-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Ev7JV0ZJlS43UtHdN0PuFY7u+Q2tyywkTnWfKrQ9IcNxZ/lzkQeKEkP+YB0hE1In dqnap2677IJbhCmll0j1xw== 0000950124-97-004460.txt : 19970825 0000950124-97-004460.hdr.sgml : 19970825 ACCESSION NUMBER: 0000950124-97-004460 CONFORMED SUBMISSION TYPE: SB-2 PUBLIC DOCUMENT COUNT: 13 FILED AS OF DATE: 19970822 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: HOTEL DISCOVERY INC CENTRAL INDEX KEY: 0001044738 STANDARD INDUSTRIAL CLASSIFICATION: [] IRS NUMBER: 311487885 STATE OF INCORPORATION: MN FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: SB-2 SEC ACT: 1933 Act SEC FILE NUMBER: 333-34235 FILM NUMBER: 97668591 BUSINESS ADDRESS: STREET 1: 7701 FRANCE AVENUE SOUTH #217 CITY: EDINA STATE: MN ZIP: 55435 BUSINESS PHONE: 6128416363 MAIL ADDRESS: STREET 1: 7701 FRANCE AVENUE SOUTH #217 CITY: EDINA STATE: MN ZIP: 55435 SB-2 1 FORM SB-2 1 AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON AUGUST 22, 1997 REGISTRATION NO. 333- ================================================================================ SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM SB-2 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 HOTEL DISCOVERY, INC. (Name of Small Business Issuer in its Charter) MINNESOTA 5812 31-1487885 (State or other jurisdiction (Primary standard industrial (I.R.S. Employer of incorporation) classification code number) Identification Number)
7701 FRANCE AVENUE SOUTH, SUITE 217 EDINA, MINNESOTA 55435 (612) 841-6363 (Address and Telephone Number of Principal Executive Offices) STEPHEN D. KING, CHAIRMAN AND CHIEF EXECUTIVE OFFICER HOTEL DISCOVERY, INC. 7701 FRANCE AVENUE SOUTH, SUITE 217 EDINA, MINNESOTA 55435 (612) 841-6363 (Name, Address, and Telephone Number of Agent For Service) Copies to: WILLIAM M. MOWER, ESQ. GIRARD P. MILLER, ESQ. GAY L. GREITER, ESQ. DOHERTY RUMBLE & BUTLER, P.A. MASLON EDELMAN BORMAN & BRAND, LLP 3500 FIFTH STREET TOWERS 3300 NORWEST CENTER 150 SOUTH FIFTH STREET MINNEAPOLIS, MINNESOTA 55402-4140 MINNEAPOLIS, MINNESOTA 55402-4235 (612) 672-8200 (612) 340-5555 FAX (612) 672-8397 FAX (612) 340-5584
APPROXIMATE DATE OF PROPOSED SALE TO THE PUBLIC: As soon as practicable after the effective date of this Registration Statement. If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box. [ ] CALCULATION OF REGISTRATION FEE ================================================================================
TITLE OF EACH CLASS PROPOSED MAXIMUM PROPOSED MAXIMUM OF SECURITIES TO AMOUNT TO BE OFFERING PRICE AGGREGATE AMOUNT OF BE REGISTERED REGISTERED(1) PER UNIT OFFERING PRICE REGISTRATION FEE - ---------------------------------------------------------------------------------------------------------------------- Units, each consisting of one share of Common Stock, $.01 par value, and one Class A Warrant to purchase one share of Common Stock........................... 2,530,000 Units(2) $5.00 $12,650,000 $3,833.33 - ---------------------------------------------------------------------------------------------------------------------- Common Stock, $.01 par value(3)... 2,530,000 Shares $6.50 $16,445,000 $4,983.33 ======================================================================================================================
(1) Pursuant to Rule 416 under the Securities Act, this registration statement also covers such additional securities as may become issuable upon exercise of the Class A Warrants. (2) Includes 330,000 Units subject to an option granted to the Underwriter to cover over-allotments, if any. (3) Issuable upon exercise of the Class A Warrants. ------------------------ 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, OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A), MAY DETERMINE. ================================================================================ 2 INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY, NOR SHALL THERE BE ANY SALE OF THESE SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE. SUBJECT TO COMPLETION, DATED AUGUST , 1997 HOTEL DISCOVERY, INC. LOGO HOTEL DISCOVERY, INC. 2,200,000 UNITS Consisting of 2,200,000 Shares of Common Stock and 2,200,000 Redeemable Class A Warrants ------------------------- Hotel Discovery, Inc. (the "Company") is offering 2,200,000 units (the "Offering"), each unit consisting of one share of Common Stock, $.01 par value (a "Share") and one redeemable Class A Warrant at an initial public offering price of $5.00 per unit (a "Unit"). The Class A Warrants are immediately exercisable and, commencing 10 trading days after the Effective Date (as hereinafter defined), transferable separate from the Common Stock. Each Class A Warrant entitles the holder to purchase at any time until four years following the date that the Registration Statement relating to this Prospectus has been declared effective by the Securities and Exchange Commission (the "Effective Date"), one share of Common Stock at an exercise price of $6.50 per Warrant, subject to adjustment. The Class A Warrants are subject to redemption by the Company for $.01 per Warrant at any time 90 days after the Effective Date, on 30 days' written notice, provided that the average closing bid price of the Common Stock exceeds $7.00 (subject to adjustment) for any 14 consecutive trading days prior to such notice. See "Description of Securities." Prior to this Offering, there has been no market for the Company's securities. See "Underwriting" for information relating to the factors considered in determining the Price to Public. The Company has applied for listing its Common Stock, Class A Warrants and Units on the Nasdaq SmallCap Market under the symbols HOTD, HOTDW and HOTDU, respectively. ------------------------- THIS OFFERING INVOLVES A HIGH DEGREE OF RISK AND SUBSTANTIAL DILUTION. SEE "RISK FACTORS" COMMENCING ON PAGE 6 AND "DILUTION" ON PAGE 12. THESE ARE SPECULATIVE SECURITIES. ------------------------- THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
==================================================================================================================== UNDERWRITING PROCEEDS TO PRICE TO PUBLIC DISCOUNT(1) COMPANY(2) - -------------------------------------------------------------------------------------------------------------------- Per Unit................................. $5.00 $0.40 $4.60 - -------------------------------------------------------------------------------------------------------------------- Total(3)(4).............................. $11,000,000 $880,000 $10,120,000 ====================================================================================================================
(1) The Underwriter will receive a sales commission equal to 8% of the Total Price to Public from the sale of the Units. The Company has also agreed to pay the Underwriter a nonaccountable expense allowance equal to 2% of the Total Price to Public. The Company has also agreed to sell to the Underwriter, for nominal consideration, a 5-year warrant to purchase up to 220,000 shares at 120% of the Price to Public (the "Underwriter's Warrant"). In addition, the Company has agreed to indemnify the Underwriter against certain liabilities. See "Underwriting." (2) Before deducting expenses of the offering estimated at $220,000, which does not include the 2% nonaccountable expense allowance described in Note 1 above and assumes no exercise of the Underwriter's over-allotment option. (3) The Company has granted the Underwriter a 45-day option to purchase up to 330,000 additional Units from the Company solely to cover over-allotments, if any. If such option is exercised in full, the Total Price to Public, Total Underwriting Discount and Total Proceeds to Company will be $12,650,000, $1,012,000 and $11,638,000, respectively. See "Underwriting." (4) At the request of the Company, up to 10% of the Units offered hereby may be reserved for sale to persons designated by the Company at the Price to Public. The Units are offered by the Underwriter, subject to receipt and acceptance by it, its right to reject orders in whole or in part and to certain other conditions. It is expected that delivery of the certificates representing the Units will be made on or about , 1997 in Minneapolis, Minnesota. RJ Steichen & Company Logo The date of this Prospectus is , 1997. 3 [INSIDE FRONT COVER OF PROSPECTUS - DESCRIPTION OF PICTURES] Picture 1 - an artist's color drawing of the proposed 200-foot front elevation of the Mall of America Unit. The entrance to the restaurant, which is located to the left, is flanked on the left side by rock waterfalls and classical statues. A large stylized banner with the words "Hotel Discovery" is located over the entrance. The prow of a large replica of a sailing ship is visible to the right of the entrance. The wall to the right of the entrance shows a progression of various building material, from masonry to brick to stucco. Picture 2 - a photograph of the front elevation of the Kenwood Unit in Cincinnati, Ohio, and a portion of the parking lot. Picture 3 - a photograph of the lobby of the Kenwood Unit, with the hostess' desk and retail area. Picture 4 - a photograph of the bar of the Kenwood Unit, with waterfall and aquariums. Picture 5 - a photograph of the Mapping Room dining area of the Kenwood Unit. Picture 6 - a photograph of the Observatory Room dining area of the Kenwood Unit. Picture 7 - a photograph of the Safari Room dining area of the Kenwood Unit. [PICTURES TO COME FROM THE COMPANY] IN CONNECTION WITH THIS OFFERING, THE UNDERWRITER MAY OVER-ALLOT OR EFFECT TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK, UNITS AND CLASS A WARRANTS AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME. 4 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 otherwise indicated, the information in this Prospectus assumes no exercise of the Underwriter's over-allotment option. This Prospectus contains forward-looking statements that involve risks and uncertainties. The Company's actual results may differ significantly from the results discussed in the forward-looking statements. Factors that might cause such differences include, but are not limited to, those discussed under the heading "Risk Factors", which investors should carefully consider. THE COMPANY The business of Hotel Discovery, Inc. (the "Company") is to develop, own and operate theme restaurants with a retail component designed to appeal to the upscale casual dining market. The Company opened its first restaurant in the Kenwood Shopping Center in Cincinnati, Ohio (the "Kenwood Unit") on December 19, 1996, and a second restaurant to be located at the Mall of America in a suburb of Minneapolis, Minnesota (the "Mall of America Unit") is under development. In October 1995, a limited partnership raised $2.5 million to build the Kenwood Unit which, at 17,000 square feet and up to 360 seats, represents the first embodiment of the Hotel Discovery theme concept. In conjunction with a reorganization of the Company, the assets of the limited partnership were directly contributed to the Company in November 1996 in consideration of Common Stock of the Company. See "Reorganization." The Company subsequently raised approximately $7 million in private placements which concluded in June and July 1997, the proceeds of which were used to complete and add special features to the Kenwood Unit, begin development of the Mall of America Unit and for working capital purposes. Management has spent more than four years in the development stage of the Hotel Discovery concept. The Company's officers bring substantial restaurant experience to the Company, with significant hands-on multi-location operating experience as well as extensive site selection and development experience. Hotel Discovery is a concept restaurant that offers four different dining themes as entertainment. In the Kenwood Unit, the themes of adventure, imagination, exploration and innovation are embodied in the Safari Room, the Artist Loft, the Observatory and the Mapping Room, respectively. Specially designed furnishings and decorations, as well as the sights and sounds of state-of-the-art video and audio systems, transport guests along imaginative dining journeys. Imaginary places filled with myths and legends provide a unique blend of awareness, enjoyment, and entertainment to guests of Hotel Discovery. The Hotel Discovery menu offers a broad range of cuisine from around the world, including "cultural fusion" menu items such as Barcelona Spring Rolls and Asian Tacos. Features include American, Asian, Jamaican, West Indian, Mexican and European tastes and textures. Menu items are freshly made, using only the highest quality fresh meats, produce, spices and other ingredients. The menu mirrors the exploratory journey and adventure society themes of the restaurant itself. The Company targets the upscale casual segment of the dining-out industry, for which quality food pleasingly presented is an important consideration. Management expects that future restaurants will be located in highly visible, upscale malls or resort areas which feature upper and upper middle class demographics and a high level of tourist traffic. The Company is considering potential sites in Las Vegas and Chicago, but no assurances can be given that attractive sites will be located in those cities or that negotiations to build or lease such sites will be successfully concluded. The Company began operations as Hotel Mexico, Inc., an Ohio corporation, and was reorganized as Hotel Discovery, Inc., a Minnesota corporation, in August 1997. See "Reorganization." The Company was incorporated in January 1994 as an Ohio corporation. Its executive offices are located at 7701 France Avenue South, Suite 217, Edina, Minnesota 55435 and its telephone number is (612) 841-6363. 3 5 THE OFFERING Securities Offered............ 2,200,000 Units, each Unit consisting of one share of Common Stock and one redeemable Class A Warrant at an initial public offering price of $5.00 per Unit. Each Class A Warrant is immediately exercisable and, commencing 10 trading days after the Effective Date, transferable separately from the Common Stock. Each Class A Warrant entitles the holder to purchase, at any time until four years after the Effective Date, one share of Common Stock at an exercise price of $6.50 per Warrant, subject to adjustment. The Class A Warrants are subject to redemption by the Company for $.01 per Warrant at any time 90 days after the Effective Date, on 30 days' written notice, provided that the average closing bid price of the Common Stock exceeds $7.00 (subject to adjustment) for any 14 consecutive trading days prior to such notice. Common Stock Outstanding Before this Offering........ 5,399,289 Shares Common Stock Outstanding After this Offering......... 7,599,289 Shares(1) Proposed Nasdaq SmallCap Market Symbols: Common Stock................ HOTD Warrants.................... HOTDW Units....................... HOTDU Use of Proceeds............... The Company intends to utilize the proceeds for further concept development, to complete development and construction of a second Hotel Discovery restaurant at the Mall of America in Bloomington, Minnesota (the "Mall of America Unit") and a third Hotel Discovery restaurant at an unidentified site, and for working capital. - ------------------------- (1) Does not include (i) 330,000 Units subject to the Underwriter's over-allotment option; (ii) 220,000 shares of Common Stock issuable upon exercise of the Underwriter's Warrant at 120% of the Price to Public; (iii) 2,200,000 shares of Common Stock which are issuable upon the exercise of the Class A Warrants at an exercise price of $6.50 per Warrant; (iv) 214,955 shares of Common Stock issuable upon exercise of warrants at an exercise price of $3.75 per warrant; (v) 500,000 shares of Common Stock reserved for issuance under the Company's 1997 Stock Option and Compensation Plan, of which options relating to 452,666 shares are currently outstanding at an exercise price of $3.00 per share; and (vi) 25,000 shares of Common Stock issuable upon exercise of directors' stock options at an exercise price of $3.34 per share. 4 6 SUMMARY FINANCIAL INFORMATION
