As filed with the Securities and Exchange Commission on March 21, 1997
Registration No. 333-_______
- - ------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-----------------
FORM SB-2
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
AMERICAN CHAMPION ENTERTAINMENT, INC.
(Name of Small Business Issuer in its Charter)
Delaware 7812 94-3261987
(State or other (Primary Standard (I.R.S. Employer
jurisdiction of Industrial Classification Identification No.)
incorporation or Code Number)
organization)
26203 PRODUCTION AVENUE, SUITE 5
HAYWARD, CALIFORNIA 94545
(510) 782-8168
(Address and telephone number of principal
executive offices and principal place of business)
COPIES TO: ANTHONY K. CHAN COPIES TO:
ANTHONY J. BISHOP, ESQUIRE CHIEF EXECUTIVE OFFICER GREGORY SICHENZIA,
SHEPPARD, MULLIN, RICHTER & 26203 PRODUCTION AVENUE, ESQUIRE
HAMPTON LLP SUITE 5 SINGER ZAMANSKY LLP
333 SOUTH HOPE STREET, HAYWARD, CALIFORNIA 94545 40 EXCHANGE PLACE
48TH FLOOR (510) 782-8168 20TH FLOOR
LOS ANGELES, CALIFORNIA (Name and address and NEW YORK, NEW YORK
90071 telephone number of agent 10005
(213) 620-1780 for service) (212) 809-8550
APPROXIMATE DATE OF PROPOSED SALE TO THE PUBLIC: AS SOON AS
PRACTICABLE AFTER THIS REGISTRATION STATEMENT BECOMES EFFECTIVE.
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering.[ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering.[ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box.[ ]
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<TABLE>
CALCULATION OF REGISTRATION FEE
<CAPTION>
TITLE OF EACH CLASS OF PROPOSED PROPOSED
SECURITIES TO BE AMOUNT TO BE MAXIMUM MAXIMUM AMOUNT OF
REGISTERED REGISTERED OFFERING AGGREGATE REGISTRATION
PRICE OFFERING FEE
PER UNIT (1) PRICE (1)
<S> <C> <C> <C> <C>
Common Stock 1,265,000(2) $5.00 $ 6,325,000 $ 1,917
Warrants to purchase
Common Stock 2,070,000(3) $0.10 $ 207,000 $ 63
Shares of Common Stock
issuable upon exercise 2,070,000 $5.00 $10,350,000 $ 3,137
of the Warrants
</TABLE>
(1) Estimated solely for purposes of calculating the registration fee
pursuant to Rule 457(o).
(2) Includes 165,000 shares of Common Stock which may be purchased by the
Underwriters pursuant to an over-allotment option.
(3) Includes 270,000 Warrants which may be purchased by the Underwriters
pursuant to an over-allotment option.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
EXHIBIT INDEX ON PAGE 96
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AMERICAN CHAMPION ENTERTAINMENT, INC.
-------------------
CROSS REFERENCE SHEET
Showing Location in Prospectus of Information
Required by Items of Form SB-2
-------------------
FORM SB-2 ITEM NUMBER AND CAPTION Prospectus Caption
- - --------------------------------- ------------------
1. Front of Registration Outside Front Cover Page of
Statement and Outside Front Prospectus
Cover of Prospectus
2. Inside Front and Outside Inside Front Cover Page of
Back Cover Pages of Prospectus; Outside Back Cover
Prospectus. Page of Prospectus; Additional
Information
3. Summary Information and Prospectus Summary; Risk
Risk Factors Factors
4. Use of Proceeds Prospectus Summary; Use of
Proceeds; Rescission Offer
5. Determination of Offering Outside Front Cover Page of
Price. Prospectus; Underwriting
6. Dilution Dilution
7. Selling Security Holders Not Applicable
8. Plan of Distribution Outside Front Cover Page of
Prospectus; Underwriting
9. Legal Proceedings Business
10. Directors, Executive Management
Officers, Promoters and
Control Persons
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11. Security Ownership of Principal Stockholders
Certain Beneficial Owners
and Management
12. Description of Securities Prospectus Summary; Dividend
Policy; Capitalization;
Description of Securities
13. Interest of Named Experts Not Applicable
and Counsel
14. Disclosure of Commission Management; Underwriting
Position on Indemnification
for Securities Act
Liabilities
15. Organization Within Last Certain Transactions
Five Years
16. Description of Business Prospectus Summary; Risk
Factors; Management's
Discussion and Analysis of
Financial Condition and Results
of Operations; Business
17. Management's Discussion Management's Discussion and
and Analysis or Plan of Analysis of Financial Condition
Operation and Results of Operations
18. Description of Property Business
19. Certain Relationship and Certain Transactions
Related Transactions
20. Market for Common Equity Outside Front Cover Page of
and Related Stockholder Prospectus; Dividend Policy;
Matters Capitalization; Description of
Securities; Principal
Stockholders; Shares Eligible
for Future Sale
21. Executive Compensation Management
22. Financial Statements Financial Statements
23. Changes in and Disagreements Not Applicable
with Accountants on
Accounting and Financial
Disclosure
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<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 MARCH 21, 1997
PROSPECTUS
AMERICAN CHAMPION ENTERTAINMENT, INC.
1,100,000 SHARES OF COMMON STOCK
1,800,000 REDEEMABLE COMMON STOCK PURCHASE WARRANTS
This Prospectus relates to an offering (the "Offering") by American
Champion Entertainment, Inc. (the "Company") of 1,100,000 shares of common
stock, $.0001 par value (the "Common Stock"), and 1,800,000 redeemable Common
Stock purchase warrants (the "Warrants") through a group of underwriters (the
"Underwriters") represented by Dalton Kent Securities Group, Inc. (the
"Representative"). The Common Stock and the Warrants may be purchased separately
and will be transferable separately after issuance. The Common Stock is being
offered at $5.00 per share and the Warrants are being offered at $.10 per
Warrant.
Each Warrant entitles the registered holder thereof to purchase one share
of Common Stock at an exercise price of $5.00 per share, subject to adjustment
in certain events, at any time during the period commencing from the date hereof
and expiring on the fifth anniversary of the date hereof. The Warrants are
subject to redemption by the Company at $.10 per Warrant at any time commencing
12 months after the date hereof upon certain terms and conditions. See
"Description of Securities -- Warrants."
Prior to the Offering, there has been no public market for the Common
Stock or the Warrants, and there can be no assurance that any such market for
the Common Stock or the Warrants will develop after the closing of the Offering
or that, if developed, it will be sustained. The offering price of the Common
Stock and the Warrants and the initial exercise price and other terms of the
Warrants were established by negotiation between the Company and the
Representative and do not necessarily bear any direct relationship to the
Company's assets, earnings, book value per share or other generally accepted
criteria of value. See "Underwriting." The Company has applied for quotation of
the Common Stock and the Warrants on The Nasdaq SmallCap Market ("NASDAQ") under
the trading symbols "ACEI" and "ACEIW," respectively.
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THE SECURITIES OFFERED HEREBY ARE SPECULATIVE AND INVOLVE A HIGH DEGREE OF RISK.
ONLY INVESTORS WHO CAN BEAR THE RISK OF LOSS OF THEIR ENTIRE INVESTMENT SHOULD
INVEST. SEE "RISK FACTORS" BEGINNING ON PAGE 11.
THE REPORT OF THE COMPANY'S INDEPENDENT AUDITORS INDICATES THAT THE COMPANY HAS
INCURRED RECURRING OPERATING LOSSES, HAS A WORKING CAPITAL DEFICIENCY AND, AS A
RESULT OF THESE CONDITIONS, EXPRESSES DOUBT ABOUT THE COMPANY'S ABILITY TO
CONTINUE AS A GOING CONCERN. SEE "FINANCIAL STATEMENTS."
THE COMPANY MAY ALSO HAVE FAILED TO COMPLY WITH CERTAIN FEDERAL AND/OR STATE
SECURITIES LAWS WITH RESPECT TO CERTAIN PRIOR SALES OF THE COMPANY'S SECURITIES.
THE COMPANY INTENDS TO MAKE A RESCISSION OFFER TO THE PURCHASERS OF SUCH
SECURITIES AFTER THE CLOSING OF THIS OFFERING. SEE "RESCISSION OFFER."
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE COMMISSION OR
ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
UNDERWRITING DISCOUNTS PROCEEDS TO
PRICE TO PUBLIC AND COMMISSIONS (1) COMPANY (2)
Per Share........... $5.00 $.50 $4.50
Per Warrant......... $.10 $.01 $ .09
Total (3)........... $5,680,000 $568,000 $5,112,000
(1) Does not include additional compensation to the Underwriters consisting
of (i) a non-accountable expense allowance equal to 3% of the gross
proceeds of the Offering (excluding any proceeds from the exercise of any
Warrants or Underwriters' Warrants (as defined below)), of which
approximately $20,000 has been paid by the Company to date; (ii) warrants
(the "Underwriters' Warrants") entitling the Underwriters to purchase up
to 110,000 shares of Common Stock and 180,000 Warrants, at a price of
$6.00 per share of Common Stock and $0.12 per Warrant; (iii) a two-year
preferential right to the Representative in connection with certain future
public and private offerings of the Company's securities; and (iv) a
three-year consulting agreement pursuant to which the Representative will
receive an aggregate fee of $108,000, payable upon the completion of this
Offering. The Company has agreed to indemnify the Underwriters against
certain liabilities, including those arising under the Securities Act of
1933, as amended (the "Securities Act"). See "Underwriting."
(2) Before deducting expenses of the Offering, other than the Underwriters'
discounts and commissions, payable by the Company, estimated to be
approximately $700,000. See "Underwriting."
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(3) The Company has granted the Underwriters an option, exercisable for
45 days from the closing of the Offering, to purchase up to an
additional 165,000 shares of Common Stock and/or 270,000 Warrants, upon
the same terms and conditions solely for the purpose of covering
over-allotments, if any (the "Underwriters' Over-allotment Option"). If
the Underwriters' Over-allotment Option is exercised in full, the total
Price to Public, Underwriting Discounts and Commissions and Proceeds to
Company will be $6,532,000, $653,200 and $5,878,800, respectively. See
"Underwriting."
The Common Stock and Warrants are being severally offered by the
Underwriters named herein, subject to prior sale, when, as and if delivered to
and accepted by the Underwriters under certain other conditions. The
Underwriters reserve the right to reject any order in whole or in part and to
withdraw, cancel or modify the offer without notice. It is expected that
certificates representing the shares of Common Stock and Warrants offered hereby
will be made available for delivery in New York, New York on or about
____________, 1997.
-----------------
DALTON KENT SECURITIES GROUP, INC.
-----------------
The date of this Prospectus is _____________, 1997.
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IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR
EFFECT TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON
STOCK AND THE WARRANTS OF THE COMPANY AT A LEVEL ABOVE THAT WHICH MIGHT
OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH STABILIZING, IF COMMENCED, MAY BE
DISCONTINUED AT ANY TIME.
As a result of this Offering, the Company will become subject to the
information and reporting requirements of the Securities Exchange Act of 1934,
as amended (the "Exchange Act"), and in accordance therewith will file periodic
reports, proxy statements and other information with the Securities and Exchange
Commission (the "Commission"). The Company intends to furnish to its
stockholders annual reports containing financial statements audited by an
independent public accounting firm and quarterly reports containing unaudited
financial statements for the first three quarters of each fiscal year.
[Pictures]
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PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED
INFORMATION AND FINANCIAL STATEMENTS, INCLUDING THE NOTES THERETO, APPEARING
ELSEWHERE IN THIS PROSPECTUS. UNLESS THE CONTEXT OTHERWISE REQUIRES, REFERENCES
IN THIS PROSPECTUS TO THE COMPANY ARE REFERENCES TO THE COMPANY AND ITS
SUBSIDIARIES, AMERICAN CHAMPION MEDIA, INC. ("AC MEDIA") AND AMERICA'S BEST
KARATE. EXCEPT AS OTHERWISE NOTED, ALL INFORMATION IN THE PROSPECTUS ASSUMES NO
EXERCISE OF THE WARRANTS, THE UNDERWRITERS' OVER-ALLOTMENT OPTION, THE
UNDERWRITERS' WARRANTS OR OUTSTANDING OPTIONS OR WARRANTS TO PURCHASE SHARES OF
THE COMPANY'S COMMON STOCK.
The Company is in the development stage with respect to various media
projects, including (i) the development, production and marketing of "ADVENTURES
WITH KANGA RODDY," a television program aimed at pre-school and primary school
children (the "Kanga Roddy Series"), (ii) the licensing of merchandising rights
related to the Kanga Roddy Series, and (iii) the development, production and
marketing of various video tapes, audio tapes and workbooks that specialize in
fitness information.
The Company also operates a chain of karate schools with eight locations
in the San Francisco Bay area and two locations in Las Vegas. The co-founders of
the Company, George Chung and Anthony Chan, are both members of the Karate Black
Belt Hall of Fame. The experiences of Messrs. Chung and Chan with the martial
arts, and the values and disciplines they promote, were the inspiration for the
Company's decision to pursue its media projects, all of which are based on such
martial arts values and disciplines.
"ADVENTURES WITH KANGA RODDY"
The Company is developing and producing "ADVENTURES WITH KANGA RODDY," a
television program aimed at pre-school and primary school children. The Kanga
Roddy Series will use martial arts values such as humility, discipline and
respect, with the added elements of song, contemporary music, dance, vibrant
colors and exciting movements to attempt to capture the young audience's
attention. The Kanga Roddy Series features a six-foot tall kangaroo character
named Kanga Roddy who is a martial arts expert. Unlike other television shows
which feature violence, Kanga Roddy never fights because he understands that
conflict can always be resolved with knowledge, compassion, humility, respect
and an open mind.
Each episode of the Kanga Roddy Series will open with the Kanga Roddy
theme song which is anticipated to be easily memorized by young children much in
the same way as the popular theme song from the "BARNEY" television show. After
the theme song, each show will focus on a group of children at a community
center and their teachers (played by Jennifer Montana and Karen Lott, wives of
former San Francisco 49ers football players Joe Montana and Ronnie Lott) who
will be working on activities such as reading, physical fitness and arts and
crafts. During these activities, the children will encounter an ethical or
social problem which causes uneasiness or unhappiness amongst some of the
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children. Their teachers will sense the problem and suggest that the children
seek help from their friend, Uncle Pat, the proprietor of a rare book bookstore
played by Pat Morita of KARATE KID fame. Uncle Pat, with the assistance of his
pet bookworm Shakespeare, magically transport the children to the land of Hi-Yah
where Kanga Roddy lives.
Once in the land of Hi-Yah, Kanga Roddy and his friend Bantu, a female African
snake, help the children solve their problem by giving examples presented
through songs. Kanga Roddy gets inspiration for the proper solution to the
problem through flashbacks to lessons learned from his martial arts teacher
Zatochi, a wise old snow monkey. The children also learn one physical activity
each time they visit Kanga Roddy such as balance, jumping, or kicking. Kanga
Roddy is particularly capable of teaching such activities since the actor inside
the Kanga Roddy costume is a black belt karate instructor at one of the
Company's karate studios. When the children return to the community center, they
review what they have learned with their teachers.
The Company completed the pilot episode of the Kanga Roddy Series in
January 1997 and intends to use a portion of the proceeds from the Offering to
finance the production of the next 12 episodes. Thirteen episodes of a
television series is the standard number of episodes for a television season.
The Company is vigorously pursuing various avenues for broadcasting the
Kanga Roddy Series, primarily public and cable television. The Company has
received an offer from KTEH, the public broadcasting system ("PBS") station
serving the San Jose, California area, to purchase the exclusive right to
distribute the Kanga Roddy Series throughout the United States for a two-year
period. If the Company accepts this proposal, the Company would receive certain
funds for the sale of this exclusive distribution right and would be committed
to sharing with KTEH a percentage of the profits received from sales of certain
video tapes and other merchandise related to the Kanga Roddy Series. KTEH has
informed the Company that it believes it can convince other PBS stations
covering at least 40% of the U.S. broadcast market to also air the program.
The Company is also pursuing broadcasting of the Kanga Roddy Series on
cable television but has not received any proposals to date. There is no
assurance that the Company will be able to achieve the broadcasting of the Kanga
Roddy Series on either public or cable television.
The Company's strategy with respect to ADVENTURES WITH KANGA RODDY also
includes pursuing licensing and merchandising opportunities. Characters
developed in a popular series, and often the series itself, achieve a high level
of recognition and popularity, making them valuable assets for the licensing and
merchandising market. However, if the Kanga Roddy Series does not attain and
maintain widespread distribution on television, or widespread popularity, it is
unlikely that any significant licensing or merchandising opportunities or
revenue will arise or be maintained.
The Company also hopes to realize revenues through the distribution of the
Kanga Roddy Series in the home video market, although there is no assurance that
the Company will be able to do so.
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"FITNESS PRODUCTS"
The Company is also in the business of developing, producing and marketing
various video tapes, audio tapes and workbooks that specialize in fitness
information and education ("Fitness Products"). The Company's first Fitness
Product, entitled "STRONG MIND FIT BODY," consists of video tapes, audio tapes
and a workbook, and teaches motivational techniques to start and stay with an
exercise program in order to lose weight. "STRONG MIND FIT BODY" targets the
large number of overweight individuals in the United States between the ages of
25 to 55 who are 15 to 100 pounds over their ideal weight, and utilizes
celebrity testimonials from former superstar football players Ronnie Lott and
Dwight Clark to endorse the product.
In June 1996, the Company entered into an exclusive distribution agreement
with respect to "STRONG MIND FIT BODY." The distributor has the exclusive right
for one year (ending June 1997) to sell such product to health, fitness,
exercise and nutrition related companies, and the exclusive right for five years
to sell such product to, or together with products sold by, Health Rider, Nordic
Trak and ICON (major fitness equipment manufacturers). Notwithstanding the above
contract, the Company has not recognized any significant revenues from the
"STRONG MIND FIT BODY" product and there can be no assurance that any
significant revenues will be generated from such product in the future.
The Company's second Fitness Product, entitled the "Joe Montana Exercise
Video", is a cardio kick-boxing video starring former superstar quarterback Joe
Montana and his wife Jennifer, both of whom have been training in the Company's
karate schools for approximately three years. This 50-minute video exercise
program enables viewers to exercise without the need to buy expensive machinery.
The Company hopes to enter into an exclusive distribution agreement with, or
sell the rights to such video program to, a third party although there is no
assurance that the Company will be able to do so.
KARATE STUDIOS
The Company also manages and operates a chain of karate "studios" with
eight locations in the San Francisco Bay area and two locations in Las Vegas.
All of the Company's karate studios operate under the name "America's Best
Karate". George Chung, the Company's Chairman of the Board, and Anthony Chan,
the Company's President and Chief Executive Officer, are both members of the
Karate Black Belt Hall of Fame.
The Company has a close relationship with the five-time Superbowl Champion
San Francisco 49ers. During the football season, as many as 30 players from the
team take instruction from Mr. Chung. Mr. Chung also serves as a fitness
consultant to the San Francisco 49ers football team, and assists the team with
the mental and physical preparation of certain players before games.
Each of the Company's instructors, all of whom are black belts, has
undergone a rigorous training program conducted by Messrs. Chung and Chan and/or
other instructors of America's Best Karate. Generally speaking, instructors are
prior students of America's Best Karate who have "graduated" to become
instructors. Each karate studio conducts approximately 40 classes per week, each
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for a 45 minute period. Each class is generally comprised of 10 to 15 students
and taught by one to three instructors. Generally, students are initially
enrolled in a black belt course requiring approximately thirty-six months of
study; however, many students eventually convert to the more intensive and
longer (48 months) second degree black belt program. Classes are organized by
skill level and age group. Students may take as many classes as are available
each week without additional charge. Fees, if paid in advance, are generally
$1,800 and $2,400 for the black belt and second degree black belt programs,
respectively. An installment payment plan is available at higher rates. At each
karate studio, the Company also sells martial arts related products, such as
uniforms, other clothing and safety equipment. See "Business."
The Company's strategy with respect to its karate studios is to provide an
environment where students can study martial arts disciplines in a clean and
attractive setting and have fun. Unlike many traditional studios, the Company
utilizes music to enhance the enjoyment level of its martial arts instruction.
The Company was incorporated in Delaware in February 1997 to serve as a
holding company for AC Media, a Delaware corporation formed in February 1997,
and America's Best Karate, a California corporation formed in June 1991. This
Prospectus assumes that the reorganization transaction giving effect to this
holding company structure will be completed prior to the closing of the
Offering, and that each share of the currently outstanding shares of common
stock of America's Best Karate will be converted into 28.1 shares of Common
Stock of the Company. The Company's executive offices are located at 26203
Production Avenue, Suite 5, Hayward, California 94545, and its telephone number
is (510) 782-8168.
THE OFFERING
SECURITIES OFFERED. . . . . . 1,100,000 shares of Common Stock and
1,800,000 Warrants. Each Warrant
entitles the registered holder thereof
to purchase one share of Common Stock
at an exercise price of $5.00 per
share, subject to adjustment, at any
time through the fifth anniversary of
the date hereof. The shares of Common
Stock and the Warrants may be
purchased separately and are
separately tradeable and transferable
immediately upon issuance. See
"Description of Securities" and
"Underwriting."
OFFERING PRICE. . . . . . . . $5.00 per share of Common Stock and
$.10 per Warrant.
Common Stock Outstanding:
Prior to the Offering (1). 2,444,671 shares of Common Stock
AFTER THE OFFERING (1)(2). 3,544,671 shares of Common Stock
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WARRANTS OUTSTANDING:
PRIOR TO THE OFFERING. . . None
AFTER THE OFFERING (3). . 1,800,000 Warrants
EXERCISE PERIOD OF WARRANTS
OFFERED HEREBY. . . . . . The five year period commencing from
the date hereof.
REDEMPTION OF WARRANTS. . . . . Redeemable by the Company at any time
commencing 12 months after the date
hereof, at a price of $.10 per
Warrant, upon not less than 30 days'
prior written notice to the holders of
the Warrants, provided the average
closing bid quotation of the Common
Stock as reported on NASDAQ or the OTC
Bulletin Board, if traded thereon, or
if not traded thereon, the average
closing sale price of the Common Stock
if listed on a national securities
exchange (or other reporting system
that provides last sale prices), has
been at least 120% of the then current
exercise price of the Warrants
(initially, $6.00 per share), for a
period of 20 consecutive trading days
ending on the third day prior to the
date on which the Company gives notice
of redemption. The Warrants will be
exercisable until the close of
business on the day immediately
preceding the date fixed for
redemption. See "Description of
Securities -- Warrants."
USE OF PROCEEDS . . . . . . . The net proceeds from the Offering,
aggregating approximately $4,412,000,
will be used approximately as follows:
(i) $2,200,000 to complete production
of the next 12 episodes of the Kanga
Roddy Series, (ii) $525,000 to repay
debt, and (iii) the remainder to be
used for working capital purposes,
including the funding of the Company's
rescission offer, the hiring of
additional management personnel,
relocation of the Company's
headquarters and other general
corporate purposes. See "Use of
Proceeds" and "Rescission Offer."
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RISK FACTORS. . . . . . . . . The securities offered hereby involve
a high degree of risk. Only investors
who can bear the risk of loss of their
entire investment should invest. See
"Risk Factors."
PROPOSED NASDAQ SYMBOLS:
COMMON STOCK . . . . . . ACEI
WARRANTS . . . . . . . . ACEIW
- - -------------------
(1) Excludes (i) 54,328 shares which the Company intends to issue to employees
of the Company, or which the Company is contractually obligated to issue,
upon completion of this Offering, and (ii) 250,000 shares subject to
options granted under the Company's stock options plans which the Company
intends to grant upon completion of this Offering. See "Management - Stock
Plans."
(2) Excludes, subject to adjustment, if any, a maximum of (i) 1,800,000
shares of Common Stock issuable upon exercise of the Warrants offered
hereby, (ii) 290,000 shares of Common Stock issuable upon exercise of
the Underwriters' Warrants (including shares issuable upon exercise of
the 180,000 Warrants constituting part of the Underwriters' Warrants),
and (iii) 435,000 shares of Common Stock issuable upon exercise of the
Underwriters' Over-allotment Option (including shares of Common Stock
issuable upon exercise of the 270,000 Warrants constituting part of the
Underwriters' Over-allotment Option.) See "Description of Securities"
and "Underwriting."
(3) Excludes 270,000 Warrants issuable upon the exercise of the Underwriters'
Over-allotment Option and 180,000 Warrants issuable upon exercise of the
Underwriters' Warrants. See "Description of Securities" and
"Underwriting."
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SUMMARY FINANCIAL DATA
(in thousands, except share and per share amounts)
Year Ended December 31,
-----------------------
1996 1995
---- ----
STATEMENTS OF OPERATIONS DATA (1):
Net revenues.................................. $ 1,051 $ 1,119
(Loss) from operations........................ (640) (452)
Net income (loss)............................. (640) 75
Pro-forma earnings (loss) per share .......... $ (.26) $ .03
Pro-forma shares outstanding ................. 2,444,671 2,444,671
December 31, 1996
-----------------
BALANCE SHEET DATA (1): Actual As Adjusted(2)(3)
- - ----------------------- ------ -----------------
Cash........................................ $ 29 $ 3,916
Current assets.............................. 139 4,026
Current liabilities......................... 1,410 885
Working capital (deficiency)................ (1,271) 3,141
Total assets................................ 970 4,857
Total liabilities........................... 1,968 1,443
Stockholders' equity (deficiency)........... (998) 3,414
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(1) Assumes that the reorganization transaction whereby the Company will
become the parent holding company of America's Best Karate and AC Media
will be completed prior to the closing of the Offering and that each share
of the currently outstanding shares of common stock of America's Best
Karate will be converted into 28.1 shares of Common Stock of the Company.
(2) Gives effect to the receipt by the Company of the net proceeds from the
sale of the 1,100,000 shares of Common Stock and 1,800,000 Warrants
offered hereby and the use of a portion of the proceeds to repay
certain debt. See "Use of Proceeds" and "Capitalization."
(3) Assumes that no security holders accept the rescission offer which the
Company intends to make to certain of its security holders after the
closing of this offering. See "Rescission Offer."
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RISK FACTORS
An investment in the securities being offered hereby involves a high
degree of risk. In addition to the other information in this Prospectus, the
following risk factors should be considered in evaluating the Company and its
business before purchasing securities offered hereby.
1. HISTORY OF LOSSES AND DEFICITS; GOING CONCERN QUALIFICATION. The
Company sustained operating losses of $451,540 and $639,799, in 1995 and 1996,
respectively. As of December 31, 1996, the Company had a working capital deficit
of $1,271,410 and stockholders' deficiency of $998,350. The Company's Financial
Statements included herein were prepared on the assumption that the Company will
continue as a going concern. The report of the Company's independent auditors
expresses doubt about the Company's ability to do so. The Company's ability to
continue as a going concern is dependent on its receipt of the net proceeds of
this Offering and, thereafter, on attaining profitability. See "Financial
Statements" and "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
2. UNCERTAINTY OF ATTAINING PROFITABILITY. The Company expects to
incur significant additional operating losses for the foreseeable future as
it continues to develop, produce and market its media projects, including the
Kanga Roddy Series. There can be no assurance that the Company will ever
achieve profitability. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
3. LIQUIDITY AND FINANCING REQUIREMENTS; DEPENDENCE ON OFFERING PROCEEDS.
The Company's venture into media projects, including the development and
production of the Kanga Roddy Series, requires substantial amounts of capital.
Although the Company was able to finance the production of the pilot episode of
the Kanga Roddy Series with its own funds, the Company is dependent on the
proceeds of this Offering to produce the next 12 episodes of the Kanga Roddy
Series. The Company believes that the net proceeds of this Offering allocated to
the development and production of the Kanga Roddy Series, together with funds
generated from operations, if any, will be sufficient to produce these next 12
episodes. In the event that production costs are higher than expected, or the
Company is forced to use funds earmarked for production for other purposes, the
Company could be required to modify its operations or to seek additional
financing sooner than currently anticipated. The Company has no current
arrangements with respect to such additional financing and there can be no
assurance that such additional financing will be available at all or on terms
acceptable to the Company. See "Use of Proceeds."
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4. DEPENDENCE ON THE SUCCESS OF THE KANGA RODDY SERIES. The Company is
dependent on the success of the Kanga Roddy Series, which in turn is dependent
upon unpredictable and volatile factors beyond the Company's control, such as
children's preferences, competing programming and the availability of other
entertainment activities for children. The failure of the Company to attract a
significant television audience for the Kanga Roddy Series over a long period of
time would have a material adverse effect on the Company's financial condition
and results of operations, and in all likelihood on the market price of the
Company's securities. There is no assurance that the Kanga Roddy Series will be
successful or that, if successful initially, that television viewership of the
Kanga Roddy Series will be maintained.
5. LICENSING AND MERCHANDISING. The Company's strategy in producing the
Kanga Roddy Series includes the licensing of its characters to others for the
merchandising of a variety of products ranging from toys to apparel. The ability
of the Company to successfully exploit the merchandising opportunities afforded
by the Kanga Roddy Series is dependent on the popularity of the Kanga Roddy
Series and the ability of the Company's characters to provide attractive
merchandising features to its customers. If the Company is unable to attract a
significant television audience for the Kanga Roddy Series, it is doubtful that
any significant licensing or merchandising opportunities will arise. Even if the
Kanga Roddy Series is popular with television audiences, there is no assurance
that licensing opportunities will materialize as the Company must compete with
hundreds of owners of creative content who seek to license their characters and
properties to a limited number of manufacturers and distributors. See
"Business-- Licensing and Merchandising."
6. ABSENCE OF SIGNIFICANT EXPERIENCE WITH TELEVISION PROGRAMMING OR
LICENSING AND MERCHANDISING. Prior to this date, the Company has had no
significant experience with the development and production of television
programming or with the licensing and merchandising of products. As a result,
the Company could enter into contracts or make other agreements that are on less
than optimal terms. The television and licensing and merchandising businesses
are complicated and the absence of experience in such businesses could
materially and adversely affect the financial condition and results of
operations of the Company.
7. DEPENDENCE ON KEY PERSONNEL. The Company is dependent on the efforts
and abilities of Anthony Chan and George Chung, the Company's founders and
principal executive officers, and certain other members of senior management.
The Company has entered into employment agreements, effective as of the closing
of this Offering, with each George Chung, Anthony Chan, Don Berryessa and Jan
Hutchins, President of the Company's subsidiary AC Media. See "Management -
Employment Agreements." The loss of the services of either Messrs. Chung or
Chan, or of other key personnel, could have a material adverse effect on the
business of the Company.
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8. DEPENDENCE ON ASSOCIATION WITH JOE MONTANA, RONNIE LOTT AND THE SAN
FRANCISCO 49ERS. The success of the Kanga Roddy Series depends in part on the
Company's continued association with former 49ers Joe Montana and Ronnie Lott,
and their wives, and the San Francisco 49ers. The failure of Joe Montana, Ronnie
Lott, or their wives, or the San Francisco 49ers, to continue to actively
support the Kanga Roddy Series could have a material adverse impact on the
ability to market the Kanga Roddy Series. None of Joe Montana, Ronnie Lott, or
their wives, or the San Francisco 49ers are obligated to engage in any business
transactions or jointly participate in any opportunities with the Company, and
the possibility exists that the current relationships between the parties could
materially change in the future.
9. COMPETITION. Each of the industries in which the Company competes is
highly competitive and most of the companies with which the Company competes
have greater financial and other resources than the Company. With respect to the
Company's television production activities, the Company competes on the basis
of relationships and pricing for access to a limited supply of facilities and
talented creative personnel to produce its programs. If the Company is
successful at getting the Kanga Roddy Series aired on television, the Company
will compete for time slots, ratings and related advertising revenues and for
the licensing and merchandising of products related to the Kanga Roddy Series.
The Company's Fitness Products compete with many other products aimed at the
fitness and weight loss markets, including other video tapes, audio tapes and
workbooks, and various types of exercise machinery. Many of these competing
products are sponsored or endorsed by celebrities and sports figures, and are
marketed by companies having significantly greater resources than the Company.
The martial arts industry is also highly competitive. The Company's competitors
include a variety of small to medium sized martial arts instructional centers,
many of which may be better established and better financed than the Company.
See "Business--Competition."
10. GOVERNMENT REGULATION AND POTENTIAL RETURN OF MEMBERSHIP FEES. In the
event that the Company elects to close a given Karate studio, state or local
laws may require that the Company return the "unearned" portion of membership
fees to Karate studio members. Some states require that health and other fitness
clubs register with an appropriate regulatory authority and post a bond in order
to secure payment of such "unearned" membership fees. The Company is not aware
of any existing or pending legislation in the states in which it operates which
would require the Company to post a bond. Conceivably, in the event such laws
are in effect, or are enacted in states where the Company operates Karate
studios, the cost associated with posting such bonds or returning "unearned"
membership fees could in the aggregate be substantial and may adversely affect
the Company's financial condition and its future prospects. Pursuant to the
terms of its standard contract with its students, America's Best Karate is
required to refund (i) all funds received if a student cancels within three (3)
days of signing a membership contract and (ii) all "unearned" funds received in
the event the student dies, becomes permanently disabled, moves more than
twenty-five (25) miles away from America's Best Karate or America's Best Karate
closes for more than thirty (30) consecutive days. The Company does not
currently maintain nor does it anticipate maintaining a reserve account for
return of membership fees. As a consequence, the Company may be unable to refund
membership fees which could have a material adverse effect on the Company's
business and its prospects.
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11. CONTROL BY MESSRS. CHAN AND CHUNG; ANTI-TAKEOVER EFFECTS OF DELAWARE
LAW. Anthony Chan and George Chung, the Company's founders and principal
executive officers, collectively beneficially own 951,750 shares of the
Company's outstanding Common Stock, representing approximately 38.93% of the
outstanding shares prior to this offering and approximately 26.85% of the
outstanding shares of Common Stock after this offering. Since holders of Common
Stock do not have any cumulative voting rights and directors are elected by a
majority vote, Messrs. Chan and Chung are in a position to strongly influence
the election of directors as well as the affairs of the Company. See
"Management" and "Principal Stockholders." In addition, Section 203 of the
General Corporation Law of Delaware prohibits the Company from engaging in
certain business combinations with interested stockholders, as defined by
statute. These provisions may have the effect of delaying or preventing a change
of control of the Company without action by the stockholders, and therefore
could adversely affect the price of the Company's Common Stock. See "Description
of Securities."
12. BROAD DISCRETION IN APPLICATION OF PROCEEDS. The management of the
Company has broad discretion to adjust the application and allocation of the net
proceeds of this Offering, including funds received upon exercise of the
Warrants, in order to address changed circumstances and opportunities. As a
result of the foregoing, the success of the Company will be substantially
dependent upon the discretion and judgment of the management of the Company with
respect to the application and allocation of the net proceeds hereof. Pending
use of such proceeds, the net proceeds of this Offering will be invested by the
Company in short-term, interest bearing obligations. See "Use of Proceeds."
13. DILUTION. The net tangible book value of the Company as of
December 31, 1996 was ($1,064,894), or $(.44) per share. Purchasers of
shares of Common Stock in this Offering will suffer an immediate and
substantial dilution in the net tangible book value of the common stock from
the initial public offering price. See "Dilution."
14. LIABILITY INSURANCE. The Company has purchased liability insurance for
each of its karate studios in the amount of $1,000,000 per occurrence and
$2,000,000 in the aggregate which the Company believes is sufficient for its
current level of business operations. There is no assurance, however, that the
present coverage will continue to be available in the future or that the Company
will be able to retain such coverage at a reasonable cost. Further, there can be
no assurance that such insurance will be sufficient to cover potential claims,
including without limitation, claims brought by students or instructors injured
during karate classes, or that adequate, affordable insurance coverage will be
available to the Company in the future as the Company expands its operations. A
successful claim against the Company in excess of the liability limits or
relating to an injury excluded under the policy could have a material adverse
effect on the Company.
15. NO INTENTION TO PAY DIVIDENDS. The Company has no present
intention to declare or pay cash dividends. Any earnings which the Company
may realize in the foreseeable future will be retained to finance the growth
of the Company.
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16. ARBITRARY DETERMINATION OF OFFERING PRICE AND WARRANT EXERCISE
PRICE. Prior to the Offering, there has been no public market for the Common
Stock or the Warrants. The initial public offering price of the Common Stock
and the Warrants as well as the exercise price and terms of the Warrants have
been determined by negotiations between the Company and the Representative
and do not necessarily bear any relationship to the Company's assets, book
value, net worth or results of operations of the Company or any other
established criteria of value. See "Description of Securities" and
"Underwriting."
17. NO ASSURANCE OF PUBLIC MARKET. The Company has applied for quotation
of the Common Stock and the Warrants on Nasdaq. There can be no assurance that
such listing will be obtained, will be maintained, that an adequate trading
market for the Common Stock or the Warrants will develop after this Offering or,
if any such market develops, that it will be maintained. There can be no
assurance that, in subsequent trading, the Company's securities will not trade
at a level below the price being offered hereby.
18. POSSIBLE DELISTING OF SECURITIES FROM THE NASDAQ STOCK MARKET. While
the Company's Common Stock and Warrants meet the current Nasdaq listing
requirements and are expected to be initially included on the Nasdaq SmallCap
Market, there can be no assurance that the Company will meet the criteria for
continued listing. Continued inclusion on Nasdaq generally requires that (i) the
Company maintain at least $2,000,000 in total assets and $1,000,000 in
stockholders' equity, (ii) the minimum bid price of the Common Stock be $1.00
per share, (iii) there be at least 100,000 shares in the public float valued at
$200,000 or more, (iv) the Common Stock have at least two active market makers,
and (v) the Common Stock be held by at least 300 holders. Nasdaq has recently
proposed more stringent financial requirements for listing on Nasdaq. If
adopted, the Company will have to meet and maintain such new requirements.
If the Company is unable to satisfy Nasdaq's maintenance requirements,
its securities may be delisted from Nasdaq. In such event, trading, if any,
in the Common Stock and Warrants would thereafter be conducted
in the over-the-counter market in the so-called "pink sheets" or the NASD's
"Electronic Bulletin Board." Consequently, the liquidity of the Company's
securities could be impaired, not only in the number of securities which could
be bought and sold, but also through delays in the timing of transactions,
reduction in security analysts' coverage of the Company and lower prices for the
Company's securities than might otherwise be attained.
19. RISKS OF LOW-PRICED STOCK. If the Company's securities were delisted
from Nasdaq, they could become subject to Rule 15g-9 under the Exchange Act,
which imposes additional sales practice requirements on broker-dealers which
sell such securities to persons other than established customers and "accredited
investors" (generally, individuals with net worth in excess of $1,000,000 or
annual incomes exceeding $200,000, or $300,000 together with their spouses). For
transactions covered by this rule, a broker-dealer must make a special
suitability determination for the purchaser and have received the purchaser's
written consent to the transaction prior to sale. Consequently, such rule may
adversely affect the ability of broker-dealers to sell the Company's securities
and may adversely affect the ability of purchasers in this Offering to sell in
the secondary market any of the securities acquired hereby. Commission
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regulations define a "penny stock" to be any non-Nasdaq equity security that has
a market price (as therein defined) of less than $5.00 per share or with an
exercise price of less than $5.00 per share, subject to certain exceptions. For
any transaction involving a penny stock, unless exempt, the rules require
delivery, prior to any transaction in a penny stock, of a disclosure schedule
prepared by the Commission relating to the penny stock market. Disclosure is
also required to be made about commissions payable to both the broker-dealer and
the registered representative and current quotations for the securities.
Finally, monthly statements are required to be sent disclosing recent price
information for the penny stock held in the account and information on the
limited market in penny stocks. The foregoing required penny stock restrictions
will not apply to the Company's securities if such securities are listed on
Nasdaq and have certain price and volume information provided on a current and
continuing basis or meet certain minimum net tangible assets or average revenue
criteria. There can be no assurance that the Company's securities will qualify
for exemption from these restrictions. In any event, even if the Company's
securities were exempt from such restrictions, it would remain subject to
Section 15(b)(6) of the Exchange Act, which gives the Commission the authority
to prohibit any person that is engaged in unlawful conduct while participating
in a distribution of a penny stock from associating with a broker-dealer or
participating in a distribution of penny stock, if the Commission finds that
such a restriction would be in the public interest. If the Company's securities
were subject to the rules related to penny stocks, the market liquidity for the
Company's securities could be severely adversely affected. In such event, the
regulations on penny stocks could limit the ability of broker-dealers to sell
the Company's securities and thus the ability of purchasers of the Company's
securities to sell their securities in the secondary market.
20. SHARES AVAILABLE FOR FUTURE SALE. Sale of substantial amounts of
shares in the public market or the prospect of such sales could adversely
affect the market price of the Common Stock or the Warrants. See "Shares
Eligible for Future Sale."
21. CURRENT PROSPECTUS AND STATE REGISTRATION REQUIRED TO EXERCISE
WARRANTS. Purchasers of the Warrants will be able to exercise the Warrants
only if a current prospectus relating to the securities underlying the Warrants
is then in effect and only if such securities are qualified for sale or exempt
from qualification under the applicable securities laws of the states in which
the various holders of the Warrants reside. Although the Warrants will not
knowingly be sold to purchasers in jurisdictions in which they are not
registered or otherwise qualified for sale, purchasers may buy Common Stock or
Warrants in the aftermarket or may move to jurisdictions in which the shares of
Common Stock issuable upon exercise of the Warrants are not so registered or
qualified during the period that the Warrants are exercisable. The Company will
be unable to issue the Common Stock to those persons desiring to exercise their
Warrants if a current prospectus covering the securities issuable upon the
exercise of the Warrants is not kept effective or if such securities are not
qualified or exempt from qualification in the states in which the holders of the
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Warrants reside. In addition, the Warrants may not be called for redemption
unless a current prospectus relating to the underlying securities is then in
effect. Although the Company will use its best efforts to maintain a current
prospectus covering the securities underlying the Warrants, there can be no
assurance that the Company will be able to do so.
22. POSSIBLE RESTRICTIONS ON MARKET-MAKING ACTIVITIES IN COMPANY'S
SECURITIES. The Underwriters may act in a brokerage capacity with respect to the
purchase or sale of Common Stock or Warrants in the over-the-counter market
where each will trade. Under Rule 10b-6 promulgated under the Exchange Act,
except as described below, the Underwriters and any soliciting broker-dealer
will be prohibited from engaging in any market-making activities or soliciting
brokerage activities with regard to the Company's securities during a period
beginning nine business days prior to the commencement of any such solicitation
and ending on the later of the termination of such solicitation activity or the
termination (by waiver or otherwise) of any right that the Underwriters and
soliciting broker-dealers may have to receive a fee for soliciting the exercise
of the Warrants. As a result, the Underwriters and soliciting broker-dealers may
be unable to continue to make a market for the Company's securities during
certain periods while the Warrants are exercisable except for passive market
making allowed in accordance with Rule 10b-6A promulgated by the Commission
under the Exchange Act. Such a limitation, while in effect, could impair the
liquidity and market price of the Company's securities. See "Underwriting."
23. UNDERWRITERS WARRANTS. The Company has agreed to sell to the
Underwriters, for nominal consideration, the right to purchase up to an
aggregate of 110,000 shares of Common Stock and 180,000 Warrants (the
"Underwriters' Warrants"). The Underwriters' Warrants will be exercisable for a
four-year period commencing one year after the date of the Prospectus, at
exercise prices equal to 120% of the initial public offering prices of the
Common Stock and the Warrants. For the life of the Underwriters' Warrants, the
holders thereof are given the opportunity to profit from a rise in the market
price of the Common Stock or the Warrants, which may result in a dilution of the
interests of the other stockholders. As a result, the Company may find it more
difficult to raise additional equity capital if it should be needed for its
business while such Underwriters' Warrants are outstanding.
24. POSSIBLE ADVERSE EFFECT OF REDEMPTION OF WARRANTS. The Warrants are
redeemable by the Company, at a redemption price of $.10 per Warrant, upon at
least 30 days' prior written notice, at any time after twelve months from the
date hereof (or earlier with the prior written consent of the Representative),
if the last sales price of the Common Stock as reported on Nasdaq or the OTC
Bulletin Board (or the last sale prices if listed on a national securities
exchange) exceeds 120% of the then exercise price of the
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Warrants (initially $6.00) for 20 consecutive trading days ending on the third
day prior to the date on which notice of redemption is given, and provided that
a current prospectus relating to the underlying securities is then in effect. If
the Warrants are redeemed, Warrant holders will lose their right to exercise the
Warrants except during such 30 day redemption period, after which they will be
forced to accept the redemption price. Redemption of the Warrants could force
the holders to exercise the Warrants at a time when it may be disadvantageous
for the holders to do so or to sell the Warrants at the then market value of the
Warrants at the time of redemption. See "Description of Securities-- Warrants."
25. UNDERWRITERS' INFLUENCE ON THE MARKET. A significant amount of
the Common Stock and Warrants offered hereby may be sold to customers of the
Underwriters. Such customers subsequently may engage in transactions for the
sale or purchase of such Common Stock and Warrants and may otherwise effect
transactions in such securities. If they participate in the market, the
Underwriters may exert substantial influence on the market, if one develops,
for the Common Stock and Warrants. Such market making activity may be
discontinued at any time. The price and liquidity of the Common Stock and
Warrants may be significantly affected by the degree, if any, of the
Underwriters' participation in such market. See "Underwriting."
26. RIGHT OF RESCISSION. Commencing after the closing of this Offering and
subject to compliance with Federal and state securities laws, the Company
intends to offer to certain stockholders of the Company who previously purchased
equity or debt securities of America's Best Karate, the right to rescind their
previous purchases and receive the return of the purchase price paid for such
securities together with interest at a rate to determined by the state of
residence of the subject holder ("Rescission Offer"). The Company is making the
Rescission Offer, because, among other things, certain sales of its securities
may have failed to qualify for an exemption under the registration requirements
of Federal and state securities laws. Notwithstanding the Rescission Offer,
under Federal and state securities laws, holders of such securities may continue
to have a right to rescind and recover the purchase price paid for such
securities. Moreover, the Company may be subject to enforcement actions by the
Securities and Exchange Commission.
The holders of securities who will be offered rescission include 42
shareholders who were issued a total of 878,118 shares of common stock of
America's Best Karate during the period November 1995 to February 1997 for an
aggregate purchase price of $1,198,200, and 10 debt holders who were issued an
aggregate principal amount of $455,000 of debt of America's Best Karate during
the period October 1996 to January 1997. If every holder to whom the Rescission
Offer is made elects to rescind its original purchase of equity or debt
securities, the Company would be required to pay approximately $1,648,200
(excluding interest). The Company's obligation to purchase such securities, if
any, will be paid out of the net proceeds of this Offering which the Company
would otherwise utilize in furtherance of its business objectives. Although the
Company does not anticipate that any or many holders will accept the Rescission
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Offer due to the fact that the rescission price per share of Common Stock will
be less than the public offering price of the Common Stock in this Offering, and
due to the fact that substantially all equity and debt securities of the Company
eligible for the Rescission Offer were sold to personal or business
acquaintances of the Company and its management, if a material portion of the
net proceeds of the Offering were used by the Company to purchase securities in
the Rescission Offer, the Rescission Offer would have a material adverse effect
on the Company and on its ability to pursue its business objectives. See "Use of
Proceeds" and "Rescission Offer."
27. POTENTIAL VOLATILITY OF STOCK PRICE; RISK OF SECURITIES CLASS ACTION
LITIGATION. The market price of the Common Stock following this Offering may be
highly volatile. Factors affecting the market price include variations in the
Company's revenue, earnings and cash flow, and announcements of developments
with respect to the Company's business. In addition, the securities markets have
recently experienced significant price and volume fluctuations that have
resulted in changes in the market prices of the stocks of many companies that
have not been directly related to the operating performance of those companies.
Such broad market fluctuations may adversely affect the market price of the
Common Stock following this Offering. In the past, following periods of
volatility in the market price of a company's securities, securities class
action litigation has sometimes been instituted against the company. There can
be no assurance that such litigation will not occur in the future with respect
to the Company. Such litigation could result in substantial costs and a
diversion of management's attention and resources , which could have a material
adverse effect on the Company's business, financial condition and results in
operations. Any adverse determination in such litigation could also subject the
Company to substantial liabilities.
28. LIMITED EXPERIENCE OF REPRESENTATIVE. The Representative has had
limited experience in acting as an underwriter in public offerings of securities
which may adversely affect the proposed public offering of the Shares offered
hereby and the subsequent development of a trading market, if any, for the
Company's Common Stock and Warrants.
FORWARD LOOKING STATEMENTS AND ASSOCIATED RISKS
This Prospectus contains certain forward-looking statements, including
among others (i) anticipated trends in the Company's financial condition and
results of operations and (ii) the Company's business strategy for developing,
producing, distributing, licensing and merchandising the Kanga Roddy Series and
its Fitness Products. These forward-looking statements are based largely on the
Company's current expectations and are subject to a number of risks and
uncertainties. Actual results could differ materially from these forward-looking
statements. In addition to the other risks described elsewhere in this "Risk
Factors" discussion, important factors to consider in evaluating such
forward-looking statements include (i) changes in external competitive market
factors or in the Company's internal budgeting process which might impact trends
in the Company's results of operations; (ii) unanticipated working capital or
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other cash requirements; (iii) changes in the Company's business strategy or an
inability to execute its strategy due to unanticipated change in the industries
in which it operates; and (iv) various competitive factors that may prevent the
Company from competing successfully in the marketplace. In light of these risks
and uncertainties, many of which are described in greater detail elsewhere in
this "Risk Factors" discussion, there can be no assurance that the events
predicted in forward-looking statements contained in this Prospectus will in
fact transpire.
USE OF PROCEEDS
The net proceeds to the Company from the sale of the 1,100,000 shares of
Common Stock and the 1,800,000 Warrants offered hereby, after deduction of
underwriting discounts and commissions and other estimated Offering expenses
will be approximately $4,412,000 ($5,178,800 if the Underwriters' Over-allotment
Option is exercised in full). The Company anticipates that the net proceeds from
the Offering will be used approximately as follows: (i) $2,200,000 to complete
production of the next 12 episodes of the Kanga Roddy Series, (ii) $525,000 to
repay debt, and (iii) the remainder to be used for working capital purposes,
including the funding of the Rescission Offer, the hiring of additional
management personnel, relocation of the Company's headquarters and
other general corporate purposes. See "Capitalization," "Business" and
"Rescission Offer." The $525,000 of debt to be repaid consists of (i) $455,000
owed to certain shareholders of the Company which bears interest at 15% per
annum and is due and payable on the earlier of three days after the Company
receives the net proceeds of the Offering or July 1, 1997, and
(ii) approximately $70,000 owed to a shareholder of the Company which bears
interest at 12% per annum and is due and payable on the earlier of consummation
of the Offering or December 15, 1999.
