<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON DECEMBER 20, 1996
REGISTRATION NO. 333-9009
===============================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------
AMENDMENT NO. 2
to
FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------
KATMANDU ENTERTAINMENT CORP.
(Exact Name of Registrant as Specified in Its Charter)
<TABLE>
<CAPTION>
<S> <C> <C>
Delaware 5812 23-2851964
(State or Other Jurisdiction (Primary Standard Industrial (I.R.S. Employer
of Incorporation or Organization) Classification Code Number) Identification Number)
</TABLE>
415 N. COLUMBUS BLVD.
PHILADELPHIA, PENNSYLVANIA 19123
(215) 629-7400
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING
AREA CODE, OF REGISTRANT'S EXECUTIVE OFFICES)
------
S. LANCE SILVER AND STUART N. HARTING
CO-CHAIRMEN AND CO-PRESIDENTS
KATMANDU ENTERTAINMENT CORP.
415 N. COLUMBUS BLVD.
PHILADELPHIA, PA 19123
(215) 629-7400
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE OF AGENT FOR SERVICE)
with a copy to:
STEPHEN A. ZELNICK, Esq. LAWRENCE B. FISHER, Esq.
Morse, Zelnick, Rose & Lander, LLP Orrick, Herrington & Sutcliffe LLP
450 Park Avenue 666 Fifth Avenue - 18th Floor
New York, New York 10022 New York, New York 10103
(212) 838-8040 (212) 506-5000
(212) 838-9190 (FAX) (212) 506-5151 (FAX)
Approximate date of commencement of proposed sale to the public: As soon
as practicable after the Registration Statement becomes effective.
------
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 (the "Securities Act"), 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 the delivery of the prospectus is expected to be made pursuant to Rule
434 under the Securities Act, please check the following box. [ ]
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment which specifically states that this
Registration Statement shall thereafter become effective in accordance with
Section 8(a) of the Securities Act of 1933 or until this Registration
Statement shall become effective on such date as the Commission, acting
pursuant to said Section 8(a), may determine.
===============================================================================
<PAGE>
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
=======================================================================================================================
Amount Proposed Maximum Proposed Maximum Amount of
Title of Each Class Being Offering Price Aggregate Registration
of Securities to Be Registered Registered Per Share(1) Offering Price(1) Fee
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, par value $.001 per share (2)..... 1,552,500 $6.00 $9,315,000 $2,822.73
- -----------------------------------------------------------------------------------------------------------------------
Representative's Warrants ..................... 135,000 -- $1 (3)
- -----------------------------------------------------------------------------------------------------------------------
Common Stock issuable upon exercise of
Representative's Warrants (4) ................ 135,000 $7.20 $972,000 $294.55
- -----------------------------------------------------------------------------------------------------------------------
Total Registration Fee ................................................................................ $3,117.28
=======================================================================================================================
</TABLE>
(1) Estimated solely for purposes of determining the registration fee
pursuant to Rule 457 under the Securities Act.
(2) Includes 202,500 shares of Common Stock issuable upon exercise of the
Representative's Over-Allotment Option.
(3) No registration fee required pursuant to Rule 457 under the Securities
Act.
(4) Pursuant to Rule 416 of the Securities Act, there are also being
registered hereby such additional indeterminate number of shares of
Common Stock as may become issuable pursuant to the anti-dilution
provisions of the Representative's Warrants.
<PAGE>
KATMANDU ENTERTAINMENT CORP.
CROSS-REFERENCE SHEET
(SHOWING LOCATION IN THE PROSPECTUS OF INFORMATION
REQUIRED BY ITEMS 1 THROUGH 23, PART I OF FORM SB-2)
<TABLE>
<CAPTION>
Item and Caption in Form SB-2 Location in Prospectus
----------------------------- ----------------------
<S> <C> <C>
1. Front of SB-2 Registration Statement and Outside
Cover Page of Prospectus.......................... Outside Front Cover Page
2. Inside Front and Outside Back Cover Pages of
Prospectus........................................ Inside Front Cover Page; Outside Back Cover Page
3. Summary Information and Risk Factors .............. Prospectus Summary; Risk Factors
4. Use of Proceeds.................................... Prospectus Summary; Use of Proceeds; Management's Discussion
and Analysis of Financial Condition and Plan of Operations
5. Determination of Offering Price ................... Outside Front Cover Page of Prospectus;
Risk Factors; Underwriting
6. Dilution .......................................... Risk Factors; Dilution
7. Selling Security-Holders........................... Not Applicable
8. Plan of Distribution............................... Outside Front Cover Page; Inside Front Cover Page;
Underwriting
9. Legal Proceedings.................................. Business
10. Directors, Executive Officers, Promoters and
Control Persons................................... Risk Factors; Management
11. Security Ownership of Certain Beneficial Owners
and Management.................................... Risk Factors; Management; Principal Stockholders
12. Description of Securities ......................... Description of Securities; Underwriting
13. Interest of Named Experts and Counsel.............. Legal Matters
14. Disclosure of Commission Position of
Indemnification for Securities Act Liabilities..... Risk Factors; Management
15. Organization within Last Five Years ............... The Company; Reorganization; Certain Transactions
16. Description of Business............................ Summary; Management's Discussion and Analysis of Financial
Condition and Plan of Operations; Business
17. Management's Discussion and Analysis and
Plan of Operation ................................ Management's Discussion and Analysis of
Financial Condition and Plan of Operations
18. Description of Property............................ Prospectus Summary; Management's Discussion
and Analysis of Financial Condition and Plan of
Operations; Business
19. Certain Relationships and Related Party
Transactions..................................... The Company; Reorganization; Certain Transactions
20. Market for Common Equity and Related
Stockholder Matters............................... Outside Front Cover Page; Prospectus Summary;
Risk Factors; Dividend Policy; Underwriting
21. Executive Compensation............................. Management
22. Financial Statements .............................. Financial Statements
23. Changes and Disagreements with Accountants on
Accounting and Financial Disclosure ............. Not Applicable
</TABLE>
<PAGE>
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.
SUBJECT TO COMPLETION, DATED DECEMBER 20, 1996
PROSPECTUS
LOGO
1,350,000 SHARES OF COMMON STOCK
------
This Prospectus relates to the offering (the "Offering") of 1,350,000
shares (the "Shares") of common stock, $0.001 par value per share (the
"Common Stock") by KatManDu Entertainment Corp., a Delaware Corporation (the
"Company").
Prior to this Offering, there has been no public market for the Common
Stock, and there can be no assurance that such a market will develop after
completion of this Offering or, if developed, that it will be sustained. It
is presently anticipated that the initial public offering price per Share
will be $6.00. For information regarding the factors considered in
determining the initial public offering price of the Shares, see "Risk
Factors" and "Underwriting." Application has been made to list the Common
Stock on the Nasdaq SmallCap Market under the symbol KATX.
THE SECURITIES OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK AND IMMEDIATE
SUBSTANTIAL DILUTION. SEE "RISK FACTORS" COMMENCING ON PAGE 8 AND "DILUTION."
------
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.
===============================================================================
Price to Underwriting Proceeds to
Public Discount(1) Company(2)
- -------------------------------------------------------------------------------
Per Share.......... $ $ $
- -------------------------------------------------------------------------------
Total(3) ......... $ $ $
===============================================================================
(1) Does not include additional compensation payable to H.J. Meyers & Co.,
Inc., the representative (the "Representative") of the several
underwriters (the "Underwriters"), in the form of a non-accountable
expense allowance. In addition, see "Underwriting" for information
concerning indemnification and contribution arrangements with the
Underwriters and other compensation payable to the Representative.
(2) Before deducting estimated expenses of $547,000 payable by the Company,
excluding the non-accountable expense allowance payable to the
Representative.
(3) The Company has granted to the Underwriters an option exercisable within
45 days after the date of this Prospectus to purchase up to an aggregate
of 202,500 additional shares of Common Stock upon the same terms and
conditions as set forth above, solely to cover over-allotments, if any.
If such over-allotment option is exercised in full, the total Price to
Public, Underwriting Discount and Proceeds to Company will be $ ,
$ and $ , respectively. See "Underwriting."
The Securities are being offered by the Underwriters, subject to prior
sale, when, as and if delivered to and accepted by the Underwriters, and
subject to approval of certain legal matters by their counsel and subject to
certain other conditions. The Underwriters reserve the right to withdraw,
cancel or modify this Offering and to reject any order in whole or in part.
It is expected that delivery of the Securities offered hereby will be made
against payment at the offices of H.J. Meyers & Co., Inc., 1895 Mt. Hope
Avenue, Rochester, New York 14620-4596, on or about , 1996.
H.J. MEYERS & CO., INC.
The date of this Prospectus is , 1996
<PAGE>
[PHOTOGRAPHS AND CAPTIONS]
[This page contains five graphics and a caption for the entire page. The
largest graphic is a photograph of the entrance to KatManDu-Philadelphia: a
wooden walkway covered by a yellow awning with a large "KatManDu" sign above it
written in the style of the KatManDu Logo. There is a motorcycle parked in the
front and foliage around the entrance. The picture covers approximately
two-thirds of the page. A second graphic is a picture of a three man musical
group: one is playing the bass, one is playing the kettle drums and one is
playing the guitar. The other graphics consist of pictures of a flower and a
pineapple superimposed in the bottom left corner and along the lower left border
of the page and a picture of coconuts in the lower right corner. The caption for
the page reads as follows: "Welcome to the Mythical Island of KatManDu!"]
<PAGE>
[This page contains six graphics, four of which have their own individual
captions, and a caption for the entire page. The caption for the entire page,
which appears at the top center/right, reads "Think globally..." In the upper
left corner and along the top half of the left border a picture of a flower
and a pineapple are superimposed. In the bottom left corner is a picture of a
turbaned dancer wearing a skirt, beaded necklaces, an armband, ankle
bracelets and carrying a flaming torch. In the bottom right corner is a
picture of KatManDu promotional merchandise bearing the KatManDu logo and a
salesperson. The caption under the picture reads: "Promotional merchandise
and accessories." Above that picture, along the right border, is a picture of
a five person musical group performing on a stage with a sign that reads
"Live KatManDu". "KatManDu" is written in the style of the KatManDu logo. The
stage is decorated with flowers and foliage. The picture has a caption which
reads "Musical Entertainment". Immediately to the left of that picture, in
the top portion of the center of the page is a picture of a crowd on the
dance floor of KatManDu with the stage in the background. The picture was
shot during the daytime hours. The caption reads "Let the sun shine..."
Immediately beneath that picture is another picture showing the inside of the
entrance to KatManDu with its wood decking and tropical foliage. People are
shown walking into the restaurant. The caption reads "Kat Alley...your
adventure begins!"]
<PAGE>
[This page contains six graphics, three of which have their own individual
captions, and a caption for the entire page. The top half of the page
contains a photograph of a crowd scene on the dance floor with a band playing
on the stage. Superimposed in the upper right corner is a smaller picture of
a five-person band and immediately to the left of that picture is a picture
of a four man singing group. Underneath the left corner of the larger picture
is a caption that reads "An evening at KatManDu..." In the bottom right
corner is a picture of a crowd on the dance floor with the KatManDu stage in
the background. The caption under this picture reads "Party on the Pier
Deck..." To the left of that picture is a picture of a crowd scene at the
Main Bar. It has a caption which reads "At the Main Bar..." Attached to the
bottom left corner of this picture is a picture of coconuts. The caption for
the entire page, which appears below the large picture, reads ". . . party
locally!"]
<PAGE>
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR
EFFECT TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE
COMMON STOCK AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
------
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by reference to the more
detailed information and financial statements, including the notes thereto,
appearing elsewhere in this Prospectus. Except as otherwise specified, all
information in this Prospectus gives effect to the Reorganization (as defined
below in "Reorganization") which will be effected prior to or simultaneous with
the consummation of this Offering and assumes no exercise of the
Representative's Warrants (as defined) or the Over-Allotment Option. As used
herein the term "Company" refers to KatManDu Entertainment Corp., its
predecessors and its subsidiaries. Investors should carefully consider the
information set forth under the captions "Risk Factors" and "Dilution."
THE COMPANY
The Company owns and operates a casual dining, outdoor, theme restaurant
named "KatManDu" (referred to herein as "KatManDu-Philadelphia").
KatManDu-Philadelphia is located on the Delaware River waterfront in central
Philadelphia and operates from mid-April through mid-September. With its
waterfront setting, casual atmosphere, live musical entertainment and dancing,
KatManDu-Philadelphia is designed to replicate a mythical "tropical island
paradise" vacation setting. The Company also sells a variety of merchandise,
such as T-shirts, sweatshirts, caps, jackets and novelty items.
The Company has commenced development of a second KatManDu
restaurant/nightclub ("KatManDu-Trenton"), presently scheduled to open in the
second quarter of 1997. The Company has entered into a 30-year lease for a
21,500 square foot site which includes a 10,000 square foot historic landmark
building on the Delaware River waterfront in Trenton, New Jersey.
KatManDu-Trenton is located adjacent to an office park and the new Trenton
Thunder baseball stadium. KatManDu-Trenton will be an indoor/outdoor KatManDu
restaurant/nightclub which will operate year round. In addition, the Company has
commenced lease negotiations with respect to a third restaurant/nightclub to be
located in the Baltimore, Maryland inner harbor district ("KatManDu-Baltimore").
No asurance can be given that such negotitions will result as the execution of
a lease.
KatManDu-Philadelphia has attracted a culturally diverse, multi-aged customer
base, including both local and regional residents and tourists. Key to the
success of KatManDu has been its targeting of a socioeconomically and culturally
diverse audience with a median age in the 25-55 year-old bracket. The largest
population segment in the United States is the so-called Baby-Boomers, persons
between the ages of 30 and 50. KatManDu believes that it appeals to such age
group because it offers the right combination of quality dining and
sophisticated entertainment in a comfortable tropical island paradise vacation
environment.
KatManDu-Philadelphia seats up to 180 persons for dinner and Sunday brunch,
and can accommodate an additional 250 persons for cocktails at its "Main Bar"
area (which includes a 100 linear foot bar) and up to 1,200 persons on its dance
floor and adjoining full-service "Tiki" bar. After dinner and on Saturday and
Sunday afternoons and evenings, when live music is featured,
KatManDu-Philadelphia attracts young adults and active older adults drawn by its
music-filled environment and dancing. At other times, KatManDu-Philadelphia
provides a more relaxed atmosphere appealing to business people and families.
With the proceeds of this Offering and other forms of site specific
financing, the Company plans to complete the development and commence the
operation of KatManDu-Trenton and KatManDu-Baltimore and develop one or two
additional restaurant/nightclubs in 1998. The Company will target waterfront
locations in urban areas with favorable demographics, such as Atlantic City, the
New York City metropolitan area, Los Angeles, Las Vegas, Orlando and Miami.
The Company's executive offices are located at 415 North Columbus Boulevard,
Philadelphia, Pennsylvania 19123 and its telephone number is (215) 629-7400.
3
<PAGE>
THE OFFERING
<TABLE>
<CAPTION>
<S> <C>
Securities offered hereby ..................... 1,350,000 shares of Common Stock.
Outstanding Securities before this Offering:
Common Stock (1) (2) ........................ 1,000,000 shares of Common Stock.
Outstanding Securities after this Offering:
Common Stock (1) ............................ 2,350,000 shares of Common Stock.
Proposed NASDAQ SmallCap Market Symbol
Common Stock ................................ KATX
Use of Proceeds ............................... The net proceeds to the Company from the sale of the Shares offered
hereby are expected to be approximately $6.5 million (assuming
an initial public offering price of $6.00 per Share). Such net
proceeds will be used to finance the development and opening of
KatManDu-Trenton and KatManDu-Baltimore and one or two additional
KatManDu restaurant/nightclubs in 1998, to repay a portion of the
June 1996 Financing (as defined) and certain other funded debt,
and to provide working capital. See "Use of Proceeds."
Risk Factors .................................. An investment in the Securities offered hereby is speculative and
involves a high degree of risk. This Prospectus contains
forward-looking information which involves risks and uncertainties.
The Company's actual results could differ materially from those
anticipated by such forward-looking information as a result of
various factors, including those discussed under "Risk Factors"
in this Prospectus. In addition, purchasers of the Shares offered
hereby will experience immediate and substantial dilution with
respect to their investment. See "Risk Factors."
</TABLE>
- ------
(1) Excludes 500,000 shares of Common Stock reserved for issuance under the
Company's 1996 Stock Option Plan, of which 50,000 shares are issuable
upon exercise of outstanding options granted to certain officers,
directors, employees of and consultants to the Company, at an exercise
price equal to the initial public offering price per share. See
"Management" and "Principal Stockholders."
(2) Includes 110,784 shares of Common Stock issued in connection with the
June 1996 Financing (as defined). See "Management's Discussion and
Analysis of Financial Condition and Plan of Operations -- Liquidity and
Capital Resources."
4
<PAGE>
SUMMARY FINANCIAL INFORMATION(1)
The summary financial information set forth below is derived from the more
detailed financial statements appearing elsewhere in this Prospectus. This
information should be read in conjunction with such financial statements,
including the notes thereto. See "Management's Discussion and Analysis of
Financial Condition and Plan of Operations."
<TABLE>
<CAPTION>
For the Years ended For the Nine Months
December 31, ended September 30,
1994 1995 1995 1996
------------ ------------ ------------ ------------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Statements of Income Data:
Net revenue(2) ........................................... $2,773,042 $2,865,751 $2,859,624 $2,740,235
Food and beverage, promotional
merchandise ............................................. 633,117 620,099 593,868 619,806
General and administrative, rent expense to related party 1,723,594 1,742,898 1,635,641 1,610,049
Corporate overhead ....................................... 122,038 164,628 141,777 230,332
Compensation expense(3) .................................. -- -- -- 135,168
Interest expense net ..................................... 67,119 65,612 43,190 39,678
---------- ---------- ---------- ----------
Income before minority interest .......................... $227,174 $272,514 $445,148 $105,202
Minority interests(4) .................................... (22,717) (27,251) (44,515) (1,496)
---------- ---------- ---------- ----------
Net income ............................................... $ 204,457 $ 245,263 $ 400,633 $ 103,706
========== ========== ========== ==========
Net income per common share .............................. $ .20 $ .25 $ .40 $ .10
========== ========== ========== ==========
Weighted average number of shares
outstanding(5) .......................................... 1,000,000 1,000,000 1,000,000 1,000,000
========== ========== ========== ==========
Pro forma provision for income taxes(6) .................. $ 83,100 $ 99,600 $ 172,000 $ 71,800
---------- ---------- ---------- ----------
Pro forma net income before
cumulative effect of accounting change(6) ............... $ 121,357 $ 145,663 $ 228,633 $ 31,906
Cumulative effect of accounting change for income taxes(6) (22,100) -- -- --
---------- ---------- ---------- ----------
Pro forma net income (6) ................................. $ 143,457 $ 145,663 $ 228,633 $ 31,906
========== ========== ========== ==========
Pro forma net income per common share(6) ................. $ .14 $ .15 $ .23 $ .03
========== ========== ========== ==========
Pro forma weighted average number of shares outstanding(5) 1,000,000 1,000,000 1,000,000 1,000,000
========== ========== ========== ==========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
As of September 30, 1996
(Unaudited)
-------------------------------
Balance Sheet Data(7): As
Actual Adjusted(8)
------------- ------------
<S> <C> <C>
Cash and cash equivalents .............. $ 285,886 $5,922,917
Property and equipment, net ............ 459,487 459,487
Total assets ........................... 3,075,815 7,569,379
Loans payable -- June 1996 Financing
Notes ................................. 1,100,000 550,000
Loan payable, related parties .......... 125,000 --
Loan payable, other .................... 104,969 --
Total current liabilities .............. 1,550,579 759,611
Stockholders' equity ................... 938,508 6,223,043
Working capital (deficiency) ........... (1,241,707) 5,258,292
</TABLE>
- ------
(1) The Summary Financial Information gives effect to the Reorganization
described under "Reorganization" and sets forth on a consolidated basis
the operations of KatManDu Investment Partners ("KIP"), a Pennsylvania
limited partnership formed in 1991, KatManDu Corp. ("Kat Corp."), a
Pennsylvania corporation formed in 1990, T-Kat Corp. ("T-Kat"), a New
Jersey corporation formed in 1995 and T-Kat Urban Renewal Corporation
("Urban Renewal"), a New Jersey corporation formed in 1996. See "The
Company" and "Reorganization".
(2) KatManDu-Philadelphia is only open from mid-April through mid-September
and, generally, has no revenues for the Company's first and fourth
calendar quarters. See "Risk Factors -- Quarterly Fluctuations in Results
of Operations; Seasonality" and "Management's Discussion and Analysis of
Financial Condition and Plan of Operation."
(3) The Company has issued an aggregate of 28,160 shares of Common Stock to
certain employees of the Company. Such shares may not be sold or
otherwise transferred prior to April 1, 2001 and are also subject to
forfeiture if the employee's employment with the Company is terminated.
For financial accounting purposes, compensation expense was charged in
the amount of $135,168 in the first quarter of 1996. See note 11(f) to
the Consolidated Financial Statements.
5
<PAGE>
(4) The Preefer Interests (as defined in note 7 below) are reflected as a
"minority interest" for all periods presented. The purchase of the
Preefer Interests has been reflected using the purchase method of
accounting. Of the total amount paid for the Preefer Interests in
settlement of the Preefer Litigation (as defined in note 7 below)
($225,000), $98,284 is being amortized over a 15 year period. See note 10
to the Consolidated Financial Statements.
(5) Weighted average number of shares outstanding for both historical and pro
forma amounts, gives effect to the Reorganization and the issuance of
110,784 shares in connection with the June 1996 Financing described in
note 7 below. See "Reorganization."
(6) Prior to the consummation of the Reorganization, the Company has not been
subject to income taxes since KIP is a partnership and Kat Corp., T-Kat
and Urban Renewal are S corporations. (T-Kat's election to be taxed as an
S corporation was effective as of January 1, 1996. However, T-Kat did not
have any income in 1995.) Upon consummation of the Reorganization, the
Company will be subject to federal corporate income taxes and
Pennsylvania and New Jersey corporate income taxes. Accordingly, pro
forma net income and pro forma net income per share for certain periods
presented reflects a provision for income taxes as if the Company had
been subject to federal and state income taxes. See "The Company" and
"Reorganization" and note 7 to the Consolidated Financial Statements.
(7) The Balance Sheet Data reflects (i) the proceeds from the sale by the
Company of its 10% promissory notes (the "June 1996 Financing Notes") in
the aggregate principal amount of $1.1 million in June 1996 (the "June
1996 Financing"); (ii) the repayment of certain liabilities to related
parties; (iii) the purchase of the interests of David Preefer and Karen
Zimmerman (the "Preefer Interests") in KIP, Kat Corp. and Chinatown
Convention Center Hotel Corporation ("Chinatown"), the corporate general
partner of KIP, in connection with the settlement of a lawsuit brought by
KIP, Chinatown, S. Lance Silver and Stuart N. Harting against David
Preefer and Kat Corp. (the "Preefer Litigation"); and (iv) a capital
contribution of approximately $321,700 by certain principal stockholders
of the Company, all of which occurred in June and July 1996. See
"Management Discussion and Analysis of Financial Condition and Plan of
Operation - Liquidity and Capital Resources" and "Certain Transactions."
(8) Adjusted to reflect (i) the sale of 1,350,000 Shares offered by the
Company hereby at an assumed initial public offering price of $6.00 per
Share and the initial application of the proceeds therefrom, after
deducting estimated expenses of this Offering, (ii) the deferred offering
expenses of approximately $975,764 relating to this Offering, (iii) the
repayment of approximately $780,000 of loans (including a portion of the
June 1996 Financing) and (iv) a charge to equity of $239,700 representing
original issue discount with respect to the June 1996 Financing Notes
which are being repaid out of the proceeds of this Offering. See
"Management Discussion and Analysis of Financial Condition and Plan of
Operation - Liquidity and Capital Resources" and "Certain Transactions."
6
<PAGE>
THE COMPANY
The Company was founded in 1990 as Kat Corp., and in 1991 as KIP. KIP
holds the lease for the premises occupied by KatManDu-Philadelphia and all of
the assets used in its business, and Kat Corp. holds the liquor license for
KatManDu-Philadelphia and operates KatManDu-Philadelphia. T-Kat Corp. was
organized in 1995 to develop, own and operate KatManDu-Trenton. Urban Renewal
was formed in 1996 to lease the site to be occupied by KatManDu-Trenton. In
March 1996, the Company was organized under the laws of the State of Delaware
to serve as a holding company for the ownership interests in Kat Corp., KIP,
T-Kat and Urban Renewal. Accordingly, the three entities are presented as
wholly-owned subsidiaries. See "Reorganization."
Unless the context otherwise requires, as used herein the "Company" refers
to KatManDu Entertainment Corp., its predecessors and affiliates.
REORGANIZATION
Immediately prior to the consummation of this Offering, Messrs. Silver and
Harting, as the sole stockholders of Kat Corp., T-Kat, Urban Renewal and
Chinatown, and as the trustees of the trusts which are the sole limited
partners of KIP, will transfer their ownership interests in those entities to
the Company in a tax-free exchange pursuant to which they will receive an
additional 671,716 shares of Common Stock of the Company. Immediately
thereafter, KIP and Chinatown will be liquidated and Kat Corp., T-Kat and
Urban Renewal will become wholly-owned subsidiaries of the Company with Kat
Corp. owning and operating KatManDu-Philadelphia and T-Kat owning and
operating KatManDu-Trenton (collectively, the "Reorganization"). In addition,
in a separate transaction Messrs. Silver and Harting will transfer an
aggregate of 66,666 shares of Common Stock which they own personally to
Cherry Associates ("Cherry") in connection with a personal obligation to
Cherry. See "Principal Stockholders."
7
<PAGE>
RISK FACTORS
An investment in the Shares offered hereby is speculative and involves a
high degree of risk. In addition to the other information contained in this
Prospectus, the following risk factors should be considered carefully in
evaluating the Company and its business before purchasing the Shares offered
hereby. Prospective investors should be in a position to risk the loss of
their entire investment. This Prospectus contains forward-looking information
which involve risks and uncertainties. The Company's actual results could
differ materially from those anticipated by such forward-looking information
as a result of various factors, including those set forth in the following
risk factors and elsewhere in this Prospectus.
Limited Operating History; Dependence Upon Offering; Financial
Condition. The Company opened KatManDu-Philadelphia in 1991. All historical
financial results for the Company are derived solely from
KatManDu-Philadelphia.
KatManDu-Philadelphia is operational from mid-April to mid-September only.
Accordingly, historically the Company has not generated any revenues in the
first and fourth quarters of each calendar year (including the quarter ending
immediately following the consummation of this Offering) and its cash
position is extremely limited and, generally, it has negative working capital
during such periods. As of December 31, 1994, December 31, 1995 and September
30, 1996, the Company had negative working capital of approximately $865,000,
$900,000 and $1,241,000, respectively. With respect to the negative working
capital as of September 30, 1996, $550,000 represents the aggregate principal
amount of the June 1996 Financing Notes which will be repaid out of the
proceeds of this Offering. The Company expects to incur a non-recurring,
non-cash interest charge of $239,700 in the fourth quarter of 1996
attributable to original issue discount relating to the repayment of the June
1996 Financing Notes having an aggregate principal balance of $550,000.
Finally, the Company was in default with respect to various obligations to
its principal shareholders and entities which they control in 1994 and 1995.
All of such loans have since been repaid.
The Company's ability to generate net income in the future will depend
upon the success of KatManDu-Philadelphia and the successful implementation
of the Company's expansion strategy. As the Company's cash requirements will
be significant, the Company is dependent on the proceeds of this Offering to
implement its expansion strategy. The Company presently believes that it will
cost approximately $3.75 million to develop and construct KatManDu-Trenton.
The Company estimates that the cost of developing and opening future
restaurant/nightclubs will range between $3.5 million and $5.0 million and
could be more in certain cities. The significant investment associated with
each new restaurant/nightclub may cause the operating results of the Company
to fluctuate significantly and adversely affect the profitability of the
Company. Poor operating results at any one of the Company's current or
planned restaurant/nightclubs or a delay in a planned opening of a
restaurant/nightclub could have a material adverse effect on the
profitability of the Company. There can be no assurance that the Company will
be able to achieve the significant revenue it requires to meet its operating
and other expenses. See "Use of Proceeds" and "Management's Discussion and
Analysis of Financial Condition and Plan of Operations."
Quarterly Fluctuations In Results of Operation; Seasonality. The
restaurant business in general is subject to seasonal fluctuations.
KatManDu-Philadelphia is only open from mid-April through mid-September. For
the rest of the year it has no revenues even though it has expenses.
Therefore, after consummation of this Offering, the Company will not generate
any revenues until the second quarter of 1997 when KatManDu-Trenton is
expected to become operational and the new season for KatManDu-Philadelphia
begins. Even then, there can be no assurance that KatManDu-Trenton will
generate sufficient revenues, if any, to cover the Company's expenses. In
addition, because it is outdoors, KatManDu-Philadelphia's results of
operations are directly affected by weather conditions. Rain and below normal
temperatures, particularly on weekends, such as was the case for the 1996
season, have had and, may in the future have, an adverse impact on
operations. KatManDu-Trenton will operate year-round, having separate, fully
equipped indoor and outdoor areas. Nevertheless, there can be no assurance
that its revenues will be consistent throughout the year, or that other
restaurant/nightclubs can be developed on a similar or more profitable basis.
Moreover, the Company's results of operations may also fluctuate from quarter
to quarter in the future as a result of the amount and timing of start-up
expenses and revenues contributed by new restaurant/nightclubs and the
integration of such new restaurant/nightclubs into the operations of the
Company as well as other factors. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations."
8
<PAGE>
Possible Need For Additional Financing; Financing Risks. The Company's
ability to execute its expansion plans depends on its ability to finance the
development of new restaurant/nightclubs. The capital resources required to
develop each new KatManDu restaurant/nightclub are significant. The Company
currently estimates the total cost of developing and opening a new KatManDu
restaurant/nightclub, including development costs, construction costs,
equipment, furniture, fixtures and pre-opening expenses, will range from $3.5
million to $5.0 million or more, depending upon location, site conditions,
construction costs and other relevant factors. The Company presently expects
that the estimated net proceeds from this Offering, together with cash flow
from operations and site specific financing (i.e., landlord contributions,
vendor financing, vendor advertising, equipment leases, leases, mortgage
financings) will be sufficient to complete the development of
KatManDu-Trenton and one additional KatManDu restaurant/nightclub (i.e.,
KatManDu-Baltimore) in 1997 and one or two additional restaurant/nightclubs
in 1998. However, there can be no assurance that the net proceeds of this
Offering, together with cash flow from operations and site specific financing
will be sufficient or will be available on such terms to enable the Company
to achieve its expansion goals. The Company may be required to seek other
forms of financing (including the sale of debt and equity securities) to
achieve its expansion goals. If the Company is unable to secure additional
sources of financing on terms and conditions acceptable to the Company or at
all, the Company's expansion strategy could be materially adversely affected.
See "Business -- Expansion Plans and Site Selection."
The Company plans to obtain site specific financing arrangements to fund,
in part, the cost of developing future restaurant/nightclubs. In addition,
the Company intends to develop each new restaurant/nightclub through a
separate subsidiary. Nevertheless, the Company may be required to give each
potential lender a lien on all of its assets rather than a security interest
only in the assets of the restaurant/nightclub which is being developed. To
the extent the Company's assets are mortgaged or otherwise used to secure
such financing, such financing will increase the risks associated with a
downturn in business which might result from new competition or an adverse
change in the economy and other factors which may negatively impact the
business. Among other factors, because the Company's obligations under
long-term leases will remain constant, decreases in revenues from sales
and/or increases in operating expenses from projected levels may result in a
substantial reduction in cash available to satisfy the Company's debt service
requirements. If the revenues from a particular restaurant/nightclub are
insufficient to service the Company's debt, its lease obligations or its
operating expenses, the Company will be required to seek additional funds
from other sources or suffer the risk of loss of some or all of its
restaurant/nightclubs. There can be no assurance that the Company will be
able to obtain such additional funds on terms acceptable to it. See
"Management's Discussion and Analysis of Financial Condition and Plan of
Operations."
The Company anticipates that the total cost to develop and construct
KatManDu-Trenton will be approximately $3.75 million. The Company has
obtained a $2.5 million construction loan (the "Construction Loan") from
Equity National Bank to fund the development of KatManDu-Trenton. The
Construction Loan is secured by the assets of T-Kat and a leasehold mortgage
on KatManDu-Trenton and will be guaranteed by the Company and by Messrs.
Silver and Harting personally. The New Jersey Economic Development Authority
(the "NJEDA") has passed a resolution approving the Company's application for
a $2.5 million loan (the "NJEDA Loan"), the proceeds of which will be used to
repay the Construction Loan. The NJEDA Loan will be funded upon completion of
KatManDu-Trenton and the issuance of a certificate of occupancy with respect
thereto. It is anticipated that $1 million of the NJEDA Loan will be provided
by one of the NJEDA's local development financing funds and $1.5 million will
be provided by a bank. The portion of the NJEDA Loan funded by the local
development fund will be for a term of 10 years and will bear interest at 5%
per annum. The portion of the NJEDA to be funded by the bank will be
guaranteed by the NJEDA to the extent of 90% of such proceeds and may not be
for a term in excess of 15 years. There can be no assurance that the Company
will have sufficient cash to make the requisite payments on the NJEDA Loan or
that it will be able to obtain other financing on acceptable terms, if at
all. If the Company is unable to make the requisite payments on the NJEDA
Loan, the lender may have the right to seize some or all of the Company's
assets.
Intellectual Property; Proprietary Marks. The Company's ability to
successfully implement its tropical island paradise theme will depend, in
part, upon its ability to continue to use and protect its proprietary marks.
The Company's inability or failure to establish its rights or to adequately
protect any of its intellectual property rights or its inability to continue
to use "KatManDu" on or in connection with its promotional merchandise, may
have a material adverse effect on the Company.
In 1992, the Company's trade name, KATMANDU(R), was registered as a
service mark for restaurant and nightclub services on the Principal Register
in the United States Patent and Trademark Office. The Company
9
<PAGE>
regards its KATMANDU(R) service mark as having substantial value and being
important in its marketing program. Accordingly, the Company intends to
protect its service mark by taking appropriate legal action whenever
necessary, although there can be no assurance that the Company will be able
to effectively enforce or protect its rights and prevent others from using
the same or similar marks. The Company is aware of local restaurants which
may be operating with trade names identical to or similar to "KatManDu", and
a nightclub operating as "Club Kat-Man-Du" on Hilton Head Island, South
Carolina. However, the Company is not aware of any use of the KatManDu
service mark by others for restaurant or nightclub services that could
materially affect its business.
The Company has been using its "KatManDu" logo in connection with the sale
of promotional merchandise, such as T-shirts, sweatshirts, caps, bags and
other novelty items, since inception even though "KATMANDU" is a registered
mark in the U.S. of another company for retail store services for the sale of
women's apparel and apparel accessories and "KATMANDO" is a registered mark
in the U.S. of another company for clothing. However, the Company has not to
date received any objection to its use of "KatManDu" in connection with
promotional merchandise or otherwise. The Company also believes that there
are other users of the term "KatManDu" or close variants thereof in
association with clothing other than the two U.S. registrants identified
above. Although there can be no assurance that one or more of the owners of
these prior marks or registrations will not object to the use of "KatManDu"
by the Company in connection with the sale of promotional merchandise, the
Company has been advised by its intellectual property counsel that, in the
opinion of such counsel, the Company's use of "KatManDu" on and with respect
to the sale of promotional merchandise sold at its restaurant/nightclubs
should not be found to infringe or otherwise violate the rights of any other
known entity including the owners of the KATMANDU and KATMANDO registrations
identified above. Nevertheless, the Company intends to modify its mark for
such promotional merchandise to include, for example, the descriptive words
"restaurant/nightclub" and the geographic location and also to include the
word ISLAND before KATMANDU to further reduce the risk of a claim of
infringement and to emphasize the promotional nature of such merchandise. In
addition, the Company may file an application to register and use "Island
KatManDu" as a mark for restaurant services and as a trademark for
promotional merchandise. The Company believes that the "Island KatManDu" mark
will further distinguish its services and goods. While promotional
merchandise sales now account for less than 3% of gross revenues, a
determination that the Company's use of its name and logo with respect to
sales of its promotional merchandise infringes or otherwise violates the
rights of other owners of "KATMANDU" and/or "KATMANDO" marks or registrations
may cause the Company to incur significant expense and may also have a
material adverse effect on the Company's growth prospects and cause the
Company to be enjoined against any further use of the term "KatManDu" on and
in connection with certain promotional merchandise. See "Business --
Intellectual Property Rights."
Long-Term, Non-cancelable Leases; Affiliated Transactions. The premises
occupied by KatManDu-Philadelphia are subject to a long-term, non-cancelable
lease which terminates on November 15, 2005 (the "Philadelphia Lease").
Currently, rent under the Philadelphia Lease is $50,000 per annum. Beginning
March 1, 1997, the annual base rent will be the greater of (i) $50,000
increased to reflect cost of living adjustments and (ii) 4% of the gross
income from KatManDu-Philadelphia. The lease for KatManDu-Trenton is for a
term of 30 years. The annual rent payable by T-Kat under such lease is an
amount equal to 2% of the gross revenues of KatManDu-Trenton with a minimum
payment of $50,000 and a maximum payment of $100,000, which amounts are
adjusted every three years to reflect increases in the consumer price index
for the Philadelphia/New Jersey region. In addition, T-Kat is obligated to
pay as additional rent all real estate taxes, assessments and utility charges
applicable to such premises. Any future restaurant/nightclubs developed by
the Company may be subject to similar long-term leases which may provide for
rent which is a percentage of revenues. If an existing or future
restaurant/nightclub does not perform at a profitable level, and the decision
is made to close such restaurant/nightclub, the Company will nonetheless be
committed to perform its obligations under the applicable lease. See
"Business -- Properties."
The Company leases the premises occupied by KatManDu-Philadelphia from
Pier 25 North Associates, a Pennsylvania limited partnership ("Pier 25
North"). The general partners of Pier 25 North are S. Lance Silver and Stuart
N. Harting, the principal stockholders and senior executives of the Company,
who each own 16.20% of Pier 25 North. In addition, the Company leases the
entire second deck of the restaurant ship, The Elizabeth, located immediately
adjacent to KatManDu-Philadelphia, for its executive offices, from Elizabeth
Restaurant Partners ("ERP"), a Pennsylvania limited partnership. The general
partner of ERP is Lizzy Management Corpo-
10
<PAGE>
ration, a Pennsylvania corporation, all of the stock of which is owned by
Messrs. Silver and Harting. The limited partners of ERP are the S. Lance
Silver Trust and the Stuart N. Harting Trust and Bruce Waugh, Executive Vice
President-Operations of the Company. T-Kat will lease the premises to be
occupied by KatManDu-Trenton from Urban Renewal which, in turn, leases such
premises from the Mercer County Improvement Authority. The terms of the lease
between Urban Renewal and T-Kat are identical to the terms of the lease
between Urban Renewal and the Mercer Country Improvement Authority. Upon
consummation of the Reorganization , Urban Renewal will be a wholly-owned
subsidiary of the Company. Finally, the Company is indebted to Messrs. Silver
and Harting to the extent of $65,000. See "Business -- Properties" and
"Certain Transactions."
There can be no assurance that the leases and loans with affiliated
persons described above are on terms no less favorable to the Company as
those that could have been obtained from unaffiliated third parties. In
addition, such relationships may create conflicting legal and business
obligations for Messrs. Silver and Harting with respect to the interpretation
and/or enforcement of the terms of such leases and loans. The Company has
adopted a policy that all future transactions with related parties must be
for valid business reasons, must be approved by a majority of the Company's
disinterested directors and must be on terms which are no less favorable to
the Company as those that could be obtained from unaffiliated third parties.
Potential Conflicts of Interest. One of the Company's Directors, David
Wallack, is the owner of a theme restaurant in Miami Beach, Florida, a
possible location for a future KatManDu restaurant/nightclub. Mr. Wallack
could potentially have a conflict of interest if the Company were to expand
into Miami. The Company has adopted a policy that all future transactions
with related parties must be for valid business reasons, must be approved by
a majority of the Company's disinterested directors and must be on terms
which are no less favorable to the Company as those that could be obtained
from unaffiliated third parties.
Expansion Risks. Future growth will depend on the Company's ability to
increase the number of its restaurant/nightclubs. The Company's ability to
successfully develop, open and operate new restaurant/nightclubs will largely
be dependent upon a variety of factors, some of which may be unknown or
beyond the Company's control, including customer acceptance of the KatManDu
theme in new geographic areas; the ability of the Company's management to
identify suitable sites and to purchase or negotiate leases for such sites;
timely and economic development and construction of restaurant/nightclubs;
timely approval from local governmental authorities; the hiring and training
of skilled management and other personnel; the availability of adequate
financing; and the general state of the economy. In addition, the Company
expects that the opening of additional restaurant/nightclubs will give rise
to additional expenses associated with managing restaurant/nightclubs located
in multiple markets. Such expenses include advertising in more than one
market; lease rates and construction costs that may be higher in markets
other than Philadelphia and Trenton; travel costs; and other similar
expenses. The likelihood of success of the Company must be considered in
light of the problems, expenses, difficulties, complications and delays
frequently encountered in connection with the establishment and/or expansion
of any new business. Accordingly, there can be no assurance that the Company
will be able to open new restaurant/nightclubs or that, if opened, such
restaurant/nightclubs can be operated profitably. Furthermore, to the extent
that the Company succeeds in opening additional restaurant/nightclubs, the
Company must manage the transition to multiple site operations, higher volume
operations, the control of overhead expenses, the addition of necessary
personnel, the maintenance of effective quality food and service controls and
the ability of the Company's management to apply a list of standardized
policies and procedures to a much larger number of restaurant/nightclubs. See
"Business -- Expansion Plans and Site Selection."
Acceptance of KatManDu Theme in New Markets. Although the Company intends
future restaurant/ nightclubs to have characteristics similar to
KatManDu-Philadelphia, the KatManDu prototype restaurant/nightclub is
evolving and a number of factors could change the tropical island paradise
theme as applied in different locations. These factors include demographic
and regional differences; traffic patterns; type of available floor space;
and the availability of specialty items and entertainment. Accordingly,
future restaurant/nightclubs could be larger or smaller than
KatManDu-Philadelphia, could vary in the mix of restaurant/nightclub
operations, and could have differences in the application of the tropical
island paradise theme. There can be no assurance that the Company will be
able to predict accurately or on a timely basis how to modify the KatManDu
prototype restaurant/nightclub to accommodate local tastes. Furthermore, the
success of any restaurant based on a particular theme is subject to shifting
consumer tastes and interests and there can
11
<PAGE>
be no assurance that the tropical island paradise theme will appeal in new
markets or that it will continue to have appeal in Philadelphia. Frequently,
restaurants, particularly theme-oriented restaurants, experience a decline of
revenue growth or of actual revenues as consumers tire of the related theme.
See "Business -- The KatManDu 'Tropical Island Paradise' Vacation Theme."
Availability of Sites. The Company's primary strategy is to develop new
restaurant/nightclubs on or near waterfront sites, although it will consider
other locations. Because of the relatively large size of each KatManDu
restaurant/nightclub and the Company's site selection criteria, the
availability of desirable locations may be limited and the Company may be
hindered in finding suitable locations for the development of new
restaurant/nightclubs. Additionally, the Company's ability to open additional
restaurant/nightclubs will depend upon a number of other factors including
the ability of the Company to negotiate leases on acceptable terms. See
"Business -- Expansion Plans and Site Selection."
Possible Development and Construction Delays. In connection with the
development and construction of the KatManDu restaurant/nightclubs, a number
of events over which the Company will have no control could occur which might
materially adversely affect the costs and completion time of such projects.
Such events include governmental regulatory approvals, shortages of or the
inability to obtain labor and/or materials, inability of the general
contractor or subcontractors to perform under their contracts, strikes,
adverse weather conditions and acts of God, availability and cost of needed
debt or lease financing, and changes in federal, state or local laws or
regulations. In addition, the Company will also be dependent on unaffiliated
third parties to complete the construction of a restaurant/nightclub.
Accordingly, there can be no assurance that the Company will be able to
complete any restaurant/nightclub in a timely manner or within its proposed
budget. See "Business -- Expansion Plans and Site Selection."
Interruption in Supplies. Although the Company will not be materially
dependent upon any one supplier, the Company will be dependent on frequent
deliveries of produce and food items. As a result, the Company is subject to
the risk of possible food shortages or interruptions in supply caused by
adverse weather or other conditions which could adversely affect the
availability and cost of such items. See "Business -- Purchasing."
Competition. The restaurant business is highly competitive and, as a
result, there is a high failure rate. Competition is based primarily upon
price, service, food quality (including taste, freshness, healthfulness and
nutritional value) and location. Success or failure in both the restaurant
and entertainment industries is also generally affected by changes in
consumer preferences, national, regional and local economic conditions and
demographic changes. Also, factors such as inflation, increased food, labor
and employee benefit costs, and the availability of experienced management
and hourly employees may also adversely affect the restaurant and
entertainment industries in general and the Company's restaurant/nightclubs
in particular. Restaurant operating costs are further affected by increases
in the minimum hourly wage, unemployment tax rates and similar matters over
which the Company has no control.
The Company will compete on a general basis with a large variety of
national and regional restaurant operations, as well as locally owned
restaurants, diners, and other moderately priced, full service, casual dining
establishments and with other entertainment venues, such as nightclubs, bars
and dance clubs. There are numerous well established competitors, including
national, regional and local restaurant chains, such as TGI Friday's(R),
Bennigan's(R) and The Cheesecake Factory(R), possessing substantially greater
financial, marketing, personnel and other resources than the Company.
The Company will also compete with other theme restaurants in the highly
competitive and developing theme restaurant market. Many of the Company's
competitors in the theme restaurant industry have substantially greater
financial resources and longer operating histories than the Company,
including competitors already established in regions into which the Company
is planning to expand, as well as competitors planning to expand in the same
regions. Such competitors include Hard Rock Cafe(R), Planet
Hollywood(R),House of Blues(R), Motown Cafe(R) and Rainforest Cafe(R). Theme
restaurants, such as KatManDu-Philadelphia, are more susceptible to shifts in
consumer preferences. Additionally, other restaurants and companies could
utilize the tropical island paradise or a similar theme (e.g., Rainforest
Cafe(R), Chart House(R)). There can be no assurance that the Company will be
able to respond to various competitive factors affecting the restaurant
industries. See "Business -- Competition."
12
<PAGE>
Control By Existing Management. Upon completion of this Offering, Messrs.
Silver and Harting will own and/or control an aggregate of 705,050 shares of
Common Stock. Such stock represents approximately 30% of the voting power of the
Common Stock (27.6% assuming the Over-Allotment Option is exercised). Pursuant
to a shareholder's agreement, Messrs. Silver and Harting have the right to vote
an additional 5% of the voting power of the Company's Common Stock. (4.6% of the
Over-Allotment Option is exercised in full). Accordingly, Messrs. Silver and
Harting will be able to substantially control the Company's affairs, including,
without limitation, the sale of equity or debt securities of the Company, the
election of directors, the appointment of officers, the determination of
officers' salaries and the approval of significant corporate transactions (such
as acquisitions of the Company or its assets).
