and warrants that: (i) the Company has the
requisite power and authority to execute, deliver and perform each of its
obligations under this Note and to consummate the transactions provided for
herein. (ii) this Note has been duly executed and delivered by the Company and
constitutes the legal, valid and binding obligation of Company, enforceable
against it in accordance with its terms.
IN WITNESS WHEREOF, the Company has caused this Note to be executed
under seal and dated the day and year first above written.
TEAM COMMUNICATIONS GROUP, INC.
BY: /s/ DREW LEVIN
--------------------------------------
DREW LEVIN
PRESIDENT AND CHIEF EXECUTIVE OFFICER
ATTEST: [Corporate Seal]
_______________________________
Secretary
- 5 -
<PAGE> 30
PROMISSORY NOTE
THIS PROMISSORY NOTE (THE "NOTE") HAS NOT BEEN REGISTERED UNDER THE SECURITIES
ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), OR ANY STATE SECURITIES LAWS AND
MAY NOT BE OFFERED, SOLD, PLEDGED, ASSIGNED, OR OTHERWISE TRANSFERRED UNLESS (1)
A REGISTRATION STATEMENT WITH RESPECT THERETO IS EFFECTIVE UNDER THE SECURITIES
ACT AND ANY APPLICABLE STATE SECURITIES LAWS, OR (2) THE COMPANY RECEIVES AN
OPINION OF COUNSEL TO THE HOLDER OF THIS NOTE, WHICH COUNSEL AND OPINION ARE
REASONABLY SATISFACTORY TO THE COMPANY, THAT THIS NOTE MAY BE OFFERED, SOLD,
PLEDGED, ASSIGNED, OR OTHERWISE TRANSFERRED IN THE MANNER CONTEMPLATED WITHOUT
AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OR APPLICABLE STATE
SECURITIES LAWS.
TEAM COMMUNICATIONS GROUP, INC.
$50,000.00 PRINCIPAL AMOUNT AS OF APRIL 15, 1998
TEAM COMMUNICATIONS GROUP, INC. a California corporation (the
"Company"), for value received, hereby promises to pay Philippe de Cock de
Rameyen, with an address of 111 Boulevard Anspachlaan, 1000 Bxl, Belgium, or
registered assigns (the "Holder"), the principal aggregate amount of Fifty
Thousand Dollars ($50,000.00) on the Maturity Date (as such term is defined
below), or such earlier date as may be provided herein, together with interest
on the unpaid principal balance hereof at the rate (calculated on the basis of a
360-day year consisting of twelve 30-day months) of twelve per cent (12%) per
annum. In no event shall any interest to be paid hereunder exceed the maximum
rate permitted by law. In any such event, this Note shall automatically be
deemed amended to permit interest charges at an amount equal to, but no greater
than, the maximum rate permitted by law.
SECTION 1 PAYMENTS.
(a) All unpaid principal and interest and fees hereunder shall be
due and payable on April 18, 1999, (the "Maturity Date").
(b) Payments shall be applied first to any costs or expenses,
then to accrued interest and then to principal.
(c) If the Maturity Date falls on a day that is not a Business
Day (as defined below), the payment due on such date will be made on the next
succeeding Business Day with the same force and effect as if made on the
Maturity Date. "Business Day" means any day which is not a Saturday or Sunday
and is not a day on which banking institutions are generally authorized or
obligated to close in the City of Los Angeles, California.
(d) Company may, at its option, prepay all or any part of the
principal of this Note, without payment of any premium or penalty. All payments
on this Note shall be applied first to interest hereon, and the balance to the
payment of principal hereof.
<PAGE> 31
(e) Payments of principal of, and interest on, this Note shall be
made by check sent to the Holder's address set forth above or to such other
address as the Holder may designate for such purpose from time to time by
written notice to the Company, in such coin or currency of the United States of
America as at the time of payment shall be legal tender for the payment of
public and private debts.
(f) The obligations to make the payments provided for in this
Note are absolute and unconditional and not subject to any defense, set-off,
counterclaim, rescission, recoupment, or adjustment whatsoever. The Company
hereby expressly waives demand and presentment for payment, notice of
non-payment, notice of dishonor, protest, notice of protest, bringing of suit,
and diligence in taking any action to collect any amount called for hereunder,
and shall be directly and primarily liable for the payment of all sums owing and
to be owing hereon, regardless of, and without any notice, diligence, act or
omission with respect to, the collection of any amount called for hereunder.