The foregoing allocations are estimates only and are subject to revision
from time to time to meet the Company's requirements. Furthermore, allocations
may be changed in response to unanticipated developments in the Company's
business. The Company may re-allocate such amounts from time to time among the
categories shown above or to new categories if it believes such to be in its
best interest. In the event that the Underwriters' over-allotment option is
exercised or to the extent that the Warrants are exercised, the Company will
realize additional net proceeds, which will be added to working capital. Pending
full utilization of the net proceeds of this Offering, the Company intends to
invest such net proceeds in short-term interest bearing accounts. The Company
believes that the net proceeds from this Offering, plus working capital from
operations and other sources of funds will be adequate to sustain operations for
at least the next 12 months.
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DIVIDEND POLICY
The Company intends to retain future earnings, if any, that may be
generated from the Company's operations to help finance the operations and
expansion of the Company and, accordingly, does not plan, for the reasonably
foreseeable future, to pay dividends to holders of the Common Stock. Any
decision as to the future payment of dividends will depend on the results of
operations and financial position of the Company and such other factors as the
Company's Board of Directors, in its discretion, deems relevant.
CAPITALIZATION
The following table sets forth (i) the actual capitalization of the
Company as of December 31, 1996 (See Footnote (1)), and (ii) the pro forma
capitalization adjusted to reflect the sale by the Company of the 1,100,000
shares of Common Stock and 1,800,000 Warrants offered hereby at an assumed
initial public offering price of $5.00 per share of Common Stock and $.10 per
Warrant and the application of the net proceeds to repay certain short-term
debt.
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<PAGE>
December 31, 1996
-----------------
Actual(1) As Adjusted(1)(2)
--------- -----------------
Short-term debt:
Short-term loans.................... $ 531,288 $ --
Current portion of long term
obligations ..................... 82,740 82,740
Current obligations under a capital
leases........................... 26,459 26,459
----------- ----------
Total short-term debt......... $ 640,487 $ 109,199
Long-term debt:
Long-term obligations, less current
portion.......................... $ 71,392 $ 71,392
Long-term obligations under capital
leases........................... 20,641 20,641
------------- -----------
Total long-term debt ......... $ 92,033 $ 92,033
Stockholders' equity:
Common Stock, $.0001 par value, 10,000,000
shares authorized; 2,444,671 shares
outstanding, actual; 3,544,671 shares
outstanding, as adjusted (3)(4)...... $ 738,547 $ 355
Paid-in capital (deficit)............. (1,203,731) 3,946,461
Accumulated deficit .................. (533,166) (533,166)
Total stockholders' equity
(deficit)....................... (998,350) 3,413,650
Total capitalization and
short-term debt................. $ (265,830) $3,614,882
- - ----------------------------
(1) Assumes that the reorganization transaction whereby the Company will become
the parent holding company of America's Best Karate and AC Media will be
completed prior to the closing of the Offering and that each share of the
currently outstanding shares of common stock of America's Best Karate will
be converted into 28.1 shares of Common Stock of the Company
(2) Assumes that no holders of the Company's equity or debt securities accept
the Rescission Offer. See "Rescission Offer."
(3) Excludes (i) 54,328 shares which the Company intends to issue to employees
of the Company, or which the Company is contractually obligated to issue,
upon completion of this Offering, and (ii) 250,000 shares subject to
options granted under the Company's stock option plans which the Company
intends to grant upon completion of this Offering. See "Management -
Stock Plans."
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<PAGE>
(4) Excludes subject to adjustment, if any, a maximum of (i) 1,800,000
shares of Common Stock issuable upon exercise of the Warrants offered
hereby, (ii) 290,000 shares of Common Stock issuable upon exercise of
the Underwriters' Warrants (including shares issuable upon exercise of
the 180,000 Warrants constituting part of the Underwriters' Warrants),
and (iii) 435,000 shares of Common Stock issuable upon exercise of the
Underwriters' Over-allotment Option, (including shares of Common Stock
issuable upon exercise of the 270,000 Warrants constituting part of the
Underwriters' Over-allotment Option). See "Description of Securities"
and "Underwriting."
DILUTION
The net tangible book value of the Company at December 31, 1996 was
$(1,064,894) or $(.44) per share of Common Stock, determined by dividing the net
tangible book value of the Company (total tangible assets less total
liabilities) by the number of outstanding shares of Common Stock at that date.
The pro forma as adjusted net tangible book value at February 28, 1997, giving
effect to the sale by the Company of 1,100,000 shares of Common Stock and
1,800,000 Warrants offered hereby (at the initial public offering price of $5.00
per share of Common Stock and $.10 per Warrant, and after deduction of
underwriting discounts and commissions and estimated Offering expenses), would
have been approximately $3,347,106, or $.94 per share of Common Stock. This
represents an immediate increase in net tangible book value per share of $1.38
to the Company's existing stockholders and an immediate dilution of $4.06 per
share (or approximately 81%) to the purchasers of the shares of Common Stock in
the Offering. The following table illustrates this dilution on a per share
basis:
Assumed public offering price per share
of Common Stock...................... $5.00
Net tangible book value per share of
Common Stock before Offering......... $(.44)
Increase in net tangible book
value per share of Common Stock
attributable to the Offering... 1.38
-----
Pro forma net tangible book value per
share of Common Stock after Offering...... .94
-----
Dilution per share of Common Stock to new
purchasers of Common Stock (1) ........... $4.06
=====
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- - ----------------
(1) The computations set forth in this table assume that none of the
Underwriters' Over-allotment Option, the Underwriters' Warrants or the
Warrants issued in this Offering are exercised, and that no security
holder accept the Rescission Offer. This table also assumes that the
reorganization transaction whereby the Company will become the parent
holding company of America's Best Karate and AC Media will be completed
prior to the closing of the Offering and that each share of the
currently outstanding shares of common stock of America's Best Karate
will be converted into 28.1 shares of Common Stock of the Company.
The following table compares the number of shares of Common Stock acquired
from the Company from inception through the date of this Prospectus by all of
the Company's holders of Common Stock, the total consideration and the average
price per share in connection with such acquisitions to the price to be paid by
purchasers of Common Stock in the Offering:
<TABLE>
<CAPTION>
PERCENTAGE
OF AVERAGE PRICE
SHARES OF OUTSTANDING PERCENTAGE PER SHARE
COMMON SHARES OF TOTAL OF TOTAL OF
STOCK COMMON STOCK CONSIDERATION CONSIDERATION COMMON STOCK
--------- ------------ ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Existing Holders.. 2,444,671 68.97% $ 1,175,520 17.6% $ .48
New Investors..... 1,100,000 31.03% $ 5,500,000 82.4% $5.00
--------- ------ ----------- ----- -----
3,544,671 100.00% $ 6,675,520 100% $1.88
========== ======= ============ ==== =====
</TABLE>
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SELECTED FINANCIAL DATA
(IN THOUSANDS EXCEPT SHARE AND PER SHARE AMOUNTS)
The following selected financial data are derived from the consolidated
financial statements of the Company. The date should be read in conjunction with
the consolidated financial statements, related notes, and other financial
information included or incorporated by reference herein.
STATEMENTS OF OPERATIONS DATA (1):
- - ----------------------------------
YEARS ENDED DECEMBER 31,
------------------------
1996 1995
---- ----
NET REVENUES $1,051 $1,119
(LOSS) FROM OPERATIONS (640) (452)
NET INCOME (LOSS)............................. (640) 75
PRO-FORMA EARNINGS (LOSS) PER SHARE........... $(.26) $ .03
PRO-FORMA SHARES OUTSTANDING.................. 2,444,671 2,444,671
BALANCE SHEET DATA (1):
- - -----------------------
DECEMBER 31, 1996
-----------------
Cash............................................. $ 29
Current assets 139
Current liabilities 1,410
Working capital (deficiency)..................... (1,271)
Total assets..................................... 970
Total liabilities................................ 1,968
Stockholders' equity (deficiency)................ (998)
- - ---------------------
(1) Assumes that the reorganization transaction whereby the Company will
become the parent holding company of America's Best Karate and AC Media
will be completed prior to the closing of the Offering and that each share
of the currently outstanding shares of common stock of America's Best
Karate will be converted into 28.1 shares of Common Stock of the Company.
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<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion of the Company's financial condition and results
of operations should be read in conjunction with the Financial Statements and
Notes thereto appearing elsewhere in this Prospectus.
The Company was incorporated in Delaware in February 1997, to serve as a
holding company for America's Best Karate and AC Media. Prior to such time, the
Company's operations were conducted exclusively by its America's Best Karate
subsidiary.
RESULTS OF OPERATIONS
The following table sets forth, for the fiscal years indicated, the
percentages which items in the Statements of Operations included in the
Financial Statements of the Company bear to revenues of the fiscal years
indicated:
Percentage
Net Revenues
for the Year
Ended December 31,
------------------
1996 1995
---- ----
Revenues.......................................... 100.0% 100.0%
Costs and expenses:
Cost of sales.............................. 8.5% 7.2%
Salaries and payroll taxes................. 67.8% 55.9%
Rent....................................... 47.1% 35.2%
Selling, general and administrative........ 30.9% 37.2%
Interest................................... 6.6% 4.9%
Total costs and expenses.............. 160.9% 140.4%
(Loss) from operations............................ (60.9%) (40.4%)
Other income...................................... -- 47.1%
Net income (loss)................................. 60.9% (6.7%)
YEARS ENDED DECEMBER 31, 1996 AND DECEMBER 31, 1995
The Company's revenues for the year ended December 31, 1996 were
$1,050,553 a decrease of 6.1% from revenues in 1995 of $1,118,892. The 1996
decrease in sales is principally attributable to increased competition in 1996
resulting in lower attendance and a decrease in the fees charged to certain
students.
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<PAGE>
Salaries and payroll taxes increased from $625,399 in 1995 to $712,574 in
1996, an increase of 13.9%. This increase was primarily due to an increase in
the number of staff as a result of the Company's media projects and an increase
in the number of karate studios. Rent increased from $393,462 in 1995 to
$494,428 in 1996, an increase of 25.7%. This increase was primarily the result
of, in 1995, the opening of two karate schools in Las Vegas and the relocation
of the Company's karate school in San Leandro which resulted in rent concessions
in 1995 which were not repeated in 1996. Selling, general and administrative
expenses decreased from $415,713 in 1995 to $325,025 in 1996, a decrease of
21.8%. This decrease was primarily attributable to higher promotional expenses
in 1995 related to various karate exhibitions and lower advertising costs in
1996 as a result of the Company's decision to significantly reduce the level of
print advertising. Total costs and expenses increased from $1,570,432 in 1995 to
$1,690,352 in 1996, an increase of 7.6%, primarily due to the above described
changes in sales and payroll tax, rent and selling, general and administrative
expenses.
Loss from operations increased from ($451,540) in 1995 to ($639,799) in
1996, an increase of 41.7%, primarily due to the aforementioned decrease in
revenues and increase in total costs and expenses.
Net income (loss) decreased from $75,085 in 1995 to ($639,799) in 1996.
Such decrease was primarily the result of the aforementioned factors related to
the increase in operating loss and the receipt of $526,625 of non-recurring
fitness consulting fees in 1995.
LIQUIDITY AND CAPITAL RESOURCES
The Company has historically financed its operating and capital outlays
primarily through cash generated by operations, sales of common stock, loans
from shareholders and other third parties and bank financing.
The Company had a working capital deficiency of $1,271,410 at December 31,
1996. The Company's ability to continue as a going concern is dependent on its
receipt of the net proceeds of this Offering and, thereafter, on attaining
profitability.
The Company believes that the net proceeds of this Offering, plus working
capital from operations and other sources of funds will be adequate to sustain
operations for at least the next 12 months. To the extent that such funds are
insufficient to finance the Company's working capital requirements, the Company
will be required to raise additional funds through public or private equity or
debt financings. There can be no assurance that such additional financings will
be available, or, if available, will be on terms satisfactory to the Company.
IMPACT OF INFLATION
The Company does not believe that inflation has had a material adverse
effect on sales or income during the past several years.
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<PAGE>
BUSINESS
GENERAL
The Company is in the development stage with respect to various media
projects, including (i) the development, production and marketing of "ADVENTURES
WITH KANGA RODDY," a television program aimed at pre-school and primary school
children (the "Kanga Roddy Series"), (ii) the licensing of merchandising rights
related to the Kanga Roddy Series, and (iii) the development, production and
marketing of various audio tapes, video tapes and workbooks that specialize in
fitness information.
The Company also operates a chain of karate schools with eight locations
in the San Francisco Bay area and two locations in Las Vegas. The co-founders of
the Company, George Chung and Anthony Chan, are both members of the Karate Black
Belt Hall of Fame. The experiences of Messrs. Chung and Chan with the martial
arts, and the values and disciplines they promote, were the inspiration for the
Company's decision to pursue its media projects, all of which are based on such
martial arts values and disciplines.
"ADVENTURES WITH KANGA RODDY"
The Company is developing and producing "ADVENTURES WITH KANGA RODDY," a
television program aimed at pre-school and primary school children. The Kanga
Roddy Series will use martial arts values such as humility, discipline and
respect, with the added elements of song, contemporary music, dance, vibrant
colors and exciting movements to attempt to capture the young audience's
attention. The Kanga Roddy Series features a six-foot tall kangaroo character
named Kanga Roddy who is a martial arts expert. Unlike other television shows
which feature violence, Kanga Roddy never fights because he understands that
conflict can always be resolved with knowledge, compassion, humility, respect
and an open mind.
Each episode of the Kanga Roddy Series will open with the Kanga Roddy
theme song which is anticipated to be easily memorized by young children much in
the same way as the popular theme song from the "BARNEY" television show. After
the theme song, each show will focus on a group of children at a community
center and their teachers (played by Jennifer Montana and Karen Lott, wives of
former San Francisco 49ers football players Joe Montana and Ronnie Lott) who
will be working on activities such as reading, physical fitness and arts and
crafts. During these activities, the children will encounter an ethical or
social problem which causes uneasiness or unhappiness amongst some of the
children. The teachers will sense the problem and suggest that the children seek
help from their friend, Uncle Pat, the proprietor of a rare book bookstore
played by Pat Morita of KARATE KID fame. Uncle Pat, with the assistance of his
pet bookworm Shakespeare, magically transport the children to the land of Hi-Yah
where Kanga Roddy lives.
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<PAGE>
Once in the land of Hi-Yah, Kanga Roddy and his friend Bantu, a female
African snake, help the children solve their problem by giving examples
presented through songs. Kanga Roddy gets inspiration for the proper solution to
the problem through flashbacks to lessons learned from his martial arts teacher
Zatochi, a wise old snow monkey. The children also learn one physical activity
each time they visit Kanga Roddy such as balance, jumping, or kicking. Kanga
Roddy is particularly capable of teaching such activities since the actor inside
the Kanga Roddy costume is a black belt karate instructor at one of the
Company's karate studios. When the children return to the community center,
they review what they have learned with their teachers.
The Company completed the pilot episode of the Kanga Roddy Series in
January 1997 and intends to use a portion of the proceeds from the Offering to
finance the production of the next 12 episodes. Thirteen episodes of a
television series is the standard number of episodes for a television season.
The Company is vigorously pursuing various avenues for broadcasting the
Kanga Roddy Series primarily public and cable television. The Company has
received an offer from KTEH, the public broadcasting system ("PBS") station
serving the San Jose, California area, to purchase the exclusive right to
distribute the Kanga Roddy Series throughout the United States for a two-year
period. If the Company accepts this proposal, the Company would receive certain
funds for the sale of this exclusive distribution right and would be committed
to sharing with KTEH a percentage of the profits received from sales of certain
video tapes and other merchandise related to the Kanga Roddy Series. KTEH has
informed the Company that it believes it can convince other PBS stations
covering at least 40% of the U.S. broadcast market to also air the program.
The Company is also pursuing broadcasting of the Kanga Roddy Series on
cable television but has not received any proposals to date. There is no
assurance that the Company will be able to achieve the broadcasting of the Kanga
Roddy Series on either public or cable television.
The Company's strategy with respect to ADVENTURES WITH KANGA RODDY also
includes pursuing licensing and merchandising opportunities. Characters
developed in a popular series, and often the series itself, achieve a high level
of recognition and popularity, making them valuable assets for the licensing and
merchandising market. However, if the Kanga Roddy Series does not attain and
maintain widespread distribution on television, or widespread popularity, it is
unlikely that any significant licensing or merchandising opportunities or
revenue will arise or be maintained.
The Company plans to retain worldwide rights to its brands, and license
their use to manufacturers for specific products in exchange for royalties,
possibly accompanied by cash advances. Among the most popular licensed items are
toys, clothing, food, dinnerware/lunch boxes, watches and soft vinyl goods such
as boots, backpacks and raincoats. There is no assurance, however, that the
Company will be able to successfully license its properties.
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<PAGE>
The Company also hopes to realize revenues through the distribution of the
Kanga Roddy Series in the home video market, although there is no assurance that
the Company will be able to do so.
"FITNESS PRODUCTS"
The Company is also in the business of developing, producing and marketing
various video tapes, audio tapes and workbooks that specialize in fitness
information and education ("Fitness Products"). The Company's first Fitness
Product, entitled "STRONG MIND FIT BODY," consists of video tapes, audio tapes
and a workbook, and teaches motivational techniques to start and stay with an
exercise program in order to lose weight. "STRONG MIND FIT BODY" targets the
large number of overweight individuals in the United States between the ages of
25 to 55 who are 15 to 100 pounds over their ideal weight and utilizes
celebrity testimonials from former superstar football players Ronnie Lott and
Dwight Clark to endorse the product.
In June 1996, the Company entered into an exclusive distribution agreement
with respect to "STRONG MIND FIT BODY." The distributor has the exclusive right
for one year (ending June 1997) to sell such product to health, fitness,
exercise and nutrition related companies, and the exclusive right for five years
to sell such product to, or together with products sold by, Health Rider, Nordic
Trak and ICON (major fitness equipment manufacturers). Notwithstanding the above
contract, the Company has not recognized any significant revenues from the
"STRONG MIND FIT BODY" product and there can be no assurance that any
significant revenues will be generated from such product in the future.
The Company's second Fitness Product, entitled the "Joe Montana Exercise
Video," is a cardio kick-boxing video starring former superstar quarterback Joe
Montana and his wife Jennifer, both of whom have been training in the Company's
karate schools for approximately three years. This 50-minute video exercise
program enables viewers to exercise without the need to buy expensive machinery.
The Company hopes to enter into an exclusive distribution agreement with, or
sell the rights to such video program to, a third party although there is no
assurance that the Company will be able to do so.
KARATE STUDIOS
The Company also manages and operates a chain of company owned karate
studios with eight locations in the San Francisco Bay Area and two locations in
Las Vegas. All of the Company's karate studios operate under the name "America's
Best Karate." George Chung, the Company's Chairman of the Board and Anthony
Chan, the Company's president and Chief Executive Officer, are
both members of the Karate Black Belt Hall of Fame.
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<PAGE>
The Company has a close relationship with the five-time Superbowl Champion
San Francisco 49ers. During the football season, as many as 30 players from the
team take instruction from with Mr. Chung. Mr. Chung also serves as a fitness
consultant to the San Francisco 49ers football team, and assists the team with
the mental and physical preparation of certain players before games.
Each of the Company's instructors, all of whom are black belts, has
undergone a rigorous training program conducted by Messrs. Chung and Chan and/or
other instructors of America's Best Karate. Generally speaking, instructors are
prior students of America's Best Karate who have "graduated" to become
instructors. Each karate studio conducts approximately 40 classes each week,
each for a 45 minute period. Each class is generally comprised of 10 to 15
students and taught by one to three instructors. Generally, students are
initially enrolled in a black belt course requiring approximately thirty-six
months of study; however, many students eventually convert to the more intensive
and longer second degree black belt program. Classes are organized by skill
level and age group. Students may take as many classes as are available each
week without additional charge. Fees, if paid in advance, are generally $1,800
and $2,400 for the black belt and second degree black belt programs,
respectively. An installment payment plan is available at higher rates. At each
karate studio, the Company also sells martial arts related products, such as
uniforms, other clothing and safety equipment.
The Company's strategy with respect to its karate studios is to provide an
environment where students can study a unique combination of martial arts
disciplines in a clean and attractive setting and have fun. Unlike many
traditional studios, the Company utilizes music to enhance the enjoyment level
of its martial arts instruction.
As of December 31, 1996, there were approximately 2,000 students enrolled
at the ten karate studios. The Company believes that the average age of the
Company's students is approximately 12 years old. At these enrollment levels the
Company estimates that it is currently operating at approximately 80 percent of
its total capacity. There is currently no backlog or waiting list to enroll in
any of the courses at any of the karate studios.
To attract new students, the Company offers two introductory classes at a
price of $9.95 for both classes and also occasionally hosts pizza birthday
parties for its students at its Karate studios in order to acquaint potential
students with the benefits of the Company's martial arts programs. These
introductory programs and other promotions, including print, radio and direct
mail advertising, are coordinated by Don Berryessa, the Company's Vice President
and General Manager. The Company periodically places advertisements in
newspapers and sends out direct mail flyers in the markets in which the Company
operates karate studios. The Company also advertises its courses in the Yellow
Pages.
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<PAGE>
The Company sells a variety of martial arts products and clothing at each
of the karate studios. The Company obtains most of such products from Pioneer
Interstate and Golden Glove, both unaffiliated distributors of martial arts
products.
COMPETITION
Each of the industries in which the Company competes are highly
competitive and most of the companies with which the Company competes have
greater financial and other resources than the Company. With respect to the
Company's television activities, the Company competes on the basis of
relationships and pricing for access to a limited supply of facilities and
talented creative personnel to produce its programs. If the Company is
successful at getting the Kanga Roddy Series aired on television, the Company
will compete for time slots, ratings and related advertising revenues.
The Company's Fitness Products compete with many other products aimed at
the fitness and weight loss markets, including other video tapes, audio tapes
and workbooks, and various types of exercise machinery. Many of these competing
products are sponsored or endorsed by celebrities and sports figures, and many
are marketed by companies having significantly greater resources than the
Company.
The martial arts industry is also highly competitive. The Company's
competitors include a variety of small to medium sized martial arts
instructional centers, many of which may be better established and better
financed than the Company. Some of the Company's karate studio competitors have
significantly greater financial and other resources and longer operating history
and there can be no assurance that the Company will be able to compete
successfully in the marketplace or achieve a significant market share. The
Company does not perceive its Karate studios to be in competition with health or
fitness clubs, gyms, YMCA's or YWCA's. Although such facilities may offer some
martial arts classes, they do not generally offer intensive martial arts
programs emphasizing discipline and the development of self-confidence.
EMPLOYEES
At January 31, 1997, the Company employed a total of 13 employees on a
full-time basis and 23 employees on a part time basis. No employees are
represented by a collective bargaining unit. Management considers its
relationship with its employees to be good. See "Management" and "Executive
Compensation."
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<PAGE>
PROPERTIES
On January 1, 1995, the Company entered into a lease with Commerce Park
for its headquarters facility located in Hayward, California. The lease is for a
term of 3 years with a fixed rent of $1,558 per month with a predetermined
annual increase. The Company also leases space as needed for its ten Karate
studios in the San Francisco Bay Area and in Las Vegas, Nevada. Such leases are
for premises ranging from 1,800 sq. ft. to 3,200 sq. ft. The Company believes
that its facilities are adequate for its present purposes, but the Company
intends to relocate its headquarters at the expiration of its current lease
term.
LEGAL PROCEEDINGS
No lawsuits or proceedings are pending against the Company that in
management's opinion would have a material adverse effect upon the Company's
business, properties or financial position.
MANAGEMENT
DIRECTORS, EXECUTIVE OFFICERS AND KEY EMPLOYEES
The current directors, executive officers and key employees of the Company
are as follows:
NAME AGE POSITION(S)
- - ---- --- -----------
George Chung 35 Chairman of the Board and Director
Anthony Chan 42 President, Chief Executive Officer,
Chief Financial Officer and
Director
Don Berryessa 26 Vice President and Director
Jan Hutchins 48 President of AC Media and Nominated
Director
Alan Elkes 51 Nominated Director
Ronnie Lott 37 Nominated Director
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Mr. Chung has served as Chairman of the Board and a Director of the
Company since February 1997, and as President of America's Best Karate since
1991. From 1981 to 1991, Mr. Chung owned and operated a Karate studio in Los
Gatos, California. Mr. Chung was inducted into the Black Belt Hall of Fame in
1983. He is regarded in the martial arts industry as a pioneer in the
modernization of what is known as contemporary martial arts training, which
includes the use of music in both training and performance. He has been featured
in magazines, books, television and motion pictures. He is a published author
and wrote "Defend Yourself", a worldwide published self-defense system for
Sybervision Systems. In 1995 he was awarded a "Superbowl Ring" from the San
Francisco 49ers in recognition for his outstanding martial arts work with their
championship football team.
Mr. Chan has served as President, Chief Executive Officer, Chief Financial
Officer and a Director of the Company since February 1997, and as Chief
Executive Officer and Chief Financial Officer of America's Best Karate since
1991. From 1985 to 1990, Mr. Chan served as the Director of Chinese Affairs for
the Eisenberg Company, a diversified business enterprise. Mr. Chan's principal
duty was to negotiate contracts in the People's Republic of China. Prior to
1985, Mr. Chan worked at Bank of America as an economic forecaster. Mr. Chan
received his MBA from the University of California at Berkeley. Mr. Chan's
martial arts training began in 1968 as a youth in Hong Kong. He was the first
American allowed to train as a professional in the People's Republic of China.
He is a published author and has been featured in newspapers, magazine covers,
television and motion pictures. He was inducted into the Black Belt Hall of Fame
in 1981.
Mr. Berryessa has served as Vice President and Director of the Company
since February 1997, and as Vice President and General Manager of ABK since July
1993. Mr. Berryessa received his Bachelor's of Science degree in marketing and
economics from San Jose State University in 1992 while working as ABK's District
Manager. As ABK's District Manager, Mr. Berryessa played an instrumental role in
the expansion of ABK from one location to 10, where he was in charge of
marketing and sales. Mr. Berryessa is currently pursuing his MBA through an
executive program with Pepperdine University. Prior to working with ABK he
served as a member of the United States Army & Army Reserve as a combat
military policeman.
Mr. Hutchins has served as President of AC Media since February 1997. From
July 1994 to November 1995, Mr. Hutchins was one of a four person management
team for GolfPro International, an emerging company designing and marketing a
terrain-based, personal service robot. From 1993 to June 1994, Mr. Hutchins was
community services director for the San Francisco Giants professional baseball
team. From 1991 to 1993, Mr. Hutchins developed, produced and hosted the HOOKED
ON GOLF radio program for KNBR 68 in San Francisco. From 1972 to 1991, Mr.
Hutchins served in various capacities in the television field, including news
anchor, sports director, sports anchor/reporter and television host.
Mr. Elkes has served as Chief Executive Officer of Dalton Kent Securities
Group, Inc., an investment banking and brokerage firm, since June 1996. From
September 1994 to June 1996, Mr. Elkes served as Financial and Operations
Manager at a branch office of Corporate Securities Group Inc., an investment
banking and brokerage company. From February 1991 to September 1994, Mr. Elkes
owned and operated Minuteman Press, a printing company. Mr. Elkes began his
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<PAGE>
career in the stock brokerage industry in 1968. He has an MBA in accounting from
St. Johns University in New York and is also a licensed CPA in the State of New
York.
Mr. Lott spent 15 seasons in the National Football League, playing for the
San Francisco 49ers (1981-1990), Los Angeles Raiders (1991-1992), New York Jets
(1993-1994) and the Kansas City Chiefs (1995). Mr. Lott was selected to play in
the Pro Bowl 10 times and won four Superbowl Championships with the San
Francisco 49ers. In 1996, Mr. Lott joined FOX Sports as a studio analyst and,
along with James Brown, Howie Long and Terry Bradshaw, won an emmy for their
pregame show (FOX NFL Sunday). Mr. Lott is also very active in civic and
community activities. He founded "All-Stars Helping Kids," a non-profit charity
to raise funds for youth organizations, is involved with the national "Stay in
School" program and hosts a number of events such as golf tournaments and
benefits to raise funds for worthwhile causes. Mr. Lott is also the owner of
Ronnie Lott's Club Fitness in San Jose and Dream Sports, a sports marketing
company.
DIRECTORS' COMPENSATION
The Company's directors do not currently receive any cash compensation for
service on the Board of Directors or any committee thereof, but directors may be
reimbursed for certain expenses in connection with attendance at Board of
Directors and committee meetings following completion of the Offering. Directors
may also receive stock options under the Company's stock option plans. See
"Management - Stock Plans."
Pursuant to Section 145 of the Delaware General Corporation Law, the
Company's Certificate of Incorporation provides that the Company shall, to the
fullest extent permitted by law, indemnify all directors, officers,
incorporators, employees and agents of the Company against liability for certain
of their acts. The Company's Certificate of Incorporation also provides that,
with certain exceptions, no director of the Company will be liable to the
Company for monetary damages as a result of certain breaches of fiduciary duties
as a director. Exceptions to this include a breach of the director's duty of
loyalty, acts or omissions not in good faith or which involve intentional
misconduct or knowing violation of law, improper declaration of dividends and
transactions from which the director derived an improper personal benefit.
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the
Company pursuant to any arrangement, provisions or otherwise, the Company has
been advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Securities Act and
is, therefore, unenforceable.
EXECUTIVE COMPENSATION
During the fiscal year ended December 31, 1996, no officer of the Company
was paid more than $100,000. The following table sets forth the amount of
compensation paid to the Company's Chairman of the Board and the Company's
President and Chief Executive Officer in 1996.
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<PAGE>
<TABLE>
<CAPTION>
Annual Compensation
-------------------
FISCAL ALL OTHER ANNUAL
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION
- - --------------------------- ---- ------ ----- ------------
<S> <C> <C> <C> <C>
George Chung
Chairman of the Board 1996 $57,600 - -
Anthony Chan
President and Chief
Executive Officer 1996 $57,600 - -
</TABLE>
EMPLOYMENT AGREEMENTS
In March 1997, the Company entered into employment agreements, effective
as of the closing date of this Offering, with each of Mr. Chung, Mr. Chan and
Mr. Berryessa pursuant to which Mr. Chung will continue to serve as the
Company's Chairman of the Board, Mr. Chan will continue to serve as the
Company's President, Chief Executive Officer and Chief Financial Officer and Mr.
Berryessa will continue to serve as the Company's Vice-President. Each agreement
has a term of five years. Pursuant to the agreements, the Company will pay to
Messrs. Chung, Chan and Berryessa a base salary of $100,000, $100,000 and
$65,000 per year, respectively. Each agreement also provides for the following
bonuses: (i) options to purchase 87,500, 87,500 and 25,000 shares of Common
Stock of the Company, respectively, exercisable at 120% of the public offering
price of the Common Stock of the Company upon consummation of this Offering and
(ii) $200,000, $200,000 and $100,000, respectively, if all of the Warrants
issued to the public in this Offering are exercised by the holders thereof
within the five-year exercise period of such Warrants. In addition, the
executives are also entitled to certain fringe benefits. If any of Messrs.
Chung, Chan or Berryessa is terminated other than for cause, death or
disability, the Company is obligated to pay such executive an amount equal to
his base salary then in effect for the remaining term of the agreement.
In March 1997, the Company and AC Media entered into a two-year employment
agreement with Jan D. Hutchins effective as of the closing date of this
Offering. This agreement provides that Mr. Hutchins will receive an annual base
salary of $39,600. The employment agreement also provides for the following
bonuses: (i) 4,000 shares of Common Stock of the Company upon consummation of
this Offering, subject to compliance with applicable laws; (ii) options to
purchase 20,000 shares of Common Stock of the Company, exercisable at 120% of
the public offering price of the Common Stock of the Company upon the
consummation of this Offering, subject to compliance with applicable laws; and
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(iii) $100,000 in cash if all of the Warrants issued to the public in this
Offering are exercised by the holders thereof within two years of the
consummation of this Offering. The employment agreement also provides for
certain fringe benefits. If Mr. Hutchins is terminated other than for cause,
death or disability, the Company is obligated to pay Mr. Hutchins an amount
equal to his base salary then in effect for the remaining term of the agreement.
STOCK PLANS
1997 STOCK PLAN. The 1997 Stock Plan was adopted by the Board of Directors
and stockholders of the Company in March 1997 and becomes effective upon the
closing of this Offering. The total number of shares of Common Stock subject to
issuance under the 1997 Stock Plan is 350,000, subject to adjustments as
provided in the 1997 Stock Plan. The 1997 Stock Plan provides for the grant of
stock options (including incentive stock options as defined in Section 422 of
the Code and non-qualified stock options), stock appreciation rights ("SARs")
and other stock awards (including restricted stock awards and stock bonuses) to
employees of the Company or its affiliates or any consultant or advisor engaged
by the Company who renders bona fide services to the Company or the Company's
affiliates in connection with its business; provided, that such services are not
in connection with the offer or sale of securities in a capital raising
transaction. Prior to the date when securities are first registered pursuant to
Section 12 of the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), the 1997 Stock Plan will be administered by the Company's Board of
Directors. Upon registration, the 1995 Stock Plan will be administered by the
Compensation Committee of the Board of Directors (the "Committee") which will be
comprised of "disinterested persons" within the meaning of Rule 16b-3 of the
Securities Exchange Act of 1934, as amended. Stock options may be granted by the
Committee on such terms, including vesting and payment forms, as it deems
appropriate in its direction; provided, that no option may be exercised later
than ten years after its grant, and the purchase price for incentive stock
options and non-qualified stock options shall not be less than 100% and 85% of
the fair market value of the Common Stock at the time of grant, respectively.
SARs may be granted by the Committee on such terms, including payment forms, as
the Committee deems appropriate, provided that a SAR granted in connection with
a stock option shall become exercisable and lapse according to the same vesting
schedule and lapse rules established for the stock option (which shall not
exceed ten years from the date of grant). A SAR shall not be exercisable during
the first six months of its term and only when the fair market value of the
underlying Common Stock exceeds the SAR's exercise price and is exercisable
subject to any other conditions on exercise imposed by the Committee. In the
event of a change in control of the Company, the Committee retains the
discretion to accelerate the vesting of stock options and SARs and to remove
restrictions on transfer of restricted stock awards. Unless terminated by the
Board of Directors, the 1997 Stock Plan continues until December 2007. Upon the
occurrence of an event constituting a Change of Control, in the sole discretion
of the Committee, all options and SARs will become immediately exercisable in
full for the remainder of their terms and restrictions on stock granted pursuant
to a Restricted Stock Award will lapse. The Board of Directors has authorized
the grant of options to certain officers and key employees to purchase an
aggregate of 250,000 shares of Common Stock under the 1997 Stock Plan at 120% of
the initial public offering price upon consummation of the Offering.
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The following table presents certain information concerning the number of
shares of Common Stock subject to options that will be granted to certain
executive officers and key employees pursuant to the 1997 Stock Plan upon
consummation of the Offering:
NUMBER OF SHARES
NAME OF INDIVIDUAL UNDERLYING OPTIONS
George Chung . . . . . . . . . . . . . . . . . . 87,500
Anthony Chan . . . . . . . . . . . . . . . . . . 87,500
Don Berryessa . . . . . . . . . . . . . . . . . . 25,000
Jan Hutchins . . . . . . . . . . . . . . . . . . 20,000
1997 NON-EMPLOYEE DIRECTORS STOCK OPTION PLAN. The Company's 1997
Non-Employee Directors Stock Option Plan (the "Directors Plan") was adopted by
the Board of Directors and stockholders of the Company in March 1997 and becomes
effective upon the closing of this Offering. A total of 50,000 shares are
available for grant under the Directors Plan. The Directors Plan provides for
the automatic grant to each of the Company's non-employee directors of (i) an
option to purchase 5,000 shares of Common Stock on the date of such director's
initial election or appointment to the Board of Directors (the "Initial Grant")
and (ii) an option to purchase 2,000 shares of Common Stock on each anniversary
thereof on which the director remains on the Board of Directors (the "Annual
Grant"). The options will have an exercise price of 100% of the fair market
value of the Common Stock on the date of grant and have a 10-year term. Initial
Grants become exercisable in two equal annual installments commencing on the
first anniversary of date of grant thereof and Annual Grants become fully
exercisable beginning on the first anniversary of the date of grant. Both
Initial and Annual Grants are subject to acceleration in the event of certain
corporate transactions. Any options which are vested at the time the optionee
ceases to be a director shall be exercisable for one year thereafter. Options
which are not vested automatically terminate in the event the optionee ceases to
be a director of the Company. Options which are vested on the date the optionee
ceased to be a director due to death or disability generally remain exercisable
for five years thereafter. If the Company is a party to a transaction involving
a sale of substantially all its assets, a merger or consolidation, all then
outstanding options under the Directors Plan may be cancelled. However, during
the 30 day period preceding the effective date of such transaction, all partly
or wholly unexercised options will be exercisable, including those not yet
exercisable pursuant to the vesting schedule. As of the date of this Prospectus,
no options have been granted under the Directors Plan.
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CERTAIN TRANSACTIONS
Messrs. Chung and Chan are the guarantors of two loans from
shareholders originally totaling $27,000 and bearing interest at 14% per
annum which are due and payable in 1999 and 2000, and are the direct obligors
on a $100,000 loan from a third party which is being treated as a debt of the
Company which loan bears interest at the rate of 12% per annum and is due on
the earlier of the completion of this Offering or December 15, 1999. Messrs.
Chung and Chan are also the guarantors of two bank credit lines of the
Company with credit limits of $80,000 and $50,000, and of one property lease
of the Company and are the direct obligors on two property leases which are
being treated as leases of the Company. See "Notes to Financial Statements."
In a letter dated October 29, 1996, the Company agreed to pay Joe
and Jennifer Montana, significant shareholders of the Company, $50,000 in
cash, payable 30 days prior to the release of the Company's second Fitness
Product, entitled the "Joe Montana Exercise Video." In such letter, the
Company also agreed to pay Joe and Jennifer Montana an additional $50,000
from the proceeds of this Offering and a royalty payment of $1 per video tape
sold. See "Business-Fitness Products."
Mr. Alan Elkes, a director nominee of the Company, is Chief
Executive Officer of the Representative. For a description of the arrangements
between the Company and the Representative, see "Underwriting."
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PRINCIPAL STOCKHOLDERS
The following table sets forth certain information with respect to
the beneficial ownership of the Company's Common Stock as of February 28, 1997,
and as adjusted to reflect the sale of the Common Stock and Warrants being
offered hereby, by (i) each person (or group of affiliated persons) who is known
by the Company to own beneficially more than 5% of the Common Stock, (ii) each
of the Company's directors, (iii) each of the Named Executive Officers and (iv)
all directors and executive officers of the Company as a group. Except as
otherwise noted, the persons or entities in this table have sole voting and
investment power with respect to all the shares of Common Stock owned by them.
SHARES BENEFICIALLY
OWNED PRIOR TO SHARES BENEFICIALLY
NAME AND ADDRESS OFFERING OWNED AFTER OFFERING
OF BENEFICIAL OWNER NUMBER PERCENT NUMBER PERCENT
- - ------------------- ------ ------- ------ -------
George Chung 476,075(1) 19.47% 476,075(1) 13.43%
Anthony Chan 475,675 19.46% 475,675 13.42%
Don Berryessa 168,600(2) 6.90% 168,600(2) 4.76%
Montana Family Trust 158,455 6.48% 158,455 4.47%
Peter Kwong 129,962(3) 5.32% 129,962(3) 3.67%
- - ----------
(1) Includes 400 shares owned by Mr. Chung's wife.
(2) Includes 28,100 shares owned by Mr. Berryessa's wife.
(3) Includes 3,512 shares owned by Mr. Kwong's wife.
RESCISSION OFFER
Commencing after the closing of this Offering and subject to compliance
with Federal and state securities laws, the Company anticipates offering to
certain shareholders of the Company who previously purchased equity or debt
securities of America's Best Karate, the right to rescind their previous
purchases and receive the return of the purchase price paid for such securities
together with interest at a rate to be determined by the state of residence of
the subject holder. The Company is making this offer because, among other
things, certain sales of its securities may not have qualified for an assumption
under the registration requirements of the Federal and state securities laws.
The Company's obligation to purchase such shares will be paid out of the net
proceeds of this Offering. See "Use of Proceeds."
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The holders of securities who will be offered rescission will include 42
shareholders who were issued a total of 878,118 shares of common stock of
America's Best Karate during the period November 1995 to February 1997 for an
aggregate purchase price of $1,198,200, and 10 debt holders who were issued an
aggregate principal amount of $455,000 of debt of America's Best Karate during
the period October 1996 to January 1997.
The original purchase price of all of the securities which are the subject
of the Rescission Offer is approximately $1,648,200, excluding interest (which
will vary). All of the holders of Common Stock eligible for the Rescission Offer
paid less than $5.00 per share, the public offering price of the shares of
Common Stock offered hereby. Holders of the debt securities eligible for the
Rescission Offer, paid no additional consideration for the issuance of their
securities. The Company does not believe that any or many shareholders will
tender securities pursuant to the Rescission Offer because the price per Share
in this Offering is higher than the amount recoverable through rescission and
because substantially all such securities were sold to personal or business
acquaintances of the Company and its management. However, the Rescission Offer
will be kept open for at least 30 days and there can be no assurance that the
price of the shares in the trading market during such period will not be less
than the prices paid by the shareholders who are being offered rescission in the
Rescission Offer or that a significant number of such shareholders will not
accept the Rescission Offer. To the extent that the Company is required to use
proceeds from this Offering to meet its obligations under the Rescission Offer,
such funds will not be available to be utilized by the Company in furtherance of
its business objectives. Payment of the purchase price and interest to
individuals who elect to rescind will be made as soon as practicable after
receipt by the Company of the notice of rescission and the appropriate
certificates.
Notwithstanding the Rescission Offer, under applicable Federal and state
securities laws, shareholders may continue to have a right to rescind and
recover the purchase price from the Company and may not be banned from asserting
potential claims against the Company for alleged violations of securities laws.
In addition, the Company may be subject to enforcement actions by the Commission
and/or state securities authorities.
DESCRIPTION OF SECURITIES
SECURITIES OFFERED
The 1,100,000 shares of Common Stock and 1,800,000 Warrants offered hereby
are offered separately from one another and will be traded separately upon the
consummation of this Offering.
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GENERAL
The Company has an authorized capital of 10,000,000 shares of Common
Stock, $.0001 par value, of which 2,444,671 shares are currently outstanding.
The issued and outstanding shares of Common Stock are fully paid and
non-assessable, and all the shares of Common Stock underlying the Warrants
included in the Offering, when issued, will be fully paid and non-assessable.
Holders of the Shares are entitled to one vote per share on all matters
submitted to a vote of the stockholders and do not have cumulative voting rights
in the election of directors.
Holders of the Common Stock are entitled to share pro rata in such
dividends as may be declared by the board of directors out of funds legally
available. See "Dividend Policy." On any dissolution, liquidation or winding-up
of the Company, the holders of Common Stock will be entitled to share pro rata
in all distributions made after payment of or provision for the payment of all
debts and prior claims. There are no preemptive rights or conversion privileges
applicable to the Common Stock.
WARRANTS
Warrants will be issued pursuant to a Warrant Agreement between the
Company and _____________ (the "Transfer and Warrant Agent") and will be in
registered form. The Company has authorized the issuance of Warrants to purchase
an aggregate of 1,800,000 shares of Common Stock (exclusive of 270,000 Warrants
issuable upon exercise of the Underwriters' Over-Allotment Option and 180,000
Warrants underlying the Underwriters' Warrants). Each Warrant entitles its
holder to purchase, at any time from the date of this Prospectus through the
fifth anniversary date of this Prospectus, one share of Common Stock at an
exercise price of $5.00 per share, subject to adjustment in accordance with the
anti-dilution and other provisions referred to below.
The Warrants may be redeemed by the Company at any time commencing one
year from the date of this Prospectus (or earlier with the prior written consent
of the Representative) and prior to their expiration, at a redemption price of
$.10 per Warrant, on not less than 30 days' prior written notice to the holders
of such Warrants, provided that the last sales price of the Common Stock on
Nasdaq is at least 120% ($6.00 per share, subject to adjustment) of the exercise
price of the Warrants for a period of 20 consecutive trading days ending on the
third day prior to the date the notice of redemption is given. Holders of
Warrants shall have exercise rights until the close of the business day
preceding the date fixed for redemption. The exercise price of the Warrants
should in no event be regarded as an indication of any future market price of
the securities offered hereby.
The exercise price and the number of shares of Common Stock purchasable
upon the exercise of the Warrants are subject to adjustment upon the occurrence
of certain events, including stock dividends, stock splits, combinations or
reclassification of the Common Stock. The Warrants do not confer upon holders
any voting or any other rights as stockholders of the Company.
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Subject to the rules and regulations of the NASD, the Underwriters shall
be entitled to act as the warrant solicitation agent for the solicitation of the
Warrants for a period of five years after the date hereof, commencing one year
after the date hereof and receive a warrant solicitation fee of five percent
(5%) of the exercise price for each Warrant exercised during the period
commencing one year after the date hereof.
The Company is required to have a current Registration Statement on file
with the Commission and to effect appropriate qualifications under the laws and
regulations of the states in which the holders of Warrants reside in order to
comply with applicable laws in connection with the exercise of Warrants and the
sale of the Common Stock issued upon such exercise. The Company, therefore, will
be required to file post-effective amendments to its Registration Statement when
subsequent events require such amendments in order to continue the registration
of the Common Stock underlying the Warrants and to take appropriate action under
state securities laws. There can be no assurance that the Company will be able
to keep its Registration Statement current or to effect appropriate action under
applicable state securities laws. Its failure to do so may restrict the ability
of the Warrant holders to exercise the Warrants and resell or otherwise dispose
of the underlying Common Stock, whether pursuant to redemption of the Warrants
or otherwise.
LIMITATION OF DIRECTORS' LIABILITIES
The Company's Certificate of Incorporation eliminates, to the fullest
extent permitted by law, the liability of its directors to the Company and its
stockholders for monetary damages for breach of the directors' fiduciary duty.
This provision is intended to afford the Company's directors the benefit of the
Delaware General Corporation Law, which provides that directors of Delaware
corporations may be relieved of monetary liability for breach of their fiduciary
duty of care, except under certain circumstances involving breach of a
director's duty of loyalty, acts or omissions not in good faith or involving
intentional misconduct or a knowing violation of law or any transaction from
which the director derived an improper personal benefit.
CERTAIN ANTI-TAKEOVER DEVICES
The Company is subject to Section 203 of the Delaware General Corporation
Law ("Section 203"), which restricts certain transactions and business
combinations between a corporation and an "Interested Stockholder" owning 15% or
more of the corporation's outstanding voting stock for a period of three years
from the date the stockholder becomes an Interested Stockholder. Subject to
certain exceptions, unless the transaction is approved by the Board of Directors
and the holders of at least 66-2/3% of the outstanding voting stock of the
corporation (excluding shares held by the Interested Stockholder), Section 203
prohibits significant business transactions such as a merger with, disposition
of assets to, or receipt of disproportionate financial benefits by the
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Interested Stockholder, or any other transaction that would increase the
Interested Stockholder's proportionate ownership of any class or series of the
corporation's stock. The statutory ban does not apply if, upon consummation of
the transaction in which any person becomes an Interested Stockholder, the
Interested Stockholder owns at least 85% of the outstanding voting stock of the
corporation (excluding shares held by persons who are both directors and
officers or by certain stock plans).
TRANSFER AGENT AND REGISTRAR
_______________________ has been appointed as the transfer agent and
registrar for the Company's Common Stock. Its telephone number is
- - ------------.
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SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this Offering, the Company will have 3,544,671 shares
of Common Stock outstanding. All of the 1,100,000 shares of Common Stock sold in
this Offering will be freely transferable by persons other than "affiliates" of
the Company (as that term is defined under the Securities Act).
The remaining 2,444,671 outstanding shares of Common Stock will be
"restricted securities" within the meaning of Rule 144 under the Securities Act
and may not be sold in the absence of a registration under the Securities Act
unless an exemption from registration is available, including the exemption
contained in Rule 144. Prior to the effective date of the Offering, each of the
Company's officers and directors and their affiliates and certain other
shareholders owning an aggregate of 2,100,000 shares of Common Stock will enter
into lock-up agreements whereby they will agree not to offer or sell any shares
of Common Stock or other equity securities of the Company or any securities
convertible into or exchangeable for, or warrants to purchase or acquire, Common
Stock, owned as of the date of this Prospectus or hereafter acquired, without
the consent of the Representative, except as follows: 125,000 shares of Common
Stock six months after the date hereof, provided however, that the Common Stock
has traded at least 15,000 shares per day at a bid price of at least $7.50 per
share (150% above the initial public offering price) for any fifteen consecutive
trading days during such period; an additional 375,000 shares of Common Stock
twelve months after the date hereof; an additional 500,000 shares of Common
Stock eighteen months after the date hereof; and an additional 1,100,000 shares
of Common Stock twenty-four months after the date hereof. The Representative
may, in its discretion and without notice to the public, waive the lock-up and
permit the holders of these shares to resell all or a portion of their shares at
any time prior to the time periods described above. As of ___________, 1997, and
without giving effect to the above described lock-up agreements, no shares of
Common Stock which are currently outstanding are immediately eligible for sale
in the public market without restrictions, ________ shares of Common Stock will
be eligible for sale, subject to the restrictions of Rule 144, on the 91st day
after the effectiveness of this Prospectus and __________ shares of Common Stock
will be eligible for sale, subject to the restrictions of Rule 144, one year
after the effectiveness of this Prospectus.
In general, under Rule 144 as currently in effect, a person who has
beneficially owned restricted securities for a period of at least two years,
including an "affiliate" as that term is defined in Rule 144, is entitled to
sell, within any three-month period commencing 90 days after the date of this
Prospectus, a number of "restricted" shares that does not exceed the greater of
1% of the then outstanding shares of Common Stock (approximately 3,544,671
shares immediately after the Offering) or the average weekly trading volume
during the four calendar weeks preceding such sale. Sales under Rule 144 are
also subject to certain manner of sale limitations, notice requirements and the
availability of current public information about the Company. Rule 144(k)
provides that a person who is not deemed an "affiliate" and who has beneficially
owned shares for at least three years is entitled to sell such shares at any
time under Rule 144 without regard to the limitation described above.
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In addition, any employee, officer or director of or consultant to the
Company who purchased his or her shares pursuant to a written compensatory plan
or contract may be entitled to rely on the resale provisions of Rule 701. Rule
701 permits affiliates to sell their Rule 701 shares under Rule 144 without
complying with the holding period requirements of Rule 144. Rule 701 further
provides that non-affiliates may sell such shares in reliance on Rule 144
without having to comply with the public information, volume limitation
or notice provisions of Rule 144. In both cases, a holder of Rule 701
shares is required to wait until 90 days after the date of this
Prospectus before selling such shares.
The Company has agreed to file a registration statement under the
Securities Act with respect to the resale of 305,000 shares of Common Stock of
the Company by certain shareholders upon demand by a majority of such
shareholders. Upon the effectiveness of such registration statement, such
shareholders would be free to sell their shares in the public market without
volume restriction unless such shares were held by an affiliate or are subject
to a lock-up agreement described above.
UNDERWRITING
The Company has agreed to sell, and the Underwriters have agreed to
purchase from the Company, 1,100,000 shares of Common Stock and 1,800,000
Warrants. The underwriting agreement between the Company and the Underwriters
(the "Underwriting Agreement") provides that the obligations of the Underwriters
are subject to certain conditions precedent. The Underwriters are committed to
purchase all of the securities offered hereby if any are purchased.