TWENTY-SIX WEEKS ENDED YEAR ENDED YEAR ENDED ------------------------- DECEMBER 31, DECEMBER 29, JUNE 30, JUNE 29, 1995 1996 1996 1997 ------------ ------------ -------- -------- (UNAUDITED) STATEMENT OF OPERATIONS DATA: Net sales................................... $ 0 $ 104,129 $ 0 $ 1,864,564 Restaurant costs and expenses............... 0 309,563 0 2,525,472 Selling, general and administrative expenses.................................. 14,775 138,209 44,122 765,573 Pre-opening and development costs........... 923,482 1,970,452 413,889 189,423 Other (income) expense...................... 2,209 13,507 (10,950) 65,787 ---------- ----------- ---------- ----------- Net loss.................................. $ (940,466) $(2,327,602) $ (447,061) $(1,681,691) ========== =========== ========== =========== Net loss per share.......................... $ (.28) $ (.53) $ (.10) $ (.33) ========== =========== ========== =========== Shares used in per share calculations....... 3,362,611 4,355,187 4,286,100 5,058,240 ========== =========== ========== ===========
JUNE 29, 1997 ------------------------------------------ PRO FORMA PRO FORMA AS ACTUAL (1) ADJUSTED(2) ------ --------- ------------ BALANCE SHEET DATA: Working capital (deficiency).......................... $(1,684,117) $ (284,117) $ 9,395,883 Total assets.......................................... 6,972,765 7,572,765 17,252,765 Total liabilities..................................... 5,065,966 4,265,966 4,265,966 Accumulated deficit................................... (5,123,427) (5,123,427) (5,123,427) Stockholders' equity.................................. 1,906,799 3,306,799 12,986,799
- ------------------------- (1) Assumes completion on June 29, 1997 of the sale of 499,804 shares of Common Stock at $3.00 per share for net proceeds of approximately $1.4 million that actually occurred in July 1997. (2) As adjusted for the sale of the Units offered hereby and the anticipated application of the net proceeds therefrom. Does not include: (i) 330,000 Units subject to the Underwriter's over-allotment option; (ii) 220,000 shares of Common Stock issuable upon exercise of the Underwriter's Warrant at 120% of the Price to Public; (iii) 2,200,000 shares of Common Stock which are issuable upon the exercise of the Class A Warrants at an exercise price of $6.50 per Warrant; (iv) 214,955 shares of Common Stock issuable upon exercise of warrants at an exercise price of $3.75 per warrant; (v) 500,000 shares of Common Stock reserved for issuance under the Company's 1997 Stock Option and Compensation Plan, of which options relating to 452,666 shares are currently outstanding at an exercise price of $3.00 per share; and (vi) 25,000 shares of Common Stock issuable upon exercise of directors' stock options at an exercise price of $3.34 per share. 5 7 RISK FACTORS An investment in the Shares offered hereby is highly speculative and involves a high degree of risk. Investors could lose their entire investment. Prospective investors should carefully consider the following factors, along with the other information set forth in this Prospectus, in evaluating the Company, its business and prospects before purchasing the Shares. LACK OF SIGNIFICANT OPERATING HISTORY The Company's first restaurant, the Kenwood Unit, opened on December 19, 1996 and, accordingly, the Company faces all of the risks, expenses and difficulties frequently encountered in connection with the operation and development of a new business enterprise, including the lack of a significant operating history. Management anticipates net losses to continue for the foreseeable future. There can be no assurance that the Company will be able to generate significant revenues or operate profitably. Future revenues and profits, if any, will depend upon various factors, including market acceptance of the Hotel Discovery concept, the quality of restaurant operations, the ability to expand to multi-unit locations and general economic conditions. Furthermore, to the extent the Company's expansion strategy is successful, there is no assurance that the Company will successfully manage the transition to higher volume operations, control its operating expenses, attract necessary additional personnel, or attract the required capital. Unless otherwise stated, all historical financial results for the Company are derived solely from the Kenwood Unit, which may not be indicative of other locations. LIMITED BASE OF OPERATIONS The Company currently operates one restaurant, the Kenwood Unit, and plans to open the Mall of America Unit in the second quarter of 1998. During the Company's initial development stage, the combination of a relatively small number of locations and the significant investment associated with each new restaurant may cause the operating results of the Company to fluctuate significantly and adversely affect the profitability and cash flow of the Company. Due to the small number of current and planned locations and the large expenditure required to open each new unit, poor operating results at any one unit or a delay in the planned opening of a unit would materially affect the profitability and cash flow of the entire Company. Future growth in revenues and profits will depend to a substantial extent on the Company's ability to increase the number of its restaurants and on its choice of locations. Because of the substantial financial requirements associated with opening new units, the investment risk related to any one Hotel Discovery unit is much larger than that associated with most other restaurant companies' venues. DEPENDENCE ON KEY PERSONNEL The Company will be largely dependent upon the personal efforts and abilities of Stephen D. King, Chairman and Chief Executive Officer, and Ronald K. Fuller, President and Chief Operating Officer. The loss or unavailability to the Company of either of these individuals could have a material adverse effect upon the Company's business. See "Management." NEED FOR ADDITIONAL MANAGEMENT The success of the Company will depend in large part upon the Company's ability to supplement its existing management team. While both Messrs. King and Fuller have significant restaurant and multi-location restaurant management experience, the Company will need to hire other corporate level and management employees to help implement and operate its expansion plans, including a chief financial officer. The failure to obtain, or delays in obtaining, key employees could have a material adverse effect on the Company. See "Management." DEPENDENCE ON DISCRETIONARY CONSUMER SPENDING The success of the Company's operations depends to a significant extent on a number of factors including discretionary consumer spending, economic conditions affecting disposable consumer income, the overall 6 8 success of the malls, entertainment centers and other venues where Hotel Discovery restaurants are or will be located, and the continued popularity of theme restaurants generally and the Company's concept in particular. Theme restaurants are more susceptible to shifts in consumer preferences and frequently experience a decline of revenue growth or of actual revenues as consumers tire of the related theme. RISKS OF NEW CONSTRUCTION Construction projects, including the opening of additional restaurant locations, entail risks, including shortages of materials or skilled labor, unforeseen environmental, engineering or geological problems, work stoppages, weather interference, floods, difficulties with regulatory agencies and unanticipated cost increases, any of which could give rise to delays and cost overruns. LIMITED FINANCIAL RESOURCES; ADEQUACY OF PROCEEDS AND NEED FOR ADDITIONAL FINANCING The Company's ability to execute its business strategy depends to a significant degree on its ability to obtain substantial equity capital and other financing to fund the development of additional restaurants. The proceeds of this Offering will provide the Company with the financing required to develop and open the Mall of America Unit and for working capital purposes. The total cost of developing the Kenwood Unit was approximately $4.7 million, which included $3.5 million for building design and construction and $1.2 million for equipment, furniture and fixtures. The Company estimates that the total cost of developing the planned Mall of America Unit will be approximately $4.5 million, net of landlord contributions. Although the Company estimates that the proceeds from this Offering will be sufficient to develop and open both the Mall of America Unit and a third Hotel Discovery restaurant, there can be no assurance that both of such restaurants can be developed at such estimated costs. If the proceeds of this Offering are not sufficient to develop a third unit, the Company may be required to seek additional funds through an additional offering of the Company's equity securities or by incurring indebtedness. If additional funds are required, there can be no assurance that any additional funds will be available on terms acceptable to the Company or its shareholders. New investors may seek and obtain substantially better terms than were granted its present investors and the issuance of such securities would result in dilution to existing shareholders. Furthermore, as the Company prepares to open additional restaurants, it will expend a relatively higher amount on administrative expenses than would a mature company with similar operations. EXPANSION STRATEGY The Company's ability to open and successfully operate additional restaurants will also depend upon the hiring and training of skilled restaurant management personnel and the ability to successfully manage growth, including monitoring units and controlling costs, food quality and customer service. The Company anticipates that the opening of additional restaurants will result in additional expenses associated with managing operations located in multiple markets. Furthermore, the Company believes that competition for unit-level management has become increasingly intense as additional restaurant chains expand to new markets. Achieving consumer awareness and market acceptance will require substantial efforts and expenditures by the Company. An extraordinary amount of management's time may be drawn to such matters and may adversely affect operating results. The Company is considering potential sites in Las Vegas and Chicago, but there can be no assurance that the Company will be able to enter into any other contracts for development of additional restaurants on terms satisfactory to the Company or at all. Accordingly, there can be no assurance that the Company will be able to open new restaurants or that, if opened, those units can be operated profitably. RESTAURANT AND RETAIL INDUSTRY COMPETITION The restaurant and specialty retail businesses are highly competitive. The restaurant industry is highly competitive with respect to price, service, quality and location and, as a result, has a high failure rate. There are numerous well-established competitors, including national, regional and local restaurant chains, possessing substantially greater financial, marketing, personnel and other resources than the Company. There can be no assurance that the Company will be able to successfully respond to various competitive factors affecting the restaurant industry. The restaurant industry is also generally affected by changes in consumer preferences, 7 9 national, regional and local economic conditions and demographic trends. The performance of restaurant facilities may also be affected by factors such as traffic patterns, demographic considerations, and the type, number and location of competing facilities. In addition, factors such as inflation, increased labor and employee benefit costs, and the availability of experienced management and hourly employees may also adversely affect the restaurant industry in general and the Company in particular. Restaurant operating costs are further affected by increases in the minimum hourly wage, unemployment tax rates and similar matters over which the Company has no control. The theme retail business is also highly competitive, particularly in locations experiencing an oversupply of retail businesses. Hotel Discovery would compete with a number of well-established specialty retailers possessing significantly greater financial, marketing, personnel and other resources than the Company. LONG-TERM, NON-CANCELABLE LEASES The Company has entered into long-term leases relating to the Kenwood Unit and the Mall of America Unit. These leases are non-cancelable by the Company (except in limited circumstances) and range in term from 12 to 15 years. Additional restaurants developed by the Company are likely to be subject to similar long-term, non-cancelable leases. If the Kenwood Unit, the Mall of America Unit or any other future restaurant does not perform at a profitable level and the decision is made to close that unit, the Company may nonetheless be committed to perform its obligations under the applicable lease, which would include, among other things, payment of the applicable base rent for the balance of the respective lease term. If such a termination were to occur at one or more of these locations, the Company could lose a restaurant without necessarily receiving an adequate return on its investment. See "Description of Leases." CONTROL OF THE COMPANY Following this offering, Stephen D. King will control approximately 29.6% of the Company's Common Stock, assuming all of the shares offered hereunder are sold. See "Principal Shareholders." Thus Mr. King will have the ability to substantially influence the election of members of the Board of Directors and to direct the operations and financial affairs of the Company. GOVERNMENT REGULATION The restaurant business is subject to various federal, state and local government regulations, including those relating to the sale of food and alcoholic beverages. The failure to maintain food and liquor licenses would have a material adverse effect on the Company's operating results. In addition, restaurant operating costs are affected by increases in the minimum hourly wage, unemployment tax rates, sales taxes and similar costs over which the Company has no control. Many of the Company's restaurant personnel will be paid at rates based on the federal minimum wage. Increases in the minimum wage would result in an increase in the Company's labor costs. The Company will be subject to "dram shop" statutes in certain states, including Minnesota and Ohio, which generally provide a person injured by an intoxicated person the right to recover damages from the establishment that served alcoholic beverages to the intoxicated person. The Company has obtained liability insurance against such potential liability. TRADEMARKS The Company's ability to successfully implement its Hotel Discovery concept will depend in part upon its ability to protect its trademarks. The Company has filed a trademark application with the United States Patent and Trademark Office to register the "Hotel Discovery" mark and design. There can be no assurance that the Company will be granted trademark registration for any or all of the proposed uses in the Company's applications. In the event the Company's mark is granted registration, there can be no assurance that the Company can protect such mark and design against prior users in areas where the Company conducts or will conduct operations. There is no assurance that the Company will be able to prevent competitors from using the same or similar marks, concepts or appearance. 