SECTION 2 EVENTS OF DEFAULT.
The occurrence of any of the following events shall constitute an
event of default (an "Event of Default"):
(a) A default in the payment of the principal on the Note, more
than fourteen (14) calendar days after the same shall become due and payable.
(b) A default in the payment of any interest accrued on the Note,
when and as the same shall become due and payable, which default shall continue
for fourteen calendar days after the date fixed for the making of such interest
payment.
(c) A final judgment or judgments for the payment of money in
excess of $250,000 in the aggregate shall be rendered by one or more courts,
administrative or arbitral tribunals, or other bodies having jurisdiction
against the Company and the same shall not be discharged (or provision shall not
be made for such discharge), or a stay of execution thereof shall not be
procured, within 60 days from the date of entry thereof and the Company shall
not, within such 60-day period, or such longer period during which execution of
the same shall have been stayed, appeal therefrom and cause the execution
thereof to be stayed during such appeal.
(d) The entry of a decree or order by a court having jurisdiction
adjudging the Company a bankrupt or insolvent, or approving a petition seeking
reorganization, arrangement, adjustment, or composition of, or in respect of,
the Company, under federal bankruptcy law, as now or hereafter constituted, or
any other applicable federal or state bankruptcy, insolvency, or other similar
law, and the continuance of any such decree or order unstayed and in effect for
a period of 60 days; or the commencement by the Company of a voluntary case
under federal bankruptcy law, as now or hereafter constituted, or any other
applicable federal or state bankruptcy, insolvency, or other similar law, or the
consent by it to the institution of bankruptcy or insolvency proceedings against
it, or the filing by it of a petition or answer or consent seeking
reorganization or relief under federal bankruptcy law or any other applicable
federal or state law, or the consent by it to the filing of such petition or to
the appointment of a receiver, liquidator, assignee, trustee, sequestrator, or
similar official of the Company or of any substantial part of its property, or
the making by it of an
- 2 -
<PAGE> 32
assignment for the benefit of creditors, or the admission by it in writing of
its inability to pay its debts generally as they become due, or the taking of
corporate action by the Company in furtherance of any such action.
(e) A default is declared under the terms of any collateral
security agreements.
(f) A default is declared under any other of the Company's
obligations in excess of $250,000 in the aggregate.
(g) A sale of all or substantially all of the assets of the
Company.
then, and in every such case, during the continuance of the Event of Default,
the Holder may, without presentment, demand or notice declare the principal of
this Note, together with all unpaid accrued interest thereon, to be immediately
due and payable, and upon any such declaration the same shall become and be
immediately due and payable, anything in this Note to the contrary
notwithstanding. The Holder, if not paid promptly at maturity or acceleration of
this Note, shall be entitled to, and the Company covenants and agrees to pay to
the Holder, such additional amount as shall be sufficient to cover the cost and
expenses of collection of this Note, including, without limitation, reasonable
attorneys' fees and costs. Upon an Event of Default, the Holder may take such
action as it deems desirable for the enforcement and collection of the principal
of, and unpaid accrued interest on, this Note, as well as all additional sums to
which the Holder may be entitled as aforesaid. The Holder's rights hereunder
shall be in addition to any other rights the Holder may have at law or in
equity.
SECTION 3 REMEDIES UPON DEFAULT.
(a) Upon the occurrence of an Event of Default, the principal
amount then outstanding of, and the accrued and unpaid interest on, this Note
shall automatically become immediately due and payable without presentment,
demand, protest, or other formalities of any kind, all of which are hereby
expressly waived by the Company.
(b) The Holder may institute such actions or proceedings in law
or equity as it shall deem expedient for the protection of its rights and may
prosecute and enforce its claims against all assets of the Company, and in
connection with any such action or proceeding shall be entitled to receive from
the Company payment of the principal amount of this Note plus accrued interest
to the date of payment plus reasonable expenses of collection, including,
without limitation, attorneys' fees and expenses.
SECTION 4 MISCELLANEOUS.
(a) Any notice or other communication required or permitted to be
given hereunder shall be in writing and shall be mailed by certified mail,
return receipt requested, or by Federal Express, Express Mail, or similar
overnight delivery or courier service or delivered (in person or by telecopy,
telex, or similar telecommunications equipment) against receipt to the party to
whom it is to be given, (i) if to the Company, at its address at 12300 Wilshire
Boulevard, Suite 400, Los Angeles, California 90025 Attention: President, (ii)
if to the Holder, at its address set forth on the first page hereof, or (iii) in
either case, to such other address as the party shall have furnished in writing
in accordance with the provisions of this Section 4(a). Any notice or other
communication
- 3 -
<PAGE> 33
given by certified mail shall be deemed given at the time of receipt. Any notice
given by other means permitted by this Section 4(a) shall be deemed given at the
time of receipt thereof.