The Representative has advised that it proposes initially to offer the
1,100,000 shares of Common Stock and 1,800,000 Warrants to the public at the
initial public offering prices set forth on the cover page of this Prospectus
and that it may allow to selected dealers who are members of the NASD
concessions not in excess of $.20 per share of Common Stock and $.00 per
Warrant, of which not more than $.10 per share of Common Stock and $.00 per
Warrant may be re-allowed to certain other dealers.
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The Underwriting Agreement provides further that the Underwriters will
receive a non-accountable expense allowance of 3% of the gross proceeds of the
Offering (excluding for purposes of this calculation, proceeds from any exercise
of Warrants or the Underwriters' Over-allotment Option), of which approximately
$20,000 has been paid by the Company to date. The Company has also agreed to pay
all expenses in connection with qualifying the shares of Common Stock and the
Warrants offered hereby for sale under the laws of such states as the
Underwriters may designate, including expenses of counsel retained for such
purpose by the Underwriters.
Pursuant to the Underwriters' Over-allotment Option, which is exercisable
for a period of 45 days after the closing of the Offering, the Underwriters may
purchase up to 15% of the total number of shares of Common Stock and Warrants
offered hereby, solely to cover over-allotments.
The Company has agreed to sell to the Underwriters, for nominal
consideration, the Underwriters' Warrants to purchase 110,000 shares of Common
Stock and 180,000 Warrants. The Underwriters' Warrants will be non-exercisable
for one year after the date of this Prospectus. Thereafter, for a period of four
years, the Underwriters' Warrants will be exercisable at $6.00 per share of
Common Stock and $0.12 per Warrant. The Warrants contained in the Underwriters'
Warrants are exercisable for common stock at $6.00 share. The Underwriter's
Warrants are not transferable for a period of one year after the date of this
Prospectus, except to officers and directors of the Representative,
co-underwriters and to members of the selling group and their officers and
partners. The Company has also granted certain demand and "piggyback"
registration rights to the holders of the Underwriters' Warrants.
For the life of the Underwriters' Warrants, the holders thereof are given,
at nominal cost, the opportunity to profit from a rise in the market price of
the Common Stock with a resulting dilution in the interest of other
stockholders. Further, such holders may be expected to exercise the
Underwriters' Warrants at a time when the Company would in all likelihood be
able to obtain equity capital on terms more favorable than those provided in the
Underwriters' Warrants.
The Underwriting Agreement provides for reciprocal indemnification between
the Company and the Underwriter against liabilities in connection with the
Offering, including liabilities under the Securities Act.
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The Company has agreed that upon closing of the Offering it will, for a
period of not less than three years, engage a designee of the Representative as
advisor to the Board of Directors of the Company. In addition and in lieu of the
Representative's right to designate an advisor, the Company has agreed, if
requested by the Representative during such three year period, to nominate and
use its best efforts to cause the election of a designee of the Representative
as a director of the Company. The Representative has not yet designated any such
person.
The Representative intends to act as a market maker for the Common Stock
and the Warrants after the closing of the Offering.
Commencing one year after the date of this Prospectus and for a period of
five years after the date hereof, the Company will pay the Representative a fee
of 5% of the exercise price of each Warrant exercised, provided (i) the exercise
price of the Warrant was solicited by a member of the NASD, (ii) the Warrant was
not held in a discretionary account, (iii) the disclosure of compensation
arrangements was made both at the time of the Offering and at the time of
exercise of the Warrant, (iv) the solicitation of the exercise of the Warrant
was not a violation of Rule 10b-6 under the Exchange Act and (v) the
Representative is designated in writing as the soliciting NASD member. Unless
granted an exemption from Rule 10b-6 under the Exchange Act by the Commission,
the Representative and any other soliciting broker/dealers will be prohibited
from engaging in any market making activities or solicited brokerage activities
with regard to the Company's securities during the periods prescribed by
exemption (xi) to Rule 10b-6 before the solicitation of the exercise of the of
any Warrant until the later of the termination of such solicitation activity or
the termination of any right the Representative and any other soliciting
broker/dealer may have to receive a fee for the solicitation of the exercise of
the Warrants. As a result, the Representative and soliciting broker dealers may
be unable to continue to provide a market for the Company's securities during
certain periods while the Warrants are exercisable.
The Company agreed to retain the Representative as a management and
financial consultant at a monthly fee of $3,000 for a three-year period
commencing on the closing the Offering. The entire fee of $108,000 is payable at
the closing of the Offering. Pursuant to this agreement, the Representative will
be obligated to provide general financial advisory services to the Company on an
as-needed basis with respect to possible future financing or acquisitions by the
Company and related matters. The agreement does not require the Representative
to provide any minimum number of hours of consulting services to the Company.
The initial public offering price of the shares of Common Stock and the
Warrants offered hereby and the initial exercise price and the other terms of
the Warrants have been determined by negotiation between the Company and the
Representative and do not necessarily bear any direct relationship to the
Company's assets, earnings, book value per share or other generally accepted
criteria of value. Factors considered in determining the offering price of the
-53-
Page 53 of 209
<PAGE>
shares of Common Stock and Warrants and the exercise price of the Warrants
included the business in which the Company is engaged, the Company's financial
condition, an assessment of the Company's management, the general condition of
the securities markets and the demand for similar securities for comparable
companies.
The Representative or members of the selling group may, at their option,
charge a customary "ticket charge" to purchasers in the Offering. Any such
charge will not exceed $15.00 and will be disclosed on the customer's
confirmation slip.
The Company has agreed to grant the Representative a right of first
refusal for a period of two years from the date of the consummation of this
Offering for any public or private offering of securities to raise capital and
sale of securities to be made by the Company, its affiliates or any of its
present or future subsidiaries.
The Company has also agreed that for a period of two years from the date
on which this Registration Statement is declared effective by the Securities and
Exchange Commission, the Company will not, without the Representative's consent,
issue any shares of its Common Stock, preferred stock, any warrants or options
or any other rights to purchase Common Stock or preferred stock, except as
contemplated by the Underwriting Agreement and except for an amount of options
or warrants not to exceed 10% of the Company's issued and outstanding Common
Stock on the date of the consummation of this Offering.
Prior to the Effective Date, the Company will cause each of the Company's
stockholders, officers and directors to enter into a written agreement with the
Representative that he or she will not publicly or privately sell any shares of
the Company's Common Stock or preferred stock owned directly or indirectly by
him or her or beneficially by him or her (as defined by the Exchange Act) on the
Effective Date without the consent of the Representative except as follows:
125,000 shares of Common Stock six months after the Effective Date, provided
however, that the Common Stock has traded at least 15,000 shares per day at a
bid price of at least $7.50 per share for fifteen consecutive trading days; an
additional 375,000 shares of Common Stock twelve months after the Effective
Date; an additional 500,000 share of Common Stock eighteen months after the
Effective Date; and an additional 1,100,000 shares of Common Stock twenty-four
months after the Effective Date.
LEGAL MATTERS
The legality of the issuance of the shares of Common Stock offered hereby
will be passed upon for the Company by Sheppard, Mullin, Richter & Hampton LLP,
Los Angeles, California. Singer Zamansky LLP, New York, New York, is acting as
counsel for the Underwriters in connection with this Offering.
-54-
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<PAGE>
EXPERTS
The financial statements of America's Best Karate as of December 31, 1996,
and for the two years then ended and the balance sheet of American Champion
Entertainment, Inc. as of February 5, 1997 have been included herein and in the
registration statement in reliance upon the reports of Moore Stephens, P.C.,
independent certified public accountants, appearing elsewhere herein, and upon
the authority of such firm as experts in accounting and auditing.
ADDITIONAL INFORMATION
The Company has filed with the Los Angeles Regional Office of the
Securities and Exchange Commission a registration statement on Form SB-2
(herein, together with all amendments and exhibits, referred to as the
"Registration Statement") under the Securities Act with respect to the
securities being offered pursuant to this Prospectus. This Prospectus does not
contain all information set forth in the Registration Statement, certain parts
of which are omitted in accordance with the rules and regulations of the
Securities and Exchange Commission. Statements contained herein concerning the
provisions of any documents are not necessarily complete and in each instance,
reference is made to the copy of such document filed as an exhibit to the
Registration Statement. Each such statement is qualified in its entirety
by such reference. A copy of the Registration Statement may be
inspected by anyone without charge at the Securities and Exchange Commission's
principal office located at 450 Fifth Street, N.W., Washington, D.C. 20549, the
Pacific Regional Office located at 5670 Wilshire Boulevard, 11th Floor, Los
Angeles, California 90036-3648, the New York Regional Office located at 7 World
Trade Center, 13th Floor, New York, New York 10048, and the Chicago Regional
Office located at Northwestern Atrium Center, 500 West Madison Street, Chicago,
Illinois 60661-2511, and copies of all or any part thereof may be obtained from
the Public Reference Branch of the Commission upon the payment of certain fees
prescribed by the Securities and Exchange Commission. The Commission maintains
an Internet Web Site at http://www.sec.gov.
-55-
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<PAGE>
INDEX TO FINANCIAL STATEMENTS
- - ------------------------------------------------------------------------------
AMERICAN CHAMPION ENTERTAINMENT, INC.:
Report of Independent Auditors........................................F-1
Balance Sheet as of February 5, 1997 [Date of Incorporation]..........F-2
Notes to Balance Sheet................................................F-3..6
AMERICA'S BEST KARATE:
Report of Independent Auditors........................................F-7
Balance Sheet.........................................................F-8..9
Statements of Operations..............................................F-10..11
Statements of Stockholders' Equity [Deficit]..........................F-12
Statements of Cash Flows..............................................F-13..14
Notes to Financial Statements.........................................F-15..29
. . . . . . . . . . . . . . .
-56-
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<PAGE>
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors of
American Champion Entertainment, Inc.
Hayward, California
We have audited the accompanying balance sheet of American Champion
Entertainment, Inc. as of February 5, 1997 [date of incorporation]. This balance
sheet is the responsibility of the Company's management. Our responsibility is
to express an opinion on this balance sheet based on our audit.
We conducted our audit in accordance with generally accepted
auditing standards. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the balance sheet is free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the balance sheet. 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 audit provides a reasonable basis for our
opinion.
As discussed in Note 1, the Company was inactive on February 5,
1997.
In our opinion, the balance sheet referred to above, presents
fairly, in all material respects, the financial position of American Champion
Entertainment, Inc. as of February 5, 1997, in conformity with generally
accepted accounting principles.
/s/ Moore Stephens, P.C.
-----------------------------
MOORE STEPHENS, P.C.
Certified Public Accountants.
Cranford, New Jersey
February 5, 1997
-F-1-
Page 57 of 209
<PAGE>
AMERICAN CHAMPION ENTERTAINMENT, INC.
- - ------------------------------------------------------------------------------
BALANCE SHEET AS OF FEBRUARY 5, 1997 [DATE OF INCORPORATION]
- - ------------------------------------------------------------------------------
ASSETS:
Organization Costs $ 2,500
===========
LIABILITIES AND STOCKHOLDERS' EQUITY:
Due to Related Party $ 2,500
COMMITMENTS AND CONTINGENCIES --
STOCKHOLDERS' EQUITY:
Common Stock, 10,000,000 Authorized, $.0001 Par
Value, None Outstanding --
TOTAL STOCKHOLDERS' EQUITY --
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY: $ 2,500
===========
See Notes to Balance Sheet.
-F-2-
Page 58 of 209
<PAGE>
AMERICAN CHAMPION ENTERTAINMENT, INC.
NOTES TO BALANCE SHEET
- - ------------------------------------------------------------------------------
[1] ORGANIZATION AND NATURE OF OPERATIONS
American Champion Entertainment, Inc. [the "Company" or "ACE"] was incorporated
on February 5, 1997 under the laws of the State of Delaware for the purpose of
consummating the transactions described in Note 4 below. At the date of
incorporation, there was no issuance of or subscriptions for its capital stock.
[2] ORGANIZATION COSTS
Organization costs are costs incurred that pertain to the incorporation of the
Company. The costs are being amortized over 60 months using the straight-line
method.
[3] DESCRIPTION OF SECURITIES
The authorized capital stock of the Company consists of 10,000,000 shares of
voting common stock, par value $.0001 per share.
[4] SUBSEQUENT EVENTS [UNAUDITED] SUBSEQUENT TO THE DATE OF THE REPORT OF THE
INDEPENDENT AUDITORS
[A] PROPOSED MERGER - Subsequent to February 5, 1997 [date of incorporation],
the Company will merge with America's Best Karate ["ABK"] which (a) operates
karate studios; (b) has begun producing fitness information video tapes, books,
and audio tapes, and (c) has begun producing educational television programs for
children which emphasize martial arts values and fun. Pursuant to the merger,
ABK will become a wholly-owned subsidiary of American Champion Entertainment,
Inc. References to the Company for periods subsequent to February 5, 1997 refer
to the consolidated entity. Consolidated financial statements to be presented
will include the accounts of both companies. Intercompany transactions and
balances will be eliminated in consolidation.
ACE will own 100% of the shares of ABK at the time of the merger. See the
historical financial statements and notes thereto of ABK elsewhere in this
prospectus. American Champion Media ["AC Media"], a wholly-owned subsidiary of
ABK, will operate and manage all media related programs.
[B] PROPOSED PUBLIC OFFERING - On December 5, 1996, ACE [a company in formation
at that date] entered into a letter of intent with an Underwriter to offer
common stock through a public offering. Pursuant to the letter of intent, the
Underwriter will purchase on a "firm commitment" basis, 1,100,000 shares of
common stock at a public offering price of $5 per share and 1,800,000 warrants
at a public offering price of $0.10 per warrant. The Company agreed to pay
-F-3-
Page 59 of 209
<PAGE>
AMERICAN CHAMPION ENTERTAINMENT, INC.
NOTES TO BALANCE SHEET
- - ------------------------------------------------------------------------------
underwriting discounts and commissions, and a non-accountable expense allowance
totaling 13% of the gross proceeds. The Company also agreed to enter into a
consulting agreement for a three-year period after the closing of the
underwriting transaction for a total fee of $108,000 payable at closing.
[C] EMPLOYMENT AGREEMENTS - In March 1997, the Company entered into employment
agreements, effective as of the closing date of the proposed public offering
(the "Offering"), with each of Mr. Chung, Mr. Chan and Mr. Berryessa pursuant to
which Mr. Chung will continue to serve as the Company's Chairman of the Board,
Mr. Chan will continue to serve as the Company's President, Chief Executive
Officer and Chief Financial Officer and Mr. Berryessa will continue to serve as
the Company's Vice-President. Each agreement has a term of five years. Pursuant
to the agreements, the Company will pay to Messrs. Chung, Chan and Berryessa a
base salary of $100,000, $100,000 and $65,000 per year, respectively. Each
agreement also provides for the following bonuses: (i) options to purchase
87,500, 87,500 and 25,000 shares of Common Stock of the Company, respectively,
exercisable at 120% of the public Offering price of the Common Stock of the
Company upon consummation of the Offering and (ii) $200,000, $200,000 and
$100,000, respectively, if all of the Warrants issued to the public in the
Offering are exercised by the holders thereof within the five-year
exercise period of such Warrants. In addition, the executives are also
entitled to certain fringe benefits. If any of Messrs. Chung, Chan or
Berryessa is terminated other than for cause, death or disability, the Company
is obligated to pay such executive an amount equal to his base salary then in
effect for the remaining term of the agreement.
In March 1997, the Company and AC Media entered into a two year employment
agreement with Jan D. Hutchins effective as of the closing date of the Offering.
This agreement provides that Mr. Hutchins will receive an annual base salary of
$39,600. The employment agreement also provides for the following bonuses: (i)
four thousand [4,000] shares of Common Stock of the Company upon consummation of
the proposed public Offering, subject to compliance with applicable laws; (ii)
options to purchase twenty thousand [20,000] shares of Common Stock of the
Company, exercisable at 120% of the public Offering price of the Common Stock of
the Company upon the consummation of the proposed public Offering, subject to
compliance with applicable laws; and (iii) $100,000 in cash if all of the
Warrants are issued to public in this Offering exercised by the holders thereof
within two years of the consummation of the proposed public Offering. The
employment agreement also provides for certain fringe benefits. If Mr. Hutchins
is terminated other than for cause, death or disability, the Company is
obligated to pay Mr. Hutchins an amount equal to his base salary then in effect
for the remaining term of the agreement.
-F-4-
Page 60 of 209
<PAGE>
[D] 1997 STOCK PLAN - The 1997 Stock Plan was adopted by the Board of Directors
and stockholders of the Company in March 1997 and becomes effective upon the
closing of this Offering. The total number of shares of Common Stock subject to
issuance under the 1997 Stock Plan is 350,000, subject to adjustments as
provided in the 1997 Stock Plan. The 1997 Stock Plan provides for the grant of
stock options (including incentive stock options as defined in Section 422 of
the Code and non-qualified stock options), stock appreciation rights ("SARs")
and other stock awards (including restricted stock awards and stock bonuses) to
employees of the Company or its affiliates or any consultant or advisor engaged
by the Company who renders bona fide services to the Company or the Company's
affiliates in connection with its business; provided, that such services are not
in connection with the offer or sale of securities in a capital raising
transaction. Prior to the date when securities are first registered pursuant to
Section 12 of the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), the 1997 Stock Plan will be administered by the Company's Board of
Directors. Upon registration, the 1995 Stock Plan will be administered by the
Compensation Committee of the Board of Directors (the "Committee") which will be
comprised of "disinterested persons" within the meaning of Rule 16b-3 of the
Securities Exchange Act of 1934, as amended. Stock options may be granted by the
Committee on such terms, including vesting and payment forms, as it deems
appropriate in its direction; provided, that no option may be exercised later
than ten years after its grant, and the purchase price for incentive stock
options and non-qualified stock options shall not be less than 100% and 85% of
the fair market value of the Common Stock at the time of grant, respectively.
SARs may be granted by the Committee on such terms, including payment forms, as
the Committee deems appropriate, provided that a SAR granted in connection with
a stock option shall become exercisable and lapse according to the same vesting
schedule and lapse rules established for the stock option (which shall not
exceed ten years from the date of grant). A SAR shall not be exercisable during
the first six months of its term and only when the fair market value of the
underlying Common Stock exceeds the SAR's exercise price and is exercisable
subject to any other conditions on exercise imposed by the Committee. In the
event of a change in control of the Company, the Committee retains the
discretion to accelerate the vesting of stock options and SARs and to remove
restrictions on transfer of restricted stock awards. Unless terminated by the
Board of Directors, the 1997 Stock Plan continues until December 2007. Upon the
occurrence of an event constituting a Change of Control, in the sole discretion
of the Committee, all options and SARs will become immediately exercisable in
full for the remainder of their terms and restrictions on stock granted pursuant
to a Restricted Stock Award will lapse. The Board of Directors has authorized
the grant of options to certain officers and key employees to purchase
-F-5-
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<PAGE>
an aggregate of 250,000 shares of Common Stock under the 1997 Stock Plan at 120%
of the initial public offering price upon consummation of the Offering.
[E] 1997 NON-EMPLOYEE DIRECTORS STOCK OPTION PLAN - The Company's 1997
Non-Employee Directors Stock Option Plan (the "Directors Plan") was adopted by
the Board of Directors and stockholders of the Company in March 1997 and becomes
effective upon the closing of the Offering. A total of 50,000 shares are
available for grant under the Directors Plan. The Directors Plan provides for
the automatic grant to each of the Company's non-employee directors of (i) an
option to purchase 5,000 shares of Common Stock on the date of such director's
initial election or appointment to the Board of Directors (the "Initial Grant")
and (ii) an option to purchase 2,000 shares of Common Stock on each anniversary
thereof on which the director remains on the Board of Directors (the "Annual
Grant"). The options will have an exercise price of 100% of the fair market
value of the Common Stock on the date of grant and have a 10-year term. Initial
Grants become exercisable in two equal annual installments commencing on the
first anniversary of date of grant thereof and Annual Grants become fully
exercisable beginning on the first anniversary of the date of grant. Both
Initial and Annual Grants are subject to acceleration in the event of certain
corporate transactions. Any options which are vested at the time the optionee
ceases to be a director shall be exercisable for one year thereafter. Options
which are not vested automatically terminate in the event the optionee ceases to
be a director of the Company. Options which are vested on the date the optionee
ceased to be a director due to death or disability generally remain exercisable
for five years thereafter. If the Company is a party to a transaction involving
a sale of substantially all its assets, a merger or consolidation, all then
outstanding options under the Directors Plan may be cancelled. However, during
the 30 day period preceding the effective date of such transaction, all partly
or wholly unexercised options will be exercisable, including those not yet
exercisable pursuant to the vesting schedule.
-F-6-
Page 62 of 209
<PAGE>
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors of
America's Best Karate
Hayward, California
We have audited the accompanying balance sheet of America's Best Karate [a
California corporation] as of December 31, 1996, and the related statements of
operations, stockholders' equity [deficit], and cash flows for each of the years
in the two-year period ended December 31, 1996. These financial statements are
the responsibility of America's Best Karate'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 financial statements referred to above present fairly,
in all material respects, the financial position of America's Best Karate as of
December 31, 1996, and the results of its operations and its cash flows for each
of the years in the two-year period ended December 31, 1996, in conformity with
generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that
America's Best Karate will continue as a going concern. As discussed in Note
3 to the financial statements, America's Best Karate had a working capital
deficit of $(1,271,410) and a deficiency in stockholders' equity of $(998,350).
Additionally, America's Best Karate has experienced continuing losses from
operations. These factors raise substantial doubt about America's Best Karate's
ability to continue as a going concern. Management's plans in regard to these
matters are also described in Note 3. The financial statements do not include
any adjustments that might result from the outcome of this uncertainty.
/s/ Moore Stephens, P.C.
-----------------------------
MOORE STEPHENS, P.C.
Certified Public Accountants.
Cranford, New Jersey
January 31, 1997
-F-7-
Page 63 of 209
<PAGE>
AMERICA'S BEST KARATE
- - ------------------------------------------------------------------------------
BALANCE SHEET AS OF DECEMBER 31, 1996.
- - ------------------------------------------------------------------------------
ASSETS:
CURRENT ASSETS:
Cash $ 28,763
Account Receivable 5,817
Loans Receivable - Related Parties 92,083
Prepaid Expenses and Other 12,462
-----------
TOTAL CURRENT ASSETS 139,125
------------
PROPERTY AND EQUIPMENT - NET OF ACCUMULATED DEPRECIATION
AND AMORTIZATION OF $249,263 50,860
-----------
OTHER ASSETS:
Film Costs - Net of Accumulated Amortization of $4,685 660,004
Deferred Offering Costs 66,544
Deposits 49,657
Other Assets 3,300
-----------
TOTAL OTHER ASSETS 779,505
-----------
TOTAL ASSETS $ 969,490
===========
LIABILITIES AND STOCKHOLDERS' EQUITY [DEFICIT]
CURRENT LIABILITIES:
Accounts Payable and Accrued Expenses $ 316,644
Deferred Revenues - Current Portion 453,404
Short-Term Debt 179,113
Loans Payable - Related Parties 352,175
Long-Term Debt - Current Portion 82,740
Obligations Under Capital Leases 26,459
-----------
TOTAL CURRENT LIABILITIES 1,410,535
------------
-F-8-
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<PAGE>
LONG-TERM LIABILITIES:
Deferred Revenues 465,272
Long-Term Debt 71,392
Obligations Under Capital Leases 20,641
-----------
TOTAL LONG-TERM LIABILITIES 557,305
------------
TOTAL LIABILITIES 1,967,840
------------
COMMITMENTS AND CONTINGENCIES --
------------
STOCKHOLDERS' EQUITY [DEFICIT]:
Common Stock, No Par Value, 100,000 Shares
Authorized, 92,030 Issued and Outstanding 738,547
Paid-in Capital [Deficit] (1,203,731)
Accumulated Deficit (533,166)
------------
TOTAL STOCKHOLDERS' EQUITY [DEFICIT] (998,350)
------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY [DEFICIT] $ 969,490
===========
See Accompanying Notes to Financial Statements.
-F-9-
Page 65 of 209
<PAGE>
AMERICA'S BEST KARATE
- - ------------------------------------------------------------------------------
STATEMENTS OF OPERATIONS
- - ------------------------------------------------------------------------------
YEARS ENDED
DECEMBER 31,
1996 1995
------- -------
REVENUE:
Tuition and Related Fees $ 931,231 $ 1,008,832
Accessories and Video Sales 119,322 110,060
---------- -----------
TOTAL REVENUE 1,050,553 1,118,892
---------- -----------
COSTS AND EXPENSES:
Cost of Sales 88,942 81,116
Salaries and Payroll Taxes 712,574 625,399
Rent 494,428 393,462
Selling, General and Administrative 325,025 415,713
Interest 69,383 54,742
---------- -----------
TOTAL COSTS AND EXPENSES 1,690,352 1,570,432
---------- -----------
[LOSS] FROM OPERATIONS (639,799) (451,540)
OTHER INCOME:
Fitness Consulting -- 526,625
---------- -----------
[LOSS] INCOME BEFORE INCOME TAXES (639,799) 75,085
PROVISION FOR INCOME TAXES -- --
---------- -----------
NET [LOSS] INCOME - HISTORICAL $ (639,799) $ 75,085
============ ============
-F-10-
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<PAGE>
CHARGE IN LIEU OF INCOME TAXES (13,775)
-----------
PRO FORMA NET INCOME $ 61,310
===========
PRO FORMA [LOSS] EARNINGS PER SHARE:
Net [Loss] Income $ (26) $ .03
========== ============
Number of Shares 2,444,671 2,444,671
========== ===========
See Accompanying Notes to Financial Statements.
-F-11-
Page 67 of 209
<PAGE>
AMERICA'S BEST KARATE
- - ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
STATEMENTS OF STOCKHOLDERS' EQUITY [DEFICIT]
- - ------------------------------------------------------------------------------
TOTAL
-----
COMMON STOCK PAID-IN STOCKHOLDERS'
---------------- ------- -------------
NUMBER OF CAPITAL ACCUMULATED EQUITY
----------- ------- ----------- -------
SHARES AMOUNT [DEFICIT] [DEFICIT] [DEFICIT]
------ ------ --------- --------- --------
<S> <C> <C> <C> <C> <C>
BALANCE - JANUARY 1, 1995 50,000 $ 37,938 $ -- $(1,172,183) $(1,134,245)
Issuance of Common Stock 26,251 237,266 -- -- 237,266
Receivable from Stockholders -- (37,766) -- -- (37,766)
S Corp. Distributions -- (236,009) -- -- (236,009)
Net Income -- -- -- 75,085 75,085
--------- --------- --------- ------------ -----------
BALANCE -
DECEMBER 31, 1995 76,251 1,429 -- (1,097,098) (1,095,669)
Capitalization of Accumulated
Deficit on S Corp.
Termination -- -- (1,203,731) 1,203,731 --
Issuance of Common Stock 15,324 707,500 -- -- 707,500
Common Stock Issued for
Short-Term Loans 455 21,636 -- -- 21,636
Reduction of Receivable from
Stockholders -- 20,500 -- -- 20,500
S Corp. Distributions -- (12,518) -- -- (12,518)
Net [Loss] -- -- -- (639,799) (639,799)
--------- --------- ---------- ------------ ----------
BALANCE - DECEMBER 31,
1996 92,030 $ 738,547 $(1,203,731) $ 533,166) $ (998,350)
========= ========= ============ ============ ============
</TABLE>
See Accompanying Notes to Financial Statements.
-F-12-
Page 68 of 209
<PAGE>
AMERICA'S BEST KARATE
- - ------------------------------------------------------------------------------
STATEMENTS OF CASH FLOWS
- - ------------------------------------------------------------------------------
YEARS ENDED
------------
DECEMBER 31,
--------------
OPERATING ACTIVITIES: 1996 1995
------- -------
Net [Loss] Income $ (639,799) $ 75,085
Adjustments to Reconcile Net [Loss] Income to
Net Cash [Used for] Provided by
Operating Activities:
Depreciation and Amortization 64,409 64,914
Interest Amortization - Debt Issue Costs 6,272 1,100
Loss on Property and Equipment 2,430 --
[Increase] Decrease in:
Accounts Receivable (5,817) --
Prepaid Expenses and Other 3,567 80,206
Increase [Decrease] in:
Accounts Payable and Accrued Expenses 77,335 (3,285)
Deferred Revenues (55,319) (114,208)
---------- ----------
NET CASH - OPERATING ACTIVITIES (546,922) 103,812
---------- ---------
INVESTING ACTIVITIES:
Purchase of Property and Equipment (7,014) (22,384)
Payments for Film Costs (350,364) (114,482)
Advances to Stockholders (92,083) --
Deposits 2,083 (16,816)
---------- ---------
NET CASH - INVESTING ACTIVITIES (447,378) (153,682)
---------- ----------
FINANCING ACTIVITIES:
S Corp. Distributions (12,518) (236,009)
Proceeds from Issuance of Common Stocks 728,000 199,500
Proceeds from Short-Term Debt 49,344 73,596
-F-13-
Page 69 of 209
<PAGE>
Proceeds from Loans from Related Parties 338,850 1,050
Proceeds [Payments] from/on Long-Term Debt (52,078) 28,243
Principal Payments on Capital Leases (28,234) (26,673)
Deferred Offering Costs (66,544) --
---------- ----------
NET CASH - FINANCING ACTIVITIES 956,820 39,707
---------- ----------
NET [DECREASE] IN CASH (37,480) (10,163)
CASH - BEGINNING OF YEARS 66,243 74,406
---------- ----------
CASH - END OF YEARS $ 28,763 $ 66,243
========== ==========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest $ 57,663 $ 53,642
State Income Taxes $ -- $ 3,164
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND
FINANCING ACTIVITIES:
Capital Lease Obligations Incurred for
Use of Equipment $ -- $ 53,209
Common Stock Issued for Short-Term Debt $ 21,636 $ --
See Accompanying Notes to Financial Statements.
-F-14-
Page 70 of 209
<PAGE>
AMERICA'S BEST KARATE
NOTES TO FINANCIAL STATEMENTS
- - ------------------------------------------------------------------------------
[1] ORGANIZATION AND NATURE OF OPERATIONS
America's Best Karate ["ABK"] was incorporated in the State of California in
June 1991. It owns and operates karate studios in the San Francisco Bay Area and
in Las Vegas, Nevada. During 1995, ABK began producing fitness information video
tapes, books, and audio tapes. During 1996, it also began producing educational
television programs for children which emphasize martial arts values and fun.
During 1996 and 1995, ABK's revenue resulted primarily from martial arts
instruction services.
An organizational restructuring is expected to be completed in 1997. While ABK
will focus solely on operating and managing the karate studios, AMERICAN
CHAMPION MEDIA, INC. ["AC Media"], a 100%-owned subsidiary of ABK, will be
formed to operate and manage all media-related programs. ABK will in turn be a
100%-owned subsidiary of a newly formed parent holding company, AMERICAN
CHAMPION ENTERTAINMENT, INC. ["ACE"], which will be owned by the then existing
stockholders of ABK.
[2] SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
REVENUE RECOGNITION - Substantially all students are required to sign a student
enrollment agreement [the "Enrollment Agreement"] covering a period from 36 to
48 months to complete a black belt course or a 2nd degree black belt course,
respectively. The students have the option to (a) make an initial fee payment
equal to 2-5 months of instruction with the remaining amount payable monthly
over the remaining term of the agreement, [starting with the month following
enrollment], or (b) make one or more lump sum payments for the entire course at
a significant discount. Revenues are recognized over the term of the Enrollment
Agreement.
A student may cancel an Enrollment Agreement at any time. A refund, if any, is
made if the student's advanced payments exceed the elapsed portion of the
course, prorated at $75 per month [additional family members, prorated at $45
per person per month]. The elapsed portion of the course is the number of months
between the course starting date and the cancellation date.
Fee payments subject to refund are shown in ABK's financial statements as
deferred revenue which will be recognized as revenue in the future years if
there is no cancellation by the student.
CONCENTRATION OF CREDIT RISK - Financial instruments which potentially subject
ABK to concentrations of credit risk are cash and accounts receivable arising
from its normal business activities. ABK places its cash with high credit
quality financial institutions. The amount on deposit in any one institution
that exceeds federally insured limits is subject to credit risk. ABK did not
have any cash accounts subject to such risk at December 31, 1996. To reduce
credit risk, ABK requires advanced payments from students and thus, no student
fees receivable is recorded.
-F-15-
Page 71 of 209
<PAGE>
CASH AND CASH EQUIVALENTS - ABK considers certain highly liquid instruments
purchased with original maturities of three months or less to be cash
equivalents. ABK did not have any cash equivalents at December 31, 1996.
PROPERTY AND EQUIPMENT - Property and equipment is stated at cost. Depreciation
for furniture and fixtures and certain equipment is computed using the
straight-line method over an estimated useful life of five years. Leasehold
improvements are amortized using the straight-line method over the term of the
respective leases. Leased assets under capital lease agreements are amortized
using the straight-line method over the shorter of the estimated useful lives or
the length of the lease terms, ranging from two to five years.
-F-16-
Page 72 of 209
<PAGE>
AMERICA'S BEST KARATE
NOTES TO FINANCIAL STATEMENTS
- - ------------------------------------------------------------------------------
[2] SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES [CONTINUED]
FILM COSTS - Film costs consist of the capitalized costs related to the
production of original film masters for videos and television programs. The
total film cost for the production of the master for the STRONG MIND FIT BODY
video is amortized using the individual-film-forecast-computation method which
amortizes costs in the ratio that current gross revenues bear to anticipated
total gross revenues over a period of up to four years. The management of ABK
periodically reviews its estimates of future revenues for each master and if
necessary a revision is made to amortization rates and a writedown to net
realizable value may occur. The net film costs are presented on the balance
sheet at the net realizable value for each master.
Amortization expense for 1996 was $4,685, and there was no film cost
amortization in 1995.
FAIR VALUES OF FINANCIAL INSTRUMENTS - The carrying value of cash, receivables,
accounts payable, and short-term borrowings approximates fair value due to the
short maturity of these instruments. The carrying value of long-term obligations
approximates fair value since the interest rates either fluctuate with the
lending banks' prime rates or approximate market rate. None of the financial
instruments are held for trading purposes.
LOAN INTEREST AMORTIZATION - The value of the stock given to lenders as
additional compensation are being amortized over the term of the loans [See
Notes 8 and 13].
PRO FORMA EARNINGS [LOSS] PER SHARE - Pro forma earnings [loss] per share are
based on the 2,444,671 shares issued for all periods presented. Shares or
equivalents issued within a one year period prior to the initial filing of the
initial public offering of the registration statement [see Note 15] are treated
as outstanding for all reported periods.
INCOME TAXES - Starting 1993, ABK elected to be taxed under the provisions of
Subchapter S of the Internal Revenue Service Code. Under those provisions, ABK
did not pay federal corporate income taxes on its taxable income. Instead, the
stockholders were liable for individual federal income taxes on their respective
shares of the corporate income. Accordingly, no provision has been made for
federal income tax for the year ended December 31, 1995, and the period from
January to February 1996, when the S Corp. status was terminated. In addition,
ABK was taxed as an S Corp. in the state of California. Under state provisions
in California there is a minimal income tax rate for S corporations. Pro forma
net income and earnings per share are presented as if ABK was a C corporation in
1995.
-F-17-
Page 73 of 209
<PAGE>
Starting March 1996, income taxes are provided for the tax effects of
transactions reported in the financial statements and consist of taxes currently
due plus deferred taxes. Deferred taxes are recognized for differences between
the basis of assets and liabilities for financial statement and income tax
purposes. The differences relate primarily to depreciable assets [use of
different depreciation methods and lives for financial statement and income tax
purposes], deferred revenue related to tuition fees, and the receivables and
payables recorded for financial statement purposes. The deferred tax assets and
liabilities represent the future tax consequences of those differences, which
will either be taxable or deductible when the assets and liabilities are
recovered or settled. Deferred taxes are also recognized for operating losses
that are available to offset future taxable income.
DEFERRED OFFERING COSTS - Deferred offering costs consist of costs incurred in
relation to an anticipated public offering. If the offering is not consummated,
such costs will be expensed and not recorded as a reduction of the net proceeds
of the offering.
-F-18-
Page 74 of 209
<PAGE>
AMERICA'S BEST KARATE
NOTES TO FINANCIAL STATEMENTS
- - ------------------------------------------------------------------------------
[3] GOING CONCERN
At December 31, 1996, ABK had a working capital deficit of $(1,271,410) and a
deficiency in stockholders' equity of $(998,350). Additionally, ABK has
experienced continuing losses from operations. These factors cause substantiated
doubt about ABK's ability to continue as a going concern.
ACE is contemplating an initial public offering to provide for gross proceeds of
approximately $5,700,000 to ABK and AC Media [See Note 15]. ABK believes that
the net proceeds from this offering will be sufficient for it to conduct its
operations for the twelve month period following the offering. However, the
success of the offering cannot be assured.
The accompanying financial statements have been prepared on a going concern
basis which contemplates the realization of assets and the satisfaction of
liabilities and commitments in the normal course of business. The continuation
of ABK as a going concern is dependent upon the success of the public offering,
and, thereafter, on attaining profitability. There can be no assurances that
management will be successful in the implementation of its plans. The financial
statements do not include any adjustments in the event ABK is unable to continue
as a going concern.
[4] USE OF ESTIMATES, RISKS AND UNCERTAINTIES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Additionally, there are risks and uncertainties which could impact the future of
ABK. See discussion of Risk Factors in the accompanying registration statement
of which these financial statements and Notes are a part.
-F-19-
Page 75 of 209
<PAGE>
[5] PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
Furniture and Fixtures $ 95,322
Equipment 34,367
Leasehold Improvements 50,535
Leased Assets 119,899
-----------
Total 300,123
Less: Accumulated Depreciation and Amortization (249,263)
PROPERTY AND EQUIPMENT - NET $ 50,860
---------------------------- ============
Depreciation expense was $64,409 and $64,914 for the years ended December 31,
1996 and 1995, respectively.
The accumulated depreciation related to the leased assets at December 31, 1996
was $105,641. Depreciation on leased assets is included in depreciation expense.
-F-20-
Page 76 of 209
<PAGE>
AMERICA'S BEST KARATE
NOTES TO FINANCIAL STATEMENTS
- - ------------------------------------------------------------------------------
Total 664,689
Less: Accumulated Amortization (4,685)
FILM COSTS - NET $ 660,004
=============
Both videos were completed in 1996, but only the STRONG MIND FIT BODY video has
been partially released in 1996. The production of the first pilot episode of
THE ADVENTURES WITH KANGA RODDY was completed in January 1997.
[7] SHORT-TERM DEBT
Short-term debt consists of:
Unsecured loan of $50,000 from an individual, requiring monthly
interest-only payments a the rate of 15%, due July 1997. This
individual will receive either 71.174 shares of ABK shares of ACE.
In the event the initial public offering (See unsuccessful, interest
and principal payments shall be made on an amortized schedule over
the next 36 months $ 50,000
Drawings from a $35,000 bank business credit card line with
interest at the bank's prime plus 6.75%. 34,113
Unsecured loans ranging from $27,000 to $54,000 from various
individuals with interest at 13% payable on a monthly basis
adjustable to .624% - 1.248% of net profit before taxes when
the sum of the interest payments equals the loan amount.
Lenders have the option to convert the loans into 0.624% -
1.248% of the number of common shares issued in the proposed
initial public offering (See Note 15). 81,000
Unsecured non-interest bearing loan from an individual in the
original amount of $20,000, due on demand. 14,000
-----------
TOTAL SHORT-TERM LOANS $ 179,113
- - ---------------------- ============
The weighted average interest rate of short-term borrowings as of December 31,
1996 was approximately 14%.
-F-21-
Page 77 of 209
<PAGE>
AMERICA'S BEST KARATE
NOTES TO FINANCIAL STATEMENTS
- - ------------------------------------------------------------------------------
[8] LOANS PAYABLE - RELATED PARTIES
Loans payable to related parties consist of:
Unsecured loans from various individuals ranging from
$10,000 to $150,000, requiring monthly interest-only
payments at the rate of 15%, due July 1997. Four
hundred and fifty-five shares of common stock with an
assigned value of $21,636 were given to certain
individuals as additional compensation for these unsecured
loans. The loans are presented net of this unamortized
charge at December 31, 1996. The common stock will be
converted at the rate of 1 existing share to 28.1
ACE shares. One of the individuals [see Note 13B] will
receive either 14.235 shares of ABK or 400 shares of ACE. In
the event the proposed initial public offering (See Note 15) is
unsuccessful, interest and principal payments shall be made
on an amortized schedule over the next 36 months. $ 322,336
Loan of $30,000 from various individuals, with interest at
the 3-month CD rate [approximately 5%] plus 3.5%,
due on demand 29,839
------------
TOTAL LOANS PAYABLE TO RELATED PARTIES $ 352,175
============
[9] LONG-TERM DEBT
Long-term debt consist of:
Loans from three banks in amounts ranging from $9,000 to
$80,000, with interest rates spanning from the bank's
reference rate [approximately 8.5% at December 31, 1996]
plus 2.25% to 4%, maturing from May 1998 to April
1999. Two of the bank loans are guaranteed by two
stockholders. $ 67,586
-F-22
Page 78 of 209
<PAGE>
AMERICA'S BEST KARATE
NOTES TO FINANCIAL STATEMENTS
- - ------------------------------------------------------------------------------
Loans from various individuals in the amounts ranging
from $13,500 to $100,000, with interest spanning from
12% to 14%, payable in 60 monthly principal and
interest payments, maturing from December 1998
to June 2000. In the event ABK is sold or goes
public, one loan becomes due immediately and the note
holder will be given 1% of the shares of the
underwriting at that time. Two of the individual
loans are guaranteed by two stockholders. 86,546
Less: Current Portion (82,740)
-------------
LONG-TERM PORTION $ 71,392
=============
ABK agreed to maintain certain financial ratios and other covenants for one of
the bank loans. As of December 31, 1996, ABK did not meet the financial ratios
as required by the bank. Therefore, bank debt in the amount of $22,222 has been
classified as current.
Aggregate maturities required on long-term debt at December 31, 1996 is as
follows:
1997 $ 82,740
1998 37,783
1999 31,799
2000 1,810
----------
TOTALS $ 154,132
------ ==========
-F-23-
Page 79 of 209
<PAGE>
AMERICA'S BEST KARATE
NOTES TO FINANCIAL STATEMENTS
- - ------------------------------------------------------------------------------
[10] LEASE COMMITMENTS
ABK leases facilities under operating leases and gym equipment under capital
leases that range from two to six years and expire at various dates through
2000. Some leases have options to renew for additional terms and some require
additional increases as defined. There are two operating leases which reflect
officers of ABK as lessees and another operating lease is personally guaranteed
by two officers of ABK.
The future minimum lease payments under these leases are:
Year Ending Capital Operating
- - ----------- ------- ---------
December 31, Leases Leases
- - ------------ ------- --------
1997 $ 33,828 $ 354,901
1998 17,624 191,781
1999 5,890 130,295
2000 -- 39,142
---------- ----------
TOTAL MINIMUM LEASE PAYMENTS 57,342 716,119
---------------------------- ==========
Less: Amount Representing Interest 10,242
----------
Present Value of Net Minimum Capital Lease Payments 47,100
Less: Current Portion of Obligations Under Capital
Leases 26,459
----------
NON-CURRENT PORTION OF OBLIGATIONS UNDER CAPITAL
------------------------------------------------
LEASES $ 20,641
------ ==========
Total rent expense was $494,428 and $393,462 for the years ended December 31,
1996 and 1995, respectively.
-F-24
Page 80 of 209
<PAGE>
AMERICA'S BEST KARATE
NOTES TO FINANCIAL STATEMENTS
- - ------------------------------------------------------------------------------
[11] INCOME TAXES
Generally accepted accounting principles require the establishment of deferred
tax asset for all deductible temporary differences and operating loss
carryforwards. At December 31, 1996, ABK had a deferred tax asset of
approximately $246,000 resulting from the temporary difference between the basis
of assets and liabilities for financial statements and income tax purposes. In
addition, ABK has available at December 31, 1996, approximately $353,000 of
unused operating loss carryforwards that may be applied against future taxable
income and that expire in 2011. Realization of the tax asset is dependent upon
future events affecting utilization of the carryforwards. Because of the
uncertainty that ABK will generate income in the future sufficient to fully or
partially utilize these carryforwards, a valuation allowance has been
established for the full amount of the tax asset.
[12] FITNESS CONSULTING
In 1995, ABK earned $526,625 as fees for fitness consulting to certain
organizations and individuals. There was no such income earned in 1996, and the
management of ABK does not expect to receive this type of income in the future.
[13] RELATED PARTY TRANSACTIONS
[A] During 1996, ABK borrowed $333,800 from six of its stockholders. The loans
bear interest at the rate of 15% and mature in July 1997. As additional
compensation to these stockholders, a total of 455.5 shares with a value of
$21,636 were issued to them. For the year ended December 31, 1996, $5,172 of
this amount has been expensed in the statement of operations. The loans are
presented net of this unamortized charge of $16,464 at December 31, 1996.
[B] In 1996, ABK borrowed $10,000 from an individual related to another
individual who is an officer, director and stockholder. The loan bears interest
at the rate of 15% and matures in July 1997. This individual will receive either
14.235 shares of ABK or 400 shares of ACE as additional compensation.
[C] ABK also borrowed $30,000 from a bank credit card line under the name of an
individual who is an officer, director and stockholder, together with two other
individuals related to him. ABK pays interest at the bank's rate of 3-month CD
[approximately 5%] plus 3.5%.
[D] ABK paid consulting fees to two of its stockholders in the total amount of
$6,000 for the year ended December 31, 1995.
[E] During 1995, ABK leased certain equipment costing $53,209, which was
originally purchased by the leasing companies from a trading corporation
partially owned by an individual who is officer, director and stockholder.
-F-25-
Page 81 of 209
<PAGE>
AMERICA'S BEST KARATE
NOTES TO FINANCIAL STATEMENTS
- - ------------------------------------------------------------------------------
[F] During 1995 and 1996, ABK issued S Corp. distributions of $236,009 and
$12,518, respectively, to three stockholders.
[G] In November 1996, ABK agreed to pay to two participants of the JOE MONTANA
EXERCISE video the sum of $50,000 from the proceeds of the intended initial
public offering and another $50,000 when the video is released. Accordingly,
$100,000 is accrued in these financial statements for this liability. These two
participants are stockholders of ABK.
[14] COMMITMENTS AND CONTINGENCIES
[A] In August 1995, ABK entered into a consulting agreement with a corporation
for the development of the STRONG MIND FIT BODY video. ABK has agreed to pay to
that corporation a royalty fee of 2.5% on the gross profit of each program sold.
[B] In October 1995, ABK signed a deal memo with the producer and writer of the
audio tapes and workbook for the STRONG MIND FIT BODY whereby ABK agreed to pay
to him a royalty fee of 1% of the gross income of the project with a maximum of
$15,000.
[C] In June 1996, ABK entered into an agreement with a consultant for THE
ADVENTURES WITH KANGA RODDY, with monthly payments of $2,144 beginning June 1996
until the arrangement is terminated.
[D] In September 1996, ABK signed a deal memo with the director of THE
ADVENTURES WITH KANGA RODDY television program, whereby the director would
receive 2% in the distribution of net profits from the TV broadcasting,
syndication, and video sales of that program.
[E] A royalty fee of $1 will be paid to the two participants of the JOE MONTANA
EXERCISE video [see Note 13G] for each tape sold.
[14] COMMITMENTS AND CONTINGENCIES [CONTINUED]
[F] RIGHT OF RESCISSION - Commencing after the closing of the proposed public
offering [See Note 15] and subject to compliance with federal and state
securities laws, ACE intends to offer to certain stockholders who previously
purchased equity or debt securities of ABK, the right to rescind their previous
purchases and receive the return of the purchase price paid for such securities
together with interest at a rate to be determined by the state of residence of
the subject holder ["Rescission Offer"]. ACE is making the Rescission Offer,
because, among other things, certain sales of its securities may have failed to
qualify for an exemption under the registration requirements of federal and
state securities laws. Notwithstanding the Rescission Offer, under federal and
state securities laws, holders of such securities may continue to have a right
to rescind and recover the purchase price paid for such securities. Moreover,
ACE may be subject to enforcement actions by the Securities and Exchange
Commission.
-F-26-
Page 82 of 209
<PAGE>
AMERICA'S BEST KARATE
NOTES TO FINANCIAL STATEMENTS
- - ------------------------------------------------------------------------------
[15] PROPOSED PUBLIC OFFERING
On December 5, 1996, ACE [a company in formation at that date,] entered into a
letter of intent with an Underwriter to offer common stock through a public
offering. Pursuant to the letter of intent, the Underwriter will purchase on a
"firm commitment" basis, 1,100,000 shares of common stock at a public offering
price of $5 per share and 1,800,000 warrants at a public offering price of $0.10
per warrant. ACE agreed to pay underwriting discounts and commissions, and a
non-accountable expense allowance totaling 13% of the gross proceeds. ACE also
agreed to enter into a consulting agreement for a three-year period after the
closing of the underwriting transaction for a total fee of $108,000 payable at
closing.
[16] NEW AUTHORITATIVE PRONOUNCEMENT
The FASB has also issued SFAS No. 123, "Accounting for Stock-Based
Compensation," in October 1995. SFAS No. 123 uses a fair value based method of
accounting for stock options and similar equity instruments issued to employees
as contrasted to the intrinsic valued based method of accounting prescribed by
Accounting Principles Board ["APB"] Opinion No. 25, "Accounting for Stock Issued
to Employees." The recognition requirements of SFAS No. 123 are effective for
transactions entered into in fiscal years that begin after December 15, 1995.
ABK will continue to apply Opinion No. 25 in recognizing its stock based
employee arrangements. The disclosure requirements of SFAS No. 123 are effective
for financial statements for fiscal years beginning after December 15, 1995.
ABK adopted the disclosure requirements on January 1, 1996. SFAS No. 123 also
applies to transactions in which an entity issues its equity instruments to
acquire goods or services from non-employees. Those transactions must be
accounted for based on the fair value of the consideration received or the fair
value of the equity instrument issued, whichever is more reliably measurable.
This requirement is effective for transactions entered into after December 15,
1995.
[17] INDUSTRY SEGMENTS
ABK operates a chain of karate studios and is involved in the development of
fitness videos and educational television programs which are segmented into two
categories for reporting purposes. Tuition and related fees includes ABK's
activities related to its operations of karate studios. Videos and television
reflect the activities related to the development and production of fitness
videos and educational television programs.