8 10 SUBSTANTIAL DILUTION Purchasers of the securities offered hereby will experience immediate substantial dilution of $3.37 per share in net tangible book value per share of Common Stock if all of the shares offered hereby are sold. See "Dilution." DIVIDENDS NOT LIKELY At the present time, the Company intends to use earnings, if any, to finance further growth of the Company's business. Accordingly, investors should not purchase the shares with a view toward receipt of dividends. LACK OF PUBLIC MARKET; DETERMINATION OF OFFERING PRICE Prior to this Offering, there has been no public market for the Company's securities. Although the Company has applied for listing of the Common Stock on the Nasdaq SmallCap Market, there can be no assurance that an active public market will develop or be sustained. In addition, the SmallCap Market may be significantly less liquid than the Nasdaq National Market. If the Company fails to maintain the standards for quotation, the Company's securities could be removed from the market and traded in the over-the-counter market. As a result, an investor would find it more difficult to dispose of, or obtain accurate quotations as to the price of, the securities. In addition, if the Company fails to maintain its qualification for the Units to trade on the Nasdaq SmallCap Market, the Units will be subject to certain rules of the Securities and Exchange Commission relating to "penny stocks." Such rules require broker-dealers to make a suitability determination for purchasers and to receive the purchaser's prior written consent for a purchase transaction, thus restricting the ability of purchasers and broker-dealers to sell the stock in the open market. The offering price of the Units has been arbitrarily determined by negotiation between the Company and the Underwriter and bears no relationship to the Company's current operating results, book value, net worth or financial statement criteria of value. The factors considered in determining the offering price included an evaluation by management of the history of and prospects for the industry in which the Company competes and the prospects for earnings of the Company. Such factors are largely subjective, and the Company makes no representation as to any objectively determinable value of the Units offered hereby. See "Underwriting". CURRENT PROSPECTUS AND STATE REGISTRATION REQUIRED TO EXERCISE WARRANTS; POSSIBLE REDEMPTION OF WARRANTS Purchasers of Units will be able to exercise the Class A Warrants only if a current prospectus relating to the shares of Common Stock underlying the Class A 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 Class A Warrants reside. Although the Company will use its best efforts to (i) maintain the effectiveness of a current prospectus covering the shares of Common Stock underlying the Class A Warrants and (ii) maintain the registration of such Common Stock under the securities laws of the states in which the Company initially qualifies the Units for sale in the Offering, there can be no assurance that the Company will be able to do so. The Company will be unable to issue shares of Common Stock to those persons desiring to exercise their Class A Warrants if a current prospectus covering the shares issuable upon the exercise of the Class A Warrants is not kept effective or if such shares are not qualified nor exempt from qualification in the states in which the holders of the Warrants reside. The Class A Warrants are subject to redemption at any time by the Company at $.01 per Warrant 90 days after the Effective Date, on 30 days' prior written notice, if the average closing bid price of the Common Stock shall exceed $7.00 (subject to adjustment), for 14 consecutive trading days, at any time prior to such notice and provided a current prospectus covering the shares is then effective under federal securities laws. If the Class A Warrants are redeemed, Warrant holders will lose their right to exercise the Warrants except during such 30-day redemption period. Redemption of the Class A Warrants could force the holders to 9 11 exercise the Class A Warrants at a time when it may be disadvantageous for the holders to do so or to sell the Class A Warrants at the then market price or accept the redemption price, which is likely to be substantially less than the market value of the Class A Warrants at the time of redemption. See "Description of Securities -- Class A Warrants." UNDERWRITER'S WARRANT The Company has agreed to sell to the Underwriter, for nominal consideration, a five-year warrant to purchase up to 220,000 shares of Common Stock at 120% of the Price to Public. As long as the Underwriter's Warrant or other outstanding warrants remain unexercised, the Company's ability to raise additional capital may be adversely affected. See "Underwriting." UNDESIGNATED STOCK The Company's authorized capital consists of 100,000,000 shares of capital stock. The Board of Directors, without any action by the Company's stockholders, is authorized to designate and issue shares in such classes or series (including classes or series of preferred stock) as it deems appropriate and to establish the rights, preferences and privileges of such shares, including dividends, liquidation and voting rights. The Company currently has 5,399,289 shares of Common Stock outstanding and has authorized the issuance of an additional 2,530,000 shares of Common Stock in contemplation of this Offering. A further 3,489,955 shares of Common Stock have been authorized for the following: (i) 2,200,000 shares issuable upon the exercise of the Class A Warrants being issued as part of this Offering (2,530,000 if the Underwriter's over-allotment option is exercised in full), (ii) 220,000 shares issuable upon the exercise of the Underwriter's Warrant, (iii) 214,955 shares of Common Stock issuable upon exercise of warrants; (iv) 500,000 shares for issuance under the Company's 1997 Stock Option and Compensation Plan, of which options relating to 452,666 shares are currently outstanding, and (v) 25,000 shares of Common Stock issuable upon exercise of directors' stock options. No other class of common stock or preferred stock is currently designated and there is no current plan to designate or issue any such securities. The rights of holders of preferred stock and other classes of common stock that may be issued may be superior to the rights granted to the holders of the Units. The ability of the Board of Directors to designate and issue such undesignated shares could impede or deter an unsolicited tender offer or takeover proposal regarding the Company. Further, the issuance of additional shares having preferential rights could adversely affect the voting power and other rights of holders of Common Stock. SHARES ELIGIBLE FOR FUTURE SALE The sale, or availability for sale, of substantial amounts of Common Stock in the public market subsequent to this offering may adversely affect the prevailing market price of Common Stock and may impair the Company's ability to raise additional capital by the sale of its equity securities. The Company and its directors, executive officers and 5% shareholders have agreed that they will not sell nor grant any option for the sale of or otherwise dispose of any shares of Common Stock for 180 days after the Effective Date without the prior written consent of the Underwriter. It is expected that 4,438,288 shares of the Company's Common Stock which were sold in reliance on "private placement" exemptions under the Securities Act of 1933, as amended (the "1933 Act") will become eligible for sale pursuant to Rule 144 under the 1933 Act as follows: 1,157,625 shares on the Effective Date, 707,966 shares in September 1997, 1,092,400 shares in the fourth quarter of 1997 (except that the holders of such 1,092,400 shares have agreed not to sell or otherwise dispose of such shares for 90 days after the Effective Date), 800,685 shares in the second quarter of 1998, and 679,612 shares in the third quarter of 1998. See "Description of Securities - -- Shares Eligible for Future Sale." In connection with this Offering, certain officers and directors of the Company have agreed to escrow a portion of their shares with the State of Minnesota for three years or until (i) the Company meets certain earnings requirements established by the State of Minnesota, or (ii) the State of Minnesota determines that the escrow agreement is no longer necessary. A total of shares of Common Stock will be subject to such escrow. 10 12 MINNESOTA ANTI-TAKEOVER LAW The Company is subject to Minnesota statutes regulating business combinations and restricting voting rights of certain persons acquiring shares of the Company, which may hinder or delay a change in control of the Company. USE OF PROCEEDS The net proceeds to be received by the Company from this Offering, after deducting estimated costs and expenses of the Offering, are estimated to be approximately $9,680,000 ($11,165,000 if the Underwriter's over-allotment option is exercised in full). The Company intends to utilize the net proceeds as follows: Further concept development................................. $ 300,000 Development and construction of the Mall of America Unit.... 4,500,000 Development and construction of a third Hotel Discovery restaurant at an unidentified site........................ 4,500,000 Working capital............................................. 380,000 ---------- Total....................................................... $9,680,000 ==========
NEW FACILITIES The Company intends to apply at least $9,000,000 of the net proceeds to develop and open two new Hotel Discovery restaurants. The Company currently estimates that the average cost of developing and opening new Hotel Discovery restaurants, including equipment, furniture, fixtures and pre-opening expenses, will range from $4,000,000 to $4,500,000 per facility, net of landlord contributions, depending upon location, site conditions, construction costs, and the level of landlord contributions to a facility. There can be no assurance that the Company will be able to develop and open new Hotel Discovery restaurants at such costs. GENERAL The foregoing represents the Company's best estimate of its allocation of the net proceeds of this Offering, based upon the current state of its business operations, its current plans and current economic and industry conditions. These estimates are subject to change based on unanticipated levels and types of competition, adverse market trends and new business opportunities. Any material revisions in the allocation of proceeds will be made at the discretion of the Board of Directors. The Company believes the net proceeds from this Offering, together with cash generated from operations, will be sufficient to meet the Company's capital needs for at least 12 months, in connection with the Company's plans to develop the Mall of America Unit and the third restaurant Unit. Pending the use of the proceeds of this Offering, the Company intends to invest the proceeds in short-term, high quality, interest-bearing instruments. If the Underwriter exercises the over-allotment option in full, the Company will realize additional net proceeds of approximately $1,485,000. Such additional net proceeds will be added to the Company's working capital. 11 13 DILUTION As of June 29, 1997, the Company's net tangible book value was $1,886,799 or approximately $0.39 per share of Common Stock. "Net tangible book value" represents the tangible assets of the Company less all liabilities. Without giving effect to any other changes in net tangible book value after June 29, 1997, other than to give effect to (i) the sale of the securities offered hereby (assuming the entire offering price of the Units is allocated to the Common Stock), and (ii) the application of the net proceeds therefrom, the tangible book value as of June 29, 1997 would have been $11,566,799, or approximately $1.63 per share. This represents an immediate increase to existing shareholders in net tangible book value of approximately $1.24 per share and an immediate dilution to new shareholders of $3.37 per share. "Dilution" represents the difference between the amount per share paid by purchasers in this Offering and pro forma net tangible book value per share of the Common Stock after this Offering. The following table illustrates the per share dilution to new investors as of June 29, 1997: Public offering price....................................... $5.00 Net tangible book value before offering..................... $0.39 Increase in net tangible book value attributable to new investors................................................. 1.24 ----- Pro forma net tangible book value after the offering........ 1.63 ----- Dilution in net tangible book value to new investors(1)..... $3.37 =====
- ------------------------- (1) The dilution in net tangible book value per share to new investors, assuming the Underwriter's over-allotment option is fully exercised, would be $3.24. The following table summarizes the differences between the existing shareholders and the new investors with respect to the number of shares of Common Stock purchased from the Company, the total cash consideration paid, and the average cash consideration per share of Common Stock paid (assuming the entire offering price of the Units is allocated to the Common Stock).
TOTAL CASH SHARES PURCHASED(1) CONSIDERATION ------------------- --------------------- AVERAGE PRICE NUMBER PERCENT AMOUNT PERCENT PER SHARE ------ ------- ------ ------- ------------- Founding Investors....................... 3,000,000 39.5% $ 2,500,000 12.1% $0.83 Private Placement Investors.............. 2,399,289 31.5 7,197,867 34.7 3.00 New Investors............................ 2,200,000 29.0 11,000,000 53.2 5.00 --------- ----- ----------- ----- Total............................... 7,599,289 100.0% $20,697,867 100.0% ========= ===== =========== =====
- ------------------------- (1) The foregoing table takes into account the July 1997 sale of 499,804 shares of Common Stock at $3.00 per share but does not take into consideration: (i) 330,000 Units subject to the Underwriter's over-allotment option; (ii) 220,000 shares of Common Stock issuable upon exercise of the Underwriter's Warrant at 120% of the Price to Public; (iii) 2,200,000 shares of Common Stock which are issuable upon the exercise of the Class A Warrants at an exercise price of $6.50 per Warrant; (iv) 214,955 shares of Common Stock issuable upon exercise of warrants at an exercise price of $3.75 per warrant; (v) 500,000 shares of Common Stock reserved for issuance under the Company's 1997 Stock Option and Compensation Plan, of which options relating to 452,666 shares are currently outstanding at an exercise price of $3.00 per share; and (vi) 25,000 shares of Common Stock issuable upon exercise of directors' stock options at an exercise price of $3.34 per share. 12 14 DIVIDEND POLICY The Company has never declared or paid any cash dividends on its Common Stock, and the Board of Directors presently intends to retain all earnings, if any, for use in the Company's business for the foreseeable future. Any future determination as to declaration and payment of dividends will be made at the discretion of the Board of Directors. CAPITALIZATION The following table sets forth the capitalization of the Company as of June 29, 1997, as further adjusted to give effect to the sale of the Units offered hereby and the anticipated application by the Company of the proceeds therefrom.