Government Regulation. The Company's business is subject to various
federal, state and local government regulations relating to the development
and operation of restaurants, bars and clubs, including those relating to
building and zoning requirements and the preparation and sale of food and
alcoholic beverages. While the Company has not yet experienced an inability
to obtain or maintain any necessary governmental licenses, permits or
approvals, the failure to obtain or maintain food and liquor licenses could
have a material adverse effect on the Company's operating results.
Difficulties or failures in obtaining required licenses and approvals will
result in delays or cancellations of the opening of new
restaurant/nightclubs. The food and liquor licenses are also subject to
suspension or non-renewal if the granting authority determines that the
conduct of the holder does not meet the standards for initial grant or
renewal. Although the Company has satisfied restaurant and liquor licensing
requirements for KatManDu-Philadelphia and KatManDu-Trenton, no assurance can
be given that the Company will be able to maintain existing approvals or
obtain such further approvals at other locations.
The Federal Americans With Disabilities Act (the "Disabilities Act")
prohibits discrimination on the basis of disability in public accommodations
and employment. Although KatManDu-Philadelphia and KatManDu-Trenton are
designed to satisfy the requirements of the Disabilities Act, no assurance
can be given that the Company will not be required to make modifications to
its restaurant/nightclubs to comply with current and/or future laws, rules
and regulations relating to accommodations for the disabled. See "Business --
Regulation."
Potential "Dram Shop" Liability. Restaurants in most states are subject to
"dram shop" laws and legislation, which impose liability on licensed
alcoholic beverage servers for injuries or damages caused by their negligent
service of alcoholic beverages to a visibly intoxicated person or to a minor,
if such service is the proximate cause of the injury or damage and such
injury or damage is reasonably foreseeable. While the Company maintains
liquor liability insurance as part of its comprehensive general liability
insurance which management believes is adequate to protect against such
liability, there can be no assurance that the Company will not be subject to
a judgment in excess of such insurance coverage or that it will be able to
continue to maintain such insurance coverage at reasonable costs or at all.
The imposition of a judgment substantially in excess of the Company's
insurance coverage would have a material adverse effect on the Company.
Similarly, the failure of the Company to obtain and maintain insurance
coverage could also materially and adversely affect the Company. See
"Business -- Regulation."
Insurance. Although the Company will carry general liability and
commercial insurance, liquor insurance, property insurance and workers
compensation insurance, there can be no assurance that this insurance will be
adequate to protect the Company against any liability claims. Any claim that
is not covered by one of such policies or is in excess of the limits of
liability of the relevant policy would have a material adverse effect on the
financial condition of the Company. In addition there can be no assurance
that the Company will be able to maintain its insurance on reasonable terms.
See "Business -- Insurance."
Dependence on Key Personnel. The Company's success is dependent upon the
personal efforts and abilities of the Company's senior corporate management,
particularly S. Lance Silver, Chief Executive Officer and Co-President, and
Stuart N. Harting, Co-President and Secretary. The loss of the services of
either of these individuals could have a substantial adverse effect on the
Company. The Company has entered into three year employment agreements with
each of Messrs. Silver and Harting commencing on the Effective Date and has
agreed to obtain "key-man" life insurance policies on the lives of Messrs.
Silver and Harting in the amount of $1 million each prior to the consummation
of this Offering. The success of the Company will also depend upon the
ability to attract and retain a highly qualified additional corporate and
unit level management teams. The failure to obtain, or delays in obtaining,
other key employees could have a material adverse effect on the Company. See
"Management."
13
<PAGE>
Substantial Dilution. Purchasers of the Common Stock offered hereby will
experience immediate and substantial dilution in net tangible book value of
$3.59 per share of Common Stock from the initial public offering price or
approximately 60%. See "Dilution."
Absence of Dividends. The Company does not expect to pay cash or stock
dividends on its Common Stock in the foreseeable future. To the extent, the
Company has earnings in the future, it intends to retain such earnings in the
business operations of the Company. In 1994 and 1995, respectively, the
Company made cash distributions of $485,000 and $400,000 even though its
profits in such years were approximately $204,500 and $245,000. In addition,
in June 1996, the Company repaid loans due to affiliates of Messrs. Silver
and Harting of approximately $368,000. Messrs. Silver and Harting immediately
recontributed their share of such loan proceeds, $321,000, to the Company.
See "Dividend Policy."
Broad Discretion In Application of Proceeds. Approximately $4.15 million
(63.8%) of the estimated net proceeds from this Offering has been allocated
to expansion and $1.28 million (19.7%) to working capital. Accordingly, the
Company will have broad discretion as to the application of such proceeds.
Pending the use of proceeds as described above, the net proceeds will be
invested in short-term, interest bearing, investment grade government
securities. See "Use of Proceeds" and "Certain Transactions."
Substantial Use of Proceeds for Repayment of Debt and Other Pre-Existing
Obligations and to Benefit Related Parties. The Company intends to use
approximately $780,000 (12%) of the estimated net proceeds of this Offering
to repay indebtedness (including accrued interest thereon) and satisfy
pre-existing obligations of the Company and, therefore, such funds will be
unavailable to fund future growth. Included in the indebtedness to be repaid
are June 1996 Financing Notes having an aggregate principal amount of
$550,000, $125,000 payable to 1809 Chestnut Associates ("1809 Chestnut"), an
affiliate of Messrs. Silver and Harting, and $105,000 payable to Cherry. In
addition, the Company intends to use approximately $220,000 (3.4%) of the
estimated net proceeds of this Offering to pay back taxes owed by the
Company. In the event the Company does not pay such taxes, Messrs. Silver and
Harting may have personal liability for all or a portion of such taxes. See
"Use of Proceeds" and "Certain Transactions."
Limitation of Director Liability. The Company's Certificate of
Incorporation provides that a director of the Company will not be personally
liable to the Company or its stockholders for monetary damages for breach of
the fiduciary duty of care as a director, including breaches which constitute
gross negligence, subject to certain limitations imposed by the Delaware
General Corporation Law (the "DGCL"). Thus, under certain circumstances,
neither the Company nor the stockholders will be able to recover damages even
if directors take actions which harm the Company. See "Management --
Indemnification of Directors and Officers and Related Matters."
Lack of Public Market; Nasdaq; Maintenance Requirement; Determination of
Offering Price; Volatility of Prices of the Securities. Prior to this Offering,
there has been no public market for the Common Stock. Although the Company has
applied for listing of the Common Stock on the Nasdaq SmallCap Market under the
symbol KATX, there can be no assurance that it will be quoted on such system or
under such symbol or that an active public market for the Common Stock will be
developed or be sustained after this Offering. Nasdaq has recently proposed new
maintenance criteria which, if implemented, would require among other things, $2
million in net tangible assets, $1 million market value of the public float and
adherence to certain corporate governance provisions. The failure to meet these
maintenance criteria in the future may result in a delising of the Common Stock
from Nasdaq. The offering price of the Shares offered hereby has been
arbitrarily determined by negotiations between the Company and the
Representative and bears no relationship to the Company's current earnings, book
value, net worth or financial statement criteria of value. The factors
considered in determining the offering price included an evaluation by
management and the Representative of the history of and prospects for the
industry in which the Company competes and the prospects for earnings of the
Company. Furthermore, the trading prices of the Common Stock could be subject to
wide fluctuations in response to variations in the Company's operating results,
announcements by the Company or others, developments affecting the Company or
its competitors, suppliers or customers and other events or factors. In
addition, the stock market has experienced extreme price and volume fluctuations
in recent years. These fluctuations have had a substantial impact on the market
prices of many companies, often unrelated to their performance, and may
adversely affect the market prices for the Common Stock. See "Underwriting."
Delaware Anti-Takeover Statute; Issuance of Preferred Stock; Barriers to
Takeover. The Company is a Delaware corporation and, thus, upon the
consummation of this offering, will become subject to the prohibitions
imposed by Section 203 of the DGCL, which is generally viewed as an
anti-takeover statute. In general, this statute will prohibit the Company,
once public, from entering into certain business combinations without the
14
<PAGE>
approval of its Board of Directors and, as such, could prohibit or delay
mergers or other attempted takeovers or changes in control with respect to
the Company. Such provisions may discourage attempts to acquire the Company.
In addition, the Company's authorized capital consists of 30,000,000 shares
of capital stock of which 25,000,000 shares are designated as Common Stock
and 5,000,000 shares are designated as Preferred Stock. No class other than
the Common Stock is currently designated and there is no current plan to
designate or issue any such securities. The Board of Directors, without any
action by the Company's shareholders, is authorized to designate and issue
shares in such classes or series (including classes or series of Preferred
Stock) as it deems appropriate and to establish the rights, preferences and
privileges of such shares, including dividends, liquidation and voting
rights. The rights of holders of Preferred Stock and other classes of common
stock that may be issued may be superior to the rights granted to the holders
of the existing Common Stock. Further, the ability of the Board of Directors
to designate and issue such undesignated shares could impede or deter an
unsolicited tender offer or takeover proposal regarding the Company and the
issuance of additional shares having preferential rights could adversely
affect the voting power and other rights of holders of Common Stock. Issuance
of Preferred Stock, which may be accomplished though a public offering or a
private placement to parties favorable to current management, may dilute the
voting power of holders of Common Stock (such as by issuing Preferred Stock
with super voting rights) and may render more difficult the removal of
current management, even if such removal may be in the stockholders' best
interests. Any such issuance of Preferred Stock could prevent the holders of
Common Stock from realizing a premium on their shares. See "Description of
Securities -- Preferred Stock" and "Risk Factors -- Control by Existing
Management."
Potential Adverse Impact on Market Price of Securities; Shares Eligible
for Future Sale. Sales of substantial amounts of the Company's securities in
the public market after this Offering or the perception that such sales may
occur could materially adversely affect the market price of the Common Stock
and may impair the Company's ability to raise additional capital by the sale
of its equity securities. Of the 2,350,000 shares of Common Stock to be
outstanding upon completion of this Offering, the 1,350,000 Shares offered
hereby (1,552,500 if the Over-Allotment Option is exercised in full) will be
immediately freely tradable without restriction under the Securities Act of
1933, as amended (the "Securities Act") except for any Securities purchased
by an "affiliate" of the Company (as that term is defined under the rules and
regulations of the Securities Act), which will be subject to the resale
limitations of Rule 144 under the Securities Act. The remaining 1,000,000
Common Stock outstanding prior to consummation of this Offering are
"restricted" securities within the meaning of Rule 144 under the Securities
Act and may be sold under the conditions of such rule, including satisfaction
of certain holding period requirements. Except as otherwise provided herein,
all officers and directors and stockholders of the Company have executed
agreements ("Lock-Up Agreements") pursuant to which they have agreed not to,
directly or indirectly, issue, offer, agree to sell, sell or grant an option
for the purchase or sale of, transfer, pledge, assign, hypothecate,
distribute or otherwise dispose of or encumber any shares of Common Stock or
options, rights, warrants or other securities convertible into, exchangeable
or exercisable for or evidencing any right to purchase or subscribe for
shares of Common Stock (whether or not beneficially owned by such person) or
any beneficial interest therein for a period of 24 months from the date of
this Prospectus; provided however, after the expiration of the first 12
months of such 24 month period, the Representative may release any such
holder from his or her Lock-Up Agreement . Holders of 177,450 shares of
Common Stock, including the holders of the June 1996 Financing Notes, have
executed firm Lock-Up Agreements, which will terminate after 12 months. In
connection, therewith, the Company has granted a demand registration right,
exercisable one year from the date of this Prospectus, with respect to
137,500 shares of Common Stock. Accordingly, taking into consideration the
restrictions of Rule 144 and the Lock-Up Agreements, 177,450 of the
restricted shares of Common Stock will become eligible for sale beginning in
__________ 1997 and 822,550 of the restricted shares will become eligible for
sale beginning in __________ 1998. In addition, upon completion of this
Offering, options to purchase an aggregate of 50,000 shares of Common Stock
will have been granted. Such shares will also be subject to a Lock-Up
Agreement providing for a 24 month lock-up period. It is not known what
effect, if any, future sales of additional securities or the availability of
such securities for sale will have on the market price of the Common Stock
prevailing from time to time. Nevertheless, the sale or availability for sale
of significant quantities of securities could materially adversely affect the
market price of the Common Stock. See "Shares Eligible for Future Sale."
For a period of 12 months from the date of this Prospectus, the Company
has agreed that it will not sell or otherwise dispose of any securities without
the prior written consent of the Representative, which consent shall not be
unreasonably
15
<PAGE>
withheld. In addition, for a period of 24 months after the date of this
Prospectus, the Company will not issue or sell any securities pursuant to
Regulation S under the Securities Act without the prior written consent of
the Representative. See "Underwriting" and "Shares Eligible for Future Sale."
Representative's Potential Influence on the Market. A significant number
of the Shares offered hereby may be sold to customers of the Representative.
Such customers may engage in transactions for the sale or purchase of such
Shares through or with the Representative. Although it has no obligation to
do so, the Representative intends to make a market in the Common Stock and
may otherwise effect transactions in such securities. If it participates in
such market, the Representative may influence the market, if one develops,
for the Common Stock. Such market-making activity may be discontinued at any
time. Moreover, if the Representative sells the Common Stock issuable upon
exercise of the Representative's Warrants (as defined) it may be required
under the Securities Exchange Act of 1934, as amended (the "Exchange Act"),
to temporarily suspend its market-making activities. The prices and
liquidity of the Common Stock may be significantly affected by the degree, it
any, of the Representative's participation in such market. See
"Underwriting."
"Penny Stock" Regulations May Impose Certain Restrictions on Marketability
of Securities. The Securities and Exchange Commission (the "Commission") has
adopted regulations which generally define "penny stock" to be any equity
security that has a market price (as defined) of less than $5.00 per share,
subject to certain exceptions. In the event of authorization of the Shares
offered hereby for quotation on the Nasdaq SmallCap Market, such securities
will initially be exempt from the definition of "penny stock." If the Shares
offered hereby are removed from listing on the Nasdaq SmallCap Market at any
time following the date of this Prospectus, such Shares may become subject to
rules that impose additional sales practice requirements on broker-dealers
who sell such Shares to persons other than established and accredited
investors (generally, those persons with assets in excess of $1,000,000 or
annual income exceeding $200,000 or $300,000 together with their spouse). For
transactions covered by these rules, the broker-dealer must make a special
suitability determination for the purchase. Additionally, for any transaction
involving a "penny stock", unless exempt, the rules require the delivery,
prior to the transaction, of a risk disclosure document mandated by the
Commission relating to the penny stock market. The broker-dealer also must
disclose the commission payable to both the broker-dealer and the registered
representative, current quotations for the securities and, if the
broker-dealer and the registered representative, current quotations for the
securities and, if the broker-dealer is the sole market-market. Finally,
monthly statements must be sent disclosing recent price information for the
"penny stock" held in the account and information on the limited market in
"penny stocks." Consequently, the "penny stock" rules may restrict the
ability of broker-dealers to sell the Common Stock and may affect the ability
of purchasers in the Offering to sell shares of Common Stock in the secondary
market.
In the event that the Company were not able to qualify the Shares for
listing on the Nasdaq SmallCap Market, the Company would attempt to have the
shares traded in over-the-counter market via the Electronic Bulletin Board or
the "pink sheets." In such event, holders of Common Stock may encounter
substantially greater difficulty in disposing of their shares and/or in
obtaining accurate quotations as to the prices of the shares.
Administrative Proceedings Involving Representative. On July 16, 1996, the
National Association of Securities Dealers, Inc. ("NASD") issued a notice of
Acceptance, Waiver, and Consent (the "AWC") whereby the Representative was
censured and ordered to pay fines and restitution to retail customers in the
amount of $250,000 and approximately $1.025 million, respectively. The AWC
was issued in connection with the claims by the NASD that the Representative
charged excessive markups and markdowns in connection with the trading of
four certain securities originally underwritten by the Representative. The
activities in question occurred during the periods between December 1990 and
October 1993. The Representative has informed the Company that the fines and
refunds will not have a material adverse effect on the Representative's
operations and that the Representative has effected remedial measures to help
ensure that the subject conduct does not recur. As of the date of this
Prospectus, all fines and restitution associated with such activities have
been paid. In the event that the foregoing activities materially adversely
affect the Representative's ability to act as a market maker for the Common
Stock, and other market makers do not continue to make a market in the Common
Stock, a market for and liquidity of the said shares may be adversely
affected. See "Underwriting."
Risks Associated with Forward-Looking Statements Included in this
Prospectus. This Prospectus contains certain forward-looking statements
regarding the plans and objectives of management for future operations,
16
<PAGE>
including plans and objectives relating to the development of KatManDu-Trenton
and other KatManDu restaurant/nightclubs. The forward-looking statements
included herein are based on current expectations that involve numerous risks
and uncertainties. The Company's plans and objectives are based on favorable
weather conditions for its outdoor restaurants, assumptions that the Company's
tropical island paradise theme will be accepted in markets outside Philadelphia,
that competitive conditions within the theme restaurant and entertainment
industries will not change materially or adversely and that there will be no
unanticipated material adverse change in the Company's operations or business.
Assumptions relating to the foregoing involve judgments with respect to, among
other things, future economic, competitive and market conditions and future
business decisions, all of which are difficult or impossible to predict
accurately and many of which are beyond the control of the Company. Although the
Company believes that its assumptions underlying the forward-looking statements
are reasonable, any of the assumptions could prove inaccurate and, therefore,
there can be no assurance that the forward-looking statements included in this
Prospectus will prove to be accurate. In light of the significant uncertainties
inherent in the forward-looking statements included herein particularly in view
of the Company's early stage operations, the inclusion of such information
should not be regarded as a representation by the Company or any other person
that the objectives and plans of the Company will be achieved.
17
<PAGE>
USE OF PROCEEDS
The net proceeds to the Company from the sale of the Shares offered
hereby, after deducting underwriting discounts and commissions and estimated
offering expenses, are estimated to be approximately $6.5 million (or
approximately $7.5 million if the Over-Allotment Option is exercised in
full). The Company intends to apply the net proceeds approximately as
follows:
<TABLE>
<CAPTION>
Amount Percentage
------------ ------------
<S> <C> <C>
Development of KatManDu restaurant/nightclubs:
Additional 2-3 KatManDu restaurant/nightclubs $3,398,000 52.3%
KatManDu-Trenton ............................ 750,000 11.5%
Repayment of Debt:
June 1996 Financing ......................... 550,000 8.5%
Loans from Affiliates ....................... 125,000 1.9%
Loans from Non-Affiliates ................... 105,000 1.6%
Payment of Delinquent Taxes ................... 220,000 3.4%
Consulting Fee Due Representative ............. 72,000 1.1%
Working Capital ............................... 1,280,000 19.7%
------------ ------------
Total ..................................... $6,500,000 100.0%
============ ============
</TABLE>
In addition to KatManDu-Trenton, the Company plans to develop one
additional restaurant/nightclub in 1997 (i.e., KatManDu-Baltimore) and one or
two more in 1998. Based on current estimates of the cost of developing a
KatManDu restaurant/nightclub and the Company's site selection criteria, the
Company is allocating approximately $3.4 million to the development of such
restaurant/nightclubs. In addition to the proceeds of this Offering, each new
KatManDu restaurant/nightclub will be financed out of cash flow from
operations and other forms of site specific financing, such as mortgages,
landlord concessions, vendor advertising and financing and equipment leases.
The Company estimates that the costs of developing and opening a new
restaurant/nightclub will range from $3.5 million to $5.0 million or more,
depending upon location, site conditions, construction costs, site specific
financing and size and type of the restaurant/nightclub. The total estimated
cost of developing a new KatManDu restaurant/nightclub includes all costs
relative to constructing, developing and opening a new restaurant/nightclub,
including but not limited to architectural and design fees, permit costs,
engineering costs, construction costs, initial food, liquor and merchandise
inventory, furniture and fixtures, initial staffing and employee training
costs, ground breaking and grand opening costs, and initial marketing and
promotional costs. The Company expects that it will incur approximately
$650,000 in preopening and related costs (including professional fees,
licenses, and working capital) and $750,000 of inventory, fixtures and
equipment in connection with the opening of each restaurant/nightclub. The
Company may also utilize certain of the net proceeds to acquire and develop
restaurant operations with formats and concepts complementary to those of the
Company or to acquire existing restaurants for conversion to the Company's
existing concepts. The Company does not presently have any agreements,
commitments, plans or understandings concerning any specific acquisition.
The Company has commenced the development of KatManDu-Trenton, which is
scheduled to open in the second quarter of 1997. The Company is allocating
approximately $750,000 of the net proceeds of this Offering to complete the
development of KatManDu-Trenton. The Company currently estimates that the
total cost of developing and opening KatManDu-Trenton, including development
costs, construction costs, equipment, furniture, fixtures and pre-opening
expenses, will be approximately $3.75 million, which will be financed in
part, by the Construction Loan. The Construction Loan will be secured by the
assets of T-Kat, a leasehold mortgage and will be guaranteed by the Company
and Messrs. Silver and Harting personally. The balance of the development
costs, approximately $1.25 million, will be paid by the Company. The Company
has already incurred approximately $540,000 of such expenses, of which
approximately $490,000 has been paid. Of such amount, approximately $400,000
has been paid out of the proceeds of the June 1996 Financing and the balance
was paid from the Company's cash flow from operations. Upon completion of
KatManDu-Trenton and the issuance of a certificate of occupancy with respect
thereto, the Construction Loan will be repaid with the proceeds of the NJEDA
Loan. No assurance can be given that KatManDu-Trenton will be successfully
developed or that it will be developed at such costs.
18
<PAGE>
The Company will use $550,000 of the net proceeds from this Offering to
repay the portion of the June 1996 Financing due upon the consummation of
this Offering. The balance of the June 1996 Financing is due one year from
the date of this Offering. The proceeds of the June 1996 Financing, $1.1
million in the aggregate, were used to purchase the Preefer Interests in
connection with the settlement of the Preefer Litigation and to pay certain
obligations and expenses of the Company, including expenses relating to this
Offering. In addition, the Company has used approximately $400,000 of such
proceeds to pay expenses relating to the development of KatManDu-Trenton.
The Company will use approximately $125,000 of the net proceeds of this
Offering to repay a short-term loan borrowed from 1809 Chestnut and
approximately $105,000 to repay a short-term borrowing from Cherry, incurred
in April 1996. The proceeds of such loans were used to pay preopening
expenses relating to the 1996 season of KatManDu-Philadelphia.
The Company will use approximately $220,000 of the net proceeds of this
Offering to pay delinquent taxes owed to the City of Philadelphia and the
State of Pennsylvania.
The Company has agreed to pay the Representative $72,000 out of the net
proceeds of this Offering in consideration for advisory and consulting
services to be provided by the Representative during the one year period
following this Offering.
Working capital includes funds to be used for funding the anticipated
increase in inventories, for general and administration expenses, and for
other general corporate purposes.
The Company believes that the estimated net proceeds to be received by the
Company from this Offering, together with revenue from operations, will be
sufficient to meet the Company's cash requirements for a period of at least
12 months following the date of this Prospectus, including the further
development and completion of KatManDu-Trenton and the opening of at least
one additional restaurant/nightclub (i.e., KatManDu-Baltimore). Thereafter,
if the Company has insufficient funds for its needs, it may be required to
seek additional funds from other sources. There can be no assurance that
additional funds can be obtained on acceptable terms, if at all. If necessary
funds are not available, the Company's business would be materially adversely
affected.
The foregoing represents the Company's best estimate of its expected use
of the net proceeds of this Offering. The amounts actually expended for
certain purposes described above may vary significantly depending on numerous
factors, including but not limited to, the development of KatManDu-Trenton.
The Company reserves the right to reallocate among the foregoing uses.
Any proceeds from the exercise of the Over-Allotment Option, will be added
to working capital.
19
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company as of
September 30, 1996 (i) on an actual basis giving effect to the Reorganization
and (ii) as adjusted, to give effect to the receipt of the estimated net
proceeds from the sale by the Company of the Shares offered hereby and the
initial application thereof and the recognition of unamortized original issue
discount of approximately $239,700 related to the portion of the June 1996
Financing being repaid out of the net proceeds of this Offering. The table
should be read in conjunction with the Consolidated Financial Statements and
notes thereto appearing elsewhere in this Prospectus.
<TABLE>
<CAPTION>
September 30, 1996
-----------------------------
Actual(2) As Adjusted(3)
----------- --------------
(Unaudited)
<S> <C> <C>
Short term debt:
Loan Payable -- June 1996 Financing Notes $ 550,000 $ --
Loan Payable to related party ........... 125,000 --
Loan Payable -- other ................... 104,969 --
----------- --------------
Total short-term debt ................... $ 779,969 $ --
=========== ==============
Long term debt:
Loan Payable -- June 1996 Financing Notes $ 550,000 $ 550,000
Stockholders' equity (deficit):
Preferred Stock, par value $.001;
5,000,000 shares authorized; no shares
issued and outstanding ................ $ -- $ --
Common Stock, par value $.001;
25,000,000 shares authorized; 1,000,000
shares issued and outstanding --
actual; 2,350,000 shares issued and
outstanding -- as adjusted(1) ......... 1,000 2,350
Additional paid-in capital .............. 1,572,403 6,855,589
Accumulated deficit ..................... (634,895) (634,895)
----------- --------------
Total stockholders' equity .............. 958,508 6,223,043
----------- --------------
Total capitalization .................... 1,508,508 6,773,043
=========== ==============
</TABLE>
- ------
(1) Excludes (i) 500,000 shares of Common Stock reserved for issuance under
the Company's 1996 Stock Option Plan of which 50,000 shares are issuable
upon exercise of outstanding options granted to certain officers,
employees, directors of and consultants to the Company, at an exercise
price equal to the initial public offering price per Share, and (ii)
135,000 shares of Common Stock issuable upon exercise of the
Representative's Warrant. See "Management" and "Principal Stockholders"
and "Underwriting."
(2) Includes (i) the proceeds from the June 1996 Financing and the issuance
of 110,784 shares of Common Stock in connection therewith; (ii) the
repayment of certain liabilities to related parties; (iii) the purchase
of the Preefer Interests in connection with the settlement of the Preefer
Litigation; and (iv) a capital contribution to the Company of
approximately $321,700 by certain principal stockholders of the Company,
all of which occurred in June and July 1996. See "Management Discussion
and Analysis of Financial Condition and Plan of Operation -- Liquidity
and Capital Resources" and "Certain Transactions."
(3) Adjusted to reflect (i) the receipt of the estimated net proceeds from
the sale of 1,350,000 Shares pursuant to this Offering at an assumed
price of $6.00 per Share; (ii) the deferred offering expenses of
approximately $975,764 relating to this Offering; (iii) the repayment of
approximately $780,000 of loans including the repayment $550,000
principal amount of the June 1996 Financing Notes; and (iv) the related
charge to equity of $239,700 representing original issue discount
attributable to the shares issued with respect to the June 1996 Financing
Notes which are being repaid out of the proceeds of this Offering.
20
<PAGE>
DILUTION
The negative net tangible book value of the Common Stock at September 30,
1996 was approximately $829,608 or $.83 per share. Net tangible book value
per share equals the Company's total stockholders' equity, less the Company's
intangible assets of $1,768,116, divided by the number of shares of Common
Stock outstanding. After giving effect to the sale by the Company of the
Shares offered hereby (and after deducting the underwriting discount and the
estimated offering expenses and assumes the Over-Allotment Option is not
exercised), the pro forma net tangible book value at September 30, 1996 would
have been $5,670,392, or $2.41 per share. This represents an immediate
increase in pro forma net tangible book value of $3.24 per share to current
stockholders and an immediate dilution of $3.59 (approximately 60%) per share
to new investors purchasing Shares in this Offering. Dilution is determined
by subtracting (i) pro forma net tangible book value per share after this
Offering from (ii) the amount of cash paid by a new investor for a Share of
Common Stock. The following table illustrates the per Share dilution:
<TABLE>
<CAPTION>
<S> <C> <C>
Initial public offering price of one Share ........................ $6.00
Net tangible book value per share before this Offering(1) .... ($ .83)
Increase per share attributable to new investors ............. $3.24
--------
Pro forma net tangible book value per share after this Offering (2) $2.41
-------
Dilution per Share to new investors ............................... $3.59
=======
</TABLE>
- ------
(1) Net tangible book value reflects receipt of the proceeds of the June 1996
Financing and the related issuance of 110,784 shares of Common Stock in
connection therewith. In addition, it reflects (i) the purchase of the
Preefer Interests in connection with the settlement of the Preefer
Litigation, (ii) the payment of related party loans and (iii) receipt of
a capital contribution from certain principal stockholders. See "Certain
Transactions" and "Management's Discussion and Analysis of Financial
Condition and Plan of Operation -- Liquidity and Capital Resources."
Finally, net tangible book value includes architectural, engineering and
other construction costs of approximately $540,000 incurred in connection
with the tenant improvements made to the KatManDu-Trenton
restaurant/nightclub site.
(2) If the Over-Allotment Option is exercised in full, the net tangible book
value would be $6,727,442 and dilution per Share to new investors would
be $2.64 (44%). The above table assumes no exercise of outstanding
options or warrants.
The following table sets forth as of September 30, 1996, the number and
percentage of shares purchased, and the amount and percentage of cash and
other consideration paid by existing stockholders for shares of Common Stock
purchased from the Company and by new investors (before deduction of the
underwriting discount and other estimated offering expenses):
<TABLE>
<CAPTION>
Total Cash and Other
Shares Purchased Consideration
------------------------ -------------------------
Price
Number Percent Amount Percent Per Share
----------- --------- ------------ --------- -----------
<S> <C> <C> <C> <C> <C>
Existing Stockholders(1) 1,000,000 42.55% $1,573,403 16% $1.57
Public Investors ........ 1,350,000 57.45% $8,100,000 84% $6.00
----------- --------- ------------ --------- -----------
Total .............. 2,350,000 100.00% $9,673,403 100%
</TABLE>
- ------
(1) Includes a capital contribution of approximately $321,700 made by certain
stockholders in June and July 1996 and original issue discount of
approximately $664,700 attributable to the issuance of 110,784 shares of
Common Stock in connection with the June 1996 Financing.
21
<PAGE>
DIVIDEND POLICY
Historically, the Company has distributed all of its profits to its
shareholders. For the years ended December 31, 1995 and 1994 such
distribution amounted to, approximately, $456,000 and $400,000, in the
aggregate, respectively. Through September 30, 1996, the Company has
distributed approximately $358,000, in the aggregate, to its shareholders.
The Board of Directors does not intend to pay out any cash dividends on
the Company's Common Stock in the foreseeable future. The Board of Directors
presently intends to retain all earnings, if any, to finance the development
and opening of additional restaurant/nightclubs. The payment of dividends in
the future, if any, will be at the discretion of the Board of Directors and
will depend upon such factors as earnings levels, capital requirements, the
Company's financial condition and other factors deemed relevant by the Board
of Directors.
22
<PAGE>
SELECTED FINANCIAL DATA(1)
The selected financial data of the Company presented below have been
derived from the Consolidated Financial Statements of the Company, which have
been audited by Arthur Andersen, LLP, independent public accountants. The
selected balance sheet data of the Company for the nine months ended
September 30, 1996, have been derived from financial statements which are not
audited, but in the opinion of management, such financial statements include
all adjustments necessary for a full presentation of the position and results
of operations as of such date and for such period. Results of operations for
the nine months ended September 30, 1995 and September 30, 1996 are not
necessarily indicative of results for the full year. The following selected
financial information should be read in conjunction with the Consolidated
Financial Statements and the related Notes thereto and with "Management's
Discussion and Analysis of Financial Condition and Plan of Operations"
included elsewhere in this Prospectus.
SELECTED FINANCIAL DATA:
<TABLE>
<CAPTION>
For the Nine
For the Years ended Months ended
December 31, September 30,
---------------------------- ----------------------------
1994 1995 1995 1996
------------ ------------ ------------ ------------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Net revenue(2) ............................. $2,773,042 $2,865,751 $2,859,624 $2,740,235
Food and beverage, promotional merchandise . 633,117 620,099 593,868 619,806
General and administrative, rent expense to
related party ............................. 1,723,594 1,742,898 1,635,641 1,610,049
Corporate overhead(3) ...................... 122,038 164,628 141,777 230,332
Compensation expense(4) .................... -- -- -- 135,168
Interest expense, net ...................... 67,119 65,612 43,190 39,678
------------ ------------ ------------ ------------
Income before minority interest ............ $ 227,174 $ 272,514 $ 445,148 $ 105,202
Minority interests(5) ...................... (22,717) (27,251) (44,515) (1,496)
------------ ------------ ------------ ------------
Net income ................................. $ 204,457 $ 245,263 $ 400,633 $ 103,706
============ ============ ============ ============
Net income per common share ................ $ .20 $ .25 $ .40 $ .10
============ ============ ============ ============
Weighted average number of shares
outstanding(6) ............................ 1,000,000 1,000,000 1,000,000 1,000,000
============ ============ ============ ============
Pro forma provision for income taxes(7) .... $ 83,100 $ 99,600 $ 172,000 $ 71,800
------------ ------------ ------------ ------------
Pro forma net income before cumulative
effect of accounting change (7) ........... $ 121,357 $ 145,663 $ 228,633 $ 31,906
Cumulative effect of accounting change for
income taxes(7) ........................... (22,100) -- -- --
------------ ------------ ------------ ------------
Pro forma net income (7) ................... $ 143,457 $ 145,663 $ 228,633 $ 31,906
============ ============ ============ ============
Pro forma net income per share (7) ......... $ .14 $ .15 $ .23 $ .03
============ ============ ============ ============
Pro forma weighted average number of shares
outstanding(6) ............................ 1,000,000 1,000,000 1,000,000 1,000,000
============ ============ ============ ============
</TABLE>
23
<PAGE>
SELECTED BALANCE SHEET DATA:
<TABLE>
<CAPTION>
AS OF DECEMBER 31 AS OF SEPTEMBER 30,
1994 1995 1996
----------- ----------- -------------------
(UNAUDITED)
<S> <C> <C> <C>
Cash and cash equivalents .............. $ 92,838 $ 19,768 $ 285,886
Property and equipment, net ............ 628,972 515,835 459,487
Total assets ........................... 797,212 664,919 3,075,815
Loans payable -- June 1996 Financing
Notes ................................. -- -- 1,100,000
Loan payable, related parties .......... 559,010 405,158 125,000
Loan payable, other .................... -- -- 104,969
Total current liabilities .............. 989,148 985,838 1,550,579
Stockholders (deficit) equity .......... (204,071) (357,647) 938,508
Working capital (deficiency) ........... (864,927) (921,523) (1,241,707)
</TABLE>
- ------
(1) The Selected Financial Data gives effect to the Reorganization and sets
forth on a combined basis the operations of KIP, Kat Corp., T-Kat and
Urban Renewal. See "The Company" and "Reorganization."
(2) KatManDu-Philadelphia is only open from mid-April through mid-September.
Accordingly, the Company historically has had no revenues for the first
and fourth calendar quarters. See "Risk Factors -- Quarterly Fluctuations
In Results of Operations; Seasonality" and "Management's Discussion and
Analysis of Financial Condition and Plan of Operation."
(3) The Company has entered into employment contracts with Messrs. Silver and
Harting increasing their individual annual compensation from $54,000 to
$100,000 cash for the first year following the consummation of this
Offering and to $150,000 in each of the two years thereafter. In
addition, Messrs. Silver and Harting can each earn an additional $50,000
in the first year of their employment agreements if the Company operates
three restaurant/nightclubs by the end of such year. Thereafter, their
respective base salaries will increase to $150,000 per annum provided the
Company is operating 3 restaurant/nightclubs. See "Management."
(4) The Company issued an aggregate of 28,160 shares of Common Stock to
certain employees of the Company. Such shares may not be sold or
otherwise transferred prior to April 1, 2001 and are also subject to
forfeiture if the employee's employment with the Company is terminated.
For financial accounting purposes, compensation expense was charged in
the amount of $135,168 in the first quarter of 1996. See note 11(f) to
the Consolidated Financial Statements.
(5) The Preefer Interests are reflected as a "minority interest" for all
periods presented. The purchase of the Preefer Interests has been
reflected using the purchase method of accounting. Of the total amount
paid for the Preefer Interests in settlement of the Preefer Litigation
($225,000), $98,284 is being amortized over a 15 year period. See note 10
to the Consolidated Financial Statements.
(6) Weighted average number of shares outstanding for both historical and pro
forma amounts, gives effect to the Reorganization and the issuance of
110,784 shares in connection with the June 1996 Financing. See
"Reorganization."
(7) Prior to the consummation of this Offering, the Company has not been
subject to income taxes. Upon consummation of this Offering, the Company
will be subject to federal corporate income taxes and Pennsylvania and
New Jersey corporate income taxes. Accordingly, pro forma net income and
pro forma net income per share for certain periods presented reflects a
provision for income taxes as if the Company had been subject to federal
and state income taxes. See note 7 to the Consolidated Financial
Statements.
24
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND PLAN OF OPERATIONS
This Management's Discussion and Analysis of Financial Condition and Plan
of Operations and other parts of this Prospectus contain forward-looking
information that involve risks and uncertainties. The Company's actual
results could differ materially from those anticipated by such
forward-looking information. Factors that may cause such differences include,
but are not limited to, those discussed under "Risk Factors" and elsewhere in
this Prospectus. This Management's Discussion and Analysis of Financial
Condition and Plan of Operations should be read in conjunction with the
Company's consolidated financial statements and notes thereto, included
elsewhere in this Prospectus.
OVERVIEW
The Company owns and operates a restaurant/nightclub featuring live
musical entertainment and dancing in a "mythical tropical island paradise"
setting. KatManDu-Philadelphia, a 17,425 square foot restaurant/nightclub
facility located on the Delaware River waterfront in Philadelphia,
Pennsylvania, opened in May 1991. The total cost of developing, constructing
and opening KatManDu-Philadelphia was approximately $1.12 million, which
included approximately $630,000 for the design and construction, $441,000 for
equipment, furniture and fixtures and $47,000 for other costs. The restaurant
area of KatManDu-Philadelphia has a seating capacity of 160 to 180 persons.
In addition, there is a 100 linear foot bar in an approximate 1,600 square
foot main bar area (the "Main Bar") that can accommodate up to 250 people and
a 4,400 square foot nightclub area that contains a dance floor, full-service
"Tiki" bar, performance stage and deejay booth and which can accommodate
another 1,200 persons. Rental payments under the lease for the premises
occupied by KatManDu-Philadelphia (the "Philadelphia Lease") currently are
$50,000 per year. In March 1997 the annual rent under the Philadelphia Lease
will increase to the greater of (i) $50,000 increased by a cost of living
adjustment and (ii) 4% of KatManDu-Philadelphia's gross income. Because it is
an outdoor facility, KatManDu-Philadelphia is operational only 5 months a
year from mid-April through mid-September.
KatManDu-Trenton. The Company plans to open a second restaurant/nightclub,
KatManDu-Trenton, in the second quarter of 1997. KatManDu-Trenton will be
located on the Delaware River waterfront in Trenton, New Jersey in an area
that has been designated for development. As part of this program, a new
stadium was completed in 1995 to be used by the Trenton Thunder minor league
baseball club and as a venue for concerts. The Company will incur significant
expenses during the next five months to complete the development of
KatManDu-Trenton. The Company estimates that the total cost of developing and
opening KatManDu-Trenton will be approximately $3.75 million which includes
approximately $2.25 million for construction costs, $625,000 for furniture,
fixtures and equipment and the balance for other costs. The total cost of
developing KatManDu-Trenton will be financed with the proceeds of the
Construction Loan, the proceeds of the June 1996 Financing, cash flow from
operations and the net proceeds of this Offering. Upon completion of
KatManDu-Trenton and the issuance of a certificate of occupancy with respect
thereto, the Construction Loan is expected to be repaid with the proceeds of
the NJEDA Loan. As of September 30, 1996, project development costs, such as
architectural and engineering fees, general contractor costs, legal costs and
permitting and licensing fees, for KatManDu-Trenton were approximately
$540,000, of which $490,000 has been paid.
Plan of Operation. Immediately following this Offering the Company will
not generate any revenue until the second quarter of 1997 when
KatManDu-Trenton is expected to commence operations and KatManDu-
Philadelphia commences its 1997 season. Future revenues and profits of the
Company will depend upon various factors, including the continued success of
KatManDu-Philadelphia, the success of KatManDu-Trenton, the opening of
additional restaurant/nightclubs, market acceptance of the KatManDu concept
and general economic conditions. In addition to the continued seasonal
operation of KatManDu-Philadelphia and the continued development and,
ultimately, the operation of KatManDu-Trenton, the Company's plan of
operation for the next 12 months is to develop at least one additional
restaurant/nightclub (i.e., KatManDu-Baltimore). The Company believes that
cash flow from operations, together with the proceeds from this Offering will
be sufficient to satisfy the Company's working capital requirements for at
least the next 12 months.
The Company further believes that cash flow from operations, the proceeds
of this Offering and other forms of site specific financing (i.e., landlord
contributions, vendor financing, vendor advertising, equipment leases, and
25
<PAGE>
mortgage financing) should be sufficient to develop one additional
restaurant/nightclub in 1997 (i.e. KatManDu-Baltimore) and one or two
additional restaurant/nightclubs in 1998. The Company estimates that the costs
of developing and opening a new restaurant/nightclub will range from $3.5
million to $5.0 million or more depending upon location, site conditions,
construction costs, and size and type of the restaurant/nightclub. This sum
represents all costs relative to constructing, developing and opening a new
restaurant/nightclub, including but not limited to architectural and design
fees, permit costs, engineering costs, construction costs, initial food, liquor
and merchandise inventory, furniture and fixtures, initial staffing and employee
training costs, ground breaking and grand opening costs, and initial marketing
and promotional costs. The Company expects that it will incur approximately
$650,000 in preopening costs and related costs and purchase approximately
$750,000 of inventory, fixtures and equipment in connection with the opening of
each restaurant/nightclub. Generally, the Company will capitalize the
construction costs relating to the construction of a new restaurant/nightclub,
and will treat all preopening costs, including the cost of hiring and training
the initial workforce, travel, promotion and advertising expenses, as period
costs and expense them as incurred. The Company may require additional capital
in the future through securities offerings and debt financings to expand its
business operations if cash flow from operations is less than anticipated and/or
site specific financing is not available on terms acceptable to the Company.
There can be no assurance that the Company will successfully implement its
expansion plans, in which case the Company will continue to be dependent on
the revenues from KatManDu-Philadelphia and, eventually, KatManDu-Trenton as
well. The Company also faces all of the risks, expenses and difficulties
frequently encountered in connection with the expansion and development of a
new business. Furthermore, to the extent the Company's expansion strategy is
successful, it must manage the transition to multiple site operations, higher
volume operations, the control of overhead expenses and the addition of
necessary personnel.
GENERAL
KatManDu-Philadelphia is exclusively an outdoor facility and, therefore,
is only open from mid-April through mid-September. The 1996 season began on
April 19th and ended on September 21st. In 1995 the season began on April
20th and ended on September 21st. KatManDu-Trenton will operate year-round
and is expected to commence operations in the second quarter of 1997.
The Company's revenues are derived, generally, from sales of food and
beverages, gate charges, banquet fees and sales of promotional merchandise.
Revenue is generated primarily from the sale of food and beverages, both
alcoholic and non-alcoholic. In addition, there is a "gate charge" collected
from patrons as they enter the restaurant. The gate charge ranges from $3.00
to $7.00 and is collected daily after 8:30 p.m. and beginning at 2:00 p.m. on
Saturdays and Sundays. Finally, the Company derives revenue from the sale of
promotional merchandise (i.e., T-shirts, sweatshirts, caps, jackets, bags,
etc.). To date, merchandise sales have constituted only a small portion of
total revenues -- less than 3%. The Company will attempt to increase its sale
of promotional merchandise as a percentage of total revenues through more
aggressive marketing of the KatManDu concept to its customers and by
increasing the amount of floor space in each unit reserved for the display
and sale of such merchandise. For example, in KatManDu-Philadelphia the
retail area occupies approximately 80 square feet. In KatManDu-Trenton, the
retail area has been allocated approximately 260 square feet. However, there
can be no assurance that an increase in the amount of retail area will result
in higher sales. Also, there can be no assurance that the Company will be
able to continue to use the term "KatManDu" on or in connection with
merchandise sales. See "Risk Factors -- Intellectual Property; Proprietary
Marks."
The Company's principal costs are food and beverage costs, merchandise
costs and general and administrative expenses. General and administrative
expenses include all corporate and administrative functions that serve to
support existing operations and provide an infrastructure to support future
growth. Management, supervisory and staff salaries, employee benefits,
travel, data processing, training, rent and office supplies are major items
of expense in this category. The more substantial costs (i.e., food, beverage
and labor) are variable. Management projects that when a new KatManDu
restaurant/nightclub opens, it will incur higher than normal levels of labor
costs as new personnel complete training. Management believes, however, that
as the new staff gains experience, hourly labor schedules over the ensuing
30-60 day period will be gradually adjusted to provide operating efficiencies
similar to those at KatManDu-Philadelphia.
26
<PAGE>
QUARTERLY FLUCTUATIONS IN REVENUES, SEASONALITY AND INFLATION
The restaurant business in general is subject to seasonal fluctuations.
KatManDu-Philadelphia generally is only open from mid-April through
mid-September. For the rest of the year, it has no revenues even though it
has expenses. Therefore, after consummation of this Offering, the Company
will not generate any revenues until the second quarter of 1997 when
KatManDu-Trenton is expected to commence operations and the new season begins
for KatManDu-Philadelphia. Even then, there can be no assurance that
KatManDu-Trenton will generate any sufficient revenues, if at all, to cover
the Company's expenses.
The timing of new restaurant/nightclub openings will result in significant
fluctuations in quarterly results. It is expected that revenues will be
greatest in the third quarter as a result of seasonal traffic increases. In
addition, KatManDu-Philadelphia is solely an outdoor facility. Accordingly,
the performance of KatManDu-Philadelphia is further subject to weather
conditions. Rain and below normal temperatures, particularly on weekends,
such as was the case for the 1996 season, has had and, may in the future
have, an adverse impact on its operations. KatManDu-Trenton and, it is
anticipated, most subsequent restaurant/nightclubs will have both indoor and
outdoor restaurant/nightclubs. Accordingly, they will have revenues all
year-round and the weather will not be as much of a factor.
The primary inflationary factors affecting the Company's operations
include food, beverage and labor costs. In addition, the Company's leases
require the Company to pay taxes, maintenance, repairs and utilities, and
these costs are subject to inflationary increases. The Company believes low
inflation rates have contributed to relatively stable costs. There is no
assurance, however, that low inflation rates will continue.
RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995
General. For the nine months ended September 30, 1996, the Company had a
net profit of $103,706 on gross revenues of $2,805,601 compared to a net
profit of $400,633 on gross revenues of $2,947,174 for the period ending
September 30, 1995. The reduction in net profits of $296,927 is primarily
attributable to a non- cash charge to earnings of $135,168 relating to stock
issued to certain employees of the Company for services rendered and lower
sales due to cold and inclement weather conditions and the resultant loss of
profits thereon. Gross margins on food and beverage sales (including banquet
sales) generally remained constant at 76% and 77% for the nine months ended
September 30, 1996 and September 30, 1995, respectively. On an operating
basis, the Company earned $238,874 for the nine months ended September 30,
1996, representing approximately a 40% decrease from the comparable period in
the prior year. Operating income is net of the costs and expenses incurred
with respect to the construction and development of KatManDu-Trenton.
Revenues. Net revenues (which represents gross revenues less promotional
beverage and meal disallowances) was $2,740,235 for the nine months ended
September 30, 1996 compared to $2,859,624 for the nine months ended September
30, 1995. Gross revenues by category for the nine months ended September 30,
1996 and 1995 are set forth in the table below. Food revenues are comprised
of the sale of food, non-alcoholic beverages and promotional food sales.
Beverage revenues are comprised of the sale of liquor, beer, wine and
promotional liquor sales.
<TABLE>
<CAPTION>
Period ending Period Ending
September 30, Percentage of September 30, Percentage of Percentage Increase
1996 Gross Revenue 1995 Gross Revenue (Decrease)
--------------- --------------- --------------- --------------- -------------------
<S> <C> <C> <C> <C> <C>
Food ......... $ 672,600 24% $ 712,549 24% (6%)
Beverage ..... 1,502,994 54% 1,621,353 55% (7%)
Gate ......... 338,565 12% 396,123 13% (15%)
Banquet ...... 219,584 7% 147,951 5% 48%
Merchandise .. 59,003 2% 45,513 2% 30%
Miscellaneous 12,855 1% 23,685 1% (46%)
--------------- --------------- --------------- --------------- -------------------
Total ........ $2,805,601 100% $2,947,174 100% 5%
</TABLE>
The decrease in gross revenues for the period ended September 30, 1996
from the earlier comparable period is attributed to the impact of cold and
inclement weather on the KatManDu-Philadelphia outdoor restaurant/nightclub.
Accordingly, the number of dining and bar patrons decreased and revenue from
gate charges decreased approximately 15% due to the impact of these adverse
weather conditions.
27
<PAGE>
Costs and Expenses. Total costs and expenses (excluding non-cash
compensation expenses) for the nine months ended September 30, 1996 were
$2,460,187 compared to $2,371,286 for the nine months ended September 30,
1995. As a percentage of gross revenues, total costs and expenses (excluding
non-cash compensation expenses) for the periods ended September 30, 1996 and
1995 were 88% and 80%, respectively. Restaurant operating expenses consist
primarily of food and beverage costs, occupancy costs and labor costs. Food
and beverage costs (including banquet costs) increased to 24% of the related
revenue during the first nine months of fiscal 1996 from 23% in the first
nine months of fiscal 1995. Food costs increased to 31% of food sales for the
nine month period ended September 30, 1996 from 29% for the nine month period
ended September 30, 1995. Liquor costs decreased to 19% of liquor sales for
the nine month period ended September 30, 1996 from 20% for the nine month
period ended September 30, 1995. Merchandise costs were 75% of merchandise
sales for the nine month period ended September 30, 1996 compared to 77% in
the comparable 1995 period.
General administrative expenses, consisting primarily of labor, occupancy
(including rent to a related party) and other direct unit operating costs
were $1,610,049 for the nine months ended September 30, 1996 compared to
$1,635,641 for the nine months ended September 30, 1995, and as a percentage
of gross revenues, increased to 57% in the first nine months of fiscal 1996
from 55% in the first nine months of 1995. Such increase was primarily due to
lower revenues in 1996. Total payroll (excluding employee benefits) for the
period increased to $640,814 from $567,001 in the prior period, or by 13%.
This increase was attributable to the hiring of additional service management
personnel and increases in compensation payable to other executives in
anticipation of the Company's expansion.
Corporate overhead consisting principally of payroll costs relating to the
Company's senior management, increased to $230,332 through September 30, 1996
from $141,777 through September 30, 1995. As a percent of gross revenues,
corporate overhead expenses increased to 8% of gross revenues from 5% for the
periods in question. Commencing on the day this Offering is consummated, the
annual salaries of each of Messers. Silver and Harting will increase to
$100,000 for the first year following the consummation of this Offering. In
addition, Messrs. Silver and Harting can each earn an additional $50,000 in
the first year following this Offering if the Company operates three
restaurant/nightclubs by the end of the first year following the closing of
this Offering. Thereafter, their respective base salaries will increase to
$150,000 per annum provided the Company is operating 3 restaurant/nightclubs.
Interest Income (Expense), Net. Interest income was negligible during the
respective nine months ended September 30, 1996 and 1995. Net interest
expense decreased to $39,678 through September 30, 1996 from $43,190 through
September 30, 1995 due primarily to decreases in the principal indebtedness
of the Company. However, the majority of such loans had been repaid as of
September 30, 1996.
Net Income After Taxes (Pro Forma). Pro forma net income after taxes for
the nine months ended September 30, 1996 was $31,906 compared to $228,633 for
the nine months ended September 30, 1995.
RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1994
Revenue. Gross revenues increased 3.3% to $2,953,301 in 1995 from
$2,860,223 in 1994. This was primarily due to a more successful advertising
and promotion strategy as well as more favorable weather conditions in the
latter half of the season. Food and beverage revenues were $2,487,085 in
1995, representing 84.2% of gross revenues versus $2,451,992, or 85.7%, in
1994. This percentage decline reflects increases in revenues from other
sources, such as gate charges and sales of promotional merchandise. Sales of
promotional merchandise increased 24.7% to $45,793 in 1995 from $36,713 in
1994 as a result of a broader selection, better quality goods and a more
concerted selling effort. One of the Company's business goals is to increase
sales of promotional merchandise as a percentage of total revenues.
Accordingly, the selection offered has been expanded in the current year as
well as the amount of floor space devoted to selling such merchandise.
Costs and Expenses. Costs and expenses, as a percentage of net revenues
was approximately 88.2% in 1995 and 89.4% in 1994. This primarily resulted
from improved operating efficiencies and cost controls. Food and beverage
costs decreased by $27,280 to $585,115 in 1995 from $612,395 in 1994. Thus,
as a percentage of revenues, food and beverage costs decreased to 20.42% in
1995 from 22.08% in 1994. Payroll for management and operations personnel,
not including employee benefits and officers' payroll, totaled $438,795 or
15.31% of
28
<PAGE>
net revenues in 1995 and $499,409 or 18.01% of net revenues in 1994.
Advertising and promotion declined to 4.4% of net revenues in 1995, from 6.4%
of net revenues in 1994. The cost for bands and musicians also decreased in
1995 to 7.6% of net revenues from 10.1% of net revenues in 1994.
LIQUIDITY AND CAPITAL RESOURCES
Since inception, the principal capital requirement of the Company has been
funding KatManDu-Philadelphia (including furniture, fixtures and equipment
therein). The Company has been able to meet its capital requirements through
cash flow generated by KatManDu-Philadelphia and by borrowing funds from
various sources, including related parties. As of December 31, 1995, the
Company had cash on hand of $19,768, a working capital deficiency of $921,523
and had total liabilities of $1,022,566 of which $455,423 was owed to related
parties. As of September 30, 1996, cash and cash equivalents on hand was
$285,886, the working capital deficiency was $1,241,707 and total liabilities
were $2,137,307 of which $125,000 was owed to related parties. Such amounts
include the aggregate principal amount of the June 1996 Financing Notes, one
half of which will be repaid upon the successful completion of this Offering
and the balance of which is due one year from the consummation of this
Offering. If this Offering is not completed, none of such Notes are due until
May 31, 1998. In addition, as of December 31, 1995, the sum of the
undistributed profits attributable to the Preefer Interests and the principal
and accrued interest on the obligations related to the Preefer Interests was
approximately $125,000. In June 1996, the Preefer liabilities were satisfied
as the Company purchased the interests for an aggregate of $225,000.
Since 1994, the Company has also been funding the development of
KatManDu-Trenton. The Company has recently entered into a lease (the "Trenton
Lease") pursuant to which it has the right to occupy a 21,500 square foot
site which includes a 10,000 square foot landmark building on the Delaware
River waterfront in Trenton, New Jersey, and to develop and operate therein a
KatManDu restaurant/nightclub. The Trenton Lease is a 30-year lease. Rent
payable under the Trenton Lease is 2% of revenues derived from
KatManDu-Trenton but may not be less than $50,000 nor more than $100,000 per
year, which amount will increase every three years to reflect the increase in
the consumer price index for the Philadelphia/New Jersey region over such
period. In addition, the Company is responsible for all real estate taxes and
operating expenses attributable to the property. The Company anticipates that
KatManDu-Trenton will be complete and open to the public in the second
quarter of 1997.
As of September 30, 1996, the Company has incurred approximately $540,000
of expenses in connection with the development of KatManDu-Trenton. It is
anticipated that the total cost of developing and opening KatManDu-Trenton
will be $3.75 million which amount includes all pre-opening expenses as well
as the cost of furniture, fixtures and equipment. The Company has obtained a
$2.5 million Construction Loan from Equity National Bank to develop
KatManDu-Trenton. In addition, through September 30, 1996, the Company has
paid approximately $490,000 towards the development of KatManDu-Trenton. The
balance of the development costs will be paid out of the proceeds of this
Offering. Accordingly, the Company is dependent on the proceeds of this
Offering to complete the development of KatManDu-Trenton. Upon completion of
the development of KatManDu-Trenton and the issuance of a certificate of
occupancy with respect thereto, it is anticipated that the proceeds of the
NJEDA Loan will be used to repay the Construction Loan.
In June 1996, the Company successfully completed the sale of the June 1996
Financing Notes, in the aggregate principal amount of $1.1 million, to
accredited investors. The June 1996 Financing Notes bear interest at 10% per
annum, payable monthly in arrears. In addition, the Company issued 110,784
shares of Common Stock to the purchasers of the June 1996 Financing Notes.
One-half of the aggregate principal amount of the June 1996 Financing Notes
will be due upon the completion of this Offering and the balance will be due
one year from such date. If this Offering is not completed all of such Notes
are due May 31, 1998. In the event a closing with respect to this Offering
has not occurred prior to February 28, 1997, the Company has the option to
redeem the shares of Common Stock issued to the purchasers of the June 1996
Financing Notes at a fixed price which increases over time. Said option may
be exercised by the Company only if it has repaid the entire principal
balance of and accrued interest on the June 1996 Financing Notes.
To date, the Company has expended all of the proceeds of the June 1996
Financing. Of such amount, $225,000 was used to purchase the Preefer
Interests in connection with the settlement of the Preefer Litigation,
29
<PAGE>
approximately $400,000 has been used to pay expenses related to the development
of KatManDu-Trenton and approximately $215,000 was used to pay expenses in
connection with this Offering. The balance was used to pay other obligations and
expenses of the Company and for working capital. The repayment of the June 1996
Financing Notes will result in a non-recurring, non-cash charge to equity of
approximately $664,700, representing original issue discount attributable to the
issuance of 110,784 shares of Common Stock to the purchasers of the June 1996
Financing Notes. Of such amount, $239,700 will be a charge when June 1996
Financing Notes, having an aggregate principal balance of $550,000, are repaid
upon consummation of this Offering and the balance, approximately $425,000, will
be a charge when the remainder of such Notes are paid one year after the
consummation of this Offering. See "Use of Proceeds" and "Certain Transactions."
Future KatManDu restaurant/nightclubs will be financed, in part, with the
proceeds of this Offering remaining after completion of KatManDu-Trenton,
cash flow from operations and other forms of site specific financing, such as
landlord concessions, mortgage financings, vendor financing, vendor
advertising and equipment leases. In the event cash flow from operations
and/or site specific finance is insufficient for the Company to meet its
expansion plans, the Company will be required to seek other forms of
financing, including, possibly, the sale of equity and debt securities. There
are no assurances that such financing will be available or if available, that
the terms of such financing will be acceptable or favorable to the Company.
Management believes that the net proceeds of this Offering and cash flow
from operations will be sufficient to meet the Company's working capital
requirements for the next 12 months. Virtually all of the Company's revenues
are collected in cash or pursuant to credit card processing. Food and
beverage inventories are expected to increase in relation to trade accounts
payable.
FINANCIAL REPORTING
In March 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 121, "Accounting for the Impairment of
Long Lived Assets and for Long Lived Assets to Be Disposed Of" ("SFAS 121").
This statement establishes financial accounting and reporting standards for
the impairment of long lived assets, certain identifiable intangibles, and
goodwill related to those assets to be held and used, and for long lived
assets and certain identifiable intangibles to be disposed of. This statement
is effective for financial statements for fiscal years beginning after
December 15, 1995, although earlier application is encouraged. The Company
does not expect that the adoption of SFAS 121 will have a material effect on
its consolidated financial statements.
The FASB issued Statement of Financial Accounting Standards No. 123,
"Accounting for Stock Based Compensation" ("SFAS 123"), which will require
companies either to reflect in their financial statements or reflect as
supplemental disclosure the impact on earnings and earnings per share of the
fair value of stock based compensation using certain pricing models for the
option component of stock option plans. It is the Company's intention to
continue to account in its basic financial statements under the general
philosophy of Accounting Principles Board Opinion No. 25, as allowed under
the new standard, which measures only the intrinsic option value as
compensation. Disclosure, as required by SFAS 123, will be made commencing
with the Company's financial statements for the year ending December 31, 1996
and will reflect the impact of the compensation for options issued in 1996 in
the Notes to the Consolidated Financial Statements. Accordingly, SFAS 123 has
no impact on the financial position and results of operations for any period
described herein.
30
<PAGE>
BUSINESS
The Company owns and operates, under the name "KatManDu", a casual dining,
outdoor restaurant/nightclub, located on the Delaware River waterfront in
Philadelphia, Pennsylvania. KatManDu is designed to replicate a mythical
tropical island paradise vacation setting by featuring quality food, friendly
service, live musical entertainment and dancing. It is an outdoor
restaurant/nightclub and is therefore open only from mid-April until
mid-September. KatManDu-Philadelphia has a total area of approximately 17,425
feet. The dining area has a seating capacity of 160-180 persons. The
nightclub area, approximately 4,400 square feet, can accommodate up to 1,200
persons and includes a stage for live performances, a sound booth for
recorded music, a dance floor and a full service "Tiki" bar. In addition
there is also a 1,600 square foot "Main Bar" area which includes a 100 linear
foot bar and which can accommodate an additional 250 people. Finally, there
is a small retail area of approximately 80 square feet that offers
promotional merchandise.
The Company is planning to open a second restaurant/nightclub in the
second quarter of 1997 on a 21,500 square foot site on the Delaware River
waterfront in Trenton, New Jersey ("KatManDu-Trenton"). The Company has
entered into a 30-year lease for the site which includes a 10,000 square foot
historic landmark building. KatManDu-Trenton is designed to operate year
round, having separate indoor and outdoor restaurant/nightclubs, each with
its own separate restaurant and nightclub areas and Main Bar. The outdoor
restaurant/nightclub, which will only be used from mid-April through
mid-September, will have a 2,400 square foot dining area with a seating
capacity of 160-180 persons, a 800 square foot "Main Bar" area which includes
an 80 linear foot bar which can accommodate approximately 200 people and a
4,100 square foot nightclub area, which includes a stage, a deejay booth, a
dance floor and a full-service "Tiki" bar which can accommodate up to 900
persons. The indoor restaurant/nightclub will be open year round. In the
summer season (mid-April through mid-September), weather permitting, the
indoor stage will be disassembled and the nightclub area of the indoor
restaurant/nightclub will be used as additional restaurant seating. It will
have a total of approximately 5,000 square feet and will accommodate up to
350 people for dinner and cocktails or 100 people for dinner and up to 650
people in the nightclub area. In addition, KatManDu-Trenton will have a
retail area of approximately 260 square feet for sales of the Company's
promotional merchandise.
The Company estimates that the total cost to develop, construct and open
KatManDu-Trenton will be $3.75 million. The Company will finance this cost
with the proceeds of the Construction Loan, proceeds of the June 1996
Financing, cash flow from operations and the proceeds of this Offering. In
addition, the Company will use the proceeds of the NJEDA Loan to repay the
Construction Loan upon completion of KatManDu-Trenton.
The Company has commenced lease negotiations for a site in the Baltimore,
Maryland inner harbor district. In addition, the Company is considering other
sites in New York City, Atlantic City, Los Angeles, Las Vegas, Orlando and
Miami.
The Company believes that the popularity of theme restaurants in general,
when combined with its high-quality, moderately-priced food, live musical
entertainment and dancing will make KatManDu restaurant/nightclubs a
destination restaurant for residents and tourists that will be able to
compete with other theme restaurants. Management believes that the Company
has refined its menu and overall restaurant operations and successfully
demonstrated consumer acceptance of the KatManDu concept.
KatManDu-Philadelphia has attracted a culturally diverse, multi-aged customer
base. After dinner and on Saturday and Sunday afternoons and evenings, when
live music is featured, KatManDu attracts young adults and active older
adults drawn to its music-filled, environment. At other times KatManDu
provides a more relaxed atmosphere appealing to business people and families.
The Company's strategy is to develop and operate additional
restaurant/nightclubs on waterfront and other locations in cities with
favorable demographics where the KatManDu theme will have broad appeal to
local residents and tourists. In addition to KatManDu-Trenton, the Company
anticipates developing one other KatManDu restaurant/nightclub in 1997 (i.e.,
KatManDu-Baltimore) and one or two more in 1998 with the proceeds of this
Offering, cash flow from operations and other site specific financing, such
as landlord concessions, mortgages and capital leases.
INDUSTRY OVERVIEW: THEME RESTAURANTS
In recent years theme restaurants have gained increasing popularity, as a
number of such restaurants featuring a variety of different themes have
opened. It is estimated that in 1996 the theme casual dining segment of
31
<PAGE>
the restaurant industry will have $1 billion of revenues and $5 billion in
revenues by the year 2000. The two most popular and well known restaurants of
this genre are Planet Hollywood(R) and Hard Rock Cafe(R), both of which
combine an entertainment component with a casual dining atmosphere. Aside
from enhancing the dining experience, the entertainment component also
provides an additional revenue stream, predominantly from merchandise sales.
Patrons of theme restaurants have evidenced a willingness to purchase
souvenir T-shirts, hats, mugs, and other items bearing the logo and
reflecting the lifestyle of the particular theme restaurant. These retail
sales are typically at higher profit margins than food and beverage sales,
inclusive of labor costs.
THE KATMANDU "TROPICAL ISLAND PARADISE" VACATION THEME
Each KatManDu restaurant/nightclub will be modeled after
KatManDu-Philadelphia in terms of decor, menu, entertainment and ambiance.
"Tropical Island Paradise Theme." By replicating the outdoor island
environment in well populated urban and suburban locations, KatManDu attempts
to provide a short vacation-break feeling for its patrons. Each KatManDu
restaurant/nightclub will be designed to simulate a tropical island paradise
setting through use of multi- level natural wood decking, tenting, tropical
foliage and large aquariums filled with exotic coral reef fish. Each KatManDu
restaurant/nightclub will either be situated in a waterfront setting or in a
setting simulating a waterfront location. In addition, the focal point for
each KatManDu restaurant/nightclub will be a large centrally located, tent
covered Main Bar serving a complete array of alcoholic and non-alcoholic
drinks, many of them using tropical fruit juices and extracts with
descriptive names evoking the tropical island paradise theme.
Menu. Following its tropical island paradise theme, KatManDu has created a
menu which draws on diverse culinary influences such as the Caribbean, the
Middle East, Central America, Asian and traditional American. The menu
features an eclectic array of regional specialties, such as Caribbean Black
Bean Chile, Crab Quesadilla, Grilled Jamaican Chops, Thai Chicken, Shrimp Dim
Sum, Crab Cakes, Mushroom Lasagna, Santa Fe Salad, Jambalaya, Grilled Salmon,
Roasted Eggplant and Olive Hummus, sorbets served in natural lemon, coconut,
peach and other casings, Chocolate Pecan Pie, Cheesecake and Key Lime Pie but
also includes a wide variety of appetizers, soups, pastas, sandwiches,
salads, burgers and full-platter entrees and deserts. Menu items are prepared
on-site using fresh, quality ingredients. A children's menu is also
available. The price range of salads and appetizers is $3.75 to $11.95. Lunch
and dinner entrees range in price from $6.95 to $16.95 with daily specials
which add a diverse and more expensive alternative. Portions are generous and
significant attention is placed on presentation and preparation. Because the
menu is not tied to any particular type of food or beverage, the Company can
introduce and eliminate items based on local or current consumer trends
without altering its tropical island paradise theme. The Company endeavors to
hire experienced chefs and invests substantial time training kitchen
employees to maintain consistent food preparation. Since the Company
considers its extensive menu selection to be an important factor in its
appeal, continuous attention is devoted to the development of new menu items.
Nightclub Operations. Each KatManDu restaurant will include a large dance
area and adjoining full- service "Tiki" bar, a stage for live musical
entertainment and a deejay booth. The mood of the nightclub will be casual
and informal. Musical entertainment is continuous, alternating between live
shows and pre-recorded music. The entertainment format draws on an eclectic
mix of musical styles generally referred to as World Music, which is designed
to have universal appeal. Under this "World Music" banner,
KatManDu-Philadelphia has established itself as a major venue for Reggae,
Soca, Calypso and other Caribbean music, as well as Brazilian, Latin,
Afro-Pop, traditional American Rhythm & Blues, Rock and Roll, and the latest
in Modern Rock and New Music.
The KatManDu music program is formulated and implemented by a house
booking agent. The house booking agent maintains contacts with record company
representatives, tour packages and booking agencies throughout the country
and the world. Much of the information regarding new and exciting acts is
gleaned from trade publications such as Billboard Magazine and general
interest music publications such as Rolling Stone, Pulse, Spin, Reggae
Report, and others. On-going involvement in talent booking and event
promotion, has introduced KatManDu into the network of professional
entertainment artists and agents. Through its reputation for major live music
event presentations, KatManDu has developed its own talent base, including
regional, national and international performers.
32
<PAGE>
Sound/Lighting/Ambiance. Sound and lights adjust through the afternoon and
evening hours to create the desired level of energy and excitement within the
dining environment. The ambiance of the restaurant is enhanced both by the
display and exhibition of items intended to evoke a tropical island paradise
theme and by the use of lighting and audio techniques.
RESTAURANT/NIGHTCLUB OPERATIONS
KatManDu-Philadelphia operates seven days per week, from 11:30 a.m. until
2:00 a.m. from mid-April through mid-September. It is closed the rest of the
year. KatManDu-Trenton has been designed as two separate, fully functional
restaurant/nightclubs, one indoor and one outdoor. The outdoor area will be
closed from mid-September through mid-April but the indoor area will be
available for year-round use.
The configuration of future KatManDu restaurant/nightclubs will generally
follow the format of KatManDu-Philadelphia and KatManDu-Trenton, depending
on whether they will be solely outdoor or year-round facilities. In addition,
each restaurant/nightclub will take into account such factors as the size and
location of the unit, local tastes, demographics and other relevant
considerations.
EXPANSION PLANS AND SITE SELECTION
The Company believes that the KatManDu concept has broader appeal than
other theme-based restaurants. KatManDu-Philadelphia has attracted a
culturally diverse, multi-aged customer base. After dinner and on Saturday
and Sunday afternoons and evenings, when live music is featured,
KatManDu-Philadelphia attracts young adults and active older adults drawn by
its music filled environment and dancing. At other times, KatManDu-
Philadelphia provides a more relaxed atmosphere appealing to business people
and families. The Company's business strategy is to use the "KatManDu" theme
developed and refined at KatManDu-Philadelphia in additional
restaurant/nightclubs in other markets, particularly on waterfront sites. The
Company believes that the KatManDu physical environment, ambiance, menu and
live music and dance format can be replicated in other markets. Expansion
will be facilitated by food, beverage and general managers trained at
KatManDu-Philadelphia, a number of whom would be available for employment at
new sites Unlike KatManDu-Philadelphia, most new restaurant/nightclubs are
expected to operate on a year-round basis. While the Company has not yet
arranged to purchase or lease sites in the areas being considered for future
development other than Trenton, New Jersey, it has entered into lease
negotiations for a site in the Baltimore, Maryland inner harbor district. The
Company expects to develop one other KatManDu restaurant/nightclub in 1997
(i.e., KatManDu-Baltimore), and one or two more in 1998. The Company will
target waterfront locations, in urban areas with favorable demographics, such
as Atlantic City, New Jersey, the New York metropolitan area, Los Angeles,
California, Las Vegas, Nevada, and Miami and Orlando, Florida.
By expanding its operations and building additional KatManDu
restaurant/nightclubs, the Company is seeking to increase its name brand
recognition and establish a secondary meaning in the marketplace for
"KatManDu." The Company believes that this will have a favorable impact on
the Company's business operations, particularly with respect to merchandise
sales.
The Company plans to pursue a number of different expansion possibilities.
First, the Company will seek to establish KatManDu restaurant/nightclubs in
high profile, heavy-traffic, waterfront locations. The waterfront locations
enhance the tropical island paradise sensation. In addition, by being in such
locations, the Company believes its restaurants appeal to both destination
customers as well as passers-by who are drawn to its visually and audibly
exciting environment. The Company may acquire such sites outright, lease them
and build the facility itself or enter into an arrangement where the owner of
the property would develop the restaurant/nightclubs (build-to-suit).
Secondly, the Company will consider locating future restaurants in malls and
attempt to create the tropical island paradise setting through the use of
artificial pools, foliage etc. The Company will also consider non-mall, high
traffic entertainment complexes, such as multiscreen movie complexes, stadium
venues and similar sites and will further consider joint venture arrangements
with real estate developers or other theme restaurant companies.
Typical KatManDu restaurants are expected to be between 20,000 and 30,000
square feet and cost between $3.5 million and $5.0 million or more to develop
which includes the cost of furniture, fixtures and equipment and pre-opening
expenses. The Company will seek to secure landlord contributions towards the
development of
33
<PAGE>
new restaurant/nightclubs. However, the actual cost of developing a KatManDu
restaurant/nightclub will be dependent on several factors, including, but not
limited to, location, the Company's decision to lease or purchase the real
property and to renovate an existing building or construct a new facility and
the cost of labor and materials in the particular market.
Successful expansion of the Company's operations will be largely dependent
upon a variety of factors, some of which are currently unknown or beyond the
Company's control, including: customer acceptance of the KatManDu concept in
new geographic areas; the ability of the Company to identify suitable sites
and to negotiate leases or purchases of such sites; timely and economic
development and construction of facilities; the hiring of skilled management
and other personnel; the ability of the Company to apply its standardized
policies and procedures to a much larger number of facilities; the
availability of adequate financing; the general ability to successfully
manage growth (including monitoring restaurants, controlling costs and
maintaining effective quality food and service controls); and the general
state of the economy. The development of future restaurant/nightclubs will be
financed from cash flow from operations, the proceeds of this Offering,
mortgage and other site specific financing, including landlord concessions,
build-out allowances, vendor financing and advertising and equipment leases.
There can be no assurance the Company will be able to open new
restaurant/nightclubs at the planned rate of expansion, or at all. In
addition, further increases in the number of restaurant/nightclubs, or
opening restaurant/nightclubs at a faster pace or cash flows at levels lower
than currently anticipated will require additional debt or equity financings.
No assurance can be given that cash flow from operations combined with these
other financings, if any, will be sufficient to fund the cost of developing a
new restaurant/nightclub. The Company may encounter difficulties obtaining
adequate financing for expansion. In addition, it is expected that the
opening of new restaurant/nightclubs will give rise to additional expenses
associated with managing restaurants located in multiple markets. There is no
assurance that suitable sites for additional restaurant/nightclubs will be
obtained on desirable terms, that adequate financing for the Company's
expansion plans will be obtained or that any additional
restaurant/nightclubs, if developed, would be profitable.
MANAGEMENT AND EMPLOYEES
The Company's ability to manage a complex operation will be central to its
overall success. The Company believes that its management must include
skilled personnel at all levels. The Company's Executive Vice
President-Operations Bruce Waugh, has almost 20 years experience in the
restaurant industry. S. Lance Silver and Stuart N. Harting, the founders of
the Company, have been involved in its operation and management since its
inception. Previously, they operated and managed the bar and restaurant at
the Society Hill Hotel in Philadelphia. In addition, they have been real
estate investors and developers for approximately 30 years.
The General Manager of each restaurant/nightclub will report directly to
the Chief Operating Officer. The Company plans to monitor quality and
consistency in each of its restaurant/nighclubs through the careful training
and supervision of personnel and the establishment of high standards relating
to personnel performance, food and beverage preparation, and maintenance of
facilities. The Company believes that it has been able to attract high
quality, experienced restaurant and management personnel with its competitive
compensation and bonus programs. Staffing levels will vary according to the
size of each KatManDu restaurant/nightclub.
Management believes that an employee oriented culture creates a sense of
personal responsibility among all employees, and pride in the Company's
products, resulting in a higher level of customer service. By providing
extensive training and attractive compensation, the Company fosters a strong
corporate culture and encourages a sense of personal commitment from its
employees. The Company believes its compensation structure and positive
corporate culture enable it to attract and maintain quality employees. The
Company will place particular emphasis on the hiring of the General Manager
of each restaurant/nightclub, focusing on experience and management skills.
The Company presently has approximately 132 employees, most of whom are
part-time employees. Generally, the Company prefers to hire the same
employees from season to season. The Company estimates that KatManDu-Trenton
will employ 140-150 employees, some of whom will be full-time. The Company
believes that its relationship with its employees is good.
Service and Training. The Company is committed to providing its customers
with prompt, friendly and attentive service by staffing each KatManDu
restaurant/nightclub with an experienced management team and a
34
<PAGE>
high ratio of service personnel to customers. The Company's commitment to
customer service and satisfaction is further evidenced by several Company
practices and policies, including periodic visits by restaurant management to
customers' tables, active involvement of restaurant management in responding
to customer comments and assigning waitpersons to a limited number of tables,
generally four for dinner and five for lunch. Teamwork is emphasized through
a runner system for delivering food to the tables that is designed to serve
customers in an efficient and timely manner.
The Company believes that the training and knowledge of its employees and
the consistency and quality of the service they deliver are central to the
Company's success. Accordingly, each new restaurant employee of the Company
participates in a training program during which the employee works under the
close supervision of a restaurant manager or experienced key employees who
are familiar with Company policies. Generally, such training program is three
weeks for staff and twelve weeks for managers. Once hired, employees undergo
training in food quality and preparation and beverage preparation, customer
service and sales skills and employee relations. This includes written
training materials relating to food and beverage quality and service
standards, lectures, observation and simulation exercises. The final stage is
in-store training where employees work for a two week period implementing
their newly learned skills. Management strives to instill enthusiasm and
dedication in its employees and to create a rewarding working environment
where employees know what is expected of them in measurable terms. Management
continuously solicits employee feedback concerning restaurant operations and
attempts to be responsive to the employee's concerns.
PURCHASING
The Company attempts to obtain consistent quality items at competitive
prices from reliable sources. In order to maximize operating efficiencies and
to provide the freshest ingredients for its food products while obtaining the
lowest possible prices for the required quality, each restaurant/nightclub
management team will determine the daily quantities of food items needed and
will order such quantities from major suppliers at prices often negotiated
directly with the Company's corporate office. Food and supplies will be
shipped directly to the particular restaurant/nightclub. The Company
purchases perishable food products locally. The Company does not maintain a
central food product warehouse or commissary. The Company has not experienced
any significant delays in receiving restaurant supplies and equipment. The
Company is not dependent on any one supplier for its restaurant goods.
MANAGEMENT INFORMATION SYSTEMS ACCOUNTING
The Company uses an integrated management information system that is
designed to be utilized in all future KatManDu restaurant/nightclubs. This
system includes a computerized point-of-sale system which facilitates the
movement of customer food and beverage orders between the customer areas and
kitchen operations, controls cash, handles credit card authorizations, keeps
track of revenues on a per employee basis and provides management with
revenue data. The point-of-sale system is accessed by service personnel who
are assigned individual identification keys and appropriate information is
printed in the kitchen and bar areas which eliminates the need to read
handwritten tickets. The point-of-sale system electronically transfers data
nightly into the Company's computer system. The Company's automated
point-of-sale system also provides data for posting directly to the Company's
general ledger and to other accounting subsystems. The automated general
ledger system provides various management reports comparing current and prior
operating results as well as measuring performance against predetermined
operating budgets. The results are reported to and reviewed with Company
management by accounting personnel. Such reporting includes (i) bi-weekly
reports of revenues, cost of revenues and selected controllable unit
expenses, (ii) detailed quarterly performance reports of revenues and
expenses and (iii) quarterly reports of administrative expense performance.
Informal inventories are done on a daily basis and formal inventories are
taken every two weeks for accounting purposes.
LIQUOR CONTROL SYSTEM
KatManDu-Philadelphia uses a liquor control system as an alternative to
free-pouring. The system consists of a series of manifold trays mounted on
multi-level heavy duty shelving, with each tray having four manifolds. Each
manifold tray has a pump which is activated when a bartender pushes the
appropriate button, a series of which are available at each bartender
station. The buttons are programmed either for single liquor pours, for
35
<PAGE>
house liquors and the more popular premium and requested liquors, or for
multiple liquor drinks. (The system is not used for beer and wine.) The manifold
trays, liquor bottles and pumps are located in a remote location from the bars
in a "pump room." The pump room is typically checked by a manager at the end of
each night, or every two hours during times of peak operations, to assure that
nothing is running out. For security, the pump room is always kept locked; only
the general manager and four assistant managers have the key. Additional
accessory equipment consists of such items as a control unit with interface
boards that allows for the integration of the liquor control system with the
point-of-sale computer system.
The liquor control system permits management to control and account for
virtually every drink poured. By virtue of its interface with the point of
sale system, drinks are immediately rung up when poured once the drink button
is pressed, the product name and its price are immediately displayed on a
digital read-out found on the register and the price is entered. The drink
cannot be voided once entered and rung in.
The liquor control system has many advantages: it improves customer
satisfaction by producing drinks that are consistent; it lowers the liquor
cost by eliminating waste and loss due to overpouring, broken liquor bottles
(no bottles to be handled) or unauthorized comp drinks; it minimizes the need
to free-pour liquor; it increases the speed and efficiency of the bar staff;
it cuts down on labor costs for bartenders because one bartender can serve
more customers; it allows the Company to purchase liquor in 1.75 liter
bottles which are more economical than the standard 750 ml; and provides for
securely stocking a valuable liquor inventory in a remote location. The
liquor control system also provides the flexibility of programming 3
different pour sizes and 3 different price levels per brand of liquor. Basic
maintenance can be performed on-site by Company trained personnel. Also,
on-site personnel can calibrate the system without the need for a service
personnel visit.
MARKETING AND PROMOTION
To date, the Company has relied primarily upon "word of mouth" referrals,
and local radio and print advertising to attract customers to
KatManDu-Philadelphia. The Company does direct mail and advertising to target
"house VIP" customer lists. In addition, a color newsletter is mailed to
approximately 5,000 people to promote specific programs, events and
activities. KatManDu-Philadelphia has also received a significant amount of
positive media publicity, particularly, for its support of many civic and
charitable efforts and as host for successful events for such organizations
as the Red Cross, Variety Club, Muscular Dystrophy Association, Cerebral
Palsy, Leukemia Society, Action Aids, the Ronald McDonald House, Miss America
Pageant and others.
The KatManDu-Philadelphia musical entertainment format has contributed
significantly to the media and publicity profile of the business. Featuring
daily live music presentations totaling approximately ten shows each week
provides KatManDu wide exposure in a variety of media including newspapers,
magazines, radio and TV outlets throughout the region. The presentation of
such musical events provides an ongoing stream of highly promotable
"news-making" opportunities. Finally, the Company uses its promotional
merchandise, comfortable, colorful, casual clothing with a pre-washed look,
to promote its image of a tropical island paradise.
COMPETITION
The restaurant and nightclub businesses are highly competitive. The
principal competitive factors within the restaurant and entertainment
industries generally include the uniqueness and perceived quality of the
restaurant or attraction, its proximity to a densely populated area, the
atmosphere and cleanliness of the establishment and the quality of food,
beverage and entertainment available. In addition, the restaurant industry is
also generally affected by changes in consumer preferences; national,
regional and local economic conditions; and demographic trends. The
performance of an individual restaurant/nightclub may also be affected by
factors such as traffic patterns, demographic considerations, and type,
number and location of competing restaurants. Factors such as inflation,
increased food, labor and employee benefit costs, and the availability of
experienced management and hourly employees may also adversely affect the
restaurant and retail industries in general, and the Company's
restaurant/nightclubs in particular. Restaurant operating costs are further
affected by increases in the minimum hourly wage, unemployment tax rates and
similar matters over which the Company has no control.
Many of the Company's competitors have well established reputations and
identities and possess substantially greater financial, marketing, personnel
and other resources than the Company. These competitors include established
local independent restaurants as well as national chain restaurants such as
TGI Friday's(R), Benni-
36
<PAGE>
gan's(R) and The Cheesecake Factory(R). The Company is also aware that other
theme restaurants which have substantially greater financial and marketing
resources than the Company, such as Planet Hollywood(R), Hard Rock Cafe(R),
House of Blues(R), Motown Cafe(R) and Rainforest Cafe(R), have announced, or
are contemplating plans to open theme restaurants or have actually opened
such restaurants in some of the markets where future KatManDu
restaurant/nightclubs may be located, such as New York, Miami, Orlando,
Atlantic City, Los Angeles and Las Vegas. In addition, other restaurants may
use the tropical island paradise or similar theme (i.e., Chart House(R),
Rainforest Cafe(R)). These restaurants, as well as additional restaurants
that may open, will offer direct competition to the Company. The Company
believes its attention to and emphasis on providing continuous entertainment
in the form of live performances and prerecorded music and dancing in a
themed environment distinguishes it from other theme restaurants.
Finally, to the extent that the Company generates revenues from the sale
of promotional merchandise, it may be competing with certain other retail
establishments. The retail business is highly speculative and has
traditionally involved a high degree of risk. The success of retail business
is dependent on a variety of factors, including public taste, inventory
selection and the popularity of other retail outlets in the area. As in the
case of the restaurant business, the retail business is often affected by
changes in consumer taste, national, regional or local economic conditions,
demographic-trends, traffic patterns and the type, number and location of
competing retail outlets.
REGULATION
The Company is subject to federal, state and local laws affecting its
business, including various health, sanitation and safety standards, as well
as regulation of the sale of alcohol and beer. To date, the Company has not
experienced any difficulty in obtaining or maintaining the permits and
licenses necessary for the conduct of its business. However, the failure to
receive or retain, or delay in obtaining, a license to serve alcohol and beer
in a particular location could adversely affect the Company's operations in
that location and impair the Company's ability to obtain licenses elsewhere.
Restaurants in most states, including Pennsylvania and New Jersey, are
subject to dram shop laws and legislation which impose liability on licensed
alcoholic beverage servers for injuries or damages caused by their negligent
service of alcoholic beverages to a visibly intoxicated person or to a minor,
if such service is the proximate cause of the injury or damage and such
injury or damage is reasonably foreseeable. While the Company maintains
liquor liability insurance as part of its existing comprehensive general
liability insurance, which management believes is adequate to protect against
such liability, there can be no assurance that it will not be subject to a
judgment in excess of such insurance coverage or that it will be able to
continue to maintain such insurance coverage at reasonable costs. The
imposition of a judgment substantially in excess of the Company's insurance
coverage would have a material adverse effect on the Company. Similarly, the
failure or inability of the Company to maintain insurance coverage could
materially and adversely affect the Company. The Disabilities Act prohibits
discrimination on the basis of disability in public accommodations and
employment. The Company believes that KatManDu-Philadelphia and
KatManDu-Trenton comply with the requirements of the Disabilities Act;
however, the Company may be required to further modify such
restaurant/nightclubs to comply with the provisions of the Disabilities Act.
See "Risk Factors."
PROPERTIES
The premises occupied by KatManDu-Philadelphia is leased by the Company
pursuant to a non-cancelable lease, (the "Philadelphia Lease"), expiring on
November 15, 2005, at a current rent of $50,000 per annum. Beginning March 1,
1997 the base rent under the Philadelphia Lease will be equal to the greater
of (i) $50,000 increased by a cost of living adjustment and (ii) 4% of
KatManDu-Philadelphia's gross income. The Company has also entered into a
lease, expiring September 30, 2001, (the "Elizabeth Lease") for the entire
second deck of the restaurant ship, Elizabeth, which is adjacent to
KatManDu-Philadelphia. The base rent under this lease is $50,000 per year.
The Company uses such leased premises for its executive offices. The
Philadelphia Lease and the Elizabeth Lease are with Pier 25 North and ERP,
respectively, each an affiliate of the founders of the Company. See "Certain
Transactions."
The site leased by KatManDu-Trenton, consisting of approximately 21,500
square feet, is leased pursuant to a thirty-year non-cancelable lease (the
"Trenton Lease"), providing for annual rent equal to 2% of the gross
37
<PAGE>
revenues of KatManDu-Trenton, but no less than $50,000 and no more than
$100,000, subject to adjustment every three years to reflect increases in the
consumer price index for the Philadelphia/New Jersey region during such
period. In addition, the Company is obligated pay all property taxes,
assessments and utility charges attributable to the premises covered by such
lease.
INTELLECTUAL PROPERTY RIGHTS
The Company's ability to successfully implement the KatManDu concept will
depend in part upon its ability to continue to use and to protect its
proprietary marks. The Company uses "KatManDu" in connection with its
restaurant services and the sale of promotional merchandise, particularly
clothing. In 1992, the Company's trade name KATMANDU(R) was registered as a
service mark on the Principal Register in the United States Patent and
Trademark Office for restaurant and nightclub services. The Company regards
its KATMANDU(R) service mark as having substantial value and being important
in its marketing program. Accordingly, the Company intends to protect its
service mark by taking appropriate legal action whenever necessary. The
Company is aware of local restaurants which may be operating with tradenames
identical or similar to "KATMANDU" and a nightclub operating as "Club
Kat-Man-Du" on Hilton Head Island, South Carolina. However, the Company is
not aware of any use of the "KatManDu" service mark by others for restaurant
or nightclub services that could materially affect its business.
The Company also uses its proprietary mark in connection with the sale of
promotional merchandise even though "KATMANDU" is a registered mark in the
U.S. of another company for retail store services for the sale of women's
apparel and apparel accessories and "KATMANDO" is a registered mark in the
U.S. of another company for clothing. However, the Company has not to date
received any objection to its use of "KatManDu" in connection with the sale
of promotional merchandise or otherwise. The Company believes that there are
other users of the term "KatManDu" or a close variation thereof in
association with clothing other than the two U.S. registrants identified
above. Although there can be no assurance that one or more of the owners of
these prior marks or registrations will not object to the extended use of
"KatManDu" by the Company in connection with the sale of promotional
merchandise, the Company has been advised by its intellectual property
counsel that, in the opinion of such counsel, its use of "KatManDu" on and
with respect to the sale of promotional merchandise sold at its
restaurant/nightclubs should not be found to infringe or otherwise violate
the rights of any other entity or the owners of these marks. Nevertheless,
the Company intends to modify its mark for such promotional merchandise to
include descriptive words and geographic locations and also to include the
word "Island" before "KatManDu". The Company also may file an application to
register and use "Island KatManDu" as a service mark for restaurant services
and as a trademark for related promotional merchandise.
INSURANCE
The Company maintains general liability and commercial insurance
(including liquor liability insurance) and product liability insurance to
cover customary risks inherent in the operation of its business in general.
While the Company believes that it maintains insurance policies which are
adequate in amount and coverage for its current operations, there can be no
assurance that coverage will continue to be available in adequate amounts or
at a reasonable cost.
LEGAL PROCEEDINGS
The Company is a named defendant in the case of Middleton v. City of
Philadelphia et al, filed in the Court of Common Pleas, Philadelphia County.
The action arises out of an accident occurring on April 4, 1994 involving a
pedestrian struck by a drunk driver. Litigation counsel for the Company has
advised that the risk of an adverse judgment is minimal, in part because at
the time of the accident KatManDu-Philadelphia was closed for the season. The
plaintiff sued the Commonwealth of Pennsylvania, the city of Philadelphia and
other land owners and business owners around the site of the accident on
North Columbus Boulevard, alleging that the defendants had a duty to provide
a safe passageway for pedestrians. The case is currently at the discovery
stage and has not yet been scheduled for trial. The Company is not aware of
any other threatened litigation that would have a material adverse effect on
its business.
38
<PAGE>
MANAGEMENT
DIRECTORS, EXECUTIVE OFFICERS AND KEY EMPLOYEES OF THE COMPANY
The following table sets forth certain information with respect to each
person who is a director or executive officer or key employee of the Company:
Name Age Position
----------------- ----- --------------------------------------------------
S. Lance Silver .. 54 Co-Chairman, Chief Executive Officer, Co-President
and Director
Stuart N. Harting. 54 Co-Chairman, Co-President, Secretary and Director
Dennis Mehigan .. 31 Chief Financial Officer and Treasurer
Bruce Waugh ..... 40 Executive Vice President -- Operations and Director
David R. Gromacki 33 Senior Vice President -- Executive Chef
Diane Thomsen ... 29 Assistant Vice President and General Manager --
KatManDu-Philadelphia
David Wallack ... 49 Director
Jill R. Felix ... 52 Director
S. LANCE SILVER co-founded the Company in 1990, and has served as its
Co-Chairman, Chief Executive Officer and Co-President and as a Director since
inception. Prior to entering the restaurant business, Mr. Silver was a real
estate developer and a founder and principal of Silver & Harting, a real
estate development and mangement firm. Mr. Silver is an active member of the
Philadelphia Waterfront Business Association. From 1980 through 1983 Mr.
Silver managed and operated the bar and restaurant at the Society Hill Hotel
in Philadelphia, which he developed with Mr. Harting. Mr. Silver was a
general partner of Hoopskirt Factory Partners ("HFP"), a Pennsylvania limited
partnership, which filed a petition for relief under Chapter 11 of the U.S.
Bankruptcy Code of 1978, as amended (the "Bankruptcy Code"), in April 1993.
The filing prevented the holder of the first mortgage on the property owned
by HFP from foreclosing. Alternative financing was obtained and an order of
dismissal was entered on November 1, 1994 and all claims were paid in full.
In addition, Mr. Silver was a principal stockholder of a corporate general
partner of Headhouse Associates, a Pennsylvania limited partnership
("Headhouse"), which owned a leasehold and which filed for protection under
the Chapter 11 of the Bankruptcy Code in December 1991. Mr. Silver received
his degree in business administration and finance from Drexel University.
STUART N. HARTING co-founded the Company in 1990, and has served as its
Co-Chairman and Co-President and as a Director since inception and as
Secretary since December 1996. Prior to entering the restaurant business, Mr.