(b) Upon receipt of evidence satisfactory to the Company of the
loss, theft, destruction, or mutilation of this Note (and upon surrender of this
Note if mutilated), the Company shall execute and deliver to the Holder a new
Note of like date, tenor, and denomination.
(c) No course of dealing and no delay or omission on the part of
the Holder in exercising any right or remedy shall operate as a waiver thereof
or otherwise prejudice the Holder's rights, powers, or remedies. No right,
power, or remedy conferred by this Note upon the Holder shall be exclusive of
any other right, power, or remedy referred to herein or now or hereafter
available at law, in equity, by statute or otherwise, and all such remedies may
be exercised singly or concurrently.
(d) This Note may be amended only by a written instrument
executed by the Company and the Holder hereof. Any amendment shall be endorsed
upon this Note, and all future Holders shall be bound thereby.
(e) This Note shall be governed by, and construed in accordance
with, the laws of the State of California without giving effect to principles
governing conflicts of law.
(f) In any action or proceeding, the Company waives personal
service of any summons, complaint, or other process and agrees that service
thereof may be made in accordance with Section 6(a). Within 30 days after such
service, or such other time as may be mutually agreed upon in writing by the
attorneys for the parties to such action or proceeding, the Company shall appear
or answer such summons, complaint, or other process. Should the Company fail to
appear or answer within such 30-day period or such extended period, as the case
may be, the Company shall be deemed in default and judgment may be entered
against the Company for the amount as demanded in any summons, complaint, or
other process so served.
(g) Company represents and warrants that: (i) the Company has the
requisite power and authority to execute, deliver and perform each of its
obligations under this Note and to consummate the transactions provided for
herein. (ii) this Note has been duly executed and delivered by the Company and
constitutes the legal, valid and binding obligation of Company, enforceable
against it in accordance with its terms.
IN WITNESS WHEREOF, the Company has caused this Note to be executed and
dated the day and year first above written.
TEAM COMMUNICATIONS GROUP, INC.
BY: /s/ DREW LEVIN
--------------------------------------
DREW LEVIN
PRESIDENT AND CHIEF EXECUTIVE OFFICER
- 4 -
<PAGE> 34
CONTRACT OF PROMISE TO PAY
THIS CONTRACT OF PROMISE TO PAY (THE "CONTRACT") HAS NOT BEEN REGISTERED UNDER
THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), OR ANY STATE
SECURITIES LAWS AND MAY NOT BE OFFERED, SOLD, PLEDGED, ASSIGNED, OR OTHERWISE
TRANSFERRED UNLESS (1) A REGISTRATION STATEMENT WITH RESPECT THERETO IS
EFFECTIVE UNDER THE SECURITIES ACT AND ANY APPLICABLE STATE SECURITIES LAWS, OR
(2) THE COMPANY RECEIVES AN OPINION OF COUNSEL TO THE HOLDER OF THIS CONTRACT,
WHICH COUNSEL AND OPINION ARE REASONABLY SATISFACTORY TO THE COMPANY, THAT THIS
CONTRACT MAY BE OFFERED, SOLD, PLEDGED, ASSIGNED, OR OTHERWISE TRANSFERRED IN
THE MANNER CONTEMPLATED WITHOUT AN EFFECTIVE REGISTRATION STATEMENT UNDER THE
SECURITIES ACT OR APPLICABLE STATE SECURITIES LAWS.
TEAM COMMUNICATIONS GROUP, INC.
$115,000.00 PRINCIPAL AMOUNT AS OF MAY 15, 1998
TEAM COMMUNICATIONS GROUP, INC. a California corporation (the
"Company"), for value received, hereby promises to pay HighBridge Fund Ltd.,
with an address of: c/o Rana Investment Company, P O Box 60148, Riyadh 11545,
Saudi Arabia, or registered assigns (the "Holder"), the principal aggregate
amount of One Hundred Fifteen Thousand Dollars ($115,000.00) on the Maturity
Date (as such term is defined below), or such earlier date as may be provided
herein.
SECTION 1 PAYMENTS.
(a) All unpaid principal and fees, if any, hereunder shall be due
and payable on November 15, 1998, (the "Maturity Date").