PRO FORMA ACTUAL PRO FORMA(1) AS ADJUSTED(2) ------ ------------ -------------- Long-term debt: Long-term debt, net................................. $ 895,870 $ 895,870 $ 895,870 Convertible debt(3)................................. 150,000 150,000 150,000 ----------- ----------- ----------- Total long-term debt........................... 1,045,870 1,045,870 1,045,870 ----------- ----------- ----------- Stockholders' equity: Common stock, $.01 par value; 100,000,000 shares authorized; 4,899,485 shares issued and outstanding; 5,399,289 pro forma; 7,599,289 as adjusted......................................... 48,995 53,993 75,993 Additional paid-in capital.......................... 7,581,231 8,976,233 18,634,233 Common stock subscribed............................. (600,000) (600,000) (600,000) Accumulated deficit................................. (5,123,427) (5,123,427) (5,123,427) ----------- ----------- ----------- Total stockholders' equity..................... 1,906,799 3,306,799 12,986,799 ----------- ----------- ----------- Total capitalization........................... $ 2,952,669 $ 4,352,669 $14,032,669 =========== =========== ===========
- ------------------------- (1) Assumes completion on June 29, 1997 of the sale of 499,804 shares of Common Stock at $3.00 per share for net proceeds of approximately $1,400,000 which was completed in July 1997. (2) As adjusted for the sale of the Units offered hereby and the anticipated application of the net proceeds therefrom. Does not include: (i) 330,000 Units subject to the Underwriter's over-allotment option; (ii) 220,000 shares of Common Stock issuable upon exercise of the Underwriter's Warrant at 120% of the Price to Public; (iii) 2,200,000 shares of Common Stock which are issuable upon the exercise of the Class A Warrants at an exercise price of $6.50 per Warrant; (iv) 214,955 shares of Common Stock issuable upon exercise of warrants at an exercise price of $3.75 per warrant; (v) 500,000 shares of Common Stock reserved for issuance under the Company's 1997 Stock Option and Compensation Plan, of which options relating to 452,666 shares are currently outstanding at an exercise price of $3.00 per share; and (vi) 25,000 shares of Common Stock issuable upon exercise of directors' stock options at an exercise price of $3.34 per share. (3) Convertible into 39,600 shares of Common Stock at maturity on July 1, 1999. 13 15 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion should be read in connection with the Company's financial statements and related notes thereto included elsewhere in this Prospectus. OVERVIEW The Company was formed in January 1994 as an Ohio corporation to develop, own and operate upscale, casual theme restaurants under the name "Hotel Discovery." The Company opened its first restaurant in the Kenwood Shopping Center in Cincinnati, Ohio in December 1996. Prior to opening the Kenwood Unit, the Company had no revenues and its activities were devoted solely to development. The Company is presently developing a unit in the Mall of America in Bloomington, Minnesota. Future revenue and profits, if any, will depend upon various factors, including market acceptance of the Hotel Discovery concept, the quality of the restaurant operations, the ability to expand to multi-unit locations and general economic conditions. The Company's present sources of revenue are limited to its existing unit. There can be no assurances the Company will successfully implement its expansion plans, in which case it will continue to be dependent on the revenues from the existing unit. The Company also faces all of the risks, expenses and difficulties frequently encountered in connection with the expansion and development of a new and expanding business. Furthermore, to the extent that the Company's expansion strategy is successful, it must manage the transition to multiple site operations, higher volume operations, the control of overhead expenses and the addition of necessary personnel. The Company has adopted a 52/53 week accounting period ending on the Sunday nearest December 31 of each year. RESULTS OF OPERATIONS The Company had no revenues or operations during the period from January 13, 1994 (Inception) to December 19, 1996 (the opening of the Kenwood Unit). Accordingly, comparisons to periods prior to December 19, 1996 are not meaningful. Total Revenues -- The Kenwood Unit opened in December 1996. For the year ended December 29, 1996, the Company had total sales of $104,129 compared with $1,864,564 for the 26 weeks ended June 29, 1997. Costs and Expenses -- For the year ended December 31, 1995, the Company had a net loss of $940,466. For the year ended December 29, 1996, the Company had a net loss of $2,327,602 compared with a net loss of $1,681,691 for the 26 weeks ended June 29, 1997. The net losses for 1995 and 1996 are largely attributable to concept development and pre-opening costs totaling $923,482 and $1,970,452 for each period, respectively. The net loss for the 1997 period is largely attributable to additional expenses as the Company increases its corporate overhead structure for the development of additional locations supported by revenues from a single operating unit. On February 1, 1997, the Company entered into an employment agreement with an executive officer requiring the payment of annual compensation totaling $200,000 per year. This agreement, and continued increases in the Company's corporate overhead, will impact general and administrative expenses on an ongoing basis. 14 16 OPERATING RESULTS OF THE KENWOOD UNIT During the period from the commencement of Kenwood Unit operations (December 19, 1996) to December 29, 1996, food and beverage costs were $43,324 or 41.6% of sales compared with $612,115 or 32.8% of sales for the June 29, 1997 period. The improvement in food and beverage costs as a percentage of sales is due primarily to improved operating efficiencies. Labor, benefits and other direct restaurant operating expenses were $241,239 or 231.7% of sales during the period from the commencement of Kenwood operations (December 19, 1996) to December 29, 1996, compared to $1,638,357 or 87.9% of sales during the 26 weeks ended June 29, 1997. This improvement in restaurant operating expenses as a percentage of sales is due primarily to improved labor management and other operating efficiencies and increased sales. Although no assurances can be given, management believes that the Kenwood Unit's current level of sales, trained workforce and general operation will continue to improve unit level performance in future periods. LIQUIDITY AND CAPITAL RESOURCES The Company has met its capital requirements through the sale of Common Stock to and borrowings from its principal shareholder, Stephen D. King, the private placement of common stock and debt, and through revenues from operations. During the period from January 13, 1994 (Inception) through September 1995, the Company's predecessor sold 1,750 shares of Common Stock to Mr. King and another individual for nominal consideration, which shares were split 825-to-1 in November 1996. During the years ended December 29, 1996 and December 31, 1995, the maximum amount of borrowings from Mr. King outstanding at any time was $1,213,469 and $862,891, respectively. At year end December 29, 1996, and December 31, 1995, the amount of such outstanding indebtedness was $447,787 and $862,891, respectively. Included in these amounts were concept development costs reimbursed to a demonstration restaurant owned and operated by Mr. King in the amount of $278,101 for the year ended December 29, 1996 and $433,996 for the year ended December 31, 1995. The Company paid interest of 11.5% on all such advances. In October 1995, the Company's predecessor and Kenwood Restaurant Limited Partnership, an Ohio limited partnership formed in June 1995 (the "Kenwood Partnership"), raised $2.5 million in a private placement of 250 shares of Common Stock of the Company's predecessor (which shares were split 825-to-1 in November 1996, and now represent 206,250 shares of the Company) and limited partnership interests in the Kenwood Partnership. In a reorganization of the Company which occurred in November 1996, the Kenwood Partnership contributed all of its assets to the Company's predecessor, including the Kenwood Unit, in exchange for 1,350,000 shares of Common Stock of the Company. From November 1996 through July 1997, the Company's predecessor completed private placements of an aggregate of 2,392,889 shares of Common Stock at $3.00 per share. The net proceeds were approximately $5.9 million. Such proceeds have been, and will be, used for new and additional features for the Kenwood Unit, repayment of indebtedness, working capital and development of the planned Mall of America Unit. For the year ended December 31, 1995, the year ended December 29, 1996 and the 26 weeks ended June 29, 1997, the Company used $932,549, $1,024,187 and $2,387,424, respectively, in cash flow for operating activities. Since Inception, the Company's principal capital requirements have been the funding of (i) the development of the Company and the Hotel Discovery concept, (ii) the construction of the Kenwood Unit and the acquisition of furniture, fixtures and equipment therein and (iii) toward the development of the Mall of America Unit. Total capital expenditures for the Kenwood Unit were approximately $4.7 million. When completed, the Company estimates that capital expenditures for the Mall of America Unit will be approximately $4.5 million, net of landlord contributions of $1.6 million. The unit is expected to be complete in the second quarter of 1998. 15 17 The Company borrowed $1.0 million under a leasehold mortgage term loan from a bank, which is personally guaranteed by Mr. King. This financing was used for the Kenwood Unit. Principal and interest are due monthly through October 1999, at which time the remaining balance is due in full. In December 1996, the Company borrowed an additional $2.5 million under a mortgage term loan from a bank. Payments of interest only were due through January 1998, at which time the entire principal balance was due. This loan was paid in full on January 31, 1997. In May 1997, the Company borrowed $2.0 million on a 13-month term note, with interest only payable monthly at the rate of 7.15%. This note was guaranteed by Mr. King and was fully secured by substantially all of the Company's assets. This note was repaid in full in July 1997. On June 23, 1997, the Company borrowed $800,000 from Provident Bank, which is fully secured by substantially all of the Company's assets. The loan bears interest at 2% over the bank's reference rate payable monthly. The loan was personally guaranteed by Mr. King. This loan was repaid in full in July 1997. After the completion of the Mall of America Unit, future development and expansion will be financed through cash flow from operations and other forms of financing such as the sale of additional equity and debt securities, capital leases and other credit facilities. There are no assurances that such financing will be available on terms acceptable or favorable to the Company. 16 18 BUSINESS GENERAL Hotel Discovery, Inc. is a Minnesota corporation which was formed to develop, own and operate upscale casual theme restaurants. The Company was formed in January 1994 as an Ohio corporation, prior to reorganizing as a Minnesota corporation, and operates one Hotel Discovery restaurant in the Kenwood Shopping Center in Cincinnati, Ohio, which opened in December 1996. A second restaurant to be located at the Mall of America in a suburb of Minneapolis, Minnesota, is currently under development. The Company also has a license agreement with Eastgate Restaurants, Inc., a corporation wholly-owned by Stephen D. King, for the operation of a demonstration and test restaurant in Cincinnati which opened in June 1994. HOTEL DISCOVERY CONCEPT Hotel Discovery restaurants will serve the rapidly emerging upscale casual segment of the restaurant industry. Each Hotel Discovery restaurant will combine two contemporary trends within the restaurant industry by incorporating the entertainment features of restaurants such as Planet Hollywood, Rainforest Cafe and Dave & Buster's with the upscale casual attributes of restaurants like Palomino and The Cheesecake Factory. The Hotel Discovery concept is carefully designed to provide guests with a new and innovative dining concept providing noteworthy food, superior service and genuinely imaginative surroundings and special effects. Hotel Discovery restaurants will contain visual and audio effects providing a unique sight and sound experience. Management believes the Hotel Discovery restaurant ambiance and entertainment quality strongly differentiate its concept from traditional casual segment restaurants such as Applebee's, Bennigan's, Chili's and Friday's and goes beyond the simple food service-only concept of a typical theme restaurant. THE CONCEPT AND THE KENWOOD UNIT Hotel Discovery is designed around the concepts of adventure, imagination, exploration and invention. It is based on a foundation of superior food and excellent service coupled with soft, sophisticated, non-intrusive entertainment. The surroundings and extensive self-entertainment aspects within Hotel Discovery restaurants, such as videos corresponding to each dining room, provide guests with soft discovery experiences that allow them to actively and passively participate in quality dining experiences. Imaginary places, myths, and legends intended to pique guests' individual interests provide a unique land of awareness, enjoyment, and entertainment to guests of Hotel Discovery. Specially designed furnishings and decorations, along with specially arranged audio-visual presentations, are carefully orchestrated to transport guests along imaginative dining journeys. The guest's voyage begins the moment he or she enters the restaurant and sees a hologram of an old-time sailing ship rocking on ocean waves. The guest is greeted by the concierge and then introduced to his or her adventure guide, who seats the guest in one of four distinctly different dining rooms: the Mapping Room, the Safari Room, the Artist Loft, or the Observatory. Features of Hotel Discovery include the sights and sounds of state-of-the-art video and audio systems, as well as more tangible entertainment items such as aquariums, waterfalls, a 25-foot moving whale's tail, space shuttle, a star dome with fiber optic lights, an artist's work in progress and African masks with moving eyes. While guests venture through the many different aspects of Hotel Discovery at their leisure, they are able to experience destinations both real and imaginary within any of the four dining rooms. ADDITIONAL CONCEPT DEVELOPMENT In July 1997, the Company entered into an agreement with The Cuningham Group, an architectural and engineering firm based in Minneapolis, Minnesota, to assist the Company with Hotel Discovery concept development and rollout. The Cuningham Group offers full design and build services and the Company believes that it is a leading firm in the growing restaurant entertainment segment. Clients of The Cuningham Group in the restaurant and entertainment industries include Rainforest Cafe, Grand Casinos, Hilton Hotels, Paramount Studios, Steven Spielberg, MCA, IMAX Corporation, Harrah's Entertainment, Knott's Berry Farm, Walt Disney Company, Universal Studios and Six Flags. 17 19 THE CONCEPT AND THE MALL OF AMERICA UNIT The Company has obtained a lease for a 16,000-square-foot Hotel Discovery restaurant to be located on the third floor of the Mall of America in Bloomington, Minnesota, a suburb of Minneapolis (the "Mall of America Unit"). The lease is for a 12-year term and provides for minimum annual rent of $25 per square foot or, if higher, 6% of gross sales. The minimum rent of $405,000 has been waived for the first year of the lease. The Mall has agreed to reimburse the Company for up to $1.6 million for leasehold improvements. FLOOR PLAN OF THE MALL OF AMERICA UNIT* [BLUEPRINT OF MALL OF AMERICA UNIT] * subject to change. The Mall of America site will feature a 200-foot-long, curved front elevation that is planned to include waterfalls, stone masonry, brick and stucco which will symbolize the evolution of building materials through the centuries. As currently under development, the entrance will be very open and inviting, with a large replica of a sailing ship framing the retail merchandise area on one side and a half wall of rock with water fountains leading into the Discovery Club Bar on the other. The bar will be used to entertain guests who are waiting to be seated in the dining rooms and is expected to feature a stylized, partially open globe that will be large enough for guests to actually sit inside and enjoy sound and lighting effects. The dining room themes of imagination, invention, adventure and exploration will be carried forward and expanded to represent a period and place for each room. As currently planned, the imagination room will become an artist's loft in Paris, France, with large windows, completed works of art and works in process on display. The invention room will become Galileo's Observatory in seventeenth-century Florence, Italy, with graceful arches, polished wood surfaces and a towering telescope replica mounted on a rotating platform. The adventure room will recall the natural splendor of the famous Serengheti plains from the vantage point of a luxuriously appointed veranda. The exploration room, with massive stone ruins and primitive wooden structures, will evoke Machu Picchu, the mysterious Incan city in the clouds. RETAIL COMPONENT The retail area of a Hotel Discovery restaurant is located at the entrance of the facility. All restaurant patrons will have to pass by merchandise on their way to and from the dining areas. The retail component of the Hotel Discovery concept at the Kenwood Unit includes a collection of adult and children's casual clothing, including T-shirts, sweat shirts, shirts and caps, and a limited amount of other logo merchandise. The Mall of America Unit will display a much larger selection of merchandise which will be centered around the four 18 20 themes of imagination, invention, exploration and adventure as expressed in the four dining rooms. Such merchandise is expected to include educational toys and games, stationery, prints, telescopes, art materials, jewelry, primitive musical instruments, gift items and travel and hotel memorabilia. The Company believes that its unique theme will generate significant consumer identification similar to the retail items sold by other restaurant/retail facilities. EXPANSION PLANS; LOCATION SELECTION Management believes the Hotel Discovery concept is ideally targeted to the upscale mall and resort area customer