Harting was a real estate developer and a founder and principal of Silver &
Harting, a real estate development and management firm. From 1980 through
1983 Mr. Harting managed and operated the bar and restaurant at the Society
Hill Hotel in Philadelphia which he developed with Mr. Silver. Mr. Harting is
an active member of the Philadelphia Waterfront Business Association, of
which he was President from 1992-1996. In addition, Mr. Harting is a Director
of the Delaware River Ferry Company. Mr. Harting was a general partner of HFP
and a principal stockholder of a corporate general partner of Headhouse. See
discussion above. Mr. Harting holds a business administration degree from
Temple University and has been a member of the Advisory Board of its business
school since 1990.
DENNIS MEHIGAN, a certified public accountant, was hired as the Company's
Chief Financial Officer and Treasurer in December 1996. He has been
associated with Yampolsky, Mandeloff, Silver & Co., P.C., an accounting firm
located in Philadelphia, Pennsylvania, since 1987 and has been an officer and
stockholder thereof since January 1993. Mr. Mehigan has been the chief
accountant for the Company since 1991. Mr. Mehigan received a BS in Finance
from Juniata College in May 1987.
39
<PAGE>
BRUCE WAUGH, Executive Vice President-Operations of the Company, is a
restaurant and hospitality industry professional with 20 years experience in
bar and restaurant management. He joined the Company in March 1991,
participating in the planning and opening of KatManDu-Philadelphia, and has
been its General Manager since its inception, overseeing complete systems
implementation, training and control. Mr. Waugh was elected to the Board of
Directors of the Company in August 1996. Mr. Waugh holds a Bachelor of
Science degree in business management from LaSalle University.
DAVID R. GROMACKI, Senior Vice President of the Company, has been the
Executive Chef of KatManDu-Philadelphia since its inception. From 1990 to
1991, Mr. Gromacki was the Executive Chef at the Dock Street Restaurant, a
micro brewery pub & restaurant in Philadelphia. His prior positions were as
the Executive Chef and co-owner of the Main Street Bar and Grill, from 1984
through 1985, a fine dining restaurant/nightclub featuring jazz and blues in
Lexington, Kentucky and as Executive Chef at the Peppercorn Duck Club, from
1986 through 1988 a fine dining restaurant in the Hyatt Regency Hotel in
Lexington, Kentucky. Throughout this same period he was employed by Carmen
Catering, a concert and tour caterer. Mr. Gromacki served as Executive Chef
of Woodstock 1994 and other concert tours. Mr. Gromacki received in 1981 a
Culinary Arts degree from Johnson and Wales Culinary Institute in Providence,
RI.
DIANE THOMSEN, Assistant Vice President of the Company since March 1996,
has been employed by the Company since its inception. Ms. Thomsen is
currently the Assistant General Manager of KatManDu-Philadelphia with
specific responsibility as Beverage Director and, generally, overseeing all
operations while reporting to Mr. Waugh. Upon consummation of this Offering,
the Company intends to promote Ms. Thomsen to General Manager of
KatManDu-Philadelphia. From 1988 to 1991, Ms. Thomsen was employed as
Assistant Manager at Baci, a Philadelphia-based fine dining
restaurant/nightclub. She holds a marketing and management degree from Temple
University.
DAVID WALLACK was elected to the Board of Directors of the Company in
August 1996. Mr. Wallack is the developer, owner and operator since 1991 of
Mango's Tropical Cafe, a restaurant/cabaret/nightclub situated in the center
of Ocean Drive in the heart of the Deco-District in Miami Beach, Florida. Mr.
Wallack received a B.A. from the University of Miami and a J.D. from Miami
Law School. He is a member of the Florida Bar Association and is
Vice-Chairman of the Ocean Drive Association, an organization which has
helped to guide the redevelopment and resurgence of the South Beach
community.
JILL R. FELIX was elected to the Board of Directors of the Company in
August 1996. Ms. Felix, a real- estate professional, has been associated with
Liberty Property Trust, formerly Rouse & Associates, Malvern, Pennsylvania,
since 1979. Since October 1995 she has served as the Senior Vice President,
New Business Development. Her previous positions with that company were
President, Rouse International France from 1993 through 1995 and Partner for
International Development from 1988 through 1993. Ms. Felix received a B.S.
degree in Sociology and Psychology from the University of Wisconsin in 1966
and a Masters Degree in Social Work from Bryn Mawr College in 1968.
Each of the Company's directors has been elected to serve until the next
annual meeting of stockholders and until the election and qualification of a
successor. The Company's executive officers are elected annually by the
Company's Board of Directors and serve at the discretion of the Board of
Directors.
COMMITTEES OF THE BOARD OF DIRECTORS
The Board of Directors has an Audit Committee comprised of Ms. Felix and
Mr. Wallack. The Audit Committee recommends to the Board of Directors the
appointment of independent auditors, reviews and approves the scope of the
annual audit of the Company's financial statements, reviews and approves any
non-audit services performed by the independent auditors, reviews the
findings and recommendations of the internal and independent auditors and
periodically reviews and approves major accounting policies and significant
internal accounting control procedures.
The Board of Directors also has a Compensation Committee comprised of Ms.
Felix and Mr. Wallack. The Compensation Committee reviews and recommends
compensation of officers and directors, administers stock option plans and
reviews major personnel matters.
40
<PAGE>
COMPENSATION OF EXECUTIVE OFFICERS
No executive of the Company received more than $100,000 in compensation in
1995. The following table sets forth certain summary information concerning
the aggregate total annual salary and bonus paid or accrued by the Company
for services rendered in 1995 to its chief executive officer and
co-Presidents. None of the below named executive officers were granted
options by the Company in 1995.
ANNUAL COMPENSATION
<TABLE>
<CAPTION>
All Other
Salary Bonus Compensation
Name and principal position Year ($) ($) ($)
----------------------------------- ------ --------- ------- --------------
<S> <C> <C> <C> <C>
S. Lance Silver, Co-Chairman, CEO &
Co-President(1)(2) ............... 1995 $54,000 -- --
Stuart N. Harting, Co-Chairman &
Co-President(1)(2) ............... 1995 $54,000 -- --
</TABLE>
- ------
(1) Does not include distribution of his share of profits of Kat Corp. and
KIP.
(2) Pursuant to their employment agreements with the Company, Messrs. Silver
and Harting will each be paid $100,000 for the first year following the
consummation of this Offering. In addition, Messrs. Silver and Harting
can each earn an additional $50,000 in the first year of their employment
agreements if the Company operates 3 restaurant/nightclubs by the end of
such year. Thereafter, their respective base salaries will increase to
$150,000 per annum provided the Company is operating 3
restaurant/nightclubs.
EMPLOYMENT AGREEMENTS
In December 1996, the Company entered into a three-year employment
agreement with each of Messrs. Silver and Harting (to be effective as of the
Effective Date) pursuant to which Mr. Silver will serve as Chief Executive
Officer co-President of the Company and Mr. Harting will serve as
co-President and Secretary of the Company. Messrs. Silver and Harting will
each be paid $100,000 for the first year following the consummation of this
Offering. In addition, Messrs. Silver and Harting can each earn an additional
$50,000 in the first year of their employment agreements if the Company
operates 3 restaurant/nightclubs by the end of such year. Thereafter, their
respective base salaries will increase to $150,000 per annum provided the
Company is operating 3 restaurant/nightclubs. In addition, they will have the
opportunity to earn performance-related bonuses, including stock options
issued pursuant to the Company's 1996 Stock Option Plan. Pursuant to such
agreement, they may not disclose confidential information about the Company
and they have agreed not to compete with the Company for a one-year period
after any termination of employment. If either Messrs. Silver or Harting is
terminated by the Company without "good cause," they are entitled to receive
their base salary and benefits for the remaining term of their employment
agreement or 24 months, whichever is shorter.
STOCK OPTIONS
In April 1996, in order to attract and retain persons necessary for the
success of the Company, the Company adopted its 1996 Stock Option Plan (the
"Option Plan") covering up to 500,000 shares of Common Stock, pursuant to
which officers, directors and key employees of the Company and consultants to
the Company are eligible to receive incentive and/or non-incentive stock
options. The Option Plan, which expires March 1, 2006, will be administered
by the Board of Directors or a committee designated by the Board of
Directors. The selection of participants, allotment of shares, determination
of price and other conditions relating to the purchase of options will be
determined by the Board of Directors, or a committee thereof, in its sole
discretion. Incentive stock options granted under the Option Plan are
exercisable for a period of up to 10 years from the date of grant at an
exercise price which is not less than the fair market value of the Common
Stock on the date of the grant, except that the term of an incentive stock
option granted under the Option Plan to a shareholder owning more than 10% of
the outstanding Common Stock may not exceed five years and its exercise price
may not be less than 110% of the fair market value of the Common Stock on the
date of the grant. Non-qualified stock options granted under the Option Plan
are exercisable for a period of up to 10 years from the date of grant at an
exercise price which may not be less than 85% of the fair market value of the
Common Stock on the date of grant. As of the date hereof, the Company has
granted incentive stock options to 3 of its officers for an aggregate of
23,966 shares and 16,034 non-qualified options to 1 consultant. Such options
are exercisable at a price of $6.00
41
<PAGE>
per share over a five-year period. Options are generally exercisable for
one-quarter of the shares covered thereby as of first anniversary of the date
of the grant and for an additional one-quarter of the shares covered thereby
each year thereafter. In addition, 5,000 shares exercisable at a price of
$6.00 per share will be granted to each of the Company's 2 outside directors
upon their taking office immediately following the closing of this Offering.
Options granted to outside directors are exercisable for 50% of the shares
covered immediately upon grant and for the remainder of the shares following
one year's service. No other options have been granted or exercised under the
Option Plan.
INDEMNIFICATION OF DIRECTORS AND OFFICERS AND RELATED MATTERS
The Company's Certificate of Incorporation limits, to the maximum extent
permitted by the DGCL, the personal liability of directors and officers for
monetary damages for breach of their fiduciary duties as directors and
officers (other than liabilities arising from acts or omissions which involve
intentional misconduct, fraud or knowing violations of law or the payment of
distributions in violation of the DGCL). The Certificate of Incorporation
provides further that the Company shall indemnify to the fullest extent
permitted by the DGCL any person made a party to an action or proceeding by
reason of the fact that such person was director, officer, employee or agent
of the Company. Subject to the Company's Certificate of Incorporation, the
By-laws provide that the Company shall indemnify directors and officers for
all costs reasonably incurred in connection with any action, suit or
proceeding in which such director or officer is made a party by virtue of his
being an officer or director of the Company, except where such director or
officer is finally adjudged to have been derelict in the performance of his
duties as such director or officer.
The Company has not entered into indemnification agreements with any of
its directors. The Company expects to enter into separate indemnification
agreements with its officers and directors containing provisions which are in
some respects broader than the specific indemnification provisions contained
in the Company's Certificate of Incorporation and By-laws. The
indemnification agreements may require the Company, among other things, to
indemnify such directors and officers against certain liabilities that may
arise by reason of their status as directors and officers (other than
liabilities arising from willful misconduct of a culpable nature), to advance
their expenses incurred as a result of any proceeding against them as to
which they could be indemnified, and to obtain directors' and officers'
insurance, if available on reasonable terms. The Company believes these
agreements are necessary to attract and retain qualified persons as directors
and officers.
At present, there is no pending litigation or proceeding involving any
director, officer, employee or agent of the Company where indemnification
will be required or permitted. The Company is not aware of any threatened
litigation or proceeding which may result in a claim for such
indemnification.
42
<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information concerning stock
ownership by (i) each person known by Company to be the beneficial owner of
more than 5% of the outstanding Common Stock, (ii) each director of the
Company, and (iii) all officers and directors as a group as of the date of
this Prospectus and the percentage ownership of the Common Stock for each
named person prior to and after consummation of this Offering.
<TABLE>
<CAPTION>
Prior to Offering After Offering
------------------------------ -----------------------------
Shares Shares
Name and Address(1) of Beneficial Beneficially Benefically
Owner(2) Owned Percentage Owned Percentage
------------------------------------- -------------- ------------ ------------- ------------
<S> <C> <C> <C> <C>
Stuart N. Harting(3)(5)(6) .......... 385,858 38.59% 352,525 15.00%
S. Lance Silver(4)(5)(6) ............ 385,858 38.59% 352,525 15.00%
Bruce Waugh(5)(6) ................... 18,840 1.88% 18,840 *
David Wallack(7) .................... 1,816 * 4,316 *
Jill R. Felix(7) .................... -- -- 2,500 *
All directors and officers as a group
(8 persons)(5) ..................... 801,692 80.17% 740,026 31.42%
</TABLE>
- ------
* Represents less than one percent.
(1) The addresses of the persons named in this table are: Messrs. Silver,
Harting, Waugh, c/o the Company, 415 North Columbus Boulevard,
Philadelphia, PA 19123; Mr. Wallack, 900 Ocean Drive, Miami Beach,
Florida; and Ms. Felix, 602 Cricklewood Road, West Chester, Pennsylvania
19380.
(2) Unless otherwise indicated, each named person has sole voting and
investment power with respect to the shares of Common Stock set forth
opposite his name.
(3) Includes shares of Common Stock which are owned by the Stuart N.
Harting Trust, an irrevocable trust established by Mr. Harting of which
he is the trustee and his wife and children are the beneficiaries, and
50,000 shares of Common Stock which are pledged as additional security
for his indebtedness to Cherry. Simultaneously with the Reorganization
Mr. Harting transferred 33,333 shares of Common Stock to Cherry in
connection with a personal obligation to Cherry.
(4) Includes shares of Common Stock which are owned by the S. Lance Silver
Trust, an irrevocable trust established by Mr. Silver of which he is the
trustee and his wife and children are the beneficiaries, and 50,000
shares of Common Stock which are pledged as additional security for his
indebtedness to Cherry. Simultaneously with the Reorganization Mr. Silver
transferred 33,333 shares of Common Stock to Cherry in connection with a
personal obligation to Cherry.
(5) Holders of 117,500 shares of Common Stock, including Mr. Waugh, have
entered into an agreement with Messrs. Silver and Harting granting them
the right to vote such shares and in connection therewith have executed
irrevocable proxies in favor of Messrs. Silver and Harting.
(6) Mr. Waugh has entered into a restricted stock agreement with the
Company, pursuant to which the shares of Common Stock which he owns (i)
may not be sold or otherwise transferred prior to April 1, 2001 and (ii)
will be forfeited if his employment with the Company is terminated
(unless such termination is without cause, or by reason of death or
disability of such employee) prior to such date. These restrictions will
lapse with respect to 25% of the shares of Common Stock on each of
April 1, 1998, 1999, 2000 and 2001.
(7) Shares owned after the Offering includes 2,500 shares of Common Stock
issuable upon exercise of stock options granted under the Option Plan
exerciseable within 60 days of the effective date this Offering.
43
<PAGE>
CERTAIN TRANSACTIONS
Immediately prior to this Offering, the Company will effect the
Reorganization pursuant to which it will issue 671,716 shares of Common Stock
to S. Lance Silver, Stuart N. Harting, the S. Lance Silver Trust and the
Stuart N. Harting Trust in a tax-free exchange for all of their rights, title
and interest in various predecessors of the Company. See "The Company" and
"Reorganization." In addition, upon formation of the Company, an aggregate of
117,500 shares of Common Stock was issued to various officers and employees
of and consultants to the Company. Finally, in June 1996, the Company issued
110,784 shares of Common Stock to the purchasers of the June 1996 Financing
Notes including 1,816 shares of Common Stock to David Wallack, a Director of
the Company. See "Management", "Principal Stockholders" and "Management's
Discussion and Analysis of Financial Condition and Plan of Operation --
Liquidity and Capital Resources."
In June 1995, the Company paid its past due indebtedness to the S. Lance
Silver Trust and the Stuart N. Harting Trust in the amounts of $122,695 and
$119,338, respectively, including interest, of $46,517 and $43,161,
respectively, and to Lizzy Management Corporation ("Lizzy"), a corporation
controlled by Messrs. Silver and Harting, in the amount of $15,832. In June
and July 1996, the Company paid its past-due indebtedness to Powerhouse
Associates, a Pennsylvania partnership ("Powerhouse") and 1809 Chestnut, in
the amounts of $30,654 and $346,245, respectively, including accrued
interest. Such indebtedness was incurred in 1991 and bore interest at a rate
of 12.5% per annum. Messrs. Silver and Harting control, directly and
indirectly, approximately 95% of Powerhouse Associates and 85% of 1809
Chestnut. Messrs. Silver and Harting and the entities which they control
immediately contributed their share of the proceeds from the repayment of the
Powerhouse and 1809 Chestnut loans, approximately $321,700, to the Company.
In April 1996, the Company borrowed approximately $125,000 from 1809
Chestnut and $105,000 from Cherry. The proceeds of the loan were used to fund
certain expenses associated with the opening of KatManDu-Philadelphia for
the 1996 season. The entire principal amount of such loans, together with
accrued interest thereon will be repaid out of the proceeds of this Offering.
In June 1996, the Company consummated the June 1996 Financing pursuant to
which it sold the June 1996 Notes in the aggregate principal amount of $1.1
million, and 110,784 shares of Common Stock for a total consideration of $1.1
million. One half of such amount, $550,000, will be paid out of the net
proceeds of this Offering and the balance, $550,000, is due one year from the
date of this Prospectus.
In June 1996, the Company purchased the Preefer Interests for an aggregate
of $225,000 in connection with the settlement of the Preefer Litigation. Of
the total purchase price, $54,550 was attributable to the outstanding
principal balance of a loan made by Karen Zimmerman to KIP and $33,538
represented the accrued interest on such loan.
The Company will continue to lease the premises currently occupied by
KatManDu-Philadelphia from Pier 25 North, an affiliate of Messrs. Silver and
Harting. Beginning in March 1997, annual rental payments due under the lease
will be equal to the greater of (i) $50,000 increased by cost of living
adjustments and (ii) 4% of the gross income of KatManDu-Philadelphia. The
lease terminates in November 2005. The Company has entered into lease with
ERP for the second deck of the restaurant ship Elizabeth, which is used for
the Company's executive offices. See "Business -- Properties." T-Kat will
sublease the KatManDu-Trenton restaurant from Urban Renewal which leases the
premises from the Mercer County Improvement Authority. The terms of the
sublease between T-Kat and Urban Renewal are identical to the terms of the
over-lease between the Mercer County Improvement Authority and Urban Renewal.
Upon consummation of the Reorganization, Urban Renewal will become a
wholly-owned subsidiary of the Company.
T-Kat has obtained the Construction Loan from Equity National Bank. The
Construction Loan is secured by all of the assets of T-Kat, a leasehold
mortgage encumbering the Trenton Lease, an assignment of T-Kat's liquor
license and is to be guaranteed by Messrs. Silver and Harting and the
Company. The Construction Loan is for a term of 12 months and bears interest
at a floating rate equal to 1% above the New York Prime Rate, as published in
the money section of the Wall Street Journal. Interest only will be payable
monthly, calculated daily based upon the actual principal balance of the
Construction Loan and the current interest rate.
44
<PAGE>
In December 1996, the Company granted a demand registration right,
exercisable one year from the date of this Prospectus, to Cherry and to
certain holders of June 1996 Financing Notes, to register the 137,500 shares
of Common Stock which they own. Also, in December 1996 the Company borrowed
$65,000 from Messrs. Silver and Harting. Such loan is due February 15, 1998
and bears interest at 12% per annum. The proceeds of this loan were used to
pay certain expenses of the Company relating to this Offering.
The Company believes that all prior transactions between the Company, its
officers, directors or other affiliates of the Company have been on terms no
less favorable than could have been obtained from unaffiliated third parties.
Any future transactions and loans with officers, directors or 5% stockholders
or their affiliates of the Company must be for valid business reasons, be on
terms no less favorable to the Company than could be obtained from
unaffiliated third parties and such transactions be approved by a majority of
the independent outside members of the Company's Board of Directors who do
not have an interest in the transactions.
45
<PAGE>
DESCRIPTION OF SECURITIES
CAPITAL STOCK
The Company's authorized capital stock consists of 25,000,000 shares of
Common Stock and 5,000,000 shares of undesignated Preferred Stock. After the
closing of this Offering, there will be issued and outstanding 2,350,000
shares of Common Stock (2,552,500 shares of Common Stock if the
Representative's Over-Allotment Option is exercised in full). None of the
Preferred Stock is issued and outstanding.
COMMON STOCK
There are no preemptive, subscription, conversion or redemption rights
pertaining to the Common Stock. The absence of preemptive rights could result
in a dilution of the interest of the existing stockholders should additional
shares of Common Stock be issued. In addition, the rights of holders of the
shares of Common Stock may become subject in the future to prior and superior
rights and preferences in the event the Board of Directors establishes one or
more additional classes of Common Stock, or one or more series of Preferred
Stock. The Board of Directors has no present plan to establish any such
additional class or series. See "Risk Factors -- Delaware Anti-Takeover
Statute; Issuance of Preferred Stock; Barriers to Takeover." Holders of the
Common Stock are entitled to receive such dividends as may be declared by the
Board of Directors out of assets legally available therefor, and to share
ratably in the assets of the Company available upon liquidation.
Each share of Common Stock is entitled to one vote for all purposes and
cumulative voting is not permitted in the election of directors. According,
the holders of more than 50% of all of the outstanding shares of Common Stock
can elect all of the directors. Significant corporate transactions, such as
amendments to the certificate of incorporation, mergers, sales of assets and
dissolution or liquidation require approval by the affirmative vote of the
majority of the outstanding shares of Common Stock. Other matters to be voted
upon by the holders of Common Stock normally require the affirmative vote of
a majority of the shares present or represented by proxy at the particular
stockholders' meeting. Prior to the completion of this Offering, the
Company's directors and officers as a group beneficially own approximately
80.17% of the outstanding Common Stock of the Company. Upon completion of
this Offering, such persons will beneficially own approximately 31.42% of the
Common Stock (28.94% if the Representative's Over-Allotment Option is
exercised in full). See "Principal Stockholders." Accordingly, such persons
will continue to exert substantial control over the Company's affairs,
including without limitations, the sale of equity or debt securities of the
Company, the appointment of officers, the determination of officers'
compensation, mergers and acquisitions and a determination concerning the
sale of all or substantially all of the Company's assets.
There are 24 holders of record of the Company's Common Stock as of the
date of this Prospectus.
The Company has applied for the listing of the shares of Common Stock on
the Nasdaq SmallCap Market under the symbol "KATX". There can be no assurance
that the Common Stock will be quoted on such system or under such symbol.
There currently is no established market for the Common Stock, and there can
be no assurance that any such market will develop.
PREFERRED STOCK
The Board of Directors of the Company is authorized (without any further
action by the stockholders) to issue Preferred Stock in one or more series
and to fix the voting rights, liquidation preferences, dividend rates,
conversion rights, redemption rights and terms, including sinking fund
provisions, and certain other rights and preferences. Satisfaction of any
dividend preferences of outstanding Preferred Stock would reduce the amount
of funds available for the payment of dividends on the Common Stock. Also
holders of the Preferred Stock would normally be entitled to receive a
preference payment in the event of any liquidation, dissolution or winding up
of the Company before any payment is made to the holders of Common Stock. In
addition, under certain circumstances, the issuance of preferred stock may
render more difficult or tend to discourage a merger, tender offer or proxy
contest, the assumption of control by a holder of a large block of the
Company's securities, or the removal of incumbent management. The Board of
Directors of the Company, without stockholder
46
<PAGE>
approval, may issue Preferred Stock with voting and conversion rights which
could adversely affect the holders of Common Stock. On the date of this
Prospectus, none of the 5,000,000 authorized shares of Preferred Stock are
outstanding and the Company has no present intention to issue any shares of
Preferred Stock.
TRANSFER AGENT AND REGISTRAR
Continental Stock Transfer and Trust Company, located at 2 Broadway, New
York, New York 10004, is the transfer agent and registrar for the Common
Stock.
47
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Prior to this Offering, there has been no market for the Common Stock of
the Company, and no predictions can be made for the effect, if any, that
market sales of shares or the availability of shares for sale will have on
the market price prevailing from time to time. Nevertheless, sales of
substantial amounts of the Common Stock in the public market could adversely
affect prevailing market prices for the Common Stock and the ability of the
Company to raise equity capital in the future.
Upon completion of this Offering, there will be 2,350,000 Common Shares
issued and outstanding (2,552,500, if the Representative's Over-Allotment
Option is exercised in full). The Shares purchased in this Offering, will be
freely tradable without registration or other restriction under the
Securities Act, except for any shares purchased by an "affiliate" (as defined
in the Act) of the Company. Shares purchased by an "affiliate" of the Company
will be subject to Rule 144.
The remaining 1,000,000 shares of Common Stock held by existing
stockholders will be restricted securities as that term is defined in Rule
144 under the Securities Act ("Restricted Shares"). Restricted Shares may be
sold in the public market only if registered under the Securities Act or if
they qualify for an exemption from registration under Rule 144 promulgated
under the Securities Act. Sale of the Restricted Shares in the public market,
or the availability of such shares for sale, could adversely affect the
market prices of Common Stock.
In general, under Rule 144 as currently in effect, any person (or persons
whose shares are aggregated) including persons deemed to be affiliates, whose
restricted securities have been fully paid for and held for at least two
years from the later of the date of issuance by the Company or acquisition
from an affiliate, may sell such security in broker's transactions or
directly to market makers, provided that the number of shares sold in any
three-month period may not exceed the greater of 1% of the then outstanding
shares of Common Stock or the average weekly trading volume of the shares of
Common Stock in the over-the-counter market during the four calendar weeks
preceding the sale. Sales under Rule 144 are also subject to certain notice
requirements and the availability of current public information about the
Company. After three years have elapsed from the later of the issuance of
restricted securities by the Company or their acquisition from an affiliate,
such securities may be sold without limitation by persons who are not
affiliates under the rule.
Except as otherwise described herein, holders of the Restricted Shares
have entered into Lock-Up Agreements pursuant to which they have agreed not
to, directly or indirectly, issue, offer, agree or offer to sell, sell,
transfer, assign, encumber, grant an option for the purchase or sale of,
pledge, hypothecate or otherwise dispose of any beneficial interest in such
securities for a period of 24 months following the date of this Prospectus;
provided, however, the Representative may release any such holder from the
Lock-Up Agreement after the first 12 months of such period. The purchasers of
the June 1996 Financing Notes and Cherry, will be able to sell the shares of
Common Stock 12 months after the date of this Prospectus. In addition, Cherry
and certain holders of June 1996 Financing Notes, owning an aggregate of
137,500 shares of Common Stock, have been granted a demand registration right
as against the Company exercisable one year from the date of this Prospectus.
Accordingly, approximately 177,450 shares of Common Stock will become
eligible for sale in ------1997 and 822,550 shares will become eligible for
sale in ------1998.
For a period of 12 months from the date of this Prospectus, the Company
has agreed that it will not sell any securities without the prior written
consent of the Representative, which consent may not be unreasonably
withheld. During the 3 year period from the closing of the Offering, the
Representative has a right of first refusal to act as underwriter or agent
for any public or private offering or sale of the securities of the Company
or any successor to the Company or any of the officers or directors of the
Company or shareholders owning beneficially at least five percent (5%) of the
Company's Common Stock. In addition, for a period of 24 months after the date
of this Prospectus, the Company will not issue or sell any securities
pursuant to Regulation S under the Securities Act without the prior written
consent of the Representative.
48
<PAGE>
UNDERWRITING
The Underwriters named below (the "Underwriters"), for whom H.J. Meyers &
Co., Inc. is acting as representative (in such capacity, the
"Representative"), 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 set forth opposite their
names:
Number of
Underwriter Shares
-------------------------- -------------
H.J. Meyers & Co., Inc. ....................................
-------------
Total ................................................. 1,350,000
=============
The Underwriters are committed to purchase all the Shares of Common Stock
offered hereby, if any of such securities are purchased. The Underwriting
Agreement provides that the obligations of the several Underwriters are
subject to conditions precedent specified therein.
The Company has been advised by the Representative that the Underwriters
propose initially to offer the Shares to the public at the initial public
offering prices set forth on the cover page of this Prospectus and to certain
dealers at such prices less concessions not in excess of $ per Share.
Such dealers may reallow a concession not in excess of $ per Share to
certain other dealers. After the commencement of the Offering, the public
offering prices, concession and reallowance may be changed by the
Representative.
The Representative has informed the Company that it does not intend to
sell any of the Shares offered hereby to accounts for which they exercise
discretionary authority.
The Company has agreed to pay to the Representative a non-accountable
expense allowance equal to 3% of the gross proceeds derived from the sale of
the Shares, of which $30,000 has been paid to date.
The Company has granted to the Underwriters an over-allotment option,
exercisable during the forty-five (45) day period from the date of this
Prospectus, to purchase up to an additional 202,500 shares of Common Stock at
the initial public offering price per Share offered hereby, less
underwriting discounts and the non-accountable expense allowance. Such
option may be exercised only for the purpose of covering over-allotments, if
any, incurred in the sale of the Shares offered hereby. To the extent such
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 proportionate to its initial commitment.
In connection with this Offering, the Company has agreed to sell to the
Representative and/or its designees, for nominal consideration, warrants to
purchase from the Company up to 135,000 shares of Common Stock (the
"Representative's Warrants"). The Representative's Warrants are initially
exercisable at a price of $ per share of Common Stock [120% of the initial
public offering price per Share] for a period of four (4) years, commencing
at the beginning of the second year after their issuance and sale and are
restricted from sale, transfer, assignment or hypothecation for a period of
twelve (12) months from the date hereof, except to officers of the
Representative.
The Representative's Warrants will contain anti-dilution provisions
providing for adjustment in the event of any stock dividend, stock split,
recapitalization, reclassification or similar transaction.
49
<PAGE>
The Representative's Warrants and the securities thereunder may not be
offered for sale except in compliance with the applicable provisions of the
Securities Act. The Company has agreed that, upon written request by a holder
or holders of 50% or more of the Representative's Warrants which is made
during the exercise period of the Representative's Warrants, the Company
will, on two separate occasions, register the Representative's Warrants and
any of the securities issuable upon exercise thereof. The initial such
registration will be at the Company's expense and the second such
registration will be at the expense of the holder(s) of the Representative's
Warrants.
For the period during which the Representative's Warrants is exercisable,
the holder or holders will have the opportunity to profit form the rise in
the market value of the Common Stock, with a resulting dilution in
the interest of the other stockholders of the Company. The holder or holders
of the Representative's Warrants can be expected to exercise it 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 Representative's Warrants. Such
fact may adversely affect the terms on which the Company can obtain
additional financing. To the extent that the Representative realizes any gain
from the resale of the Representative's Warrants or the securities issuable
thereunder, such gain may be deemed additional underwriting compensation
under the Securities Act.
The Company has agreed to enter into a one-year consulting agreement with
the Representative, pursuant to which the Representative will act as a
financial consultant to the Company, commencing on the closing date of this
Offering. Under the terms of this agreement, the Representative, to the
extent reasonably required in the conduct of the business of the Company, and
at the prior written request of the principal executive officer of the
Company, has agreed to consult with the Company relating to corporate
financing and other financial service matters. The non-refundable consulting
fee of $72,000 will be payable, in full, on the closing date of this
Offering.
All officers, directors and holders of the Company's outstanding capital
stock prior to the consummation of the Offering have agreed that they will
not sell any shares of Common Stock owned by them (or subsequently acquired
under any option, warrant or convertible security owned prior to this
Offering) for a period of twenty-four (24) months following the date of this
Prospectus; provided, however, after the expiration of the 12 month period
following the date of this Prospectus they may sell but only with the
Representative's prior written consent. An appropriate legend shall be marked
on the face of certificates representing all such securities.
The Company has agreed that for a period of 12 months from the date of
this Prospectus, it will not sell any securities (with the exception of the
shares of Common Stock issued upon exercise of currently outstanding options
or warrants) without the prior written consent of the Representative, which
consent may not be unreasonably withheld. During the 3 year period from the
closing of the Offering, the Representative has a right of first refusal to
act as underwriter or agent for any public or private offering or sale of the
securities of the Company or any successor to the Company or any of the
officers or directors of the Company or shareholders owning beneficially at
least five percent (5%) of the Company's Common Stock. In addition, for a
period of 24 months after the date of this Prospectus, the Company will not
issue or sell any securities pursuant to Regulation S under the Securities
Act without the prior written consent of the Representative.
The Company has also agreed that, for a period of 2 years from the closing
of this Offering, if it participates in any merger, consolidation or other
transaction which the Representative has brought to the Company (including an
acquisition of assets or stock for which it pays, in whole or in part, with
shares of the Company's Common Stock or other securities), if any such
transaction is consummated within 3 years of the closing of this Offering,
then it will pay for the Representative's services an amount equal to 5% of
the first $3,000,000 of value paid or received in the transaction, 3 1/2 % of
any consideration paid over $3,000,000 and not greater than $5,000,000 and 2%
of all such value above $5,000,000 and will reimburse the Representative for
its out-of-pocket and incidental expenses, including fees and expenses of
its legal counsel and any other advisor retained
50
<PAGE>
by the Representative (subject to prior approval by the Company). The Company
has also agreed that if, during this 2 year period, someone other than the
Representative renders advice in connection therewith, then upon consummation
of the transaction the Company will pay to the Representative as a fee the
appropriate amount as set forth above or as otherwise agreed to between the
Company and the Representative.
The Company has agreed that, for a period of 3 years from the date of this
Prospectus, the Representative may designate one nominee for election to the
Company's Board of Directors or act as an observer to attend all meetings of
the Board of Directors. Such observer shall have no voting rights and shall
be reimbursed for all out-of-pocket expenses incurred in connection with
attending such meetings.
For a period of 3 years from the date of this Prospectus, the Company has
also agreed to obtain the written consent of the Representative prior to
issuing any shares of undesignated preferred stock.
On July 16, 1996, the NASD issued a notice of acceptance of the AWC
whereby the Representative was censured, and ordered to pay fines and
restitution to retail customers in the amount of $250,000 and approximately
$1.025 million, respectively. The AWC was issued in connection with claims by
the NASD that the Representative charged excessive markups and markdowns in
connection with the trading of four certain securities originally
underwritten by the Representative. The activities in question occurred
during periods between December 1, 1990 and October 1993. The Representative
has informed the Company that the fines and refunds will not have a material
adverse effect on the Representative's operations and that the Representative
has effected remedial measures to help ensure that the subject conduct does
not recur. As of the date of this Prospectus, all fines and restitution
associated with such AWC have been paid.
The Underwriting Agreement provides for reciprocal indemnification between
the Company and the Representative against certain liabilities in connection
with the Registration Statement, including liabilities under the Securities
Act. Insofar as indemnification for liabilities arising under the Act may be
permitted to directors, officers and controlling persons of the Company
pursuant to the Underwriting Agreement, or otherwise, the Company has been
advised that in the opinion of the Commission such indemnification is against
public policy as expressed in the Securities Act and is, therefore,
unenforceable.
Prior to this Offering, there has been no public market for the Common
Stock. Consequently, the initial public offering prices of the Shares has
been determined by negotiation between the Company and the Representative 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
assessment of the Company's management, the prospects of the Company, its
capital structure and the market for initial public offerings.
Prior to this Offering the Company had entered into a letter of intent with
National Securities Corporation with respect to a possible public offering.
The foregoing is a summary of the principal terms of the agreements
described above and does not purport to be complete. Reference is made to a
copy of each such agreement which is filed as exhibits to the Registration
Statement. See "Available Information."
LEGAL MATTERS
The validity of the securities offered hereby will be passed upon for the
Company by Morse, Zelnick, Rose & Lander, LLP ("MZRL"), a professional
limited liability partnership, with offices in New York, New York. Partners
of MZRL, or their affiliates, will own an aggregate of 58,750 shares of
Common Stock. Orrick, Herrington & Sutcliffe LLP, New York, New York has
acted as counsel to the Underwriters.
EXPERTS
The financial statements and schedules included in this Prospectus and
elsewhere in the Registration Statement have been audited by Arthur Andersen
LLP, independent public accountants, as indicated in their report with
respect thereto, and are included herein in reliance upon the authority of
said firm as experts in giving said report.
51
<PAGE>
AVAILABLE INFORMATION
The Company is not a reporting company under the Exchange Act. The Company
has filed a Registration Statement on Form SB-2 under the Securities Act with
the Commission with respect to the Shares offered hereby. This Prospectus
filed as a part of the Registration Statement does not contain all of the
information contained in the Registration Statement and the exhibits thereto,
certain portions of which have been omitted in accordance with the rules and
regulations of the Commission. For further information with respect to the
Company and the Shares offered hereby, reference is made to such Registration
Statements including the exhibits and schedules thereto. Statements contained
in this Prospectus as to the contents of any contract, agreement or other
documents are not necessarily complete, and in each instance, reference is
made to such contract, agreement or other document filed as an exhibit to the
Registration Statement, each such statement being qualified in all respects
by such reference. The Registration Statement and exhibits may be inspected
without charge and copied at the public reference facilities maintained by
the Commission at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W.,
Washington, D.C. 20549, as well as at the New York regional office of the
Commission at Seven World Trade Center, 14th Floor, New York, New York 10048.
Registration statements transmitted through the Commission's Electronic Data
Gathering, Analysis and Retrieval System are also public available through the
Commission's Internet site on the World Wide Web (http://www.sec.gov).
Copies of such material can also be obtained from the Public Reference
Section of the Commission at Room 1024, Judiciary Plaza, 450 Fifth Street,
N.W., Washington, D.C. 20549, at prescribed rates. Application will be made
to list the Common Stock on the Nasdaq SmallCap Market. The foregoing
material also should be available for inspection at the National Association
of Securities Dealers, Inc., 1735 K Street, N.W., Washington, D.C. 20006.
The Company intends to furnish its stockholders with annual reports
containing financial statements audited by its independent certified public
accountants.
52
<PAGE>
KATMANDU ENTERTAINMENT CORP.
INDEX
DECEMBER 31, 1995
AND SEPTEMBER 30, 1996 (UNAUDITED)
<TABLE>
<CAPTION>
<S> <C>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ............................ F - 2
CONSOLIDATED FINANCIAL STATEMENTS:
CONSOLIDATED BALANCE SHEETS AS OF DECEMBER 31, 1995 AND SEPTEMBER
30, 1996 (UNAUDITED) ........................................... F - 3 - 4
CONSOLIDATED STATEMENTS OF INCOME FOR THE YEARS ENDED DECEMBER 31,
1994 AND 1995, FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1995 AND
1996 (UNAUDITED) ............................................... F - 5
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' (DEFICIT) EQUITY FOR THE
YEARS ENDED DECEMBER 31, 1994 AND 1995, FOR THE NINE MONTHS
ENDED SEPTEMBER 30, 1996 (UNAUDITED) ........................... F - 6
CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER
31, 1994 AND 1995, FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1995
AND 1996 (UNAUDITED) ........................................... F - 7
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ........................ F - 8 - 14
</TABLE>
F-1
<PAGE>
After giving effect of the stock transfer discussed in Note 11, we would be
in a position to render the following audit report.
Arthur Andersen LLP
New York, New York
September 3, 1996
(except with respect to the matters
discussed in Note 11, as to which
the date is December 11, 1996)
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Katmandu Entertainment Corp.
We have audited the accompanying consolidated balance sheet of Katmandu
Entertainment Corp. (a Delaware corporation) and subsidiaries as of December
31, 1995, and the related consolidated statements of income, stockholders'
equity and cash flows for each of the two years in the period ended December
31, 1995. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our 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 statement 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 financial position of Katmandu
Entertainment Corp. and subsidiaries as of December 31, 1995, and the results
of their operations and their cash flows for each of the two years in the
period ended December 31, 1995, in conformity with generally accepted
accounting principles.
F-2
<PAGE>
KATMANDU ENTERTAINMENT CORP.
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 1995 AND SEPTEMBER 30, 1996 (UNAUDITED)
<TABLE>
<CAPTION>
December 31, September 30,
1995 1996
-------------- --------------
(Unaudited)
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents ......................... $ 19,768 $ 285,886
Inventories ....................................... 7,294 20,015
Prepaid expenses .................................. 10,270 --
Loan receivable, related parties .................. 26,983 2,971
-------------- --------------
Total Current Assets ......................... 64,315 308,872
-------------- --------------
PROPERTY AND EQUIPMENT, AT COST .....................
Furniture ......................................... 75,950 75,950
Leasehold improvements ............................ 582,558 603,703
Machinery and equipment ........................... 467,211 467,211
-------------- --------------
1,125,719 1,146,864
Less: Accumulated depreciation .................... 609,884 687,377
-------------- --------------
Net Property and Equipment ................... 515,835 459,487
-------------- --------------
OTHER ASSETS
Liquor license .................................... 23,000 23,000
Intangible assets, net of accumulated amortization
of $46,555 at December 31, 1995, $47,294 at
September 30, 1996 (Unaudited) ................. 7,103 6,364
Deferred financing cost ........................... -- 664,704
Deferred offering expenses ........................ -- 975,764
Construction in progress .......................... 54,666 539,340
Purchase of Minority Interest ..................... -- 98,284
-------------- --------------
Total Other Assets ........................... 84,769 2,307,456
-------------- --------------
TOTAL ASSETS ........................................ $ 664,919 $3,075,815
============== ==============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
<PAGE>
KATMANDU ENTERTAINMENT CORP.
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 1995 AND SEPTEMBER 30, 1996 (UNAUDITED)
<TABLE>
<CAPTION>
December 31, September 30,
1995 1996
-------------- --------------
(Unaudited)
<S> <C> <C>
CURRENT LIABILITIES
Accounts payable and accrued expenses ....................... $ 380,174 $ 419,194
Accounts payable to a related party ......................... 17,711 --
Loan payable, June 1996 Financing Notes ..................... -- 550,000
Taxes payable, other than on income ......................... 110,855 328,078
Interest payable to related parties ......................... 32,554 --
Loan payable to related parties ............................. 405,158 125,000
Loan payable, other ......................................... -- 104,969
Minority interest ........................................... 39,386 --
Other current liabilities ................................... -- 23,338
-------------- --------------
Total Current Liabilities .............................. 985,838 1,550,579
-------------- --------------
LONG-TERM DEBT ................................................... -- 550,000
OTHER LIABILITIES
Deferred rent ............................................... 36,728 36,728
COMMITMENTS AND CONTINGENCIES
(NOTES 10 & 11)
STOCKHOLDERS'(DEFICIT) EQUITY
Preferred stock, $.001 par value; 5,000,000 shares
authorized, none issued and outstanding as of December 31,
1995 and September 30, 1996 (Unaudited) ................... -- --
Common stock, $.001 par value; 25,000,000 shares authorized,
771,716 shares issued and outstanding as of December 31,
1995; and 1,000,000 shares issued and outstanding as of
September 30, 1996 (Unaudited) ............................ 772 1,000
Additional paid in capital .................................. 22,228 1,572,403
Accumulated deficit ......................................... (380,647) (634,895)
-------------- --------------
Total Stockholders' (Deficit) Equity ................... (357,647) 938,508
-------------- --------------
TOTAL LIABILITIES AND STOCKHOLDERS'
(DEFICIT) EQUITY ............................................... $ 664,919 $3,075,815
============== ==============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE>
KATMANDU ENTERTAINMENT CORP.