(b) Payments shall be applied first to any costs or expenses, then
to principal.
(c) If the Maturity Date falls on a day that is not a Business Day
(as defined below), the payment due on such date will be made on the next
succeeding Business Day with the same force and effect as if made on the
Maturity Date. "Business Day" means any day which is not a Saturday or Sunday
and is not a day on which banking institutions are generally authorized or
obligated to close in the City of Los Angeles, California.
(d) Payments of principal of this Contract shall be made by check
sent to the Holder's address set forth above or to such other address as the
Holder may designate for such purpose from time to time by written notice to the
Company, in such coin or currency of the United States of America as at the time
of payment shall be legal tender for the payment of public and private debts.
(e) The obligations to make the payments provided for in this
Contract are absolute and unconditional and not subject to any defense, set-off,
counterclaim, rescission,
<PAGE> 35
recoupment, or adjustment whatsoever. The Company hereby expressly waives demand
and presentment for payment, notice of non-payment, notice of dishonor, protest,
notice of protest, bringing of suit, and diligence in taking any action to
collect any amount called for hereunder, and shall be directly and primarily
liable for the payment of all sums owing and to be owing hereon, regardless of,
and without any notice, diligence, act or omission with respect to, the
collection of any amount called for hereunder.
SECTION 2 EVENTS OF DEFAULT.
The occurrence of any of the following events shall constitute an
event of default (an "Event of Default"):
(a) A default in the payment of the principal on the Contract,
more than three (3) business days after the same shall become due and payable.
(b) A default in the payment of any other fee(s), accrued on the
Contract, when and as the same shall become due and payable, which default shall
continue for three (3) business days after the date fixed for the making of such
payment.
(c) A final judgment or judgments for the payment of money in
excess of $250,000 in the aggregate shall be rendered by one or more courts,
administrative or arbitral tribunals, or other bodies having jurisdiction
against the Company and the same shall not be discharged (or provision shall not
be made for such discharge), or a stay of execution thereof shall not be
procured, within 60 days from the date of entry thereof and the Company shall
not, within such 60-day period, or such longer period during which execution of
the same shall have been stayed, appeal therefrom and cause the execution
thereof to be stayed during such appeal.
(d) The entry of a decree or order by a court having jurisdiction
adjudging the Company a bankrupt or insolvent, or approving a petition seeking
reorganization, arrangement, adjustment, or composition of, or in respect of,
the Company, under federal bankruptcy law, as now or hereafter constituted, or
any other applicable federal or state bankruptcy, insolvency, or other similar
law, and the continuance of any such decree or order unstayed and in effect for
a period of 60 days; or the commencement by the Company of a voluntary case
under federal bankruptcy law, as now or hereafter constituted, or any other
applicable federal or state bankruptcy, insolvency, or other similar law, or the
consent by it to the institution of bankruptcy or insolvency proceedings against
it, or the filing by it of a petition or answer or consent seeking
reorganization or relief under federal bankruptcy law or any other applicable
federal or state law, or the consent by it to the filing of such petition or to
the appointment of a receiver, liquidator, assignee, trustee, sequestrator, or
similar official of the Company or of any substantial part of its property, or
the making by it of an assignment for the benefit of creditors, or the admission
by it in writing of its inability to pay its debts generally as they become due,
or the taking of corporate action by the Company in furtherance of any such
action.
(e) A default is declared under the terms of a collateral security
agreement, if any.
(f) A default is declared under any other of the Company's
obligations in excess of $250,000 in the aggregate.
- 2 -
<PAGE> 36
(g) A sale of all or substantially all of the assets of the
Company.
then, and in every such case, during the continuance of the Event of Default,
the Holder may, without presentment, demand or notice declare the principal of
this Contract, together with all unpaid accrued interest thereon, to be
immediately due and payable, and upon any such declaration the same shall become
and be immediately due and payable, anything in this Contract to the contrary
notwithstanding. The Holder, if not paid promptly at maturity or acceleration of
this Contract, shall be entitled to, and the Company covenants and agrees to pay
to the Holder, such additional amount as shall be sufficient to cover the cost
and expenses of collection of this Contract, including, without limitation,
reasonable attorneys' fees and costs. Upon an Event of Default, the Holder may
take such action as it deems desirable for the enforcement and collection of the
principal of this Contract, as well as all additional sums to which the Holder
may be entitled as aforesaid. The Holder's rights hereunder shall be in addition
to any other rights the Holder may have at law or in equity.