segment. Future expansion activities will be concentrated in locations which exhibit large upper and upper middle class demographics and malls containing upscale, quality retailers and upscale casual restaurants. In addition, the large size of planned Hotel Discovery restaurants will necessitate locations in areas with significant tourist as well as local traffic. Several leading leasing managers of upscale malls have expressed interest in having a Hotel Discovery restaurant as a tenant. The Company currently intends to aim future expansion at upscale malls or resort areas. AWARD-WINNING MENU The Hotel Discovery menu features items from around the world. In the 1997 Taste of Cincinnati festival, Hotel Discovery's Ebony Butterfly Medallions won "Best Entree" and another Hotel Discovery menu entry won honorable mention in the vegetarian category. Menu offerings include a variety of freshly prepared steaks, chicken, seafood, entree salads and pastas, all with an eclectic, international flair. The menu mirrors the exploratory journey and adventure society concept embodied in the restaurant itself. Management believes that continual guest feedback on the key attributes of food quality, menu variety, service and ambiance is crucial to Hotel Discovery's success. It is currently obtained by weekly tabulation of comment cards that are distributed with every guest check, an extensive mystery diner program and periodic marketing research and telephone interviews. This constant feedback enables Hotel Discovery management to monitor guest response to all areas of the operation and react accordingly. Great care is taken to ensure that only the finest and freshest meats, vegetables, spices and other ingredients are used in Hotel Discovery recipes. Hotel Discovery's freshly prepared menu items are designed to cater to the most discerning tastes consistent with the image of an upscale casual dining experience. RESTAURANT OPERATIONS Hotel Discovery strives to maintain quality through extensive training of its employees and careful supervision of personnel. The Company has developed, and expects to implement at each Hotel Discovery restaurant, operations in accordance with a detailed operating manual, which contains specifications relating to food and beverage preparation, maintenance of premises and employee conduct. Each restaurant is expected to have a director of operations, five to seven managers and a controller. The Company places emphasis on employee training and incentives. Problems of employee turnover, low morale and inconsistent performance have been worsening within the restaurant industry in recent years. The Company believes that many of these problems can be lessened through extensive training, both initially and on an ongoing basis. Hotel Discovery training begins with classroom sessions that immerse new employees in Company food, beverage and service standards and guest communication guidelines. Each prospective guest service employee actually tastes, and is tested on, every food and beverage item on the menu. Daily shift meetings are held prior to lunch and dinner to communicate daily specials and feedback from comment cards and to reinforce service standards. MANAGEMENT AND FINANCIAL CONTROLS Hotel Discovery has implemented specific management control features for employee follow-up, customer satisfaction, and financial results. These controls are described below. 19 21 Employee Follow-up. Shift schedules are posted weekly for each position in the restaurant. Each shift is managed by a scheduled manager. Managers are responsible for executing job functions and following a thorough and complete checklist for each category of the restaurant. Checklists review the appearance of the outside of the restaurant, the dining room, kitchen and restrooms as well as dining room service and food preparation. Regular one-on-one meetings are held with employees and feedback as to their performance is given on a regular and consistent basis. This feedback includes positive reinforcement as well as redirection when a change in focus is needed. In addition, the restaurant's director of operations holds a weekly quality circle luncheon for key employees from each position in the restaurant. The President of the Company also holds a quarterly "town meeting" with selected employees to ensure that a strong communications system between the corporate office and the field is in place. Customer Satisfaction. Similar checklists are used to ensure that guests receive a high level of service and food quality. In addition, floor management is conducted during all peak seating periods by management. Management's incentives include a bonus based upon a percentage of cash flow and/or profitability. These incentives enable the manager to act and work as a "partner." It is this type of pay-for-performance system that will allow the results of Hotel Discovery restaurants to mirror those of an entrepreneurially owned and operated business. Financial Controls. Financial controls are monitored through a computer software system that is state-of-the-art for tracking sales, food costs, labor, and guest lists. All of this data is reviewed on a daily, weekly and monthly basis, enabling management to react promptly to correct deviations and capitalize on trends. COMPETITION The food service industry is intensely competitive with respect to food quality, concept, location, service and price. In addition, there are many well-established food service competitors with substantially greater financial and other resources than the Company and with substantially longer operating histories. The Company believes that it competes with other full-service dine-in restaurants, take-out food service companies, fast-food restaurants, delicatessens, cafeteria-style buffets and prepared food stores, as well as with supermarkets and convenience stores. Competitors include national, regional and local restaurants, purveyors of carry-out food and convenience dining establishments. Competition in the food service business is often affected by changes in consumer tastes, national, regional, and local economic and real estate conditions, demographic trends, traffic patterns, the cost and availability of labor, purchasing power, availability of product and local competitive factors. The Company attempts to manage or adapt to these factors, but it should be recognized that some or all of these factors could cause the Company to be adversely affected. Management is of the opinion that quality food pleasingly presented is an absolute requirement within the upscale casual segment of the market. THE UPSCALE CASUAL DINING SEGMENT The Hotel Discovery concept is positioned squarely in the upscale casual segment of the dining-out industry. Virtually all the successful upscale casual chains in the full service restaurant industry locate in major metropolitan areas and most typically within or contiguous to a high-traffic, upscale regional mall or resort area. While mall traffic in general has been sporadic or declining in recent years as the "big box" concept in retailing drains potential customers away from malls, the regional mall still remains a viable concept for fulfilling customer needs. In actuality, the declining customer count within the regional mall has created an opportunity for the upscale casual segment of the restaurant industry. Landlords desiring to increase traffic within the upscale mall have shown a willingness to provide restaurants with generous "add backs" or "give ups" to locate within a specific mall in order to increase the traffic flow, thereby creating an advantageous situation for both the mall developer as well as the restaurant investor. Although price is not the most important determinant to customer count within this $15 per average check niche, value is. The Hotel Discovery menu is extensive, varied, innovative, original and constantly evolving, using only the freshest ingredients coupled with a pleasing presentation. The surroundings are 20 22 high-energy and casual with efficient, attentive and friendly service. Rather than merely a place to consume food, the concept appeals to all the senses through video, audio and entertainment features. While the dining-out industry as a whole has shown relatively sluggish growth over the last few years, the segment of the industry targeted by Hotel Discovery has shown both rapid and consistent growth. Since the mid-1980s the top 20% of households have been increasing their share of total income. While this trend has had a profound effect on retailing in general, the effect on various segments of the restaurant industry has also been quite pronounced. An increase in the frequency of meals consumed away from home and a significantly larger average check have been observed. GOVERNMENT REGULATIONS Hotel Discovery restaurants are subject to federal, state and local laws affecting the operation of its restaurants, including zoning, health, sanitation and safety regulation and alcoholic beverage licensing requirements. Each restaurant is operated in accordance with standardized procedures designed to assure compliance with all applicable codes and regulations. The suspension of food service or liquor license would cause an interruption of operations at the affected restaurant. The Company believes that it is in compliance with all licensing and other regulations. The Company is also subject to the Fair Labor Standards Act, which governs minimum wages, overtime and working conditions. A significant portion of Hotel Discovery restaurant employees are paid at rates relating to federal minimum wage. Accordingly, an increase in the minimum wage would directly increase each restaurant's labor cost. Obtaining alcoholic beverage licenses from various jurisdictions will require disclosure of certain detailed information about directors, officers and greater than 10% shareholders of the Company's equity securities, and will necessitate that such persons be approved by the appropriate liquor licensing authority. THE KENWOOD UNIT LOCATION The Kenwood Unit is located in the recently refurbished Sycamore Plaza at Kenwood Shopping Center, 7800 Montgomery Road, Cincinnati, Ohio, and opened for business on December 19, 1996. The restaurant contains approximately 17,000 square feet on three levels and is located at the northeast corner of the Shopping Center Plaza. The Company leases the site upon which the restaurant is constructed. The Kenwood Unit was open for dinner on December 19, 1996 and for lunch on January 4, 1997. For the 26 weeks ended June 29, 1997, the Kenwood Unit had total sales of $1,864,564. The Kenwood location represents the highest volume retail sales per square foot in Cincinnati, reflecting a combination of high disposable income in the Kenwood/Montgomery area as well as a population of approximately 200,000 within a five-mile radius. The site contains an exclusive no-build area which provides a direct view of the restaurant from both Kenwood and Montgomery Roads. There is ample parking available adjacent to the location within the shopping center complex. DESCRIPTION OF LEASE The initial term of the lease is for 15 years. In addition, the Company has the right to extend the term of the lease for two additional terms of five years each, exercisable not earlier than 12 months nor later than six months prior to the expiration of the initial term or first option period, as applicable. The lease provides for the payment of both a monthly fixed minimum rent and a percentage rent based on gross sales in excess of an escalating base amount. The monthly fixed minimum rent is $12,833 for the first five years of the lease, $14,117 for the sixth through tenth years, $15,400 for the eleventh through fifteenth years, $16,683 during the first five-year lease renewal term and $17,967 during the second five-year lease renewal term. 21 23 In addition to the fixed minimum rent, the lease provides for the payment of a percentage rent equal to 4% of the gross sales from the restaurant in excess of the following annual gross sales amounts: $3,850,000 for the first five years of the lease, $4,235,000 for the sixth through tenth years, $4,620,000 for the eleventh through fifteenth years, $5,004,999 for the first five-year lease renewal term and $5,390,000 for the second five-year lease renewal term. The lease is a "triple net" lease and, in addition to the fixed minimum rent and percentage rent, the Company is required to pay its proportionate share of taxes, insurance, and maintenance and operation costs. Initially, the estimated annual amount payable with respect to taxes, maintenance and operating costs, and insurance is $4.15 a square foot, or approximately $32,000 per year. The landlord agreed to reimburse the Company in an amount up to $200,000 as a construction allowance for the completion of building and leasehold improvements within 30 days of the opening of the Kenwood Unit. The Company expects to complete the necessary documentation to obtain such reimbursement in the near future. In addition, the landlord agreed that it will not construct any permanent facility within a designated no-build area outlined in the lease. This "no-build" area allows unimpaired visibility of the restaurant from both Kenwood Road and Montgomery Road. FINANCING OF THE KENWOOD UNIT The total cost of the Kenwood Unit, including additional features, was approximately $4.7 million. Approximately $2,475,000 of the cost of the restaurant was funded by the proceeds of a private placement in October 1995. Another $1,025,000 was financed by a private placement which was concluded in June 1997, $850,000 of which was spent on new additional features. Leasehold improvements in the amount of $200,000 will be financed by the landlord. An additional $1,000,000 was funded by a leasehold mortgage term loan (the "Loan") which was incurred by the Kenwood Restaurant Limited Partnership and assumed by the Company. The Loan is secured with a leasehold mortgage and lien on the assets of the restaurant and is guaranteed by Mr. King individually. The Loan bears interest at a floating rate which is currently 9.06% and provides for monthly payments of principal in the amount of $5,785 plus interest through October 1999, at which time the remaining balance is due in full. THE MALL OF AMERICA UNIT LOCATION The Mall of America Unit will consist of a 16,000-square-foot restaurant located on the third floor of the Mall of America in Bloomington, Minnesota. The site is leased pursuant to a lease dated August 4, 1997 between Mall of America Company, a Minnesota general partnership, and the Company. The Mall of America opened in August 1992 with 266 tenants and now holds approximately 520 stores, merchandise carts and attractions, including four large anchor tenants (Macy's, Bloomingdale's, Sears and Nordstrom). The mall encompasses 4.2 million square feet on four enclosed floors, of which 2.5 million square feet are leasable, and employs 11,000 to 13,000 people, depending on the season. More than 93% of the leasable space is under contract, up from 71% five years ago. The mall draws an estimated 40 million visitors per year. Tourists account for 35% to 39% of mall traffic, which percentage increases up to 50% in the summer months. According to a recent article in the Minneapolis Star Tribune, the industry benchmark for success in prime shopping malls is $325 in annual sales per square foot, while stores in the Mall of America with fewer than 15,000 square feet (which includes most of the mall's tenants) average $450 in annual sales per square foot. This figure is partially offset by higher-than-average expenses, including property taxes and charges for common areas such as the rotunda and broad hallways. Mall development will increasingly focus on 22 24 entertainment in order to maintain a strong flow of visitors to the mall. Since it opened in 1992, the mall has emerged as a laboratory for new retail and development concepts, including: - Knott's Camp Snoopy, the country's first indoor amusement park combined with a shopping center, - The first Rainforest Cafe, a tropical-theme restaurant with related entertainment and merchandise which has undergone three expansions since its 1994 opening and has since opened six other locations in the United States and in London, England; - Postmark America, the U.S. Postal Service's only retail store, and - Chrysler's Great Cars Great Trucks, a prototype showcase where shoppers can inspect vehicles and use touchscreen computers to price customized vehicles. Having successfully pioneered the Hotel Discovery concept at the Kenwood Unit, the management of the Company is optimistic that the Mall of America, with its reputation for innovation in retailing and entertainment, will be an ideal location to showcase the Company's continuing development of its highly-themed, entertainment-oriented Hotel Discovery restaurant concept. DESCRIPTION OF MALL OF AMERICA LEASE The term of the lease is for 12 years, commencing on the earlier of (i) the day following the last day allowed to the Company for completion of remodeling of the leased space or (ii) the date on which the restaurant opens for business. The lease does not provide for renewal terms. The lease provides for the payment of either a minimum annual rent or a percentage rent based on gross sales. The minimum annual rent is $25 per square foot, or $405,375 per year based on approximately 16,215 square feet of leased area. The percentage rent is the amount by which 6% of gross sales exceeds minimum rent. The lease provides for waiver of the minimum annual rent for the first year of the lease. The landlord will also reimburse the Company for up to $1.6 million in leasehold improvements. The lease is a triple net lease and, in addition to the fixed minimum rent and percentage rent, the Company is required to pay its proportionate share of taxes, insurance, and maintenance and operation costs. EMPLOYEES As of August 22, 1997, the Company employed 133 persons, of whom 82 worked in full-time positions and 51 were part-time. The Mall of America Unit is expected to employ approximately 250 full- and part-time personnel when operating at full capacity. No current employee is covered by a collective bargaining agreement, and the Company has never experienced an organized work stoppage, strike or labor dispute. The Company considers relations with its employees to be excellent. LEGAL PROCEEDINGS The Company is not a party to any material litigation and is not aware of any threatened litigation that would have a material adverse effect on its business. 23 25 MANAGEMENT DIRECTORS, EXECUTIVE OFFICERS AND KEY EMPLOYEES The following table sets forth certain information with respect to each of the directors and executive officers of the Company.