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 1994 AND 1995 AND FOR THE NINE MONTHS
ENDED SEPTEMBER 30, 1995 AND 1996 (UNAUDITED)
<TABLE>
<CAPTION>
Year Ended December 31, Nine Months Ended September 30,
------------------------------ -------------------------------
1994 1995 1995 1996
------------- ------------- ------------ ------------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Revenue
Food and beverage ............. $2,451,992 $2,487,085 $2,481,853 $2,395,178
Gate charges .................. 355,597 396,123 396,123 338,565
Promotional merchandise ....... 36,713 45,793 45,513 59,003
Miscellaneous ................. 15,921 24,300 23,685 12,855
---------- ---------- ---------- ----------
Gross revenue ................. 2,860,223 2,953,301 2,947,174 2,805,601
Promotional disallowance ...... (87,181) (87,550) (87,550) (65,366)
---------- ---------- ---------- ----------
Net revenue ........................ $2,773,042 $2,865,751 $2,859,624 $2,740,235
---------- ---------- ---------- ----------
Cost and expenses
Food and beverage ............. 612,395 585,115 558,884 575,523
Promotional merchandise ....... 20,722 34,984 34,984 44,283
General administrative
expenses, rent expense to
related party ............... 1,723,594 1,742,898 1,635,641 1,610,049
Corporate overhead ............ 122,038 164,628 141,777 230,332
Compensation expense (Note 11f) -- -- -- 135,168
---------- ---------- ---------- ----------
Total Cost and Expenses .. 2,478,749 2,527,625 2,371,286 2,595,355
---------- ---------- ---------- ----------
Operating income ................... 294,293 338,126 488,338 144,880
Interest income .................... 2,264 2,009 1,610 3,040
Interest expense ................... (69,383) (67,621) (44,800) (42,718)
---------- ---------- ---------- ----------
Income before minority interest .... 227,174 272,514 445,148 105,202
Minority interests ................. (22,717) (27,251) (44,515) (1,496)
---------- ---------- ---------- ----------
Net income .................... $ 204,457 $ 245,263 $ 400,633 $ 103,706
========== ========== ========== ==========
Net income per common share ........ $ .20 $ .25 $ .40 $ .10
========== ========== ========== ==========
Weighted average number of shares
outstanding ...................... 1,000,000 1,000,000 1,000,000 1,000,000
========== ========== ========== ==========
Pro forma provision for income taxes
(Note 7) ......................... 83,100 99,600 172,000 71,800
---------- ---------- ---------- ----------
Pro forma net income before
cumulative effect of accounting
change ........................... $ 121,357 $ 145,663 $ 228,663 $ 31,906
Cumulative effect of accounting
change for income taxes (Note 7) . (22,100) -- -- --
---------- ---------- ---------- ----------
Pro forma net income ............... $ 143,457 $ 145,663 $ 228,633 $ 31,906
========== ========== ========== ==========
Pro forma net income per
common share ..................... $ .14 $ .15 $ .23 $ .03
========== ========== ========== ==========
Pro forma weighted average number of
shares outstanding ............... 1,000,000 1,000,000 1,000,000 1,000,000
========== ========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE>
KATMANDU ENTERTAINMENT CORP.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS'(DEFICIT) EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1994, 1995 AND FOR THE
NINE MONTHS ENDED SEPTEMBER 30, 1996
(UNAUDITED)
<TABLE>
<CAPTION>
Preferred Stock Common Stock
-------------------- ------------------------ Additional
No. of No. of Paid-In Accumulated
Shares Amount Shares Amount Capital Deficit Total
-------- -------- ----------- --------- ------------ ------------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1993 .... -- $ -- 771,716 $ 772 $ 22,228 $ 24,784 $ 47,784
Net income .................... 204,457 204,457
Distributions ................. -- -- -- -- -- (456,312) (456,312)
-------- -------- ----------- --------- ------------ ------------- ------------
Balance, December 31, 1994 .... -- -- 771,716 $ 772 $ 22,228 ($ 227,071) ($ 204,071)
Net income .................... -- -- -- -- -- 245,263 245,263
Distributions ................. -- -- -- -- -- (398,839) (398,839)
-------- -------- ----------- --------- ------------ ------------- ------------
Balance, December 31, 1995 .... -- $ -- 771,716 $ 772 $ 22,228 ($ 380,647) ($ 357,647)
======== ======== =========== ========= ============ ============= ============
Net income .................... 103,706 103,706
Distributions ................. -- -- -- -- -- (357,954) (357,954)
Issuance of common stock ...... -- -- 117,500 117 563,883 -- 564,000
Issuance of common stock,
June 1996 Financing Notes .... -- -- 110,784 111 664,593 -- 664,704
Contributions from stockholders . -- -- -- -- 321,699 -- 321,699
-------- -------- ----------- --------- ------------ ------------- ------------
Balance, September 30, 1996 ... -- $ -- 1,000,000 $ 1,000 $1,572,403 ($ 634,895) $ 938,508
======== ======== =========== ========= ============ ============= ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
<PAGE>
KATMANDU ENTERTAINMENT CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1994 AND 1995
AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1995 AND 1996 (UNAUDITED)
<TABLE>
<CAPTION>
December 31, September 30,
-------------------------- --------------------------
1994 1995 1995 1996
----------- ----------- ----------- -----------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income ..................................... $ 204,457 $ 245,263 $ 400,633 $ 103,706
-------- --------- -------- ---------
Adjustments to reconcile net income to net cash
provided by operating activities:
Amortization and depreciation ............... 138,545 129,735 87,305 78,232
Minority interest ........................... 22,717 27,251 44,515 1,496
Non-cash compensation ....................... -- -- -- 135,168
Changes in operating assets and liabilities:
Inventories ............................... (4,600) (2,694) (2,695) (12,721)
Prepaid expenses .......................... (300) (9,970) (29,173) 10,270
Accounts payable, related party, trade and
accrued expenses ....................... 58,208 216,811 120,905 44,647
Taxes payable, other than on income ....... (29,670) (15,460) 25,567 217,223
Deferred rent ............................. (3,704) (3,704) -- --
Interest payable to related party ......... 28,955 (67,474) (59,302) (32,554)
-------- --------- -------- ---------
Total Adjustments ...................... 210,151 274,495 187,122 441,761
-------- --------- -------- ---------
Net Cash Provided By Operating Activities 414,608 519,758 587,755 545,467
-------- --------- -------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Insurance proceeds ............................. 129,435 -- -- --
Purchase of property and equipment ............. -- (7,682) (7,682) (21,145)
Construction in progress ....................... (5,000) (49,666) (20,128) (484,674)
-------- --------- -------- ---------
Net Cash Provided By (Used In) Investing
Activities ........................... 124,435 (57,348) (27,810) (505,819)
-------- --------- -------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Deferred offering expenses ..................... -- -- -- 117,772
Deferred financing costs ....................... -- -- -- (664,704)
Purchase of minority interest .................. -- -- -- (139,166)
Loan payable, June 1996 Financing Notes ........ -- -- -- 1,100,000
Loan payable, related parties, net ............. 10,442 (136,641) (264,238) (256,146)
Loan payable, other ............................ -- -- -- 104,969
Contributions from stockholders ................ -- -- -- 321,699
Distributions .................................. (485,204) (398,839) (270,365) (357,954)
-------- --------- -------- ---------
Net Cash (Used In) Provided By Financing
Activities ........................... (474,762) (535,480) (534,603) 226,470
-------- --------- -------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 64,281 (73,070) 25,342 266,118
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD ... 28,557 92,838 92,838 19,768
-------- --------- -------- ---------
CASH AND CASH EQUIVALENTS, END OF PERIOD ......... $ 92,838 $ 19,768 $ 118,180 $ 285,886
========= ========= ========= =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOWS INFORMATION:
Cash paid for interest .......................... $ 40,428 $ 135,095 $ 104,102 $ 64,272
========= ========= ========= =========
NON CASH OPERATING
ACTIVITIES:
Bartered services ............................... $ 21,497 $ 29,080 $ 29,080 $ 30,640
========= ========= ========= =========
Compensation .................................... $ -- $ -- $ -- $ 135,168
========= ========= ========= =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-7
<PAGE>
KATMANDU ENTERTAINMENT CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995
NOTE 1 -- BUSINESS ACTIVITIES AND ORGANIZATION
Katmandu Entertainment Corporation, ("Katmandu" or the "Company") was
incorporated on March 29, 1996 in the State of Delaware to wholly own
Katmandu Corporation ("Kat Corp."), T-Kat Corporation ("T-Kat") and Katmandu
Investment Partners ("KIP"), all of which are under common ownership and
control. Accordingly, the three entities are presented as wholly owned
subsidiaries of the Company. All significant intercompany transactions and
balances have been eliminated in consolidation.
Kat Corp. was formed in 1990, in the Commonwealth of Pennsylvania and
operates a restaurant and nightclub on the Philadelphia, Pennsylvania
waterfront. The business is a seasonal operation, open from April through
September.
T-Kat is developing a restaurant and nightclub on the Trenton, New Jersey
waterfront. While the Company was incorporated on August 25, 1995, in the
State of New Jersey, the concept for the development project and various
project costs commenced effective January 1, 1994.
KIP (a Pennsylvania Limited Partnership) was formed in 1991 to own the
furniture, leasehold improvements and machinery and equipment used in the
restaurant and nightclub operation of Kat Corp. KIP is owned by Chinatown
Convention Center Hotel Corporation, general partner (1%), and three limited
partners, Lance Silver Trust (44.55%), Stuart Harting Trust (44.55%) and Karen
Zimmerman (9.9%).
NOTE 2 -- RISKS AND UNCERTAINTIES
The Company has a net working capital deficiency and limited operating
history. Although the Company has operating income at year end, the Company's
ability to generate net income in the future will depend upon the success of
its location in Philadelphia and the successful implementation of the
Company's expansion strategy. Management believes that its current
operations, the proceeds from the June 1996 Financing and capital
contribution made subsequent to year end will be sufficient to support the
business activities through December 1996. (See Note 11)
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities 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.
The Company is subject to a number of risks including the Company's
limited operating history. The Company is also subject to general expansion
risks, availability of sites, and acceptance and evolution of its concept.
Additionally, there are risks associated with obtaining financing as well as
the quarterly fluctuations that exist due to the seasonality of the business
that could impact the future results of the Company. See discussions of Risk
Factors in the accompanying registration statement of which these combined
financial statements and notes to consolidated financial statements are a
part.
NOTE 3 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CASH AND CASH EQUIVALENTS: For the purpose of the statement of cash flows,
all highly liquid investments with an original maturity of 3 months or less
are considered cash equivalents.
INVENTORIES: Inventories at December 31, 1995 are valued at the lower of
cost or market value, using the first-in, first-out (FIFO) method.
PROPERTY AND EQUIPMENT AND DEPRECIATION: Property and equipment are stated
at cost. Depreciation is calculated using straight-line method over lesser of
their estimated useful lives or remaining term of lease. Estimated useful
lives are as follows:
Furniture .................................. 7 years
Leasehold improvements ..................... 15 years
Machinery and equipment..................... 5-7 years
F-8
<PAGE>
KATMANDU ENTERTAINMENT CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
DECEMBER 31, 1995
NOTE 3 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (Continued)
Expenditures for renewals and betterments which significantly extend the
useful life of property and equipment are capitalized; expenditures for
maintenance and repairs are charged to income. When property and equipment
are retired, the asset and related accumulated depreciation accounts are
relieved of the applicable amounts. Gains or losses from retirements or sales
are credited or charged to income. Depreciation expense was $131,278 and
$120,819 for the years ended December 31, 1994 and 1995, respectively.
INTANGIBLE ASSETS AND AMORTIZATION: Intangible assets are recorded at cost
less related accumulated amortization. Amortization is calculated on a
straight-line basis for periods ranging from 5-15 years. Amortization expense
was $7,267 and $8,916 for the years ended December 31, 1994 and 1995,
respectively.
CONSTRUCTION IN PROGRESS: The Company capitalizes the costs relating to
the opening of the site in Trenton, New Jersey and will amortize such cost
over the twelve months following the opening date. At balance sheet date,
these costs are comprised primarily of legal and architectural expenses. The
Company will treat all pre-opening costs as period costs and expense them as
incurred.
ADVERTISING COSTS: Advertising costs are generally charged to operations
in the year incurred. Advertising expense totaled $178,015 and $126,301 for
the years ended December 31, 1994 and 1995, respectively.
INCOME TAXES: Income taxes are determined under the liability method as
required by Statement of Financial Accounting Standards No. 109, "Accounting
for Income Taxes", ("SFAS 109"). Under SFAS 109, deferred tax assets and
liabilities are determined based upon differences between financial reporting
and tax basis of assets and liabilities.
RECENTLY ISSUED ACCOUNTING STANDARDS: During March 1995, the Financial
Accounting Standards Board ("FASB") issued Statement of Financial Accounting
Standards No. 121 ("SFAS 121"), "Accounting for the Impairment of Long Lived
Assets and for Long Lived Assets to Be Disposed Of." This statement
establishes financial accounting and reporting standards for the impairment
of long lived assets, certain identifiable intangibles, and goodwill related
to those assets to be held and used, and for long lived assets and certain
identifiable intangibles to be disposed of. This statement is effective for
financial statements for fiscal years beginning after December 15, 1995,
although earlier application is encouraged. The Company does not expect that
the adoption of SFAS 121 will have a material effect on its financial
statements.
The FASB issued Statement of Financial Accounting Standards No. 123,
"Accounting to Stock Based Compensation" ("SFAS 123"), which will require
companies either to reflect in their financial statements or reflect as
supplemental disclosure the impact on earnings and earnings per share of the
fair value of stock based compensation using certain pricing models for the
option component of stock option plans. It is the Company's intention to
continue to account in its basic financial statements under the general
philosophy of Accounting Principles Board Opinion No. 25, as allowed under
the new standard, which measures only the intrinsic option value as
compensation. Disclosure, as required by SFAS 123, will be made commencing
with the Company's financial statements for the year ending December 31, 1996
and will reflect the impact of the compensation for options issued in 1995
and 1996 (if any) in the Notes to the Consolidated Financial Statements.
Accordingly, SFAS 123 has no impact on the financial position and results of
operations for any period described herein.
STOCK OPTION PLAN: Subsequent to balance sheet date, the Company adopted a
1996 Stock Option Plan ("Plan") in which 500,000 shares of Common Stock have
been reserved for issuance to employees, officers and directors of the
Company. At December 31, 1994 and 1995, no shares were issued in connection
with this Plan.
EARNINGS PER SHARE: Both historical and pro forma earnings per share are
computed using the weighted average number of common shares outstanding
adjusted for the issuance of shares in connection with the June 1996
Financing discussed in Note 11.
F-9
<PAGE>
KATMANDU ENTERTAINMENT CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
DECEMBER 31, 1995
NOTE 3 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (Continued)
RECLASSIFICATIONS: Certain prior year amounts have been reclassified to
conform to current year presentation.
INTERIM PERIODS PRESENTED: The interim consolidated financial statements
for the nine months ended September 30, 1995 and 1996 are unaudited.
Accordingly, they do not include all of the information and notes required by
generally accepted accounting principles for complete financial statements.
In the opinion of management, all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation have been included.
Operating results for the nine month period ended September 30, 1996 are not
necessarily indicative of the results that may be expected for the year
ending December 31, 1996.
NOTE 4 -- BANK LINE OF CREDIT
The Company utilized a $125,000 bank line of credit bearing interest at
bank prime rate during its 1994 and 1995 operating seasons. The line of
credit expired December 31, 1995 and was not renewed by the Company. The
unpaid balance on the line of credit was $0 at December 31, 1995. Interest
expense on the line of credit was $2,980 and $4,051 for the years ended
December 31, 1994 and 1995, respectively.
NOTE 5 -- LOANS RECEIVABLE, RELATED PARTIES
At December 31, 1995, the Companies were owed $26,983, from various
parties related through common ownership and control. The loans were
non-interest bearing with no specified repayment terms.
NOTE 6 -- ACCOUNTS PAYABLE TRADE AND ACCRUED EXPENSES
Accounts payable and accrued expenses as of December 31, 1995 consists of
the following:
Accounts payable ..................................... $348,726
Accrued expenses ..................................... 19,448
Accrued bonus ....................................... 12,000
-----------
Total .......................................... $380,174
===========
NOTE 7 -- INCOME TAXES
Kat Corp., with the consent of its stockholders, elected to be taxed as an
S-Corporation for federal and state income tax purposes. As such, Kat Corp.
is not subject to federal and state corporate income taxes. Kat Corp.'s
income will, instead, be taxed to the individual stockholders. T-Kat was a C
Corporation for the year ended December 31, 1995 that had no material
operations or profitability. It also elected to be taxed as an S-Corporation
for federal and state income tax purposes effective January 1, 1996. KIP is a
Partnership. Its income will be taxed to the individual parties. No provision
for income taxes has been made for federal or state income taxes due to the
tax structure of the combined companies.
F-10
<PAGE>
KATMANDU ENTERTAINMENT CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
DECEMBER 31, 1995
NOTE 7 -- INCOME TAXES - (Continued)
Immediately after the transfer of ownership discussed in Note 11, the
Company will no longer be treated as an S-Corporation. The accompanying
consolidated financial statements reflect a provision for income taxes on a
pro forma basis as if the Company was liable for federal, state and local
income taxes as a taxable corporate entity throughout the years presented.
The pro forma adjustments to income taxes represent the difference between
historical income taxes and the income taxes that would have been reported
had the Company filed federal, state and local income tax returns as a single
corporate entity for each of the years presented.
The following summarizes pro forma income taxes provision:
For the Year Ended
---------------------------------
1994 1995
---------- ----------
Pro forma income tax adjustment:
Current
Federal ................... $ 75,000 $ 94,500
State ..................... 24,300 30,600
---------- ----------
Total ..................... $ 99,300 $125,100
========== ==========
Deferred
Federal ................... (13,500) (21,000)
State ..................... (2,700) (4,500)
---------- ----------
Total ..................... (16,200) (25,500)
Pro forma income tax ........... $ 83,100 $ 99,600
========== ==========
The pro forma provision for income taxes differs from the amounts computed by
applying federal statutory rates due to the following:
For the Year Ended
-------------------
1994 1995
--------- --------
Pro forma provision computed at the federal statutory
rate ................................................... 34.0% 34.0%
State income taxes, net of federal tax benefit .......... 7.0% 7.0%
--------- --------
Total ................................................... 41.0% 41.0%
NOTE 8 -- NOTE PAYABLE TO RELATED PARTIES
The Company is indebted to various parties related through common
ownership and control and various limited partners.
<TABLE>
<CAPTION>
1995
----------
<S> <C>
Katmandu Investment Partners:
Demand note payable to a minority stockholder with interest at 12.5%
per annum ................................................................ $ 54,550
Demand note payable to a related party with interest at 12.5% per annum .... 24,730
Demand notes payable to a related party with interest at 12.5% per annum.... 325,878
----------
$405,158
==========
</TABLE>
Substantially all assets of the Company have been pledged as collateral
for the above borrowings.
NOTE 9 -- RELATED PARTY TRANSACTIONS
In June 1995, KIP satisfied in full its indebtedness to certain related
parties. The total amount paid was $257,865, of which $89,678 represented
accrued interest.
F-11
<PAGE>
KATMANDU ENTERTAINMENT CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
DECEMBER 31, 1995
NOTE 9 -- RELATED PARTY TRANSACTIONS - (Continued)
KIP leases, from a related party, the pier on which the business on the
Philadelphia waterfront operates. The lease is classified as an operating
lease and expires November, 2005. The terms of the lease stipulate that the
annual minimum rent for the year ending March 31, 1996 will be $50,000.
Beginning March 1, 1997, the annual minimum rent becomes the greater of
$50,000 plus an adjustment for cost of living and four percent (4%) of the
gross business conducted on the premises.
Rent expense is straight-lined over the life of the lease. Total rent
expense for the years ended December 31, 1994 and 1995 was $52,296 in each
year.
At December 31, 1995 future minimum lease payments under the above leases,
excluding real estate taxes and operating costs are as follows:
Year Ended December 31,
-----------------------
1996 ............................... $ 50,000
1997 ............................... 50,000
1998 ............................... 50,000
1999 ............................... 50,000
2000 ............................... 50,000
Thereafter .......................... 245,833
--------
$495,833
NOTE 10 -- COMMITMENTS AND CONTINGENCIES
Kat Corp. and KIP are guarantors of a loan payable by a related entity.
The balance of the loan at December 31, 1995 was $375,315. The Companies are
also guarantors of an equipment lease payable by the same related entity. The
balance of the lease payable at December 31, 1995 was $40,953.
KIP has pledged substantially all of its assets as guarantor of an
additional loan payable by two of its partners. The balance of the loan at
December 31, 1995 was $282,763.
During 1995 the Company entered into discussions with David Preefer and
Karen Zimmerman, holders of minority interests in each of Kat Corp., KIP and
Chinatown, with the objective to settle litigation among the parties. As of
December 31, 1995, such minority interest included in the accompanying
balance sheets was approximately $125,220, (including amounts due and notes
payable). The Company, based on advice of litigation counsel, concluded that
no material adjustment to the consolidated financial statements would result
from the resolution of this matter.
In June 1996, this matter was settled and as a result the Company repaid all
the amounts due and repurchased these minority interests. The latter was
accounted for under the purchase method of accounting as follows:
Loans, including interest of $31,284 ............ $ 85,834
Minority interest ............................... $ 40,882
----------
$126,716
Total paid ...................................... $225,000
----------
Cost relating to acquisition of Minority Interest. $ 98,284
F-12
<PAGE>
KATMANDU ENTERTAINMENT CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
DECEMBER 31, 1995
NOTE 11 -- SUBSEQUENT EVENTS
a) Proposed Initial Public Offering
On December 10, 1996 the Company entered into a letter of intent to offer
1,350,000 shares of Common Stock.
b) June 1996 Financing
In June 1996, the Company sold $1.1 million of its 10% notes ("June 1996
Financing Notes") to accredited investors (the "June 1996 Financing").
Interest on the June 1996 Financing Notes is payable monthly in arrears. In
addition, in connection with the June 1996 Financing, the Company issued
110,784 shares of Common Stock to the purchasers of such Notes. If the
proposed initial public offering is consummated, the June 1996 Financing
Notes having an aggregate principal amount of $550,000 are due the day
following the day of closing with respect to the Company's proposed public
offering and the balance will be due one year following such closing. If such
proposed initial public offering is not consummated all of the June 1996
Financing Notes will be due May 31, 1998. In the event the initial public
offering for the sale of Common Stock is more or less than $6.00 per share,
the number of shares of Common Stock issued to the lenders will be adjusted
so that the total number of shares issued to the lenders will be equal to
$664,700.
The Company used approximately $368,000 of the proceeds to repay two
related parties in full satisfaction of loans that existed at balance sheet
date. Two principal stockholders control, directly and indirectly,
approximately 95% of one entity and 85% of another entity. These two
stockholders and the entities which they control immediately contributed
their share of the proceeds from the repayment of the loans, approximately
$321,700, to the Company.
c) Loans
In April, 1996 the Company borrowed approximately $125,000 from a related
party and $105,000 from an unrelated party. The $125,000 loan is bearing
interest at an imputed rate and is due on demand. The $105,000 loan bears
interest at 12% per annum. The principle and accrued interest are due
April, 2000. The proceeds of the loans were used to fund certain expenses
associated with the opening of Katmandu-Philadelphia for the 1996 season. The
entire principal amount of such loans, together with accrued interest thereon
will be repaid out of the proceeds of this Offering. In December 1996, the
Company borrowed $65,000 from its principal stockholders. Such loans bear
interest at 12% per annum and is due February 15, 1998. The proceeds of this
were used to pay expenses relating to the proposed initial public offering.
d) Stock Option Plan
In April 1996, the Company adopted its 1996 Stock Option Plan covering up
to 500,000 shares of Common Stock, pursuant to which officers, directors, and
key employees are eligible to receive options. As of July 1996, options were
granted for an aggregate of 50,000 shares exercisable at a price of $6.00 per
share, and vest for a period of approximately 2 to 5 years.
e) Katmandu-Trenton ("T-Kat")
In July 1996 the Company obtained a commitment from a bank for a $2.5
million construction loan to be used in conjunction with the development of
Katmandu-Trenton. Furthermore, in connection with development of
Katmandu-Trenton, the Company has, subsequent to year end entered into an
agreement to lease the premises. The lease for Katmandu-Trenton is for a term
of 30 years. The annual rental payable by T-Kat under such lease is an amount
equal to 2% of the gross revenues of Katmandu-Trenton with a minimum payment
of $50,000 and a maximum payment of $100,000 which amounts are adjusted every
three years to reflect increases in the consumer price index for the
Philadelphia/New Jersey region. In addition T-Kat is obligated to pay as
additional rent all real estate taxes, assessments and utility charges
applicable to such premises.
f) Stockholders' Equity
Subsequent to year end, the stockholders approved a change in the
capitalization of the Company so that the number of authorized shares of
Common Stock and Preferred Stock are 25,000,000 and 5,000,000, respec-
F-13
<PAGE>
KATMANDU ENTERTAINMENT CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
DECEMBER 31, 1995
NOTE 11 -- SUBSEQUENT EVENTS - (Continued)
tively. Immediately prior to the consummation of the offering, the shareholders
of Chinatown, Kat Corporation, T-Kat and T-Kat Urban Renewal Corporation, an
entity formed in 1996 and which is inactive, and the limited partners of KIP
will transfer their ownership interests in those entities to the Company in a
tax-free exchange pursuant to which transferors will receive a total of 771,716
shares of Common Stock of the Company. Of such shares, 66,666 shares of Common
Stock were transferred in connection with a loan payable. In addition, in
connection with the June 1996 Financing, the Company issued 110,784 shares of
Common Stock to the lenders. All shares and per share amounts in the combined
financial statements have been retroactively restated to give effect to these
transactions, where applicable.
In March 1996, the Company issued 117,500 shares of Common Stock at a
price of $4.80 per share to certain employees and consultants. Compensation
expense was charged in the amount of $135,168 in the first quarter of 1996,
in connection with the shares issued to the employees, and a deferred asset
of $428,832 was recorded in connection with the shares issued to the
consultants, as their services were related to the initial public offering.
By September 30, 1996, the Company paid and/or accrued an additional $546,932
in offering costs. Such cost are included in the balance sheet as deferred
offering expenses.
g) New Lease
In July 1996, the Company entered into a new lease with a related party
for additional space as an executive office. The terms of the lease provide
for annual base rent of $50,000. The lease terminates on September 30, 2001.
h) Taxes, Payable other than on income (Unaudited)
As of September 30, 1996, the Company had taxes payable other than on
income of approximately $330,000. This amount is primarily related to amounts
due for business privilege taxes and liquor consumption taxes. As of December
1996, a portion of such taxes were delinquent and therefore the Company may
be subject to penalties and interest with respect to such taxes. The Company
has estimated the amount of the potential additional liability and
accordingly, has recorded an accrual in the September 30, 1996 interim
financial statements.
F-14
<PAGE>
[This page contains five graphics. In the top left corner is a picture of
patrons dining under umbrella covered tables. To the right of that picture,
is a picture of a table decorated with flowers on which different types of
food is displayed, with decking and foliage in the background. Below that is
a large picture of the multi-colored front cover of the KatManDu menu with
the KatManDu logo at the top. In the bottom right corner is a picture of food
presented on a plate. Above this picture is a caption which reads "Classic
KatManDu dining." Above that picture, in the center of the left border of the
page is a picture of a flower and coconuts.]
<PAGE>
=============================================================================
No Underwriter, dealer, salesman or any other person has been authorized
to give any information or to make any representations other than those
contained in this Prospectus and, if given or made, such information or
representations must not be relied upon as having been authorized by the
Company or any Underwriter. Neither the delivery of this Prospectus nor any
sale made hereunder shall, under any circumstances, create any implication
that there has been no change in the affairs of the Company since the date
hereof or that the information contained herein is correct as of any date
subsequent to the date hereof. This Prospectus does not constitute an offer
to sell or a solicitation of an offer to buy any securities offered hereby by
anyone in any jurisdiction in which such offer or solicitation is not
authorized or in which the person making such offer or solicitation is not
qualified to do so or to anyone to whom it is unlawful to make such offer or
solicitation.
------
TABLE OF CONTENTS
Page
--------
Prospectus Summary ........................... 3
The Company .................................. 7
Reorganization ............................... 7
Risk Factors ................................. 8
Use of Proceeds .............................. 18
Capitalization ............................... 20
Dilution ..................................... 21
Dividend Policy .............................. 22
Selected Financial Data ...................... 23
Management's Discussion and Analysis of
Financial Condition and Plan of Operations .. 25
Business ..................................... 31
Management ................................... 39
Principal Stockholders ....................... 43
Certain Transactions ......................... 44
Description of Securities .................... 46
Shares Eligible for Future Sale .............. 48
Underwriting ................................. 49
Legal Matters ................................ 51
Experts ...................................... 51
Available Information ........................ 52
Index to Financial Statements ................ F-1
------
Until , 1997 (25 days after the date of this Prospectus), all
dealers effecting transactions in the registered securities, whether or not
participating in this distribution, may be required to deliver a Prospectus.
This delivery requirement is in addition to the obligations of dealers to
deliver a Prospectus when acting as Underwriters and with respect to their
unsold allotments or subscriptions.
=============================================================================
<PAGE>
=============================================================================
LOGO
1,350,000 SHARES OF COMMON STOCK
----------
PROSPECTUS
----------
H.J. MEYERS &
CO., INC.
, 1996
=============================================================================
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Sections 145 of the Delaware General Corporation Law grants to the Company
the power to indemnify the officers and directors of the Company, under
certain circumstances and subject to certain conditions and limitations as
stated therein, against all expenses and liabilities incurred by or imposed
upon them as a result of suits brought against them as such officers and
directors if they act in good faith and in a manner they reasonably believe
to be in or not opposed to the best interests of the Company and, with
respect to any criminal action or proceeding, have no reasonable cause to
believe their conduct was unlawful.
The Company's certificate of incorporation provides as follows:
"NINTH: A director of the Corporation shall not be personally liable to
the Corporation or its stockholders for monetary damages for breach of
fiduciary duty as a director, except for liability (i) for any breach of the
director's duty of loyalty to the Corporation or its stockholders, (ii) for
acts or omissions not in good faith or which involve intentional misconduct
or a knowing violation of law, (iii) under Section 174 of the Delaware
General Corporation Law, or (iv) for any transaction from which the director
derived an improper personal benefit.
TENTH: (a) Right to Indemnification. Each person who was or is made a
party or is threatened to be made a party to or is involved in any action,
suit or proceeding, whether civil, criminal, administrative or investigative
(hereinafter a "proceeding"), by reason of the fact that he or she, or a
person of whom he or she is the legal representative, is or was a director or
officer, of the Corporation or is or was serving at the request of the
Corporation as a director, officer, employee or agent of another corporation
or of a partnership, joint venture, trust or other enterprise, including
service with respect to employee benefit plans, whether the basis of such
proceeding is alleged action in an official capacity as a director, officer,
employee or agent or in any other capacity while serving as a director,
officer, employee or agent, shall be indemnified and held harmless by the
Corporation to the fullest extent authorized by the General Corporation Law,
as the same exists or may hereafter be amended (but, in the case of any such
amendment, only to the extent that such amendment permits the Corporation to
provide broader indemnification rights than said law permitted the
Corporation to provide prior to such amendment), against all expense,
liability and loss (including attorneys' fees, judgments, fines, ERISA excise
taxes or penalties and amounts paid or to be paid in settlement) reasonably
incurred or suffered by such person in connection therewith and such
indemnification shall continue as to a person who has ceased to be a
director, officer, employee or agent and shall inure to the benefit of his or
her heirs, executors and administrators; provided, however, that, except as
provided in paragraph (b) hereof, the Corporation shall indemnify any such
person seeking indemnification in connection with a proceeding (or part
thereof) initiated by such person only if such proceeding (or part thereof)
was authorized by the Board of Directors of the Corporation. The right to
indemnification conferred in this Section shall be a contract right and shall
include the right to be paid by the Corporation the expenses incurred in
defending any such proceeding in advance of its final disposition; provided,
however, that, if the General Corporation Law requires, the payment of such
expenses incurred by a director or officer (in his or her capacity as a
director or officer and not in any other capacity in which service was or is
rendered by such person while a director or officer, including, without
limitation, service to an employee benefit plan) in advance of the final
disposition of a proceeding, shall be made only upon delivery to the
Corporation of an undertaking, by or on behalf of such director or officer,
to repay all amounts so advanced if it shall ultimately be determined that
such director or officer is not entitled to be indemnified under this Section
or otherwise. The Corporation may, by action of its Board of Directors,
provide indemnification to employees and agents of the Corporation with the
same scope and effect as the foregoing indemnification of directors and
officers.
(b) Right of Claimant to Bring Suit. If a claim under paragraph (a) of
this Section is not paid in full by the Corporation within thirty days after
a written claim has been received by the Corporation, the claimant may at any
time thereafter bring suit against the Corporation to recover the unpaid
amount of the claim and, if successful in whole or in part, the claimant
shall be entitled to be paid also the expense of prosecuting such claim. It
shall be a defense to any such action (other than an action brought to
enforce a claim for expenses incurred in defending any proceeding in advance
of its final disposition where the required undertaking, if any is required,
II-1
<PAGE>
has been tendered to the Corporation) that the claimant has not met the
standards of conduct which make it permissible under the General Corporation
Law for the Corporation to indemnify the claimant for the amount claimed, but
the burden of proving such defense shall be on the Corporation. Neither the
failure of the Corporation (including its Board of Directors, independent
legal counsel, or its stockholders) to have made a determination prior to the
commencement of such action that indemnification of the claimant is proper in
the circumstances because he or she has met the applicable standard of
conduct set forth in the General Corporation Law, nor an actual determination
by the Corporation (including its Board of Directors, independent legal
counsel, or its stockholders) that the claimant has not met such applicable
standard or conduct, shall be a defense to the action or create a presumption
that the claimant has not met the applicable standard of conduct.
(c) Non-Exclusivity of Rights. The right to indemnification and the
payment of expenses incurred in defending a proceeding in advance of its
final disposition conferred in this Section shall not be exclusive of any
other right which any person may have or hereafter acquire under any statute,
provision of the Certificate of Incorporation, by-law, agreement, vote of
stockholders or disinterested directors or otherwise.
(d) Insurance. The Corporation may maintain insurance, at its expense, to
protect itself and any director, officer, employee or agent of the
Corporation or another corporation, partnership, joint venture, trust or
other enterprise against any such expense, liability or loss, whether or not
the Corporation would have the power to indemnify such person against such
expense, liability or loss under the General Corporation Law."
Reference is made to the form of the Underwriting Agreement, filed as
Exhibit 1.1 hereto, which contains provisions for indemnification of the
Company, its directors, officers, and any controlling persons, by the
Underwriters against certain liabilities for information furnished by the
Underwriters.
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
Expenses in connection with the issuance and distribution of the shares of
Common Stock being registered hereunder other than underwriting commissions
and expenses, are estimated below.
Registration fee .............................. $ 5,000
NASD fee ...................................... 3,500
Printing expenses ............................. 75,000
Accounting fees and expenses .................. 150,000
Legal fees and expenses ....................... 250,000
State securities law fees and expenses ........ 50,000
Transfer agent and registrar fees and expenses.. 2,500
Miscellaneous ................................. 11,000
---------
Total ......................................... $547,000
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES
During the past three years the Registrant has issued the following
unregistered securities:
A. On April 1, 1996, the Company issued an aggregate of 47,000 shares of
Common Stock to James R. Bergman, Bruce Waugh, Jack Gromacki and Diane
Thomsen; and an aggregate of 70,500 shares were issued to outside
consultants, including 58,750 to Morse, Zelnick, Rose & Lander, LLP. In
addition, the Company issued 50,000 shares of Common Stock to each of S.
Lance Silver and Stuart N. Harting. These transactions were exempt pursuant
to Section 4(2) of the Securities Act of 1933.
B. On June 19, 1996, the Company issued 110,784 shares of Common Stock to
14 accredited investors in connection with their purchase of the Company's
10% promissory notes, in the aggregate principal amount of $1.1 million.
Included in such shares are 1,816 shares issued to David Wallack, a Director
of the Company. These transactions were exempt pursuant to Section 4(2) of
the Securities Act of 1933 and also by reason of Rules 505 and 506 of
Regulation D. The Company relied upon the sophistication of such investors.
II-2
<PAGE>
C. Immediately prior to this Offering, a holding company structure will be
formalized when the Company issues 671,716 shares of Common Stock to the
owners of the operating KatManDu entities, KatManDu Investment Partners,
KatManDu Corporation, T-Kat Corp., T-Kat Urban Renewal Corporation and
Chinatown Convention Center Hotel Corporation, in exchange for their
ownership interest in such entities. This transaction will be exempt pursuant
to Section 4(2) of the Securities Act of 1933.
None of the transactions described above involved public offerings of the
Registrant's securities. All of the shares issued in the above transactions
have appropriate restrictive legends and are subject to "stop transfer"
instructions.
II-3
<PAGE>
ITEM 27. EXHIBITS
(A) EXHIBITS:
<TABLE>
<CAPTION>
Exhibit
No. Description Page
----------- ------------------------------------------------------------------------------------ --------
<S> <C> <C>
1.1 Form of Underwriting Agreement(1)
1.2 Form of Exchange and Reorganization Agreement
3.1 Certificate of Incorporation of the Company(2)
3.1(a) Certificate of Amendment of Certificate of Incorporation of the Company(2)
3.2 Form of By-Laws of the Company
4.1 Specimen Stock Certificate(2)
4.3 Form of Representative's Warrant Agreement including Form of Representative's Warrant(1)
5.1 Form of Opinion of Morse, Zelnick, Rose & Lander, LLP
10.1 1996 Stock Option Plan
10.2 Form of Shareholders Agreement among S. Lance Silver, Stuart N. Harting, James R. Bergman,
Bruce Waugh, Jack Gromacki, Diane Thomsen, Steven Rabinovici, Inter- Equity Capital Partners,
LP and Morse, Zelnick, Rose & Lander, LLP
10.3 Form of Employment Agreement between the Company and S. Lance Silver
10.4 Form of Employment Agreement between the Company and Stuart N. Harting
10.5 Form of Financial Consulting Agreement between the Company and the
Representative(1)
10.6 Form of Representative's Warrant(2)
10.7 Lease for KatManDu-Philadelphia(2)
10.8 Lease for KatManDu-Trenton(2)
10.9 Lease with Elizabeth Restaurant Partners(2)
10.10 Form of Note Purchase Agreement with respect to June 1996 Financing; Form of June 1996
Financing Note; Agreement modifying the terms thereof
21.1 List of Subsidiaries of the Registrant
23.1 Consent of Arthur Andersen, LLP
23.2 Consent of Morse, Zelnick, Rose & Lander, LLP (included in Exhibit 5.1)
24 Power of Attorney (included in signature page hereof)
</TABLE>
- ------
(1) To be filed by amendment.
(2) Previously filed.
II-4
<PAGE>
ITEM 28. CERTAIN UNDERTAKINGS
A. The undersigned Registrant hereby undertakes:
(1) to file, during any period in which offers or sales are being made, a
post-effective amendment to this Registration Statement:
(i) to include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933, as amended (the "Act");
(ii) to reflect in the prospectus any facts or events arising after the
effective date of the Registration Statement (or the most recent
post-effective amendment thereof) which, individually or in the aggregate,
represent a fundamental change in the information set forth in the
Registration Statement; and
(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 Act, each
such post-effective 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.
(4) 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.
(5) For purposes of determining any liability under the Securities Act of
1933, the information omitted from the form of prospectus filed as part of a
registration statement in reliance upon Rule 430A and contained in the 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 the
registration statement as of the time it was declared effective.
(6) For the purpose of determining any liability under the Securities Act
of 1933, each post-effective amendment that contains a form of prospectus
shall be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
B. Insofar as indemnification for liabilities arising under the Act may be
permitted to directors, officers and controlling persons of the Registrant
pursuant to the foregoing provisions, or otherwise, the Registrant has been
advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for 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, the Registrant will, unless in the opinion
of its counsel the matter has been settled by controlling precedent, submit
to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Act and
will be governed by the final adjudication of such issue.
II-5
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, as
amended, the Registrant certifies that it has reasonable grounds to believe
that it meets all of the requirements for filing on Form SB-2 and authorized
this Amendment No. 2 to the Registration Statement to be signed on its behalf
by the undersigned, in the City of Philadelphia, State of Pennsylvania on
December 20, 1996.
KATMANDU ENTERTAINMENT CORP.
By: /s/ S. Lance Silver
----------------------------------
S. Lance Silver
Co-Chairman and Chief Executive
Officer
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signatures appears
below constitutes and appoints S. Lance Silver and Stephen A. Zelnick, and
each one of them individually, his true and lawful attorneys-in-fact and
agents, with full power of substitution and resubstitiution for him and in
his name, place and stead, in any and all capacities to sign any and all
amendments (including post-effective amendments) to this registration
statement, and any registration statement relating to the offering hereunder
pursuant to Rule 462(b) under the Securities Act of 1933, as amended, and to
file the same with the Commission, granting unto said attorneys-in-fact and
agents, and each of them, full power and authority to do and perform each and
every act and thing requisite or necessary to be done and about the premises,
as fully to all intents and purpose as he might or could do in person, hereby
ratifying and confirming all that said attorneys-in-fact and agents or any of
them, or their or his substitutes, may lawfully do or cause to be done by
virtue hereof.
Pursuant to the requirement of the Securities Act, this Amendment No. 2 to
the registration statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ S. Lance Silver Co-Chairman, Chief Executive Officer, December 20, 1996
------------------------ Co-President and Director
S. Lance Silver
/s/ Stuart N. Harting Co-Chairman, Co-President, Secretary December 20, 1996
------------------------ and Director
Stuart N. Harting
/s/ Dennis Mehigan Chief Financial Officer and Treasurer December 20, 1996
------------------------
Dennis Mehigan
/s/ Bruce Waugh Executive Vice President-Operations December 20, 1996
------------------------ and Director
Bruce Waugh
/s/ David Wallack Director December 20, 1996
------------------------
David Wallack
/s/ Jill R. Felix Director December 20, 1996
------------------------
Jill R. Felix
</TABLE>
II-6
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
No. Description Page
----------- ----------- --------
<S> <C> <C>
1.1 Form of Underwriting Agreement(1)
1.2 Form of Exchange and Reorganization Agreement
3.1 Certificate of Incorporation of the Company(2)
3.1(a) Certificate of Amendment of Certificate of Incorporation of the Company(2)
3.2 Form of By-Laws of the Company
4.1 Specimen Stock Certificate(2)
4.3 Form of Representative's Warrant Agreement including Form of Representative's Warrant(1)
5.1 Form of Opinion of Morse, Zelnick, Rose & Lander, LLP
10.1 1996 Stock Option Plan
10.2 Form of Shareholders Agreement among S. Lance Silver, Stuart N. Harting, James R. Bergman,
Bruce Waugh, Jack Gromacki, Diane Thomsen, Steven Rabinovici, Inter- Equity Capital Partners,
LP and Morse, Zelnick, Rose & Lander, LLP
10.3 Form of Employment Agreement between the Company and S. Lance Silver
10.4 Form of Employment Agreement between the Company and Stuart N. Harting
10.5 Form of Financial Consulting Agreement between the Company and the
Representative(1)
10.6 Form of Representative's Warrant(1)
10.7 Lease for KatManDu-Philadelphia(2)
10.8 Lease for KatManDu-Trenton(2)
10.9 Lease with Elizabeth Restaurant Partners(2)
10.10 Form of Note Purchase Agreement with respect to June 1996 Financing; Form of June 1996
Financing Note; Agreement modifying the terms thereof
21.1 List of Subsidiaries of the Registrant
23.1 Consent of Arthur Andersen, LLP
23.2 Consent of Morse, Zelnick, Rose & Lander, LLP (included in Exhibit 5.1)
24 Power of Attorney (included in signature page hereof)
</TABLE>
- ------
(1) To be filed by amendment.
(2) Previously filed.
</R.
<PAGE>
EXCHANGE AND REORGANIZATION AGREEMENT
AGREEMENT, dated as of the ____ st day of _____, 1996, by and among
KATMANDU ENTERTAINMENT CORP. ("KEC"), a Delaware corporation having an address
at 415 North Columbus Boulevard, Philadelphia, Pennsylvania 19123; KATMANDU
INVESTMENT PARTNERS ("KIP"), a Pennsylvania limited partnership having an
address at 415 North Columbus Boulevard, Philadelphia, Pennsylvania 19123;
CHINATOWN CONVENTION CENTER HOTEL CORPORATION ("Chinatown"), a Pennsylvania
corporation having an address at 415 North Columbus Boulevard, Philadelphia,
Pennsylvania 19123; KATMANDU CORPORATION ("Kat Corp."), a Pennsylvania
corporation having an address at 415 North Columbus Boulevard, Philadelphia,
Pennsylvania 19123; T-KAT CORPORATION ("T-KAT"), a New Jersey corporation having
an address at 415 North Columbus Boulevard, Philadelphia, Pennsylvania 19123; S.
LANCE SILVER ("Silver") having an address at 8 Shawnee Court, Medford, New
Jersey 08055; STUART N. HARTING ("Harting") having an address at 600 Coles Mill
Road, Haddonfield, New Jersey 08033; the S. LANCE SILVER TRUST (the "Silver
Trust") having an address c/o S. Lance Silver, Trustee, 8 Shawnee Court,
Medford, New Jersey 08055; and the STUART N. HARTING TRUST (the "Harting Trust")
having an address c/o Stuart N. Harting, Trustee, 600 Coles Mill Road,
Haddonfield, New Jersey 08033.
W I T N E S S E T H
WHEREAS, Chinatown is the general partner of KIP, owning a 1% general
partnership interest therein; and
WHEREAS, Silver and Harting own all of the issued and outstanding stock
of Chinatown; and
WHEREAS, the Silver Trust and the Harting Trust own all of the limited
partnership interests in KIP; and
WHEREAS, KIP is the owner of the restaurant located on Pier 25 on the
Delaware River waterfront, 415 N. Columbus Boulevard, Philadelphia,
Pennsylvania, operated under the name "KatManDu" ("KatManDu-Philadelphia"); and
WHEREAS, Kat Corp. is the holder of the liquor license for
KatManDu-Philadelphia and is the operator of KatManDu-Philadelphia pursuant to a
management agreement, dated March 1, 1991, between Kat Corp. and KIP; and
WHEREAS, Silver and Harting own all of the issued and outstanding stock
of T-KAT; and
WHEREAS, T-KAT was formed for the purpose of developing, owning and
operating a KatManDu restaurant/nightclub similar to KatManDu-Philadelphia
on the Delaware River waterfront in Trenton, Mercer County, New Jersey
("KatManDu-Trenton"); and
WHEREAS, KEC has filed a registration statement on Form SB-2 with the
Securities and Exchange Commission (the "SEC") for the purpose of offering and
selling to the public (the "Offering") 1,600,000 shares of its common stock,
$.001 par value (the "Common Stock") and 1,600,000 Redeemable Common Stock
Purchase Warrants (the "Redeemable Warrants"); and
<PAGE>
WHEREAS, the KEC Common Stock being offered to the public in connection
with the Offering will represent approximately forty (40%) per cent of the total
issued and outstanding shares of KEC at the time of the Offering; and
WHEREAS, immediately prior to the date on which the Offering is
declared effective by the SEC (the "Effective Date"), each of Silver, Harting,
the Silver Trust and the Harting Trust will transfer all of their respective
rights, title and interests in and to Chinatown, KIP, Kat Corp. and T-KAT in
exchange for an aggregate of 1,606,884 shares of KEC Common Stock and
immediately thereafter KEC will liquidate Chinatown and KIP and Kat Corp. and
T-KAT will survive as wholly-owned subsidiaries of KEC with Kat Corp. owning and
operating KatManDu-Philadelphia and T-KAT owning and operating KatManDu-Trenton;
and
WHEREAS, Silver and Harting each presently owns 200,000 shares of the
Common Stock of KEC; and
WHEREAS, as a result of the transactions described herein, Silver,
Harting, the Silver Trust and the Harting Trust will, in the aggregate, own in
excess of 2,000,000 shares of the Common Stock of KEC, constituting
approximately fifty (50%) of the total issued and outstanding shares of KEC
Common Stock.
NOW, THEREFORE, in consideration of the foregoing premises, the mutual
representations, warranties and covenants set forth below and other good and
valuable consideration, the sufficiency of which is hereby acknowledged, the
parties hereto hereby agree as follows:
1. Basic Transactions
------------------
Immediately prior to the Effective Date:
(a) each of Silver and Harting will transfer all of their right, title
and interest in and to Chinatown, representing all of the issued and outstanding
shares of Chinatown, to KEC in exchange for _____ shares of KEC Common Stock
(___ shares each), and KEC will immediately thereafter liquidate and dissolve
Chinatown;
(b) each of the Silver Trust and the Harting Trust will transfer all of
its right, title and interest in and to KIP, representing all of the limited
partnership interests in KIP, to KEC in exchange for ____ shares of KEC Common
Stock (___ shares each), and KEC will immediately thereafter liquidate and
dissolve KIP;
(c) each of Silver and Harting will transfer all of their right, title
and interest in and to Kat Corp., representing all of the issued and outstanding
shares of Kat. Corp., to KEC in exchange for _____ shares of KEC Common Stock
(___ shares each), and thereafter Kat Corp. will own and operate
KatManDu-Philadelphia as a wholly-owned subsidiary of KEC;
(d) each of Silver and Harting will transfer all of their right, title
and interest in and to T-KAT, representing all of the issued and outstanding
shares of T-KAT, to KEC in exchange for ____ shares of KEC Common Stock (___
shares each), and thereafter T-KAT will continue to
2
<PAGE>
develop and, ultimately own and operate, KatManDu-Trenton as a wholly-owned
subsidiary of KEC.
2. Tax Considerations
------------------
It is the intent of the parties hereto that:
(a) the transaction described in paragraph (a) of Section 1 of this
Agreement constitute and qualify as tax free reorganization described in
section 368(a)(1)(A) of the Internal Revenue Code of 1986, as amended (the
"Code"); and
(b) the closing of the Offering and the consummation of the
transactions described in paragraphs (a) - (d) of Section 1 are interdependent
transactions and are to be considered as component parts of the same transaction
effected pursuant to Section 351 of the Code so that, upon consummation of the
Offering and the transactions described in Section 1 hereof, Silver, Harting,
the Silver Trust and the Harting Trust together with purchasers of KEC Common
Stock pursuant to the Offering will be in "control" of KEC for purposes of
section 368(c) of the Code; and
(c) The parties hereto will report the transactions described in
Section 1 hereof for federal, state and local income tax purposes consistent
with the provisions of this Section 2 and will timely file all such returns,
forms, statements and agreements as may be required by the Internal Revenue
Service (the "IRS") on such basis. The provisions of this Section 2 shall
survive the closing of the Offering and the transactions described herein.