SECTION 3 REMEDIES UPON DEFAULT.
(a) Upon the occurrence of an Event of Default, the principal
amount and any fees, default fees, or other amounts then outstanding of this
Contract shall automatically become immediately due and payable without
presentment, demand, protest, or other formalities of any kind, all of which are
hereby expressly waived by the Company.
(b) The Holder may institute such actions or proceedings in law or
equity as it shall deem expedient for the protection of its rights and may
prosecute and enforce its claims against all assets of the Company, and in
connection with any such action or proceeding shall be entitled to receive from
the Company payment of the principal amount of this Contract plus reasonable
expenses of collection, including, without limitation, attorneys' fees and
expenses.
(c) If an Event of Default has occurred, the entire balance due
under this Contract shall thereafter, at Holder's option, bear interest at
eighteen percent (18%) per annum, from the date of the Event of Default,
calculated over a year of 360 days.
SECTION 4 SECURITY.
(a) This note shall be secured by a personal stock pledge from
Drew S. Levin, of even date herewith. Such stock pledge is incorporated herein
by this reference.
SECTION 5 MISCELLANEOUS.
(a) Any notice or other communication required or permitted to be
given hereunder shall be in writing and shall be mailed by certified mail,
return receipt requested, or by Federal Express, Express Mail, or similar
overnight delivery or courier service or delivered (in person or by telecopy,
telex, or similar telecommunications equipment) against receipt to the party to
whom it is to be given, (i) if to the Company, at its address at 12300 Wilshire
Boulevard, Suite 400, Los Angeles, California 90025 Attention: President, (ii)
if to the Holder, at its address set forth on the first page hereof, or (iii) in
either case, to such other address as the party shall have furnished in writing
in accordance with the provisions of this Section 4(a). Any notice or other
communication
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<PAGE> 37
given by certified mail shall be deemed given at the time of receipt. Any notice
given by other means permitted by this Section 4(a) shall be deemed given at the
time of receipt thereof.
(b) Upon receipt of evidence satisfactory to the Company of the
loss, theft, destruction, or mutilation of this Contract (and upon surrender of
this Contract if mutilated), the Company shall execute and deliver to the Holder
a new Contract of like date, tenor, and denomination.
(c) No course of dealing and no delay or omission on the part of
the Holder in exercising any right or remedy shall operate as a waiver thereof
or otherwise prejudice the Holder's rights, powers, or remedies. No right,
power, or remedy conferred by this Contract upon the Holder shall be exclusive
of any other right, power, or remedy referred to herein or now or hereafter
available at law, in equity, by statute or otherwise, and all such remedies may
be exercised singly or concurrently.
(d) This Contract may be amended only by a written instrument
executed by the Company and the Holder hereof. Any amendment shall be endorsed
upon this Contract, and all future Holders shall be bound thereby.
(e) This Contract shall be governed by, and construed in
accordance with, the laws of the State of Georgia giving effect to principles
governing conflicts of law. Venue shall lie in the state or Federal courts
located in Fulton County, Georgia.
(f) In any action or proceeding, the Company waives personal
service of any summons, complaint, or other process and agrees that service
thereof may be made in accordance with Section 6(a). Within 30 days after such
service, or such other time as may be mutually agreed in upon in writing by the
attorneys for the parties to such action or proceeding, the Company shall appear
or answer such summons, complaint, or other process. Should the Company fail to
appear or answer within such 30-day period or such extended period, as the case
may be, the Company shall be deemed in default and judgment may be entered
against the Company for the amount as demanded in any summons, complaint, or
other process so served.
(g) Company represents and warrants that: (i) the Company has the
requisite power and authority to execute, deliver and perform each of its
obligations under this Contract and to consummate the transactions provided for
herein. (ii) this Contract has been duly executed and delivered by the Company
and constitutes the legal, valid and binding obligation of Company, enforceable
against it in accordance with its terms.
IN WITNESS WHEREOF, the Company has caused this Contract to be executed
and dated the day and year first above written.
TEAM COMMUNICATIONS GROUP, INC.
\
BY: /s/ DREW LEVIN
--------------------------------------
DREW LEVIN
PRESIDENT AND CHIEF EXECUTIVE OFFICER
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<PAGE> 1
EXHIBIT 10.5
FIRST AMENDMENT TO LEASE
This First Amendment to Lease (the "FIRST AMENDMENT") is made effective as of
March 20, 1998, by and between 12300 Corporation, a Delaware corporation,
("LANDLORD") and DSL Entertainment Group, Inc., a California corporation
("TENANT") with reference to the following facts and circumstances.