The relative contributions to net sales, income from operations and identifiable
assets of ABK's two industry segments for the two-year period ended December 31,
1996 are as follows:
-F-27-
Page 83 of 209
<PAGE>
AMERICA'S BEST KARATE
NOTES TO FINANCIAL STATEMENTS
- - ------------------------------------------------------------------------------
[17] INDUSTRY SEGMENTS [CONTINUED]
1996 1995
---- ----
Net Sales [1]:
Tuition and Related Fees $ 1,031,407 $1,118,892
Videos and Television 19,146 --
----------- ----------
NET SALES $ 1,050,553 $1,118,892
--------- =========== ==========
Depreciation and Amortization:
Tuition and Related Fees $ 64,409 $ 64,914
Videos and Television -- --
----------- ----------
DEPRECIATION AND AMORTIZATION $ 64,409 $ 64,914
----------------------------- =========== ==========
Capital Expenditures:
Tuition and Related Fees $ 7,014 $ 22,384
Videos and Television 350,364 114,482
----------- ----------
CAPITAL EXPENDITURES $ 357,378 $ 136,866
-------------------- =========== ==========
[Loss] From Operations:
Tuition and Related Fees $ (473,655) $ (321,498)
Videos and Television (166,144) (130,042)
------------ ----------
Totals (639,799) (451,540)
Less Other [2] -- 526,625
------------ ----------
NET [LOSS] INCOME $ (639,799) $ 75,085
----------------- =========== ==========
Identifiable Assets [3]:
Tuition and Related Fees $ 100,517 $ 162,257
Videos and Television 729,848 118,882
----------- ----------
Totals 830,365 281,139
Add: Corporate and Other 139,125 82,272
----------- ----------
ASSETS $ 969,490 $ 363,411
------ =========== ==========
[1] There were no sales between industry segments.
[2] Other includes fees earned for fitness consulting.
[3] Corporate and other assets are principally cash, receivables, and
prepaid expenses.
-F-28-
Page 84 of 209
<PAGE>
AMERICA'S BEST KARATE
NOTES TO FINANCIAL STATEMENTS
- - ------------------------------------------------------------------------------
[18] SUBSEQUENT EVENTS
In January 1997, ABK received bridge loans from various individuals totaling
$75,000 with interest at 15% payable in monthly installments. The principal
amount is due on the earlier of July 1, 1997 or the closing of the proposed
initial public offering. A total of 106.76 shares of ABK or 3,000 shares of ACE
will be issued to the lenders as additional compensation.
[19] SUBSEQUENT EVENTS [UNAUDITED] SUBSEQUENT TO THE DATE OF THE REPORT OF
INDEPENDENT AUDITORS
In February 1997, ABK entered into a private placement in which they obtained
$244,000 of financing in exchange for 305,000 shares of ACE.
. . . . . . . . . . . . . . .
-F-29-
Page 85 of 209
<PAGE>
NO DEALER, SALES REPRESENTATIVE OR ANY OTHER
PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION
OR TO MAKE ANY REPRESENTATIONS IN CONNECTION
WITH THIS OFFERING OTHER THAN THOSE CONTAINED 1,100,000 Shares
IN THIS PROSPECTUS, AND, IF GIVEN OR MADE, of Common Stock
SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE
RELIED UPON AS HAVING BEEN AUTHORIZED BY THE
COMPANY OR ANY UNDERWRITER. THIS PROSPECTUS DOES 1,800,000 Redeemable
NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION Common Stock
OF AN OFFER TO BUY ANY SECURITIES OTHER THAN THE Purchase Warrants
SHARES OF COMMON STOCK TO WHICH IT RELATES OR AN
OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY,
TO ANY PERSON IN ANY JURISDICTION IN WHICH SUCH AN
OFFER OR SOLICITATION WOULD BE UNLAWFUL. NEITHER
THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE
HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE AMERICAN CHAMPION
ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN ENTERTAINMENT, INC.
THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF
OR THAT THE INFORMATION CONTAINED HEREIN IS CORRECT
AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF.
- - -------------------------------------------
TABLE OF CONTENTS
Page
Prospectus Summary..................... 9
Risk Factors........................... 16
Use of Proceeds........................ 25 -------------------------
Dividend Policy........................ 26 PROSPECTUS
Capitalization......................... 26 -------------------------
Dilution............................... 28
Selected Financial Data................ 30
Management's Discussion and
Analysis of Financial
Condition and Results of
Operations............................ 31
Business............................... 33
Management............................. 38 Dalton Kent
Certain Transactions................... 44 Securities Group, Inc.
Principal Stockholders................. 45
Rescission Offer....................... 45
Description of Securities.............. 46
Shares Eligible for Future Sale........ 50
Underwriting........................... 51
Legal Matters.......................... 54 , 1997
Experts................................ 55
Additional Information................. 55
Index to Financial Statements.......... 56
- - --------------------------------
Page 86 of 209
<PAGE>
Until ________________, 1997
(25 days after the date of this
Prospectus), all dealers effecting
transactions in the Registered Securities,
whether or not partici pating in this
distribution, may be required to deliver
a Prospectus. This is in addition to
the obliga tion of dealers to deliver
a Prospectus when acting as Underwriters
with respect to their unsold allotments
or subscriptions.
Page 87 of 209
<PAGE>
PART II. INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Company's Certificate of Incorporation limits, to the maximum extent
permitted by Delaware law, the personal liability of directors for monetary
damages for breach of their fiduciary duties as a director. The Company's Bylaws
provided that the Company shall indemnify its officers and directors and may
indemnify its employees and other agents to the fullest extent permitted by
Delaware law.
Section 145 of the Delaware General Corporation Law provides that a
corporation may indemnify a director, officer, employee or agent made a party to
an action by reason of that fact that he or she was a director, officer employee
or agent of the corporation or was serving at the request of the corporation
against expenses actually and reasonably incurred by him or her in connection
with such action if he or she acted in good faith and in a manner he or she
reasonably believed to be in, or not opposed to, the best interests of the
corporation and with respect to any criminal action, had no reasonable cause to
believe his or her conduct was unlawful.
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers or persons controlling the Company
pursuant to the foregoing provisions, 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.
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The estimated expenses payable by the Company in connection with the
distribution of the securities being registered are as follows:
Amount
________
SEC Registration Fee...............................................$ 5,117
NASD Filing Fee..................................................... 2,118
NASDAQ Listing Fee.................................................. 8,500
Printing Expenses .................................................. 50,000
Accounting Fees and Expenses........................................ 95,000
Legal Fees and Expenses............................................. 150,000
Blue-Sky Fees and Expenses.......................................... 50,000
Transfer Agent's Fees and Expenses.................................. 2,500
Underwriters' Non-Accountable Expense Allowance.................... 196,000
Representative's Consulting Fee.................................... 108,000
Miscellaneous Expenses............................................. 32,765
----------
Total........................................................$ 700,000
============
II-1
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<PAGE>
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES
In _______, 1997, in connection with the reorganization transaction whereby
the Company became the parent holding company of America's Best Karate and AC
Media, an aggregate of _________ shares of Common Stock of the Company were
issued to an aggregate of ___ persons, each of whom was a shareholder of
America's Best Karate. This issuance was effected in reliance upon the exemption
from registration provided by Section 4(2) of the Securities Act and/or
Registration D adopted thereunder on the basis that the transaction did not
involve a public offering.
Set forth below is a listing of issuances of unregistered shares of Common
Stock by the Company's subsidiary, America's Best Karate, during the last three
years prior to the aforementioned reorganization transaction. All of such sales
were intended to be exempt from the registration requirements under the
Securities Act pursuant to Section 4(2). Because certain of such sales may not
have qualified for such exemption, the Company intends to make a rescission
offer to certain holders of such securities. See "Rescission Offer."
Date Shareholder No. Of Shares Consideration
- - ---- ----------- ------------- ------------
23-May-95 Don Berryessa 5,000.00 Services
01-Jun-95 Peter K. Y. Kwong 4,500.00 Services
01-Jun-95 Sheri Sylvester 1,000.00 Services
01-Jun-95 Don H. Yee 752.00 Services
01-Jun-95 Montana Family Trust 5,639.00 Services
01-Jun-95 Ronnie Lott 752.00 Services
01-Jun-95 Dwight Clark 752.00 Services
01-Jun-95 Carmen Policy 752.00 Services
01-Jun-95 Brent Jones 100.00 Services
01-Jun-95 Mary Ochs 752.00 Services
01-Jun-95 Palestra Corp 752.00 Services
07-Nov-95 Richard & Gloria Yee 500.00 $20,000
07-Nov-95 Steven Tang 250.00 $10,000
14-Nov-95 Ricky Tung 1,000.00 $40,000
14-Nov-95 Albert Tang 1,000.00 $40,000
30-Nov-95 May Roberts 250.00 $10,000
08-Dec-95 John R. Powers, III 500.00 $20,000
08-Dec-95 Laurene Yip 250.00 $10,000
20-Dec-95 Bonnie LeMat 250.00 $10,000
20-Dec-95 Susan Yagai 250.00 $10,000
20-Dec-95 Dale Chung 1,000.00 $40,000
27-Dec-95 Linda Durnell 250.00 $10,000
08-Jan-96 Ricky Tung 1,000.00 $40,000
08-Jan-96 Petro Estakhri 500.00 $20,000
12-Jan-96 Terry L. Gray 250.00 $10,000
31-Jan-96 Amy Chow 100.00 $ 4,000
23-Feb-96 Michael Booth 165.00 $ 5,000
26-Feb-96 Billy Y. Prasadi 250.00 $10,000
02-Apr-96 Richard Yee 1,000.00 $40,000
02-Apr-96 Kwong Family Trust 500.00 $20,000
II-2
Page 89 of 209
<PAGE>
02-Apr-96 Ted & Irene Chin 500.00 $20,000
02-Apr-96 May Roberts 250.00 $10,000
05-Apr-96 Stanley Ching 500.00 $20,000
12-Apr-96 May Roberts 500.00 $20,000
24-May-96 Kwong Family Trust 500.00 $20,000
01-Jun-96 Stanley Ching 500.00 $20,000
29-May-96 William Loh 500.00 $20,000
03-Jun-96 Warren Wong 2,000.00 $80,000
03-Jun-96 Ted & Irene Chin 500.00 $20,000
03-Jun-96 Tommy O. Ng 1,000.00 $40,000
19-Aug-96 Clayton Tominaga 1,500.00 $90,000
20-Aug-96 Laurene Yip 125.00 $ 7,500
20-Aug-96 Peter C. Ho 125.00 $ 7,500
25-Aug-96 Camilla T. Y. Kwong 125.00 $ 7,500
25-Aug-96 Tommy O. Ng 125.00 $ 7,500
14-Oct-96 John R. Powers, III 71.17 For loan
14-Oct-96 May W. Roberts 71.17 For loan
01-Nov-96 John R. Powers, III 71.17 For loan
09-Nov-96 Noreen Yamaoka 142.35 For loan
25-Nov-96 John C. Chan 14.235 For loan
25-Nov-96 Dale Chung 14.235 For loan
01-Dec-96 John R. Powers, III 71.17 For loan
01-Dec-96 Albert & Amy Tang 125.00 $ 7,500
01-Dec-96 Laurene Yip 125.00 $ 7,500
01-Dec-96 Stephen Thomas 125.00 $ 7,500
01-Dec-96 Louisa Kwok 500.00 $30,000
04-Dec-96 Michael Tom 166.67 $10,000
05-Dec-96 Rafael S. Tom 300.00 $18,000
10-Dec-96 Peter Ho 125.00 $ 7,500
11-Dec-96 Paul P. H. Shen 150.00 $ 9,000
12-Dec-96 Eric C. & Ellen Ng 500.00 $30,000
27-Dec-96 Van Living Trust 250.00 $15,000
27-Dec-96 Vivian Lee 125.00 $ 7,500
28-Dec-96 Brian Shing 150.00 $ 9,000
28-Dec-96 Joseph Chan 166.67 $10,000
30-Dec-96 Julian & Ann Englestad 71.17 For loan
31-Dec-96 Marianne Chung 14.235 For loan
14-Jan-97 Stanley F. Wasowski 35.587 For loan
14-Jan-97 Amy Okegaki 14.235 For loan
16-Jan-97 Rafael Tom 14.235 For loan
19-Jan-97 Stephen Thomas 67.00 $ 4,020
23-Jan-97 Jack Yuk Lim Tam 42.705 For loan
31-Jan-97 Scott Gerard 2,135.231 $48,000
11-Mar-97 Susan Cohen 177.936 $ 4,000
11-Mar-97 Peter Marsh 2,135.231 $48,000
13-Mar-97 Keith Loiselle 676.157 $15,200
17-Mar-97 Paul G. Leff 1,779.359 $40,000
18-Mar-97 Rory Nichols 889.680 $20,000
18-Mar-97 Brian Schuster 889.680 $20,000
18-Mar-97 Al Levine 889.680 $20,000
18-Mar-97 William E. Gay, Jr. 213.523 $ 4,800
18-Mar-97 David Braver 142.349 $ 3,200
19-Mar-97 Sarine Chaki 711.744 $16,000
20-Mar-97 Al Levine 213.523 $ 4,800
II-3
Page 90 of 209
<PAGE>
Set forth below is a listing of issuances of debt securities by the
Company's subsidiary, America's Best Karate, during the last three years prior
to the aforementioned reorganization transaction. All of such sales were
intended to be exempt from the registration requirements under the Securities
Act pursuant to Section 4(2). Because certain of such sales may not have
qualified for such exemption, the Company intends to make a rescission offer to
certain holders of such securities. See "Rescission Offer."
Date Debtholder Principal Amount of Debt
- - ---- ---------- ------------------------
8-Dec-94 Thomas Fu $27,000
15-Dec-94 Michael Triantos $100,000
30-Apr-95 Thomas Fu $27,000
5-May-95 David Lei $27,000
14-Oct-96 John R. Powers, III $50,000
14-Oct-96 May W. Roberts $50,000
1-Nov-96 John R. Powers, III $50,000
9-Nov-96 Noreen Yamaoka $100,000
25-Nov-96 John C. Chan $10,000
26-Nov-96 Dale Chung $10,000
1-Dec-96 John R. Powers, III $50,000
30-Dec-96 Julian and Ann Englestad $50,000
31-Dec-96 Marianne Chung $10,000
14-Jan-97 Stanley F. Wasowski $25,000
14-Jan-97 Amy Okagaki $10,000
16-Jan-97 Rafael Tom $10,000
23-Jan-97 Jack Yuk Lim $30,000
II-4
Page 91 of 209
<PAGE>
ITEM 27. EXHIBITS
EXHIBIT NO. DESCRIPTION
----------- -----------
1.1* Form of Underwriting Agreement
3.1* Certificate of Incorporation
3.3* Bylaws
4.1* Specimen stock certificate
4.2* Form of Warrant
4.3* Form of Underwriters' Warrant
5* Opinion of Sheppard, Mullin, Richter &
Hampton LLP
10.1 1997 Stock Plan
10.2 Form of Stock Option Agreement for 1997 Stock
Plan
10.3 1997 Non-Employee Directors Stock Option Plan
10.4 Form of Non-Employee Directors Stock Option
Agreement
10.5 Form of Business Loan Agreement utilized for
$455,000 of short-term loans due the earlier
of July 1, 1997 or consummation of the
Offering
10.6 Business Loan Agreement between ABK and the
Bank of Canton of California dated May 15,
1993, and related Promissory Note and
Security Agreement
10.7 Business Loan Agreement between the Company
and Silicon Valley Bank dated April 25, 1995,
and related Promissory Note and Security
Agreement
10.8 Promissory Note dated December 15, 1994 made
payable by Messrs. Chung and Chan and their
wives in favor of Michael Triantos M.D. Inc.
Money Purchase and Profit Sharing Pension
Plans Trust
II-5
Page 92 of 209
<PAGE>
10.9 Employment Agreement between the Company and
George Chung dated March 4, 1997, effective
upon the closing date of the Offering
10.10 Employment Agreement between the Company and
Anthony Chan dated March 4, 1997, effective
upon the closing date of the Offering
10.11 Employment Agreement between the Company and
Don Berryessa dated March 4, 1997, effective
upon the closing date of the Offering
10.12 Employment Agreement between the Company, AC
Media and Jan Hutchins dated March 4, 1997,
effective upon the closing date of the
Offering
10.13 Convertible Loan Agreement dated as of May 5,
1995, between ABK and David Y. Lei
10.14 Convertible Loan Agreement dated as of
December 8, 1994, between ABK and Thomas Y.
Fu
10.15 Amended Deal Memo between ABK and Rick
Fichter dated February 23, 1997, with respect
to payments related to the Kanga Roddy Series
10.16* Consulting Agreement between the Company and
the Representative
10.17 Form of Indemnification Agreement
21.1* Subsidiaries of the Registrant
23.1* Consent of Sheppard, Mullin, Richter &
Hampton LLP (contained in Exhibit 5)
23.2 Consent of Moore Stephens, P.C.
- - ------------------
* To be filed by amendment.
ITEM 28. UNDERTAKINGS.
(a) The undersigned Registrant hereby undertakes to provide to the
Underwriters at the closing specified in the Underwriting Agreement certificates
in such denominations and registered in such names as required by the
Underwriters to permit prompt delivery to each purchaser.
II-5
Page 93 of 209
<PAGE>
(b) Insofar as indemnification for liabilities arising under the
Securities Act may be permitted to directors, officers, and controlling persons
of the Company pursuant to the provisions described in Item 24, 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. In the event that a claim for indemnification
against such liabilities (other than the payment by the Company of expenses
incurred or paid by the director, officer or controlling person of the Company
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 Company 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 Securities Act and will be governed by the final
adjudication of such issue.
(c) The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities
Act, the information omitted from the form of prospectus filed as part of a
registration statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the Company pursuant to Rule 424(b)(1) or (4) or 497(h)
under the Securities Act shall be deemed to be part of this Registration
Statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the
Securities Act, each post-effective amendment that contains a form of prospectus
shall be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
(d) 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; (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
Securities 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.
II-6
Page 94 of 209
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, 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 Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Hayward, State of California, on March 20, 1997.
AMERICAN CHAMPION ENTERTAINMENT, INC.
By: /s/ Anthony Chan
---------------------------------
Anthony Chan
Chief Executive Officer
POWER OF ATTORNEY
Each person whose signature appears below hereby constitutes and appoints
Anthony Chan his true and lawful attorney-in-fact and agent, with full power of
substitution, to sign on his behalf, individually and in each capacity stated
below, all amendments and post-effective amendments to this Registration
Statement on Form SB-2 and to file the same, with all exhibits thereto and any
other documents in connection therewith, with the Securities and Exchange
Commission under the Securities Act of 1933, granting unto said attorney-in-fact
and agent full power and authority to do and perform each and every act and
thing requisite and necessary to be done in and about the premises, as fully and
to all intents and purposes as each might or could do in person, hereby
ratifying and confirming each act that said attorney-in-fact and agent may
lawfully do or cause to be done by virtue thereof.
In accordance with the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates stated.
SIGNATURE TITLE DATE
--------- ----- -----
/s/ Anthony Chan President, Chief Executive March 20, 1997
- - ----------------- Officer, Chief Financial
Anthony Chan Officer and Director
(principal executive officer
and principal financial officer
/s/ George Chung Chairman of the Board and March 20, 1997
- - ---------------- Director
George Chung
/s/ Don Berryessa Vice President and Director March 20, 1997
- - -----------------
Don Berryessa
II-7
Page 95 of 209
<PAGE>
EXHIBIT INDEX
-------------
EXHIBIT NO. DESCRIPTION PAGE
- - ----------- -------------- ----
1.1* Form of Underwriting Agreement
3.1* Certificate of Incorporation
3.3* Bylaws
4.1* Specimen stock certificate
4.2* Form of Warrant
4.3* Form of Underwriters' Warrant
5* Opinion of Sheppard, Mullin, Richter &
Hampton LLP
10.1 1997 Stock Plan 98
10.2 Form of Stock Option Agreement for 1997
Stock Plan 109
10.3 1997 Non-Employee Directors Stock Option
Plan 113
10.4 Form of Non-Employee Directors Stock
Option Agreement 118
10.5 Form of Business Loan Agreement utilized
for $455,000 of short-term loans due the
earlier of July 1, 1997 or consummation
of the Offering 121
10.6 Business Loan Agreement between ABK and
the Bank of Canton of California dated
May 15, 1993, and related Promissory Note
and Security Agreement 124
10.7 Business Loan Agreement between the
Company and Silicon Valley Bank dated
April 25, 1995, and related Promissory
Note and Security Agreement 159
10.8 Promissory Note dated December 15, 1994
made payable by Messrs. Chung and Chan
and their wives in favor of Michael
Triantos M.D. Inc. Money Purchase and
Profit Sharing Pension Plans Trust 177
Page 96 of 209
<PAGE>
EXHIBIT INDEX (Continued)
10.9 Employment Agreement between the Company
and George Chung dated March 4, 1997,
effective upon the closing date of the
Offering 179
10.10 Employment Agreement between the Company
and Anthony Chan dated March 4, 1997,
effective upon the closing date of the
Offering 182
10.11 Employment Agreement between the Company
and Don Berryessa dated March 4, 1997,
effective upon the closing date of the
Offering 185
10.12 Employment Agreement between the Company,
AC Media and Jan Hutchins dated March 4,
1997, effective upon the closing date of
the Offering 188
10.13 Convertible Loan Agreement dated as of
May 5, 1995, between ABK and David Y. Lei 192
10.14 Convertible Loan Agreement dated as of
December 8, 1994, between ABK and Thomas
Y. Fu 196
10.15 Amended Deal Memo between ABK and Rick
Fichter dated February 23, 1997, with
respect to payments related to the Kanga
Roddy Series 200
10.16* Consulting Agreement between the Company
and the Representative
10.17 Form of Indemnification Agreement 202
21.1* Subsidiaries of the Registrant
23.1* Consent of Sheppard, Mullin, Richter &
Hampton LLP (contained in Exhibit 5)
23.2 Consent of Moore Stephens, P.C. 209
- - ------------------
* To be filed by amendment.
Page 97 of 209
<PAGE>
Exhibit 10.1
AMERICAN CHAMPION ENTERTAINMENT, INC.
1997 STOCK PLAN
1. PURPOSE. The purposes of the American Champion Entertainment, Inc.
1997 Stock Plan ("Plan") are to encourage key personnel of American Champion
Entertainment, Inc. (the "Company") and its subsidiaries to increase their
interest in the Company's long-term success, to enhance the profitability and
value of the Company for the benefit of its shareholders and to assist the
Company and its subsidiaries in attracting, retaining and motivating key
personnel by giving suitable recognition for services which contribute
materially to the Company's success.
2. DEFINITIONS. The following definitions shall be applicable
throughout the Plan:
"Act" means the Securities Act of 1933, as amended from time to time.
"Affiliate" means any parent or subsidiary (as defined in
Section 424(e) and (f) of the Code) of the Company.
"Award" means an Option, Stock Appreciation Right or Other Stock
Award.
"Board" means the Board of Directors of the Company.
"Change of Control" means, unless the Board otherwise directs by
resolution adopted prior thereto, (i) the acquisition by any entity,
person or group (other than the Company or its Affiliates or an employee
benefit plan maintained by the Company or one of its Affiliates) of
beneficial ownership of 20% or more of the outstanding voting stock of the
Company; or (ii) the occurrence of a transaction requiring shareholder
approval for the acquisition of the Company by the purchase of stock or
assets, or by merger, or otherwise; or (iii) the election during any
period of 24 months or less of 50% or more of the members of the Board
without the approval of the nomination of such members by a majority of
the Board consisting of members who were serving at the beginning of such
period.
"Code" means the Internal Revenue Code of 1986, as amended from time
to time.
"Committee" means the Committee of the Board consisting of two or
more directors, each of whom (i) is a "disinterested person" within the
meaning of Rule 16b-3, and (ii) is an "outside director" within the
meaning of Section 162(m) of the Code, or successor rule or regulation.
"Consultant" means any consultant or advisor engaged by the Company
who renders bona fide services to the Company or an Affiliate in
connection with its business, provided that such services must not be in
connection with the offer or sale of securities in a capital-raising
transaction.
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Page 98 of 209
<PAGE>
"Disability" means permanent and total disability as defined in
Section 22(e)(3) of the Code.
"Company" means American Champion Entertainment, Inc., a Delaware
corporation.
"Employee" means any person who is employed by the Company or an
Affiliate.
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
"Fair Market Value" means for any given day (i) the closing sales
price on such date of a share of Stock as reported on the principal
securities exchange on which such shares of Stock are then listed or
admitted to trading, or as reported by Nasdaq, or (ii) if not so reported,
the average of the bid and ask prices on such date as reported on the OTC
Bulletin Board, or (iii) if no such quotations are available, as
determined by the Committee in good faith in their absolute discretion.
"Grant Limit" means the total number of shares of Stock that can be
issued to any Participant in any fiscal year pursuant to an Award granted
hereunder.
"Incentive Stock Option" means an Option granted by the Committee to
an Employee Participant under the Plan which is designated by the
Committee as an Incentive Stock Option pursuant to Section 422 of the Code.
"Non-Qualified Stock Option" means an Option granted by the Committee
to a Participant under the Plan which is not designated by the Committee
as an Incentive Stock Option.
"Option" means an Award granted under Section 6 of the Plan.
"Other Stock Awards" means an Award granted under Section 8 of the
Plan.
"Participant" means any individual designated by the Committee to
participate in the Plan.
"Performance-Based Compensation" means (i) an Option granted at less
than 100% of the Fair Market Value of the Stock at the time of grant,
(ii) a Restricted Stock Award or (iii) a Stock Bonus, in each case which
has been granted with the intention that such award will be deductible
under Section 162(m) of the Code, or successor provision.
"Plan" means this American Champion Entertainment, Inc. 1997 Stock
Plan.
"Restricted Stock Award" means an Award granted under Section 8(a)
of the Plan.
"Rule 16b-3" means Rule 16b-3 promulgated under the Exchange Act, or
any successor rule or regulation.
"Stock" means the common stock of the Company, $.001 par value.
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Page 99 of 209
<PAGE>
"Stock Appreciation Right" means an Award granted under Section 7
of the Plan.
"Stock Bonus" means an Award granted under Section 8(b) of the Plan.
"Termination Date" means the date an optionee ceases to be employed
or engaged by the Company.
3. ADMINISTRATION. The Plan shall be administered by the Committee. The
Committee shall have full power, discretion and authority to interpret, construe
and administer the Plan, to prescribe, amend and rescind rules and regulations
relating to the Plan, to provide for conditions and assurances deemed necessary
or advisable to protect the interests of the Company and to make all other
determinations necessary or advisable for the administration of the Plan, to the
extent not contrary to the explicit provisions of the Plan. Determinations,
interpretations and other actions by the Committee pursuant to the Plan shall be
final, conclusive and binding on all persons for all purposes.
The Committee shall have full power, discretion and authority to
establish applicable performance measures for Awards intended to be
Performance-Based Compensation, which performance measures shall include one or
more of the following: improvements in revenues, earnings per share, profit
before taxes, net income or operating income; return on shareholder equity;
return on net assets; and stock price performance. Further, the Committee shall
determine the specific targets related to each such performance measure and the
performance period for each such Award. The Committee shall establish in writing
such performance measures, specific targets and performance periods as provided
in Section 162(m) of the Code and the regulations promulgated thereunder, or
successor provision or regulation.
The Committee's decisions and determinations under the Plan need not
be uniform and may be made selectively among Participants whether or not such
Participants are similarly situated. The Committee may, in its discretion,
delegate to others responsibilities to assist in administering the Plan.
Prior to the date when securities of the Company are first
registered pursuant to Section 12 of the Exchange Act, the Plan shall be
administered by the Board.
4. ELIGIBILITY. Any Employee selected by the Committee, except a member
of the Committee or a director whose principal employment is not with the
Company or an Affiliate, and any Consultant selected by the Committee shall be
eligible for Awards contemplated under the Plan except that Consultants shall
not be eligible for Incentive Stock Option grants.
5. STOCK SUBJECT TO PLAN AND GRANT LIMIT. The total number of shares of
Stock subject to issuance under the Plan may not exceed 350,000 subject to
adjustments as provided in the Plan. Shares to be delivered under the Plan may
consist, in whole or in part, of authorized but unissued shares or shares
purchased by the Company on the open market or by private purchase. The Grant
Limit shall equal the number of shares available for issuance under the Plan,
subject to adjustment as provided in Section 10 hereof.
-3-
Page 100 of 209
<PAGE>
Except as otherwise provided in the Plan, shares of Stock that are
subject to an Option or Stock Appreciation Right which, for any reason, expires
or is terminated unexercised as to such shares, and shares of Stock subject to a
Restricted Stock Award made under the Plan which are reacquired by the Company
pursuant to the Plan, shall again become available for issuance under the Plan.
6. STOCK OPTIONS. The Committee may grant stock Options alone or in
addition to any other Awards granted under the Plan. Options granted under the
Plan may be of two types: (i) Incentive Stock Options; and (ii) Non-Qualified
Stock Options. Subject to the limitations contained herein with respect to
Incentive Stock Options, the Committee may grant Incentive Stock Options,
Non-Qualified Stock Options, or both types of Options to a Participant and the
Committee shall have complete discretion in determining the number of Options
granted to each Participant, subject to the Grant Limit. To the extent that any
Option does not qualify as an Incentive Stock Option, it shall constitute a
separate Non-Qualified Stock Option. The provisions of Options need not be the
same with respect to each Participant granted an Option.
Each Option shall be set forth in a written agreement, shall be
subject to the following terms and conditions and shall contain such additional
terms and conditions not inconsistent with the terms of the Plan as the
Committee deems appropriate:
(a) The exercise price of shares subject to any Incentive Stock
Option shall not be less than the Fair Market Value of the Stock at the
time the Incentive Stock Option is granted; the exercise price of shares
subject to any Non-Qualified Stock Option shall be such price as the
Committee shall determine on the date on which such Non-Qualified Stock
Option is granted, provided that such exercise price may not be less than
85% of the Fair Market Value of the Stock at the time the Non-Qualified
Stock Option is granted;
(b) If the exercise price of a Non-Qualified Stock Option is less
than 100% of the Fair Market Value of the Stock at the time the
Non-Qualified Stock Option is granted, the Committee may designate such
award as Performance-Based Compensation in which event the Committee shall
establish performance measures for such award, the specific targets
applicable to such measures and the performance period for such award;
(c) The exercise price of any shares exercised under any Option must
be paid in full upon such exercise in cash or stock of the Company held
for at least six months, or in such other form as the Committee may
determine;
(d) The term of each Option shall be fixed by the Committee but no
Option may be exercised after the expiration of 10 years from the date
such Option is granted;
(e) In the event that an optionee shall cease to be employed or
engaged by the Company or an Affiliate, the vesting of such optionee's
Options shall immediately and automatically terminate on the Termination
Date and if the cessation of employment or engagement is:
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Page 101 of 209
<PAGE>
(1) due to any reason other than due to retirement,
Disability or death, such optionee's Options exercisable on the
Termination Date shall remain exercisable for 30 days after the
Termination Date;
(2) due to retirement, such optionee's Options exercisable on
the Termination Date shall remain exercisable for three months after
the Termination Date;
(3) due to a Disability, such optionee's Options exercisable
on the Termination Date shall remain exercisable for one year after
the Termination Date, or;
(4) due to death while employed or engaged by the Company or
its Affiliate, or during the three month period following retirement
or during the one year period following cessation of employment due
to a Disability, the optionee's Options exercisable at the time of
death shall remain exercisable for one year after the date of the
optionee's death;
provided, however, that notwithstanding anything herein to the contrary,
if any Option would otherwise expire on an earlier date than described
above, such Option shall remain exercisable only until the earlier
expiration date;
(f) Options shall become exercisable at such time or times after the
first six months of their terms and subject to such terms and conditions
(including, without limitation, installment exercise provisions) as shall
be determined by the Committee, and if the Committee provides that any
Option is exercisable only in installments, the Committee may waive such
installment exercise provisions at any time in whole or in part based on
any factors as the Committee may determine;
(g) Incentive Stock Options may be granted only to Employees;
(h) In the case of an Incentive Stock Option, the aggregate Fair
Market Value (determined as of the time the Option is granted) of the
Stock with respect to which Options are exercisable for the first time by
any Employee during any calendar year (under all such plans of the Company
and its Affiliates) shall not exceed $100,000;
(i) No Incentive Stock Option shall be granted to a Participant who,
at the time the Incentive Stock Option is granted, owns (within the
meaning of Section 422 of the Code) Stock possessing more than 10% of the
total combined voting power of all classes of stock of the Company or any
Affiliate unless the exercise price per share of Stock is at least 110% of
the Fair Market Value of the Stock at the time the Incentive Stock Option
is granted and the Incentive Stock Option by its terms is not exercisable
after the expiration of five years from the date of grant;
(j) No Option shall be sold, transferred, pledged, assigned or
otherwise alienated or hypothecated otherwise than by will or by the laws
of descent and distribution or pursuant to a qualified domestic relations
order as defined in the Code; and
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<PAGE>
(k) All Options shall be exercisable during the optionee's lifetime
only by the optionee or by a transferee permitted pursuant to Section 6(j)
above.
Anything in the Plan to the contrary notwithstanding, no term of
this Plan relating to Incentive Stock Options shall be interpreted, amended or
altered, nor shall any discretion or authority granted under the Plan be
exercised, so as to disqualify the Plan under Section 422 of the Code or,
without the consent of the Participants affected, to disqualify any Incentive
Stock Option under Section 422.
7. STOCK APPRECIATION RIGHTS. The Committee may grant Stock Appreciation
Rights alone or in conjunction with all or part of any Option granted under the
Plan, subject to the Grant Limit. In the case of a Non-Qualified Stock Option,
such Stock Appreciation Rights may be granted either at or after the time of the
grant of such Non-Qualified Stock Option. In the case of an Incentive Stock
Option, such Stock Appreciation Rights may be granted only at the time of the
grant of the Incentive Stock Option.
Each Stock Appreciation Right shall be set forth in a written
agreement, shall be subject to the following terms and conditions and shall
contain such additional terms and conditions not inconsistent with the terms of
the Plan as the Committee deems appropriate:
(a) Subject to subparagraphs (b) and (c) below, a Stock Appreciation
Right granted in connection with an Option shall become exercisable and
shall lapse according to the same vesting schedule and lapse rules that
are established for the Option; a Stock Appreciation Right granted
independently of an Option shall become exercisable and shall lapse in
accordance with the vesting schedule and lapse rules established by the
Committee;
(b) A Stock Appreciation Right and any related Option shall not be
exercisable during the first six months of their terms by any Participant;
(c) A Stock Appreciation Right shall be exercisable only when the
Fair Market Value of the Stock relating to the Stock Appreciation Right
exceeds the exercise price thereof;
(d) If the exercise price of a Stock Appreciation Right is less than
100% of the Fair Market Value of the Stock at the time the Stock
Appreciation Right is granted, such award may be designated by the
Committee to be Performance-Based Compensation in which event the
Committee shall establish performance measures for such award, the
specific targets applicable to such measures and the performance period
for such award;
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<PAGE>
(e) Upon the exercise of a Stock Appreciation Right with respect
to any number of shares of Stock, the holder shall be entitled to receive
payment of an amount (subject to subparagraph (f), below) determined by
multiplying (i) the difference between the Fair Market Value per share
of Stock on the date of exercise and the exercise price of the related
Option (or in the case of an Stock Appreciation Right granted
independent of an Option, the exercise price of the Stock Appreciation
Right as established by the Committee) by (ii) the number of shares in
respect of which the Stock Appreciation Right is exercised. At the
discretion of the Committee, payment for Stock Appreciation Rights may
be made in cash or stock of the Company held for at least six months,
or in a combination thereof. If payment is made in Stock, the value of
such Stock shall be the Fair Market Value determined as of the date of
exercise;
(f) At the time of grant, the Committee may establish, in its sole
discretion, a maximum amount per share which will be payable upon exercise
of a Stock Appreciation Right;
(g) Notwithstanding any other provisions of the Plan, the Committee
may impose such conditions on exercise of a Stock Appreciation Right
(including, without limitation, the right of the Committee to limit the
time of exercise to specified periods) as may be required to satisfy the
requirements of Rule 16b-3;
(h) The Committee may provide that upon exercise of a Stock
Appreciation Right granted in conjunction with an Option, the number of
shares of Stock for which the related Option shall be exercisable shall
reduce by the number of shares of Stock for which the Stock Appreciation
Right shall have been exercised and the number of shares of Stock for
which a Stock Appreciation Right shall be exercisable shall be reduced
upon any exercise of a related Option by the number of shares of Stock for
which such Option shall have been exercised;
(i) The term of a Stock Appreciation Right granted under the Plan
shall not exceed ten years;
(j) No Stock Appreciation Right granted under the Plan may be sold,
transferred, pledged, signed or otherwise alienated or hypothecated
otherwise than by will or by the laws of descent and distribution or
pursuant to a qualified domestic relations order as defined in the Code,
and all Stock Appreciation Rights shall be exercisable during the
Participant's lifetime only by the Participant or by a transferee
permitted pursuant to Section 7(j) above.
(k) The Committee may provide, at the time of grant, that such
Stock Appreciation Right can be exercised only in the event of a Change
of Control, subject to terms and conditions as the Committee may specify
at grant.
8. OTHER STOCK AWARDS. In addition to Options and Stock Appreciation
Rights, the Committee may grant Other Stock Awards payable in Stock upon such
terms and conditions as the Committee may determine, subject to the provisions
of the Plan. Other Stock Awards may include, but are not limited to, the
following types of Awards:
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<PAGE>
(a) Restricted Stock Awards. The Committee may grant Restricted
Stock Awards, each of which consists of a grant of shares of Stock subject
to restrictions, terms and conditions not inconsistent with the terms of
the Plan, including the Grant Limit, as the Committee deems appropriate,
which such restrictions, terms and conditions shall be set forth in
written agreements. The Committee may designate a Restricted Stock Award
as Performance-Based Compensation in which event the Committee shall
establish performance measures for such award, the specific targets
applicable to such measures and the performance period for such award.
Stock certificates evidencing a Restricted Stock Award shall be issued by
the Company in the name of the Participant, and such Participant shall be
entitled to all voting rights, rights to dividends and other rights of
holders of Stock, subject to the provisions of the Plan. The certificates
representing a Restricted Stock Award issued under the Plan and any
dividends paid thereon, shall remain in the physical custody of the
Company or an escrow holder or be placed in trust until the restrictions
imposed under the Plan have lapsed. The Committee may also require that a
legend or legends be placed on any certificates representing a Restricted
Stock Award to reference the various restrictions imposed on such Stock.
If a Restricted Stock Award is granted which requires the payment of an
exercise price by the Participant, then such Award must be accepted within
a period of 60 days (or such shorter periods as the Committee may specify
at grant) after the date of grant. The shares of Stock granted under a
Restricted Stock Award may not be sold, transferred, assigned, or
otherwise alienated or hypothecated until the lapse or release of
restrictions in accordance with the terms of the Restricted Stock Award
agreement and the Plan. Prior to the lapse or release of restrictions, all
shares of Stock are subject to forfeiture in accordance with conditions as
may be determined by the Committee. The provisions of a Restricted Stock
Award need not be the same with respect to each recipient.
(b) Stock Bonuses. The Committee may grant Stock Bonuses in such
amounts as it shall determine from time to time, subject to the Grant
Limit. A Stock Bonus shall be paid at such time and be subject to such
conditions as the Committee shall determine at the time of the grant of
such Stock Bonus. The Committee may designate a Stock Bonus as
Performance-Based Compensation in which event the Committee shall
establish performance measures for such award, the specific targets
applicable to such measures and the performance period for such award.
Certificates for shares of Stock granted as a Stock Bonus shall be issued
in the name of the Participant to whom such grant was made and delivered
to such Participant as soon as practicable after the date on which such
Stock Bonus is required to be paid.
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9. GENERAL PROVISIONS. The grant of any Award under the Plan may also be
subject to such other provisions (whether or not applicable to any Award granted
to any other Participant) as the Committee determines appropriate including,
without limitation, provisions to assist the Participant in financing the
purchase of Stock through the exercise of Options, provisions for restrictions
on resale or other disposition of shares acquired under any Award, provisions
giving the Company the right to repurchase Stock acquired under any Award in the
event the Participant elects to dispose of such Stock, provisions to comply with
compensation expense deductibility under the Code and provisions to comply with
federal and state securities laws and federal and state income tax withholding
requirements.
The obligation of the Company to make payment of Awards in Stock or
otherwise shall be subject to applicable laws, rules and regulations, and to
such approvals by governmental agencies as may be required. The Company shall be
under no obligation to register under the Act any of the shares of Stock
delivered under the Plan. All certificates for shares of Stock or other
securities delivered under the Plan shall be subject to such stock-transfer
orders and other restrictions as the Committee may deem advisable under the
rules, regulations and other requirements of the Securities and Exchange
Commission, any stock exchange upon which the Stock is then listed and any
applicable federal or state securities laws, and the Committee may cause a
legend or legends to be put on any such certificates to make appropriate
reference to such restrictions. The Committee may require each Participant
acquiring shares pursuant to an Award under the Plan to represent to and agree
with the Company in writing that the Participant is acquiring the Stock without
a view to distribution thereof.
The Company shall have the right to deduct from all Awards, to the
extent paid in cash, all federal state or local taxes as required by law to be
withheld with respect to such Awards and, in the case of Awards paid in Stock,
the Participant or other person receiving such Stock may be required to pay to
the Company prior to delivery of such Stock, the amount of any such tax which
the Company is required to withhold, if any, with respect to such Stock. At the
discretion of the Committee, the Company may accept shares of Stock, or withhold
shares of Stock otherwise issuable upon exercise of an Award, of equivalent Fair
Market Value in payment of such withholding tax obligations or provide
alternative methods of complying with such withholding tax obligations.
No Employee or other person shall have any claim or right to be
granted an Award under the Plan nor, having been selected for the grant of an
Award, to be selected for a grant of any other Award. Neither this Plan nor any
action taken hereunder shall be construed as giving any Participant any right to
be retained in the employ of the Company or its Affiliates.
Each Participant may file with the Committee a written designation
of one or more persons as the beneficiary who shall be entitled to receive the
amounts payable with respect to the benefits of an Award, if any, due under the
Plan upon such Participant's death. A Participant may, from time to time, revoke
or change the beneficiary designation without the consent of any prior
beneficiary by filing a new designation with the Committee. The last designation
received by the Committee shall be controlling; provided, however, that no
designation, or change or revocation therein shall be effective unless received
by the Committee prior to the Participant's death, and in no event shall it be
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<PAGE>
effective as of a date prior to such receipt. In the absence of any such
designation, benefits remaining unpaid at the Participant's death shall be paid
to the Participant's estate.
Except as otherwise specifically provided in the Plan, no
Participant shall be entitled to the privileges of stock ownership in respect of
Stock which is subject to an Option, Stock Appreciation Right or Other Stock
Award until such Stock has been issued to that Participant upon exercise of an
Option or Stock Appreciation Right according to its terms or upon sale or grant
of Stock in accordance with an Other Stock Award.
No Participant or other person shall have any right with respect to
this Plan, shares reserved under this Plan, or in any Award, contingent or
otherwise, until written evidence of the Award shall have been delivered to the
Participant and all the terms, conditions and provisions of the Plan applicable
to such Participant have been met.
10. CHANGES IN CAPITAL STRUCTURE. In the event of changes the
outstanding Stock or in the capital structure of the Company by reason of any
stock dividend, stock split, exchange of shares, recapitalization,
reorganization, subdivision or consolidation of shares, or other similar
transaction, the aggregate number of shares available under the Plan, the number
of shares subject to each outstanding Award and the price per share of any
Award, shall all be proportionately adjusted. In the event the Company shall be
a party to a transaction involving a sale of substantially all of its assets, a
merger or a consolidation, the Board shall make such adjustment as shall be
necessary or appropriate which may include assumption of Awards by the surviving
Company, for their continuation, for the acceleration of vesting and expiration,
or for settlement in cash. In the case of dissolution of the Company (other than
a dissolution following the sale of substantially all of the Company's assets),
the Awards outstanding hereunder shall terminate; provided, however, that each
Participant shall have 30 days' prior written notice of such event, during which
time the Participant shall have the right to exercise in full any partly or
wholly unexercised Award, including the portion not yet exercisable pursuant to
the vesting schedule set forth in any Award agreement. In the event of any
change in applicable laws or any change in circumstances which results in or
would result in any substantial dilution or enlargement of the rights granted to
or available for Participants in the Plan, or which otherwise warrants equitable
adjustment because it interferes with the intended operation of the Plan, the
Committee may make such adjustments or substitutions to Awards or agreements
evidencing Awards as the Committee determines appropriate in its sole
discretion. Any adjustment in Incentive Stock Options under this Section 10
shall be made only to the extent not constituting a "modification" within the
meaning of Section 424(h)(3) of the Code. The Company shall give each
Participant notice of an adjustment hereunder and, upon notice, such adjustments
shall be conclusive and binding for all purposes.
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<PAGE>
11. CHANGE OF CONTROL. Upon the occurrence of an event constituting a
Change of Control, the following transactions, in the sole discretion of the
Committee, may be triggered: (i) all Options and Stock Appreciation Rights shall
become immediately exercisable in full for the remainder of their terms; and
(ii) restrictions on alienation or hypothecation of Stock granted pursuant to a
Restricted Stock Award shall lapse and in such case the Participant shall be
issued Stock certificates free of any such restrictions.
12. AMENDMENTS AND TERMINATION. The Board may, from time to time, amend,
suspend or terminate the Plan in whole or in part and, if terminated, may
reinstate any or all of the provisions of the Plan, except that no amendment,
suspension or termination shall be made which would impair the rights of a
Participant under an Award theretofore granted, without such Participant's
consent. The Board shall obtain stockholder approval of any amendment to this
Plan which would be necessary to allow this Plan to continue to meet the
conditions of Rule 16b-3.
13. EFFECTIVE DATE AND TERM. The Plan shall become effective as of the
closing date of the Company's initial public offering. Unless sooner terminated
by the Committee, the Plan shall continue until the tenth anniversary of the
Plan's effective date, when it shall terminate and no Award shall be granted
under the Plan thereafter. The Plan shall continue in effect, however, insofar
as is necessary to complete all the Company's obligations under outstanding
Awards and to conclude the administration of the Plan.
14. GOVERNING LAW. The Plan and all agreements hereunder shall be
construed in accordance with and be governed by the laws of the State of
Delaware.
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<PAGE>
Exhibit 10.2
AMERICAN CHAMPION ENTERTAINMENT, INC.
1997 STOCK PLAN
STOCK OPTION GRANT AGREEMENT
Optionee: ----------------------------------------------
Number of Option Shares: -------------------------------
Exercise Price Per Share: $------------------
Date of Grant: -----------------------------
Expiration Date: ---------------------------
Type of Stock Option (check one):
---- Incentive ---- Non-Qualified
1. GRANT OF OPTION. American Champion Entertainment, Inc. (the
"Company"), a Delaware corporation, hereby grants to the optionee named above
("Optionee") an option ("Option") to purchase the total number of shares of
Common Stock of the Company set forth above (the "Shares") at the exercise price
per share set forth above (the "Exercise Price"), subject to all of the terms
and conditions of this Stock Option Grant Agreement ("Agreement") and the
Company's 1997 Stock Plan as it may be amended from time to time (the "Plan").
The Plan is incorporated herein by this reference. Terms defined in the Plan
have the same meaning in this Agreement. If designated as an Incentive Stock
Option above, this Option is intended to qualify as an "incentive stock option"
("ISO") within the meaning of Section 422 of the Internal Revenue Code of 1986,
as amended (the "Code").
2. EXERCISE PERIOD OF OPTION. Subject to the terms and conditions
of the Plan and this grant, this Option shall become exercisable as to portions
of the Shares as follows:
Percentage
From To Exercisable
---- -- -----------
Date of Grant Date Prior to 1st Anniversary 0%
of Date of Grant
1st Anniversary of Date Prior to 2nd Anniversary 50%
Date of Grant of Date of Grant
2nd Anniversary of Expiration Date 100%
Date of Grant
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3. METHOD OF EXERCISE. The Option shall be exercised by the Optionee
(a) by giving written notice to the Secretary of the Company stating the number
of shares of Common Stock with respect to which the Option is being exercised
and (b) tendering payment of the option price for each share of Common Stock to
be purchased. The exercise price of any shares of Common Stock exercised under
this Option must be paid in full upon such exercise. Payment shall be made in
cash, shares of Common Stock owned by the Optionee for at least six months or in
such other form of consideration as the Committee may permit. The Optionee's
exercise notice provided for in this Section above shall be accompanied by (i)
this Agreement (for appropriate endorsement by the Company to reflect such
exercise), (ii) an investment letter pursuant to Section 9 below, if then
required by the Committee, and (iii) such other agreements and documents as may
be reasonably requested by the Company.
4. TERMINATION. In the event that the Optionee shall cease to be
employed or engaged by the Company or an Affiliate, the vesting of such
Optionee's Options shall immediately and automatically terminate on the
Termination Date and if the cessation of employment or engagement is:
(a) due to any reason other than retirement, Disability or death,
such Optionee's Options exercisable on the Termination Date
shall remain exercisable for 30 days after the Termination
Date;
(b) due to retirement, such Optionee's Options exercisable on the
Termination Date shall remain exercisable for three months
after the Termination Date;
(c) due to a Disability, such Optionee's Options exercisable on
the Termination Date shall remain exercisable for one year
after the Termination Date; or
(d) due to death while employed or engaged by the Company or its
Affiliate, or during the three month period following
retirement or during the one year period following cessation
of employment due to a Disability, the Optionee's Options
exercisable at the time of death shall remain exercisable for
one year after the date of the Optionee's death.
5. NON-TRANSFERABILITY OF OPTION. This Option may not be sold,
transferred, pledged, assigned or otherwise alienated or hypothecated otherwise
than by will or by the laws of descent and distribution or pursuant to a
qualified domestic relations order as defined in the Code.
6. "AT WILL" STATUS UNCHANGED. If Optionee is an "at will"
employee at the time this Option is granted, that status shall remain unchanged
after the grant of this Option and the grant of this Option shall not create any
obligation on the part of the Company to continue Optionee's employment.
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7. NO RIGHTS AS STOCKHOLDER. Optionee shall have no rights as a
stockholder with respect to shares of the Company's Common Stock covered by
this Option until the date of the issuance of a stock certificate or stock
certificates.
8. MODIFICATION, TERMINATION AND ADJUSTMENT. The rights of the
Optionee are subject to modification, termination and adjustment in certain
events as provided in the Plan.
9. INVESTMENT COVENANT. The Optionee represents and agrees that as
a condition to exercise of this Option, the shares of Common Stock of the
Company that the Optionee acquires under this Option will be acquired by the
Optionee for investment and not with a view to distribution or resale, unless
counsel for the Company is then of the opinion that such a representation is not
required under the Securities Act of 1933, as amended, or any other applicable
law, regulation or rule of any governmental agency.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement.
AMERICAN CHAMPION ENTERTAINMENT, INC.
By ---------------------------------------
Its ----------------------------------
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ACCEPTANCE BY OPTIONEE:
The Optionee acknowledges receipt of a copy of the Plan, a copy of
which is annexed hereto, and represents that the Optionee is familiar with the
terms and provisions thereof. The Optionee hereby accepts this Option subject to
all the terms and provisions of the Plan and this Stock Option Grant Agreement.
The Optionee hereby agrees to accept as binding, conclusive, and final all
decisions and interpretations of the Board and where applicable, the Committee,
upon any questions arising under the Plan and this Stock Option Grant Agreement.