3. Representations and Warranties
------------------------------
(a) Each of Silver, Harting, the Silver Trust and the Harting
Trust (each a "Transferor" and, collectively, the "Transferors") on his or its
own behalf and not on behalf of any other Transferor represents and warrants as
follows:
(i) Each Transferor is the legal and equitable owner of his or
its respective interests in each of Chinatown, KIP, Kat Corp.
and T-KAT and that such interests, on the date the exchanges
described in Section 1 hereof are consummated, will be owned
free and clear of all mortgages, liens, pledges and other
security interests.
(ii) Each Transferor has the full power and authority to
execute and deliver this Agreement and to perform his or its
obligations hereunder, that he or it has duly executed and
delivered this Agreement and that this Agreement constitutes a
valid and legally binding obligation as to such
Transferor, enforceable in accordance with its terms.
(iii) That neither the execution and the delivery of this
Agreement by such Transferor, nor the consummation of
3
<PAGE>
the transactions contemplated hereby by such Transferor, will
(A) violate any statute, regulation, rule, judgment, order,
decree, stipulation, injunction, charge, or other restriction
of any government, governmental agency or court to which such
Transferor is subject or (B) conflict with, result in a breach
of or constitute a default under, result in the acceleration
of, create in any party the right to accelerate, terminate,
modify, cancel, or require any notice under any contract,
agreement, instrument of indebtedness, security interest or
other arrangement to which he or it may be a party or by which
he or it is bound or to which any of his or its assets is
subject.
(b) Each of Kat Corp., KEC and T-KAT, on its own behalf and
not on behalf of any other entity, represent and warrant as follows:
(i) It is a corporation duly organized, validly existing and
in good standing under the laws of the state of its
incorporation.
(ii) It has the full power and authority to execute and
deliver this Agreement and to perform its obligations
hereunder, that this Agreement has been duly executed and
delivered, and that this Agreement constitutes a valid and
legally binding obligation, enforceable in accordance with its
terms and conditions.
(iii) Neither the execution and delivery of this Agreement,
nor the consummation of the transactions contemplated hereby
will (A) violate any statute, regulation, rule, judgment,
order, decree, stipulation, injunction, charge, or other
restriction of any government, governmental agency or court to
which it may be subject or any provision of its charter or
By-laws or (B) conflict with, result in a breach of,
constitute a default under, result in acceleration of, create
in any party the right to accelerate, terminate, modify, or
cancel, or require any notice under any contract, lease,
sublease, license, sublicense, franchise, permit, indenture,
agreement or mortgage for borrowed money, instrument of
indebtedness, security interest, or other arrangement to which
it may be a party or by which it may be bound or to which any
of its assets is subject and which will have a material
adverse effect on them.
4
<PAGE>
(c) KEC represents and warrants that the shares of its Common
Stock to be issued pursuant to this Agreement, at the time of such
issuance, will be free and clear of any restrictions on transfer (other than
restrictions under the Securities Act of 1933 and state securities laws and
restrictions under the Underwriters Agreement executed in connection with the
Offering) claims, taxes, security interests, options, warrants, rights,
contracts, calls, commitments, equities and demands.
(d) Kat Corp. represents and warrants that it is the holder of
a valid and existing liquor license for KatManDu-Philadelphia. Such license is
free from all defects, liens, mortgages, pledges and other security interests.
(e) T-KAT represents and warrants that it is the lessee under
a legal, valid, binding and enforceable lease for the premises known as the
Cooper Iron Works Building located on the Delaware River waterfront in Trenton,
New Jersey and has the right to occupy such premises and to conduct therein a
restaurant/nightclub facility.
(f) KIP represents and warrants as follows:
(i) it is a limited partnership duly organized, validly
existing, and in good standing under the laws of Pennsylvania
and is duly authorized to conduct business and is in good
standing under the laws of each jurisdiction in which it is
conducting business.
(ii) Neither the execution and delivery of this Agreement nor
the consummation of the transactions contemplated hereby will
(A) violate any statute, regulation, rule judgment, order,
decree, stipulation, injunction, charge, or other restriction
of any government, governmental agency or court to which it is
subject or any provision of its limited partnership agreement
or (B) conflict with, result in a breach of, constitute a
default under, result in acceleration of, create in any party
the right to accelerate, terminate, modify, or cancel, or
require any notice under any contract, lease, sublease,
license, sublicense, franchise, permit, indenture, agreement
or mortgage for borrowed money, instrument of indebtedness,
security interest, or other arrangement to which it may be a
party or by which it may
5
<PAGE>
be bound or to which any of its assets is subject and which
will have a material adverse effect on them.
(iii) It owns or leases all of the tangible and intangible
assets necessary for the conduct of the business conducted by
KatManDu-Philadelphia, other than the liquor license relevant
thereto. Each such tangible asset is free from defects, has
been maintained in accordance with normal industry practice,
and is in good operating condition and repair (subject to
normal wear and tear). It is the lessee under a legal, valid,
binding and enforceable lease for the premises on which it
conducts the operations of KatManDu-Philadelphia at Pier 25,
415 N. Columbus Boulevard, Philadelphia, Pennsylvania and has
the right to occupy such premises and to conduct therein the
operations of KatManDu-Philadelphia.
(g) All of the representations, warranties and covenants set
forth in this Section 3 shall be true as of the date hereof and as of the date
the transactions described in Section 1 hereof are consummated.
(h) Each party hereto indemnifies and holds each other party
hereto harmless from any and all losses, damages, costs (including, but not
limited to, reasonable attorneys fees), claims and/or liabilities arising,
directly or indirectly, from a breach of any representations, warranties or
covenants made by such indemnifying party as set forth herein.
4. Conditions and Obligations to Closing
-------------------------------------
(a) The obligation of KEC to consummate the transactions to be
performed by it under this Agreement is subject to the following conditions:
(i) The representations and warranties set forth in Section 3
above made by the parties hereto other than KEC shall be true
and correct in all material respects at and as of the date the
transactions described in Section 1 hereof are consummated;
(ii) no action, suit or proceeding shall be pending or
threatened before any court or quasi-judicial or
administrative agency of any federal, state, local or foreign
jurisdiction wherein an unfavorable judgment, order, decree,
stipulation, injunction or charge would (A) prevent
consummation of any of the transactions contemplated by this
Agreement, (B) cause any of the transactions contemplated by
this Agreement to be rescinded following
6
<PAGE>
consummation or (C) have an adverse effect on the right of KEC
to own and control Kat Corp. and T-KAT or have an adverse
effect on the right of Kat Corp. to own, operate or control
KatManDu-Philadelphia and the right of T-KAT to develop, own,
operate or control KatManDu-Trenton; and
(iii) the Offering shall have been declared effective by the
SEC.
KEC may waive any condition specified in this Section 4(a), other than
the condition set forth in clause (iii) thereof, if it executes a writing so
stating at or prior to the closing of the transactions described in Section 1
hereof.
(b) The obligation of each Transferor to consummate the
transactions to be performed by such Transferor under this Agreement is subject
to the following conditions:
(i) The representations and warranties set forth in Section
3 above made by the parties hereto other than such Transferor
shall be true and correct in all material respects at and as
of the date the transactions described in Section 1 hereof
are consummated.
(ii) no action, suit or proceeding shall be pending or
threatened before any court or quasi-judicial or
administrative agency of any federal, state, local or foreign
jurisdiction wherein an unfavorable judgment, order, decree,
stipulation, injunction or charge would (A) prevent
consummation of any of the transactions contemplated by this
Agreement, (B) cause any of the transactions contemplated by
this Agreement to be rescinded following consummation or (C)
have an adverse effect on the right of such Transferor to own
or control the shares of KEC Common Stock issued pursuant to
this Agreement; and
(iii) the Offering shall have been declared effective by the
SEC.
A Transferor may waive any condition specified in this Section 4(b),
other than the condition set forth in clause (iii) thereof, if such Transferor
executes a writing so stating at or prior to the closing the transactions
described in Section 1 hereof.
5. Miscellaneous
-------------
(a) This Agreement shall not confer any rights or remedies upon any
person other than the parties and their respective successors and permitted
assigns.
7
<PAGE>
(b) This Agreement (including the documents referred to herein)
constitutes the entire agreement among the parties with respect to the matters
set forth herein, and supersedes any prior understandings, agreements, or
representations by or among the parties, written or oral, that may have related
in any way to the subject matter hereof.
(c) This Agreement shall be binding upon and inure to the benefit of
the parties named herein and their respective successors and permitted assigns.
No party may assign either this Agreement or any of his, her or its rights,
interests, or obligations hereunder without the prior written approval of the
other parties hereto.
(d) This Agreement may be executed in one or more counterparts, each of
which shall be deemed an original but all of which together will constitute one
and the same instrument. A facsimile, telecopy or other reproduction of this
Agreement may be executed by one or more parties hereto, and an executed copy of
this Agreement may be delivered by one or more parties hereto by facsimile or
similar instantaneous electronic transmission device pursuant to which the
signature of or on behalf of such party can be seen, and such execution and
delivery shall be considered valid, binding and effective for all purposes. At
the request of any party hereto, all parties hereto agree to execute an original
of this Agreement as well as any facsimile, telecopy or other reproduction
hereof.
(e) The section headings contained in this Agreement are inserted for
convenience only and shall not affect in any way the meaning or interpretation
of this Agreement.
(f) All notices, requests, demands, claims, and other communications
hereunder will be in writing. Any notice, request, demand, claim or other
communication hereunder shall be deemed duly given if (and then two business
days after) it is sent by registered or certified mail, return receipt
requested, postage prepaid, and addressed to the intended recipient at the
address set forth following the name of such person in the preamble of this
Agreement. Any party may give any notice, request, demand, claim or other
communication hereunder using any other means (including personal delivery,
expedited courier, messenger service, telecopy, telex, ordinary mail, or
electronic mail), but no such notice, request, demand, claim, or other
communication shall be deemed to have been duly given unless and until it
actually is received by the individual and/or entity for whom it is intended.
Any party may change the address to which notices, requests, demands, claims,
and other communications hereunder are to be delivered by giving the other
parties notice in the manner herein set forth.
(g) This Agreement shall be governed by and construed in accordance
with the internal laws of the State of Delaware.
(h) No Amendment of any provisions of this Agreement shall be valid
unless the same shall be in writing and signed by the parties hereto. No waiver
by any party of any default, misrepresentation, or breach of warranty or
covenant hereunder, whether intentional or not, shall be deemed to extend to any
prior or subsequent default,
8
<PAGE>
misrepresentation, or breach of warranty or covenant hereunder or affect in any
way any rights arising by virtue of any prior or subsequent such occurrence.
(i) Each party hereto acknowledges and agrees that the other parties
would be damaged irreparably in the event any of the provisions of this
Agreement are not performed in accordance with their specific terms or otherwise
are breached. Accordingly, each party hereto agrees that the other parties
shall be entitled to an injunction or injunctions to prevent breaches of the
provisions of this Agreement and to enforce specifically this Agreement and the
terms and provisions hereof in any action instituted in any court of the United
States or any state thereof having jurisdiction over the parties and the matter.
9
<PAGE>
IN WITNESS WHEREOF, the Parties hereto have executed this Agreement as
of the date first above written.
KATMANDU ENTERTAINMENT CORP.
By: ______________________________
Name:
Title:
KATMANDU CORPORATION
By: ______________________________
Name:
Title:
T-KAT CORP.
By: ______________________________
Name:
Title:
KATMANDU INVESTMENT PARTNERS
By: Chinatown Convention Center Hotel
Corporation, General Partner
By: ______________________________
Name:
Title:
CHINATOWN CONVENTION CENTER
HOTEL CORPORATION
By: ______________________________
Name:
Title:
10
<PAGE>
S. LANCE SILVER TRUST
By: ______________________________
Name:
Title:
STUART N. HARTING TRUST
By: ______________________________
Name:
Title:
------------------------------
S. LANCE SILVER
------------------------------
STUART N. HARTING
<PAGE>
BY-LAWS OF
KatManDu Entertainment Corp.
(A Delaware Corporation)
ARTICLE I
STOCKHOLDERS
1. CERTIFICATES REPRESENTING STOCK.
Every holder of stock in the corporation shall be entitled to have a
certificate signed by, or in the name of, the corporation by the Chairman or
Vice-Chairman of the Board of Directors, if any, or by the President or a
Vice-President and by the Treasurer or an Assistant Treasurer or the Secretary
or an Assistant Secretary of the corporation certifying the number of shares
owned by him in the corporation. Any and all signatures on any such certificate
may be facsimiles. In case any officer, transfer agent, or registrar who has
signed or whose facsimile signature has been placed upon a certificate shall
have ceased to be such officer, transfer agent, or registrar before such
certificate is issued, it may be issued by the corporation with the same effect
as if he were such officer, transfer agent, or registrar at the date of issue.
Whenever the corporation shall be authorized to issue more than one
class of stock or more than one series of any class of stock, and whenever the
corporation shall issue any shares of its stock as partly paid stock, the
certificates representing shares of any such class or series or of any such
partly paid stock shall set forth thereon the statements prescribed by the
General Corporation Law. Any restrictions on the transfer or registration of
transfer of any shares of stock of any class or series shall be noted
conspicuously on the certificate representing such shares.
The corporation may issue a new certificate of stock in place of any
certificate theretofore issued by it, alleged to have been lost, stolen or
destroyed, and the Board of Directors may require the owner of any lost, stolen
or destroyed certificate, or his legal representative, to give the corporation a
bond sufficient to indemnify the corporation against any claim that may be made
against it on account of the alleged loss, theft or destruction of any such
certificate or the issuance of any such new certificate.
2. FRACTIONAL SHARE INTEREST.
The corporation may, but shall not be required to, issue fractions of a
share. If the corporation does not issue fractions of a share, it shall (i)
arrange for the disposition of fractional interests by those entitled thereto,
(ii) pay in cash the fair value of fractions of a share as of the time when
those entitled to receive such fractions are determined, or (iii) issue scrip or
warrants in registered or bearer form which shall entitle the holder to receive
a certificate for a full share upon the surrender of such scrip or warrants
aggregating a full share. A certificate for a fractional share shall, but scrip
or warrants shall not unless otherwise provided therein, entitle the holder to
exercise voting rights, to receive dividends thereon, and to participate in any
of the assets of the corporation in the event of liquidation. The Board of
Directors may cause scrip or warrants to be issued subject to the conditions
that they shall become void if not exchanged for certificates representing full
shares before a specified date, or subject to the conditions that the shares for
<PAGE>
which scrip or warrants are exchangeable may be sold by the corporation and the
proceeds thereof distributed to the holders of scrip or warrants, or subject to
any other conditions which the Board of Directors may impose.
3. STOCK TRANSFERS.
Upon compliance with provisions restricting the transfer or
registration of transfer of shares of stock, if any, transfers or registration
of transfers of shares of stock of the corporation shall be made only on the
stock ledger of the corporation by the registered holder thereof, or by his
attorney thereunto authorized by power of attorney duly executed and filed with
the Secretary of the corporation or with a transfer agent or a registrar, if
any, and on surrender of the certificate or certificates for such shares of
stock properly endorsed and the payment of all taxes due thereon.
4. RECORD DATE FOR STOCKHOLDERS.
For the purpose of determining the stockholders entitled to notice of
or to vote at any meeting of stockholders or any adjournment thereof, or to
express consent to corporate action in writing without a meeting, or entitled to
receive payment of any dividend or other distribution or the allotment of any
rights, or entitled to exercise any rights in respect of any change, conversion
or exchange of stock or for the purpose of any other lawful action, the
directors may fix, in advance, a record date, which shall not be more than sixty
days nor less than ten days before the date of such meeting, nor more than sixty
days prior to any other action. If no record date is fixed, the record date for
determining stockholders entitled to notice of or to vote at a meeting of
stockholders shall be at the close of business on the day next preceding the day
on which notice is given, or, if notice is waived, at the close of business on
the day next preceding the day on which the meeting is held, the record date for
determining stockholders entitled to express consent to corporate action in
writing without a meeting, when no prior action by the Board of Directors is
necessary, shall be the day on which the first written consent is expressed and
the record date for determining stockholders for any other purpose shall be at
the close of business on the day on which the Board of Directors adopts the
resolution relating thereto. A determination of stockholders of record entitled
to notice of or to vote at any meeting of stockholders shall apply to any
adjournment of the meeting, provided, however, that the Board of Directors may
fix a new record date for the adjourned meeting.
5. MEANING OF CERTAIN TERMS,
As used herein in respect of the right to notice of a meeting of
stockholders or a waiver thereof or to participate or vote thereat or to consent
or dissent in writing in lieu of a meeting, as the case may be, the term "share"
or "shares" or "share of stock" or "shares of stock" or "stockholder" or
"stockholders" refers to an outstanding share or shares of stock and to a holder
or holders of record of outstanding shares of stock when the corporation is
authorized to issue only one class of shares of stock, and said reference is
also intended to include any outstanding share or shares of stock and any holder
or holders of record of outstanding shares of stock of any class upon which or
upon whom the certificate of incorporation confers such rights where there are
two or more classes or series of shares of stock or upon which or upon whom the
General Corporation Law confers such rights notwithstanding that the certificate
of incorporation may provide for more than one class or series of shares of
stock, one or more of which are limited or denied such rights thereunder,
provided, however, that no such right shall vest in the event of an increase or
a decrease in the authorized number of shares of stock of any class or series
which is otherwise denied voting rights under the provisions of the certificate
of incorporation, except as any provision of law may otherwise require.
-2-
<PAGE>
6. STOCKHOLDER MEETINGS.
-TIME-. The annual meeting shall be held on the date and at the time
fixed, from time to time by the directors provided that the first annual meeting
shall be held on a date within 13 months after the organization of the
corporation and each successive annual meeting shall be held on a date within 13
months after the date of the preceding annual meeting. A special meeting shall
be held on the date and at the time fixed by the directors.
-PLACE. Annual meetings and special meetings shall be held at such
place, within or without the State of Delaware as the directors may from time to
time, fix. Whenever the directors shall fail to fix such place, the meeting
shall be held at the registered office of the corporation in the State of
Delaware.
-CALL. Annual meetings and special meetings may be called by the
directors or by any officer instructed by the directors to call the meeting or
by the holders of at least ten percent (10%) of all shares entitled to vote at
such meetings, unless the Charter provided for a number of shares greater than
or less than ten percent (10%), in which event special meetings may be called by
the holders of at least the percentage of shares specified in the Charter,
provided, however, that in no event may the Charter require a percentage greater
than fifty percent (50%).
-NOTICE OR WAIVER OF NOTICE. Written notice of all meetings shall be
given stating the place, date and hour of the meeting and stating the place
within the city or other municipality or community at which the list of
stockholders of the corporation may be examined. The notice of an annual meeting
shall state that the meeting is called for the election of directors and for the
transaction of other business which may properly come before the meeting and
shall (if any other action which could be taken at a special meeting is to be
taken at such annual meeting) state the purpose or purposes. The notice of a
special meeting shall in all instances state the purpose or purposes for which
the meeting is called. The notice of any meeting shall also include or be
accompanied by any additional statement information or documents prescribed by
the General Corporation Law. Except as otherwise provided by the General
Corporation Law, a copy of the notice of any meeting shall be given personally
or by mail, not less than 10 days nor more than 60 days before the date of the
meeting unless the lapse of the prescribed period of time shall have been
waived, and directed to each stockholder at his record address or at such other
address which he may have furnished by request in writing to the Secretary of
the Corporation. Notice by mail shall be deemed to be given when deposited, with
postage thereon prepaid in the United States mail. If a meeting is adjourned to
another time, not more than 30 days hence, and/or to another place and if an
announcement of the adjourned time and/or place is made at the meeting it shall
not be necessary to give notice of the adjourned meeting unless the directors
after adjournment fix a new record date for the adjourned meeting. Notice need
not be given to any stockholder who submits a written waiver of notice signed by
him before or after the time stated therein. Attendance of a stockholder at a
meeting of stockholders shall constitute a waiver of notice of such meeting
except when the stockholder attends the meeting for the express purpose of
objecting at the beginning of the meeting, to the transaction of any business
because the meeting is not lawfully called or convened. Neither the business to
be transacted at nor the purpose of, any regular or special meeting of the
stockholders need be specified in any written waiver of notice.
-STOCKHOLDER LIST. The officer who has charge of the stock ledger of
the corporation shall prepare and make, at least ten days before every meeting
of stockholders, a complete list of the stockholder arranged in alphabetical
order, and showing the address of each stockholder and the number of shares
registered in the name of each stockholder. Such list shall be open to the
examination of any stockholder for any purpose germane to the meeting, during
ordinary business hours for a period of at least ten days prior to the meeting
either at a place within the city or other municipality or community where the
meeting is to be held, which place shall be specified in the notice of the
meeting, or if not so specified, at the place where the meeting is to be held.
The list shall also be produced and kept at the time and place of the meeting
-3-
<PAGE>
during the whole time thereof, and may be inspected by any stockholder who is
present. The stock ledger shall be the only evidence as to who are the
stockholders entitled to examine the stock ledger, the list required by this
section or the books of the corporation, or to vote at any meeting of
stockholders.
-CONDUCT OF MEETING. Meetings of the stockholders shall be presided
over by one of the following officers in the order of seniority and if present
and acting - the Chairman of the Board, if any, the Vice-Chairman of the Board,
if any, the President, a Vice-President, or, if none of the foregoing is in
office and present and acting, by a chairman to be chosen by the stockholders.
The Secretary of the corporation, or in his absence, an Assistant Secretary,
shall act as secretary of every meeting, but if neither the Secretary nor an
Assistant Secretary is present the Chairman of the meeting shall appoint a
secretary of the meeting.
-PROXY REPRESENTATION. Every stockholder may authorize another person
or persons to act for him by proxy in all matters in which a stockholder is
entitled to participate, whether by waiving notice of any meeting, voting or
participating at a meeting, or expressing consent or dissent without a meeting.
Every proxy must be signed by the stockholder or by his attorney-in-fact. No
proxy shall be voted or acted upon after three years from its date unless such
proxy provides for a longer period. A duty executed proxy shall be irrevocable
if it states that it is irrevocable and, if, and only as long as, it is coupled
with an interest sufficient in law to support an irrevocable power. A proxy may
be made irrevocable regardless of whether the interest with which it is coupled
is an interest in the stock itself or an interest in the corporation generally.
-INSPECTORS. The directors, in advance of any meeting, may, but need
not, appoint one or more inspectors of election to act at the meeting or any
adjournment thereof. If an inspector or inspectors are not appointed, the person
presiding at the meeting may, but need not, appoint one or more inspectors. In
case any person who may be appointed as an inspector fails to appear or act, the
vacancy may be filled by appointment made by the directors in advance of the
meeting or at the meeting by the person presiding thereat. Each inspector, if
any, before entering upon the discharge of his duties, shall take and sign an
oath faithfully to execute the duties of inspector at such meeting with strict
impartiality and according to the best of his ability. The inspectors, if any,
shall determine the number of shares of stock outstanding and the voting power
of each, the shares of stock represented at the meeting, the existence of a
quorum, the validity and effect of proxies, and shall receive votes, ballots or
consents, hear and determine all challenges and questions arising in connection
with the right to vote, count and tabulate all votes, ballots or consents,
determine the result, and do such acts as are proper to conduct the election or
vote with fairness to all stockholders. On request of the person presiding at
the meeting, the inspector or inspectors, if any, shall make a report in writing
of any challenge, question or matter determined by him or them and execute a
certificate of any fact found by him or them.
-QUORUM. The holders of a majority of the outstanding shares of stock
shall constitute a quorum at a meeting of stockholders for the transaction of
any business. The stockholders present may adjourn the meeting despite the
absence of a quorum.
-VOTING. Each share of stock shall entitle the holder thereof to one
vote. In the election of directors, a plurality of the votes cast shall elect.
Any other action shall be authorized by a majority of the votes cast except
where the General Corporation Law prescribes a different percentage of votes
and/or a different exercise of voting power, and except as may be otherwise
prescribed by the provisions of the certificate of incorporation and these
By-Laws. In the election of directors, and for any other action, voting need not
be by ballot.
7. STOCKHOLDER ACTION WITHOUT MEETINGS. Any action required by the
General Corporation Law to be taken at any annual or special meeting of
-4-
<PAGE>
stockholders, or any action which may be taken at any annual or special meeting
of stockholders, may be taken without a meeting, without prior notice and
without a vote, if a consent in writing, setting forth the action so taken,
shall be signed by the holders of outstanding stock having not less than the
miminum number of votes that would be necessary to authorize or take such action
at a meeting at which all shares entitled to vote thereon were present and
voted. Prompt notice of the taking of the corporate action without a meeting by
less than unanimous written consent shall be given to those stockholders who
have not consented in writing.
In order to determine the stockholders entitled to consent to corporate
action in writing without a meeting, the Board of Directors may fix a record
date, which record date shall not precede the date upon which the resolution
fixing the record date is adopted by the Board of Directors, and which date
shall not be more than 10 days after the date upon which the resolution fixing
the record date is adopted by the Board of Directors. Any stockholder of record
seeking to have the stockholders authorize or take corporate action by written
consent shall, by written notice to the Secretary, request the Board of
Directors to fix a record date. Such notice shall specify the action sought to
be consented to by stockholders. The Board of Directors shall promptly, but in
all events within 10 days after the date on which such a request is received,
adopt a resolution fixing the record date. If no record date has been fixed by
the Board of Directors within 10 days after the date on which such a request is
received, the record date for determining stockholders entitled to consent to
corporate action in writing without a meeting, when no prior action by the Board
of Directors is required by applicable law, shall be the first date on which a
signed written consent setting forth the action taken or proposal to be taken is
delivered to the corporation by delivery to its registered office in the State
of Delaware, its principal place of business, or any officer or agent of the
corporation having custody of the book in which proceedings of meetings of
stockholders are recorded. Any such delivery shall be by hand or by certified or
registered mail, return receipt requested. If no record date has been fixed by
the Board of Directors and prior action by the Board of Directors is required by
applicable law, the record date for determining stockholders entitled to consent
to corporate action in writing without a meeting shall be at the close of
business on the date on which the Board of Directors adopts the resolution
taking such prior action.
In the event of the delivery of a written consent or consents
purporting to authorize or take corporate action and/or related revocations
(each such written consent and related revocation is referred to in this Section
7 as a "Consent"), the Secretary shall provide for the safekeeping of such
Consent and shall immediately appoint duly qualified and objective inspectors to
conduct, as promptly as practical, such reasonable ministerial review as they
deem necessary or appropriate for the purpose of ascertaining the sufficiency
and validity of such Consent and all matters incident thereto, including,
without limitation, whether holders of shares having the requisite voting power
to authorize or take the action specified in the Consent have given consent. If
after such investigation the Secretary shall determine that the Consent is
valid, that fact shall be certified on the records of the corporation kept for
the purpose of recording the proceedings of meetings of stockholders, and the
Consent shall be filed in such records, at which time the Consent shall become
effective as stockholder action.
ARTICLE II
DIRECTORS
1. FUNCTIONS AND DEFINITION. The business and affairs of the
corporation shall be managed by or under the direction of the Board of Directors
of the corporation. The Board of Directors shall have the authority to fix the
compensation of the members thereof. The use of the phrase "whole board" herein
refers to the total number of directors which the corporation would have if
there were no vacancies.
2. QUALIFICATIONS AND NUMBER.A director need not be a stockholder, a
citizen of the United States, or a resident of the State of Delaware. The number
-5-
<PAGE>
of directors shall be not less than two nor more than nine as may be fixed, from
time to time, by resolution of the directors.
3. ELECTION AND TERM. The first Board of Directors, unless the members
thereof shall have been named in the certificate of incorporation, shall be
elected by the incorporator or incorporators and shall hold office until the
first annual meeting of stockholders and until their successors are elected and
qualified or until their earlier resignation or removal. Any director may resign
at any time upon written notice to the corporation. Thereafter, directors who
are elected at an annual meeting of stockholders, and directors who are elected
in the interim to fill vacancies and newly created directorships, shall hold
office until the next annual meeting of stockholders and until their successors
are elected and qualified or until their earlier resignation or removal. In the
interim between annual meetings of stockholders or of special meetings of
stockholders called for the election of directors and/or for the removal of one
or more directors and for the filling of any vacancy in that connection, newly
created dictatorships and any vacancies in the Board of Directors, including
unfilled vacancies resulting from the removal of directors for cause or without
cause may be filled by the vote of a majority of the remaining directors then in
office, although less than a quorum, or by the sole remaining director.
4. MEETINGS.
-TIME. Meetings shall be held at such time as the Board shall fix,
except that the first meeting of a newly elected Board shall be held as soon
after its election as the directors may conveniently assemble.
-PLACE. Meetings shall be held at such place within or without the
State of Delaware as shall be fixed by the Board.
-CALL. No call shall be required for regular meetings for which the
time and place have been fixed. Special meetings may be called by or at the
direction of the Chairman of the Board, if any, the Vice-Chairman of the Board,
if any, of the President, or of a majority of the directors in office.
-NOTICE OR ACTUAL OR CONSTRUCTIVE WAIVER. No notice shall be required
for regular meetings for which the time and place have been fixed. Written,
oral, or any other mode of notice of the time and place shall be given for
special meetings in sufficient time for the convenient assembly of the directors
thereat. Notice need not be given to any director or to any member of a
committee of directors who submits a written waiver of notice signed by him
before or after the time stated therein. Attendance of any such person at a
meeting shall constitute a waiver of notice of such meeting, except when he
attends a meeting for the express purpose of objecting, at the beginning of the
meeting, to the transaction of any business because the meeting is not lawfully
called or convened. Neither the business to be transacted at, nor the purpose
of, any regular or special meeting of the directors need be specified in any
written waiver of notice.
-QUORUM AND ACTION. A majority of the whole Board shall constitute a
quorum except when a vacancy or vacancies prevents such majority, whereupon a
majority of the directors in office shall constitute a quorum, provided, that
such majority shall constitute at least one-third of the whole Board. A majority
of the directors present, whether or not a quorum is present, may adjourn a
meeting to another time and place. Except as herein otherwise provided, and
except as otherwise provided by the General Corporation Law, the vote of the
majority of the directors present at a meeting at which a quorum is present
shall be the act of the Board. The quorum and voting provisions herein stated
shall not be construed as conflicting with any provisions of the General
Corporation Law and these By-Laws which govern a meeting of directors held to
fill vacancies and newly created directorships in the Board or action of
disinterested directors.
-6-
<PAGE>
Any member or members of the Board of Directors or of any committee
designated by the Board, may participate in a meeting of the Board, or any such
committee, as the case may be, by means of conference telephone or similar
communications equipment by means of which all persons participating in the
meeting can hear each other.
-CHAIRMAN OF THE MEETING. The Chairman of the Board, if any and if
present and acting, shall preside at all meetings. Otherwise, the Vice-Chairman
of the Board, if any and if present and acting, or the President, if present and
acting, or any other director chosen by the Board, shall preside.
5. REMOVAL OF DIRECTORS. Except as may otherwise be provided by the
General Corporation Law, any director or the entire Board of Directors may be
removed, with or without cause, by the holders of a majority of the shares then
entitled to vote at an election of directors.
6. COMMITTEES. The Board of Directors may, by resolution passed by a
majority of the whole Board, designate one or more committees, each committee to
consist of one or more of the directors of the corporation. The Board may
designated one or more directors as alternate members of any committee, who may
replace any absent or disqualified member at any meeting of the committee. In
the absence or disqualification of any member of any such committee or
committees, the member or members thereof present at any meeting and not
disqualified from voting, whether or not he or they constitute a quorum, may
unanimously appoint another member of the Board of Directors to act at the
meeting in the place of any such absent or disqualified member. Any such
committee, to the extent provided in the resolution of the Board, shall have and
may exercise the powers and authority of the Board of Directors in the
management of the business and affairs of the corporation with the exception of
any authority the delegation of which is prohibited by Section 141 of the
General Corporation Law, and may authorize the seal of the corporation to be
affixed to all papers which may require it.
7. WRITTEN ACTION. Any action required or permitted to be taken at any
meeting of the Board of Directors or any committee thereof may be taken without
a meeting if all members of the Board or committee, as the case may be, consent
thereto in writing, and the writing or writings are filed with the minutes of
proceedings of the Board or committee.
ARTICLE III
OFFICERS
The officers of the corporation shall consist of one or more
Presidents, one or more Secretaries, one or more Treasurers, and, if deemed
necessary, expedient, or desirable by the Board of Directors, one or more Chief
Executive Officers, one or more Chairmen of the Board, a Vice-Chairman of the
Board, an Executive Vice-President, one or more other Vice-Presidents, one or
more Assistant Secretaries, one or more Assistant Treasurers, and such other
officers with such titles as the resolution of the Board of Directors choosing
them shall designate. Except as may otherwise be provided in the resolution of
the Board of Directors choosing an officer, no officers other than the Chairman
or Chairmen of the Board, as the case may be, or Vice-Chairman of the Board, if
any, need be a director. Any number of offices may be held by the same person,
as the directors may determine.
Unless otherwise provided in the resolution choosing him, each officer
shall be chosen for a term which shall continue until the meeting of the Board
of Directors following the next annual meeting of stockholders and until his
successor shall have been chosen and qualified.
-7-
<PAGE>
All officers of the corporation shall have such authority and perform
such duties in the management and operation of the corporation as shall be
prescribed in the resolutions of the Board of Directors designating and choosing
such officers and prescribing their authority and duties, and shall have such
additional authority and duties as are incident to their office except to the
extent that such resolutions may be inconsistent therewith. The Secretary or
Assistant Secretary of the corporation shall record all of the proceedings of
all meetings and actions in writing of stockholders, directors, and committees
of directors, and shall exercise such additional authority and perform such
additional duties as the Board shall assign to him. Any officer may be removed,
with or without cause, by the Board of Directors. Any vacancy in any office may
be filled by the Board of Directors.
ARTICLE IV
CORPORATE SEAL
The corporate seal shall be in such form as the Board of Directors
shall prescribe.
ARTICLE V
FISCAL YEAR
The fiscal year of the corporation shall be fixed, and shall be subject
to change, by the Board of Directors.
ARTICLE VI
CONTROL OVER BY- LAWS
Subject to the provisions of the certificate of incorporation and the
provisions of the General Corporation Law, the power to amend, alter or repeal
these By-Laws and to adopt new By-Laws may be exercised by the Board of
Directors or by the stockholders.
Dated: ______________________
-8-
<PAGE>
[MORSE, ZELNICK, ROSE & LANDER, LLP LETTERHEAD]
(212) 838-8040
__________ _____, 1996
KatManDu Entertainment Corp.
415 North Columbus Boulevard
Philadelphia, PA 19123
Dear Sirs:
We have acted as counsel to KatManDu Entertainment Corp., a Delaware
corporation (the "Company"), in connection with the preparation of a
registration statement on Form SB-2 (the "Registration Statement") filed with
the Securities and Exchange Commission under the Securities Act of 1933, as
amended (the "Act"), to register the offering by (a) the Company of (i)
2,500,000 shares of its common stock, par value $.001 per share (the "Common
Stock") (and the offering of an additional 375,000 shares if the over-allotment
option is exercised in full); (ii) 2,500,000 Redeemable Common Stock Purchase
Warrants (the "Redeemable Warrants") to purchase shares of Common Stock (and the
offering of an additional 375,000 Redeemable Warrants if the over-allotment
option is exercised in full); (iii) 2,500,000 shares of Common Stock underlying
the Redeemable Warrants (and the offering of an additional 375,000 shares of
Common Stock if the over-allotment option is exercised in full); (iv) Common
Stock Purchase Warrants (the "Representative's Warrants") to purchase 250,000
shares of Common Stock and 250,000 Redeemable Warrants; (v) 250,000 shares of
Common Stock underlying the Representative's Warrants; (vi) 250,000 Redeemable
Warrants underlying the Representative's Warrants; and (vii) 250,000 shares of
Common Stock underlying the Redeemable Warrants which underlie the
Representative's Warrants; and (b) certain shareholders of 261,666 shares of
Common Stock. We will also act as counsel for any and all amendments to the (a)
Registration Statement and (b) any Registration Statements pursuant to Rule
462(b) of the Act for additional shares of Common Stock, Redeemable Warrants,
Common Stock underlying Redeemable Warrants, Representative's Warrants, Common
Stock underlying Representative's Warrants, Redeemable Warrants underlying
Representative's Warrants and Common Stock underlying Redeemable Warrants
underlying Representative's Warrants.
In this regard, we have reviewed the Certificate of Incorporation of
the Company, as amended, resolutions adopted by the Company's Board of
Directors, the Registration Statement, the proposed form of the Redeemable
Warrants and the Representative's Warrants, the other exhibits to the
Registration Statement and such other records, documents, statutes and decisions
as we have deemed relevant in rendering this opinion. Based upon the foregoing,
we are of the opinion that:
<PAGE>
Each share of Common Stock, the Redeemable Warrants (including the
Redeemable Warrants underlying the Representative's Warrants), the
Representative's Warrants, and the Common Stock underlying the Redeemable
Warrants and the Representative's Warrants (including the Common Stock
underlying the Redeemable Warrants underlying the Representative's Warrants)
being offered pursuant to the Registration Statement and all amendments thereto
and any Registration Statements pursuant to Rule 462(b) of the Act for
additional shares of Common Stock, Redeemable Warrants, Representative's
Warrants and Common Stock underlying Redeemable Warrants (including the
Reedemable Warrants underlying the Representative's Warrants) and
Representative's Warrants (including the Common Stock underlying the Redeemable
Warrants underlying the Representative's Warrants) have been duly and validly
authorized for issuance and when issued as contemplated by the Registration
Statement or upon exercise of the Redeemable Warrants or the Representative's
Warrants, will be legally issued, fully paid and non-assessable.
We hereby consent to the use of this opinion as Exhibit 5.1 to the
Registration Statement and any and all amendments thereto, and any Registration
Statements pursuant to Rule 462(b) of the Act for additional shares of Common
Stock, Redeemable Warrants (including the Redeemable Warrants underlying the
Representative's Warrants), Representative's Warrants and Common Stock
underlying Redeemable Warrants and Representative's Warrant (including the
Common Stock underlying Redeemable Warrants underlying Representative's
Warrants). In giving such opinion, we do not thereby admit that we are acting
within the category of persons whose consent is required under Section 7 of the
Act or the rules or regulations of the Securities and Exchange Commission
thereunder. Members of this firm or their affiliates own an aggregate of 40,000
shares of Common Stock of the Company.
Very truly yours,
MORSE, ZELNICK, ROSE & LANDER, LLP
<PAGE>
KATMANDU ENTERTAINMENT CORP.
1996 STOCK OPTION PLAN
1. PURPOSES. The purposes of this Stock Option Plan are to attract and
retain the best qualified personnel for positions of substantial responsibility,
to provide additional incentive to the Employees of the Company or its
Subsidiaries, if any (as defined in Section 2 below), as well as other
individuals who perform services for the Company or its Subsidiaries, and to
promote the success of the Company's business.
Options granted hereunder may be either "incentive stock options", as
defined in Section 422A of the Internal Revenue Code of 1986, as amended, or
"non-qualified stock options", at the discretion of the Board and as reflected
in the terms of the written instrument evidencing an Option.
2. DEFINITIONS. As used herein, the following definitions shall apply:
(a) "Board" shall mean the Committee, if one has been
appointed, or the Board of Directors of the Company, if no Committee is
appointed.
(b) "Common Stock" shall mean the Common Shares of the Company
(par value $.001 per share).
(c) "Company" shall mean Kat*Man*Du Entertainment Corp., a
Delaware corporation.
(d) "Committee" shall mean the Committee appointed by the
Board of Directors in accordance with paragraph (a) of Section 4 of the Plan, if
one is appointed.
(e) "Continuous Status as an Employee" shall mean the absence
of any interruption or termination of service as an Employee. Continuous Status
as an Employee shall not be considered interrupted in the case of sick leave,
military leave, or any other leave of absence approved by the Board.
(f) "Employee" shall mean any person, including officers and
directors, employed by the Company or any Parent or Subsidiary of the Company.
The payment of a director's fee by the Company shall not be sufficient to
constitute "employment" by the Company.
(g) "Exchange Act" shall mean the Securities Exchange Act of
1934, as amended.
<PAGE>
(h) "Incentive Stock Option" shall mean a stock option
intended to qualify as an incentive stock option within the meaning of Section
422A of the Internal Revenue Code of 1986, as amended.
(i) "Non-qualified Stock Option" shall mean a stock option not
intended to qualify as an Incentive Stock Option.
(j) "Option" shall mean a stock option granted pursuant to the
Plan.
(k) "Optioned Stock" shall mean the Common Stock subject to an
Option.
(l) "Optionee" shall mean an Employee or other person who
receives an Option.
(m) "Parent" shall mean a "parent corporation", whether now or
hereafter existing, as defined in Section 425(e) of the Internal Revenue Code of
1986, as amended.
(n) "Securities Act" shall mean the Securities Act of 1933, as
amended.
(o) "SEC" shall mean the Securities and Exchange Commission.
(p) "Share" shall mean a share of the Common Stock, as
adjusted in accordance with Section 11 of the Plan.
(q) "Subsidiary" shall mean a "subsidiary corporation",
whether now or hereafter existing, as defined in Section 425(f) of the Internal
Revenue Code of 1986, as amended.
3. STOCK.
Subject to the provisions of Section 11 of the Plan, the maximum
aggregate number of shares which may be optioned and sold under the Plan is
500,000 shares of Common Stock. If an Option should expire or become
unexercisable for any reason without having been exercised in full, the
unpurchased Shares which were subject thereto shall, unless the Plan shall have
been terminated, become available for further grant under the Plan.
4. ADMINISTRATION.
(a) Procedure. The Company's Board of Directors may appoint a Committee
to administer the Plan. The Committee shall consist of not less than two members
of the Board of Directors who shall administer the Plan on behalf of the Board
of Directors, subject to such terms and conditions as the Board of Directors may
prescribe. Once appointed, the Committee shall continue to serve until otherwise
directed by the Board of Directors. From time to time the Board of Directors may
increase the size of the Committee and appoint additional members thereof,
remove members (with or without cause), and appoint new members in substitution
therefor, fill vacancies, however caused, or remove all members of the Committee
and thereafter directly administer the Plan.
2
<PAGE>
If a majority of the Board of Directors is eligible to be granted
Options or has been eligible at any time within the preceding year, a Committee
must be appointed to administer the Plan. The Committee must consist of not less
than two members of the Board of Directors, all of whom are "disinterested
persons" as defined in Rule 16b-3 of the General Rules and Regulations
promulgated under the Exchange Act.
(b) Powers of the Board. Subject to the provisions of the Plan, the
Board shall have the authority, in its discretion: (i) to grant Incentive Stock
Options, in accordance with Section 422 of the Internal Revenue Code of 1986,
as amended, or to grant Non-qualified Stock Options; (ii) to determine, upon
review of relevant information and in accordance with Section 8(b) of the Plan,
the fair market value of the Common Stock; (iii) to determine the exercise price
per share of Options to be granted which exercise price shall be determined in
accordance with Section 8(a) of the Plan; (iv) to determine the persons to whom,
and the time or times at which, Options shall be granted and the number of
shares to be represented by each Option; (v) to interpret the Plan; (vi) to
prescribe, amend and rescind rules and regulations relating to the Plan; (vii)
to determine the terms and provisions of each Option granted (which need not be
identical) and, with the consent of the holder thereof, modify or amend each
Option; (viii) to accelerate or defer (with the consent of the Optionee) the
exercise date of any Option; (ix) to authorize any person to execute on behalf
of the Company any instrument required to effectuate the grant of an Option
previously granted by the Board; and (x) to make all other determinations deemed
necessary or advisable for the administration of the Plan.
(c) Effect of the Board's Decision. All decisions, determinations, and
interpretations of the Board shall be final and binding on all Optionees and any
other holders of any Options granted under the Plan.
5. ELIGIBILITY; NON-DISCRETIONARY GRANTS.
(a) General. Incentive Stock Options may be granted only to Employees.
Non-qualified Stock Options may be granted to employees as well as directors
(subject to the limitations set forth in Section 4), independent contractors and
agents, as determined by the Board. Any person who has been granted an Option
may, if he is otherwise eligible, be granted an additional Option or Options.
The Plan shall not offer upon any Optionee any right with respect to
continuation of employment by the Company, nor shall it interfere in any way
with his right or the Company's right to terminate his employment at any time.
(b) Limitation on Incentive Stock Options. No Incentive Stock Option
may be granted to an Employee if, as the result of such grant, the aggregate
fair market value (determined at the time each option was granted) of the Shares
with respect to which such Incentive Stock Options are exercisable for the first
time by such Employee during any calendar year (under all such plans of the
Company and any Parent and Subsidiary) shall exceed One Hundred Thousand Dollars
($100,000).
(c) Annual Limitation on all Stock Options. No Stock Options may be
granted to any Employee in any fiscal year if as a result of such grant the
aggregate number of shares subject to options granted to such Employee that year
(under all such plans of the Company and any
3
<PAGE>
Parent or Subsidiary) exceed 100,000 shares subject to the anti-dilution
provisions of this Plan (Section 11) and/or other Plans as applicable.
(d) Non-discretionary Option Grants. Each director of the Company upon
first taking office, other than a director who is an officer, employee or
beneficial owner of 10% or more of the Company's Common Stock, shall be granted
an Option for 10,000 shares, exercisable with respect to one-half of the Shares
covered immediately upon such grant and exercisable with respect to the
remaining one-half of the Shares covered on the first anniversary of the date of
grant.
6. TERM OF THE PLAN. The Plan shall become effective upon the earlier
to occur of (i) its adoption by the Board of Directors, or (ii) its approval by
vote of the holders of a majority of the outstanding shares of the Company
entitled to vote on the adoption of the Plan. The Plan shall continue in effect
until March 1, 2006 unless sooner terminated under Section 13 of the Plan.
7. TERM OF THE OPTION. The term of each Option shall be ten (10) years
from the date of grant hereof or such shorter term as may be provided in the
instrument evidencing the Option. However, in the case of an Incentive Stock
Option granted to an Employee who, immediately before the Incentive Stock Option
is granted, owns stock representing more than ten percent (10%) of the voting
power of all classes of stock of the Company or any Parent or Subsidiary, the
term of the Incentive Stock Option shall be five (5) years from the day of grant
thereof or such shorter time as may be provided in the instrument evidencing the
Option.
8. EXERCISE PRICE AND CONSIDERATION.
(a) The per Share exercise price for the Shares to be issued pursuant
to the exercise of an Option shall be such price as is determined by the Board,
but shall be subject to the following:
(i) In the case of an Incentive Stock Option:
(A) granted to an Employee who, immediately before
the grant of such Incentive Stock Option, owns stock
representing more than ten percent (10%) of the voting power
of all classes of stock of the Company or any Parent or
Subsidiary, the per Share exercise price shall be no less than
one hundred ten percent (110%) of the fair market value per
Share on the date of grant, as the case may be;
(B) granted to an Employee not subject to the
provisions of Section 8(a)(i)(A), the per Share exercise price
shall be no less than one hundred percent (100%) of the fair
market value per Share on the date of grant.