A. Landlord is the Owner of that certain building located at 12300
Wilshire Boulevard, Los Angeles, California 90025 ("PROPERTY");
B. Landlord's predecessor in interest and Tenant entered into a certain
Lease Agreement (the "LEASE") dated April 25, 1995 for the Premises
described as Suite 400 (the "PREMISES") located in the Property.
C. The Premises covered by the Lease is identified as that portion of
the fourth (4th) floor of the Property containing approximately 4,588
rentable square feet of office space. (See "Exhibit A").
D. American Realty Advisors ("ADVISOR") is the real estate investment
manager to the Landlord and has the responsibility for operating the
Property in accordance with the fiduciary and other responsibilities
imposed by ERISA and such other laws as impact Advisor's relationship
to its client.
E. Landlord and Tenant desire to further amend the Lease upon terms and
conditions hereinafter set forth.
NOW, THEREFORE, in consideration of the foregoing facts and circumstances, the
mutual covenants and promises contained herein and after good and valuable
consideration, the receipt and sufficiency of which is acknowledged by each
of the parties, the parties do hereby agree to the following:
1. Definitions. Each capitalized term used in this First Amendment shall
have the same meaning as is ascribed to such capitalized term in the Lease,
unless otherwise provided for herein.
2. Extension of the Lease Term. The expiration of the Lease is extended
from May 15, 1998 to May 14, 1999.
3. Rent. Effective May 15, 1998, Monthly Rent pursuant to Article 1.6 of
the Lease shall be as follows:
May 15, 1998 to May 14, 1999 $2.10 per square foot $9,634.80 (Monthly rent)
Rent is due and payable on the first of each and every month, in addition to
other sums due under the Lease such as Operating Costs.
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<PAGE> 2
4. Operating Costs. Tenant shall remain obligated to pay its pro rata
share of operating costs which is 10.053%, in accordance with Article 1.9 of the
Lease, during the balance of the Lease Term. The Base Year for calculation of
Operating Costs shall remain calendar year 1995.
5. Improvements. Tenant agrees to accept the Premises in its current
"as-is" condition.
6. No Defenses. Tenant affirms that, as of the date of execution of
this First Amendment, no default or breach by Landlord exists under the Lease
and Tenant has no defenses, offsets or counterclaims that could be asserted in
an action by Landlord to enforce Landlord's remedies under the Lease.
7. No Other Inducements. It is expressly warranted by each of the
undersigned parties that no promise or inducement has been offered except as
herein set forth and that this First Amendment is executed without reliance
upon any statement or representation of any person or party released or its
representatives concerning the nature and extent of damages, costs and/or legal
liability therefor.
8. Broker. Tenant represents to Landlord that except for CB
Commercial Real Estate Group, Inc. (the "Broker"), Tenant has not dealt with
any real estate broker, salesperson or finder in connection with this First
Amendment, and no other such person initiated or participated in the
negotiation of this First Amendment or is entitled to any commission in
connection herewith. Tenant hereby agrees to indemnify, defend and hold
Landlord, its property manager and their respective employees harmless from and
against any and all liabilities, claims, demands, actions, damages, costs and
expenses (including attorney's fees) arising from either (a) a claim for a fee
or commission made by any broker, other than the Broker, claiming to have acted
by or on behalf of Tenant in connection with this First Amendment, or (b) a
claim of, or right to lien under the statutes of California relating to real
estate broker liens with respect to any such broker retained by Tenant.
9. Binding. The Lease, as amended hereby, shall continue in full
force and effect, subject to the terms and provisions thereof and hereof. In
the event of any conflict between the terms of the Lease and the terms of this
First Amendment, the terms of this First Amendment shall control. This First
Amendment shall be binding upon and inure to the benefit of Landlord, Tenant
and their respective successors and assigns.
10. Submission. Submission of this First Amendment by Landlord to
Tenant for examination and/or execution shall not in any manner bind Landlord
and no obligations on Landlord shall arise under this First Amendment unless
and until this First Amendment is fully signed and delivered by Landlord and
Tenant; provided, however, the execution and delivery by Tenant of this First
Amendment to Landlord shall constitute an irrevocable offer by Tenant of the
terms and conditions herein contained, which offer may not be revoked for
thirty (30) days after such delivery.