OPTIONEE:
--------------------------------------
--------------------------------------
(Printed Name)
Optionee Address:
--------------------------------------
--------------------------------------
--------------------------------------
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<PAGE>
Exhibit 10.3
AMERICAN CHAMPION ENTERTAINMENT, INC.
1997 NON-EMPLOYEE DIRECTORS STOCK OPTION PLAN
1. PURPOSE. American Champion Entertainment, Inc., a Delaware
corporation (the "Company"), hereby establishes its 1997 Non-Employee Directors
Stock Option Plan (the "Plan"). The purpose of the Plan is to provide
non-employee directors with an opportunity to participate in the growth of the
Company through stock ownership.
2. ELIGIBILITY. Only non-employee directors of the Company shall be
eligible to participate in the Plan.
3. STOCK AVAILABLE FOR OPTIONS UNDER THE PLAN. Subject to adjustment as
provided in Section 5 hereof, the aggregate number of shares of the common stock
of the Company ("Common Stock") as to which options may be granted under the
Plan shall not exceed 50,000 shares. Any of such shares which may remain unsold
and which are not subject to outstanding options at the termination of the Plan
shall cease to be reserved for the purpose of the Plan, but until termination of
the Plan, the Company shall at all times reserve a sufficient number of shares
to meet the requirements of the Plan.
In the event that any option granted under the Plan shall expire or
terminate for any reason, including termination by the voluntary surrender
thereof for cancellation, without having been exercised in whole or in part, the
unpurchased shares subject thereto shall again be available for options to be
granted under the Plan.
4. STOCK OPTION. The options granted under the Plan shall be evidenced
by a written option agreement which shall contain the following terms and
conditions:
a. OPTION PRICE. The option price of shares of Common Stock covered
by each option shall be 100% of the fair market value of the Common Stock
on the date such option is granted. The fair market value shall be equal
to (i) the closing sales price on such date of a share of Common Stock as
reported on the principal securities exchange on which such shares of
Common Stock are then listed or admitted to trading, or as reported on
Nasdaq, or (ii) if not so reported, the average of the closing bid and ask
prices on such date as reported on the OTC Bulletin Board, or (iii) if no
such quotations are available, as determined by the Board of Directors of
the Company in good faith in their absolute discretion.
b. NUMBER OF SHARES.
(i) Each non-employee director shall automatically receive an
option to purchase 5,000 shares of Common Stock on the date of his or her
first election as a director (the "Initial Grant").
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(ii) Each year, as of the date of the Annual Meeting of
Stockholders of the Company, each non-employee director who has been
elected or re-elected or who is continuing as a member of the Board of
Directors as of the adjournment of the Annual Meeting (other than any
non-employee director eligible for an initial grant pursuant to Section
4(b)(i) hereof by reason of first election at such meeting) shall
automatically receive an option to purchase 2,000 shares of Common Stock
(the "Annual Grant").
c. EXPIRATION AND TERMINATION OF OPTIONS.
(i) EXPIRATION. Each option and all rights and obligations
thereunder shall, subject to the provisions of Section 4(c)(ii) hereof,
expire ten (10) years from the date of grant.
(ii) TERMINATION. In the event that an optionee shall cease to
be a director of the Company for any reason, the vesting of his or her
options shall immediately and automatically terminate. In the event that
an optionee shall cease to be a director of the Company for any reason
other than a disability (as defined in Section 22(e)(3) of the Internal
Revenue Code of 1986, as amended from time to time, herein "Disability")
or death, the vested portion of the option at the time the optionee ceases
to be a director shall be exercisable for 30 days subsequent to the date
the optionee ceased to be a director unless such option would expire
pursuant to Section 4(c)(i) hereof at an earlier date, in which case such
option shall remain exercisable only until the earlier expiration date. In
the event that the optionee shall cease to be a director of the Company
due to Disability, the portion of his or her options vested at the date
the optionee ceased to be a director shall remain exercisable for one year
after such cessation unless such options would expire pursuant to Section
4(c)(i) at an earlier date, in which case such options shall remain
exercisable only until the earlier expiration date. In the event that the
optionee should die while a director of the Company or during the one year
period following resig nation as a director due to Disability, the portion
of his or her options vested at the date the optionee ceased to be a
director shall remain exercisable for one year after the date of the
optionee's death, unless such options would expire pursuant to
Section 4(c)(i) at an earlier date, in which case the options shall
remain exercisable only until the earlier expiration date.
d. NON-TRANSFERABILITY OF THE OPTIONS. An option granted under the
Plan may not be transferred otherwise than by will or the laws of descent
and distribution or as permitted by Rule 16b-3 of the Securities Exchange
Act of 1934, as amended, or successor rule or regulation ("Rule 16b-3").
An option granted under the Plan may, during the lifetime of the optionee
to whom granted, be exercised only by such optionee, his or her guardian
or legal representative, or by a transferee permitted by Rule 16b-3.
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e. EXERCISE OF OPTIONS.
(i) Subject to the provisions of the Plan, an Initial Grant
pursuant to Section 4(b)(i) shall be exercisable as follows:
Percentage
From To Exercisable
---- -- -----------
Date of Grant Day prior to 1st 0%
Anniversary
1st Anniversary Day prior to 2nd 50%
Anniversary
2nd Anniversary Expiration Date 100%
(ii) Subject to the provisions of the Plan, an Annual Grant
pursuant to Section 4(b)(ii) shall be exercisable in full beginning on the first
anniversary date of the date of grant.
(iii) Options may be exercised by giving written notice to the
Secretary of the Company stating the number of shares of Common Stock with
respect to which the option is being exercised and tendering payment therefor.
Payment for shares of Common Stock shall be made in full at the time that an
option or any part thereof is exercised. Payment may be made (i) in cash, or
(ii) by delivery of shares of stock of the Company held by optionee for at least
six months, which shares shall be valued, for purposes of payment, at their fair
market value on the date of payment, determined in accordance with procedures
established in Subsection 4(a).
5. CAPITAL ADJUSTMENTS AND CHANGES IN THE COMPANY. In the event of any
stock dividend, stock split, exchange of shares, recapitalization, subdivision
or consolidation of shares, or other similar transaction, the aggregate number
of shares available under the Plan, the number of shares subject to each
outstanding option and the option price per share, shall all be proportionately
adjusted.
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In the event the Company shall be a party to a trans action
involving a sale of substantially all its assets, a merger or a consolidation,
all then outstanding options under the Plan may be cancelled by the Company as
of the effective date of any such transaction by giving notice to each optionee
of its intention to do so and by permitting the exercise, during the 30-day
period preceding the effective date of such transaction, of all partly or wholly
unexercised options in full, including the portion not yet exercisable pursuant
to the vesting schedule set forth in Subsection 4(e) above.
In the case of dissolution of the Company (other than a dissolution
following a sale of substantially all of the Company's assets), every option
outstanding hereunder shall terminate; provided, however, that each optionee
shall have 30 days' prior written notice of such event, during which time the
optionee shall have a right to exercise any partly or wholly unexercised option
in full, including the portion not yet exer cisable pursuant to the vesting
schedule set forth in Subsection 4(e) above.
6. NO OBLIGATION. The granting of an option shall impose no obligation
on the Company to continue optionee's service as a director for any period.
7. LEGAL AND OTHER REQUIREMENTS. The obligation of the Company to issue
or transfer shares of Common Stock under options granted under the Plan shall be
subject to all applicable laws, regulations, rules and approvals including, but
not by way of limitation, the effectiveness of a registration statement under
the Securities Act of 1933, as amended, the qualification of the options and the
shares of Common Stock reserved for issuance upon exercise of options under
applicable state securities laws, the satisfaction of applicable listing
requirements of the principal securities exchange on which the Company's Common
Stock is listed or admitted to trading, if deemed necessary or appropriate by
the Company, and the payment by the optionee to the Company, upon its demand, of
such amount or in lieu thereof, of such number of shares of Common Stock of the
Company as may be requested by the Company for the purpose of satisfying any
liability to withhold federal, state or local income or other taxes incurred by
reason of the exercise of such options or the delivery of shares of Common Stock
incident thereto.
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<PAGE>
8. TERMINATION AND AMENDMENT OF PLAN. The Board of Directors, without
further action on the part of the stockholders, may suspend or terminate the
Plan except that no such action may materially and adversely affect any
outstanding option without the consent of the optionee. Only if and to the
extent stockholder approval is necessary to allow this Plan to meet the
conditions of Rule 16b-3, the Board of Directors shall obtain stockholder
approval of any amendments to this Plan which would: (a) materially increase the
benefits accruing to participants under the Plan, (b) materially increase the
number of securities which may be issued under the Plan, or (c) materially
modify the requirements as to eligibility for participation in the Plan. This
Plan may not be amended more than once every six months, other than to comport
with changes in the Internal Revenue Code, the Employee Retirement Income
Security Act or the rules thereunder.
9. EFFECTIVE DATE AND DURATION OF PLAN. This Plan shall become effective
as of the closing date of the Company's initial public offering ("Effective
Date"). Unless sooner terminated by the Committee, the Plan shall continue until
the tenth anniversary of the Effective Date, when it shall terminate and no
options shall be granted under the Plan thereafter. The Plan shall continue in
effect, however, insofar as is necessary to complete all the Company's
obligations under outstanding options and to conclude the administration of the
Plan.
10. GOVERNING LAW. The Plan and all agreements hereunder shall be
construed in accordance with and be governed by the laws of the State of
Delaware.
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<PAGE>
Exhibit 10.4
AMERICAN CHAMPION ENTERTAINMENT, INC.
1997 NON-EMPLOYEE DIRECTORS STOCK OPTION PLAN
NON-EMPLOYEE DIRECTORS STOCK OPTION AGREEMENT
---------------------------------------------
This Non-Employee Director Stock Option Agreement (the "Agreement")
is made and entered into as of _____________ by and between, American Champion
Entertainment, Inc. (the "Company") and ____________ (the "Optionee").
RECITALS
The Company has adopted its 1997 Non-Employee Directors Stock Option
Plan (the "Plan") and, pursuant to such, desires to grant Optionee an option to
purchase _______ shares of the common stock, $.0001 par value ("Common
Stock"), of the Company upon the terms and conditions hereinafter set forth.
Capitalized terms used and not defined herein shall have the meanings set forth
in the Plan.
AGREEMENT
In consideration of the promises and of the undertakings of the
parties hereto hereinafter set forth, it is hereby agreed:
1. GRANT OF OPTION.
The Company hereby grants Optionee the option to purchase, upon and
subject to the terms and conditions of the Plan, all or part of __________
shares of Common Stock of the Company at the price equal to $____ per share.
2. TERM OF OPTION.
This option, subject to the provisions of Section 3 hereof, shall
expire on the tenth anniversary of the date on which this option is granted
("Expiration Date").
3. TERMINATION.
In the event that Optionee shall cease to be a director of the
Company for any reason, the vesting of this option shall immediately and
automatically terminate. In the event that Optionee shall cease to be a director
of the Company for any reason other than a disability (as defined in Internal
Revenue Code ss. 22(e)(3), herein "Disability") or death, the vested portion of
the option at the time Optionee ceases to be a director shall be exercisable for
30 days subsequent to the date Optionee ceased to be a director unless such
option would expire pursuant to Section 2 hereof at an earlier date in which
case such option shall remain exercisable only until the earlier
expiration date. In the event that Optionee shall cease to be a director of the
Company due to Disability, the portion of this option vested at the date
Optionee ceased to be a director shall remain exercisable for one year after
such cessation unless such option would expire pursuant to Section 2 hereof at
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<PAGE>
an earlier date in which case such option shall remain exercisable only until
the earlier expiration date. In the event that Optionee should die while a
director of the Company or during the one year period following resignation as a
director due to Disability, the portion of this option vested at the date
Optionee ceased to be a director shall remain exercisable for one year after the
date of Optionee's death, unless this option would expire pursuant to Section 2
hereof at an earlier date, in which case this option shall remain exercisable
only until the earlier expiration date.
4. NON-TRANSFERABILITY OF OPTION.
This option may not be transferred otherwise than by will or the
laws of descent and distribution or as permitted by Rule 16b-3 of the Securities
Exchange Act of 1934, as amended, or successor rule or regulation ("Rule
16b-3"). During the lifetime of Optionee, this option may be exercised only by
Optionee, or Optionee's guardian or legal representative or by a transferee
permitted by Rule 16b-3.
5. EXERCISE OF OPTION.
(i) Subject to the provisions of the Plan, an Initial Grant
pursuant to Section 4(b)(i) of the Plan shall be exercisable as follows:
Percentage
From To Exercisable
---- -- -----------
Date of Grant Day prior to 0%
1st Anniversary of
Date of Grant
1st Anniversary Day prior to 50%
of Date of Grant 2nd Anniversary of
Date of Grant
2nd Anniversary Expiration Date 100%
of Date of Grant
(ii) Subject to the provisions of the Plan, an Annual Grant
pursuant to Section 4(b)(ii) of the Plan shall be exercisable in full beginning
on the first anniversary of the date of grant.
(iii) This option may be exercised by giving written notice to
the Secretary of the Company stating the number of shares of Common Stock with
respect to which the option is being exercised and tendering payment therefor.
Payment for shares of Common Stock shall be made in full at the time that the
option, or any part thereof, is exercised. Payment may be made (a) in cash, or
(b) by delivery of shares of stock of the Company held by Optionee for at least
six months, which shares shall be valued, for purposes of payment, at their fair
market value on the date of payment, determined in accordance with procedures
established in the Plan.
-2-
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<PAGE>
6. NO RIGHTS AS SHAREHOLDER.
Optionee shall have no rights as a shareholder with respect to
shares of the Company's Common Stock covered by this option until the date of
the issuance of a stock certificate or stock certificates.
7. NO OBLIGATION.
Optionee agrees that the granting of this option shall impose no
obligation on the Company to continue Optionee's service as a director for any
period.
8. MODIFICATION, TERMINATION AND ADJUSTMENT.
The rights of Optionee are subject to modification, termination and
adjustment in certain events as provided in the Plan.
9. INCORPORATION BY REFERENCE.
This Agreement is subject to the terms and provisions of the Plan
which is incorporated herein by this reference.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement.
"COMPANY"
AMERICAN CHAMPION ENTERTAINMENT, INC.
By ----------------------------------
Its ----------------------------------
"OPTIONEE":
--------------------------------------
--------------------------------------
[Printed Name]
Optionee Address:
--------------------------------------
--------------------------------------
--------------------------------------
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<PAGE>
Exhibit 10.5
BUSINESS LOAN AGREEMENT
-----------------------
BORROWER: AMERICA'S BEST KARATE, INC. LENDER:
26203 Production Ave, Suite 5
Hayward, CA 94545
Fed Tax # 94-3140933
Principal Loan Date Interest Rate Interest Payment
Amount (simple, yr) Payment Due Date
Principal Payment $---------- 07-01-1997
THIS BUSINESS LOAN AGREEMENT between AMERICA'S BEST KARATE, INC.
("Borrower") and ---------------- ("Lender") is made and executed on the
following terms and conditions.
TERM. This Agreement shall be effective as of ----------------, and
shall continue for a time period defined per above schedule, or until all
indebtedness of Borrower to Lender has been paid back in full from proceeds of
an Initial Public Offering (IPO) of Borrower's securities, whichever occurs
first. In the event that the indebtedness is paid from proceeds of the IPO,
payment of both applicable interest and principal shall be made within three (3)
business days from the time Borrower received good funds from its underwriter of
the IPO.
USE OF LOAN PROCEEDS. It is represented to Lender that Borrower
intends to engage into an Underwriting Agreement with an underwriter of
Borrower's choice to execute an IPO that is targeted to become effective in the
early months of 1997. Loan proceeds will be used in the interim period prior to
the effective date of the IPO for the purposes of legal, accounting,
underwriting expenses, production of a 30-minute pilot show for television, and
general working capital.
ADDITIONAL COMPENSATION. For providing the loan to Borrower, Lender
is granted common stock from Borrower as follows. These common stock is from the
original authorized base of 100,000 shares, prior to any forward split, and has
a value equal to the price of stock sold most recently in a private placement of
Borrower's stock.
Amount of shares Issue Date Value ($ per share)
----
---------------- ---------- -----------------------
---------- --------- $-------------
ALTERNATIVE PAYBACK METHOD. In the event the IPO is unsuccessful for
whatever cause and Borrower is incapable to completely pay back the indebtedness
to Lender by 07-01-1997, then interest shall continue to accrue at the same
above rate and payments of applicable interest and principal shall be made in an
amortized schedule over the next thirty-six (36) months.
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<PAGE>
REPRESENTATIONS AND WARRANTIES. Borrower represents and warrants to
Lender as of the date of this Agreement:
ORGANIZATION. Borrower is a corporation which is duly organized,
validly existing, and in good standing under the laws of the
State of California. Borrower has the full power and authority to
own its properties and to transact the businesses in which it is
presently engaged or presently proposes to engage.
AUTHORIZATION. The execution, delivery, and performance of this
Agreement and all related documents by Borrower, to the extent to be
executed and performed by Borrower, have been duly authorized by all
necessary action by Borrower; and do not conflict with any provision
of its articles of incorporation or organization or bylaws.
LEGAL EFFECT. This Agreement constitutes, and any instrument or
agreement require hereunder to be given by Borrower when delivered
will constitute, legal, valid and binding obligations of Borrower
enforceable against Borrower in accordance with their respective
terms.
SURVIVAL OF REPRESENTATION AND WARRANTIES. Borrower understands and
agrees that Lender is relying upon the above representations and
warranties in making the above referenced Loan to Borrower. Borrower
further agrees that the foregoing representations and warranties
shall be continuing in nature and shall remain in full force and
effect until such time as Borrower's Loan shall be paid in full, or
until this Agreement shall be terminated in the manner provided
above, whichever is the last to occur.
INSPECTION. Lender or agents of Lender may at any reasonable time,
inspect Borrower's properties and examine or audit Borrower's books,
accounts, and records.
DEFAULT. Defined as failure of Borrower to make any payment to
Lender when due on the Loan. In the event of Default, Lender may
immediately request the entire remainder of Loan to become due and
payable. Lender may submit to the jurisdiction of the courts of
Alameda County, the State of California. Borrower agrees to pay upon
demand all of Lender's out-of-pocket expenses, including attorney's
fees, incurred in connection with Borrower's Default on this
Agreement. Borrower also will pay any court costs, in addition to
all other sums provided by law.
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<PAGE>
BORROWER AND LENDER acknowledge having read all the provisions of
this Business Loan Agreement, and agree to its items. This agreement is dated
as of --------------------.
BORROWER:
AMERICA'S BEST KARATE, INC. LENDER:
By: ------------------------------------ By: ------------------------
Anthony K. Chan
Chief Executive Officer & Secretary
By: ------------------------------------
George Chung
President
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<PAGE>
Exhibit 10.6
BUSINESS LOAN AGREEMENT
<TABLE>
<CAPTION>
- - ---------------------------------------------------------------------------------------------------------
Principal Loan Date Maturity Loan No. Call Collateral Account Other Initials
<S> <C> <C> <C> <C> <C> <C> <C> <C>
$80,000.00 05-17-1993 05-17-1998 7500206 400 PKC
- - ---------------------------------------------------------------------------------------------------------
References in the shaded area are for Lender's use only and do not limit the
applicability of this document to any particular loan or item.
- - ---------------------------------------------------------------------------------------------------------
</TABLE>
Borrower: AMERICA'S BEST KARATE, INC. Lender: BANK OF CANTON OF CALIFORNIA
5568 NEWPARK MALL ROAD 900 WEBSTER STREET
NEWARK, CA 94560 OAKLAND, CA 94607
================================================================================
THIS BUSINESS LOAN AGREEMENT between AMERICA'S BEST KARATE, INC. ("Borrower")
and BANK OF CANTON OF CALIFORNIA ("Lender") is made and executed on the
following terms and conditions. Borrower has received prior commercial loans
from Lender or has applied to Lender for a commercial loan or loans and other
financial accommodations, including those which may be described on any exhibit
or schedule attached to this Agreement. Any such loans and financial
accommodations, together with all future loans and financial accommodations from
Lender to Borrower, are referred to in this Agreement individually as the "Loan"
and collectively as the "Loans." Borrower understand and agrees that: (a) in
granting, renewing, or extending any Loan, Lender is relying upon Borrower's
representations, warranties, and agreements, as set forth in this Agreement; (b)
the granting, renewing, or extending of any Loan by Lender at all times shall be
subject to Lender's sole judgment and discretion; and (c) all such Loans shall
be and shall remain subject to the following terms and conditions of this
Agreement.
TERM. This Agreement shall be effective as of May 17,1993, and shall continue
thereafter until all Indebtedness of Borrower to Lender has been performed In
full and the parties terminate this Agreement in writing.
DEFINITIONS. The following words shall have the following meanings when used In
this Agreement. Terms not otherwise defined in this Agreement shall have the
meanings attributed to such terms in the Uniform Commercial Code. All references
to dollar amounts shall mean amounts in lawful money of the United States of
America.
AGREEMENT. The word "Agreement" means this Business Loan Agreement, as
this Business Loan Agreement may be amended or modified from time to time,
together with all exhibits and schedules attached to this Business Loan
Agreement from time to time.
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<PAGE>
05-17-1993 BUSINESS LOAN AGREEMENT Page 2
Loan No. 7500206 (Continued)
BORROWER. The word "Borrower" means AMERICA'S BEST KARATE, INC.
The word "Borrower" also includes, as applicable all subsidiaries and
affiliates of Borrower as provided below in the paragraph titled
"Subsidiaries and Affiliates."
CERCLA. The word "CERCLA" means the Comprehensive Environmental
Response, Compensation, and Liability Act of 1980, as amended.
COLLATERAL. The word "Collateral" means and includes without limitation
all property and assets granted as collateral security for a Loan, whether
real or personal property, whether granted directly or indirectly, whether
granted now or in the future, and whether granted in the form of a
security interest, mortgage, deed of trust, assignment, pledge, chattel
mortgage, chattel trust, factor's lien, equipment trust, conditional sale,
trust receipt, lien, charge, lien or title retention contract, lease or
consignment intended as a security device, or any other security or lien
interest whatsoever, whether created by law, contract, or otherwise.
ERISA. The word "ERISA" means the Employee Retirement Income Security
Act of 1974. as amended.
EVENT OF DEFAULT. The words "Event of Default" mean and include any of
the Events of Default set forth below in the section titled "EVENTS OF
DEFAULT."
GRANTOR. The word "Grantor" means and Includes each and all of the persons
or entities granting a Security Interest in any Collateral for the
Indebtedness, including without limitation all Borrowers granting such a
Security Interest.
GUARANTOR. The word "Guarantor" means and includes without limitation,
each and all of the guarantors, sureties, and accommodation parties in
connection with any Indebtedness.
INDEBTEDNESS. The word "Indebtedness" means and includes without
limitation all Loans, together with all other obligations, debts and
liabilities of Borrower to Lender, or any one or more of them, as well as
all claims by Lender against Borrower, or any one or more of them; whether
now or hereafter existing, voluntary or involuntary, due or not due,
absolute or contingent, liquidated or unliquidated; whether Borrower may
be liable individually or jointly with others; whether Borrower may be
obligated as a guarantor, surety, or otherwise; whether recovery upon such
Indebtedness may be, or hereafter may become barred by any statute of
limitations; and whether such Indebtedness may be or hereafter may become
otherwise unenforceable.
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<PAGE>
05-17-1993 BUSINESS LOAN AGREEMENT Page 3
Loan No. 7500206 (Continued)
LENDER. The word "Lender" means BANK OF CANTON OF CALIFORNIA, its
successors and assigns.
LOAN. The word "Loan" or "Loans" means and includes any and all commercial
loans and financial accommodations from Lender to Borrower, whether now or
hereafter existing, and however evidenced, including without limitation
those loans and financial accommodations described herein or described on
any exhibit or schedule attached to this Agreement from time to time.
NOTE. The word "Note" means Borrower's promissory note or notes, if any,
evidencing Borrower's Loan obligations in favor of Lender, as well as any
substitute, replacement or refinancing note or notes therefor.
RELATED DOCUMENTS. The words "Related Documents" mean and include without
limitation all promissory notes, credit agreements, loan agreements,
guaranties, security agreements, mortgages, deeds of trust, and all other
Instruments, agreements and documents, whether now or hereafter existing,
executed in connection with the Indebtedness.
SECURITY AGREEMENT. The words "Security Agreement" mean and include
without limitation any agreements, promises, covenants, arrangements,
understandings or other agreements, whether created by law, contract or
otherwise, evidencing, governing, representing, or creating a Security
Interest.
SECURITY INTEREST. The words "Security Interest" mean and include without
Imitation any type of collateral security, whether in the form of a lien,
charge, mortgage, deed of trust, assignment, pledge,. chattel mortgage,
chattel trust, factor's lien, equipment trust, conditional sale, trust
receipt, lien or title retention contract, lease or consignment intended
as a security device, or any other security or lien interest whatsoever,
whether created by law, contract or otherwise.
SARA. The word "SARA" means the Superfund Amendments and Reauthorization
Act of 1986.
REPRESENTATIONS AND WARRANTIES. Borrower represents and warrants to Lender as of
the date of this Agreement and as of the date of each disbursement of Loan
proceeds:
ORGANIZATION. Borrower is a corporation which is duly organized, validly
existing, and in good standing under the laws of the State of California.
Borrower has the full power and authority to own its properties and to
transact the businesses in which it is presently engaged or presently
proposes to engage. Borrower also is duly qualified as a foreign
corporation and is in good standing in all states in which the failure to
so qualify would have a material adverse effect on its businesses or
financial condition.
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<PAGE>
05-17-1993 BUSINESS LOAN AGREEMENT Page 4
Loan No. 7500206 (Continued)
AUTHORIZATION. The execution, delivery, and performance of this Agreement
and all Related Documents by Borrower, to the extent to be executed,
delivered or performed by Borrower, have been duty authorized by all
necessary action by Borrower; do not require the consent or approval of
any other person, regulatory authority or governmental body; and do not
conflict with, result in a violation of, or constitute a default under (a)
any provision of its articles of incorporation or organization, or bylaws,
or any agreement or other Instrument binding upon Borrower or (b) any law,
governmental regulation, court decree, or order applicable to Borrower.
FINANCIAL INFORMATION. Each financial statement of Borrower supplied to
Lender truly and completely disclosed Borrower's financial condition as of
the date of the statement, and there has been no material adverse change
in Borrower's financial condition subsequent to the date of the most
recent financial statement supplied to Lender. Borrower has nonmaterial
contingent obligations except as disclosed in such financial statements.
LEGAL EFFECT. This Agreement constitutes, and any instrument or agreement
required hereunder to be given by Borrower when delivered will constitute,
legal, valid and binding obligations of Borrower enforceable against
Borrower in accordance with their respective terms.
PROPERTIES. Except as contemplated by this Agreement or as previously
disclosed In Borrower's financial statements or in writing to Lender and
as accepted by Lender, and except for property tax liens for taxes not
presently due and payable, Borrower owns and has good title to all of
Borrower's properties free and clear of all Security Interests, and has
not executed any security documents or financing statements relating to
such properties. All of Borrower's properties are titled in Borrower's
legal name, and Borrower has not used, or filed a financing statement
under any other name for at least the last five (5) years.
"HAZARDOUS SUBSTANCES." The terms "hazardous waste," "hazardous
substance," "disposal," "release," and "threatened release," as used In
this Agreement, shall have the same meanings as set forth in the
Comprehensive Environmental Response, Compensation, and Liability Act of
1980, as amended, 42 U.S.C. Section 9601, et seq. (CERCLA), the Superfund
Amendments and Reauthorization Act of 1986, Pub. L. No. 99-499 ("SARA"),
the Hazardous Materials Transportation Act. 49 U.S.C. Section 1801, et
seq., the Resource Conservation and Recovery Act, 49 U.S.C. Section 6901,
et seq., Chapters 6.5 through 7.7 of Division 20 of the California Health
and Safety Code, Section 25100, et seq., or other applicable state or
Federal laws, rules, or regulations adopted pursuant to any of the
foregoing. Except as disclosed to and acknowledged by Lender in writing.
Borrower represents and warrants that: (a) During the period of Borrower's
ownership of Borrower's properties, there has been no use, generation,
manufacture, storage, treatment, disposal, release or threatened release
-4-
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<PAGE>
05-17-1993 BUSINESS LOAN AGREEMENT Page 5
Loan No. 7500206 (Continued)
of any hazardous waste or substance by any person on, under, or about any
of the properties, (b) Borrower has no knowledge of, or reason to believe
that there has been (i) any use, generation, manufacture, storage,
treatment, disposal, release, or threatened release of any hazardous waste
or substance by any prior owners or occupants of any of the properties, or
(ii) any actual or threatened litigation or claims of any kind by any
person relating to such matters, (c) Neither Borrower nor any tenant,
contractor, agent or other authorized user of any of the properties
shall use, generate, manufacture, store, treat, dispose of, or
release any hazardous waste or substance on, under, or about any of the
properties; and any such activity shall be conducted in compliance with
all applicable federal, state, and local laws, regulations, and
ordinances, including without limitation those laws, regulations and
ordinances described above. Borrower authorizes Lender and its agents to
enter upon the properties to make such inspections and tests as Lender may
deem appropriate to determine compliance of the properties with this
section of the Agreement. Any inspections or tests made by Lender shall be
for Lender's purposes only and shall not be construed to create any
responsibility or liability on the part of Lender to Borrower or to any
other person. The representations and warranties contained herein are
based on Borrower's due diligence in investigating the properties for
hazardous waste. Borrower hereby (a) releases and waives any future claims
against Lender for indemnity or contribution in the event Borrower becomes
liable for cleanup or other costs under any such laws, and (b) agrees to
indemnify and hold harmless Lender against any and all claims, losses,
liabilities, damages, penalties, and expenses which Lender may directly or
indirectly sustain or suffer resulting from a breach of this section of
the Agreement or as a consequence of any use, generation, manufacture,
storage, disposal, release or threatened release occurring prior to
Borrower's ownership or interest in the properties, whether or not the
same was or should have been known to Borrower. The provisions of this
section of this Agreement, including the obligation to indemnify, shall
survive the payment of the Indebtedness and the termination or expiration
of this Agreement and shall not be affected by Lender's acquisition of any
Interest in any of the properties, whether by foreclosure or otherwise.
LITIGATION AND CLAIMS. No litigation, claim, investigation, administrative
proceeding or similar action (including those for unpaid taxes) against
Borrower is pending or threatened, and no other event has occurred which
may materially adversely effect Borrower's financial condition or
properties, other than litigation, claims, or other events, if any, that
have been disclosed to and acknowledged by Lender in writing.
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<PAGE>
05-17-1993 BUSINESS LOAN AGREEMENT Page 6
Loan No. 7500206 (Continued)
TAXES. To the best of Borrower's knowledge, all tax returns and reports of
Borrower that are or were required to be filed, have been filed, and all
taxes, assessments and other governmental charges have been paid in full,
except those presently being or to be contested by Borrower in good faith
or in the ordinary course of business and for which adequate reserves have
been provided.
LIEN PRIORITY. Unless otherwise previously disclosed to Lender in writing,
Borrower has not entered into or granted any Security Agreements, or
permitted the filing or attachment of any Security Interests on or
affecting any of the Collateral directly or indirectly securing repayment
of Borrower's Loan and Note, that would be prior or that may in any way
be superior to Lender's Security Interests and rights in and to such
Collateral.
BINDING EFFECT. This Agreement, the Note and all Security Agreements
directly or indirectly securing repayment of Borrower's Loan and Note are
binding upon Borrower as seem as upon Borrower's successors,
representatives and assigns, and are legally enforceable in accordance
with their respective terms.
COMMERCIAL PURPOSES. Borrower intends to use the Loan proceeds solely
for business or commercial related purposes.
EMPLOYEE BENEFIT PLANS. Each employee benefit plan as to which Borrower
may have any liability, complies in all material respects with an
applicable requirements of law and regulations, and (i) no Reportable
Event nor Prohibited Transaction (as defined In ERISA) has occurred with
respect to any such plan, (ii) Borrower has not withdrawn from any such
plan or initiated steps to do so, and (iii) no steps have been taken to
terminate any such plan.
LOCATION OF BORROWER'S OFFICES AND RECORDS. The chief place of business of
Borrower and the office or offices where Borrower keeps its records
concerning the Collateral is located at 5568 NEWPARK MALL ROAD, NEWARK, CA
94560.
INFORMATION. All information heretofore or contemporaneously herewith
furnished by Borrower to Lender for the purposes of or in connection with
this Agreement or any transaction contemplated hereby is, and all
information hereafter furnished by or on behalf of Borrower to Lender will
be, true and accurate in every material respect on the date as of which
such information is dated or certified; and none of such information is or
will be incomplete by omitting to state any material fact necessary to
make such information not misleading.
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<PAGE>
05-17-1993 BUSINESS LOAN AGREEMENT Page 7
Loan No. 7500206 (Continued)
SURVIVAL OF REPRESENTATION AND WARRANTIES. Borrower understands and agrees
that Lender is relying upon the above representations and warranties in
making the above referenced Loan to Borrower. Borrower further agrees that
the foregoing representations and warranties shall be continuing in nature
and shall remain in full force and effect until such time as Borrower's
Loan and Note shall be paid in full, or until this Agreement shall be
terminated In the manner provided above, whichever is the last to occur.
AFFIRMATIVE COVENANTS. Borrower covenants and agrees with Lender that, while
this Agreement is in effect, Borrower will:
LITIGATION. Promptly inform Lender in writing of (a) all material adverse
changes in Borrower's financial condition, and (b) all litigation and
claims and all threatened litigation and claims affecting Borrower or any
Guarantor which could materially affect the financial condition of
Borrower or the financial condition of any Guarantor.
FINANCIAL RECORDS. Maintain its books and records in accordance with
generally accepted accounting principles, applied on a consistent basis,
and permit Lender to examine and audit Borrower's books and records at all
reasonable times.
ADDITIONAL INFORMATION. Furnish such additional information and
statements, lists of assets and liabilities, agings of receivables and
payables, inventory schedules, budgets, forecasts, tax returns, and other
reports with respect to Borrower's financial condition and business
operations as Lender may request from time to time.
INSURANCE. Maintain fire and other risk insurance, public liability
insurance, and such other insurance as Lender may require with respect to
Borrower's properties and operations, in form, amounts, coverages and with
insurance companies reasonably acceptable to Lender. Borrower, upon
request of Lender, will deliver to Lender from time to time the policies
or certificates of insurance in form satisfactory to Lender, including
stipulations that coverages will not be cancelled or diminished without at
least ten (10) days' prior written notice to Lender. In connection with
all policies covering assets in which Lender holds or is offered a
security Interest for the Loans, Borrower will provide Lender with such
loss payable or other endorsements as Lender may require.
-7-
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<PAGE>
05-17-1993 BUSINESS LOAN AGREEMENT Page 8
Loan No. 7500206 (Continued)
INSURANCE REPORTS. Furnish to Lender, upon request of Lender, reports on
each existing insurance policy showing such information as Lender may
reasonably request, including without limitation, the following: (a) the
name of the insurer (b) the risks insured; (c) the amount of the policy;
(d) the properties insured; (e) the then current property values on the
basis of which insurance has been obtained, and the manner of determining
those values; and (f) the expiration date of the policy. In addition, upon
request of Lender (however, not more often than annually), Borrower will
have an independent appraiser satisfactory to Lender determine, as
applicable, the actual cash value or replacement cost of any Collateral.
GUARANTIES. Prior to disbursement of any Loan proceeds, furnish executed
guaranties of the Loans in favor of Lender, on Lander's forms, and in the
amounts and by fill guarantors named below:
Guarantors Amounts
---------- -------
ANTHONY K. CHAN and JAMIE Z. CHAN $80,000.00
GEORGE CHUNG $80,000.00
ANTHONY K. CHAN $80,000.00
GEORGE CHUNG $80,000.00
OTHER AGREEMENTS. Comply with all terms and conditions of all other
agreements, whether now or hereafter existing, between Borrower and any
other party and notify Lender immediately in writing of any default in
connection with any other such agreements.
LOAN PROCEEDS. Use all Loan proceeds solely for Borrower's business
operations, unless specifically consented to the contrary by Lender
in writing.
TAXES, CHARGES AND LIENS. Pay and discharge when due all of its
indebtedness and obligations, including without limitation, all
assessments, taxes, governmental charges, levies and liens, of every kind
and nature, imposed upon Borrower or its properties, income, or profits,
prior to the date on which penalties would attach, and all lawful claims
that, if unpaid, might become a lien or charge upon any of Borrower's
properties, income, or profits. Provided however, Borrower will not be
required to pay and discharge any such assessment, tax, charge, levy, lien
or claim so long as (a) the legality of the same shall be contested In
good faith by appropriate proceedings, and (b) Borrower shall have
established on its books adequate reserves with respect to such contested
assessment, tax, charge, levy, lien, or claim in accordance with generally
accepted accounting practices. Borrower, upon demand of Lender, will
furnish to Lender evidence of payment of the assessments, taxes, charges,
levies, liens and claims and will authorize the appropriate governmental
official to deliver to Lender at any time a written statement of any
assessments, taxes, charges, levies, liens and claims against Borrower's
properties, income, or profits.
-8-
Page 131 of 209
<PAGE>
05-17-1993 BUSINESS LOAN AGREEMENT Page 9
Loan No. 7500206 (Continued)
PERFORMANCE. Perform and comply with all terms, conditions, and provisions
set forth in this Agreement and in all other instruments and agreements
between Borrower and Lender in a timely manner, and promptly notify Lender
if Borrower learns of the occurrence of any event which constitutes an
Event of Default under this Agreement.
OPERATIONS. Substantially maintain its present executive and management
personnel; conduct its business affairs in a reasonable and prudent manner
and in compliance with all applicable federal, state and municipal laws,
ordinances, rules and regulations respecting its properties, charters,
businesses and operations, including compliance with all minimum funding
standards and other requirements of ERISA and other laws applicable to
Borrower's employee benefit plans.
INSPECTION. Permit employees or agents of Lender at any reasonable time to
inspect any and all collateral for the Loan or Loans and Borrower's other
properties and to examine or audit Borrower's books, accounts, and records
and to make copies and memoranda of Borrower's books, accounts, and
records. If Borrower now or at any time hereafter maintains any records
(including without limitation computer generated records and computer
software programs for the generation of such records) in the possession of
a third party, Borrower, upon request of Lender, shall notify such party
to permit Lender free access to such records at all reasonable times and
to provide Lender with copies of any records it may request, all at
Borrower's expense.
COMPLIANCE CERTIFICATE. Unless waived in writing by Lender, provide Lender
at least annually and at the terms of each disbursement of Loan proceeds
with a certificate executed by Borrower's chief financial officer, or
other officer or person acceptable to Lender, certifying that the
representations and warranties set forth in this Agreement are true and
correct as of the date of the certificate and further certifying that, as
of the date of the certificate, no Event of Default exists under this
Agreement.
ADDITIONAL ASSURANCES. Make, execute and deliver to Lender such promissory
notes, mortgages. deeds of trust, security agreements, financing
statements, instruments, documents and other agreements as Lender or its
attorneys may reasonably request to evidence and secure the Loans and to
perfect all Security Interests.
-9-
Page 132 of 209
<PAGE>
05-17-1993 BUSINESS LOAN AGREEMENT Page 10
Loan No. 7500206 (Continued)
NEGATIVE COVENANTS. Borrower covenants and agrees with Lender that while this
Agreement is in effect, Borrower shall not, without the prior written consent
of Lender:
INDEBTEDNESS AND LIENS. (a) Except for trade debt incurred In the normal
course of business and indebtedness to Lender contemplated by this
Agreement, create, incur or assume indebtedness for borrowed money,
including capital leases, (b) sell, transfer, mortgage, assign, pledge,
lease, grant a security interest in, or encumber any of Borrower's assets,
or (c) sell with recourse any of Borrower's accounts, except to Lender.
CONTINUITY OF OPERATIONS. (a) Engage in any business activities
substantially different than those In which Borrower is presently engaged,
(b) cease operations, liquidate, merge, transfer, acquire or consolidate
with any other entity, change ownership, dissolve or transfer or sell
Collateral out of the ordinary course of business, or (c) pay any
dividends on Borrower's stock (other than dividends payable in its stock
and except as may be statutorily required by Subchapter S corporations) or
purchase or retire any of Borrower's outstanding shares or alter or amend
Borrower's capital structure.
LOANS, ACQUISITIONS AND GUARANTIES. (a) Loan, invest in or advance money
or assets, (b) purchase, create or acquire any interest in any other
enterprise or entity, or (c) incur any obligation as surety or guarantee
other than in the ordinary course of business.
CESSATION OF ADVANCES. If Lender has made any commitment to make any Loan to
Borrower whether under this Agreement or under any other agreement, Lender shall
have no obligation to make Loan Advances or to disburse Loan proceeds if: (a)
Borrower or any Guarantor is in default under the terms of this Agreement or any
of the Related Documents or any other agreement that Borrower or any Guarantor
has with Lender; (b) Borrower becomes insolvent, files a petition in bankruptcy
or similar proceedings, or is adjudged a bankrupt; (c) there occurs a material
adverse change in Borrower's financial condition, in the financial condition of
any Guarantor, or in the value of any Collateral securing any Loan; or (d) any
Guarantor seeks, claims or otherwise attempts to limit, modify or revoke such
Guarantor's guaranty of the Loan or any other loan with Lender.
DEPOSIT ACCOUNTS. Borrower grants to Lender a contractual possessory security
interest in, and hereby assigns, conveys, delivers, pledges, and transforms to
Lender all Borrower's right, title and interest in and to, Borrower's accounts
with Lender (whether checking, savings, or some other amount), including without
limitation all accounts held jointly with someone also and all accounts Borrower
may open in the future, excluding however all IRA, Keogh, and trust accounts.
EVENTS OF DEFAULT. Each of the following shall constitute an Event of Default
under this Agreement:
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<PAGE>
05-17-1993 BUSINESS LOAN AGREEMENT Page 11
Loan No. 7500206 (Continued)
DEFAULT ON INDEBTEDNESS. Failure of Borrower to make any payment when
due on the Loans.
OTHER DEFAULTS. Failure of Borrower or any Grantor to comply with or to
perform when due any other term, obligation, covenant or condition
contained In this Agreement or in any of the Related Documents, or failure
of Borrower to comply with or to perform any other term, obligation,
covenant or condition contained in any other agreement between Lender and
Borrower. If any failure, other than a failure to pay money, is curable
and if Borrower or Grantor, as the case may be, has not been given a
notice of a similar breach within the preceding twelve (12) months, it
may be cured (and no Event of Default will have occurred) if Borrower or
Grantor, as the case may be, after receiving written notice from
Lender demanding cure of such failure: (a) cures the failure within
fifteen (15) days; or (b) if the cure requires more than fifteen (15)
days, immediately initiates steps which Lender deems in Lender's sole
discretion to be sufficient to cure the failure and thereafter continues
and completes all reasonable and necessary steps sufficient to produce
compliance as soon as reasonably practical.
DEFAULT IN FAVOR OF THIRD PARTIES. Should Borrower or any Grantor default
under any loan, extension of credit, security agreement, purchase or sales
agreement, or any other agreement, in favor of any other creditor or
person that may materially affect any of Borrower's property or Borrower's
or any Grantor's ability to repay the Loans or perform their respective
obligations under this Agreement or any of the Related Documents.
FALSE STATEMENTS. Any warranty, representation, or statement made or
furnished to Lender by or on behalf of Borrower or any Grantor under this
Agreement or the Related Documents is false or misleading in any material
respect, either now or at the time made or furnished.
DEFECTIVE COLLATERALIZATION. This Agreement or any of the Related
Documents ceases to be in full force and effect (including failure of any
Security Agreement to create a valid and perfected Security Interest) at
any time and for any reason.
INSOLVENCY. The dissolution or termination of Borrower's existence as a
going business, insolvency, appointment of a receiver for any part of
Borrower's property, any assignment for the benefit of creditors, any type
of creditor workout, or the commencement of any proceeding under any
bankruptcy or insolvency laws by or against Borrower.
-11-
Page 134 of 209
<PAGE>
05-17-1993 BUSINESS LOAN AGREEMENT Page 12
Loan No. 7500206 (Continued)
CREDITOR OR FORFEITURE PROCEEDINGS. Commencement of foreclosure or
forfeiture proceedings, whether by judicial proceeding, self-help,
repossession or any other method, by any creditor of Borrower, any
creditor of any Grantor against any collateral securing the Indebtedness,
or by any governmental agency. This includes a garnishment, attachment, or
levy on or of any of Borrower's deposit accounts with Lender. However,
this Event of Default shall not apply if there is a good faith dispute by
Borrower or Grantor, as the case may be, as to the validity or
reasonableness of the claim which is the basis of the creditor or
forfeiture proceeding, and if Borrower or Grantor gives Lender written
notice of the creditor or forfeiture proceeding and furnishes reserves or
a surety bond for the creditor or forfeiture proceeding satisfactory to
Lender.
EVENTS AFFECTING GUARANTOR. Any of the preceding events occurs with
respect to any Guarantor of any of the indebtedness or such Guarantor dies
or becomes incompetent. Lender, at its option, may, but shall not be
required to, permit the Guarantor's estate to assume unconditionally the
obligations arising under the guaranty in a manner satisfactory to Lender,
and, in doing so, cure the Event of Default.
CHANGE IN OWNERSHIP. Any change in ownership of twenty-five percent (25%) or
more of the Common Stock of the Borrower.
EFFECT OF AN EVENT OF DEFAULT. If any Event of Default shall occur, all
commitments and obligations of Lender under this Agreement or the Related
Documents or any other agreement immediately will terminate and, at Lender's
option, all Loans immediately will become due and payable, all without notice
-12
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<PAGE>
05-17-1993 BUSINESS LOAN AGREEMENT Page 13
Loan No. 7500206 (Continued)
of any kind to Borrower, except that in the case of an Event of Default of the
type described in the "insolvency"' subsection above, such acceleration shall be
automatic and not optional.
MISCELLANEOUS PROVISIONS. The following miscellaneous provisions are a part of
this Agreement:
AMENDMENTS. This Agreement, together with any Related Documents,
constitutes the entire understanding and agreement of the parties as to
the matters set forth in this Agreement. No alteration of or amendment to
this Agreement shall be effective unless given in writing and signed by
the party or parties sought to be charged or bound by the alteration or
amendment.
APPLICABLE LAW. This Agreement has been delivered to Lender and accepted
by Lender in the State of California. If there is a lawsuit, Borrower
agrees upon Lender's request to submit to the jurisdiction of the courts
of Alameda County, the State of California. Lender and Borrower hereby
waive the right to any jury trial in any action, proceeding, or
counterclaim brought by either Lender or Borrower against the other.
Subject to the provisions on arbitration, this Agreement shall be governed
by and construed in accordance with the laws of the State of California.
ARBITRATION. Lender and Borrower agree that all disputes, claims and
controversies between them, whether individual, joint, or class in nature,
arising from this Agreement or otherwise, including without limitation
contract and tort disputes, shall be arbitrated pursuant to the Rules of
the American Arbitration Association, upon request of either party. No act
to take or dispose of any Collateral shall constitute a waiver of this
arbitration agreement or be prohibited by this arbitration agreement. This
includes, without limitation obtaining injunctive relief or a temporary
restraining order; invoking a power of sale under any deed of trust or
mortgage; obtaining a writ of attachment or imposition of a receiver; or
exercising any rights relating to personal property, including taking or
disposing of such property with or without judicial process pursuant to
Article 9 of the Uniform Commercial Code. Any disputes, claims, or
controversies concerning the lawfulness or reasonableness of any act, or
exercise of any right, concerning any Collateral, including any claim to
rescind, reform, or otherwise modify any agreement relating to the
Collateral shall also be arbitrated, provided however that no arbitrator
shall have the right or the power to enjoin or restrain any act of any
party. Lender and Borrower agree that in the event of an action for
judicial foreclosure pursuant to California Code of Civil Procedure
Section 726, or any similar provision in any other state, the commencement
of such an action will not constitute a waiver of the right to arbitrate
and the court shall refer to arbitration as much of such action, including
counterclaims, as lawfully may be referred lo arbitration. Judgment upon
any award rendered by any arbitrator may be entered in any court having
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<PAGE>
05-17-1993 BUSINESS LOAN AGREEMENT Page 14
Loan No. 7500206 (Continued)
jurisdiction. Nothing in this Agreement shall preclude any party from
seeking equitable relief from a court of competent jurisdiction. The
statute of limitations, estoppel, waiver, laches, and similar doctrines
which would otherwise be applicable in an action brought by a party shall
be applicable in any arbitration proceeding, and the commencement of an
arbitration proceeding shall be deemed the commencement of an action for
these purposes. The Federal Arbitration Act shall apply to the
construction, interpretation, and enforcement of this arbitration
provision.
CAPTION HEADINGS. Caption headings in this Agreement are for convenience
purposes only and are not to be used to interpret or define the provisions
of this Agreement.
MULTIPLE PARTIES; CORPORATE AUTHORITY. All obligations of Borrower under
this Agreement shall be joint and several, and all references to Borrower
shall mean each and every Borrower. This means that each of the persons
signing below Is responsible for all obligations in this Agreement.
CONSENT TO LOAN PARTICIPATION. Borrower agrees and consents to Lender's
sale or transfer, whether now or later, of one or more participation
Interests in the Loans to one or more purchasers, whether related or
unrelated to Lender. Lender may provide, without any limitation whatsoever
to any one or more purchasers, or potential purchasers, any information or
knowledge Lender may have about Borrower or about any other matter
relating to the Loan, and Borrower hereby waives any rights to privacy it
may have with respect to such matters. Borrower additionally waives any
and all notices of sale of participation interests, as well as all notices
of any repurchase of such participation interests. Borrower also agrees
that the purchasers of any such participation interests will be considered
as the absolute owners of such interests in the Loans and shall have all
the rights granted under the participation agreement or agreements
governing the sale of such participation interests. Borrower further
waives all rights of offset or counterclaims that it may have now or later
against Lender or against any purchaser of such a participation interest
and unconditionally agrees that either Lender or such purchaser may
enforce Borrower's obligation under the Loans irrespective of the failures
or insolvency of any holder of any interest in the Loans. Borrower further
agrees that the purchaser of any such participation interests may enforce
Borrower's interests irrespective of any personal claims or defenses that
Borrower may have against Lender. .
COSTS AND EXPENSES. Borrower agrees to pay upon demand all of Lender's
out-of-pocket expenses, including attorneys' fees, incurred in connection
with the preparation, execution, enforcement and collection of this
Agreement or in connection with the Loans made pursuant to this Agreement.
Lender may pay someone else to help collect the Loans and to enforce this
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<PAGE>
05-17-1993 BUSINESS LOAN AGREEMENT Page 15
Loan No. 7500206 (Continued)
Agreement, and Borrower will pay that amount. This includes, subject to
any limits under applicable law, Lender's attorneys' fees and Lender's
legal expenses, whether or not there is a lawsuit, including attorneys'
fees for bankruptcy proceedings (including efforts to modify or vacate any
automatic stay or injunction), appeals, and any anticipated post-judgment
collection services. Borrower also will pay any court costs, in addition
to all other sums provided by law.