(ii) In the case of a Non-qualified Stock Option:
(A) granted to an Employee, the per Share exercise
price shall be determined by the Board or the Committee, as
the case may be, in its sole discretion but in no event may
it be less than eighty-five percent (85%) of the fair market
value per Share on the date of grant;
(B) granted to a director who is not an officer,
employee, or beneficial owner of 10% or more of the Company's
Common Stock, the per Share exercise price shall be no less
than one hundred percent (100%) of the fair market value per
Share on the date of grant.
(b) The fair market value shall be determined by the Board in its
discretion; provided, however, that where there is a public market for the
Common Stock, the fair market value per Share shall be the mean of the bid and
asked prices or, if applicable, the closing price of the Common Stock on the
date of grant, as reported by the National Association of Securities Dealers
Automated Quotation (NASDAQ) System or, in the event the Common Stock is listed
on a stock exchangeable, the fair market value per Share shall be the closing
price on such exchange on the date of grant of the Option, as reported in the
Wall Street Journal.
4
<PAGE>
(c) The consideration to be paid for the Shares to be issued upon
exercise of an Option or in payment of any withholding taxes thereon, including
the method of payment, shall be determined by the Board an may consist entirely
of (i) cash, check or promissory note; (ii) other Shares of Common Stock owned
by the Employee having a fair market value on the date of surrender equal to the
aggregate exercise price of the Shares as to which said Option shall be
exercised; (iii) an assignment by the Employee of the net proceeds to be
received from a registered broker upon the sale of the Shares or the proceeds of
a loan from such broker in such amount; or (iv) any combination of such methods
of payment, or such other consideration and method of payment for the issuance
of Shares to the extent permitted under New York Law and meeting rules and
regulations of the SEC to plans meeting the requirements of Section 16(b)(3) of
the Exchange Act.
9. EXERCISE OF OPTION.
(a) Procedure or Exercise; Rights as a Stockholder. Any option granted
hereunder shall be exercisable at such times and subject to such conditions as
may be determined by the Board, including performance criteria with respect to
the Company and/or the Optionee, and as such shall be perishable under the terms
of the Plan.
An Option may not be exercised for a fraction of a Share.
An Option shall be deemed to be exercised when written notice of such
exercise has been given to the Company in accordance with the terms of the
instrument evidencing the Option by the person entitled to exercise the Option
and full payment for the Shares with respect to which the Option is exercised
has been received by the Company. Full payment may, as authorized by the Board,
consist of any consideration and method of payment allowable under Section 8(c)
of the Plan; it being understood that the Company shall take such action as may
be reasonably required to permit use of an approved payment method. Until the
issuance, which in no event will be delayed more than thirty (30) days from the
date of the exercise of the Option, (as evidenced by the appropriate entry on
the books of the Company or of a duly authorized transfer agent of the Company)
of the stock certificate evidencing such Shares, no right to vote or receive
dividends or any other rights as a stockholder shall exist with respect to the
Optioned Stock, notwithstanding the exercise of the Option. No adjustment will
be made for a dividend or other right for which the record date is prior to the
date the stock certificate is issued, except as provided in the Plan.
Exercise of an Option in any manner shall result in a decrease in the
number of Shares which thereafter may be available, both for purposes of the
Plan and for sale under the Option, by the number of Shares as to which the
Option is exercised.
(b) Termination of Status as an Employee. If any Employee ceases to
serve as an Employee, he may, but only within thirty (30) days (or such other
period of time not exceeding three (3) months as is determined by the Board)
after the date he ceases to be an Employee of the Company, exercise his Option
to the extent that he was entitled to exercise it as of the date of such
termination. To the extent that he was not entitled to exercise the Option at
the date of such termination, or if he does not exercise such Option (which he
was entitled to exercise) within the time specified herein, the Option shall
terminate.
5
<PAGE>
(c) Notwithstanding the provisions of Section 9(b) above, in the event
an Employee is unable to continue his employment with the Company as a result of
his total and permanent disability (as defined in Section 105(d)(4) of the
Internal Revenue Code of 1986, as amended), he may, buy only within three (3)
months (or such other period of time not exceeding twelve (12) months as is
determined by the Board) from the date of disability, exercise his Option to the
extent he was entitled to exercise it at the date of such disability. To the
extent that he was not entitled to exercise it at the date of such disability,
or if he does not exercise such Option (which he was entitled to exercise)
within the time specified herein, the Option shall terminate.
(d) Death of Optionee. In the event of the death of an Optionee:
(i) during the term of the Option who is at the time of his death
an Employee of the Company and who shall have been in
Continuous Status as an Employee since the date of grant of
the Option, the Option may be exercised, at any time within
twelve (12) months following the date of death, by the
Optionee's estate or by a person who acquired the right to
exercise that would have accrued had the Optionee continued
living one (1) month after the date of death; or
(ii) within thirty (30) days (or such other period of time not
exceeding three (3) months as is determined by the Board)
after the termination of Continuous Status as an Employee, the
Option may be exercised, at any time within three (3) months
following the date of death, by the Optionee's estate or by a
person who acquired the right to exercise the Option by
bequest or inheritance, but only to the extent of the right to
exercise that had accrued at the date of termination.
10. NON-TRANSFERABILITY OF OPTIONS. The Option may not be sold,
pledged, assigned, hypothecated, transferred, or disposed of in any manner other
than by will or by the laws of descent or distribution and may be exercised,
during the lifetime of the Optionee, only by the Optionee.
11. ADJUSTMENTS UPON CHANGES IN CAPITALIZATION OR MERGER. Subject to
any required action by the Stockholders of the Company, the number of shares of
Common Stock covered by each outstanding Option, and the number of shares of
Common Stock which have been authorized for issuance under the Plan but as to
which no Options have yet been granted or which have been returned to the Plan
upon cancellation or expiration of an Option, as well as the price per share of
Common Stock covered by each such outstanding Option, shall be proportionately
adjusted for any increase or decrease in the number of issued shares of Common
Stock resulting from a stock split or the payment of a stock dividend with
respect to the Common Stock or any other increase or decrease in the number of
issued shares of Common Stock effected without receipt of consideration by the
Company; provided, however, that conversion of any convertible securities of the
Company shall not be deemed to have been "effected without receipt of
consideration". Such adjustment shall be made by the Board, whose determination
in that respect by the Company of shares of stock of any class, or securities
convertible into shares of stock of any class, shall affect, and no adjustment
by reason thereof shall be made with respect to, the number or price of shares
of Common Stock subject to an Option.
6
<PAGE>
In the event of the proposed dissolution or liquidation of the Company,
or in the event of a proposed sale of all or substantially all of the assets of
the Company, or the merger of the Company with or into another corporation, the
Board of Directors of the Company shall, as to outstanding Options, either (i)
make appropriate provision for the protection of any such outstanding Options by
the substitution on an equitable basis of appropriate stock of the Company or of
the merged, consolidated or otherwise reorganized corporation which will be
issuable in respect to one share of Common Stock of the Company; provided, only
that the excess of the aggregate fair market value of the shares subject to the
Options immediately after such substitution over the purchase price thereof is
not more than the excess of the aggregate fair market value of the shares
subject to such Options immediately before such substitution over the purchase
price thereof, or (ii) upon written notice to an Optionee, provide that all
unexercised Options must be exercised within a specified number of days of the
date of such notice or they will be terminated. In any such case, the Board of
Directors may, in its discretion, advance the lapse of any waiting or
installment periods and exercise dates.
12. TIME FOR GRANTING OPTIONS. The date of grant of an Option shall,
for all purposes, be the date on which the Board makes the determination
granting such Option. Notice of the determination shall be given to each person
to whom an Option is so granted within a reasonable time after the date of such
grant.
13. AMENDMENT AND TERMINATION OF THE PLAN.
(a) The Board may amend or terminate the Plan from time to time in such
respects as the Board may deem advisable; provided, however, that the following
revisions or amendments shall require approval of the holders of a majority of
the outstanding shares of the Company entitled to vote:
(i) any increase in the number of Shares subject to the Plan, other
than in connection with an adjustment under Section 11 of the
Plan;
(ii) any change in the designation of the class of persons eligible to
be granted options; or
(iii) any material increase in the benefits accruing to participants
under the Plan.
(b) Stockholder Approval. If any amendment requiring stockholder
approval under Section 13(a) of the Plan is made, such stockholder approval
shall be solicited as described in Section 17(a) of the Plan.
(c) Effect of Amendment or Termination. Any such amendment or
termination of the Plan shall not affect Options already granted and such
Options shall remain in full force and effect as if this Plan had not been
amended or terminated, unless mutually agreed otherwise between the Optionee and
the Board, which agreement must be in writing and signed by the Optionee and the
Company.
14. CONDITIONS UPON ISSUANCE OF SHARES. Shares shall not be issued
pursuant to the exercise of an Option unless the exercise of such Option and the
issuance
7
<PAGE>
and delivery of such Shares pursuant thereto shall comply with all relevant
provisions of law, including, without limitation, the Securities Act of 1933, as
amended, the Exchange Act, the rules and regulations promulgated thereunder, and
the requirements of any stock exchange upon which the Shares may then be listed,
and shall be further subject to the approval of counsel for the Company with
respect to such compliance.
As a condition to the exercise of an Option, the Company may require
the person exercising such Option to represent and warrant at the time of any
such exercise that the Shares are being purchased only for investment and
without any present intention to sell or distribute such Shares, if in the
opinion of counsel for the Company, such a representation is required by, or
appropriate under, any of the aforementioned relevant provisions of law.
15. RESERVATION OF SHARES. The Company, during the term of this Plan,
will at all times reserve and keep available such number of Shares as shall be
sufficient to satisfy the requirements of the Plan.
Inability of the Company to obtain authority from any regulatory body
having jurisdiction, which authority is deemed by the Company's counsel to be
necessary to the lawful issuance and sale of any Shares hereunder, shall relieve
the Company of any liability in respect of the failure to issue or sell such
Shares as to which such requisite authority shall not have been obtained.
16. OPTION AGREEMENT. Options shall be evidenced by written option
agreements in such form as the Board shall approve.
17. STOCKHOLDER APPROVAL. Continuation of the Plan shall be subject to
approval by the stockholders of the Company within twelve (12) months before or
after the date the Plan is adopted. If such stockholder approval is obtained at
a duly held stockholders' meeting, it may be obtained by the affirmative vote of
the holders of a majority of the outstanding shares of the Company entitled to
vote thereon. The approval of such stockholders of the Company shall be (1)
solicited substantially in accordance with Section 14(a) of the Exchange Act and
the rules and regulations promulgated thereunder, or (2) solicited after the
Company has furnished in writing to the holders entitled to vote substantially
the same information concerning the Plan as that which would be required by the
rules and regulations in effect under Section 14(a) of the Exchange Act at the
time such information is furnished.
18. OTHER PROVISIONS. The Stock Option Agreement authorized under the
Plan shall contain such other provisions, including, without limitations,
restrictions upon the exercise of the Option, as the Board of Directors of the
Company shall deem advisable. Any Incentive Stock Option Agreement shall contain
such limitations and restrictions upon the exercise of the Incentive Stock
Option as shall be necessary in order that such option will be an Incentive
Stock Option as defined in Section 422A of the Internal Revenue Code of 1986, as
amended.
19. INDEMNIFICATION OF BOARD. In addition to such other rights of
indemnification as they may have as directors or as members of the Board, the
members of the Board shall be indemnified by the Company against the reasonable
expenses, including attorneys' fees actually and necessarily incurred in
connection with the defense of any action suit or
8
<PAGE>
proceeding, or in connection with any appeal therein, to which they or any of
them may be a party by reason of any action taken or failure to act under
or in connection without the Plan or any Option granted thereunder, and against
all amounts paid by them in settlement thereof (provided such settlement is
approved by independent legal counsel selected by the Company) or paid by them
in satisfaction of a judgment in any such action, suit or proceeding that such
Board member is liable for negligence or misconduct in the performance of his
duties, provided that within sixty (60) days after institution of any such
action, suit or proceeding a Board member shall, in writing, offer the Company
the opportunity, at its own expense, to handle and defend the same.
20. OTHER COMPENSATION PLANS. The adoption of the Plan shall not affect
any other stock option or incentive or other compensation plans in effect for
the Company or any Subsidiary, nor shall the Plan preclude the Company from
establishing any other forms of incentive or other compensation for employees
and directors of the Company or any Subsidiary.
21. COMPLIANCE WITH EXCHANGE ACT RULE 16b-3. With respect to persons
subject to Section 16 of the Exchange Act, transactions under the Plan are
intended to comply with all applicable conditions of Rule 16b-3 or its
successors under the Exchange Act. To the extent any provision of the Plan or
action by the Board fails to so comply, it shall be deemed null and void, to the
extent permitted by law and deemed advisable by the Board.
22. SINGULAR, PLURAL; GENDER. Whenever used herein, nouns in the
singular shall include the plural, and the masculine pronoun shall include the
feminine gender.
23. HEADINGS, ETC., NO PART OF PLAN. Headings of Articles and Sections
hereof are inserted for convenience and reference; they constitute no part of
the Plan.
9
<PAGE>
AGREEMENT, dated as of the 1st day of April, 1996, by and among S.
LANCE SILVER ("Silver"), STUART N. HARTING ("Harting"), JAMES R. BERGMAN
("Bergman"), BRUCE WAUGH ("Waugh"), DAVID R. GROMACKI ("Gromacki"), DIANE
THOMSEN ("Thomsen"), STEVEN RABINOVICI ("Rabinovici"), INTEREQUITY CAPITAL
PARTNERS, LLP ("InterEquity") and MORSE, ZELNICK, ROSE & LANDER, LLP ("MZRL").
W I T N E S S E T H
WHEREAS, each of the parties hereto is a shareholder of KatManDu
Entertainment Corp. ("KEC"), a Delaware corporation, owning the number of shares
of KEC common stock, par value $.001 per share (the "Common Stock") set forth
opposite his, her or its name on Schedule A annexed hereto and made a part
hereof; and
WHEREAS, Bergman, Waugh, Gromacki, Thomsen, Rabinovici, InterEquity and
MZRL (collectively referred to herein as the "Other Shareholders") have each
agreed to grant to Silver and Harting, jointly, the right to vote the shares of
Common Stock which they own.
NOW, THEREFORE, in consideration of the premises set forth above and
the mutual agreements, representations and warranties set forth herein and other
good and valuable consideration, the sufficiency of which is hereby
acknowledged, the parties hereto agree as follows:
1. Voting of KEC Common Stock.
---------------------------
(a) For as long as they own shares of KEC Common Stock, the
Other Shareholders agree that:
(i) At any special or annual meeting of shareholders of KEC at
which Directors are to be elected or in connection with a solicitation of
consents through which Directors are to be elected, they each shall vote (or
give a written consent with respect to) all of their shares of KEC Common Stock
as directed by Silver and Harting.
(ii) At any special or annual meeting of shareholders of KEC
at which it is proposed to remove Directors from office, or in connection with a
solicitation of consents through which Directors are to be removed from office,
they each shall vote (or give a written consent with respect to) all of their
shares of KEC Common Stock as directed by Silver and Harting.
(iii) At any special or annual meeting of the shareholders of
KEC or in connection with the solicitation of consents on any matter other than
the election or removal of
<PAGE>
Directors, they each shall vote (or give a written consent with respect
to) all of their shares of KEC Common Stock in accordance with the instructions
of Silver and Harting.
(b) In the event Silver and Harting shall not have given any
instructions with respect to matters referred to in Section 1(a) hereof, then,
and in such event, the Other Shareholders shall be free to vote their shares of
KEC Common Stock in any manner that they so choose.
2 Proxy. In order to insure their obligations under Section 1 hereof,
-----
the Other Shareholders shall simultaneously herewith deliver to Silver and
Harting his, her or its, as the case may be, irrevocable proxy with respect to
all of the shares of KEC Common Stock owned by such Other Shareholder from time
to time in the form annexed hereto as Exhibit A (the "Proxy"); it being agreed
that the Proxy shall be revoked immediately upon the termination of this
Agreement.
3. Restrictive Legend.
-------------------
3.1 Legend on Stock Certificates. Each certificate evidencing shares o
----------------------------
KEC Common Stock held by the Other Shareholders shall contain the following
legend:
THE RIGHT OF THE HOLDER OF THIS CERTIFICATE
TO VOTE THE SHARES REPRESENTED HEREBY MAY BE
RESTRICTED IN CERTAIN RESPECTS AS PROVIDED IN THE
TERMS OF A SHAREHOLDERS AGREEMENT DATED AS OF APRIL
1, 1996, A COPY OF WHICH IS ON FILE AT THE OFFICES OF
THE COMPANY AT 415 NORTH COLUMBUS BOULEVARD,
PHILADELPHIA, PENNSYLVANIA 19123.
3.2 Removal of Legend. The foregoing legend, or pertinent portions
------------------
thereof, shall be removed by KEC, through delivery of a replacement certificate
not bearing such legend, if the provisions of this Agreement which are the
subject of such legend shall have terminated in accordance with their terms.
4. Termination.
------------
4.1 Change in Control. This Agreement shall terminate and be of no
------------------
further force and effect after a "Change in Control" shall have occurred. A
Change of Control will be deemed to have occurred if following: (a) a tender or
exchange offer for voting securities of KEC, (b) a proxy contest for the
election of Directors of KEC, or (c) a merger or consolidation or sale of all or
substantially all of the business or assets of KEC, the persons constituting the
Board of Directors of KEC immediately prior to the initiation of such event
cease to constitute a majority of the Board of Directors of KEC upon the
occurrence of such event or within one year after such event.
4.2 Bankruptcy. This Agreement shall terminate and be of no further
-----------
force and effect at such time as: (a) KEC, pursuant to Title 11 of the U.S. Code
or any similar federal or state law
2
<PAGE>
for the relief of debtors ("Bankruptcy Law") (i) commences a voluntary case or
proceeding, (ii) consents to the entry of an order for relief against it in an
involuntary case or proceeding, (iii) consents to the appointment of a receiver,
trustee or similar official of it or for all or substantially all of its
property, or (iv) makes a general assignment for the benefit of its creditors;
or (b) a court of competent jurisdiction enters an order or decree under any
Bankruptcy Law that: (i) is for relief against KEC in an involuntary case or
proceeding, (ii) appoints a receiver, trustee or similar official for KEC or for
all or substantially all of its property, or (iii) orders the liquidation of KEC
and the order or decree remains unstayed and in effect for 90 days.
4.3 Events Relating to Silver and Harting.
--------------------------------------
(a) If at any time the shares of KEC Common Stock owned,
directly and indirectly, by Silver and Harting and any trusts of which they are
trustees and any other entities in which they own, directly or indirectly, in
excess of 50% of the equity interests, in the aggregate shall represent less
than 35% of the then outstanding shares of KEC Common Stock then, and in such
event, this Agreement shall terminate and be of no further force and effect.
(b) Upon the death and/or "disability" (as defined in the
Employment Agreements executed by Silver and KEC, and Harting and KEC,
respectively) of both Silver and Harting this Agreement shall terminate and be
of no further force and effect.
4.4 Sale By Other Shareholder. If an Other Shareholder shall sell or
-------------------------
otherwise transfer his, her or its shares of Common Stock to a person other than
(i) an Other Shareholder (ii) the spouse, ancestor or lineal descendant of an
Other Shareholder (including the transferor Other Shareholder) and (iii) in the
case of an Other Shareholder who is not a natural person, any partner or
shareholder of such Other Shareholder, this Agreement shall terminate
and be of no further force or effect with respect to the shares of Common Stock
so transferred.
4.5 Other Events of Termination.
---------------------------
(a) If the Board of Directors of KEC shall have approved or
recommended acceptance of (i) a tender or exchange offer for voting securities
of KEC or (ii) a merger or consolidation of KEC (each being hereinafter referred
to as an "Approved Transaction"), then and in such event, the Other Shareholders
may tender, exchange, sell or otherwise dispose of any and all of their shares
of KEC Common Stock in the manner provided for in such Approved Transaction.
(b) If immediately after the consummation of an Approved
Transaction, the persons constituting the Board of Directors immediately prior
thereto cease to constitute a majority of the Board of Directors of such
successor corporation as shall have been contemplated by such Approved
Transaction, then, and in such event, this Agreement shall terminate and be of
no further force and effect.
3
<PAGE>
5. Miscellaneous.
--------------
5.1 Notice. Any notice, request, instruction or other document to be
-------
given hereunder by any party to any of the other parties shall be in writing and
shall be deemed to have been duly given when delivered personally or five (5)
days after dispatch by registered or certified mail, postage prepaid, return
receipt requested, to the party to whom the same is so given or made at the
address of such party as set forth on Schedule A annexed hereto and made a part
hereof or to such other address as the one party shall specify to the other
parties in writing.
5.2 Successors and Assigns.
----------------------
(a) The provisions of this Agreement shall be binding upon and
inure to the benefit of the parties hereto and their respective successors and
permitted assigns, except that no party may assign or otherwise transfer any of
its rights under this Agreement without the prior written consent of the other
parties hereto.
(b) All of the terms, covenants and agreements contained in
this Agreement are solely for the benefit of the parties hereto, and their
respective successors and assigns, and no other parties (including, without
limitation, any other stockholder or creditor of KEC, or any director, officer
or employee of KEC) are intended to be benefited by, or entitled to enforce,
this Agreement.
5.3 Entire Agreement; Amendment.
---------------------------
(a) This Agreement and the other instruments and agreements
referred to herein embody the entire agreement of the parties hereto with
respect to the subject matter hereof and supersede all prior agreements with
respect thereto.
(b) No failure or delay by any party hereto in exercising any
right, power or privilege hereunder shall operate as a waiver thereof nor shall
any single or partial exercise thereof preclude any other or further exercise
thereof or the exercise of any other right, power or privilege. The rights and
remedies herein provided shall be cumulative and not exclusive of any rights or
remedies provided by law.
(c) Since a breach of certain provisions of this Agreement
could not adequately be compensated by money damages, any party shall be
entitled, in addition to any other right or remedy available to such party, to
an injunction restraining such breach or a threatened breach and to specific
performance of any such provisions of this Agreement, and in either case no bond
or other security shall be required in connection therewith.
5.4 Choice of Law. This Agreement shall be construed in accordance with
-------------
and governed by the laws of the State of Delaware applicable to agreements made
and to be performed entirely within such state.
4
<PAGE>
5.5 No Partnership. No partnership, joint venture or joint undertaking
--------------
is intended to be, or is, formed between any of the parties hereto by reason of
this Agreement or the transactions contemplated herein.
5.6 Counterparts and Headings. This Agreement may be executed in two or
-------------------------
more counterparts, each of which shall be deemed an original and all of which
together shall constitute one and the same instrument. All headings (including,
without limitation, Article headings and Section titles) are inserted for
convenience of reference only and shall not affect its meaning or
interpretation.
5.7 Severability. If and to the extent that any court of competent
------------
jurisdiction holds any provision (or any part thereof) of this Agreement to be
invalid or unenforceable, such holding shall in no way affect the validity of
the remainder of this Agreement
IN WITNESS WHEREOF, the parties hereto have duly executed this
Agreement as of the day and year first above written.
____________________________________
S. LANCE SILVER
____________________________________
STUART N. HARTING
____________________________________
JAMES R. BERGMAN
____________________________________
BRUCE WAUGH
____________________________________
DAVID R. GROMACKI
____________________________________
DIANE THOMSEN
____________________________________
STEVEN M. RABINOVICI
INTEREQUITY CAPITAL PARTNERS, LLP
By: __________________________________
MORSE, ZELNICK, ROSE & LANDER, LLP
By: __________________________________
5
<PAGE>
EXHIBIT A
IRREVOCABLE PROXY
KNOW ALL MEN BY THESE PRESENTS that I, ______________________ do hereby
constitute and appoint S. Lance Silver and Stuart N. Harting, jointly or the
survivor of them (the "Appointee"), as my agent to attend any annual or special
meetings of the shareholders of KatManDu Entertainment Corp., a Delaware
corporation (the "Company"), and any continuation or adjournment thereof, and
said Appointee shall have full power to vote all shares of common stock, par
value $.001 per share, of the Company ("Common Stock") which are held by me,
from time to time, including, without limitation, shares of Common Stock,
acquired by me after the date hereof (the "Shares") for me and to act for me and
in my name, place and stead, in the same manner, to the extent, and with all
powers I would possess if personally executing such document or present at such
meeting, giving to said Appointee full power of substitution and revocation. The
Appointee shall by this appointment have all voting and consensual rights and
powers pertaining to the Shares as if he were the record and beneficial owner of
such Shares.
This proxy is given in consideration of the execution by the Company of
an Agreement, dated as of April 1, 1996, by and among the Company and the
Appointee and certain Other Shareholders (as defined therein) which by its terms
is an agreement made pursuant to the provisions of Section 212 of the Delaware
General Corporation Law.
THIS PROXY IS IRREVOCABLE and shall survive until termination of the
agreement, dated as of April 1, 1996, among the undersigned, the appointees and
other shareholders, pursuant to which this Irrevocable Proxy has been granted
as set forth therein.
Dated: ______________________
_______________________________
In Presence of:
_____________________________
Witness
6
<PAGE>
SCHEDULE A
Name and Address Number of Shares
- ---------------- ----------------
S. Lance Silver 659,315
8 Shawnee Court
Medford, New Jersey 08033
Stuart N. Harting 659,315
600 Coles Mill Road
Haddonfield, New Jersey 08033
James R. Bergman 34,620
910 South Delhi Street
Philadelphia, Pennsylvania 19147
Bruce Waugh 34,620
487 Rick Road
Southhampton, Pennsylvania 18966
David R. Gromacki 13,845
15 High Street
Moorestown, New Jersey 08057
Diane Thomsen 3,285
2848 Magee Street
Philadelphia, Pennsylvania 19149
Steve Rabinovici 60,000
48 Country Drive
Plainview, New York 11803
InterEquity Capital Partners, LLP 20,000
220 Fifth Avenue
New York, New York 10001
Morse, Zelnick, Rose & Lander, LLP 40,000
450 Park Avenue - Suite 902
New York, New York 10022
7
<PAGE>
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT (the "Agreement") is made as of this
____ day of _________, 1996, by and between KATMANDU ENTERTAINMENT CORP., a
Delaware Corporation (the "Company"), and S. LANCE SILVER (the "Executive"). The
Agreement shall become effective as of the date on which the Registration
Statement on Form SB-2 with respect to the Company's initial public offering
shall be deemed effective by the Securities and Exchange Commission (the
"Effective Date").
W I T N E S S E T H:
WHEREAS, the Company believes that it would benefit from the
application of the Executive's particular and unique skill, experience and
background to the management and operation of the Company, and wishes to employ
the Executive as Chief Executive Officer ("CEO") and Co-President of the
Company; and
WHEREAS, the parties desire by this Agreement to set forth the
terms and conditions of the employment relationship between the Company and the
Executive.
NOW, THEREFORE, in consideration of the foregoing and the
mutual covenants in this Agreement, the Company and the Executive agree as
follows:
1. Employment and Duties. The Company hereby employs the
Executive as CEO and Co-President on the terms and conditions provided in
this Agreement and Executive
-1-
<PAGE>
agrees to accept such employment subject to the terms and conditions of this
Agreement. The Executive shall perform the duties and responsibilities as are
customary for the officer of a corporation in such positions, and shall perform
such other duties and responsibilities as are reasonably determined from time to
time by the Board of Directors of the Company (the "Board"). The Executive shall
be based at the Company's offices in Philadelphia, Pennsylvania or such other
place that shall constitute the Company's headquarters, although he may perform
such duties and responsibilities, consistent with his obligations hereunder,
from any other location, and except for business travel incident to his
employment under this Agreement, the Company agrees the Executive shall not be
required to relocate.
2. Term. The term of this Agreement shall be for three years
(the "Initial Term"), commencing on the Effective Date, and expiring on the day
preceding the third anniversary of the Effective Date (the "Termination Date"),
unless extended by mutual agreement of the parties or earlier terminated in
accordance with the terms of this Agreement.
3. Compensation. As compensation for performing the services
required by this Agreement, and during the term of this Agreement, the Executive
shall be compensated as follows:
(a) Base Compensation. The Company shall pay to the
Executive an annual salary ("Base Compensation") of $150,000, payable in equal
installments pursuant to the Company's customary payroll procedures in effect
for its executive personnel at the time of payment, but in no event less
frequently than monthly, subject to withholding for applicable federal, state,
and local taxes. The Executive shall be entitled to increases in Base
Compensation and bonuses with respect to each fiscal year during the term of
this Agreement, to be determined
-2-
<PAGE>
by the Compensation Committee of the Board based on periodic reviews of the
Executive's performance conducted on at least an annual basis. The Executive's
Base Compensation shall not be reduced during the term of this Agreement.
(b) Incentive Compensation. In addition to Base
Compensation, the Executive shall receive additional compensation ("Incentive
Compensation"). The Incentive Compensation shall be pursuant to short-term
and/or long-term incentive compensation programs which shall be established by
the Compensation Committee of the Board. For purposes of this Agreement, the
Executive's "Pro Rata Share" of Incentive Compensation for any fiscal year of
the Company shall be a fraction whose numerator shall be equal to the number of
months (or parts of months) during which the Executive was actually employed by
the Company during any such fiscal year and whose denominator shall be the total
number of months in such fiscal year.
4. Employee Benefits. During the term of this Agreement and
subject to the limitations set forth in this Section 4, the Executive and his
eligible dependents shall have the right to participate in any retirement plans
(qualified and non-qualified), pension, insurance, health, disability or other
benefit plan or program that has been or is hereafter adopted by the Company (or
in which the Company participates), according to the terms of such plan or
program, on terms no less favorable than the most favorable terms granted to
senior executives of the Company.
5. Vacation and Leaves of Absence. The Executive shall be
entitled to the normal and customary amount of paid vacation provided to senior
executive officers of the Company, but in no event less than 25 days during each
12 month period, beginning on the Effective Date of this Agreement. Any vacation
days that are not taken in a given 12 month period shall not accrue or carry
over from year to year. Upon any termination of this Agreement
-3-
<PAGE>
for any reason whatsoever, accrued and unused vacation for the year in which
this Agreement terminates will be paid to the Executive within 10 days of such
termination based on his annual rate of Base Compensation in effect on the date
of such termination. In addition, the Executive may be granted leaves of absence
with or without pay for such valid and legitimate reasons as the Board in its
sole and absolute discretion may determine, and is entitled to the same sick
leave and holidays provided to other senior executive officers of the Company.
6. Expenses.
(a) Business Expenses. The Executive shall be promptly
reimbursed against presentation of vouchers or receipts for all reasonable and
necessary expenses incurred by him in connection with the performance of
business-related duties.
(b) Automobile Expense. During the term of this Agreement,
in order to facilitate the performance of the Executive's duties hereunder, and
otherwise for the convenience of the Company, the Company shall provide the
Executive with an automobile allowance of $750 per month.
7. Indemnification. The Company shall (and is hereby obligated
to) indemnify (including advance payment of expenses, which such expenses shall
include without limitation attorneys' fees) the Executive in each and every
situation where (i) the Company is obligated to make such indemnification
pursuant to applicable law and the relevant portions of the Company's
Certificate of Incorporation and By-Laws, and (ii) the Company, under applicable
law, is not obligated, but is nevertheless permitted or empowered, to make such
indemnification.
8. Termination and Termination Benefits.
(a) Termination by the Company.
-4-
<PAGE>
(i) With Cause. The Company may terminate this Agreement
prior to its expiration date only with "cause" by action of the Board. For
purposes of this subsection 8(a)(i), "cause" shall mean (1) the continuing
willful failure by the Executive to substantially perform his duties hereunder
for any reason other than total or partial incapacity due to physical or mental
illness, (2) gross negligence or malfeasance on the part of the Executive in the
performance of his duties hereunder, and (3) the conviction of the Executive, by
a court of competent jurisdiction, of a felony. Termination pursuant to this
subsection 8(a)(i) shall be effective immediately upon giving the Executive
written notice thereof and the reason or reasons therefor with respect to
clauses (2) and (3) above, and 15 days after written notice thereof from the
Board to the Executive specifying the acts or omissions constituting the failure
and requesting that they be remedied with respect to clause (1) above, but only
if the Executive has not cured such failure within such 15 day period. In the
event of a termination pursuant to this subsection 8(a)(i), the Executive shall
be entitled to payment of his Base Compensation and the benefits pursuant to
Section 4 hereof up to the effective date of such termination.
(ii) Disability. If due to illness, physical or mental
disability, or other incapacity, the Executive shall fail, for a total of any
six consecutive months ("Disability"), to substantially perform the principal
duties required by this Agreement, the Company may terminate this Agreement upon
30 days' written notice to the Executive. In such event, the Executive shall be
(A) paid his Base Compensation until the Termination Date and his Pro Rata Share
of any Incentive Compensation payable to him for the year in which the
termination occurs, and (B) provided with employee benefits pursuant to Section
4, to the extent available, until the Termination Date; provided, however, that
any compensation to be paid to the Executive
-5-
<PAGE>
pursuant to this subsection 8(a)(ii) shall be offset against any payments
received by the Executive pursuant to any policy of disability insurance the
premiums of which are paid for by the Company.
(b) Termination by the Executive. The Executive may
terminate this Agreement for "good reason" upon 30 days' written notice to the
Company (during which period the Executive shall, if requested in writing by the
Company, continue to perform his duties as specified under this Agreement). For
purposes of this Agreement, if the Executive's employment is terminated by the
Company without cause (as such term is defined in subsection 8(a)(i) above) it
shall be deemed as though the Executive terminated this Agreement for "good
reason" under this subsection 8(b). In such event, the Executive shall be paid
his Base Compensation up to the effective date of such termination and his full
share of any Incentive Compensation payable to him for the year in which the
termination occurs. For purposes of the Executive's termination of this
Agreement for "good reason" under this subsection 8(b), "good reason" includes
without limitation (A) the Company's failure to make any of the payments or
provide any of the benefits to the Executive under this Agreement, and (B) the
Company's material breach of any provision of this Agreement. In addition, it
shall, at the option of the Executive, be deemed as though the Executive
terminated this Agreement for "good reason" pursuant to this subsection 8(b) in
the event that Stuart N. Harting, the Company's Co-President, terminates his
Employment Agreement with the Company for "good reason" pursuant to subsection
8(b) of such Employment Agreement.
(c) Additional Termination Compensation. In the event of a
termination of this Agreement pursuant to subsection 8(b) above, the Company, in
addition to paying the Executive his Base Compensation and Incentive
Compensation as hereinabove
-6-
<PAGE>
provided, shall make the following payment (hereinafter "Termination
Compensation") to the Executive: a lump sum payment equal to the lesser of (A)
24 months' Base Compensation, or (B) the Base Compensation that the Executive
would have received during the remaining portion of the Initial Term, if any.
Payment of Termination Compensation to the Executive shall occur no later than
14 days following the effective date of the Executive's termination.
(d) Death Benefit. Notwithstanding any other provision of
this Agreement, this Agreement shall terminate on the date of the Executive's
death. In such event the Executive's estate shall be paid his Base Compensation
for the remainder of the month in which such termination occurs and his Pro Rata
Share of any Incentive Compensation payable to him for the year in which such
termination occurs.
(e) No Mitigation. The Executive shall not be required to
mitigate the amount of any payments provided for by this Agreement by seeking
employment or otherwise, nor shall the amount of any payment or benefit provided
in this Agreement be reduced by any compensation or benefit earned by the
Executive after termination of his employment.
9. Company Property. All food and beverage preparation,
menu-related, advertising, promotional, sales, suppliers', manufacturers' and
other materials or articles or information, including without limitation data
processing reports, customer sales analyses, invoices, price lists or
information, samples, or any other materials or data of any kind furnished to
the Executive by the Company or developed by the Executive on behalf of the
Company or at the Company's direction or for the Company's use or otherwise in
connection with the Executive's employment hereunder, are and shall remain the
sole and confidential property of the Company; if
-7-
<PAGE>
the Company requests the return of such materials at any time during or at or
after the termination of the Executive's employment, the Executive shall
immediately deliver the same to the Company.
10. Covenant Not To Compete.
(a) No Solicitation or Competition. During the
effectiveness of this Agreement and for a period of one year after termination
of the Executive's employment with the Company for any reason other than
termination by the Company without cause or termination by the Executive for
good reason, the Executive shall not, directly or indirectly, solicit, induce,
encourage or attempt to influence any client, customer, employee, consultant,
independent contractor, salesman or supplier of the Company to cease to do
business or terminate his employment with the Company, and shall not engage in
(as a principal, partner, director, officer, agent, employee, consultant or
otherwise) or be financially interested in any business operating anywhere
within a 50 mile radius of any of the Company's restaurant, bar and night-club
units which is involved in business activities which are in competition with the
business activities carried on by the Company, or being definitively planned by
the Company, at the time of the termination of Executive's employment. However,
nothing contained in this Section 10 shall prevent the Executive from holding
for investment no more than five percent (5%) of any class of equity securities
of a company whose securities are publicly traded or from engaging in any real
estate-related activities that are not in competition with the business
activities of the Company.
(b) Confidentiality of Company Property. During the
effectiveness of this Agreement and at all times thereafter, the Executive shall
not use for his personal benefit, or disclose, communicate or divulge to, or use
for the direct or indirect benefit of any person, firm, association or company
other than the Company, any material referred to in Section 9 above.
-8-
<PAGE>
(c) Saving Clause. If the period of time or the area
specified in subsection (a) above should be adjudged unreasonable in any
proceeding, then the period of time shall be reduced by such number of months or
the area shall be reduced by the elimination of such portion thereof or both so
that such restrictions may be enforced in such area and for such time as is
adjudged to be reasonable. If the Executive violates any of the restrictions
contained in the foregoing subsection (a), the restrictive period shall not run
in favor of the Executive from the time of the commencement of any such
violation until such time as such violation shall be cured by the Executive to
the satisfaction of Company.
11. Miscellaneous.
(a) Integration; Amendment. This Agreement constitutes
the entire agreement between the parties hereto with respect to the matters set
forth herein and supersedes and renders of no force and effect all prior
understandings and agreements between the parties with respect to the matters
set forth herein. No amendments or additions to this Agreement shall be binding
unless in writing and signed by both parties.
(b) Severability. If any part of this Agreement is
contrary to, prohibited by, or deemed invalid under applicable law or
regulations, such provision shall be inapplicable and deemed omitted to the
extent so contrary, prohibited, or invalid, but the remainder of this Agreement
shall not be invalid and shall be given full force and effect so far as
possible.
(c) Waivers. The failure or delay of any party at any
time to require performance by the other party of any provision of this
Agreement, even if known, shall not affect the right of such party to require
performance of that provision or to exercise any right, power, or remedy
hereunder, and any waiver by any party of any breach of any provision of this
Agreement shall not be construed as a waiver of any continuing or succeeding
breach of such provision, a waiver of the provision itself, or a waiver of any
right, power, or
-9-
<PAGE>
remedy under this Agreement. No notice to or demand on any party in any case
shall, of itself, entitle such party to the other or further notice or demand in
similar or other circumstances.
(d) Power and Authority. The Company represents and
warrants to the Executive that it has the requisite corporate power, to enter
into this Agreement and perform the terms hereof; and that the execution,
delivery and performance of this Agreement by it has been duly authorized by all
appropriate corporate action; and this Agreement represents the valid and
legally binding obligation of the Company and is enforceable against it in
accordance with its terms.
(e) Burden and Benefit; Survival. This Agreement shall
be binding upon and inure to the benefit of the parties hereto and their
respective heirs, executors, personal and legal representatives, successors and
assigns. In addition to, and not in limitation of anything contained in this
Agreement, it is expressly understood and agreed that the Company's obligation
to pay Termination Compensation as set forth herein shall survive any
termination of this Agreement.
(f) Governing Law; Headings. This Agreement and its
construction, performance, and enforceability shall be governed by, and
construed in accordance with, the laws of the Commonwealth of Pennsylvania.
Headings and titles herein are included solely for convenience and shall not
affect, or be used in connection with, the interpretation of this Agreement.
-10-
<PAGE>
(g) Notices. All notices called for under this Agreement
shall be in writing and shall be deemed given upon receipt if delivered
personally or by facsimile transmission and followed promptly by mail, or mailed
by registered or certified mail (return receipt requested), postage prepaid, to
the parties at the following addresses (or at such other address for a party as
shall be specified by like notice; provided that notices of a change of address
shall be effective only upon receipt thereof):
If to the Executive:
S. Lance Silver
8 Shawnee Court
Medford, New Jersey 08055
-11-
<PAGE>
with a copy to:
S. Lance Silver, Esquire
Wolf, Block, Schorr and Solis-Cohen
Twelfth Floor, Packard Building
Philadelphia, Pennsylvania 19102-2678
If to the Company:
Katmandu Entertainment Corp.
417 North Columbus Boulevard
Philadelphia, Pennsylvania 19123
Attention: Board of Directors
with a copy to:
Morse, Zelnick, Rose & Lander, LLP
450 Park Avenue
New York, New York 10022
Attention: Howard Morse, Esquire
or to any other address or addressee as any party entitled to receive notice
under this Agreement shall designate, from time to time, to others in the manner
provided in this subsection 11(g) for the service of Notices.
Any notice delivered to the party hereto to whom it is
addressed shall be deemed to have been given and received on the day it was
received; provided, however, that if such day is not a business day then the
notice shall be deemed to have been given and received on the business day next
following such day. Any notice sent by facsimile transmission shall be deemed to
have been given and received on the business day next following the day of
transmission.
(h) Number of Days. In computing the number of days for
purposes of this Agreement, all days shall be counted, including Saturdays,
Sundays and holidays; provided, however, that if the final day of any time
period falls on a Saturday, Sunday or holiday on which
-12-
<PAGE>
federal banks are or may elect to be closed, then the final day shall be deemed
to be the next day which is not a Saturday, Sunday or such holiday.
IN WITNESS WHEREOF, the parties have duly executed this
Agreement as of the date first above written.
ATTEST: KATMANDU ENTERTAINMENT CORP.
______________________ By: _____________________________
Name:
Title:
______________________ _________________________________
S. Lance Silver
-13-
<PAGE>
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT (the "Agreement") is made as of this
____ day of _________, 1996, by and between KATMANDU ENTERTAINMENT CORP., a
Delaware Corporation (the "Company"), and STUART N. HARTING (the "Executive").
The Agreement shall become effective as of the date on which the Registration
Statement on Form SB-2 with respect to the Company's initial public offering
shall be deemed effective by the Securities and Exchange Commission (the
"Effective Date").
W I T N E S S E T H:
WHEREAS, the Company believes that it would benefit from the
application of the Executive's particular and unique skill, experience and
background to the management and operation of the Company, and wishes to employ
the Executive as Co-President of the Company; and
WHEREAS, the parties desire by this Agreement to set forth the
terms and conditions of the employment relationship between the Company and the
Executive.
NOW, THEREFORE, in consideration of the foregoing and the
mutual covenants in this Agreement, the Company and the Executive agree as
follows:
1. Employment and Duties. The Company hereby employs the
Executive as Co-President on the terms and conditions provided in this
Agreement and
-1-
<PAGE>
Executive agrees to accept such employment subject to the terms and conditions
of this Agreement. The Executive shall perform the duties and responsibilities
as are customary for the officer of a corporation in such position, and shall
perform such other duties and responsibilities as are reasonably determined from
time to time by the Board of Directors of the Company (the "Board"). The
Executive shall be based at the Company's offices in Philadelphia, Pennsylvania
or such other place that shall constitute the Company's headquarters, although
he may perform such duties and responsibilities, consistent with his obligations
hereunder, from any other location, and except for business travel incident to
his employment under this Agreement, the Company agrees the Executive shall not
be required to relocate.
2. Term. The term of this Agreement shall be for three years
(the "Initial Term"), commencing on the Effective Date, and expiring on the day
preceding the third anniversary of the Effective Date (the "Termination Date"),
unless extended by mutual agreement of the parties or earlier terminated in
accordance with the terms of this Agreement.
3. Compensation. As compensation for performing the services
required by this Agreement, and during the term of this Agreement, the Executive
shall be compensated as follows:
(a) Base Compensation. The Company shall pay to the
Executive an annual salary ("Base Compensation") of $150,000, payable in equal
installments pursuant to the Company's customary payroll procedures in effect
for its executive personnel at the time of payment, but in no event less
frequently than monthly, subject to withholding for applicable federal, state,
and local taxes. The Executive shall be entitled to increases in Base
Compensation and bonuses with respect to each fiscal year during the term of
this Agreement, to be determined
-2-
<PAGE>
by the Compensation Committee of the Board based on periodic reviews of the
Executive's performance conducted on at least an annual basis. The Executive's
Base Compensation shall not be reduced during the term of this Agreement.
(b) Incentive Compensation. In addition to Base
Compensation, the Executive shall receive additional compensation ("Incentive
Compensation"). The Incentive Compensation shall be pursuant to short-term
and/or long-term incentive compensation programs which shall be established by
the Compensation Committee of the Board. For purposes of this Agreement, the
Executive's "Pro Rata Share" of Incentive Compensation for any fiscal year of
the Company shall be a fraction whose numerator shall be equal to the number of
months (or parts of months) during which the Executive was actually employed by
the Company during any such fiscal year and whose denominator shall be the total
number of months in such fiscal year.
4. Employee Benefits. During the term of this Agreement and
subject to the limitations set forth in this Section 4, the Executive and his
eligible dependents shall have the right to participate in any retirement plans
(qualified and non-qualified), pension, insurance, health, disability or other
benefit plan or program that has been or is hereafter adopted by the Company (or
in which the Company participates), according to the terms of such plan or
program, on terms no less favorable than the most favorable terms granted to
senior executives of the Company.
5. Vacation and Leaves of Absence. The Executive shall be
entitled to the normal and customary amount of paid vacation provided to senior
executive officers of the Company, but in no event less than 25 days during each
12 month period, beginning on the Effective Date of this Agreement. Any vacation
days that are not taken in a given 12 month period shall not accrue or carry
over from year to year. Upon any termination of this Agreement
-3-
<PAGE>
for any reason whatsoever, accrued and unused vacation for the year in which
this Agreement terminates will be paid to the Executive within 10 days of such
termination based on his annual rate of Base Compensation in effect on the date
of such termination. In addition, the Executive may be granted leaves of absence
with or without pay for such valid and legitimate reasons as the Board in its
sole and absolute discretion may determine, and is entitled to the same sick
leave and holidays provided to other senior executive officers of the Company.
6. Expenses.
(a) Business Expenses. The Executive shall be promptly
reimbursed against presentation of vouchers or receipts for all reasonable and
necessary expenses incurred by him in connection with the performance of
business-related duties.
(b) Automobile Expense. During the term of this Agreement,
in order to facilitate the performance of the Executive's duties hereunder, and
otherwise for the convenience of the Company, the Company shall provide the
Executive with an automobile allowance of $750 per month.
7. Indemnification. The Company shall (and is hereby obligated
to) indemnify (including advance payment of expenses, which such expenses shall
include without limitation attorneys' fees) the Executive in each and every
situation where (i) the Company is obligated to make such indemnification
pursuant to applicable law and the relevant portions of the Company's
Certificate of Incorporation and By-Laws, and (ii) the Company, under applicable
law, is not obligated, but is nevertheless permitted or empowered, to make such
indemnification.