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<PAGE> 3
11. Limit of Liability. Neither Landlord nor any principal of Landlord
nor any owner of the Property, whether disclosed or undisclosed, shall have any
personal liability with respect to any of the provisions of the Lease, as
hereby amended, or the Premises, and if Landlord is in breach or default with
respect to Landlord's obligations under the Lease, as hereby amended, or
otherwise, Tenant shall look solely to the equity interest of Landlord in the
Property for the Satisfaction of Tenant's remedies or judgments.
12. Miscellaneous.
12.1 Attorneys' and Other Fees. Should either party institute any action
or proceeding to enforce or interpret this First Amendment or any provision
hereof, for damages by reason of any alleged breach of this First Amendment or
of any provision hereof, or for a declaration or rights hereunder, the
prevailing party in any such action or proceeding shall be entitled to receive
from the other party all costs and expenses, including actual attorneys' and
other fees, reasonably incurred in good faith by the prevailing party in
connection with such action or proceeding. The term "ATTORNEYS' AND OTHER FEES"
shall mean and include attorneys' fees, accountants' fees, and any and all
consultants' and other similar fees incurred in connection with the action or
proceeding and preparations therefor. The term "ACTION OR PROCEEDING" shall
mean and include actions, proceedings, suits, arbitrations, appeals and other
similar proceedings.
12.2 Notices. Any notice, demand, request, covenant, approval or other
communication to be given by one party to the other shall be in writing (unless
some other form of notice is specifically provided for herein) and given by
personal service, telegram, or express mail, Federal Express, DHL or any other
similar form of airborne/overnight delivery service, or mailing in the United
States mail (certified and return receipt requested), addressed to the parties
at their respective addresses as follows:
IF TO LANDLORD:
Insignia Commercial Group, Inc.
20750 Ventura Boulevard, Suite 222
Woodland Hills, California 91364
Attention: Frank Khan
WITH A COPY TO:
12300 Corporation
c/o American Realty Advisors
700 North Brand Boulevard, Suite 300
Glendale, California 91203
Attention: Stanley L. Iezman
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<PAGE> 4
IF TO TENANT:
DSL Entertainment Group, Inc.
12300 Wilshire Boulevard, Suite 400
Los Angeles, California 90025
Attention: Drew Levin and Laurie S. Levin
12.3 TIME OF ESSENCE. TIME IS OF THE ESSENCE OF THIS FIRST
AMENDMENT AND EACH AND EVERY TERM AND PROVISION HEREOF.
12.4 Modification. A modification of any provision herein
contained, or any other amendment to this First Amendment, shall be effective
only if the modification or amendment is in writing and signed by both Landlord
and Tenant.
12.5 Waiver. No Waiver by any party hereto of any breach or default
shall be considered to be a waiver of any other breach or default. The waiver
of any condition shall not constitute a waiver of any breach or default with
respect to any covenant, representation or warranty.
12.6 Successors and Assigns. This First Amendment shall inure to
the benefit of, and be binding upon, the parties hereto and their respective
heirs, successors and assigns.
12.7 Number and Gender. As used in this First Amendment, the neuter
includes masculine and feminine, and the singular includes the plural.
12.8 Governing Law. This First Amendment shall be governed by,
interpreted under and construed and enforced in accordance with the laws of the
State of California applicable to agreements made and to be performed with the
laws of the State of California applicable to agreements made and to be
performed wholly within the State of California.
12.9 Construction. Headings at the beginning of each Section and
subsection solely for the convenience of the parties and are not a part of this
First Amendment. Except as otherwise provided in this First Amendment, all
exhibits referred to herein are attached hereto and are incorporated herein by
this reference. Unless otherwise indicated, all references herein to Articles,
Sections, subsections, paragraphs, subparagraphs or provisions are to those in
this First Amendment. Any reference to a paragraph or Section herein includes
all subparagraphs or subsections thereof. This First Amendment shall not be
construed as if it had been prepared by only Landlord or Tenant, but rather as
if both Landlord and Tenant had prepared the same. In the event any portion of
this First Amendment shall be declared by any court or competent jurisdiction
to be invalid, illegal or unenforceable, such portion shall be deemed severed
from this First Amendment, and the remaining parts hereof shall remain in full
force and effect, as fully as though such invalid, illegal or unenforceable
portion had never been part of this First Amendment.