NAME AGE POSITION(S) HELD ---- --- ---------------- Stephen D. King.............................. 41 Chairman and Chief Executive Officer Ronald K. Fuller............................. 51 President, Chief Operating Officer and Director Steven B. Carey.............................. 36 Vice President -- Menu Development John J. Motschenbacher....................... 34 Controller Patricia J. Diamond.......................... 38 Director of Retail Thomas W. Orr................................ 52 Director
Stephen D. King, the Chairman and Chief Executive Officer of the Company, is a managing partner of BaryCenter Capital Management, a Cincinnati-based financial advisor and investment firm. Mr. King will devote substantially all of his management time to the Company. From 1982 to 1990, Mr. King served in various capacities, including Chief Executive Officer, of Pizza Hut of Cincinnati, Inc., which operates 36 Pizza Hut restaurants in the Cincinnati, Ohio area. Mr. King has also served in various capacities with Long John Silver, Two Pesos and Skyline Chili franchise operations. Mr. King also has extensive real estate and financing expertise and, from 1991 to 1994, served as managing partner of a real estate development partnership with properties valued at approximately $60 million. Ronald K. Fuller joined the Company as President and Chief Operating Officer in January 1997. Mr. Fuller had served since 1993 as President and Chief Executive Officer for Leeann Chin, Inc., Minneapolis, Minnesota. From 1985 to 1993, Mr. Fuller held several executive positions with General Mills, Inc. and General Mills Restaurants, Inc. in Minneapolis and Orlando, Florida, including Vice President -- Operations, Executive Vice President -- New Concept Development, and President/General Manager. Thomas W. Orr is a Director of the Company and has been a Senior Consultant since 1995 for the Delta Consulting Group, Trumbull, Connecticut, specializing in business strategy, new business development, marketing and sales. From 1994 to 1995, Mr. Orr was President of the retail chicken group of ConAgra Broiler Company, with responsibility for strategic direction, operations of five plants, sales, marketing, international and commodity businesses. Mr. Orr had previously been associated with ConAgra Broiler Company from 1991 to 1993 as Vice President of Sales and Vice President of Marketing. From 1993 to 1994, Mr. Orr served as Senior Vice President for Jennie-O Foods, Inc., a subsidiary of Hormel Foods, with responsibility for strategy development, marketing and sales for the retail, food service and commodity divisions. Steven B. Carey became Vice President -- Menu Development of the Company in January 1997. From 1994 until that time, Mr. Carey was Corporate Executive Chef for Leeann Chin, Inc. From 1985 to 1994 he acted as Executive Chef or Senior Executive Chef for a number of units of Restaurants Unlimited, based in Seattle, Washington, including Palomino (Minneapolis), Ryan's Grill (Honolulu), Cutter's Grand Cafe (Philadelphia), Kincaid's Bayhouse (Burlingame, California) and Skates on the Bay (Berkeley). John J. Motschenbacher became Corporate Controller of the Company in June 1997. From 1993 to immediately prior to joining the Company, Mr. Motschenbacher served in various capacities for Leeann Chin, Inc., including as Director of Accounting and MIS and as Corporate Controller. He was the Controller of Q-Steaks, Inc., a steakhouse chain based in St. Louis Park, Minnesota. From 1991 to 1992 he was a Regional Controller for Bon Appetit Management Company (San Francisco), a provider of contract and institutional food service. From 1988 to 1991, he served as Senior Regional Accountant and then Manager of Accounting and Administration for Consul Restaurant Corporation (Bloomington, Minnesota), a Chi-Chi's Restaurant franchisee and provider of contract food services. 24 26 Patricia J. Diamond became Director of Retail of the Company in August 1997. From April 1996 to immediately prior to joining the Company, Ms. Diamond served as General Manager of UnderWater World at the Mall of America, where she was responsible for developing and coordinating all aquarium operations, including financial, personnel, marketing and retail functions. From January 1992 to April 1996, Ms. Diamond acted as General Manager of the LEGO Imagination Center at the Mall of America, where she was responsible for setup, development, and management, including budgeting, hiring of personnel, retail, exhibition and special events promotion. EXECUTIVE COMPENSATION The following table sets forth all cash compensation paid by the Company for the period from January 13, 1994 (Inception) through December 29, 1996 to the Company's Chairman and Chief Executive Officer:
LONG-TERM ANNUAL COMPENSATION COMPENSATION ------------------------ --------------- OTHER ANNUAL AWARD NAME OF INDIVIDUAL POSITION SALARY COMPENSATION OPTIONS GRANTED ------------------ -------- ------ ------------ --------------- Stephen D. King................... Chairman of the Board and $0(1) 0 -- Chief Executive Officer
- ------------------------- (1) Effective August 1, 1997, the Company began paying a salary to Mr. King of $200,000 per year. EMPLOYMENT AGREEMENTS Mr. Fuller has a two-year employment agreement with the Company, which provides for an annual base salary of $200,000 for his first year of employment, which may be adjusted annually as determined by the Board of Directors, plus a bonus based upon the Company's performance. Such agreement also provides that if Mr. Fuller is terminated by the Company for a reason other than "cause," as defined therein, he will receive up to two years' severance if such termination occurs prior to the Effective Date and one year's severance if such termination occurs thereafter. Mr. Fuller receives medical, dental and other customary benefits. The employment agreement provides that Mr. Fuller will not compete with the Company for one year following termination of his employment. Mr. Fuller received options to purchase 300,000 shares of Common Stock at an exercise price of $3.00 per share. Options to purchase 50,000 shares are currently vested. The remaining options vest over two years. The Company intends to retain other executive management employees pursuant to employment agreements. The Company intends to offer stock options to such employees. STOCK OPTION AND COMPENSATION PLAN The Board of Directors adopted the 1997 Stock Option and Incentive Compensation Plan (the "Plan") in January 1997 and reserved 500,000 shares of Common Stock for issuance to employees and key consultants under the Plan. The Plan is administered by the Board of Directors, which has the discretion to determine the number and purchase price of shares subject to stock options, which may not be below 85% of the fair market value of the Common Stock on the date granted, the term of each option, and the time or times during its term when the option becomes exercisable. As of the date of this Prospectus, options aggregating 452,666 shares of Common Stock have been granted to certain non-executive employees of the Company. BOARD OF DIRECTORS AND DIRECTOR COMPENSATION Each of the Company's directors has been elected to serve until the next annual meeting of shareholders. The Company's executive officers are appointed annually by the Company's directors. Each of the Company's directors continues to serve until his or her successor has been designated and qualified. 25 27 Directors receive no fees for serving as directors. The Company's sole non-employee director, Mr. Orr received a ten-year option to purchase 25,000 shares of Common Stock when he joined the Board. One-third of the options vest on each of the first, second and third anniversaries of the date of grant. The option granted to Mr. Orr has an exercise price of $3.34 a share. Members of the Board who are also employees of the Company receive no options for their services as directors. REORGANIZATION The Company's predecessor, Hotel Mexico, Inc. ("HMI"), was originally incorporated in January 1994 as an Ohio corporation. The Kenwood Restaurant Limited Partnership, an Ohio limited partnership (the "Kenwood Partnership"), was formed in June 1995 for the purpose of owning and operating the Kenwood Unit. The general partner of the Kenwood Partnership is Kenwood Restaurant, Inc., an Ohio corporation (the "General Partner"), which is 12.9% owned by Stephen D. King and 87.1% owned by other shareholders. Mr. King owns 23.9% of the voting stock of the General Partner. The Kenwood Partnership has 22 limited partners (the "Limited Partners") as a result of a private placement in October 1995. HMI's operations and the net assets of the Kenwood Partnership were combined on November 14, 1996. On that date, the Kenwood Partnership contributed all of its net assets to a newly formed corporation in exchange for shares of such corporation. HMI then merged with and into the newly-formed corporation, the name of which was changed to Hotel Mexico, Inc. Upon consummation of the merger, outstanding shares of HMI were converted into an aggregate of 1,350,000 shares of Common Stock of the newly formed corporation. The shares of HMI Common Stock received by the Kenwood Partnership in the reorganization will be retained by the Kenwood Partnership until the Effective Date. At that time, it is anticipated that the shares of Common Stock and any other partnership assets will be distributed to the general and limited partners in accordance with the Partnership Agreement and the Kenwood Partnership will be dissolved. On June 24, 1997, the Board of Directors of HMI approved its reincorporation as a Minnesota corporation named Hotel Discovery, Inc. Following approval of the transaction and of the name change by HMI's shareholders at a special meeting held on August 11, 1997, HMI was merged with and into Hotel Discovery, Inc., a newly-formed Minnesota corporation, on August 22, 1997. Hotel Discovery, Inc. has an authorized capital stock of 100,000,000 undesignated shares, and each share of Common Stock of HMI was converted into one share of Common Stock of Hotel Discovery, Inc. CERTAIN TRANSACTIONS The Company granted a five-year non-exclusive license to Eastgate Restaurants, Inc., an Ohio corporation wholly owned by Stephen D. King, to test the concept at a demonstration restaurant at 792 Eastgate South Drive, Cincinnati, Ohio, which opened in June 1994. The license granted includes the right to use the Hotel Mexico name, emblems, restaurant design, furnishings, menu and operating procedures. The license fee included an initial payment of $2,500 to the Company and a monthly fee of $200. A principal shareholder, director and executive officer provided essentially all of the Company's working capital in the development stage. This working capital was provided by direct advances to the Company and reimbursement for various business costs and expenses incurred by the principal shareholder on behalf of the Company. During the years ended December 29, 1996 and December 31, 1995, the maximum amount of such indebtedness outstanding at any time was $1,213,469 and $862,891, respectively. At year end December 29, 1996 and December 31, 1995, the amount of such outstanding indebtedness was $447,787 and $862,891, respectively. Included in these amounts were concept development costs reimbursed to a demonstration restaurant owned and operated by the principal shareholder in the amount of $278,101 for the year ended December 29, 1996 and $433,996 for the year ended December 31, 1995. The Company pays interest of 11.5% on all such advances. As of June 29, 1997, $348,430 was outstanding on such indebtedness. 26 28 Under the Kenwood Unit lease, the landlord is required to reimburse the Company for leasehold improvements in the amount of $200,000 upon presentation of appropriate documentation, which money the Company intends to use to retire a portion of its debt to Mr. King. In December 1996, the Company borrowed $2.5 million under a term loan from PNC Bank, Ohio, National Association, fully secured by cash collateral. The loan accrued annual interest of 5.94% and payments of interest only were due through January 1998, at which time the entire principal was due. The loan was personally guaranteed by Mr. King. This loan was paid in full on January 31, 1997. In May 1997 the Company borrowed $2.0 million on a 13-month term note, with interest only payable monthly at the rate of 7.15%. This note was guaranteed by Mr. King and was fully secured by substantially all of the Company's assets. This note was repaid in full in July 1997. Mr. King has also personally guaranteed a $1,000,000 leasehold mortgage term loan from PNC Bank, Ohio to the Company. See "The Kenwood Unit--Financing of the Kenwood Unit." On June 23, 1997, the Company borrowed $800,000 from Provident Bank, which is fully secured by substantially all of the Company's assets. The loan bears interest at 2% over the bank's reference rate payable monthly. The loan was personally guaranteed by Mr. King. This loan was repaid in full in July 1997. 27 29 PRINCIPAL SHAREHOLDERS The following table sets forth certain information regarding beneficial ownership of the Company's Common Stock as of the date of this Prospectus, as adjusted to give effect to the issuance of the securities offered hereby, by (i) each person known by the Company to be the beneficial owner of more than 5% of the outstanding Common Stock, (ii) each director of the Company, (iii) each executive officer of the Company, and (iv) all executive officers and directors of the Company as a group. Unless otherwise indicated, each of the following persons has sole voting and investment power with respect to the shares of Common Stock set forth opposite their respective names.