NOTICES. All notices required to be given under this Agreement shall be
given in writing and shall be effective when actually delivered or when
deposited in the United States mail, first class, postage prepaid,
addressed to the party to whom the notice is to be given at the address
shown above. Any party may change its address for notices under this
Agreement by purpose of the notice is to change the party's address. To
the extent permitted by applicable law, if there is more than one
Borrower, notice to any Borrower will constitute notice to all Borrowers.
For notice purposes, Borrower agrees to keep Lender informed at all times
of Borrower's current address(es).
SEVERABILITY. If a court of competent jurisdiction finds any provision of
this Agreement to be invalid or unenforceable as to any person or
circumstance, such finding shall not render that provision invalid or
unenforceable as to any other persons or circumstances. If feasible, any
such offending provision shall be deemed to be modified to be within the
limits of enforceability or validity; however, if the offending provision
cannot be so modified, it shall be stricken and all other provisions of
this Agreement in all other respects shall remain valid and enforceable.
SUBSIDIARIES AND AFFILIATES OF BORROWER. To the extent the context of any
provisions of this Agreement makes it appropriate, including without
limitation any representation, warranty or covenant, the word "Borrower"
as used herein shall include all subsidiaries and affiliates of Borrower.
Notwithstanding the foregoing however, under no circumstances shall this
Agreement be construed to require Lender to make any Loan or other
financial accommodation to any subsidiary or affiliate of Borrower.
SUCCESSORS AND ASSIGNS. All covenants and agreements contained by or on
behalf of Borrower shall bind its successors and assigns and shall inure
to the benefit of Lender, its successors and assigns. Borrower shall not,
however, have the right to assign its rights under this Agreement or any
interest therein, without the prior written consent of Lender.
SURVIVAL. All warranties, representations, and covenants made by Borrower
in this Agreement or in any certificate or other instrument delivered by
Borrower to Lender under this Agreement shall be considered to have been
rolled upon by Lender and will survive the making of the Loan and delivery
to Lender of the Related Documents, regardless of any investigation made
by Lender or on Lender's behalf.
-15-
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<PAGE>
05-17-1993 BUSINESS LOAN AGREEMENT Page 16
Loan No. 7500206 (Continued)
TIME IS OF THE ESSENCE. Time is of the essence in the performance of this
Agreement.
WAIVER. Lender shall not be deemed to have waived any rights under this
Agreement unless such waiver is given in writing and signed by Lender. No
delay or omission on the part of Lender in exercising any right shall
operate as a waiver of such right or any other right. A waiver by Lender
of a provision of this Agreement shall not prejudice or constitute a
waiver of Lender's right otherwise to demand strict compliance with that
provision or any other provision of this Agreement. No prior waiver by
Lender, nor any course of dealing between Lender and Borrower, or between
Lender and any Grantor, shall constitute a waiver of any of Lender's
rights or of any obligations of Borrower or of any Grantor as to any
future transactions. Whenever the consent of Lender is required under this
Agreement, the granting of such consent by Lender in any instance shall
not constitute continuing consent in subsequent instances where such
consent is required and in all cases such consent may be granted or
withheld in the sole discretion of Lender.
BORROWER ACKNOWLEDGES HAVING READ ALL THE PROVISIONS OF THIS BUSINESS
LOAN AGREEMENT, AND BORROWER AGREES TO ITS TERMS. THIS AGREEMENT IS
DATED AS OF MAY 17, 1993.
BORROWER:
AMERICA'S BEST KARATE, INC.
By: /s/ Anthony K. Chan
-------------------------------------
Anthony K. Chan,
Chief Executive Officer and Secretary
By: /s/ George Chung
------------------------------------
George Chung, President
LENDER:
BANK OF CANTON OF CALIFORNIA
By: /s/
------------------------------------
Authorized Officer
-16-
Page 139 of 209
<PAGE>
PROMISSORY NOTE
<TABLE>
<CAPTION>
- - ---------------------------------------------------------------------------------------------------------
Principal Loan Date Maturity Loan No. Call Collateral Account Other Initials
<S> <C> <C> <C> <C> <C> <C> <C> <C>
$80,000.00 05-17-1993 05-17-1998 7500206 400 PKC
- - ---------------------------------------------------------------------------------------------------------
References in shaded area are for Lenders use only and do not limit the applicability of this document to
any particular loan or item.
- - ---------------------------------------------------------------------------------------------------------
</TABLE>
Borrower: AMERICA'S BEST KARATE, INC. Lender: BANK OF CANTON OF CALIFORNIA
5568 NEWPARK MALL ROAD 900 WEBSTER STREET
NEWARK, CA 94560 OAKLAND, CA 94607
================================================================================
Principal Amount: $80,000.00 Initial Rate: 8.250% Date of Note: May 17, 1993
PROMISE TO PAY. AMERICA'S BEST KARATE, INC. ("Borrower") promises to pay to
BANK OF CANTON OF CALIFORNIA ("Lender"), or order, in lawful money of the
United States of America, the principal amount of Eighty Thousand & 00/100
Dollars ($80,000.00), together with interest on the unpaid principal balance
from May 17, 1993, until paid in full.
PAYMENT. Subject to any payment changes resulting from changes in the index,
Borrower will pay this loan in 59 principal payments of $1,333.33 each and one
final principal and interest payment of $1,342.70. Borrower's first principal
payment is due June 17, 1993, and all subsequent principal payments are due in
the same day of each month after that. In addition, Borrower will pay regular
monthly payments of all accrued unpaid interest due as of each payment date.
Borrower's first interest payment is due June 17, 1993, and all subsequent
interest payment are due on the same day of each month after that. Borrower's
final payment due May 17, 1996, will be for all principal and accrued interest
not yet paid. Interest on this Note is computed on 365/360 simple interest
basis; that is, by applying the ratio of the annual interest rate over a year of
360 days, times the outstanding principal balance, times the actual number of
days the principal balance is outstanding. Borrower will pay Lender at Lender's
address shown above or at such other place as Lender may designate in writing.
Unless otherwise agreed or required by applicable law, payments will be applied
first to accrued unpaid interest, then to principal, and any remaining amount to
any unpaid collection costs and late charges.
-17-
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<PAGE>
VARIABLE INTEREST RATE. The interest rate on this Note is subject to change from
time to time based on changes in an index which is Lender's Prime Rate (the
"Index"). This is the rate Lender charges, or would charge, on 90-day unsecured
loans lo the most creditworthy corporate customers. This rate may or may not be
the lowest rate available from Lender at any given time. Lender will tell
Borrower the current Index rate upon Borrower's request. Borrower understands
that Lender may make loans based on other rates as well. The interest rate
change will not occur more often than each day. The Index currently is 6.000%
per annum. The interest rate to be applied to the unpaid principal balance of
this Note will be at a rate of 2.250 percentage points over the Index, resulting
in an initial rate of 8.250% per annum. NOTICE: Under no circumstances will the
interest rate on this Note be more than the maximum rate allowed by applicable
law.
PREPAYMENT. Borrower may pay without penalty all or a portion of the amount
owed earlier than it is due. Early payments will not, unless agreed to by
Lender in writing, relieve Borrower of Borrower's obligation to continue to
make payments under the payment schedule. Rather, they will reduce the
principal balance due and may result in Borrower's making fewer payments.
LATE CHARGE. If a payment is 15 days or more late, Borrower will be charged
5.000% of the regularly scheduled payment.
DEFAULT. Borrower will be in default if any of the following happens: (a)
Borrower fails to make any payment when due; (b) Borrower breaks any promise
Borrower has made to Lender, or Borrower fails to perform promptly at the time
and strictly in the manner provided in this Note or any agreement related to
this Note, or in any other agreement or loan Borrower has with Lender; (c) Any
representation or statement made or furnished to Lender by Borrower or on
Borrowers behalf is false or misleading in any material respect; (d) Borrower
becomes insolvent, a receiver is appointed for any part of Borrower's property,
Borrower makes an assignment for the benefit of creditors, or any proceeding is
commenced either by Borrower or against Borrower under any bankruptcy or
insolvency laws; (e) Any creditor tries to take any Borrower's property on or in
which Lender has a lien or security interest. This includes a garnishment of any
of Borrower's accounts with Lender. (f) Any of the events described in this
default section occurs with respect to any guarantor of this Note.
LENDER'S RIGHTS. Upon default, Lender may declare the entire unpaid principal
balance on this Note and all accrued unpaid interest immediately due, without
notice, and then Borrower will pay that amount. Upon Borrower's failure to pay
all amounts declared due pursuant to this section, including failure to pay upon
final maturity, Lender, at its option, may also, if permitted under applicable
law, increase the variable interest rate on this Note to 4.250 percentage points
over the Index. Lender may hire or pay someone else to help collect this Note if
Borrower does not pay. Borrower also will pay Lender that amount. This includes,
subject to any limits under applicable law, Lender's attorneys' fees and
Lender's legal expenses whether or not there is a lawsuit, including attorneys'
fees and legal expenses for bankruptcy proceedings (including efforts to modify
or vacate any automatic stay or injunction), appeals, amid any anticipated
post-judgment collection services. Borrower also will pay any court costs, in
addition to all other sums are provided by law. This Note has been delivered to
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<PAGE>
Lender and accepted, by Lender In the State of California. If there is a
lawsuit, Borrower agrees upon Lender's request to submit to the jurisdiction of
the courts of ALAMEDA County, the State of California. Lender and Borrower
hereby waive the right to any jury trial in any action, proceeding, or
counterclaim brought by either Lender or Borrower against the other. Subject to
the provisions on arbitration, this Note shall be governed by and construed in
accordance with the laws of the State of California.
DEPOSIT ACCOUNTS. Borrower grants to Lender a contractual possessory security
interest in, and hereby assigns, conveys, delivers, pledges, and transfers to
Lender all Borrower's right, title and interest in and to, Borrower's accounts
with Lenders (whether checking, savings, or some other account), including
without limitation all accounts held jointly with someone else and all accounts
Borrower may open in the future, excluding however all IRA, Keogh, and trust
accounts.
COLLATERAL. Borrower acknowledges this Note is secured by, in addition to any
other collateral, a Deed of Trust dated May 17, 1993, to a trustee in favor of
Lender on real property located in ALAMEDA County, State of California. That
agreement contains the following due on sale provision: Lender may, at its
option, declare immediately due and payable all sums secured by this Deed of
Trust upon the sale or transfer, without the Lender's prior written consent, of
all or any part of the Real Property, or any interest in the Real Property. A
"sale or transfer" means the conveyance of Real Property or any right, title or
interest therein; whether legal or equitable; whether voluntary or involuntary;
whether by outright sale, deed, installment sale contract, land contract,
contract for deed, leasehold interest with a term greater than three (3) years,
lease-option contract, or by sale, assignment, or transfer of any beneficial
interest in or to any land trust holding title to the Real Property, or by any
other method of conveyance of Real Property interest. If any Trustor is a
corporation or partnership, transfer also includes any change in ownership of
more than twenty-five percent (25%) of the voting stock or partnership
interests, as the case may be, of Trustor. However, this option shall not be
exercised by Lender if such exercise is prohibited by applicable law.
ARBITRATION. Lender and Borrower agree that all disputes, claims and
controversies between them, whether individual, joint, or class in nature,
arising from this Note or otherwise, including without limitation contract and
tort disputes, shall be arbitrated pursuant to the Rules of the American
Arbitration Association, upon request of either party. No act to take or dispose
of any collateral securing this Note shall constitute a waiver of this
arbitration agreement or be prohibited by this arbitration agreement. This
includes, without imitation, obtaining injunctive relief or a temporary
restraining order; invoking a power of sale under any deed of trust or mortgage;
obtaining a writ of attachment or imposition of a receiver; or exercising any
rights relating to personal property, including taking or disposing of such
property with or without judicial process pursuant to Article 9 of the Uniform
Commercial Code. Any disputes, claims or controversies concerning the lawfulness
or reasonableness of any act, or exercise of any right, concerning any
collateral securing this Note, including a claim to rescind, reform, or
otherwise modify any agreement relating to the collateral securing this Note,
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<PAGE>
shall also be arbitrated, providing however that no arbitrator shall have the
right or the power to enjoin or restrain any act of any party. Lender and
Borrower agree that in the event of an action for judicial foreclosure pursuant
to California Code of Civil Procedure Section 726, or any similar provision in
any other state, the commencement of such an action will not constitute a waiver
of the right to arbitrate and the court shall refer to arbitration as much of
such action, including counterclaims, as lawfully may be referred to
arbitration. Judgment upon any award rendered by any arbitrator may be entered
in any court having jurisdiction. Nothing in this Note shall preclude any party
from seeking equitable relief from a court of competent jurisdiction. The
statute of limitations, estoppel, waiver, laches, and similar doctrines which
would otherwise be applicable in an action brought by a party shall be
applicable in any arbitration proceeding, and the commencement of an arbitration
proceeding shall be deemed the commencement of an action for these purposes. The
Federal Arbitration Act shall apply to the construction, interpretation, and
enforcement of this arbitration provision.
GENERAL PROVISIONS. Lender may delay or forego enforcing any of its rights or
remedies under this Note without losing them. Borrower and any other person who
signs, guarantees or endorses this Note, to the extent allowed by law, waive any
applicable statute of limitations, presentment, demand for payment, protest and
notice of dishonor. Upon any change in the terms of this Note, and unless
otherwise expressly stated in writing, no party who signs this Note, whether as
maker, guarantor, accommodation maker or endorser, shall be released from
liability. All such parties agree that Lender may renew or extend (repeatedly
and for any length of time) this loan, or release any party or guarantor or
collateral; or impair, fail to realize upon or perfect Lender's security
interest in the collateral; and take any other action deemed necessary by Lender
without the consent of or notice to anyone. All such parties also agree that
Lender may modify this loan without the consent of or notice to anyone other
than the party with whom the modification is made.
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<PAGE>
PROMISSORY NOTE
(CONTINUED)
- - --------------------------------------------------------------------------------
PRIOR TO SIGNING THIS NOTE, BORROWER READ AND UNDERSTOOD ALL THE PROVISIONS OF
THIS NOTE, INCLUDING THE VARIABLE INTEREST RATE PROVISIONS. BORROWER AGREES
TO THE TERMS OF THE NOTE AND ACKNOWLEDGES RECEIPT OF A COMPLETED COPY OF
THE NOTE.
BORROWER:
AMERICA'S BEST KARATE, INC.
By: /s/ Anthony K. Chan
-----------------------------------
ANTHONY K. CHAN,
CHIEF EXECUTIVE OFFICER & SECRETARY
By: /s/ George Chung
-----------------------------------
GEORGE CHUNG, PRESIDENT
LENDER:
BANK OF CANTON OF CALIFORNIA
By: /s/
----------------------------------
Authorized Officer
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<PAGE>
COMMERCIAL SECURITY AGREEMENT
-----------------------------
<TABLE>
<CAPTION>
- - ---------------------------------------------------------------------------------------------------------
Principal Loan Date Maturity Loan No. Call Collateral Account Other Interest
<S> <C> <C> <C> <C> <C> <C> <C> <C>
$80,000.00 05-17-1993 05-17-1998 7500206 400 PKC
- - ---------------------------------------------------------------------------------------------------------
References in shaded area are for Lenders use only and do not limit the applicability of this document to
any particular loan item.
- - ---------------------------------------------------------------------------------------------------------
</TABLE>
Borrower: AMERICA'S BEST KARATE, INC. Lender: BANK OF CANTON OF CALIFORNIA
5568 NEWPARK MALL ROAD 900 WEBSTER STREET
NEWARK, CA 94560 OAKLAND, CA 94607
================================================================================
THIS COMMERCIAL SECURITY AGREEMENT is entered into between AMERICA'S BEST
KARATE, INC. (referred to below as "Grantor"); and BANK OF CANTON OF CALIFORNIA
(referred to below as "Lender"). For valuable consideration, Grantor grants to
Lender a security interest in the Collateral to secure the indebtedness and
agrees that Lender shall have the rights stated in this Agreement with respect
to the Collateral, in addition to all other rights which Lender may have by law.
DEFINITIONS. The following words shall have the following meanings when used in
this Agreement. Terms not otherwise defined in this Agreement shall have the
meanings attributed to such terms in the Uniform Commercial Code. All references
to dollar amounts shall mean amounts in lawful money of the United States of
America.
Agreement. The word Agreement means this Commercial Security Agreement, as
this Commercial Security Agreement may be amended or modified from time to
time, together with all exhibits and schedules attached to this Commercial
Security Agreement from time to time.
Collateral. The word "Collateral" means the following described property
of Grantor, whether now owned or hereafter acquired, whether now existing
or hereafter arising, and wherever located:
All inventory, chattel paper, accounts, contract rights,
equipment and general intangibles.
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<PAGE>
In addition, the word "Collateral" includes all the following, whether now
owned or hereafter acquired, whether now existing or hereafter arising,
and wherever located:
(a) All attachments, accessions, accessories, tools, parts,
supplies, increases, and additions to and all replacements of
and substitutions for any property described above.
(b) All products and produce of any of the property
described in this Collateral section.
(c) All accounts, contract rights, general intangibles,
instruments, rents, monies, payments, and all other rights,
arising out of a sale, lease or other deposition of any of the
property described in this Collateral section.
(d) All proceeds (including insurance proceeds) from the
sale, destruction, loss, or other disposition of any of the
property described in this Collateral section.
(e) All records and data relating to any of the property
described in this Collateral section, whether in the form of
a writing, photograph, microfilm, microfiche, or
electronic media, together with all of Grantor's right, title,
and interest in and to all computer software required to
utilize, create, maintain, and process any such data on
electronic media.
Event of Default. The words "Event of Default" mean and include any of
the Events of Default set forth below in the section titled "Events of
Default."
Grantor. The word "Grantor" means AMERICA'S BEST KARATE, INC., its
successors and assigns.
Guarantor. The word "Guarantor" means and includes without limitation,
each and all of the guarantors, sureties, and accommodation parties in
connection with the indebtedness.
Indebtedness. The word "Indebtedness" means the Indebtedness evidenced by
the Note, including all principal and interest, together with all other
Indebtedness and costs and expenses for which Grantor is responsible under
this Agreement or under any of the Related Documents.
The word "Lender" means BANK OF CANTON OF CALIFORNIA, its successors and
assigns.
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<PAGE>
Note. The word "Note" means the note or credit agreement dated May 17,
1993, in the principal amount of $80,000.00 from Grantor to Lender,
together with all renewals of, extensions of, modifications of,
refinancings of, consolidations of and substitutions for the note or
credit agreement.
Related Documents. The words "Related Documents" mean and include without
limitation all promissory notes, credit agreements, loan agreements,
guaranties, security agreements, mortgages, deeds of trust, and all other
instruments, agreements and documents, whether now or hereafter existing,
executed in connection with the Indebtedness.
DEPOSIT ACCOUNTS. Grantor hereby grants Lender a contractual possessory security
interest in and hereby assigns, conveys, delivers, pledges, and transfers all of
Grantor's right, title and interest in and to Grantor's accounts with Lender
(whether checking, savings, or some other account), including all accounts held
jointly with someone else and all accounts Grantor may open in the future,
excluding however all IRA, Keogh, and trust accounts.
OBLIGATIONS OF GRANTOR. Grantor warrants and covenants to Lender as follows:
Perfection of Security Interest. Grantor agrees to execute such financing
statements and to take whatever other actions are requested by Lender to
perfect and continue Lender's security interest in the Collateral. Upon
request of Lender, Grantor will deliver to Lender any and all of the
documents evidencing or constituting the Collateral, and Grantor will note
Lender's interest upon any and all chattel paper if not delivered to
Lender for possession by Lender. Grantor hereby appoints Lender as its
irrevocable attorney-in-fact for the purpose of executing any documents
necessary to perfect or to continue the security interest granted in this
Agreement. Lender may at any time, and without further authorization from
Grantor, file a carbon, photographic or other reproduction of any
financing statement or of this Agreement for use as a financing statement.
Grantor will reimburse Lender for all expenses for the perfection and the
continuation of the perfection of Lender's security interest in the
Collateral. Grantor promptly will notify Lender of any change in Grantor's
name including any change to the assumed business names of Grantor.
No Violation. The execution and delivery of this Agreement will not
violate any law or agreement governing Grantor or to which Grantor is a
party, and, its certificate or articles of incorporation and bylaws do not
prohibit any term or condition of this Agreement.
Enforceability of Collateral. To the extent the Collateral consists of
accounts, contract rights, chattel paper, or general intangibles, the
Collateral is enforceable in accordance with its terms, is genuine, and
complies with applicable laws concerning form, content and manner of
preparation and execution, and all persons appearing to be obligated on
the Collateral have authority and capacity to contract and are in fact
obligated as they appear to be on the Collateral.
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<PAGE>
At the time any account becomes subject to a security interest in favor of
Lender, the account shall be a good and valid account representing an
undisputed, bona fide Indebtedness incurred by the account debtor, for
merchandise held subject to delivery instructions or theretofore shipped
or delivered pursuant to a contract of sale, or for services theretofore
performed by Grantor with or for the account debtor; there shall be no
setoffs or counterclaims against any such account; and no agreement under
which any deductions or discounts may be claimed shall have been made with
the account debtor except those disclosed to Lender in writing.
Location of the Collateral. Grantor, upon request of Lender, will deliver
to Lender in form satisfactory to Lender a schedule of real properties and
Collateral locations relating to Grantor's operations, including without
limitation the following: (a) all real property owned or being purchased
by Grantor; (b) all real property being rented or used by Grantor; (c) all
storage facilities owned, rented, leased, or being used by Grantor; and
(d) all other properties where Collateral is or may be located. Except in
the ordinary course of its business, Grantor shall not remove the
Collateral from its existing locations without the prior written consent
of Lender.
Removal of Collateral. Grantor shall keep the Collateral (or to the extent
the Collateral consists of intangible property such as accounts, the
records concerning the Collateral) at Grantor's address shown above, or at
such other locations as are acceptable to Lender. Except in the ordinary
course of its business, including the sales of inventory, Grantor shall
not remove the Collateral from its existing locations without the prior
written consent of Lender. To the extent that the Collateral consists of
vehicles, or other titled property, Grantor shall not take or permit any
action which would require application for certificates of title for the
vehicles outside the State of California, without the prior written
consent of Lender.
Transactions Involving Collateral. Except for inventory sold or accounts
collected in the ordinary course of Grantor's business, Grantor shall not
sell, offer to sell, or otherwise transfer or dispose of the Collateral.
While Grantor is not in default under this Agreement, Grantor may sell
inventory, but only in the ordinary course of its business and only to
buyers who qualify as a buyer in the ordinary course of business. A sale
in the ordinary course of Grantor's business does not include a transfer
in partial or total satisfaction of a debt or any bulk sale. Grantor shall
not pledge, mortgage, encumber or otherwise permit the Collateral to be
subject to any lien, security interest, encumbrance, or charge, other than
the security interest provided for in this Agreement, without the prior
written consent of Lender. This includes security interests even if junior
in right to the security interests granted under this Agreement. Unless
waived by Lender, all proceeds from any disposition of the Collateral (for
whatever reason) shall be held in trust for Lender and shall not be
commingled with any other funds; provided however, this requirement shall
not constitute consent by Lender to any sale or other disposition. Upon
receipt, Grantor shall immediately deliver any such proceeds to Lender.
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<PAGE>
Title. Grantor represents and warrants to Lender that it holds good and
marketable title to the Collateral, free and clear of all liens and
encumbrances except for the lien of this Agreement. No financing statement
covering any of the Collateral is on file in any public office other than
those which reflect the security interest created by this Agreement or to
which Lender has specifically consented. Grantor shall defend Lender's
rights in the Collateral against the claims and demands of all other
persons.
Collateral Schedules and Locations. As often as Lender shall require, and
insofar as the Collateral consists of accounts and general intangibles,
Grantor shall deliver to Lender schedules of such Collateral, including
such information as Lender may require, including without limitation names
and addresses of account debtors and agings of accounts and general
intangibles. Insofar as the Collateral consists of inventory and
equipment, Grantor shall deliver to Lender, as often as Lender shall
require, such lists, descriptions. and designations of such Collateral as
Lender may require to identify the nature, extent, and location of such
Collateral. Such information shall be submitted for Grantor and each of
its subsidiaries or related companies.
Maintenance and Inspection of Collateral. Grantor shall maintain all
tangible Collateral in good condition and repair. Grantor will not commit
or permit damage to or destruction of the Collateral or any part of the
Collateral. Lender and its designated representatives and agents shall
have the right at all reasonable times to examine, inspect, and audit the
Collateral wherever located. Grantor shall immediately notify Lender of
all cases involving the return, rejection, repossession, loss or damage of
or to any Collateral; of any request for credit or adjustment or of any
other dispute arising with respect to the Collateral; and generally of all
happenings and events affecting the Collateral or the value or the amount
of the Collateral.
Taxes, Assessments and Liens. Grantor will pay when due all taxes,
assessments and liens upon the Collateral, its use or operation, upon this
Agreement, upon any promissory note or notes evidencing the Indebtedness,
or upon any of the other Related Documents. Grantor may withhold any such
payment or may elect to contest any lien if Grantor is in good faith
conducting an appropriate proceeding to contest the obligation to pay and
so long as Lender's interest in the Collateral is not jeopardized in
Lender's sole opinion. If the Collateral is subjected to a lien which is
not discharged within fifteen (15) days, Grantor shall deposit with Lender
cash, a sufficient corporate surety bond or other security satisfactory to
Lender in an amount adequate to provide for the discharge of the lien plus
any interest, costs, attorneys' fees or other charges that could accrue as
a result of foreclosure or sale of the Collateral. In any contest Grantor
shall defend itself and Lender and shall satisfy any final adverse
judgment before enforcement against the Collateral. Grantor shall name
Lender as an additional obligee under any surety bond furnished in the
contest proceedings.
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<PAGE>
Compliance With Governmental Requirements. Grantor shall comply promptly
with all laws, ordinances and regulations of all governmental authorities
applicable to the production, disposition, or use of the Collateral.
Grantor may contest in good faith any such law, ordinance or regulation
and withhold compliance during any proceeding, including appropriate
appeals, so long as Lender's interest in the Collateral, in Lender's
opinion, is not jeopardized.
Hazardous Substances. Grantor represents and warrants that the Collateral
never has been, and never will be so long as this Agreement remains a lien
on the Collateral, used for the generation, manufacture, storage,
transportation, treatment, disposal, release or threatened release of any
hazardous waste or substance, as those terms are defined in the
Comprehensive Environmental Response, Compensation, and Liability Act of
1980, as amended, 42 U.S.C. Section 9601, et seq. ("CERCLA"), the
Superfund Amendments and Reauthorization Act of 1986, Pub. L. No. 99-499
("SARA"), the Hazardous Materials Transportation Act, 49 U.S.C. Section
1801, et seq., the Resource Conservation and Recovery Act, 49 U.S.C.
Section 6901, et seq., Chapters 6.5 through 7.7 of Division 20 of the
California Health and Safety Code, Section 25100, et seq., or other
applicable state or Federal laws, rules, or regulations adopted pursuant
to any of the foregoing. The terms "hazardous waste" and "hazardous
substance" shall also include, without limitation, petroleum and petroleum
by-products or any fraction thereof and asbestos. The representations and
warranties contained herein are based on Grantor's due diligence in
investigating the Collateral for hazardous wastes and substances. Grantor
hereby (a) releases and waives any future claims against Lender for
indemnity or contribution in the event Grantor becomes liable for cleanup
or other costs under any such laws, and (b) agrees to indemnify and hold
harmless Lender against any and all claims and losses resulting from a
breach of this provision of this Agreement. This obligation to indemnify
shall survive the payment of the Indebtedness and the satisfaction of this
Agreement.
Maintenance of Casualty Insurance. Grantor shall procure and maintain all
risks insurance, including without limitation fire, theft and liability
coverage together with such other insurance as Lender may require with
respect to the Collateral, in form, amounts, coverages and basis
reasonably acceptable to Lender and issued by a company or companies
reasonably acceptable to Lender. Grantor, upon request of Lender, will
deliver to Lender from time to time the policies or certificates of
insurance in form satisfactory to Lender, including stipulations that
coverages will not be canceled or diminished without at least ten (10)
days' prior written notice to Lender and not including any disclaimer of
the insurer's liability for failure to give such a notice. In connection
with all policies covering assets in which Lender holds or is offered a
security interest, Grantor will provide Lender with such loss payable or
other endorsements as Lender may require. If Grantor at any time fails to
obtain or maintain any insurance as required under this Agreement, Lender
may (but shall not be obligated to) obtain such insurance as Lender deems
appropriate, including if it so chooses "single interest insurance," which
will cover only Lender's interest in the Collateral.
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<PAGE>
Application of Insurance Proceeds. Grantor shall promptly notify Lender of
any loss or damage to the Collateral. Lender may make proof of loss if
Grantor fails to do so within fifteen (15) days of the casualty. All
proceeds of any insurance on the Collateral, including accrued proceeds
thereon, shall be held by Lender as part of the Collateral. If Lender
consents to repair or replacement of the damaged or destroyed Collateral,
Lender shall, upon satisfactory proof of expenditure, pay or reimburse
Grantor from the proceeds for the reasonable cost of repair or
restoration. If Lender does not consent to repair or replacement of the
Collateral, Lender shall retain a sufficient amount of the proceeds to pay
all of the Indebtedness, and shall pay the balance to Grantor. Any
proceeds which have not been disbursed within six (6) months after their
receipt and which Grantor has not committed to the repair or restoration
of the Collateral shall be used to prepay the Indebtedness.
Insurance Reserves. Lender may require Grantor to maintain with Lender
reserves for payment of insurance premiums, which reserves shall be
created by monthly payments from Grantor of a sum estimated by Lender to
be sufficient to produce, at least fifteen (15) days before the premium
due date, amounts at least equal to the insurance premiums to be paid. If
fifteen (15) days before payment is due , the reserve funds are
insufficient, Grantor shall upon demand pay any deficiency to Lender. The
reserve funds shall be held by Lender as a general deposit and shall
constitute, a non-interest-bearing account which Lender may satisfy by
payment of the insurance premiums required to be paid by Grantor as they
become due. Lender does not hold the reserve funds in trust for Grantor,
and Lender is not the agent of Grantor for payment of the insurance
premiums required to be paid by Grantor. The responsibility for the
payment of premiums shall remain Grantor's sole responsibility.
Insurance Reports. Grantor, upon request of Lender, shall furnish to
Lender reports on each existing policy of insurance showing such
information as Lender may reasonably request including the following: (a)
the name of the insurer; (b) the risks insured; (c) the amount of the
policy; (d) the property insured; (e) the then current value on the basis
of which insurance has been obtained and the manner of determining that
value; and (f) the expiration date of the policy. In addition, Grantor
shall upon request by Lender (however not more often than annually) have
an independent appraiser satisfactory to Lender determine, as applicable,
the cash value or replacement cost of the Collateral.
GRANTOR'S RIGHT TO POSSESSION AND TO COLLECT ACCOUNTS. Until default and except
as otherwise provided below with respect to accounts, Grantor may have
possession of the tangible personal property and beneficial use of all the
Collateral and may use it in any lawful manner not inconsistent with this
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<PAGE>
Agreement or the Related Documents, provided that Grantor's right to possession
and beneficial use shall not apply to any Collateral where possession of the
Collateral by Lender is required by law to perfect Lender's security interest in
such Collateral. Until otherwise notified by Lender, Grantor may collect any of
the Collateral consisting of accounts. At any time and even though no Event of
Default exists, Lender may exercise its rights to collect the accounts and to
notify account debtors to make payments directly to Lender for application to
the Indebtedness. If Lender at any time has possession of any Collateral,
whether before or after an Event of Default, Lender shall be deemed to have
exercised reasonable care in the custody and preservation of the
Collateral if Lender takes such action for that purpose as Grantor shall request
or as Lender, in Lender's sole discretion, shall deem appropriate under the
circumstances, but failure to honor any request by Grantor shall not of itself
be deemed to be a failure to exercise reasonable care. Lender shall not be
required to take any steps necessary to preserve any rights in the Collateral
against prior parties, nor to protect, preserve or maintain any security
interest given to secure the Collateral.
EXPENDITURES BY LENDER. If not discharged or paid when due, Lender may (but
shall not be obligated to) discharge or pay any amounts required to be
discharged or paid by Grantor under this Agreement, including without limitation
all taxes, liens, security interests, encumbrances, and other claims, at any
time levied or placed on the Collateral. Lender also may (but shall not be
obligated to) pay all costs for insuring, maintaining and preserving the
Collateral. All such expenditures incurred or paid by Lender for such purposes
will then bear interest at the rate charged under the Note from the date
incurred or paid by Lender to the date of repayment by Grantor. All such
expenses shall become a part of the Indebtedness and, at Lender's option, will
(a) be payable on demand, (b) be added to the balance of the Note and be
apportioned among and be payable with any installment payments to become due
during either (I) the term of any applicable insurance policy or (II) the
remaining term of the Note, or (c) be treated as a balloon payment which will be
due and payable at the Note's maturity. This Agreement also will secure payment
of these amounts. Such right shall be in addition to all other rights and
remedies to which Lender may be entitled upon the occurrence of an Event of
Default.
EVENTS OF DEFAULT. Each of the following shall constitute an Event of Default
under this Agreement:
Default on Indebtedness. Failure of Grantor to make any payment when due
on the Indebtedness.
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<PAGE>
Other Defaults. Failure of Grantor to comply with or to perform any other
term, obligation, covenant or condition contained in this Agreement or in
any of the Related Documents or in any other agreement between Lender and
Grantor. If any failure, other than a failure to pay money, is curable and
if Grantor has not been given a prior notice of a breach of the same
provision of this Agreement, it may be cured (and no Event of Default will
have occurred) if Grantor, after Lender sends written notice demanding
cure of such failure, (a) cures the failure within fifteen (15) days; or
(b) if the cure requires more than fifteen (15) days, immediately
initiates steps which Lender deems in Lender's sole discretion to be
sufficient to cure the failure and thereafter continues and completes all
reasonable and necessary steps sufficient to produce compliance as soon as
reasonably practical.
False Statements. Any warranty, representation or statement made or
furnished to Lender by or on behalf of Grantor under this Agreement is
false or misleading in any material respect, either now or at the time
made or furnished.
Defective Collateralization. This Agreement or any of the Related
Documents ceases to be in full force and effect (including failure of any
collateral documents to create a valid and perfected security interest or
lien) at any time and for any reason.
Insolvency. The dissolution or termination of Grantor's existence as a
going business, the insolvency of Grantor, the appointment of a receiver
for any part of Grantor's property, any assignment for the benefit of
creditors, or the commencement of any proceeding under any bankruptcy or
insolvency laws by or against Grantor.
Creditor or Forfeiture Proceedings. Commencement of foreclosure or
forfeiture proceedings, whether by judicial proceeding, self-help,
repossession or any other method, by any creditor of Grantor or by any
governmental agency against the Collateral or any other collateral
securing the Indebtedness. This includes a garnishment of any of Grantor's
deposit accounts with Lender. However, this Event of Default shall not
apply if there is a good faith dispute by Grantor as to the validity or
reasonableness of the claim which is the basis of the creditor or
forfeiture proceeding and if Grantor gives Lender written notice of the
creditor or forfeiture proceeding and deposits with Lender monies or a
surety bond for the creditor or forfeiture proceeding, in an amount
determined by Lender, in its sole discretion, as being an adequate
reserve or bond for the dispute.
Events Affecting Guarantor. Any of the preceding events occurs with
respect to any Guarantor of any of the Indebtedness or such Guarantor dies
or becomes incompetent. Lender, at its option, may, but shall not be
required to, permit the Guarantor's estate to assume unconditionally the
obligations arising under the guaranty in a manner satisfactory to Lender,
and, in doing so, cure the Event of Default.
Insecurity. Lender, in good faith, deems itself insecure.
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<PAGE>
RIGHTS AND REMEDIES ON DEFAULT. If an Event of Default occurs under this
Agreement, at any time thereafter, Lender shall have all the rights of a secured
party under the California Uniform Commercial Code. In addition and without
limitation, Lender my exercise any one or more of the following rights and
remedies:
Accelerate Indebtedness. Lender may declare the entire Indebtedness,
including any prepayment penalty which Grantor would be required to pay,
immediately due and payable, without notice.
Assemble Collateral. Lender may require Grantor to deliver to Lender all
or any portion of the Collateral and any and all certificates of title and
other documents relating to the Collateral. Lender may require Grantor to
assemble the Collateral and make it available to Lender at a place to be
designated by Lender. Lender also shall have full power to enter upon the
property of Grantor to take possession of and remove the Collateral. If
the Collateral contains other goods not covered by this Agreement at the
time of repossession, Grantor agrees Lender may take such other goods,
provided that Lender makes reasonable efforts to return them to Grantor
after repossession.
Sell the Collateral. Lender shall have full power to sell, lease,
transfer, or otherwise deal with the Collateral or proceeds thereof in its
own name or that of Grantor. Lender may sell the Collateral at public
auction or private sale. Unless the Collateral threatens to decline
speedily in value or is of a type customarily sold on a recognized market,
Lender will give Grantor reasonable notice of the time after which any
private sale or any other intended disposition of the Collateral is to be
made. The requirements of reasonable notice shall be met if such notice is
given at least ten (10) days, or such lesser time as required by state
law, before the time of the sale or disposition. All expenses relating to
the disposition of the Collateral, including without limitation the
expenses of retaking, holding, insuring, preparing for sale and selling
the Collateral, shall become a part of the Indebtedness secured by this
Agreement and shall be payable on demand, with interest at the Note rate
from date of expenditure until repaid.
Appoint Receiver. To the extent permitted by applicable law, Lender shall
have the following rights and remedies regarding the appointment of a
receiver: (a) Lender may have a receiver appointed as a matter of right,
(b) the receiver may be an employee of Lender and may serve without bond,
and (c) all fees of the receiver and his or her attorney shall become part
of the Indebtedness secured by this Agreement and shall be payable on
demand, with interest at the Note rate from date of expenditure until
repaid.
Collect Revenues, Apply Accounts. Lender, either itself or through a
receiver, may collect the payments, rents, income, and revenues from the
Collateral. Lender may at any time in its discretion transfer any
Collateral into its own name or that of its nominee and receive the
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<PAGE>
payments, rents, income, and revenues therefrom and hold the same as
security for the Indebtedness or apply it to payment of the Indebtedness
in such order of preference as Lender may determine. Insofar as the
Collateral consists of accounts, general intangibles, insurance policies,
instruments, chattel paper, choses in action, or similar property, Lender
may demand, collect, receipt for, settle, compromise, adjust, sue for,
foreclose, or realize on the Collateral as Lender may determine, whether
or not Indebtedness or Collateral is then due. For these purposes, Lender
may, on behalf of and in the name of Grantor, receive, open and dispose of
mail addressed to Grantor; change any address to which mail and payments
are to be sent; and endorse notes, checks, drafts, money orders, documents
of title, instruments and items pertaining to payment, shipment, or
storage of any Collateral. To facilitate collection, Lender may notify
account debtors and obligors on any Collateral to make payments directly
to Lender.
Obtain Deficiency. If Lender chooses to sell any or all of the Collateral,
Lender may obtain a judgment against Grantor for any deficiency remaining
on the Indebtedness due to Lender after application of all amounts
received from the exercise of the rights provided in this Agreement.
Grantor shall be liable for a deficiency even if the transaction described
in this subsection is a sale of accounts or chattel paper.
Other Rights and Remedies. Lender shall have all the rights and remedies
of a secured creditor under the provisions of the Uniform Commercial Code,
as may be amended from time to time. In addition, Lender shall have and
may exercise any or all other rights and remedies it may have available at
law, in equity, or otherwise.
Cumulative Remedies. All of Lender's rights and remedies, whether
evidenced by this Agreement or the Related Documents or by any other
writing, shall be cumulative and may be exercised singularly or
concurrently. Election by Lender to pursue any remedy shall not exclude
pursuit of any other remedy, and an election to make expenditures or to
take action to perform an obligation of Grantor under this Agreement,
after Grantor's failure to perform, shall not effort Lender's right to
declare a default and to exercise its remedies.
MISCELLANEOUS PROVISIONS. The following miscellaneous provisions are a part of
this Agreement:
Amendments. This Agreement, together with any Related Documents,
constitutes the entire understanding and agreement of the parties as to
the matters set forth in this Agreement. No alteration of or amendment to
this Agreement shall be effective unless given in writing and signed by
the party or parties sought to be charged or bound by the alteration or
amendment.
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Applicable Law. This Agreement has been delivered to Lender and accepted
by Lender in the State of California. If there is a lawsuit, Grantor
agrees upon Lender's request to submit to the jurisdiction of the courts
of ALAMEDA County, State of California. Lender and Grantor hereby waive
the right to any jury trial in any action, proceeding, or counterclaim
brought by either Lender or Grantor against the other. Subject to the
provisions on arbitration, this Agreement shall be governed by and
construed in accordance with the laws of the State of California.
Attorneys' Fees; Expenses. Grantor agrees to pay upon demand all of
Lender's costs and expenses, including attorneys' fees and Lender's legal
expenses, incurred in connection with the enforcement of this Agreement.
Lender may pay someone else to help enforce this Agreement, and Grantor
shall pay the costs and expenses of such enforcement. Costs and expenses
include Lender's attorneys' fees and legal expenses whether or not there
is a lawsuit, including attorneys' fees and legal expenses for bankruptcy
proceedings (and including efforts to modify or vacate any automatic stay
or injunction), appeals, and any anticipated post-judgment collection
services. Grantor also shall pay all court costs and such additional fees
as may be directed by the court.
Caption Headings. Caption headings in this Agreement are for convenience
purposes only and are not to be used to interpret or define the provisions
of this Agreement.
Multiple Parties; Corporate Authority. All obligations of Grantor under
this Agreement shall be joint and several, and all references to Grantor
shall mean each and every Grantor. This means that each of the persons
signing below is responsible for all obligations in this Agreement.
Notices. All notices required to be given under this Agreement shall be
given in writing and shall be effective when actually delivered or when
deposited in the United States mail, first class, postage prepaid,
addressed to the party to whom the notice is to be given at the address
shown above. Any party may change its address for notices under this
Agreement by giving formal written notice to the other parties,
specifying that the purpose of the notice is to change the party's
address. To the extent permitted by applicable law, if there is more than
one Grantor, notice to any Grantor will constitute notice to all
Grantors. For notice purposes, Grantor agrees to keep Lender informed
at all times of Grantor's current address(es).
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Power of Attorney. Grantor hereby appoints Lender as its true and lawful
attorney-in-fact, irrevocably, with full power of substitution to do the
following: (a) to demand, collect, receive, receipt for, sue and recover
all sums of money or other property which may now or hereafter become due,
owing or payable from the Collateral; (b) to execute, sign and endorse any
and all claims, instruments, receipts, checks, draft or warrants issued in
payment for the Collateral; (c) to settle or compromise any and all claims
arising under the Collateral, and, in the place and stead of Grantor, to
execute and deliver its release and settlement for the claim; and (d) to
file any claim or claims or to take any action or institute or take part
in any proceedings, either in its own name or in the name of Grantor, or
otherwise, which in the discretion of Lender may seem to be necessary or
advisable. This power is given as security for the Indebtedness, and the
authority hereby conferred is and shall be irrevocable and shall remain in
full force and effect until renounced by Lender.
Preference Payments. Any monies Lender pays because of an asserted
preference claim in Borrower's bankruptcy will become a part of the
Indebtedness and, at Lender's option, shall be payable by Borrower as
provided above in the "EXPENDITURES BY LENDER" paragraph.
Severability. If a court of competent jurisdiction finds any provision of
this Agreement to be invalid or unenforceable as to any person or
circumstance, such finding shall not render that provision invalid or
unenforceable as to any other persons or circumstances. If feasible, any
such offending provision shall be deemed to be modified to be within the
limits of enforceability or validity; however, if the offending provision
cannot be so modified, it shall be stricken and all other provisions of
this Agreement in all other respects shall remain valid and enforceable.
Successor Interests. Subject to the limitations set forth above on
transfer of the Collateral, this Agreement shall be binding upon and inure
to the benefit of the parties, their successors and assigns.
Waiver. Lender shall not be deemed to have waived any rights under this
Agreement unless such waiver is given in writing and signed by Lender. No
delay or omission on the part of Lender in exercising any right shall
operate as a waiver of such right or any other right. A waiver by Lender
of a provision of this Agreement shall not prejudice or constitute a
waiver of Lender's right otherwise to demand strict compliance with that
provision or any other provision of this Agreement. No prior waiver by
Lender, nor any course of dealing between Lender and Grantor, shall
constitute a waiver of any of Lender's rights or of any of Grantor's
obligations as to any future transactions. Whenever the consent of Lender
is required under this Agreement, the granting of such consent by Lender
in any instance shall not constitute continuing consent to subsequent
instances where such consent is required and in all cases such consent may
be granted or withhold in the sole discretion of Lender.
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Waiver of Co-obligor's Rights. If more than one person is obligated for
the Indebtedness, Borrower irrevocably waives, disclaims and relinquishes
all claims against such other person which Borrower has or would otherwise
have by virtue of payment of the Indebtedness or any part thereof,
specifically including but not limited to all rights of indemnity,
contribution or exoneration.
GRANTOR ACKNOWLEDGES HAVING READ ALL THE PROVISIONS OF THIS COMMERCIAL
SECURITY AGREEMENT, AND GRANTOR AGREES TO ITS TERMS. THIS AGREEMENT IS DATED
MAY 17, 1993.
GRANTOR:
AMERICA'S BEST KARATE, INC.
By: /s/ Anthony K. Chan
-----------------------------------
ANTHONY K. CHAN,
CHIEF EXECUTIVE OFFICER & SECRETARY
By: /s/ George Chung
-----------------------------------
GEORGE CHUNG,
PRESIDENT
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<PAGE>
Exhibit 10.7
BUSINESS LOAN AGREEMENT
================================================================================
BORROWER: AMERICA'S BEST KARATE LENDER: SILICON VALLEY BANK
26203 PRODUCTION AVENUE, SUITE 5 SBA LENDING
HAYWARD, CA 94545 2202 N. FIRST STREET
SAN JOSE, CA 95131
================================================================================
THIS BUSINESS LOAN AGREEMENT BETWEEN AMERICA'S BEST KARATE ("BORROWER') AND
SILICON VALLEY BANK ("LENDER) IS MADE AND EXECUTED ON THE FOLLOWING TERMS AND
CONDITIONS. BORROWER HAS RECEIVED PRIOR COMMERCIAL LOANS FROM LENDER OR HAS
APPLIED TO LENDER FOR A COMMERCIAL LOAN OR LOANS AND OTHER FINANCIAL
ACCOMMODATIONS, INCLUDING THOSE WHICH MAY BE DESCRIBED ON ANY EXHIBIT OR
SCHEDULE ATTACHED TO THIS AGREEMENT. ALL SUCH LOANS AND FINANCIAL
ACCOMMODATIONS, TOGETHER WITH ALL FUTURE LOANS AND FINANCIAL ACCOMMODATIONS FROM
LENDER TO BORROWER, ARE REFERRED TO IN THIS AGREEMENT INDIVIDUALLY AS THE "LOAN"
AND COLLECTIVELY AS THE "LOANS." BORROWER UNDERSTANDS AND AGREES THAT: (A) IN
GRANTING, RENEWING, OR EXTENDING ANY LOAN, LENDER IS RELYING UPON BORROWER'S
REPRESENTATIONS, WARRANTIES, AND AGREEMENTS, AS SET FORTH IN THIS AGREEMENT; (B)
THE GRANTING, RENEWING, OR EXTENDING OF ANY LOAN BY LENDER AT ALL TIMES SHALL BE
SUBJECT TO LENDER'S SOLE JUDGMENT AND DISCRETION; AND (C) ALL SUCH LOANS SHALL
BE AND SHALL REMAIN SUBJECT TO THE FOLLOWING TERMS AND CONDITIONS OF THIS
AGREEMENT.
TERM. This Agreement shall be effective is of April 25, 1995, and shall continue
thereafter until all Indebtedness of Borrower to Lender has been performed in
full and the parties terminate this Agreement In writing.
DEFINITIONS. The following words shall have the following meanings when used in
this Agreement terms not otherwise defined in this Agreement shall have the
meanings attributed to such terms in the Uniform Commercial Code. All references
to dollar amounts shall mean amounts in lawful money of the United States of
America.
AGREEMENT. The word "Agreement" means this Business Loan Agreement, as
this Business Loan Agreement may be amended or modified from time to time,
together with all exhibits and schedules attached to this Business Loan
Agreement from time to time.
BORROWER. The word "Borrower" means AMERICA'S BEST KARATE. The word
"Borrower" also includes, as applicable, all subsidiaries and affiliates
of Borrower as provided below in the paragraph titled "Subsidiaries and
Affiliates."
CERCLA. The word "CERCLA" means the Comprehensive Environmental
Response, Compensation, and Liability Act of 1980, as amended.
CASH FLOW. The words "Cash Flow" mean net income after taxes, and
exclusive of extraordinary gains and income, plus depreciation and
amortization.
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<PAGE>
BUSINESS LOAN AGREEMENT
(Continued)
================================================================================
COLLATERAL. The word "Collateral" means and includes without limitation
all property and assets granted as collateral security for a Loan, whether
real or personal property, whether granted directly or indirectly, whether
granted now or in the future, and whether granted in the form of a
security interest, mortgage, dead of trust, assignment, pledge, chattel
mortgage, chattel trust, factor's lien, equipment trust, conditional sale,
trust receipt, lien, charge, lien or title retention contract, lease or
consignment intended as a security device, or any other security or lien
interest whatsoever, whether created by law, contract, or otherwise.
DEBT. The word "Debt" means all of Borrower's liabilities excluding
Subordinated Debt.
ERISA. The word "ERISA" means the Employee Retirement Income Security
Act of 1974, as amended.
EVENT OF DEFAULT. The words "Event of Default" mean and include without
limitation any of the Events of Default set forth below in the section
titled "EVENTS OF DEFAULT."
GRANTOR. The word "Grantor" means and includes without limitation each
and all of the persons or entities granting a Security Interest in any
Collateral for the Indebtedness, including without limitation all
Borrowers granting such a Security Interest
GUARANTOR. The word "Guarantor" means and includes without limitation
each and all of the guarantors, sureties, and accommodation parties in
connection with any Indebtedness.
INDEBTEDNESS. The word "Indebtedness" means and includes without
limitation all Loans, together with all other obligations, debts and
liabilities of Borrower to Lender, or any one or more of them, as well as
all claims by Lender against Borrower. or any one or more of them; whether
now or hereafter existing, voluntary or involuntary, due or not due,
absolute or contingent liquidated or unliquidated; whether Borrower may be
liable individually or jointly with others; whether Borrower may be
obligated as a guarantor, surety, or otherwise; whether recovery upon such
Indebtedness may be or hereafter may become barred by any statute of
limitations; and whether such Indebtedness may be or hereafter may become
otherwise unenforceable.
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<PAGE>
BUSINESS LOAN AGREEMENT
(Continued)
================================================================================
LENDER. The word "Lender" means Silicon Valley Bank, its successors
and assigns.