8. Termination and Termination Benefits.
(a) Termination by the Company.
-4-
<PAGE>
(i) With Cause. The Company may terminate this Agreement
prior to its expiration date only with "cause" by action of the Board. For
purposes of this subsection 8(a)(i), "cause" shall mean (1) the continuing
willful failure by the Executive to substantially perform his duties hereunder
for any reason other than total or partial incapacity due to physical or mental
illness, (2) gross negligence or malfeasance on the part of the Executive in the
performance of his duties hereunder, and (3) the conviction of the Executive, by
a court of competent jurisdiction, of a felony. Termination pursuant to this
subsection 8(a)(i) shall be effective immediately upon giving the Executive
written notice thereof and the reason or reasons therefor with respect to
clauses (2) and (3) above, and 15 days after written notice thereof from the
Board to the Executive specifying the acts or omissions constituting the failure
and requesting that they be remedied with respect to clause (1) above, but only
if the Executive has not cured such failure within such 15 day period. In the
event of a termination pursuant to this subsection 8(a)(i), the Executive shall
be entitled to payment of his Base Compensation and the benefits pursuant to
Section 4 hereof up to the effective date of such termination.
(ii) Disability. If due to illness, physical or mental
disability, or other incapacity, the Executive shall fail, for a total of any
six consecutive months ("Disability"), to substantially perform the principal
duties required by this Agreement, the Company may terminate this Agreement upon
30 days' written notice to the Executive. In such event, the Executive shall be
(A) paid his Base Compensation until the Termination Date and his Pro Rata Share
of any Incentive Compensation payable to him for the year in which the
termination occurs, and (B) provided with employee benefits pursuant to Section
4, to the extent available, until the Termination Date; provided, however, that
any compensation to be paid to the Executive
-5-
<PAGE>
pursuant to this subsection 8(a)(ii) shall be offset against any payments
received by the Executive pursuant to any policy of disability insurance the
premiums of which are paid for by the Company.
(b) Termination by the Executive. The Executive may
terminate this Agreement for "good reason" upon 30 days' written notice to the
Company (during which period the Executive shall, if requested in writing by the
Company, continue to perform his duties as specified under this Agreement). For
purposes of this Agreement, if the Executive's employment is terminated by the
Company without cause (as such term is defined in subsection 8(a)(i) above) it
shall be deemed as though the Executive terminated this Agreement for "good
reason" under this subsection 8(b). In such event, the Executive shall be paid
his Base Compensation up to the effective date of such termination and his full
share of any Incentive Compensation payable to him for the year in which the
termination occurs. For purposes of the Executive's termination of this
Agreement for "good reason" under this subsection 8(b), "good reason" includes
without limitation (A) the Company's failure to make any of the payments or
provide any of the benefits to the Executive under this Agreement, and (B) the
Company's material breach of any provision of this Agreement. In addition, it
shall, at the option of the Executive, be deemed as though the Executive
terminated this Agreement for "good reason" pursuant to this subsection 8(b) in
the event that S. Lance Silver, the Company's CEO and Co-President,
terminates his Employment Agreement with the Company for "good reason" pursuant
to subsection 8(b) of such Employment Agreement.
(c) Additional Termination Compensation. In the event of
a termination of this Agreement pursuant to subsection 8(b) above, the Company,
in addition to paying the Executive his Base Compensation and Incentive
Compensation as hereinabove
-6-
<PAGE>
provided, shall make the following payment (hereinafter "Termination
Compensation") to the Executive: a lump sum payment equal to the lesser of (A)
24 months' Base Compensation, or (B) the Base Compensation that the Executive
would have received during the remaining portion of the Initial Term, if any.
Payment of Termination Compensation to the Executive shall occur no later than
14 days following the effective date of the Executive's termination.
(d) Death Benefit. Notwithstanding any other provision
of this Agreement, this Agreement shall terminate on the date of the Executive's
death. In such event the Executive's estate shall be paid his Base Compensation
for the remainder of the month in which such termination occurs and his Pro Rata
Share of any Incentive Compensation payable to him for the year in which such
termination occurs.
(e) No Mitigation. The Executive shall not be required
to mitigate the amount of any payments provided for by this Agreement by seeking
employment or otherwise, nor shall the amount of any payment or benefit provided
in this Agreement be reduced by any compensation or benefit earned by the
Executive after termination of his employment.
9. Company Property. All food and beverage preparation,
menu-related, advertising, promotional, sales, suppliers', manufacturers' and
other materials or articles or information, including without limitation data
processing reports, customer sales analyses, invoices, price lists or
information, samples, or any other materials or data of any kind furnished to
the Executive by the Company or developed by the Executive on behalf of the
Company or at the Company's direction or for the Company's use or otherwise in
connection with the Executive's employment hereunder, are and shall remain the
sole and confidential property of the Company; if
-7-
<PAGE>
the Company requests the return of such materials at any time during or at or
after the termination of the Executive's employment, the Executive shall
immediately deliver the same to the Company.
10. Covenant Not To Compete.
(a) No Solicitation or Competition. During the
effectiveness of this Agreement and for a period of one year after termination
of the Executive's employment with the Company for any reason other than
termination by the Company without cause or termination by the Executive for
good reason, the Executive shall not, directly or indirectly, solicit, induce,
encourage or attempt to influence any client, customer, employee, consultant,
independent contractor, salesman or supplier of the Company to cease to do
business or terminate his employment with the Company, and shall not engage in
(as a principal, partner, director, officer, agent, employee, consultant or
otherwise) or be financially interested in any business operating anywhere
within a 50 mile radius of any of the Company's restaurant, bar and night-club
units which is involved in business activities which are in competition with the
business activities carried on by the Company, or being definitively planned by
the Company, at the time of the termination of Executive's employment. However,
nothing contained in this Section 10 shall prevent the Executive from holding
for investment no more than five percent (5%) of any class of equity securities
of a company whose securities are publicly traded or from engaging in any real
estate-related activities that are not in competition with the business
activities of the Company.
(b) Confidentiality of Company Property. During the
effectiveness of this Agreement and at all times thereafter, the Executive shall
not use for his personal benefit, or disclose, communicate or divulge to, or use
for the direct or indirect benefit of any person, firm, association or company
other than the Company, any material referred to in Section 9 above.
-8-
<PAGE>
(c) Saving Clause. If the period of time or the area
specified in subsection (a) above should be adjudged unreasonable in any
proceeding, then the period of time shall be reduced by such number of months or
the area shall be reduced by the elimination of such portion thereof or both so
that such restrictions may be enforced in such area and for such time as is
adjudged to be reasonable. If the Executive violates any of the restrictions
contained in the foregoing subsection (a), the restrictive period shall not run
in favor of the Executive from the time of the commencement of any such
violation until such time as such violation shall be cured by the Executive to
the satisfaction of Company.
11. Miscellaneous.
(a) Integration; Amendment. This Agreement constitutes
the entire agreement between the parties hereto with respect to the matters set
forth herein and supersedes and renders of no force and effect all prior
understandings and agreements between the parties with respect to the matters
set forth herein. No amendments or additions to this Agreement shall be binding
unless in writing and signed by both parties.
(b) Severability. If any part of this Agreement is
contrary to, prohibited by, or deemed invalid under applicable law or
regulations, such provision shall be inapplicable and deemed omitted to the
extent so contrary, prohibited, or invalid, but the remainder of this Agreement
shall not be invalid and shall be given full force and effect so far as
possible.
(c) Waivers. The failure or delay of any party at any
time to require performance by the other party of any provision of this
Agreement, even if known, shall not affect the right of such party to require
performance of that provision or to exercise any right, power, or
-9-
<PAGE>
remedy hereunder, and any waiver by any party of any breach of any provision of
this Agreement shall not be construed as a waiver of any continuing or
succeeding breach of such provision, a waiver of the provision itself, or a
waiver of any right, power, or remedy under this Agreement. No notice to or
demand on any party in any case shall, of itself, entitle such party to the
other or further notice or demand in similar or other circumstances.
(d) Power and Authority. The Company represents and
warrants to the Executive that it has the requisite corporate power, to enter
into this Agreement and perform the terms hereof; and that the execution,
delivery and performance of this Agreement by it has been duly authorized by all
appropriate corporate action; and this Agreement represents the valid and
legally binding obligation of the Company and is enforceable against it in
accordance with its terms.
(e) Burden and Benefit; Survival. This Agreement shall
be binding upon and inure to the benefit of the parties hereto and their
respective heirs, executors, personal and legal representatives, successors and
assigns. In addition to, and not in limitation of anything contained in this
Agreement, it is expressly understood and agreed that the Company's obligation
to pay Termination Compensation as set forth herein shall survive any
termination of this Agreement.
(f) Governing Law; Headings. This Agreement and its
construction, performance, and enforceability shall be governed by, and
construed in accordance with, the laws of the Commonwealth of Pennsylvania.
Headings and titles herein are included solely for convenience and shall not
affect, or be used in connection with, the interpretation of this Agreement.
-10-
<PAGE>
(g) Notices. All notices called for under this Agreement
shall be in writing and shall be deemed given upon receipt if delivered
personally or by facsimile transmission and followed promptly by mail, or mailed
by registered or .ertified mail (return receipt requested), postage prepaid, to
the parties at the following addresses (or at such other address for a party as
shall be specified by like notice; provided that notices of a change of address
shall be effective only upon receipt thereof):
If to the Executive:
Stuart N. Harting
600 Coles Mill Road
Haddonfield, New Jersey 08033
-11-
<PAGE>
with a copy to:
S. Lance Silver, Esquire
Wolf, Block, Schorr and Solis-Cohen
Twelfth Floor, Packard Building
Philadelphia, Pennsylvania 19102-2678
If to the Company:
Katmandu Entertainment Corp.
417 North Columbus Boulevard
Philadelphia, Pennsylvania 19123
Attention: Board of Directors
with a copy to:
Morse, Zelnick, Rose & Lander, LLP
450 Park Avenue
New York, New York 10022
Attention: Howard Morse, Esquire
or to any other address or addressee as any party entitled to receive notice
under this Agreement shall designate, from time to time, to others in the manner
provided in this subsection 11(g) for the service of Notices.
Any notice delivered to the party hereto to whom it is
addressed shall be deemed to have been given and received on the day it was
received; provided, however, that if such day is not a business day then the
notice shall be deemed to have been given and received on the business day next
following such day. Any notice sent by facsimile transmission shall be deemed to
have been given and received on the business day next following the day of
transmission.
(h) Number of Days. In computing the number of days for
purposes of this Agreement, all days shall be counted, including Saturdays,
Sundays and holidays; provided, however, that if the final day of any time
period falls on a Saturday, Sunday or holiday on which
-12-
<PAGE>
federal banks are or may elect to be closed, then the final day shall be deemed
to be the next day which is not a Saturday, Sunday or such holiday.
IN WITNESS WHEREOF, the parties have duly executed this
Agreement as of the date first above written.
ATTEST: KATMANDU ENTERTAINMENT CORP.
______________________ By: _____________________________
Name:
Title:
______________________ ________________________________
Stuart N. Harting
-13-
<PAGE>
NOTE PURCHASE AGREEMENT
This Note Purchase Agreement (the "Agreement") is made as of June 19,
1996 between Kat*Man*Du Entertainment Corp., a Delaware corporation (the
"Company"), KatManDu Corporation ("KatCorp."), a Pennsylvania corporation,
KatManDu Investment Partners ("KIP"), a Pennsylvania limited partnership and
T-KAT Corp. ("T-KAT"), a New Jersey corporation, on the one hand, and the
parties listed on Exhibit A hereto (the "Purchasers"), each of whom has executed
a Confidential Purchaser Questionnaire, a copy of which is attached hereto as
Exhibit B, on the other hand.
WHEREAS, the Company desires to sell and the Purchasers desire to
purchase $1,100,000 of the Company's 10% Notes (the "Notes") substantially in
the form set forth on Exhibit C attached hereto on the terms and conditions set
forth herein; and
WHEREAS, KatCorp., KIP and T-KAT (each a "Guarantor" and collectively
the "Guarantors") have agreed to guaranty the obligations of the Company
hereunder.
NOW, THEREFORE, in consideration of the premises and the covenants
herein contained, the parties hereto agree as follows:
1. Authorization. The Company has authorized the issuance to the
Purchasers of up to $1,100,000 in principal amount of its Notes under the terms
set forth herein and in the Notes, and has authorized the issuance of the
Initial Shares (as hereinafter defined) on the terms and conditions set forth
herein. The Notes and the Initial Shares to be issued pursuant hereto are
collectively referred to as the "Securities".
2. Payment of Notes. Subject to the terms and conditions hereof, the
Notes shall be payable as set forth in the Notes.
2.1 Guaranty. The Notes shall be guaranteed by KatCorp., KIP
and T-KAT, each of which will execute a Guaranty Agreement,
substantially in the form set forth on Exhibit D attached hereto (the
"Guaranty").
2.2 Interest. The Notes shall accrue interest on the unpaid
principal amount at a rate of 10% per annum which interest shall be
payable monthly in arrears beginning on August 1, 1996.
2.3 Due Date of Notes. The entire principal amount of the
Notes plus accrued and unpaid interest thereon shall be due in full on
the earlier of (i) the day following the day on which the Company
closes an offering of shares of its common stock, par value $.001 per
share ("Common Stock") or of any other equity or debt security pursuant
to a registration statement filed with, and declared effective by, the
Securities and Exchange Commission (a "Public Offering"), or (ii) May
31, 1998.
<PAGE>
2.4 Optional Prepayments. The Company may at any time or from
time to time upon five (5) days prior written notice to the Purchasers
prepay all or any portion of the Notes; provided that the Company may
only prepay less than all of the Notes, pro-rata (i.e. the Company may
prepay 20% of the principal balance of each of the Notes, etc.)
3. Issuance of Common Stock.
(a) As additional consideration, simultaneously herewith the
Company is issuing to the Purchasers that number of shares of its common stock
in the aggregate the ("Initial Shares") as is equal to $850,000 divided by the
proposed $6.00 sales price (the "Proposed Price") for the Common Stock in its
proposed Public Offering. Such shares (rounded to the nearest whole share) will
be issued to each Purchaser in proportion to the amount of the Notes being
purchased by such Purchaser. In the event that the Public Offering is
consummated and the price per share to the public is less than the Proposed
Price, the Company shall issue to the Purchasers, without any additional
consideration, that number of shares of Common Stock (rounded to the nearest
whole number) as is equal to $850,000 divided by the price to the public in the
Public Offering less the number of Initial Shares. In the event that the Public
Offering is consummated and both (i) the "Pre-IPO Value of the Company" (as
determined below) is less than $14,400,000 and (ii) the price per share to the
public is greater than the Proposed Price, the Purchasers shall transfer to the
Company, without any consideration, such number of shares of Common Stock
(rounded to the nearest whole number) as shall equal the difference between (A)
the number of Initial Shares and (B) the quotient obtained by dividing (1)
$850,000 by (2) the gross sales price per share of the common stock sold in the
Public Offering. The number of Initial Shares, as adjusted pursuant to clause
(i) or clause (ii) of the preceding sentence, as the case may be, is hereinafter
referred to as the "Purchaser Stock". The Purchasers acknowledge that the
certificates evidencing the Purchaser Stock will bear a legend substantially in
the following form:
"The shares evidenced by this certificate have not been
registered under the Securities Act of 1933, as amended, and
must be held indefinitely unless they are transferred pursuant
to an effective registration statement under that Act, or
after receipt of an opinion of counsel reasonably satisfactory
to the Company and its counsel that registration is not
required."
and that, appropriate stop-transfer orders will be noted on the Company's stock
records with respect to all Purchaser Stock so legended.
(b) The Pre-IPO Value of the Company shall be equal to the
number of shares of Common Stock outstanding immediately prior to the issuance
of the shares of Common Stock to be sold in the Public Offering multiplied by
the per share price to the public at which such Public Offering has been
consummated.
3.1 Optional Redemption of Common Stock. Commencing on
February 28, 1997 and only if a Public Offering shall not have occurred
prior to February 28, 1997, then and in such event, upon five (5) days
prior written notice to the Purchasers, the Company shall have the
2
<PAGE>
option to redeem all (but not less than all) of the Initial Shares;
provided, however, that the Company shall not have the right to
exercise such option unless prior to, or simultaneously with, such
exercise the Company shall have repaid the Notes in full. The aggregate
amount to be paid by the Company for such optional redemption shall be
paid in cash and shall be equal to:
(a) $110,000, if such redemption shall occur on or before May
31, 1997;
(b) $165,000, if such redemption shall occur after May 31, 1997
but on or before November 30, 1997; and
(c) $220,000, if such redemption shall occur after December 1,
1997 but on or before May 31, 1998.
3.2 Mandatory Redemption. If a Public Offering shall not have
occurred prior to February 28, 1997 and if the Initial Shares shall not
have previously been redeemed in accordance with Section 3.1 above,
then, and in such event, the Company shall be required to redeem such
Initial Shares on May 31, 1998 in cash for an aggregate amount of
$220,000.
3.3 Legends. The Initial Shares shall bear a legend, which
legend shall indicate that such shares are subject to optional and
mandatory redemption as provided in this Agreement.
3.4 Additional Shares of Common Stock. If the Notes shall not
have been paid in full on or before June 15, 1998, then, and in such
event, the Company shall issue to the Purchasers in the aggregate that
number of shares that when added to the number of Initial Shares shall,
after the issuance thereof, equal 20% of the then outstanding shares of
the Common Stock of the Company. Such shares shall be issued pro rata
to each of the Purchasers based upon the amount of the Initial Shares
held by each such Purchaser.
4. Registration. The Company agrees to include the Purchasers Stock in
any registration statement filed by the Company in connection with a Public
Offering (the "Registration Statement"). The Company agrees to keep such
registration statement effective with respect to the Purchaser Stock until the
earlier of (a) the 45th day after the day on which the Purchaser Stock is no
longer subject to any "lock-up" agreement with the underwriter of such Public
Offering or (b) the 15th day after which the Purchaser Stock may be sold without
registration pursuant to Rule 144 promulgated under the Securities Act (as
defined below) or such other successor or similar rule which permits such sales.
4.1 Registration Statement.
(a) Following the effective date of the Registration
Statement, the Company shall, upon the request of any
Purchaser, forthwith supply to such Purchaser such reasonable
number of copies of the Registration Statement, preliminary
prospectus and prospectus meeting the requirements of the
Securities Act as shall have been requested.
3
<PAGE>
(b) The Company shall pay all costs, fees and expenses in
connection with the Registration Statement; provided, however,
that the Purchaser shall be solely responsible for the fees of
any counsel retained by the Purchaser in connection with such
registration and any transfer taxes or underwriting discounts,
commissions or fees applicable to the Purchaser Stock sold by
the Purchaser pursuant thereto.
(c) The Company shall indemnify and hold harmless the
Purchaser from and against any and all losses, claims, damages
and liabilities caused by any untrue statement of a material
fact contained in the Registration Statement, any other
registration statement filed by the Company under the
Securities Act with respect to the registration of the
Purchaser Stock, any post-effective amendment to such
registration statements, or any prospectus included therein or
caused by any omission to state therein a material fact
required to be stated therein or necessary to make the
statements therein not misleading, except insofar as such
losses, claims, damages or liabilities are caused by any such
untrue statement or omission based upon information furnished
or required to be furnished in writing to the Company by the
Purchaser expressly for use therein, which indemnification
shall include each person, if any, who controls the Purchaser
within the meaning of the Securities Act and each officer,
director, employee and agent of the Purchaser; provided,
however, that the indemnification in this Section with respect
to any prospectus shall not inure to the benefit of the
Purchaser (or to the benefit of any person controlling the
Purchaser) on account of any such loss, claim, damage or
liability arising from the sale of Purchaser Stock by the
Purchaser, if a copy of a subsequent prospectus correcting the
untrue statement or omission in such earlier prospectus was
provided to the Purchaser by the Company prior to the subject
sale and the subsequent prospectus was not delivered or sent
by the Purchaser to the buyer prior to such sale; and provided
further, that the Company shall not be obligated to so
indemnify the Purchaser or other person referred to above
unless the Purchaser or other person, as the case may be,
shall at the same time indemnify the Company, its directors,
each officer signing the Registration Statement and each
person, if any, who controls the Company within the meaning of
the Securities Act, from and against any and all losses,
claims, damages and liabilities caused by any untrue statement
of a material fact contained in the Registration Statement,
any registration statement or any prospectus required to be
filed or furnished by reason of this Agreement or caused by
any omission to state therein a material fact required to be
stated therein or necessary to make the statements therein not
misleading, insofar as such losses, claims, damages or
liabilities are caused by any untrue statement or omission
based upon information furnished in writing to the Company by
the Purchaser expressly for use therein.
(d) If for any reason the indemnification provided for in the
preceding section is held by a court of competent jurisdiction
to be unavailable to an indemnified party with respect to any
loss, claim, damage, liability or expense referred to therein,
4
<PAGE>
then the indemnifying party, in lieu of indemnifying such
indemnified party thereunder, shall contribute to the amount
paid or payable by the indemnified party as a result of such
loss, claim, damage or liability in such proportion as is
appropriate to reflect not only the relative benefits received
by the indemnified party and the indemnifying party, but also
the relative fault of the indemnified party and the
indemnifying party, as well as any other relevant equitable
considerations.
(e) Neither the filing of the Registration Statement by the
Company nor the making of any request for prospectuses by the
Purchaser shall impose upon the Purchaser any obligation to
sell the Purchaser Stock.
(f) The Purchaser, upon receipt of notice from the Company
that an event has occurred which requires a post-effective
amendment to the Registration Statement or a supplement to the
prospectus included therein, shall promptly discontinue the
sale of Purchaser Stock until the Purchaser receives a copy of
a supplemented or amended prospectus from the Company, which
the Company shall provide as soon as practicable after such
notice.
5. Representations and Warranties of the Company. The Company hereby
represents and warrants to the Purchasers, as follows:
5.1 Organization and Standing; Articles and Bylaws. The
Company is a corporation duly organized, validly existing and in good
standing under, and by virtue of, the laws of the State of Delaware.
The Company has requisite corporate power and all materials licenses,
permits and authorizations necessary to own and operate its properties
and assets, and to carry on its business as currently conducted and as
proposed to be conducted. The Company is qualified to do business as a
foreign corporation in each state where the ownership or leasing of
property or the nature of business transacted requires such
qualification and no other qualification is currently required in any
other jurisdiction wherein the failure to be so qualified would be
materially adverse to the Company.
5.2 Corporate Power. The Company has all requisite legal and
corporate power to execute and deliver this Agreement, issue the
Securities, and to carry out and perform its obligations under the
terms of this Agreement.
5.3 Authorization. All corporate action on the part of the
Company and its directors and shareholders necessary for the
authorization, execution, delivery and performance of this Agreement by
the Company, the authorization, issuance and delivery of the
Securities, and the performance of the Company's obligations hereunder
have been taken. This Agreement, when executed and delivered by the
Company and the Purchasers shall constitute a valid, legal and binding
obligation of the Company, enforceable in accordance with its terms,
subject to laws of general application relating to bankruptcy,
insolvency and the relief of debtors.
5
<PAGE>
5.4 Capitalization. The Company is authorized to issue
1,000,000 shares of Common Stock par value $.001 per share. As of May
31, 1996, there were issued and outstanding a total of 657,136 shares
of Common Stock.
5.5 No Consent. No consent, authorization, approval, order,
license, certificate or permit of or from, or declaration or filing
with, any federal, state, local or other governmental authority or any
court of any other tribunal is required by the Company for the
execution, delivery or performance by the Company of this Agreement or
the execution, issuance, sale or delivery of the Securities. No consent
of any party to any contract, agreement, instrument, lease, license,
arrangement or understanding to which the Company is a party or to
which any of its properties or assets are subject is required for the
execution, delivery and performance by the Company of this Agreement,
or the execution, issuance, sale or delivery of the Securities.
5.6 No Conflict. The execution, delivery and performance of
this Agreement, and the execution, issuance, sale or delivery of the
Securities will not violate, result in a breach of, conflict with (with
or without the giving of notice or the passage of time or both) or
entitle any party to terminate or call a default under any contract,
agreement, instrument, lease, license, arrangement or understanding or
violate or result in a breach of any term of the certificate of
incorporation or by-laws of, or conflict with any law, rule,
regulation, order, judgment or decree binding upon the Company or to
which any of its operations, businesses, properties or assets are
subject.
5.7 Proposed Public Offering. The Company currently
contemplates a proposed Public Offering of 1,600,000 shares of its
Common Stock. The Company expects that immediately prior to the closing
of such Public Offering the Company will issue approximately 1,600,000
shares of its Common Stock in exchange for all of the issued and
outstanding shares of the capital stock of KatCorp and T-KAT and all of
the partnership interests in KIP and after such issuance the Company
will have issued and outstanding approximately 2,400,000 shares of its
Common Stock; so that, therefore, immediately after the closing of such
Public Offering the Company will have outstanding approximately
4,000,000 shares of its Common Stock. The Company further expects that
no other shares of any class of the Company's equity securities will be
outstanding immediately after the closing of such Public Offering.
6. Representations and Warranties of the Purchasers. The Purchasers for
themselves only hereby represent and warrant to the Company with respect to this
Agreement and to the issuance of the Securities as follows:
6.1 Authorization of Agreement. The execution, delivery and
performance of this Agreement by such Purchaser has been duly
authorized by all necessary action on the part of each such Purchaser,
does not violate any laws or regulations applicable to such Purchaser
and is the valid binding and enforceable obligation of such Purchaser
in accordance with its terms.
6
<PAGE>
6.2 Experience; Accredited Investor. Such Purchaser is
experienced in evaluating and investing in the type of companies such
as the Company. Such Purchaser is an "accredited investor" as that term
is defined in rule 501(a) of the Securities Act of 1933, as amended
(the "Securities Act"), and the rules promulgated thereunder, and such
Purchaser has accurately completed a Confidential Purchaser
Questionnaire substantially in the form attached hereto as Exhibit B.
Such Purchaser is financially able to bear the economic risk
represented by the purchase of the Securities, including the ability to
afford holding the Securities for an indefinite period or to afford a
complete loss of this investment.
6.3 Investment. Such Purchaser is acquiring the Securities for
investment for the Purchaser's own account and not with the view to, or
for resale in connection with, any distribution thereof. Such Purchaser
understands that the Securities have not been registered under the
Securities Act by reason of a specific exemption from the registration
provisions of the Securities Act which depends upon, among other
things, the bona fide nature of the investment intent as expressed
herein; and shall not make any sale, transfer or other disposition of
the Securities without registration under the 1933 Act and applicable
state securities laws unless an exemption from registration is
available under those laws.
6.4 Access to Data. Such Purchaser has had an opportunity to
discuss the Company's business, management and financial affairs with
the Company's management or its representatives and the opportunity to
review the Company's facilities. Such Purchaser has reviewed (or has
had reviewed on his behalf) the combined financial statements of
KatCorp. and KIP attached hereto on Annex I, and the risk factors set
forth on Annex II hereto.
6.5 Knowledge and Experience. Such Purchaser, together with
his, her or its representatives have such knowledge and experience in
financial business matters as to be capable of evaluating the merits
and risks of an investment in the Securities.
7. Representations and Warranties of KatCorp., KIP and T-KAT. Each of
KatCorp., KIP and T-KAT represent and warrant as follows:
7.1 Authorization of Agreement. The execution, delivery and
performance of the Guaranty has been duly authorized by all necessary
action on the part of such Guarantor, does not violate any laws or
regulations applicable to such Guarantor and is the valid binding and
enforceable obligation of such Guarantor in accordance with its terms.
8. Further Covenants.
(a) Lock-Up Agreements. The Purchasers agree that upon demand
of the underwriter of the Public Offering, each of the Purchasers will enter
into a "lock-up" agreement with such underwriter with respect to the public
sale, transfer or other disposition of the Purchaser Stock as may be required by
the underwriters of such offering, such lock-up agreement: (a) to contain such
7
<PAGE>
terms and conditions as are customarily contained in such agreements, (b) to
contain substantially the same terms and conditions as the lock-up agreements to
be entered into between such underwriter and the holders of a majority of the
outstanding shares of the Common Stock of the Company and (c) to provide for a
"lock-up" period of no longer than seven (7) months.
(b) Resales of Securities. The Purchasers acknowledge that
even if the Company is a "reporting company" under the Securities Exchange Act
of 1934, as amended, the provisions of Rule 144 as currently promulgated under
the 1933 Act to permit resales of the Securities are not available for at least
two (2) years from the date the Securities are paid for and accepted, there can
be no assurance that the conditions necessary to permit routine sales of the
Securities under Rule 144 will be satisfied in that such sales require that the
Company be current in filing periodic reports under the Securities Exchange Act
of 1934, and, if Rule 144 should become available, sales made in reliance on its
provisions could be made only in limited amounts and in accordance with the
terms and conditions of the Rule. The Purchasers acknowledge that the Company is
under no obligation to the Purchaser to register the Securities or to comply
with the conditions of Rule 144 or take any other action necessary in order to
make available any exemption for the resale of the Securities without
registration.
(c) Company Covenants. The Company hereby covenants and agrees
(i) that until payment in full of all principal and interest due on the Notes,
it will not pay or declare any cash or in kind dividends or other distributions
with respect to its capital stock; and (ii) if the Company should receive
proceeds in excess of $5,000,000 from the sale of any of its equity or debt
securities it will, within three (3) days after the receipt of such proceeds
prepay all of the Notes.
9. Closing Conditions. The Company's and each Purchasers' obligation to
consummate the transaction contemplated by this Agreement is subject to the
satisfaction of the following conditions:
9.1. Conditions to the Purchasers' Obligations. Each
Purchaser's obligation to purchase the Notes shall be subject to the
satisfaction by the Company of the following conditions:
All proceedings taken in connection with the
transactions contemplated by this Agreement, and all documents
and instruments necessary to the consummation thereof, shall
be satisfactory in form and substance to Purchasers and their
counsel, and the Purchasers and their counsel shall have
received copies (executed or certified as may be appropriate)
of all legal documents or proceedings which they requested in
connection with the consummation of the transaction.
9.2. Conditions to the Company's Obligations. The Company's
obligation to consummate the transactions contemplated in this
Agreement is subject to all proceedings taken in connection with the
transactions contemplated by this Agreement, and all documents and
instruments necessary to the consummation thereof, including the
Company's receipt of a confidential Purchaser Questionnaire from each
8
<PAGE>
Purchaser, shall be satisfactory in form and substance to the Company,
and the Company's counsel.
10. Governing Law. All questions concerning the construction, validity
and interpretation of this Agreement and the exhibits and schedules hereto shall
be governed by the internal law, and not the law of conflicts, of New York.
11. Waivers and Amendments. With the written consent of the Purchasers
then holding at least 66 2/3% of the outstanding principal amount of the Notes,
the obligations of the Company under this Agreement may be waived (either
generally or in a particular instance and either retroactively or
prospectively), and with the same consent the Company may enter into a
supplementary agreement for the purpose of adding any provisions to this
Agreement or to any supplemental agreement or modifying in any manner the rights
and obligations of the Purchasers and of the Company. Notwithstanding anything
to the contrary above, the payment of interest, time of payment of interest, the
interest rate payable, payment of principal and time of payment of principal on
the Notes may not be changed without the written consent of the Purchaser
affected thereby. Written notice of any such waiver, consent or agreement of
amendment, modification or supplement shall be given by the Company to the
Purchasers who have not previously consented thereto in writing.
12. Changes, Waivers, Etc. Neither this Agreement nor any provision
hereof may be changed, waived, discharged or terminated orally, but rather may
only be changed by a statement in writing signed by the party against which
enforcement of the change, waiver, discharge or termination is sought, except to
the extent provided in Section 11 hereof.
13. Notice. All notices, requests, demands and other communications
which are required to be or may be given under this Agreement shall be in
writing and shall be deemed to have been duly given when (a) delivered in
person, (b) the day following dispatch by an overnight courier service (such as
Federal Express or UPS, etc.) or (c) five (5) days after dispatch by certified
or registered first class mail, postage prepaid, return receipt requested, to
the party to whom the same is so given or made:
If to the Company: Kat*Man*Du Entertainment Corp.
417 N. Columbus Blvd.
Philadelphia, Pennsylvania 19123
Attn: Mr. S. Lance Silver
Telephone No. (215) 629-1444
with a copy to: Morse, Zelnick, Rose & Lander, LLP
450 Park Avenue
New York, New York 10022
Attn: Howard L. Morse, Esq.
9
<PAGE>
If to the Purchasers at the addresses set forth on Exhibit A.
with a copy to: Goldstein, Axelrod & DiGioia
369 Lexington Avenue
New York, New York 10017
Attn: Victor J. DiGioia, Esq.
14. Counterparts. This Agreement may be executed in two or more
counterparts, any one of which need not contain the signatures of more than one
party, but all such counterparts will constitute one and the same Agreement.
15. New York Notification. Any Purchaser who is a resident of New York
understands that: THE SECURITIES OFFERED HEREBY HAVE NOT BEEN APPROVED OR
DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION, NOR HAS THE ATTORNEY
GENERAL OF NEW YORK OR ANY OFFICIAL OR SIMILAR CAPACITY OF ANY STATE PASSED UPON
THE ACCURACY, ADEQUACY OR COMPLETENESS OF THE INFORMATION CONTAINED IN THIS
AGREEMENT OR THE MERITS OF THIS OFFERING. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
16. Florida Notification. Any Purchaser who is a resident of Florida
understands that: THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE FLORIDA
SECURITIES ACT IN RELIANCE UPON EXEMPTION PROVISIONS CONTAINED THEREIN.
ss.517.061(11)(a)(5) OF THE FLORIDA SECURITIES AND INVESTOR PROTECTION ACT (THE
"FLORIDA ACT") PROVIDES THAT ANY PURCHASER OF SECURITIES IN FLORIDA WHICH ARE
EXEMPTED FROM REGISTRATION UNDER ss.517.061(11) OF THE FLORIDA ACT MAY WITHDRAW
HIS AGREEMENT AND RECEIVE A FULL REFUND OF ALL MONIES PAID, WITHIN THREE
BUSINESS DAYS AFTER HE TENDERS CONSIDERATION FOR SUCH SECURITIES. THEREFORE, ANY
FLORIDA RESIDENT WHO PURCHASES SECURITIES IS ENTITLED TO EXERCISE THE FOREGOING
STATUTORY RESCISSION RIGHT WITHIN THREE BUSINESS DAYS AFTER TENDERING
CONSIDERATION FOR THE SECURITIES BY TELEPHONE, TELEGRAM, OR LETTER NOTICE TO THE
COMPANY AT THE ADDRESS OR TELEPHONE NUMBER SET FORTH ON PAGE 10 HEREOF. ANY
TELEGRAM OR LETTER SHOULD BE SENT OR POSTMARKED PRIOR TO THE END OF THE THIRD
BUSINESS DAY. A LETTER SHOULD BE MAILED BY CERTIFIED MAIL, RETURN RECEIPT
REQUESTED, TO ENSURE ITS RECEIPT AND TO EVIDENCE THE TIME OF MAILING. ANY ORAL
REQUESTS SHOULD BE CONFIRMED IN WRITING.
10
<PAGE>
IN WITNESS WHEREOF, the undersigned have executed this Agreement as of
the day and year first written above.
Kat*Man*Du Entertainment Corp. KatManDu Corporation
By:___________________________________ By: ________________________________
KatManDu Investment Partners T-KAT Corp.
By:___________________________________ By: ________________________________
PURCHASER:
______________________________________
______________________________________ ____________________________________
Jeffrey Markowitz Richard Friedman
______________________________________ ____________________________________
______________________________________ ____________________________________
______________________________________ ____________________________________
______________________________________ ____________________________________
______________________________________ ____________________________________
______________________________________ ____________________________________
11
<PAGE>
EXHIBIT A
List of Purchasers
EXHIBIT B
Confidential Purchaser Questionnaire
EXHIBIT C
Form of Promissory Note
EXHIBIT D
Form of Guaranty
ANNEX I
Financials
ANNEX II
Risk Factors
<PAGE>
THIS NOTE HAS BEEN ACQUIRED FOR INVESTMENT PURPOSES ONLY, HAS NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933 AND MAY NOT BE SOLD, TRANSFERRED,
ASSIGNED, PLEDGED OR OTHERWISE DISTRIBUTED FOR VALUE UNLESS THERE IS AN
EFFECTIVE REGISTRATION STATEMENT UNDER SUCH ACT COVERING SUCH SECURITIES OR THE
COMPANY RECEIVES AN OPINION OF COUNSEL FOR THE COMPANY STATING THAT SUCH SALE,
TRANSFER, ASSIGNMENT, PLEDGE OR DISTRIBUTION IS EXEMPT FROM THE REGISTRATION AND
PROSPECTUS DELIVERY REQUIREMENTS OF SUCH ACT.
THIS NOTE IS SUBJECT TO THE TERMS OF A NOTE PURCHASE AGREEMENT, MADE AS OF JUNE
19, 1996, AMONG THE HOLDER OF THIS NOTE KAT*MAN*DU ENTERTAINMENT CORP. AND
CERTAIN OTHER PARTIES, A COPY OF WHICH IS ON FILE AT THE EXECUTIVE OFFICES OF
KAT*MAN*DU ENTERTAINMENT CORP.
June , 1996
New York, New York
KAT*MAN*DU ENTERTAINMENT CORP.
10% NOTE DUE MAY 31, 1998
FOR VALUE RECEIVED, Kat*Man*Du Entertainment Corp., a Delaware
corporation (the "Company"), hereby promises to pay to the order of ___________
______________________, or registered assigns, at the offices of ___________
_____________ the principal sum of ___________ Dollars on May 31, 1998, with
interest thereon at the rate of ten percent (10%) per annum. This Note shall be
subject to the following terms:
1. Maturity.
The entire principal amount of this Note shall be paid upon the earlier
of (i) the day following the day on which the Company closes an offering of any
equity or debt security pursuant to a registration statement filed with, and
declared effective by, the Securities and Exchange commission or (ii) May 31,
1998.
<PAGE>
2. Interest.
The Company promises to pay interest on the unpaid principal amount of
this Note at the rate of ten percent (10%) per annum. Interest will be payable
monthly in arrears beginning on August 1, 1996 (an "Interest Payment Date").
Interest will be computed on the basis of a 360-day year of twelve 30-day
months.
3. Method of Payment.
The Company will pay interest on this Note to the person who is the
holder of this Note on the Interest Payment Date (the "Holder"). The Holder must
surrender this Note to the Company to collect payment of principal. The Company
will pay principal and interest in money of the United States that at the time
of payment is legal tender for payment of public and private debts.
4. Note Purchase Agreement, Limitations.
This Note is one of a series of similar notes (the "Notes") issued by
the Company pursuant to the Note Purchase Agreement dated as of June 19, 1996
(the "Note Agreement") between the Company, the purchasers of the Notes
(including the Holder) and certain other parties. The terms of this Note include
those stated in the Note Agreement and the Holder of this Note is entitled to
the benefits of the Note Agreement, including the Guaranty set forth therein.
Capitalized terms used but not defined herein have the meanings ascribed to them
in the Note Agreement.
5. Amendment, Supplement, Waiver.
Subject to certain exceptions, the Note Agreement and this Note may be
amended or supplemented to the extent and in the manner provided in the Note
Agreement.
6. Defaults and Remedies.
An Event of Default shall occur if:
(i) the Company defaults in the due and punctual payment of the
principal of, or interest on, any Note when and as the same shall become due and
payable, whether at maturity or at a date fixed for prepayment or by
acceleration or otherwise and such default continues for a period of fifteen
(15) days;
(ii) there occurs any material breach by the Company of any covenant
contained in this Note and/or material default by the Company in any provision
of the Note Agreement and such breach or default continues for a period of
fifteen (15) days after the Holder shall have notified the Company in writing as
to such occurrence; or
2
<PAGE>
(iii) the Company makes an assignment for the benefit of creditors or
admits in writing its inability to pay its debts generally as they become due;
or
(iv) an order, judgment or decree is entered adjudicating the Company
or any subsidiary bankrupt or insolvent; or
(v) the Company petitions or applies to any tribunal for the
appointment of a trustee or receiver of the Company, or of any substantial part
of the assets of the Company, or commences any proceedings (other than
proceedings for the voluntary liquidation and dissolution of a subsidiary)
relating to the Company or a subsidiary under any bankruptcy, reorganization,
arrangement, insolvency, readjustment of debt, dissolution or liquidation law of
any jurisdiction whether now or hereafter in effect; or
(vi) any such petition or application is filed, or any such proceedings
are commenced, against the Company, and the Company by any act indicates its
approval thereof, consent or acquiescence therein, or an order, judgment or
decree is entered appointing any such trustee or receiver, or approving the
petition in any such proceedings, and such order, judgment or decree remains
unstayed and in effect for more than sixty (60) days; or
(vii) any order, judgment or decree is entered in any proceedings
against the Company decreeing the dissolution of the Company and such order,
judgment or decree remains unstayed and in effect for more than sixty (60) days;
or
(viii) any order, judgment or decree is entered in any proceedings
against the Company decreeing a split-up of the Company which requires the
divestiture of a substantial part of the assets of the Company and such order,
judgment or decree remains unstayed and in effect for more than sixty (60) days;
or
(ix) the Company is in material default under the terms of any of the
Company's credit facilities, or, is in material default under any other
agreement for, or instrument evidencing, borrowed money and such default
continues for a period in excess of any applicable grace period with respect
thereto.
If an Event of Default occurs and is continuing, the Holder may declare
all unpaid principal of and accrued interest to the date of acceleration on this
Note to be due and payable immediately, all as and to the extent provided herein
and in the Note Agreement.
7. Governing Law.
This Note shall be governed by and construed in accordance with the
laws of the State of New York, without giving effect to its conflict of law
principals.
3
<PAGE>
8. Note Agreement to Control.
In the case of any conflict between the provisions of this Note and the
Note Agreement, the provisions of the Note Agreement shall control.
The Company will furnish to any Holder, upon written request and
without charge, a copy of the Note Agreement. Requests may be made to:
Kat*Man*Du Entertainment Corp.
417 Columbus Blvd.
Philadelphia, Pennsylvania 19123
IN WITNESS WHEREOF, the Company has caused this Note to be signed by
its duly authorized officer, effective as of the date of issuance hereof.
KAT*MAN*DU ENTERTAINMENT CORP.
By: ______________________________
Name:
Title:
4
<PAGE>
AGREEMENT entered into among KATMANDU ENTERTAINMENT CORP. (the
"Company"), a Delaware corporation having its principal place of business at 415
North Columbus Boulevard, Philadelphia, Pennsylvania on the one hand and WILLIAM
HARRIS & CO. EMPLOYEE PROFIT SHARING TRUST, IRVING HARRIS FOUNDATION, HARRIS
FOUNDATION #2 and ASTRO COMMUNICATION (collectively, the "Noteholders") on the
other, all having an address c/o Steven A. Hirsh, 2 North LaSalle, Suite 505,
Chicago IL 60602.
WITNESSETH
WHEREAS, the Company and the Noteholders entered into a Note Purchase
Agreement, dated as of June 19, 1996, pursuant to which the Noteholders agreed
to purchase from the Company and the Company agreed to sell to the Shareholders
the Company's 10% promissory notes due May 31, 1998 in the aggregate principal
amount of $550,000 (the "Notes"); and
WHEREAS, under the terms of the Note Purchase Agreement and the Notes
the Notes are due upon the earlier of May 31, 1998 and the day which follows the
day on which the Company closes an offering of shares of its common stock, par
value $.001 per share (the "Common Stock"), pursuant to a registration statement
filed with and declared effective by the Securities and Exchange Commission
(a "Public Offering"); and
WHEREAS, in connection with the purchase of the Notes, the Company
issued to the Noteholders an aggregate of 70,834 shares of Common Stock; and
WHEREAS, the Company has entered into a new letter of intent with a new
underwriter (the "Underwriter") concerning a proposed public offering of its
Common Stock (the "Public Offering") and as an inducement to the underwriter to
issue such letter of intent the Shareholders have agreed to certain amendments
and modifications to the Note Purchase Agreement; and
WHEREAS, the Company and the Shareholders wish to amend the terms of
the Note Purchase Agreement.
NOW, THEREFORE, for good and valuable consideration, the sufficiency of
which is hereby acknowledged, the parties hereto agree as follows:
1. The maturity date of the Notes shall be the day which is one year
after the date on which the Public Offering of the Company's Common Stock is
consummated.
>
2. Immediately prior to the Public Offering, each Noteholder shall sign
a "lock-up" agreement with the Underwriter and the Company which will provide
that for a period of twelve (12) months following the effective date of the
Company's Registration Statement on Form SB-2 (the "Lock-up Period"), he, she or
it will not, directly or indirectly, issue, offer, agree or offer to sell, sell,
grant an option for the purchase or sale of, transfer, pledge, assign,
hypothecate, distribute or otherwise encumber or dispose of any shares of Common
Stock or options, rights, warrants or other securities convertible into,
exchangeable or exercisable for or evidencing any right to purchase or subscribe
for shares of Common Stock (whether or not beneficially owned by such
Noteholder), or any beneficial interest therein. Upon the expiration of the
Lock-Up Period, the Company will use its best efforts to register the Shares
under the Securities Act of 1933, as amended, and any corresponding state
securities laws, such appropriate registration form promulgated by the
Securities and Exchange Commission as shall be selected by the Company.
3. The Company will not include the Noteholders as "selling
securityholders" in its Registration Statement filed in connection with the
Public Offering.
4. Except as otherwise set forth herein all other terms of the Note
Purchase Agreement shall remain in full force and effect.
5. Nothwithstanding anything contained herein to the contrary, in the
event, the Public Offering is not consummated by March 31, 1997, this Agreement
shall be null and void.
6. This Agreement may be executed in one or more counterparts which
when taken together shall constitute one and the same agreement.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of this ___ day of December, 1996.
KATMANDU ENTERTAINMENT CORP.
By:___________________________________________
S. Lance Silver, Chief Executive Officer
WILLIAM HARRIS & CO. EMPLOYEE
PROFIT SHARING TRUST
By:___________________________________________
Steven A. Hirsh, Portfolio Manager
IRVING HARRIS FOUNDATION
By:___________________________________________
Steven A. Hirsh, Portfolio Manager
HARRIS FOUNDATION #2
By:___________________________________________
Steven A. Hirsh, Portfolio Manager
ASTRO COMMUNICATION
By:___________________________________________
Steven A. Hirsh, President
<PAGE>
Exhibit 21.1
Subsidiaries of the Company
T-Kat Corp., incorporated under the laws of the State of New Jersey*
Katmandu Corp., incorporated under the laws of the Commonwealth of
Pennsylvania*
T-Kat Urban Renewal Corporation, incorporated under the laws of the State of
New Jersey*
* will become a subsidiary of the Company upon the consummation of the
Reorganization.
1
<PAGE>
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our report
(and to all references to our Firm) included in or made a part of this Amendment
No. 2 to Form SB-2 Registration Statement No. 333-9009.
Arthur Andersen LLP
New York, New York
December 16, 1996