PERCENT ---------------------- SHARES OF PRIOR TO AFTER NAME COMMON STOCK OFFERING OFFERING(1) ---- ------------ -------- ----------- Stephen D. King(2)......................................... 900,000(3) 16.7% 11.8% Ronald K. Fuller........................................... 60,000(4) 1.1 0.8 Thomas W. Orr.............................................. 0 -- -- Kenwood Restaurant Limited Partnership(2).................. 1,350,000(5) 25.0 17.8 All executive officers and directors as a group (3 persons)................................................. 960,000(3) 17.6 12.6
- ------------------------- (1) Figures do not include any shares that may be purchased in the offering by executive officers, directors and the principal shareholder of the Company. Assumes that the Underwriter's over-allotment option is not exercised. (2) Such person's address is 8260 NorthCreek Drive, Suite 140, Cincinnati, Ohio 45236. (3) Includes 225,284 shares owned by Mr. King that are subject to options to purchase held by various individuals. Does not include 403,843 shares as to which Mr. King has voting control pursuant to voting trust agreements. Such voting trust agreements will terminate on the Effective Date. Mr. King has an option exercisable through September 20, 2001 to purchase those shares. Also does not include shares held by the Kenwood Restaurant Limited Partnership, as to which shares Mr. King has voting control. See "Reorganization." Including all such shares (but excluding, subsequent to the offering, the shares subject to the voting trust agreements), Mr. King's percentage ownership would be 49.2% and 29.6%, respectively. (4) Includes 50,000 shares issuable upon exercise of stock options that are exercisable within 60 days. (5) Mr. King has voting control of these shares. See "Reorganization." 28 30 DESCRIPTION OF SECURITIES UNITS Each Unit offered hereby consists of one share of Common Stock and one redeemable Class A Warrant. Warrants are immediately exercisable and, commencing 10 trading days after the Effective Date, separately transferable from the Common Stock. Each Class A Warrant entitles the holder to purchase at any time, until the earlier of redemption by the Company or four years following the Effective Date, one share of common Stock at an exercise price of $6.50 per Warrant, subject to adjustment. CAPITAL STOCK The Company's authorized capital stock consists of 100,000,000 undesignated shares of Common Stock, $.01 par value per share in the case of Common Stock, and a par value as determined by the Board of directors in the case of Preferred Stock. After the closing of this Offering, there will be issued and outstanding 7,599,289 shares of Common Stock, or 7,929,289 shares if the Underwriter's over-allotment option is exercised in full. COMMON STOCK There are no preemptive, subscription, conversion or redemption rights pertaining to the Common Stock. The absence of preemptive rights could result in a dilution of the interest of existing shareholders should additional shares of Common Stock be issued. Holders of the Common Stock are entitled to receive such dividends as may be declared by the Board of Directors out of assets legally available therefor, and to share ratably in the assets of the Company available upon liquidation. Each share of Common Stock is entitled to one vote for all purposes and cumulative voting is not permitted in the election of directors. Significant corporate transactions, such as amendments to the articles of incorporation, mergers, sales of assets and dissolution or liquidation, require approval by the affirmative vote of the majority of the outstanding shares of Common Stock. Other matters to be voted upon by the holders of Common Stock normally require the affirmative vote of a majority of the shares present at the particular stockholders' meeting. The Company's directors and officers as a group beneficially own approximately 17.6% of the Outstanding Common Stock of the Company. Upon completion of this Offering, such persons will beneficially own approximately 12.6% of the outstanding shares (12.1% if the Underwriter's over-allotment option is exercised in full). See "Principal Shareholders." Accordingly, such persons will continue to be able to substantially control the Company's affairs including, without limitation, the sale of equity or debt securities of the Company, the appointment of officers, the determination of officers' compensation and the determination whether to cause a registration statement to be filed. There are approximately 265 beneficial holders of the Company's Common Stock as of the date of this Prospectus. The rights of holders of the shares of Common Stock may in the future become subject to prior and superior rights and preferences in the event that the Board of Directors establishes one or more additional classes of Common Stock or one or more series of Preferred Stock. The Board of Directors has no present plan to establish any such class or series. The limited partners of the Kenwood Partnership, who currently own an aggregate of 206,250 shares of Common Stock of the Company and will receive an aggregate of 922,500 additional shares of the Company's Common Stock upon dissolution of the Kenwood Partnership, have preemptive rights with respect to certain private placements of equity securities and certain debt securities of the Company pursuant to a Shareholder Agreement dated as of September 30, 1995. These preemptive rights will terminate immediately prior to the Effective Date. CLASS A WARRANTS The Class A Warrants included as part of the Units being offered hereby will be issued under and governed by the provisions of a Warrant Agreement (the "Warrant Agreement") between the Company and Norwest Bank Minnesota, N.A. as Warrant Agent (the "Warrant Agent"). The following summary of the 29 31 Warrant Agreement is not complete, and is qualified in its entirety by reference to the Warrant Agreement, a copy of which has been filed as an exhibit to the Registration Statement of which this Prospectus is a part. Commencing 10 trading days after the Effective Date, the shares of Common Stock and the Class A Warrants offered as part of the Units will be detachable and separately transferable. One Class A Warrant entitles the holder ("Warrantholder") thereof to purchase one share of Common Stock during the four years following the Effective Date, subject to earlier redemption, provided that at such time a current prospectus relating to the shares of Common Stock issuable upon exercise of the Class A Warrants is in effect and the issuance of such shares is qualified for sale or exempt from qualification under applicable state securities laws. Each Class A Warrant will be exercisable at an exercise price of $6.50 per Warrant, subject to adjustment in certain events. The Class A Warrants are subject to redemption by the Company beginning 90 days after the Effective Date, on not less than 30 days' written notice, at a price of $.01 per Warrant at any time following a period of 14 consecutive trading days where the per share average closing bid price of the Common Stock exceeds $7.00 (subject to adjustment), provided that a current prospectus covering the shares issuable upon the exercise of the Class A Warrants is then effective under federal securities laws. For these purposes, the closing bid price of the Common Stock shall be determined by the closing bid price as reported by Nasdaq so long as the Common Stock is quoted on Nasdaq and, if the Common Stock is listed on a national securities exchange, shall be determined by the last reported sale price on the primary exchange on which the Common Stock is traded. Holders of Class A Warrants will automatically forfeit all rights thereunder except the right to receive the $.01 redemption price per Warrant unless the Class A Warrants are exercised before they are redeemed. The Warrantholders are not entitled to vote, receive dividends or exercise any of the rights of holders of shares of Common Stock for any purpose. The Class A Warrants are in registered form and may be presented for transfer, exchange or exercise at the office of the Warrant Agent. Although the Company has applied for listing of the Class A Warrants on the Nasdaq SmallCap Market, there is currently no established market for the Class A Warrants, and there is no assurance that any such market will develop. The Warrant Agreement provides for adjustment of the exercise price and the number of shares of Common Stock purchasable upon exercise of the Class A Warrants to protect Warrantholders against dilution in certain events, including stock dividends, stock splits, reclassification, and any combination of Common Stock, or the merger, consolidation, or disposition of substantially all the assets of the Company. The Class A Warrants may be exercised upon surrender of the certificate therefor on or prior to the expiration date (or earlier redemption date) at the offices of the Warrant Agent, with the form of "Election to Purchase" on the reserve side of the certificate properly completed and executed as indicated, accompanied by payment of the full exercise price (by certified or cashier's check payable to the order of the Company) for the number of Class A Warrants being exercised. RECENT PRIVATE PLACEMENTS OF COMMON STOCK In July 1997, the Company concluded the private placement of 499,804 shares of Common Stock at $3.00 per share. The Company realized net proceeds of approximately $1,400,000. These proceeds were used for working capital purposes. In June 1997, the Company concluded the private placement of 1,663,085 shares of Common Stock at $3.00 per share. The Company realized net proceeds of approximately $4,350,000. Of these net proceeds, $1,200,000 was used to repay a $1.2 million working capital loan from PNC Bank, Ohio, National Association, which loan had been guaranteed by Mr. King personally. An additional $675,000 was used to complete construction and development of the Kenwood Unit, $850,000 has been or is being used for new features for the Kenwood Unit, approximately $200,000 has been used for development and execution of the lease at the Mall of America, and the balance was utilized for working capital, including operating losses. The Underwriter acted as the selling agent (the "Agent") with respect to these equity offerings. The Agent received sales commissions equal to 8% of the gross proceeds of the offering plus a non-accountable 30 32 expense allowance of 2% of gross proceeds. The Agent also received four-year warrants to purchase 199,205 shares of the Company's Common Stock at an exercise price of $3.75 per share. SHARES ELIGIBLE FOR FUTURE SALE Upon completion of this Offering, there will be 7,599,289 shares of Common Stock issued and outstanding (7,929,289 if the Underwriter's over-allotment option is exercised in full). The shares purchased in this Offering will be freely tradeable without registration or other restriction under the 1933 Act, except for any shares purchased by an "affiliate" of the Company (as defined in the Act). All the currently outstanding shares were issued in reliance upon the "private placement" exemptions provided by the Act and are deemed restricted securities within the meaning of Rule 144 ("Restricted Shares"). Restricted Shares may not be sold unless they are registered under the Act or are sold pursuant to an applicable exemption from registration, including an exemption under Rule 144. A total of 4,438,288 Restricted Shares will become eligible for sale, assuming all of the other requirements of Rule 144 have been satisfied, as follows: 1,157,625 shares upon the Effective Date, 707,966 shares in September 1997, 1,092,400 shares in the fourth quarter of 1997 (except that the holders of such 1,092,400 shares have agreed not to sell or otherwise dispose of such shares for 90 days after the Effective Date), 800,685 shares in the second quarter of 1998, and 679,612 shares in the third quarter of 1998. Rule 144 provides that if at least one year has elapsed since restricted shares of Common Stock were last acquired from the Company or an affiliate of the Company, the holder is generally entitled to sell, within any three-month period, a number of shares that does not exceed the greater of 1% of the shares of Common Stock then outstanding or the reported average weekly trading volume of the Common Stock during the four calendar weeks immediately preceding the date on which notice of the sale is sent to the SEC. Sales under Rule 144 are subject to certain manner of sale restrictions, notice requirements and availability of current public information concerning the Company. A person who is not an affiliate of the Company during the three months preceding the sale generally may sell shares without regard to the volume limitations, manner of sale provision, notice requirements or the availability of public information concerning the Company, provided that at least two years have elapsed since the shares were last acquired from the Company or an affiliate. In general, under Rule 701 as currently in effect, any employee, consultant or advisor of the Company who purchases shares from the Company by exercising a stock option outstanding on the date of the Offering is eligible to resell such shares 90 days after the date of the Prospectus in reliance on Rule 144, but need not comply with certain restrictions contained in Rule 144, including the holding period requirement. As soon as practicable after the Offering, the Company intends to register, through a Form S-8 registration statement, 500,000 shares of Common Stock that are reserved for issuance under the Stock Option Plan. See "Management." After the effective date of such registration statement, shares issued upon exercise of outstanding options would generally be eligible for immediate resale in the public market, subject to vesting under the applicable option agreements. Following this Offering, the Company cannot predict the effect, if any, that sales of the Common Stock or the availability of such Common Stock for sale will have on the market price prevailing from time to time. Nevertheless, sales by existing shareholders of substantial amounts of Common Stock could adversely affect prevailing market prices for the Common Stock if and when a public market exists. The Company's executive officers, directors and 5% shareholders have agreed that they will not sell, grant any option for the sale of, or otherwise dispose of any equity securities of the Company (or any securities convertible into or exercisable or exchangeable for equity securities of the Company) for a period of 180 days after the Effective Date without the prior written consent of the Underwriter. Private placement investors in the Company's Common Stock agreed not to sell or otherwise dispose of any shares of Common Stock for a period of 90 days after the Effective Date. MINNESOTA ANTI-TAKEOVER LAW The Company is governed by the provisions of Sections 302A.671 and 302A.673 of the Minnesota Business Corporation Act. In general, Section 302A.671 provides that the shares of a corporation acquired in a 31 33 "control share acquisition" have no voting rights unless voting rights are approved in a prescribed manner. A "control share acquisition" is an acquisition, directly or indirectly, of beneficial ownership of shares that would, when added to all other shares beneficially owned by the acquiring person, entitle the acquiring person to have voting power of 20% or more in the election of directors. In general, Section 302A.673 prohibits a publicly-held Minnesota corporation from engaging in a "business combination" with an "interested shareholder" for a period of four years after the date of the transaction in which the person became an interested shareholder, unless the business combination is approved in a prescribed manner. "Business combination" includes mergers, asset sales and other transactions resulting in a financial benefit to the interested shareholder. An "interested shareholder" is a person who is the beneficial owner, directly or indirectly, of 10% or more of the corporation's voting stock or who is an affiliate or associate of the corporation and at any time within four years prior to the date in question was the beneficial owner, directly or indirectly, of 10% or more of the corporation's voting stock. TRANSFER AGENT AND REGISTRAR Norwest Bank Minnesota, N.A. is the transfer agent and registrar for the Common Stock. UNDERWRITING