LIQUID ASSETS. The words "Liquid Assets" mean Borrower's cash on hand
plus Borrowers receivables.
LOAN. The word "Loan" or "Loans" means and includes without limitation any
and all commercial loans and financial accommodations from Lender to
Borrower, whether now or hereafter existing, and however evidenced,
including without limitation those loans and financial accommodations
described herein or described on any exhibit or schedule attached to this
Agreement from time to time.
NOTE. The word "Note" means and includes without limitation Borrower's
promissory note or notes, if any, evidencing Borrower's Loan obligations
in favor of Lender, as well as any substitute, replacement or refinancing
note or notes therefor.
RELATED DOCUMENTS. The words "Related Documents" mean and include without
limitation all promissory notes, credit agreements, loan agreements,
environmental agreements, guaranties, security agreements, mortgages,
deeds of trust, and all other instruments, agreements and documents,
whether now or hereafter existing, executed in connection with the
Indebtedness.
SECURITY AGREEMENT. The words "Security Agreement" mean and include
without limitation any agreements, promises, covenants, arrangements,
understandings or other agreements, whether created by law, contract, or
otherwise, evidencing, governing, representing, or creating a Security
Interest.
SECURITY INTEREST. The words "Security Interest" mean and include without
limitation any type of collateral security, whether in the form of a lien,
charge, mortgage, deed of trust, assignment, pledge, chattel mortgage,
chattel trust factor's lien, equipment trust, conditional sale, trust
receipt, lien or title retention contract, lease or consignment intended
as a security device, or any other security or lien interest whatsoever,
whether created by law, contract or otherwise.
SARA. The word "SARA" means the Superfund Amendments and Reauthorization
Act of 1986 as now or hereafter amended.
SUBORDINATED DEBT. The words "Subordinated Debt" mean Indebtedness and
liabilities of Borrower which have been subordinated by written agreement
to indebtedness owed by Borrower to Lender in form and substance
acceptable to Lender.
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<PAGE>
BUSINESS LOAN AGREEMENT
(Continued)
================================================================================
TANGIBLE NET WORTH. The words "Tangible Net Worth" mean Borrower's total
assets excluding all intangible assets (i.e., goodwill, trademarks,
patents, copyrights, organizational expenses, and similar intangible
items, but including leaseholds and leasehold improvements) less total
Debt.
WORKING CAPITAL. The words "Working Capital" mean Borrower's current
assets, excluding prepaid expenses, less Borrower's current liabilities.
REPRESENTATIONS AND WARRANTIES. Borrower represents and warrants to Lender as
of the date of this Agreement and as of the date of each disbursement of
Loan proceeds:
ORGANIZATION. Borrower is a corporation which is duly organized, validly
existing, and in good standing under the laws of the State of California.
Borrower has the full power and authority to own its properties and to
transact the businesses in which it is presently engaged or presently
proposes to engage. Borrower also is duly qualified as a foreign
corporation and is in good standing in all states in which the failure to
so quality would have a material adverse affect on its businesses or
financial condition.
AUTHORIZATION. The execution, delivery, and performance of this Agreement
and all Related Documents by Borrower, to the extent to be executed,
delivered or performed by Borrower, have been duly authorized by all
necessary action by Borrower, do not require the consent or approval of
any other person, regulatory authority or governmental body; and do not
conflict with, result in a violation of, or constitute a default under (a)
any provision of its articles of incorporation or organization, or bylaws,
or any agreement or other instrument binding upon Borrower or (b) any law,
governmental regulation, court decree, or order applicable to Borrower.
FINANCIAL INFORMATION. Each financial statement of Borrower supplied to
Lender truly and completely disclosed Borrower's financial condition as of
the date of the statement, and there has been no material adverse change
in Borrower's financial condition subsequent to the date of the most
recent financial statement supplied to Lender. Borrower has no material
contingent obligations except as disclosed in such financial statements.
LEGAL EFFECT. This Agreement constitutes, and any instrument or agreement
required hereunder to be given by Borrower when delivered will constitute,
legal, valid and binding obligations of Borrower enforceable against
Borrower in accordance with their respective terms.
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<PAGE>
BUSINESS LOAN AGREEMENT
(Continued)
================================================================================
PROPERTIES. Except as contemplated by this Agreement or as previously
disclosed in Borrower's financial statements or in writing to Lender and
as accepted by Lenders and except for property tax liens for taxes not
presently due and payable, Borrower owns and has good title to all of
Borrower's properties free and clear of all Security Interests, and has
not executed any security documents or financing statements relating to
such properties. All of Borrower's properties are added in Borrower's
legal name, and Borrower has not used, or filed a financing statement
under, any other name for at least the last five (5) years.
HAZARDOUS SUBSTANCES. The terms "hazardous waste," "hazardous substance,"
"disposal," "release," and "threatened release," as used in this
Agreement, shall have the same meanings as set forth in the "CERCLA,"
"SARA," the Hazardous Materials Transportation Act, 49 U.S.C. Section
1801, et seq., the Resource Conservation and Recovery Act, 49 U.S.C.
Section 6901, et seq., Chapters 6.5 through 7.7 of Division 20 of the
California Health and Safety Code, Section 25100, et seq., or other
applicable state or Federal laws, rules, or regulations adopted pursuant
to any of the foregoing. Except as disclosed to and acknowledged by Lender
in writing, Borrower represents and warrants that: (a) During the period
of Borrower's ownership of the properties, there has been no use,
generation, manufacture, storage, treatment, disposal, release or
threatened release of any hazardous waste or substance by any person on,
under, or about any of the properties. (b) Borrower has no knowledge of,
or reason to believe that there has been any use, generation, manufacture,
storage, treatment. disposal, release, or threatened release of any
hazardous waste or substance by any prior owners or occupants of any of
the properties, or any actual or threatened litigation or claims of any
kind by any person relating to such matters. (c) Neither Borrower nor any
tenant, contractor, agent or other authorized user of any of the
properties shall use, generate, manufacture, store, treat, dispose of, or
release any hazardous waste or substance on, under, or about any of the
properties; and any such activity shall be conducted in compliance with
all applicable federal, state, and local laws, regulations, and
ordinances, including without limitation those laws, regulations and
ordinances described above. Borrower authorizes Lender and its agents to
enter upon the properties to make such inspections and tests as Lender may
deem appropriate to determine compliance of the properties with this
section of the Agreement. Any inspections or tests made by Lender shall be
at Borrower's expense and for Lenders purposes only and shall not be
construed to create any responsibility or liability on the part of Lender
to Borrower or to any other person. The representations and warranties
contained herein are based on Borrower's due diligence in investigating
the properties for hazardous waste. Borrower hereby (a) releases and
waives any future claims against Lender for indemnity or contribution in
the event Borrower becomes liable for cleanup or other costs under any
such laws, and (b) agrees to indemnity and hold harmless Lender against
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<PAGE>
BUSINESS LOAN AGREEMENT
(Continued)
================================================================================
any and all claims, losses, liabilities, damages, penalties, and expenses
which Lender may directly or indirectly sustain or suffer resulting from a
breach of this section of the Agreement or as a consequence of any use,
generation, manufacture, storage, disposal, release or threatened release
occurring prior to Borrower's ownership or interest in the properties,
whether or not the same was or should have been known to Borrower. The
provisions of this section of the Agreement, including the obligation to
indemnity, shall survive the payment of the Indebtedness and the
termination or expiration of this Agreement and shall not be affected by
Lenders acquisition of any interest in any of the properties, whether by
foreclosure or otherwise.
LITIGATION AND CLAIMS. No litigation, claim, investigation, administrative
proceeding or similar action (including those for unpaid taxes) against
Borrower is pending or threatened, and no other event has occurred which
may materially adversely affect Borrower's financial condition or
properties, other than litigation, claims, or other events, if any, that
have been disclosed to and acknowledged by Lender in writing.
TAXES. To the best of Borrower's knowledge, all tax returns and reports of
Borrower that are or were required to be filed, have been filed, and all
taxes, assessments and other governmental charges have been paid in full,
except those presently being or to be contested by Borrower in good faith
in the ordinary course of business and for which adequate reserves have
been provided.
LIEN PRIORITY. Unless otherwise previously disclosed to Lender in writing,
Borrower has not entered into or granted any Security Agreements, or
permitted the filing or attachment of any Security Interests on or
affecting any of the Collateral directly or indirectly securing repayment
of Borrower's Loan and Note, that would be prior or that may in any way be
superior to Lender's Security Interests and rights in and to such
Collateral.
BINDING EFFECT. This Agreement, the Note and all Security Agreements
directly or indirectly securing repayment of Borrowers Loan and Note are
binding upon Borrower as well as upon Borrower's successors,
representatives and assigns, and are legally enforceable in accordance
With their respective terms.
COMMERCIAL PURPOSES. Borrower intends to use the Loan proceeds solely
for business or commercial related purposes.
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<PAGE>
BUSINESS LOAN AGREEMENT
(Continued)
================================================================================
EMPLOYEE BENEFIT PLANS. Each employee benefit plan as to which Borrower
may have any liability complies in all material respects with all
applicable requirements of law and regulations, and no Reportable Event
nor Prohibited Transaction (as defined in ERISA) has occurred with respect
to any such plan, (ii) Borrower has not withdrawn from any such plan or
initiated steps to do so, and (iii) no steps have been taken to terminate
any such plan.
LOCATION OF BORROWER'S OFFICES AND RECORDS. The chief place of business of
Borrower and the office or offices where Borrower keeps its records
concerning the Collateral is located at 26203 Production Avenue, Suite 5,
Hayward, CA 94545.
INFORMATION. All information heretofore or contemporaneously herewith
furnished by Borrower to Lender for the purposes of or in connection with
this Agreement or any transaction contemplated hereby is, and all
information hereafter furnished by or on behalf of Borrower to Lender will
be, true ,and accurate in every material respect on the date as of which
such information is dated or certified: and none of such information is or
will be incomplete by omitting to state any material fact necessary to
make such information not misleading.
SURVIVAL OF REPRESENTATION AND WARRANTIES. Borrower understands and agrees
that Lender is relying upon the above representations and warranties in
making the above referenced Loan to Borrower. Borrower further agrees that
the foregoing representations and warranties shall be continuing in nature
and shall remain in full force and affect until such time as Borrower's
Loan and Note shall be paid in full, or until this Agreement shall be
terminated in the manner provided above, whichever is the last to occur.
AFFIRMATIVE COVENANTS. Borrower covenants and agrees with Lender that while
this Agreement is in effect Borrower will:
LITIGATION. Promptly inform Lender in writing of (a) all material adverse
changes in Borrower's financial condition, and (b) all litigation and
claims and all threatened litigation and claims affecting Borrower or any
Guarantor which could materially affect the financial condition of
Borrower or the financial condition of any Guarantor.
FINANCIAL RECORDS. Maintain Its books and records in accordance with
generally accepted accounting principles, applied on a consistent basis,
and permit Lender to examine and audit Borrower's books and records at all
reasonable times.
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<PAGE>
BUSINESS LOAN AGREEMENT
(Continued)
================================================================================
FINANCIAL STATEMENTS. Furnish Lender with, as soon as available, but in no
event later than ninety (90) days after the end of each fiscal year,
Borrower's balance sheet and income statement for the year ended, reviewed
by a certified public accountant satisfactory to Lender, and, as soon as
available, but in no event later than thirty (30) days after the end of
each fiscal quarter, Borrower's balance sheet and profit and loss
statement for the period ended, prepared and certified as correct to the
best knowledge and belief by Borrowers chief financial officer or other
officer or person acceptable to Lender. All financial reports required to
be provided under this Agreement shall be prepared in accordance with
generally accepted accounting principles, applied on a consistent basis,
and certified by Borrower as being true and correct.
ADDITIONAL INFORMATION. Furnish such additional information and
statements, lists of assets and liabilities, agings of receivables and
payables, inventory schedules, budgets, forecasts, tax returns and other
reports with respect to Borrower's financial condition and business
operations as Lender may request from time to time.
FINANCIAL COVENANTS AND RATIOS. Comply with the following covenants and
ratios: Refer to Page 4.
For purposes of this Agreement and to the extent the following terms are
utilized in this Agreement the term "Tangible Net Worth" shall mean
Borrower's total assets excluding all intangible assets (i.e., goodwill,
trademarks, patents, copyrights, organizational expenses, and similar
intangible items, but including leaseholds and leasehold improvements)
less total Debt. The term "Debt" shall mean all of Borrower's liabilities
excluding Subordinated Debt. The term "Subordinated Debt" shall mean
indebtedness and liabilities of Borrower which have been subordinated by
written agreement to Indebtedness owed by Borrower to Lender in form and
substance acceptable to Lender. The term "Working Capital" shall mean
Borrower's current assets, excluding prepaid expenses, less Borrower's
current liabilities. The term "Liquid Assets" shall mean Borrowers cash on
hand plus Borrower's receivables. The term "Cash Flow" shall mean net
income after taxes, and exclusive of extraordinary gains and income, plus
depreciation and amortization. Except as provided above, all computations
made to determine compliance with the requirements contained in this
paragraph shall be made in accordance with generally accepted accounting
principles, applied on a consistent basis, and certified by Borrower as
being true and correct.
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<PAGE>
BUSINESS LOAN AGREEMENT
(Continued)
================================================================================
INSURANCE. Maintain fire and other risk insurance, public liability
insurance, and such other insurance as Lender may require with respect to
Borrower's properties and operations, in form, amounts, coverages and with
insurance companies reasonably acceptable to Lender. Borrower, upon
request of Lender, will deliver to Lender from time to time the policies
or certificates of insurance in form satisfactory to Lender, including
stipulations that coverages will not be cancelled or diminished without at
least ten (10) days' prior written notice to Lender. Each insurance policy
also shall include an endorsement providing that coverage in favor of
Lender will not be impaired in any way by any act, omission or default of
Borrower or any other person. In connection with all policies covering
assets in which Lender holds or is offered a security interest for the
Loans, Borrower will provide Lender with such loss payable or other
endorsements as Lender may require.
INSURANCE REPORTS. Furnish to Lender, upon request of Lender, reports on
each existing insurance policy showing such information as Lender may
reasonably request, including without limitation the following: (a) the
name of the insurer, (b) the risks insured; (c) the amount of the policy;
(d) the properties insured; (e) the then current property values on the
basis of which insurance has been obtained, and the manner of determining
those values; and (f) the expiration date of the policy. In addition, upon
request of Lender (however not more often than annually), Borrower will
have an independent appraiser satisfactory to Lender determine, as
applicable, the actual cash value or replacement cost of any Collateral.
GUARANTIES. Prior to disbursement of any Loan proceeds, furnish executed
guaranties of the Loans in favor of Lender, on Lender's forms, and in
the amounts and by the guarantors named below:
Guarantors Amounts
---------- -------
Anthony K. Chan Unlimited
George H. Chung Unlimited
OTHER AGREEMENTS. Comply with all terms and conditions of all other
agreements, whether now or hereafter existing, between Borrower and any
other party and notify Lender immediately in writing of any default in
connection with any other such agreements.
9
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<PAGE>
BUSINESS LOAN AGREEMENT
(Continued)
================================================================================
LOAN PROCEEDS. Use all Loan proceeds solely for Borrower's business
operations, unless specifically consented to the contrary by Lender in
writing.
TAXES, CHARGES AND LIENS. Pay and discharge when due all of its
indebtedness and obligations, including without limitation all
assessments, taxes, governmental charges, levies and liens of every kind
and nature, imposed upon Borrower or its properties, income, or profits,
prior to the date on which penalties would attach, and all lawful claims
that, if unpaid, might become a lien or charge upon any of Borrower's
properties, income, or profits. Provided however, Borrower will not be
required to pay and discharge any such assessment, tax, charge, levy, lien
or claim so long as (a) the legality of the same shall be contested in
good faith by appropriate proceedings, and (b) Borrower shall have
established on its books adequate reserves with respect to such
contested assessment, tax, charge, levy, lien, or claim in accordance with
generally accepted accounting practices. Borrower, upon demand of Lender,
will furnish to Lender evidence of payment of the assessments, taxes,
charges, levies, liens and claims and will authorize the appropriate
governmental official to deliver to Lender at any time a written statement
of any assessments, taxes, charges, levies, liens and claims against
Borrowers properties, income, or profits.
PERFORMANCE. Perform and comply with all terms, conditions, and provisions
set forth in this Agreement and in all other instruments and agreements
between Borrower and Lender in a timely manner, and promptly notify Lender
if Borrower learns of the occurrence of any event which constitutes an
Event of Default under this Agreement.
OPERATIONS. Substantially maintain its present executive and management
personnel; conduct its business affairs in a reasonable and prudent manner
and in compliance with all applicable federal, state and municipal laws,
ordinances, rules and regulations respecting its properties charters,
businesses and operations, Including without limitation, compliance with
the Americans With Disabilities Act and with all minimum funding standards
and other requirements of ERISA and other laws applicable to Borrower's
employee benefit plans.
INSPECTION. Permit employees or agents of Lender at any reasonable time to
inspect any and all Collateral for the Loan or Loans and Borrowers other
properties and to examine or audit Borrower's books, accounts, and records
and to make copies and memoranda of Borrower's books, accounts, and
records. If Borrower now or at any time hereafter maintains any records
10
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<PAGE>
BUSINESS LOAN AGREEMENT
(Continued)
================================================================================
(including without limitation computer generated records and computer
software programs for the generation of such records) in the possession of
a third party, Borrower, upon request of Lender, shall notify such party
to permit Lender free access to such records at all reasonable times and
to provide Lender with copies of any records it may request all at
Borrower's expense.
COMPLIANCE CERTIFICATE. Unless waived in writing by Lender, provide Lender
NO LATER THAN THIRTY (30) DAYS AFTER AND AS OF THE END OF EACH FISCAL
QUARTER and at the time of each disbursement of Loan proceeds with a
certificate executed by Borrower's chief financial officer, or other
officer or person acceptable to Lender, certifying that the
representations and warranties set forth in this Agreement are true and
correct as of the date of the certificate and further certifying that as
of the date of the certificate, no Event of Default exists under this
Agreement.
ENVIRONMENTAL COMPLIANCE AND REPORTS. Borrower shall comply in all
respects with all environmental protection federal, state and local laws,
statutes, regulations and ordinances; not cause or permit to exist, as a
result of an intentional or unintentional action or omission on its part
or on the part of any third party, on property owned and/or occupied by
Borrower, any environmental activity where damage may result to the
environment, unless such environmental activity is pursuant to and in
compliance with the conditions of a permit issued by the appropriate
federal, state or local governmental authorities; shall furnish to Lender
promptly and in any event within thirty (30) days after receipt thereof a
copy of any notice, summons, lien, citation, directive, letter or other
communication from any governmental agency or instrumentality concerning
any intentional or unintentional action or omission on Borrower's part in
connection with any environmental activity whether or not there is damage
to the environment and/or other natural resources.
ADDITIONAL ASSURANCES. Make, execute and deliver to Lender such promissory
notes, mortgages, deeds of trust, security agreements, financing
statements, instruments, documents and other agreements as Lender or its
attorneys may reasonably request to evidence and secure the Loans and to
perfect all Security Interests.
NEGATIVE COVENANTS. Borrower covenants and agrees with Lender that while this
Agreement is in affect, Borrower shall not without the prior written consent of
Lender:
11
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<PAGE>
BUSINESS LOAN AGREEMENT
(Continued)
================================================================================
INDEBTEDNESS AND LIENS. (a) Except for trade debt incurred in the normal
course of business and indebtedness to Lender contemplated by this
Agreement, create, incur or assume indebtedness for borrowed money,
including capital leases, (b) sell, transfer, mortgage, assign, pledge,
lease, grant a security interest in, or encumber any of Borrower's assets,
or (c) sell with recourse any of Borrower's accounts, except to Lender.
CONTINUITY OF OPERATIONS. (a) Engage in any business activities
substantially different than those in which Borrower is presently engaged,
(b) cease operations, liquidate, merge, transfer, acquire or consolidate
with any other entity, change ownership, dissolve or transfer or sell
Collateral out of the ordinary course of business (c) pay any dividends on
Borrower's stock (other than dividends payable in its stock), provided,
however that notwithstanding the foregoing, but only so long as no Event
of Default has occurred and is continuing or would result from the payment
dividends, if Borrower is a "Subchapter S Corporation" (as defined
in the Internal Revenue Code of 1986, as amended), Borrower may pay cash
dividends on its stock to its shareholders from time to time in amounts
necessary to enable the shareholders to pay income taxes and make
estimated income tax payments to satisfy their liabilities under federal
and state law which arise solely from their status as Shareholders of a
Subchapter S Corporation because of their ownership of shares of stock of
Borrower, or (d) purchase or retire any of Borrower's outstanding shares
or alter or amend Borrower's capital structure.
LOANS, ACQUISITIONS AND GUARANTIES. (a) Loan, invest in or advance money
or assets, (b) purchase, create or acquire any interest in any other
enterprise or entity, or (c) incur any obligation as surety or guarantor
other than in the ordinary course of business.
CESSATION OF ADVANCES. If Lender has made any commitment to make any Loan to
Borrower, whether under this Agreement or under any other agreement, Lender
shall have no obligation to make Loan Advances or to disburse Loan proceeds if
(a) Borrower or any Guarantor is in default under the terms of this Agreement or
any of the Related Documents or any other agreement that Borrower or any
Guarantor has with Lender; (b) Borrower becomes insolvent, files a petition in
bankruptcy or similar proceedings, or is adjudged a bankrupt; (c) there occurs a
material adverse change in Borrower's financial condition, in the financial
condition of any Guarantor, or in the value of any Collateral securing any Loan;
or (d) any Guarantor seeks, claims or otherwise attempts to limit, modify or
revoke such Guarantees guaranty of the Loan or any other loan with Lender.
12
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<PAGE>
BUSINESS LOAN AGREEMENT
(Continued)
================================================================================
LOAN ADVANCES. Lender, in its discretion, will make loans to Borrower, in
amounts determined by Lender, up to the amounts as defined and permitted in the
Agreement and Related Documents, including but not limited to any Promissory
Notes, executed by Borrower (the "Credit Limit"). The Borrower is responsible
for monitoring the total amount of Loans and Indebtedness outstanding from time
to time, and Borrower shall not permit the same, at any time to exceed the
Credit Limit. If at any time the total of all outstanding Loans and Indebtedness
exceeds the Credit Unit, the Borrower shall immediately pay the amount of the
excess to Lender, without notice or demand.
DEFAULT RATE. Upon default, including failure to pay upon final maturity,
Lender, at its option, may do one or both of the following: (a) increase the
variable interest rate on the Note to five percentage points (5.000%) over the
Interest Rate otherwise payable thereunder, and (b) add any unpaid accrued
interest to principal and such sum will bear Interest therefrom until paid at
the rate provided in the Note.
FINANCIAL COVENANTS. Maintain on a quarterly basis, beginning with the quarter
ending March 31, 1995, a minimum cash flow coverage of 1.50 to 1.00; a maximum
total debt minus subordinated debt to tangible net worth plus subordinated debt
ratio of 3.75 to 1.00. Furthermore, maintain profitability on a rolling four (4)
quarter basis.
EVENTS OF DEFAULT. Each of the following shall constitute an Event of Default
under this Agreement:
DEFAULT ON INDEBTEDNESS. Failure of Borrower to make any payment when
due on the Loans.
OTHER DEFAULTS. Failure of Borrower or any Grantor to comply with or to
perform when due any other term, obligation, covenant or condition
contained in this Agreement or in any of the Related Documents, or failure
of Borrower to comply with or to perform any other term, obligation,
covenant or condition contained in any other agreement between Lender and
Borrower.
DEFAULT IN FAVOR OF THIRD PARTIES. Should Borrower or any Grantor default
under any loan, extension of credit, security agreement, purchase or sales
agreement, or any other agreement, in favor of any other creditor or
person that may materially affect any of Borrower's property or Borrower's
or any Grantor's ability to repay the Loans or perform their respective
obligations under this Agreement or any of the Related Documents.
13
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<PAGE>
BUSINESS LOAN AGREEMENT
(Continued)
================================================================================
FALSE STATEMENTS. Any warranty, representation or statement made or
furnished to Lender by or on behalf of Borrower or any Grantor under this
Agreement or the Related Documents is false or misleading in any material
respect, either now or at the time made or furnished.
DEFECTIVE COLLATERALIZATION. This Agreement or any of the Related
Documents ceases to be In full force and effect (including failure of any
Security Agreement to create a valid and perfected Security Interest) at
any time and for any reason.
INSOLVENCY. The dissolution or termination of Borrower's existence as a
going business, the insolvency of Borrower, the appointment of a receiver
for any part of Borrower's property, any assignment for the benefit of
creditors, any type of creditor workout, or the commencement of any
proceeding under any bankruptcy or insolvency laws by or against Borrower.
CREDITOR OR FORFEITURE PROCEEDINGS. Commencement of foreclosure or
forfeiture proceedings, whether by judicial proceeding, self-help,
repossession or any other method, by any creditor of Borrower, any
creditor of any Grantor against any collateral securing the Indebtedness,
or by any governmental agency. This includes a garnishment, attachment, or
levy on or of any of Borrowers deposit accounts with Lender.
EVENTS AFFECTING GUARANTOR. Any of the preceding events. occurs with
respect to any Guarantor of any of the Indebtedness or such Guarantor
dies or becomes incompetent.
CHANGE IN OWNERSHIP. Any change in ownership of twenty-five percent
(25%) or more of the common stock of Borrower.
EFFECT OF AN EVENT OF DEFAULT. If any Event of Default shall occur, all
commitments and obligations of Lender under this Agreement or the Related
Documents or any other agreement immediately will terminate and, at Lender's
option, all Loans immediately will become due and payable, all without notice of
any kind to Borrower, except that in the case of an Event of Default of the type
described In the "Insolvency" subsection above, such acceleration shall be
automatic and not optional.
MISCELLANEOUS PROVISIONS. The following miscellaneous provisions are a part of
this Agreement:
14
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<PAGE>
BUSINESS LOAN AGREEMENT
(Continued)
================================================================================
AMENDMENTS. This Agreement, together with any Related Documents,
constitutes the entire understanding and agreement of the parties as to
the matters set forth in this Agreement. No alteration of or amendment to
this Agreement shall be effective unless given in writing and signed by
the party or parties sought to be charged or bound by the alteration or
amendment.
APPLICABLE LAW. THIS AGREEMENT HAS BEEN DELIVERED TO LENDER AND ACCEPTED
BY LENDER IN THE STATE OF CALIFORNIA. IF THERE IS A LAWSUIT, BORROWER
AGREES UPON LENDER'S REQUEST TO SUBMIT TO THE JURISDICTION OF THE COURTS
OF SANTA CLARA COUNTY, THE STATE OF CALIFORNIA. (INITIAL HERE AKC.)]
Lender and Borrower hereby waive the right to any jury trial in any
action, proceeding, or counterclaim brought by either Lender or Borrower
against the other. This Agreement shall be governed by and construed in
accordance with the laws of the State of California.
CAPTION HEADINGS. Caption headings in this Agreement are for convenience
purposes only and are not to be used to interpret or define the
provisions of this Agreement.
MULTIPLE PARTIES; CORPORATE AUTHORITY. All obligations of Borrower under
this Agreement shall be joint and several, and all references to Borrower
shall mean each and every Borrower. This means that each of the persons
signing below is responsible for all obligations in this Agreement.
CONSENT TO LOAN PARTICIPATION. Borrower agrees and consents to Lender's
sale or transfer, whether now or later, of one or more participation
interests in the Loans to one or more purchasers, whether related or
unrelated to Lender. Lender may provide, without any limitation
whatsoever, to any one or more purchasers, or potential purchasers, any
information or knowledge Lender may have about Borrower or about any other
matter relating to the Loan, and Borrower hereby waives any rights to
privacy it may have with respect to such matters. Borrower additionally
waives any and all notices of sale of participation interests, as well as
all notices of any repurchase of such participation interests. Borrower
15
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<PAGE>
BUSINESS LOAN AGREEMENT
(Continued)
================================================================================
also agrees that the purchasers of any such participation interests will
be considered as the absolute owners of such interests in the Loans and
will have all the rights granted under the participation agreement or
agreements governing the sale of such participation interests. Borrower
further waives all rights of offset or counterclaim that it may have now
or later against Lender or against any purchaser of such a participation
interest and unconditionally agrees that either Lender or such purchaser
may enforce Borrower's obligation under the Loans irrespective of the
failure or insolvency of any holder of any interest in the Loans. Borrower
further agrees that the purchaser of any such participation interests may
enforce its interests irrespective of any personal claims or defenses that
Borrower may have against Lender.
COSTS AND EXPENSES. Borrower agrees to pay upon demand all of Lender's
out-of-pocket expenses, including without limitation attorneys' fees,
incurred in connection with the preparation, execution, enforcement and
collection of this Agreement or in connection with the Loans made pursuant
to this Agreement. Lender may pay someone else to help collect the Loans
and to enforce this Agreement, and Borrower will pay that amount. This
includes, subject to any limits under applicable law, Lender's attorneys'
fees and Lender's legal expenses, whether or not there is a lawsuit,
including attorneys' fees for bankruptcy proceedings (including efforts
to modify or vacate any automatic stay or injunction), appeals, and any
anticipated post-judgment collection services. Borrower also will pay any
court costs, in addition to all other sums provided by law.
NOTICES. All notices required to be given under this Agreement shall be
given in writing and shall be effective when actually delivered or when
deposited with a nationally recognized overnight courier or deposited in
the United States mail, first class, postage prepaid, addressed to the
party to whom the notice is to be given at the address shown above. Any
party may change its address for notices under this Agreement by giving
formal written notice to the other parties, specifying that the purpose of
the notice is to change the party's address. To the extent permitted by
applicable law, if there is more than one Borrower, notice to any Borrower
will constitute notice to all Borrowers. For notice purposes, Borrower
agrees to keep Lender informed at all times of Borrower's current
address(es).
16
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<PAGE>
BUSINESS LOAN AGREEMENT
(Continued)
================================================================================
SEVERABILITY. If a court of competent jurisdiction finds any provision of
this Agreement to be invalid or unenforceable as to any person or
circumstance, such finding shall not render that provision invalid or
unenforceable as to any other persons or circumstances. If feasible, any
such offending provision shall be deemed to be modified to be within the
limits of enforceability or validity; However, if the offending provision
cannot be so modified, it shall be stricken and all other provisions of
this Agreement in all other respects shall remain valid and enforceable.
SUBSIDIARIES AND AFFILIATES OF BORROWER. To the extent the context of any
provisions of this Agreement makes it appropriate, including without
limitation any representation, warranty or covenant, the word "Borrower"
as used herein shall include all subsidiaries and affiliates of Borrower.
Notwithstanding the foregoing however, under no circumstances shall this
Agreement be construed to require Lender to make any Loan or other
financial accommodation to any subsidiary or affiliate of Borrower.
SUCCESSORS AND ASSIGNS. All covenants and agreements contained by or on
behalf of Borrower shall bind its successors and assigns and shall inure
to the benefit of Lender, its successors and assigns. Borrower shall not,
however, have the right to assign its rights under this Agreement or any
interest therein, without the prior written consent of Lender.
SURVIVAL. All warranties, representations, and covenants made by Borrower
in this Agreement or in any certificate or other instrument delivered by
Borrower to Lender under this Agreement shall be considered to have been
relied upon by Lender and will survive the making of the Loan and delivery
to Lender of the Related Documents, regardless of any investigation made
by Lender or on Lender's behalf.
TIME IS OF THE ESSENCE. Time is of the essence in the performance of
this Agreement.
WAIVER. Lender shall not be deemed to have waived any rights under this
Agreement unless such waiver is given in writing and signed by Lender. No
delay or omission on the part of Lender in exercising any right shall
operate as a waiver of such right or any other right. A waiver by Lender
of a provision of this Agreement shall not prejudice or constitute a
waiver of Lender's right otherwise to demand strict compliance with that
provision or any other provision of this Agreement. No prior waiver by
Lender, nor any course of dealing between Lender and Borrower, or between
Lender and any Grantor, shall constitute a waiver of any of Lender's
rights or of any obligations of Borrower or of any Grantor as to any
future transactions. Whenever the consent of Lender is required under this
Agreement, the granting of such consent by Lender in any instance shall
not constitute continuing consent in subsequent instances where such
consent is required, and in all cases such consent may be granted or
withheld in the sole discretion of Lender.
17
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<PAGE>
BUSINESS LOAN AGREEMENT
(Continued)
================================================================================
BORROWER ACKNOWLEDGES HAVING READ ALL THE PROVISIONS OF THIS BUSINESS LOAN
AGREEMENT, AND BORROWER AGREES TO ITS TERMS. THIS AGREEMENT IS DATED AS OF
APRIL 25, 1995.
BORROWER:
AMERICA'S BEST KARATE
By: /s/ Anthony K. Chan
-------------------------
Name: Anthony K. Chan Title: Chief Executive Officer
--------------- -----------------------
LENDER:
Silicon Valley Bank
By: /s/
-------------------------
Authorized Officer
================================================================================
LASER PRO. Reg. U.S. Pat. & T.M. Off, Ver. 3.19 (c) 199S CFI ProServices. Inc.
All rights reserved. (CA-C40 AMERICAS.LN Q1.OVLI
18
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<PAGE>
Exhibit 10.8
PROMISSORY NOTE
$100,000 DECEMBER 15, 1994
FOR VALUE RECEIVED, the undersigned promise to pay to the MICHAEL
TRIANTOS M.D. INC. MONEY PURCHASE AND PROFIT SHARING PENSION PLANS TRUST, whose
principal place of business and mailing address is 15000 Los Gatos Blvd. Suite
2, Los Gatos, California 95032, the sum of $100,000 (ONE HUNDRED THOUSAND
DOLLARS AND NO CENTS) until fully paid at 12% (TWELVE PERCENT) per annum.
Principal and interest are payable in lawful money of the United States as
follows:
On the fifteenth day of January 1995, and on the fifteenth day of each
month thereafter, a payment of $2224.44, or more, will be made. Such payments
will continue each and every month until December 15th, 1999, at which time a
final payment to include all principal and interest owing shall be made.
Time is of the essence in the making of these payments and no extensions
shall be implied by any action for inaction of the holder of this note. All
installments shall be due and payable on or before 4:30 PM on the date set for
performance, at the address set forth above, If any monthly payment be not paid
when the same becomes due, the entire principal and accrued and unpaid interest
owing shall automatically become due and payable immediately.
In addition, if any principal or interest is not paid when due, the said
unpaid amount shall continue to accrue interest at the rate of 12% per annum.
Should the holder of this note refer this note to an attorney for collection,
then regardless of whether any proceedings for collection are instituted, the
undersigned agree to pay all attorney's fees and expenses incurred by the holder
in the collection of any amount due under this note. The makers, endorsers,
and guarantors hereof, each jointly and severally, waive diligence, presentment,
demand of payment, protest and notice of protest.
The undersigned also promise to maintain life insurance policies for
George Chung and Anthony Chan, each in the amount of $100,000. These policies
are to be used, in the event of the death of either of the aforementioned
parties, to pay the entire outstanding principal and interest owing at that
time. A corporate resolution has been executed and a copy accompanies this
agreement which states that the proceeds of these policies will be used to pay
this loan immediately and before any other use is made of those proceeds. This
payment will be considered to satisfy the provisions of this note entirely and
completely.
In addition to the above provisions, at the time that this note shall be
paid in full, the MICHAEL TRIANTOS M.D. INC. MONEY PURCHASE AND PROFIT SHARING
PENSION PLANS TRUST may choose to accept a 1% share in the corporation America's
Best Karate, Inc. If this option is exercised then the aforementioned shall
receive 1% of the net profit for the corporation for that year paid yearly.
1
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<PAGE>
This net profit shall be calculated based on the gross revenues for the
corporation minus the operating expenses for that year. These expenses shall
include a salary paid to George Chung and Anthony Chan which for the purposes
of figuring the amount due for this provision shall not exceed 6.8% of gross
revenues.
In the event that the America's Best Karate, Inc is sold or goes public
then this note shall become immediately due and payable and the holder of this
note will be given 1% of the shares of the underwriting at that time.
/s/ George Chung
- - --------------------------
George Chung
/s/ Marianne Chung
- - --------------------------
Marianne Chung
/s/ Anthony Chan
- - --------------------------
Anthony Chan
/s/ Jamie Chan
- - --------------------------
Jamie Chan
2
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<PAGE>
Exhibit 10.9
EMPLOYMENT AGREEMENT
--------------------
This Employment Agreement ("Agreement"), is entered into by and
among George Chung ("Executive"), and American Champion Entertainment Inc., a
Delaware corporation (the "Company"), effective as of the closing date of the
Company's Initial Public Offering ("Effective Date").
In consideration of the mutual agreements set forth below, Executive
and the Company agree as follows:
1. EMPLOYMENT AS CHAIRMAN OF THE BOARD OF THE COMPANY. The Company does
hereby employ Executive as Chairman of the Board ("Chairman") of the Company.
Subject to the supervision and control of the Board of Directors of the Company,
Executive shall do and perform all services and acts necessary or advisable to
fulfill the duties and responsibilities of Chairman, and shall render such
services on the terms set forth herein. In addition, Executive shall have such
other executive and managerial powers and duties with respect to the Company
and its subsidiaries as may reasonably be assigned to him by the Board of
Directors.
2. TERM OF AGREEMENT. The term ("Term") of this Agreement shall
commence on the Effective Date and shall continue for a period of five (5)
years.
3. COMPENSATION.
3.1 Base Salary. The Company shall pay Executive an annual base
salary at the rate of $100,000 per year ("Base Salary"), payable in equal
semi-monthly installments or at such other time or times as Executive and the
Company shall agree.
3.2 Bonus. Executive shall be entitled to receive from the Company
the following bonuses:
3.2.1 Options to purchase eighty seven thousand five hundred
(87,500) shares of common stock of the Company exercisable at 120% of the IPO
price of the common stock of the Company (initially anticipated to be $5.00 per
share at the IPO and 120% shall equal $6.00 per share) upon the consummation of
any IPO of the common stock of the Company, subject to compliance with
applicable laws; and
3.2.2 $200,000 in cash if all of the warrants initially sold
by the Company in any IPO of the Company are exercised by the holders thereof
within the valid exercise period of such warrants.
3.3 Fringe Benefits. Executive shall be entitled to receive a
maximum car allowance of $500 per month, a maximum entertainment allowance of
$300 per month, maximum miscellaneous expenses of $300 per month and a maximum
allowance of $300 per month for health insurance, provided that all the
foregoing expenses are incurred and accounted for in accordance with the
policies and procedures established by the Company.
-1-
Page 179 of 209
<PAGE>
4. TERMINATION OF EXECUTIVE'S EMPLOYMENT.
4.1 Death In the event Executive's employment hereunder is
terminated by reason of Executive's death, the Company shall pay to Executive's
estate any amounts accrued hereunder to the date of death.
4.2 Disability. If, as a result of Executive's incapacity due to
physical or mental illness ("Disability") executive shall have been absent from
the full-time performance of his duties with the Company for a period of six (6)
consecutive months and, within Thirty (30) days after written notice is provided
to him by the Company, he shall not have returned to the full-time performance
of his duties, Executive's employment under this Agreement may be terminated by
the Company for Disability. During any period prior to such termination during
which Executive is absent from the full-time performance of his duties with the
Company due to Disability, the Company shall continue to pay Executive his Base
Salary at the rate in effect at the commencement of such period of Disability.
4.3 Termination for Cause. The Company may immediately terminate
Executive's employment under this Agreement for "Cause" in which case the
Company shall have no further obligations hereunder, except for payment of
amounts of Base Salary accrued through the date of termination. "Cause" shall
mean willful breach of this Agreement, habitual neglect to perform Executive's
duties hereunder, fraud, misappropriation, embezzlement, or other criminal
conduct.
4.4 Termination by the Company Other Than for Death, Disability or
Cause. If Executive's employment is terminated by the Company for any reason
other than Executive's death or Disability or for Cause, the Company shall pay
Executive an amount equal to his Base Salary in effect on the date of
termination for the remaining Term of this Agreement as if Executive had
remained in the Company's employment during such period at a rate equal to his
then Base Salary.
5. CONFIDENTIALITY. Executive shall not, except as may be required to
perform his duties hereunder or as required by applicable law, disclose to
others or use, whether directly or indirectly, any Confidential Information
regarding the Company. "Confidential Information" shall mean information about
the Company, its subsidiaries and affiliates and their respective clients and
customers that was learned by Executive in the course of his employment by the
Company, including (without limitation) any proprietary knowledge, trade
secrets, financial information, client and customer lists and all papers, and
records (including computer records) containing such Confidential Information.
Executive acknowledges that such Confidential Information is specialized, unique
in nature and of great value to the Company, and that such information gives the
Company a competitive advantage. At the Company's request, upon termination of
this Agreement, Executive agrees to return to the Company, any or all of such
Confidential Information.
6. NOTICES. All notices and other communications under this Agreement
shall be in writing and shall be given by fax or first class mail, certified or
registered with return receipt requested, and shall be deemed to have been duly
given three (3) days after mailing (at the party's then current address), or
twenty-four (24) hours after transmission of a fax (at the party's then current
fax number).
-2-
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<PAGE>
7. DISPUTE RESOLUTION: ATTORNEY'S FEES. The Company and Executive agree
that any dispute arising as to the parties' rights and obligations hereunder,
other than with respect to Section 5, shall be resolved by binding arbitration
before a private judge to be determined by mutually agreeable means. Each party
shall have the right in addition to any other relief granted by such arbitrator
(or by any court with respect to relief granted with respect to Section 5), to
attorney's fees based on a determination by the arbitrator (or, with respect to
Section 5, the court) of the extent to which each party has prevailed as to the
material issues raised in determination of the dispute.
8. TERMINATION OF PRIOR AGREEMENTS. This Agreement terminates and
supersedes any and all prior agreements and understandings between the parties
with respect to Executive's employment and compensation by the Company.
9. GOVERNING LAW. This Agreement shall be governed by and construed
in accordance with the internal laws of the State of California.
10. SEVERABILITY. In the event that a court of competent jurisdiction
determines that any portion of this Agreement is in violation of any statue or
public policy, only the portions of this Agreement that violate such statute or
public policy shall be stricken. All portions of this Agreement that do not
violate any statute or public policy shall continue in full force and effect.
Further, any court order striking any portion of this Agreement shall modify the
stricken terms as narrowly as possible to give as much effect as possible to the
intentions of the parties under this Agreement.
11. COUNTERPARTS. This Agreement may be executed in several
counterparts, each of which shall be deemed to be an original but all of which
together will constitute one and the same instrument.
IN WITNESS WHEREOF, the Company has caused this Agreement to
be executed by its respective duly authorized officer, and the Executive has
hereunto signed this Agreement as of the date first above written.
Company: Executive:
AMERICAN CHAMPION
ENTERTAINMENT , INC.
By: /s/ Anthony K. Chan /s/ George Chung
-------------------------- ---------------------
Anthony K. Chan, President George Chung
Date: March 4, 1997 Date: March 4, 1997
---------------------------------- -------------
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<PAGE>
Exhibit 10.10
EMPLOYMENT AGREEMENT
--------------------
This Employment Agreement ("Agreement"), is entered into by and
among Anthony K. Chan ("Executive"), and American Champion Entertainment Inc.,
a Delaware corporation (the "Company"), effective as of the closing date of the
Company's Initial Public Offering ("Effective Date").
In consideration of the mutual agreements set forth below, Executive
and the Company agree as follows:
1. EMPLOYMENT AS PRESIDENT/CEO/CFO OF THE COMPANY. The Company does
hereby employ Executive as President, Chief Executive Officer (CEO) and Chief
Financial Officer (CFO) of the Company. Subject to the supervision and control
of the Board of Directors of the Company, Executive shall do and perform all
services and acts necessary or advisable to fulfill the duties and
responsibilities of President, CEO and CFO, and shall render such services on
the terms set forth herein. In addition, Executive shall have such other
executive and managerial powers and duties with respect to the Company and its
subsidiaries as may reasonably be assigned to him by the Board of Directors.
2. TERM OF AGREEMENT. The term ("Term") of this Agreement shall
commence on the Effective Date and shall continue for a period of five (5)
years.
3. COMPENSATION.
3.1 Base Salary. The Company shall pay Executive an annual base
salary at the rate of $100,000 per year ("Base Salary"), payable in equal
semi-monthly installments or at such other time or times as Executive and the
Company shall agree.
3.2 Bonus. Executive shall be entitled to receive from the Company
the following bonuses:
3.2.1 Options to purchase eighty seven thousand five hundred
(87,500) shares of common stock of the Company exercisable at 120% of the IPO
price of the common stock of the Company (initially anticipated to be $5.00 per
share at the IPO and 120% shall equal $6.00 per share) upon the consummation of
any IPO of the common stock of the Company, subject to compliance with
applicable laws; and
3.2.2 $200,000 in cash if all of the warrants initially sold
by the Company in any IPO of the Company are exercised by the holders thereof
within the valid exercise period of such warrants.
3.3 Fringe Benefits. Executive shall be entitled to receive a
maximum car allowance of $500 per month, a maximum entertainment allowance of
$300 per month, maximum miscellaneous expenses of $300 per month and a maximum
allowance of $300 per month for health insurance, provided that all the
foregoing expenses are incurred and accounted for in accordance with the
policies and procedures established by the Company.
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<PAGE>
4. TERMINATION OF EXECUTIVE'S EMPLOYMENT.
4.1 Death In the event Executive's employment hereunder is
terminated by reason of Executive's death, the Company shall pay to Executive's
estate any amounts accrued hereunder to the date of death.
4.2 Disability. If, as a result of Executive's incapacity due to
physical or mental illness ("Disability") executive shall have been absent from
the full-time performance of his duties with the Company for a period of six (6)
consecutive months and, within Thirty (30) days after written notice is provided
to him by the Company, he shall not have returned to the full-time performance
of his duties, Executive's employment under this Agreement may be terminated by
the Company for Disability. During any period prior to such termination during
which Executive is absent from the full-time performance of his duties with the
Company due to Disability, the Company shall continue to pay Executive his Base
Salary at the rate in effect at the commencement of such period of Disability.
4.3 Termination for Cause. The Company may immediately terminate
Executive's employment under this Agreement for "Cause" in which case the
Company shall have no further obligations hereunder, except for payment of
amounts of Base Salary accrued through the date of termination. "Cause" shall
mean willful breach of this Agreement, habitual neglect to perform Executive's
duties hereunder, fraud, misappropriation, embezzlement, or other criminal
conduct.
4.4 Termination by the Company Other Than for Death, Disability or
Cause. If Executive's employment is terminated by the Company for any reason
other than Executive's death or Disability or for Cause, the Company shall pay
Executive an amount equal to his Base Salary in effect on the date of
termination for the remaining Term of this Agreement as if Executive had
remained in the Company's employment during such period at a rate equal to his
then Base Salary.
5. CONFIDENTIALITY. Executive shall not, except as may be required to
perform his duties hereunder or as required by applicable law, disclose to
others or use, whether directly or indirectly, any Confidential Information
regarding the Company. "Confidential Information" shall mean information about
the Company, its subsidiaries and affiliates and their respective clients and
customers that was learned by Executive in the course of his employment by the
Company, including (without limitation) any proprietary knowledge, trade
secrets, financial information, client and customer lists and all papers, and
records (including computer records) containing such Confidential Information.
Executive acknowledges that such Confidential Information is specialized, unique
in nature and of great value to the Company, and that such information gives the
Company a competitive advantage. At the Company's request, upon termination of
this Agreement, Executive agrees to return to the Company, any or all of such
Confidential Information.
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<PAGE>
6. NOTICES. All notices and other communications under this Agreement
shall be in writing and shall be given by fax or first class mail, certified or
registered with return receipt requested, and shall be deemed to have been duly
given three (3)days after mailing (at the party's then current address), or
twenty-four (24) hours after transmission of a fax (at the party's then current
fax number).
7. DISPUTE RESOLUTION: ATTORNEY'S FEES. The Company and Executive agree
that any dispute arising as to the parties' rights and obligations hereunder,
other than with respect to Section 5, shall be resolved by binding arbitration
before a private judge to be determined by mutually agreeable means. Each party
shall have the right in addition to any other relief granted by such arbitrator
(or by any court with respect to relief granted with respect to Section 5), to
attorney's fees based on a determination by the arbitrator (or, with respect to
Section 5, the court) of the extent to which each party has prevailed as to the
material issues raised in determination of the dispute.
8. TERMINATION OF PRIOR AGREEMENTS. This Agreement terminates and
supersedes any and all prior agreements and understandings between the parties
with respect to Executive's employment and compensation by the Company.
9. GOVERNING LAW. This Agreement shall be governed by and construed
in accordance with the internal laws of the State of California.
10. SEVERABILITY. In the event that a court of competent jurisdiction
determines that any portion of this Agreement is in violation of any statue or
public policy, only the portions of this Agreement that violate such statute or
public policy shall be stricken. All portions of this Agreement that do not
violate any statute or public policy shall continue in full force and effect.
Further, any court order striking any portion of this Agreement shall modify the
stricken terms as narrowly as possible to give as much effect as possible to the
intentions of the parties under this Agreement.
11. COUNTERPARTS. This Agreement may be executed in several
counterparts, each of which shall be deemed to be an original but all of which
together will constitute one and the same instrument.
IN WITNESS WHEREOF, the Company has caused this Agreement to
be executed by its respective duly authorized officer, and the Executive has
hereunto signed this Agreement as of the date first above written.
Company: Executive:
AMERICAN CHAMPION
ENTERTAINMENT, INC.
By: /s/ George Chung /s/ Anthony K. Chan
------------------------- -----------------------
George Chung Anthony K. Chan
Chairman of the Board
Date: March 4, 1997 Date: March 4, 1997
-------------------------- -------------
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<PAGE>
Exhibit 10.11
EMPLOYMENT AGREEMENT
--------------------
This Employment Agreement ("Agreement"), is entered into by and
among Don Berryessa ("Executive"), and American Champion Entertainment Inc., a
Delaware corporation (the "Company"), effective as of the closing date of the
Company's Initial Public Offering ("Effective Date").
In consideration of the mutual agreements set forth below, Executive
and the Company agree as follows:
1. EMPLOYMENT AS VICE PRESIDENT OF THE COMPANY. The Company does hereby
employ Executive as Vice President of the Company. Subject to the supervision
and control of the Board of Directors of the Company, Executive shall do and
perform all services and acts necessary or advisable to fulfill the duties and
responsibilities of Vice President, and shall render such services on the terms
set forth herein. In addition, Executive shall have such other executive and
managerial powers and duties with respect to the Company and its subsidiaries as
may reasonably be assigned to him by the Board of Directors.
2. TERM OF AGREEMENT. The term ("Term") of this Agreement shall
commence on the Effective Date and shall continue for a period of five (5)
years.
3. COMPENSATION.
3.1 Base Salary. The Company shall pay Executive an annual base
salary at the rate of $65,000 per year ("Base Salary"), payable in equal
semi-monthly installments or at such other time or times as Executive and the
Company shall agree.