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<PAGE> 5
12.10 Integration of Other Agreements. This First Amendment, the
Lease and prior amendments set forth the entire agreement and understanding of
the parties with respect to the matters set forth herein and supersedes all
previous written or oral understandings, agreements, contracts, correspondence
and documentation with respect thereto. Any oral representations or
modifications concerning this First Amendment shall be of no force or effect.
12.11 Indemnification by Tenant. Tenant agrees to indemnify, defend
and hold Landlord free and harmless of, from and against any and all claims,
demands, damages, losses, liabilities, causes of action, costs or expenses
(including reasonable attorneys' fees), directly indirectly arising in
connection with the breach of any covenant, agreement, representation, or
warranty of Tenant under the terms of this First Amendment.
12.12 Duplicate Originals: Counterparts. This First Amendment may be
executed in any number of duplicate originals, all of which shall be of equal
legal force and effect. Additionally, this First Amendment may be executed in
counterparts, but shall become effective only after a counterpart hereof has
been executed by each party; all said counterparts shall, when taken together,
constitute the entire single agreement between the parties.
12.13 Non-Waiver of Rights. No failure or delay of either party in
the exercise of any right given to such party hereunder shall constitute a
waiver thereof unless the time specified herein for exercise of such right has
expired, nor shall any single or partial exercise of any right preclude other
or further exercise thereof or of an other right.
12.14 Days. The term "days," as used herein, shall mean actual days
occurring, including Saturdays, Sundays and holidays. The term "business days"
shall mean days other than Saturdays, Sundays and holidays. If any item must be
accomplished or delivered hereunder on a day that is not a business day, it
shall be deemed to have been timely accomplished or delivered on the next
following business day.
12.15 Further Assurances. Landlord and Tenant each agree to execute
any and all other documents and to take any further actions reasonably
necessary to consummate the transactions contemplated hereby.
12.16 Joint and Several Liability. If Tenant consists of two (2) or
more parties, each of such parties (and each of Tenant's general partners)
shall be liable for Tenant's obligations under this First Amendment, and all
documents executed in connection herewith, and the liability of such parties
shall be joint and several. Additionally, the obligations and liabilities
hereunder of the general partners or other appropriate persons or entities that
comprise Tenant, if any, are and shall be joint and several.
12.17 No Third Party Beneficiaries. Except as otherwise provided
herein, no person or entity shall be deemed to be a third party beneficiary
hereof, and nothing in this First Amendment, (either expressed or implied) is
intended to confer upon any person or entity, other than Landlord and/or Tenant
(and their respective nominees, successors and assigns), any rights, remedies,
obligations or liabilities under or by reason of this First Amendment.
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<PAGE> 6
13. Secretary's Certificate. Attached hereto and made a part hereof is
the Secretary's Certificate. See Exhibit B.
14. Full Force and Effect. All other terms and conditions of the original
Lease agreement shall remain in full force and effect.
IN WITNESS WHEREOF, this First Amendment is executed as of the day and year
aforesaid.
DATE OF EXECUTION: LANDLORD:
4-24-98 12300 Corporation,
a Delaware corporation
By: [SIG]
-----------------------------------------
Title: Asset Manager
DATE OF EXECUTION: TENANT:
- ------------------ DSL Entertainment Group, Inc.
a California corporation
By: [SIG]
-----------------------------------------
Title: President/CEO
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<PAGE> 7
EXHIBIT A
<PAGE> 8
FLOOR: 4 FLOOR PLAN
[WILSHIRE CENTER]
<PAGE> 9
EXHIBIT B
SECRETARY'S CERTIFICATE
The undersigned being the duly elected and acting Secretary of DSL
Entertainment Group, Inc., a California corporation organized under the laws of
the State of California, and having custody of the corporate records of said
corporation, hereby certifies that the officer or officers executing the
foregoing lease were duly authorized to act in their capacities in conjunction
herewith as ________________________ and ________________________ as set forth
in certain resolutions adopted by the Board of Directors of said corporation on
_____________________ and that said resolutions have not been modified, amended
or rescinded in any respect.
DATED: 3-27-98
/s/ MICHAEL LATINER
----------------------------------------
Secretary
ACKNOWLEDGEMENT
State of California )
) SS
County of Los Angeles )
The foregoing lease was acknowledged before me by MICHAEL LATINER the
Secretary of DSL ENTERTAINMENT GROUP INC. a corporation under the laws of the
State of California on behalf of said corporation.
/s/ PAM SCOTT
----------------------------------------
Notary Public
(Notary Stamp or Seal)
[NOTARY STAMP]
8