3.2 Bonus. Executive shall be entitled to receive from the Company
the following bonuses:
3.2.1 Options to purchase twenty five thousand (25,000)
shares of common stock of the Company exercisable at 120% of the IPO price of
the common stock of the Company (initially anticipated to be $5.00 per share at
the IPO and 120% shall equal $6.00 per share) upon the consummation of any IPO
of the common stock of the Company, subject to compliance with applicable laws;
and
3.2.2 $100,000 in cash if all of the warrants initially sold
by the Company in any IPO of the Company are exercised by the holders thereof
within the valid exercise period of such warrants.
3.3 Fringe Benefits. Executive shall be entitled to receive a
maximum car allowance of $500 per month, a maximum entertainment allowance of
$300 per month, maximum miscellaneous expenses of $300 per month and a maximum
allowance of $300 per month for health insurance, provided that all the
foregoing expenses are incurred and accounted for in accordance with the
policies and procedures established by the Company.
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<PAGE>
4. TERMINATION OF EXECUTIVE'S EMPLOYMENT.
4.1 Death In the event Executive's employment hereunder is
terminated by reason of Executive's death, the Company shall pay to Executive's
estate any amounts accrued hereunder to the date of death.
4.2 Disability. If, as a result of Executive's incapacity due to
physical or mental illness ("Disability") executive shall have been absent from
the full-time performance of his duties with the Company for a period of six (6)
consecutive months and, within Thirty (30) days after written notice is provided
to him by the Company, he shall not have returned to the full-time performance
of his duties, Executive's employment under this Agreement may be terminated by
the Company for Disability. During any period prior to such termination during
which Executive is absent from the full-time performance of his duties with the
Company due to Disability, the Company shall continue to pay Executive his Base
Salary at the rate in effect at the commencement of such period of Disability.
4.3 Termination for Cause. The Company may immediately terminate
Executive's employment under this Agreement for "Cause" in which case the
Company shall have no further obligations hereunder, except for payment of
amounts of Base Salary accrued through the date of termination. "Cause" shall
mean willful breach of this Agreement, habitual neglect to perform Executive's
duties hereunder, fraud, misappropriation, embezzlement, or other criminal
conduct.
4.4 Termination by the Company Other Than for Death, Disability or
Cause. If Executive's employment is terminated by the Company for any reason
other than Executive's death or Disability or for Cause, the Company shall pay
Executive an amount equal to his Base Salary in effect on the date of
termination for the remaining Term of this Agreement as if Executive had
remained in the Company's employment during such period at a rate equal to his
then Base Salary.
5. CONFIDENTIALITY. Executive shall not, except as may be required to
perform his duties hereunder or as required by applicable law, disclose to
others or use, whether directly or indirectly, any Confidential Information
regarding the Company. "Confidential Information" shall mean information about
the Company, its subsidiaries and affiliates and their respective clients and
customers that was learned by Executive in the course of his employment by the
Company, including (without limitation) any proprietary knowledge, trade
secrets, financial information, client and customer lists and all papers, and
records (including computer records) containing such Confidential Information.
Executive acknowledges that such Confidential Information is specialized,
unique in nature and of great value to the Company, and that such information
gives the Company a competitive advantage. At the Company's request, upon
termination of this Agreement, Executive agrees to return to the Company, any
or all of such Confidential Information.
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<PAGE>
6. NOTICES. All notices and other communications under this Agreement
shall be in writing and shall be given by fax or first class mail, certified or
registered with return receipt requested, and shall be deemed to have been duly
given three (3) days after mailing (at the party's then current address), or
twenty-four (24) hours after transmission of a fax (at the party's then current
fax number).
7. DISPUTE RESOLUTION: ATTORNEY'S FEES. The Company and Executive
agree that any dispute arising as to the parties' rights and obligations
hereunder, other than with respect to Section 5, shall be resolved by binding
arbitration before a private judge to be determined by mutually agreeable means.
Each party shall have the right in addition to any other relief granted by such
arbitrator (or by any court with respect to relief granted with respect to
Section 5), to attorney's fees based on a determination by the arbitrator (or,
with respect to Section 5, the court) of the extent to which each party has
prevailed as to the material issues raised in determination of the dispute.
8. TERMINATION OF PRIOR AGREEMENTS. This Agreement terminates and
supersedes any and all prior agreements and understandings between the parties
with respect to Executive's employment and compensation by the Company.
9. GOVERNING LAW. This Agreement shall be governed by and construed
in accordance with the internal laws of the State of California.
10. SEVERABILITY. In the event that a court of competent jurisdiction
determines that any portion of this Agreement is in violation of any statue or
public policy, only the portions of this Agreement that violate such statute or
public policy shall be stricken. All portions of this Agreement that do not
violate any statute or public policy shall continue in full force and effect.
Further, any court order striking any portion of this Agreement shall modify the
stricken terms as narrowly as possible to give as much effect as possible to the
intentions of the parties under this Agreement.
11. COUNTERPARTS. This Agreement may be executed in several
counterparts, each of which shall be deemed to be an original but all of which
together will constitute one and the same instrument.
IN WITNESS WHEREOF, the Company has caused this Agreement to
be executed by its respective duly authorized officer, and the Executive has
hereunto signed this Agreement as of the date first above written.
Company: Executive:
AMERICAN CHAMPION
ENTERTAINMENT , INC.
By: /s/ Anthony K. Chan /s/ Don Berryessa
Anthony K. Chan, President Don Berryessa
Date: March 4, 1997 Date: March 4, 1997
---------------------------------- -------------
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<PAGE>
Exhibit 10.12
EMPLOYMENT AGREEMENT
This Employment Agreement ("Agreement"), is entered into by and
among Jan D. Hutchins ("Executive"), American Champion Entertainment Inc., a
Delaware corporation (the "Parent") and American Champion Media, Inc., a
Delaware corporation and a wholly-owned subsidiary of the Parent (the
"Company"), effective as of the closing date of the Parent's Initial Public
Offering ("Effective Date").
In consideration of the mutual agreements set forth below,
Executive, the Company and Parent agree as follows:
1. EMPLOYMENT AS PRESIDENT OF THE COMPANY. The Company does hereby
employ Executive as President of the Company. Subject to the supervision and
control of the Board of Directors of the Company, Executive shall do and perform
all services and acts necessary or advisable to fulfill the duties and
responsibilities of President and shall render such services on the terms set
forth herein, including supervising the production and marketing of the
Company's media projects. In addition, Executive shall have such other executive
and managerial powers and duties with respect to the Company and its
subsidiaries as may reasonably be assigned to him by the Board.
2. TERM OF AGREEMENT. The term ("Term") of this Agreement shall
commence on the Effective Date and shall continue for a period of two (2) years.
3. COMPENSATION.
3.1 Base Salary. The Company shall pay Executive an annual base
salary at the rate of $39,600 per year ("Base Salary"), payable in equal
semi-monthly installments or at such other time or times as Executive and the
Company shall agree.
3.2 Bonus. Executive shall be entitled to receive from the Company
or the Parent the following bonuses:
3.2.1 Four thousand (4,000) shares of common stock of the
Parent upon consummation of any initial Public offering ("IPO") of the common
stock of the Parent, subject to compliance with applicable laws;
3.2.2 Options to purchase twenty thousand (20,000) shares of
common stock of the Parent exercisable at 120% of the IPO price of the common
stock of the Parent (initially anticipated to be $5.00 per share at the IPO and
120% shall equal $6.00 per share) upon the consummation of any IPO of the common
stock of the Parent, subject to compliance with applicable laws; and
3.2.3 $100,000 in cash if all of the warrants initially sold
by the Parent in any IPO of the Parent are exercised by the holders thereof
within two years of the consummation of any IPO of the Parent.
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<PAGE>
3.3 Fringe Benefits. Executive shall be entitled to receive a
maximum car allowance of $500 per month, a maximum entertainment allowance of
$300 per month, maximum miscellaneous expenses of $300 per month and a maximum
allowance of $300 per month for health insurance, provided that all the
foregoing expenses are incurred and accounted for in accordance with the
policies and procedures established by the Company.
4. TERMINATION OF EXECUTIVE'S EMPLOYMENT.
4.1 Death In the event Executive's employment hereunder is
terminated by reason of Executive's death, the Company shall pay to Executive's
estate any amounts accrued hereunder to the date of death.
4.2 Disability. If, as a result of Executive's incapacity due to
physical or mental illness ("Disability") executive shall have been absent from
the full-time performance of his duties with the Company for a period of six (6)
consecutive months and, within Thirty (30) days after written notice is provided
to him by the Company, he shall not have returned to the full-time performance
of his duties, Executive's employment under this Agreement may be terminated by
the Company for Disability. During any period prior to such termination during
which Executive is absent from the full-time performance of his duties with the
Company due to Disability, the Company shall continue to pay Executive his Base
Salary at the rate in effect at the commencement of such period of Disability.
4.3 Termination for Cause. The Company may immediately terminate
Executive's employment under this Agreement for "Cause" in which case the
Company shall have no further obligations hereunder, except for payment of
amounts of Base Salary accrued through the date of termination. "Cause" shall
mean willful breach of this Agreement, habitual neglect to perform Executive's
duties hereunder, fraud, misappropriation, embezzlement, or other criminal
conduct.
4.4 Termination by the Company Other Than for Death, Disability or
Cause. If Executive's employment is terminated by the Company for any reason
other than Executive's death or Disability or for Cause, the Company shall pay
Executive an amount equal to his Base Salary in effect on the date of
termination for the remaining Term of this Agreement as if Executive had
remained in the Company's employment during such period at a rate equal to his
then Base Salary.
5. CONFIDENTIALITY. Executive shall not, except as may be required to
perform his duties hereunder or as required by applicable law, disclose to
others or use, whether directly or indirectly, any Confidential Information
regarding the Company. "Confidential Information" shall mean information about
the Company, its subsidiaries and affiliates and their respective clients and
customers that was learned by Executive in the course of his employment by the
Company, including (without limitation) any proprietary knowledge, trade
secrets, financial information, client and customer lists and all papers, and
records (including computer records) containing such Confidential Information.
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<PAGE>
Executive acknowledges that such Confidential Information is specialized,
unique in nature and of great value to the Company, and that such information
gives the Company a competitive advantage. At the Company's request, upon
termination of this Agreement, Executive agrees to return to the Company, any or
all of such Confidential Information.
6. NOTICES. All notices and other communications under this Agreement
shall be in writing and shall be given by fax or first class mail, certified or
registered with return receipt requested, and shall be deemed to have been duly
given three (3) days after mailing (at the party's then current address), or
twenty-four (24) hours after transmission of a fax (at the party's then current
fax number).
7. DISPUTE RESOLUTION: ATTORNEY'S FEES. The Company and Executive agree
that any dispute arising as to the parties' rights and obligations hereunder,
other than with respect to Section 5, shall be resolved by binding arbitration
before a private judge to be determined by mutually agreeable means. Each party
shall have the right in addition to any other relief granted by such arbitrator
(or by any court with respect to relief granted with respect to Section 5), to
attorney's fees based on a determination by the arbitrator (or, with respect to
Section 5, the court) of the extent to which each party has prevailed as to the
material issues raised in determination of the dispute.
8. TERMINATION OF PRIOR AGREEMENTS. This Agreement terminates and
supersedes any and all prior agreements and understandings between the parties
with respect to Executive's employment and compensation by the Company,
including the Consulting Agreement, dated June 10, 1996, between the Executive
and America's Best Karate.
9. GOVERNING LAW. This Agreement shall be governed by and
construed in accordance with the internal laws of the State of California.
10. SEVERABILITY. In the event that a court of competent jurisdiction
determines that any portion of this Agreement is in violation of any statue or
public policy, only the portions of this Agreement that violate such statute or
public policy shall be stricken. All portions of this Agreement that do not
violate any statute or public policy shall continue in full force and effect.
Further, any court order striking any portion of this Agreement shall modify the
stricken terms as narrowly as possible to give as much effect as possible to
the intentions of the parties under this Agreement.
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<PAGE>
11. COUNTERPARTS. This Agreement may be executed in several
counterparts, each of which shall be deemed to be an original but all of which
together will constitute one and the same instrument.
IN WITNESS WHEREOF, each of the Company and the Parent has
caused this Agreement to be executed by its respective duly authorized officer,
and the Executive has hereunto signed this Agreement as of the date first above
written.
Company: Executive:
AMERICAN CHAMPION MEDIA, INC.
By: /s/ Anthony K. Chan /s/ Jan D. Hutchins
------------------------ -----------------------
Jan D. Hutchins
Its: Chief Executive Officer
Date: March 4, 1997 Date: March 4, 1997
------------------------------------ --------------
AMERICAN CHAMPION ENTERTAINMENT, INC.
By: /s/ Anthony K. Chan
-------------------------
Its: President and CEO
Date: March 4, 1997
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<PAGE>
Exhibit 10.13
CONVERTIBLE LOAN AGREEMENT
THIS CONVERTIBLE LOAN AGREEMENT ("Agreement") is entered
into as of May 5, 1995, between America's Best Karate, a California corporation
("ABK"), and the party hereinafter who shall execute this Agreement as provided
("Lender").
ARTICLE 1. Loan. On the date of this Agreement, ABK is borrowing from
Lender, and Lender is lending to ABK, the principal sum of TWENTY-SEVEN
THOUSAND DOLLARS ($27,000.00) ("Loan").
ARTICLE 2. Use. The Loan proceeds shall be used for the startup and
operation of a total of six (6) martial arts schools in the City of Las Vegas,
Nevada and to engage in all activities reasonably incidental thereto.
ARTICLE 3. Interest. Interest shall accrue on the total unpaid principal
amount of the Loan at THIRTEEN PERCENT (13%) per annum, calculated on an
actual day basis using a 365-day year, and shall be due and payable on a monthly
basis. Nothing contained in this Agreement or any transaction related hereto
shall be construed or operate (either presently or prospectively): (a) to
require ABK to pay interest at a rate greater than the interest rate which
Lender may lawfully charge (but shall, instead, require the payment of interest
only to the extent of such lawful rate); or (b) to require ABK to make any
payment or do any act contrary to law. If any clause or provision contained in
this Agreement shall exceed the lawful rate of interest or shall otherwise
operate to invalidate this Agreement, in whole or in part, then (i) the amount
of interest payable hereunder by ABK shall be reduced to the maximum lawful
amount and rate of interest, (ii) any amount of interest that Lender has
received hereunder in excess of the lawful amount shall be applied to reduce the
principal amount of the Loan outstanding under this Agreement, and (iii) the
remainder of this Agreement shall remain operative and in full force and effect.
ARTICLE 4. Interest Adjustment. When the sum of payments per above
Article 3 equals the amount of the Loan, then the interest payment shall be
changed to 0.624 percent times Net Profit Before Taxes of ABK (both California
and Nevada operations). Net profit or net loss shall be determined by ABK in
accordance with generally accepted accounting principles, within thirty days
from the closing of each calendar month of the year. Financial statements and
distribution of moneys shall also be made by ABK within thirty days from the end
of each calendar month. End of the year summaries shall be reported by ABK no
later than January 31 of the following year.
ARTICLE 5. Conversion. Subject to the provisions hereof, in the event
that ABK or an affiliate of ABK consummates an initial public offering ("IPO")
of common stock, Lender shall have the option to convert, in whole or in part at
any time or from time to time, the Loan into 0.624 percent of the number of
shares offered in such IPO. For purposes of this Article 5, the number of shares
offered in an IPO shall not include any shares offered to the public pursuant to
any over-allotment option. To effect such conversion, Lender shall give written
notice to ABK thirty (30) days before the date on which such conversion shall
occur (the "Conversion Date"). Such notice shall state: (a) the dollar amount of
the Loan being converted into common stock; (b) the number of shares of common
stock which shall be delivered to Lender upon such conversion; (c) the balance
of the Loan which shall remain outstanding and (d) the Conversion Date.
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<PAGE>
ARTICLE 6. Withdrawal. Lender may withdraw the loan principal by
notifying ABK in writing 30 days in advance of the intended withdrawal date.
ABK in its sole discretion, may return the principal amount in one lump sum, or
in equal monthly payments over a 12-month period. Interest calculations
(Article 3 & 4) and Conversion rights (Article 5) shall continue in proportion
to the outstanding principal until the entire principal amount is returned to
Lender.
ARTICLE 7. Investment Representations. The following representations and
warranties are made by Lender as of the date of this Agreement:
(a) This Agreement constitutes a valid and legally binding
obligation of Lender, enforceable in accordance with its terms, subject to
bankruptcy and other laws of general application affecting the rights and
remedies of creditors and the availability of equitable remedies;
(b) Lender represents; (i) that the Agreement and any shares
of stock to be received ("Securities") are being acquired for investment
only and not with a view of the resale or distribution thereof to the
public, and that he has no present intention of selling, granting any
participation in, or otherwise distributing the same to the public;
(ii) that there is no contract, undertaking, agreement, or arrangement to
sell, transfer, or grant participation with respect to the Securities;
(iii) that he is not an underwriter of the Securities within the meaning of
Section 2(11) the Securities Act of 1933, as amended ("Securities Act");
and (iv) that he has full power and authority to enter into this Agreement;
(c) The Securities are being acquired after private
negotiation with ABK and Lender has not been attracted to the purchase of
the Securities by any publication or any advertising;
(d) Lender is or has been an investor in securities of
companies in the development stage and acknowledges that he is able to
protect his interest in connection with the sale of the Securities and has
such knowledge and experience in financial or business matters that he is
capable of evaluating the merits and risks of the investment in the
Securities;
(e) Lender is an "accredited investor" within the meaning of
Rule 501 of Regulation D promulgated by the Securities and Exchange
Commission ("Commission"), as presently in effect; and
(f) Lender understands that (i) neither the Securities nor
the sale thereof to them has been registered under the Securities Act, or
under any state securities law, (ii) no registration statement has been
filed with the Commission, nor with any other regulatory authority, and
that, as a result, any benefit which might normally accrue to an investor
by an impartial review of such a registration statement by the Commission
or other regulatory commission will not be forthcoming, and (iii) the
Securities are characterized as "restricted securities" under the federal
securities laws inasmuch as they are being acquired from ABK in a
transaction or involving a public offering and that under such laws and
applicable regulations such securities may be resold without registration
under the Securities Act only in certain limited circumstances. In this
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connection, Lender represents that he is familiar with the Commission's
Rule 144, as presently in effect, and agrees that he will not sell all
or any portion of the Securities without registration under all applicable
securities as laws or exemptions therefrom.
ARTICLE 8. Arbitration. Any dispute or controversy arising under this
Agreement shall be settled by arbitration. In any such dispute, counsel for the
parties shall act as arbitrators. In the event counsel cannot reach a resolution
for the dispute within twenty one days of the date the dispute is submitted to
them for arbitration they shall select a third arbitrator. If no agreement on
the third arbitrator exists, a third arbitrator shall be selected by the
Arbitration Committee of the American Arbitration Association. Arbitration shall
be held in San Francisco or any other place agreed upon by all parties to the
dispute. Any dispute over arbitrability may be decided by the arbitrators.
Lender may enforce the award rendered in any court of competent jurisdiction.
Any submission to arbitration as herein provided shall be accompanied by
all records, papers, correspondence, bills of accounts, and all other pertinent
or relevant exhibits respecting the presentation of the case.
ARTICLE 9. Miscellaneous,
9.1 Amendment. No amendment or waiver of any provision of this
Agreement, nor consent to any departure by ABK therefrom, shall in any event be
effective unless the same shall be in writing and signed by both parties hereto
and then such waiver or consent shall be effective only in the specific instance
and for the specific purpose for which given.
9.2 Notices. Except as otherwise specifically provided herein, all
notices, requests, demands and other communication under this Agreement shall be
in writing and shall be deemed to have been duly given on the date of delivery,
if delivered personally or by telegram to the party to whom notice is to be
given, or on the third business day after mailing if mailed by first class mail,
registered or certified, postage prepaid and properly addressed as follows:
If to ABK: If to Lender:
AMERICA'S BEST KARATE David Y. Lei
26203 Production Avenue 320 El Cerrito Avenue
Suite 5 Piedmont, CA 94611
Hayward, CA 94545
Attention: Mr. Anthony Chan
Either party may change its address for purposes of this Article by giving the
other party or parties written notice of the new address in the manner set forth
above.
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9.3 Binding Effect: Governing Law. This Agreement shall be binding
upon and inure to the benefit of ABK and the Lender and their respective
successors and assigns. Tins Agreement shall be governed by and construed in
accordance with, the internal laws of the State of California (without reference
to any principles of conflicts of laws).
9.4 Article Headings. The various Article headings are inserted for
convenience of reference only, and shall not affect the meaning or
interpretation of this Agreement or any Article thereof.
9.5 Executed Counterparts. This Agreement may be executed in one or
more counterparts, all of which together shall constitute a single agreement and
each of which shall be an original for all purposes.
9.6 Integration. This Agreement supersedes any and all other
agreements, oral or written, between the parties hereto with respect to the
subject matter hereof.
IN WITNESS WHEREOF, the parties to this agreement have executed it
effective as of the date first above written.
America's Best Karate Lender
By: /s/ Anthony K. Chan By: /s/ David Y. Lei
----------------------- ------------------------
Anthony K. Chan (signature)
Chief Executive Officer
David Y. Lei
(name in print)
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<PAGE>
Exhibit 10.14
CONVERTIBLE LOAN AGREEMENT
THIS CONVERTIBLE LOAN AGREEMENT ("Agreement") is entered
into as of December 8, 1994, between America's Best Karate, a California
corporation ("ABK"), and the party hereinafter who shall execute this Agreement
as provided ("Lender").
ARTICLE 1. Loan. On the date of this Agreement, ABK is borrowing from
Lender, and Lender is lending to ABK, the principal sum of FIFTY-FOUR
THOUSAND DOLLARS ($54,000.00) ("Loan").
ARTICLE 2. Use. The Loan proceeds shall be used for the startup and
operation of a total of six (6) martial arts schools in the City of Las Vegas,
Nevada and to engage in all activities reasonably incidental thereto.
ARTICLE 3. Interest. Interest shall accrue on the total unpaid principal
amount of the Loan at THIRTEEN PERCENT (13%) per annum, calculated on an
actual day basis using a 365-day year, and shall be due and payable on a monthly
basis. Nothing contained in this Agreement or any transaction related hereto
shall be construed or operate (either presently or prospectively): (a) to
require ABK to pay interest at a rate greater than the interest rate which
Lender may lawfully charge (but shall, instead, require the payment of interest
only to the extent of such lawful rate); or (b) to require ABK to make any
payment or do any act contrary to law. If any clause or provision contained in
this Agreement shall exceed the lawful rate of interest or shall otherwise
operate to invalidate this Agreement, in whole or in part, then (i) the amount
of interest payable hereunder by ABK shall be reduced to the maximum lawful
amount and rate of interest, (ii) any amount of interest that Lender has
received hereunder in excess of the lawful amount shall be applied to reduce the
principal amount of the Loan outstanding under this Agreement, and (iii) the
remainder of this Agreement shall remain operative and in full force and effect.
ARTICLE 4. Interest Adjustment. When the sum of payments per above
Article 3 equals the amount of the Loan, then the interest payment shall be
changed to 1.248 percent times Net Profit Before Taxes of ABK (both California
and Nevada operations). Net profit or net loss shall be determined by ABK in
accordance with generally accepted accounting principles, within thirty days
from the closing of each calendar month of the year. Financial statements and
distribution of moneys shall also be made by ABK within thirty days from the end
of each calendar month. End of the year summaries shall be reported by ABK no
later than January 31 of the following year.
ARTICLE 5. Conversion. Subject to the provisions hereof, in the event
that ABK or an affiliate of ABK consummates an initial public offering ("IPO")
of common stock, Lender shall have the option to convert, in whole or in part at
any time or from time to time, the Loan into 1.248 percent of the number of
shares offered in such IPO. For purposes of this Article 5, the number of shares
offered in an IPO shall not include any shares offered to the public pursuant to
any over-allotment option. To effect such conversion, Lender shall give written
notice to ABK thirty (30) days before the date on which such conversion shall
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<PAGE>
occur (the "Conversion Date"). Such notice shall state: (a) the dollar amount
of the Loan being converted into common stock; (b) the number of shares of
common stock which shall be delivered to Lender upon such conversion; (c) the
balance of the Loan which shall remain outstanding and (d) the Conversion Date.
ARTICLE 6. Withdrawal. Lender may withdraw the loan principal by
notifying ABK in writing 30 days in advance of the intended withdrawal date.
ABK in its sole discretion, may return the principal amount in one lump sum, or
in equal monthly payments over a 12-month period. Interest calculations
(Article 3 & 4) and Conversion rights (Article 5) shall continue in proportion
to the outstanding principal until the entire principal amount is returned to
Lender.
ARTICLE 7. Investment Representations. The following representations and
warranties are made by Lender as of the date of this Agreement:
(a) This Agreement constitutes a valid and legally binding
obligation of Lender, enforceable in accordance with its terms, subject to
bankruptcy and other laws of general application affecting the rights and
remedies of creditors and the availability of equitable remedies;
(b) Lender represents; (i) that the Agreement and any shares
of stock to be received ("Securities") are being acquired for investment
only and not with a view of the resale or distribution thereof to the
public, and that he has no present intention of selling, granting any
participation in, or otherwise distributing the same to the public;
(ii) that there is no contract, undertaking, agreement, or arrangement to
sell, transfer, or grant participation with respect to the Securities;
(iii) that he is not an underwriter of the Securities within the meaning of
Section 2(11) the Securities Act of 1933, as amended ("Securities Act");
and (iv) that he has full power and authority to enter into this Agreement;
(c) The Securities are being acquired after private
negotiation with ABK and Lender has not been attracted to the purchase of
the Securities by any publication or any advertising;
(d) Lender is or has been an investor in securities of
companies in the development stage and acknowledges that he is able to
protect his interest in connection with the sale of the Securities and has
such knowledge and experience in financial or business matters that he is
capable of evaluating the merits and risks of the investment in the\
Securities;
(e) Lender is an "accredited investor" within the meaning of
Rule 501 of Regulation D promulgated by the Securities and Exchange
Commission ("Commission"), as presently in effect; and
(f) Lender understands that (i) neither the Securities nor
the sale thereof to them has been registered under the Securities Act, or
under any state securities law, (ii) no registration statement has been
filed with the Commission, nor with any other regulatory authority, and
that, as a result, any benefit which might normally accrue to an investor
by an impartial review of such a registration statement by the Commission
or other regulatory commission will not be forthcoming, and (iii) the
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Securities are characterized as "restricted securities" under the federal
securities laws inasmuch as they are being acquired from ABK in a
transaction or involving a public offering and that under such laws and
applicable regulations such securities may be resold without registration
under the Securities Act only in certain limited circumstances.
In this connection, Lender represents that he is familiar with the
Commission's Rule 144, as presently in effect, and agrees that he will not
sell all or any portion of the Securities without registration under all
applicable securities as laws or exemptions therefrom.
ARTICLE 8. Arbitration. Any dispute or controversy arising under this
Agreement shall be settled by arbitration. In any such dispute, counsel for the
parties shall act as arbitrators. In the event counsel cannot reach a resolution
for the dispute within twenty one days of the date the dispute is submitted to
them for arbitration they shall select a third arbitrator. If no agreement on
the third arbitrator exists, a third arbitrator shall be selected by the
Arbitration Committee of the American Arbitration Association. Arbitration shall
be held in San Francisco or any other place agreed upon by all parties to the
dispute. Any dispute over arbitrability may be decided by the arbitrators.
Lender may enforce the award rendered in any court of competent jurisdiction.
Any submission to arbitration as herein provided shall be accompanied by all
records, papers, correspondence, bills of accounts, and all other pertinent or
relevant exhibits respecting the presentation of the case.
ARTICLE 9. Miscellaneous,
9.1 Amendment. No amendment or waiver of any provision of this
Agreement, nor consent to any departure by ABK therefrom, shall in any event be
effective unless the same shall be in writing and signed by both parties hereto
and then such waiver or consent shall be effective only in the specific instance
and for the specific purpose for which given.
9.2 Notices. Except as otherwise specifically provided herein, all
notices, requests, demands and other communication under this Agreement shall be
in writing and shall be deemed to have been duly given on the date of delivery,
if delivered personally or by telegram to the party to whom notice is to be
given, or on the third business day after mailing if mailed by first class mail,
registered or certified, postage prepaid and properly addressed as follows:
If to ABK: If to Lender:
AMERICA'S BEST KARATE Thomas Y. Fu
26203 Production Avenue, Suite 5 348 Red Maple Drive
Hayward, CA 94545 Danville, CA 94506
Attention: Mr. Anthony Chan
Either party may change its address for purposes of this Article by giving the
other party or parties written notice of the new address in the manner set forth
above.
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<PAGE>
9.3 Binding Effect: Governing Law. This Agreement shall be binding
upon and inure to the benefit of ABK and the Lender and their respective
successors and assigns. Tins Agreement shall be governed by and construed in
accordance with, the internal laws of the State of California (without reference
to any principles of conflicts of laws).
9.4 Article Headings. The various Article headings are inserted for
convenience of reference only, and shall not affect the meaning or
interpretation of this Agreement or any Article thereof.
9.5 Executed Counterparts. This Agreement may be executed in one or
more counterparts, all of which together shall constitute a single agreement and
each of which shall be an original for all purposes.
9.6 Integration. This Agreement supersedes any and all other
agreements, oral or written, between the parties hereto with respect to the
subject matter hereof.
IN WITNESS WHEREOF, the parties to this agreement have executed it
effective as of the date first above written.
America's Best Karate Lender
By: /s/ Anthony K. Chan /s/ Thomas Y. Fu
------------------------- -----------------------
Anthony K. Chan (signature)
Chief Executive Officer
Thomas Y. Fu
(name in print)
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<PAGE>
Exhibit 10.15
"Adventures With Kanga Roddy"
Amended Deal Memo
"The Contractor" "The Producer"
-------------- ------------
Rick Fichter America's Best Karate
7 Kramer Place 26203 Production Ave, Suite #5
San Francisco, CA 94133 Hayward, CA 94545
(415) 788-7376 (510) 782-8168
SS# ###-##-#### Tax ID# 94-3140933
Fee: Producer agrees to pay Contractor a fee of $30,000 in six equal payments.
Payments of $5,000 each are made as per Contractor's directive on the following
dates:
1) October 1, 1996 2) October 17, 1996 3) November 2, 1996
4) November 18, 1996 5) December 4, 1996 6) December 20, 1996
Contractors start date: October 1, 1996
Contractor's job description Creative Director
Credit: Full card credit as "Creative Director" in the primary position (i.e.,
last in opening title sequence or first in tail credits) and to appear for not
less than three seconds screen time.
Other terms:
(1) This agreement is a guaranteed "pay or play" deal (i.e. Producer agrees to
fee payments to Contractor without exception).
(2) Contractor's last day of obligation to Producer as "Creative Director" is
December 20, 1996.
(3) Producer agrees to provide to Contractor a Beta SP copy of the finished
program at no cost to Contractor at a time deemed appropriate by Producer
but not later than February 1, 1997.
(4) Contractor will receive credit on all subsequent episodes as "Creative
Consultant" or some other mutually acceptable terminology if Contractor
ceases to participate in a directorial role. However, Producer grants
Contractor the "first right of refusal" to continue as the Director of
subsequent 12 more episodes and Contractor agrees to consider the position.
Scheduling and compensation for work on subsequent episodes will be
negotiated in good faith between the parties.
(5) By the act of furnishing creative services for the pilot episode, the
Contractor becomes entitled to 2% (two percent) in the distribution of net
profits from broadcasting, television syndication, and sales of video tapes
of the first 13 episodes of "Adventures With Kanga Roddy" (the "Series").
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If Contractor continues to participate as a Creative Director throughout
the entire thirteen episodes, then Contractor becomes entitled to 4% (four
percent) of net profits from broadcasting, television syndication, and
sales of video tapes of these first 13 episodes.
(6) Contractor agrees to tender services in accordance with industry standards
and according to a time table appropriate to the fulfillment of his
responsibility as Creator Director.
(7) Producer owns all right, title and interest of every kind and nature in
and to the results and proceeds of Contractor's services, including, with
limitation, all outtakes and unused film footage, recordings, photographs
and tapes and any items manufactured or derived therefrom, free from any
claims whatsoever by the Contractor or any other person. Producer shall
have the exclusive right to copyright any and all of the foregoing in its
name as the owner and author thereof and to secure any and all renewals and
extensions of such copyright. Solely for the purposes of any applicable
copyright law, the Contractor and all other persons rendering services in
connection with the Series shall be deemed "employees for hire" of
Producer.
(8) This Amended Deal Memo supersedes in its entirety the Deal Memo executed
by the parties hereto on September 26 & 28, 1996.
(9) This Amended Deal Memo is assignable by Producer to American Champion
Media, Inc., an affiliate of Producer, without the consent of Contractor.
AGREED
By: /s/ Rick Fichter /s/ Anthony K. Chan
------------------------- ---------------------------
Rick Fichter America's Best Karate
By: Anthony K. Chan
Its: Chief Executive Officer
Date: February 23, 1997 Date: February 23, 1997
------------------------- -----------------
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<PAGE>
Exhibit 10.17
INDEMNIFICATION AGREEMENT
This Indemnification Agreement ("Agreement") is made as
of ____________, 1997, by and between American Champion
Entertainment, Inc., a Delaware corporation (the "Company"), and
________________ ("Indemnitee"), with reference to the following
facts:
A. Indemnitee is currently serving as a director or officer of
the Company.
B. The Company and Indemnitee recognize the substantial increase
in corporate litigation in general, subjecting officers and directors to
expensive litigation risks at the same time as the availability and coverage
of liability insurance has been severely limited.
C. Indemnitee does not regard the current protection available to
be adequate under the present circumstances to protect him or her against the
risks associated with his or her service to the Company and the Company
recognizes that Indemnitee and other officers and directors of the Company may
not be willing to continue to serve as officers or directors without
additional protection.
D. The Company desires to attract and retain the services of
highly qualified individuals, including Indemnitee, to serve as officers and
directors of the Company and thus desires to indemnify its officers and
directors to provide them with the maximum protection permitted by law.
THEREFORE, IN CONSIDERATION OF the foregoing premises, the Company
and Indemnitee hereby agree as follows:
1. Indemnification.
1.1 Third Party Proceedings. The Company shall indemnify
Indemnitee if Indemnitee is or was a party or is threatened to be made a party
to any proceeding (other than an action by or in the right of the Company to
procure a judgment in its favor) by reason of the fact that Indemnitee is or was
a director, officer, employee or other agent of the Company, or any subsidiary
of the Company, and such proceeding relates to any action or inaction on the
part of Indemnitee while an officer, director, employee or agent or by reason of
the fact that Indemnitee is or was serving at the request of the Company as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise, against expenses (including, subject to
Section 13 hereof, attorneys' fees and any expenses of establishing a right to
indemnification pursuant to this Agreement or under Delaware law), judgments,
fines, settlements (if such settlement is approved in advance by the Company,
which approval shall not be unreasonably withheld) and other amounts actually
and reasonably incurred by Indemnitee in connection with such proceeding if
Indemnitee acted in good faith and in a manner Indemnitee reasonably believed to
be in or not opposed to the best interests of the Company and, in the case of a
criminal proceeding, if Indemnitee had no reasonable cause to believe
Indemnitee's conduct was unlawful. The termination of any proceeding by
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<PAGE>
judgment, order, settlement, conviction or upon a plea of nolo contendere or its
equivalent shall not, of itself, create a presumption that Indemnitee did not
act in good faith and in a manner which Indemnitee reasonably believed to be in
or not opposed to the best interests of the Company, or with respect to any
criminal proceedings, would not create a presumption that indemnitee had
reasonable cause to believe that Indemnitee's conduct was unlawful.
1.2 Proceedings By or In the Right of the Company. The Company
shall indemnify Indemnitee if Indemnitee was or is a party or is threatened to
be made a party to any threatened, pending or completed action by or in the
right of the Company or any subsidiary of the Company to procure a judgment in
its favor by reason of the fact that Indemnitee is or was a director, officer,
employee or other agent of the Company, or any subsidiary of the Company, and
such action relates to any action or inaction on the part of Indemnitee while an
officer, director or agent, or by reason of the fact that Indemnitee is or was
serving at the request of the Company as a director, officer, employee or
agent of another corporation, partnership, joint venture, trust or other
enterprise, against expenses (including, subject to Section 13 hereof,
attorneys' fees and any expenses of establishing a right to indemnification
pursuant to this Agreement or under Delaware law) and amounts paid in
settlement, in each case to the extent actually and reasonably incurred by
Indemnitee in connection with the defense or settlement of the proceeding if
Indemnitee acted in good faith and in a manner Indemnitee believed to be in or
not opposed to the best interests of the Company, except that no indemnification
shall be made with respect to any claim, issue or matter to which Indemnitee
shall have been adjudged to have been liable to the Company in the performance
of Indemnitee's duty to the Company, unless and only to the extent that the
court in which such proceeding is or was pending shall determine upon
application that, in view of all the circumstances of the case, Indemnitee is
fairly and reasonably entitled to indemnity for expenses and then only to the
extent that the court shall determine is proper.
1.3 Successful Defense on Merits. To the extent that Indemnitee
has been successful on the merits in defense of any proceeding referred to in
Section 1.1 or 1.2 above, or in defense of any claim, issue or matter therein,
the Company shall indemnify Indemnitee against expenses (including attorneys'
fees) actually and reasonably incurred by Indemnitee in connection therewith.
1.4 Certain Terms Defined. For purposes of this Agreement,
references to "other enterprises" shall include employee benefit plans,
references to "fines" shall include any excise taxes assessed on Indemnitee with
respect to an employee benefit plan and references to "proceeding" shall include
any threatened, pending or completed action or proceeding, whether civil,
criminal, administrative or investigative. For purposes of this Agreement,
references to the "Company" shall include all constituent corporations absorbed
in a consolidation or merger as well as the resulting or surviving corporation,
so that an Indemnitee who is or was a director, officer, employee or other
agent of such a constituent corporation, or who, being or having been such a
director, officer, employee or other agent of another corporation, partnership,
joint venture, trust or other enterprise, shall stand in the same position under
the provisions of this Agreement with respect to the resulting or surviving
corporation as an Indemnitee would if he or she had served the resulting or
surviving corporation in the same capacity.
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2. Agreement to Serve. Indemnitee agrees to serve or continue to serve
as a director and/or officer of the Company for so long as he or she is duly
elected or appointed or until such time as he or she voluntarily resigns.
Indemnitee agrees to tender written notice to the Company at least 30 days prior
to voluntarily resigning. The terms of any existing employment agreement
between Indemnitee and the Company shall continue in effect but shall be
modified or supplemented by the terms of this Agreement. Nothing contained in
this Agreement is intended to create in Indemnitee any right to continued
employment.
3. Expenses; Indemnification Procedure.
3.1 Advancement of Expenses. The Company shall advance all
expenses incurred by Indemnitee in connection with the investigation, defense,
settlement (excluding amounts actually paid in settlement of any action, suit or
proceeding) or appeal of any civil or criminal action, suit or proceeding
referenced in Section 1.1 or 1.2 hereof. Indemnitee hereby undertakes to repay
such amounts advanced only if, and to the extent that, it shall be determined
ultimately that Indemnitee is not entitled to be indemnified by the Company as
authorized hereby. The advances to be made hereunder shall be paid by the
Company to Indemnitee within twenty (20) days following delivery of a written
request therefor by Indemnitee to the Company.
3.2 Notice of Claim. Indemnitee shall, as a condition precedent to
his or her right to be indemnified under this Agreement, give the Company notice
in writing as soon as practicable of any claim made against Indemnitee for which
indemnification will or could be sought under this Agreement. Notice to the
Company shall be directed to the Secretary of the Company at the address shown
on the signature page of this Agreement (or such other address as the Company
shall designate in writing to Indemnitee). In addition, Indemnitee shall give
the Company such information and cooperation as it may reasonably require and as
shall be within Indemnitee's power.
3.3 Enforcement Rights. Any indemnification provided for in
Section 1 shall be made no later than sixty (60) days after receipt of the
written request of Indemnitee. If a claim or request under this Agreement,
under any statute, or under any provision of the Company's Bylaws providing for
indemnification, is not paid by the Company, or on its behalf, within sixty (60)
days after written request for payment thereof has been received by the Company,
Indemnitee may, but need not, at any time thereafter bring suit against the
Company to recover the unpaid amount of the claim or request, and subject to
Section 13, Indemnitee shall also be entitled to be paid for the expenses
(including attorneys' fees) of bringing such action. It shall be a defense to
any such action (other than an action brought to enforce a claim for expenses
incurred in connection with any action, suit or proceeding in advance of its
final disposition) that Indemnitee has not met the standards of conduct which
make it permissible under applicable law for the Company to indemnify
Indemnitee for the amount claimed but the burden of proving such defense shall
be on the Company and Indemnitee shall be entitled to receive interim payments
of expenses pursuant to Section 3.1 unless and until such defense may be finally
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adjudicated by court order or judgment for which no further right of appeal
exists. The parties hereto intend that, if the Company contests Indemnitee's
right to indemnification, the question of Indemnitee's right to indemnification
shall be a decision for the court and no presumption regarding whether the
applicable standard has been met will arise based on any determination or lack
of determination of such by the Company (including its Board of Directors or
any committee thereof, independent legal counsel or its stockholders).
3.4 Assumption of Defense. In the event the Company shall be
obligated to pay the expenses of any proceeding against Indemnitee, the Company,
if appropriate, shall be entitled to assume the defense of such proceeding with
counsel approved by Indemnitee, which approval shall not be unreasonably
withheld, upon the delivery to Indemnitee of written notice of its election
so to do. After delivery of such notice, approval of such counsel by Indemnitee
and the retention of such counsel by the Company, the Company will not be liable
to Indemnitee under this Agreement for any fees of counsel subsequently incurred
by Indemnitee with respect to the same proceeding, unless (i) the employment of
counsel by Indemnitee is authorized by the Company, (ii) Indemnitee shall have
reasonably concluded that there may be a conflict of interest of such counsel
retained by the Company between the Company and Indemnitee in the conduct of
such defense, or (iii) the Company ceases or terminates the employment of such
counsel with respect to the defense of such proceeding, in any of which events
then the fees and expenses of Indemnitee's counsel shall be at the expense of
the Company. At all times Indemnitee shall have the right to employ other
counsel in any such proceeding at Indemnitee's expense.
3.5 Notice to Insurers. If, at the time of the receipt of a notice
of a claim pursuant to Section 3.2 hereof, the Company has director and officer
liability insurance in effect, the Company shall give prompt notice of the
commencement of such proceeding to the insurers in accordance with the
procedures set forth in the respective policies. The Company shall thereafter
take all necessary or desirable action to cause such insurers to pay, on behalf
of the Indemnitee, all amounts payable as a result of such proceeding in
accordance with the terms of such policies.
3.6 Subrogation. In the event of payment under this Agreement, the
Company shall be subrogated to the extent of such payment to all of the rights
of recovery of the Indemnitee, who shall do all things that may be necessary to
secure such rights, including the execution of such documents necessary to
enable the Company effectively to bring suit to enforce such rights.
4. Exceptions. Notwithstanding any other provision herein to the
contrary, the Company shall not be obligated pursuant to the terms of this
Agreement:
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4.1 Claims Initiated by Indemnitee. To indemnify or advance
expenses to Indemnitee with respect to proceedings or claims initiated or
brought voluntarily by Indemnitee and not by way of defense, except with respect
to proceedings brought to establish or enforce a right to indemnification under
this Agreement or any other statute or law or as otherwise required under the
Delaware General Corporation Law, but such indemnification or advancement of
expenses may be provided by the Company in specific cases if the Board of
Directors has approved the initiation or bringing of such suit; or
4.2 Lack of Good Faith. To indemnify Indemnitee for any expenses
incurred by Indemnitee with respect to any proceeding instituted by Indemnitee
to enforce or interpret this Agreement, if a court of competent jurisdiction
determines that such proceeding was not made in good faith or was frivolous; or
4.3 Insured Claims. To indemnify Indemnitee for expenses or
liabilities of any type whatsoever (including, but not limited to, judgments,
fines, ERISA excise taxes or penalties, and amounts paid in settlement) that
have been paid directly to Indemnitee by an insurance carrier under a policy of
officers' and directors' liability insurance maintained by the Company; or
4.4 Claims Under Section 16(b). To indemnify Indemnitee for
expenses and the payment of profits arising from the purchase and sale by
Indemnitee of securities in violation of Section 16(b) of the Securities
Exchange Act of 1934, as amended, or any similar successor statute.
5. Partial Indemnification. If Indemnitee is entitled under any
provision of this Agreement to indemnification by the Company for some or a
portion of the expenses, judgments, fines or penalties actually or reasonably
incurred by Indemnitee in the investigation, defense, appeal or settlement of
any civil or criminal action, suit or proceeding, but not, however, for the
total amount thereof, the Company shall nevertheless indemnify Indemnitee for
the portion of such expenses, judgments, fines or penalties to which Indemnitee
is entitled.
6. Additional Indemnification Rights; Nonexclusivity.
6.1 Scope. Notwithstanding any other provision of this Agreement,
the Company hereby agrees to indemnify Indemnitee to the fullest extent
permitted by law, including those circumstances in which indemnification would
otherwise be discretionary and notwithstanding that such indemnification is
not specifically authorized by this Agreement. In the event of any change in
any applicable law, statute or rule which narrows the right of a Delaware
corporation to indemnify a member of its Board of Directors or an officer, such
changes, to the extent not otherwise required by such law, statute or rule to be
applied to this Agreement shall have no effect on this Agreement or the parties'
rights and obligations hereunder.
6.2 Non-Exclusivity. Nothing herein shall be deemed to diminish or
otherwise restrict any rights to which Indemnitee may be entitled under the
Company's Bylaws, any agreement, any vote of stockholders or disinterested
directors, or under the laws of the State of Delaware.
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<PAGE>
7. Mutual Acknowledgement. Both the Company and Indemnitee acknowledge
that in certain instances, Federal law or applicable public policy may prohibit
the Company from indemnifying its directors and officers under this Agreement or
otherwise. Indemnitee understands and acknowledges that the Company has
undertaken or may be required in the future to undertake with the Securities and
Exchange Commission to submit the question of indemnification to a court in
certain circumstances for a determination of the Company's right under public
policy to indemnify Indemnitee.
8. Officer and Director Liability Insurance. The Company shall, from
time to time, make the good faith determination whether or not it is practicable
for the Company to obtain and maintain a policy or policies of insurance with
reputable insurance companies providing the officers and directors of the
Company with coverage for losses from wrongful acts, or to ensure the Company's
performance of its indemnification obligations under this Agreement. Among
other considerations, the Company will weigh the costs of obtaining such
insurance coverage against the protection afforded by such coverage.
Notwithstanding the foregoing, the Company shall have no obligation to obtain or
maintain such insurance if the Company determines in good faith that such
insurance is not reasonably available, if the premium costs for such insurance
are disproportionate to the amount of coverage provided, if the coverage
provided by such insurance is limited by exclusions so as to provide an
insufficient benefit, or if Indemnitee is covered by similar insurance
maintained by a subsidiary or parent of the Company.
9. Severability. Nothing in this Agreement is intended to require or
shall be construed as requiring the Company to do or fail to do any act in
violation of applicable law. The Company's inability, pursuant to court order,
to perform its obligations under this Agreement shall not constitute a breach
of this Agreement. If this Agreement or any portion hereof shall be invalidated
on any ground by any court of competent jurisdiction, then the Company shall
nevertheless indemnify Indemnitee to the fullest extent permitted by any
applicable portion of this Agreement that shall not have been invalidated and
the balance of this Agreement not so invalidated shall be enforceable in
accordance with its terms.
10. Effective Dates. This Agreement shall be effective as of the date
set forth on the first page and may apply to acts or omissions of Indemnitee
which occurred prior to such date if Indemnitee was an officer, director,
employee or other agent of the Company, or any predecessor corporation or
constituent corporation in a merger involving the Company, or was serving at
the request of the Company as a director, officer, employee or agent of another
corporation, partnership, joint venture, trust or other enterprise, at the time
such act or omission occurred.
11. Coverage. The provisions of this Agreement shall continue as to
Indemnitee for any action taken or not taken while serving in an indemnified
capacity even though Indemnitee may have ceased to serve in such capacity at the
time of any action, suit or other covered proceeding. This Agreement shall be
binding upon the Company and its successors and assigns and shall inure to the
benefit of Indemnitee and Indemnitee's estate, heirs, legal representatives and
assigns.
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<PAGE>
12. Notice. All notices, requests, demands and other communication
under this Agreement shall be in writing and shall be deemed duly given (i) if
delivered by hand and receipted for by the addressee, on the date of such
receipt, or (ii) if mailed by domestic certified or registered mail with
postage prepaid, on the third business day after the date postmarked. Addresses
for notice to either party are as shown on the signature page of this Agreement
or as subsequently modified by written notice.
13. Attorneys' Fees. In the event that any action is instituted by
Indemnitee under this Agreement to enforce or interpret any of the terms hereof,
Indemnitee shall be entitled to be paid all court costs and expenses,
including reasonable attorneys' fees, incurred by Indemnitee with respect to
such action, unless as a part of such action, the court of competent
jurisdiction determines that the action was not instituted in good faith or was
frivolous. In the event of an action instituted by or in the name of the
Company under this Agreement, or to enforce or interpret any of the terms of
this Agreement, Indemnitee shall be entitled to be paid all court costs and
expenses, including attorneys' fees, incurred by Indemnitee in defense of such
action (including with respect to Indemnitee's counterclaims and cross-claims
made in such action), unless as a part of such action the court determines that
Indemnitee's defenses to such action were not made in good faith or were
frivolous.
14. Governing Law. This Agreement shall be governed by and construed in
accordance with the laws of the State of Delaware, as applied to contracts
between Delaware residents entered into and to be performed entirely within
Delaware.
15. Consent to Jurisdiction. The Company and Indemnitee each hereby
irrevocably consent to the jurisdiction of the courts of the State of Delaware
for all purposes in connection with any action or proceeding which arises out of
or relates to this Agreement and agree that any action instituted under this
Agreement shall be brought only in the state courts in the State of Delaware.
16. Counterparts. This Agreement may be executed in one or more
counterparts, all of which taken together shall constitute one instrument.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement
as of the date first above written.
American Champion Entertainment, Inc. Address:
26203 Production Avenue
By: ------------------------------- Suite 5
Hayward, CA 94545
Title: ----------------------------
Address:
--------------------------
- - ---------------------------- --------------------------
(Signature)
- - ----------------------------
(Printed or typed name)
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<PAGE>
Exhibit 23.2
CONSENT OF CERTIFIED PUBLIC ACCOUNTANTS
We consent to the use in this Registration Statement on Form SB-2 of
our report dated February 5, 1997, on our audit of the balance sheet of American
Champion Entertainment, Inc. and of our report dated January 31, 1997 on our
audits of the financial statements of America's Best Karate. We also consent to
the reference to our firm under the caption "Experts" in the Prospectus forming
part of such Registration Statement.
/s/ Moore Stephens, P.C.
----------------------------
MOORE STEPHENS, P.C.
Certified Public Accountants
Cranford, New Jersey
March 17, 1997
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