Under the terms and subject to the conditions contained in the Underwriting Agreement, dated the effective date of this offering, R.J. Steichen & Company (the "Underwriter") has agreed to purchase from the Company, and the Company has agreed to sell to the Underwriter, an aggregate of 2,200,000 Units. The Underwriting Agreement provides that the Underwriter will be obligated to purchase, subject to the terms and conditions set forth therein, all of the Units being sold pursuant to the Underwriting Agreement (other than the Units covered by the over-allotment option) if any of the Units being sold pursuant to the Underwriting Agreement are purchased. The Company has been advised by the Underwriter that the Underwriter proposes to offer the 2,200,000 Units at a Price to Public of $5.00 per Unit and to certain selected dealers at such price less a concession not in excess of $.24 per Unit to certain other dealers who are members of the National Association of Securities Dealers, Inc. After the initial public offering, the Price to Public and other selling terms may be changed by the Underwriter. The Underwriter does not intend to confirm sales to any account over which it has discretionary authority. In the Underwriting Agreement, the Company and the Underwriter have agreed to indemnify each other (including officers, directors and control persons of each other) against certain liabilities under the 1933 Act, or to contribute to payments which the Underwriter may be required to make in respect thereof. Insofar as indemnification for liabilities arising under the 1933 Act may be permitted to directors, officers and controlling persons of the small business issuer pursuant to the foregoing provisions, or otherwise, the small business issuer has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. The Company has granted to the Underwriter an option, exercisable within 45 days after the date of this Prospectus, to purchase up to an additional 330,000 Units at the Price to Public, less the Underwriting Discount shown on the cover page of this Prospectus. This option may only be exercised in whole or in part, but only for the purpose of covering any over-allotments in the sale of the Units offered hereby. The Company's executive officers, directors and 5% shareholders have agreed that they will not sell, grant any option for the sale of, or otherwise dispose of any equity securities of the Company (or any securities convertible into or exercisable or exchangeable for equity securities of the Company) for a period of 180 days after the Effective Date without the prior written consent of the Underwriter. Private placement investors in the Company's Common Stock agreed not to sell or otherwise dispose of any shares of Common Stock for a period of 90 days after the Effective Date. 32 34 The Company has agreed to pay the Underwriter a nonaccountable expense allowance of 2% of the aggregate Total Price to Public of the Units or $220,000 ($253,000 if the Underwriter's over-allotment option is exercised in full). The Company has agreed to sell to the Underwriter, for $50.00, five-year warrants to purchase 220,000 shares of Common Stock of the Company at a price per share equal to 120% of the Price to Public (the "Underwriter's Warrant"). The Underwriter's Warrant is exercisable commencing one year from the Effective Date and for a period of four years thereafter. The Underwriter's Warrant contains anti-dilution provisions providing for appropriate adjustments to the exercise price and the number of shares on the occurrence of certain events. The shares of Common Stock received upon exercise of the Underwriter's Warrant may participate in any securities registration by the Company, at the Company's expense, during the term of the Warrant and for two years thereafter unless and to the extent that, in the judgment of the underwriter of such offering, the market for the securities to be sold by the Company would be adversely affected thereby. In addition, the holders of such shares have a one-time right to demand registration of the shares during the term of the Warrant, at the Company's expense, if and when registration of the Company's securities on Form S-3 becomes available under the 1933 Act. The Underwriter's Warrant also has a cashless exercise option. Any profits realized by the Underwriter upon the sale of the Underwriter's Warrant or the securities issuable upon exercise thereof may be deemed to constitute additional underwriting compensation. In November 1996 through July 1997, the Company sold an aggregate of 2,162,889 shares of Common Stock in two private placements in which the Underwriter acted as selling agent. The Underwriter received agent's commissions of approximately $597,616 and warrants to purchase an aggregate of 199,205 shares of Common Stock exercisable at $3.75 per share. At the request of the Company, up to 10% of the Units offered hereby may be reserved for sale to persons designated by the Company. The price of such Units will be the Price to Public set forth on the cover of this Prospectus. Prior to this Offering, there has been no public market for the shares. Consequently, the Price to Public of the Units and the exercise price of the Class A Warrants were arbitrarily determined through negotiation between the Company and the Underwriter and bears no relation to the Company's current earnings, book value, net worth, financial statement criteria of value, the history of and prospects for the industry in which the Company principally competes or the capability of the Company's management. There can be no assurance that the price at which the Units, the Class A Warrants or the Common Stock will sell in the public market after this Offering will not be lower than the price at which they are sold by the Underwriter. The foregoing is a summary of the material provisions of the Underwriting Agreement and the Underwriter's Warrant. Copies of such documents have been filed as exhibits to the Registration Statement of which this Prospectus is a part. LEGAL MATTERS The validity of the Units offered hereby will be passed upon for the Company by Maslon Edelman Borman & Brand, LLP, Minneapolis, Minnesota. Certain legal matters relating to the sale of the Units of Common Stock will be passed upon for the Underwriter by Doherty Rumble & Butler, P.A., Minneapolis, Minnesota. EXPERTS The financial statements of Hotel Discovery, Inc. at December 29, 1996 and for each of the two years in the period ended December 29, 1996 appearing in this Prospectus and Registration Statement have been audited by Ernst & Young, LLP, independent auditors, as set forth in their report appearing elsewhere herein and are included in reliance upon such report given upon the authority of such firm as experts in accounting and auditing. 33 35 ADDITIONAL INFORMATION The Company is not a reporting company under the Securities Exchange Act of 1934, as amended. The Company has filed with the Washington, D.C. Office of the Securities and Exchange Commission (the "Commission") a Registration Statement on Form SB-2 under the Act with respect to the Common Stock offered hereby. This Prospectus filed as a part of the Registration Statement does not contain all of the information contained in the Registration Statement and the exhibits thereto, certain portions of which have been omitted in accordance with the rules and regulations of the Commission. For further information with respect to the Company and the securities offered hereby, reference is made to such Registration Statement including the exhibits and schedules thereto. Statements contained in this Prospectus as to the contents of any contract, agreement or other documents are not necessarily complete, and in each instance, reference is made to such contract or other document filed as an exhibit to the Registration Statement, each such statement being qualified in all respects by such reference. The Registration Statement and exhibits may be inspected without charge and copied at the Washington office of the Commission, 450 Fifth Street, N.W., Washington, DC 20549, and copies of such material may be obtained at prescribed rates from the Commission's Public Reference Section at the same address. 34 36 INDEX TO FINANCIAL STATEMENTS
PAGE ---- Report of Independent Auditors.............................. F-1 Audited Financial Statements: Balance Sheet............................................. F-2 Statements of Operations.................................. F-3 Statements of Shareholders' Equity........................ F-4 Statements of Cash Flows.................................. F-5 Notes to Financial Statements............................... F-6
37 REPORT OF INDEPENDENT AUDITORS To the Board of Directors and Shareholders of Hotel Discovery, Inc., We have audited the accompanying balance sheet of Hotel Discovery, Inc. as of December 29, 1996 and the related statements of operations, shareholders' equity, and cash flows for the years ended December 31, 1995 and December 29, 1996. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Hotel Discovery, Inc. at December 29, 1996 and the results of its operations and its cash flows for the years ended December 31, 1995 and December 29, 1996 in conformity with generally accepted accounting principles. ERNST & YOUNG, LLP Cincinnati, Ohio August 20, 1997 F-1 38 HOTEL DISCOVERY, INC. BALANCE SHEET
DECEMBER 29, JUNE 29, 1996 1997 ------------ -------- (UNAUDITED) ASSETS CURRENT ASSETS: Cash and cash equivalents................................. $2,707,561 $ 1,998,056 Inventory................................................. 138,757 131,987 Other current assets...................................... 91,575 205,936 ---------- ----------- Total current assets................................... 2,937,893 2,335,979 ---------- ----------- PROPERTY AND EQUIPMENT Building.................................................. 1,900,547 1,900,547 Leasehold improvements.................................... 1,452,635 1,584,677 Equipment and fixtures.................................... 902,334 1,218,538 ---------- ----------- 4,255,516 4,703,762 Less: accumulated depreciation............................ (25,000) (300,000) ---------- ----------- Total property and equipment, net...................... 4,230,516 4,403,762 ---------- ----------- OTHER ASSETS................................................ 51,841 233,024 ---------- ----------- Total assets........................................... $7,220,250 $ 6,972,765 ========== =========== LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES: Short-term notes payable.................................. $2,500,000 $ 2,800,000 Accounts payable.......................................... 803,885 751,197 Accrued expenses.......................................... 538,637 14,466 Salaries and wages payable................................ 174,882 36,583 Advances payable to principal shareholder................. 447,787 348,430 Current portion of long-term debt......................... 69,420 69,420 ---------- ----------- Total current liabilities.............................. 4,534,611 4,020,096 LONG-TERM DEBT, LESS CURRENT PORTION........................ 924,795 895,870 CONVERTIBLE PROMISSORY NOTES PAYABLE........................ 150,000 150,000 ---------- ----------- Total liabilities...................................... 5,609,406 5,065,966 ---------- ----------- COMMITMENTS AND CONTINGENCIES (NOTE 7) SHAREHOLDERS' EQUITY: Common stock (.01 par value, 100,000,000 shares authorized and 3,945,400 and 4,899,485 shares issued and outstanding)........................................... 39,454 48,995 Additional paid-in capital................................ 5,013,126 7,581,231 Less: common stock subscribed............................. 0 (600,000) Accumulated deficit....................................... (3,441,736) (5,123,427) ---------- ----------- Total shareholders' equity............................. 1,610,844 1,906,799 ---------- ----------- Total liabilities and shareholders' equity............. $7,220,250 $ 6,972,765 ========== ===========
See accompanying notes F-2 39 HOTEL DISCOVERY, INC. STATEMENTS OF OPERATIONS
YEAR ENDED TWENTY-SIX WEEKS ENDED --------------------------- ------------------------ DECEMBER 31, DECEMBER 29, JUNE 30, JUNE 29, 1995 1996 1996 1997 ------------ ------------ -------- -------- (UNAUDITED) NET SALES................................... $ 0 $ 104,129 $ 0 $ 1,864,564 ---------- ----------- ---------- ----------- COSTS AND EXPENSES: Food and beverage costs................... 0 43,324 0 612,115 Labor and benefits........................ 0 85,407 0 1,036,302 Restaurant operating expenses............. 0 155,832 0 602,055 Depreciation and amortization............. 0 25,000 0 275,000 Selling, general and administrative expenses............................... 14,775 138,209 44,122 765,573 Pre-opening and development costs......... 923,482 1,970,452 413,889 189,423 ---------- ----------- ---------- ----------- Total costs and expenses............. 938,257 2,418,224 458,011 3,480,468 ---------- ----------- ---------- ----------- LOSS FROM OPERATIONS........................ (938,257) (2,314,095) (458,011) (1,615,904) OTHER INCOME (EXPENSE): Interest (expense)........................ (2,209) (13,507) 0 (92,503) Interest income........................... 0 0 10,950 26,716 ---------- ----------- ---------- ----------- Total other income (expense)......... (2,209) (13,507) 10,950 (65,787) ---------- ----------- ---------- ----------- Net loss............................. $ (940,466) $(2,327,602) $ (447,061) $(1,681,691) ========== =========== ========== =========== Shares used in per share calculations....... 3,362,611 4,355,187 4,286,100 5,058,240 ========== =========== ========== =========== Net loss per share.......................... $ (.28) $ (.53) $ (.10) $ (.33) ========== =========== ========== ===========
See accompanying notes F-3 40 HOTEL DISCOVERY, INC. STATEMENTS OF SHAREHOLDERS' EQUITY
COMMON STOCK ADDITIONAL ------------------- PAID-IN COMMON STOCK ACCUMULATED SHARES AMOUNT CAPITAL SUBSCRIBED DEFICIT TOTAL ------ ------ ---------- ------------ ----------- ----- BALANCE -- JANUARY 1, 1995..... 1,650,000 $16,500 $ 9,000 $ (25,500) $ (173,668) $ (173,668) Issuance of shares........... 1,350,000 13,500 2,461,000 (1,750,000) -- 724,500 Cash received on stock subscribed................. -- -- -- 830,000 -- 830,000 Net loss..................... -- -- -- -- (940,466) (940,466) --------- ------- ---------- ----------- ----------- ----------- BALANCE -- DECEMBER 31, 1995... 3,000,000 30,000 2,470,000 (945,500) (1,114,134) 440,366 Issuance of shares........... 945,400 9,454 2,543,126 -- -- 2,552,580 Cash received on stock subscribed................. -- -- -- 945,500 -- 945,500 Net loss..................... -- -- -- -- (2,327,602) (2,327,602) --------- ------- ---------- ----------- ----------- ----------- BALANCE -- DECEMBER 29, 1996... 3,945,400 39,454 5,013,126 -- (3,441,736) 1,610,844 Issuance of shares (unaudited)................ 947,685 9,477 2,548,969 (690,000) -- 1,868,446 Shares issued for services (unaudited)................ 6,400 64 19,136 -- -- 19,200 Cash received on stock subscribed (unaudited)..... -- -- -- 90,000 -- 90,000 Net loss (unaudited)......... -- -- -- -- (1,681,691) (1,681,691) --------- ------- ---------- ----------- ----------- ----------- BALANCE -- JUNE 29, 1997 (UNAUDITED)........ 4,899,485 $48,995 $7,581,231 $ (600,000) $(5,123,427) $ 1,906,799 ========= ======= ========== =========== =========== ===========
See accompanying notes F-4 41 HOTEL DISCOVERY, INC. STATEMENTS OF CASH FLOWS
YEAR ENDED TWENTY-SIX WEEKS ENDED --------------------------- ----------------------- DECEMBER 31, DECEMBER 29, JUNE 30, JUNE 29, 1995 1996 1996 1997 ------------ ------------ -------- -------- (UNAUDITED) OPERATING ACTIVITIES: Net loss.................................. $ (940,466) $(2,327,602) $(447,061) $(1,681,691) Depreciation and amortization.......... 0 25,000 0 275,000 Shares issued for services............. 0 0 0 19,200 Changes in operating assets and liabilities -- Inventory............................ 0 (138,757) 0 6,770 Other current assets................. 20,000 (71,575) 20,000 (114,361) Other assets......................... 0 0 34,527 (177,183) Accounts payable..................... (12,083) 775,228 148,731 (52,689) Accrued expenses and salaries and wages payable..................... 0 713,519 0 (662,470) ---------- ----------- --------- ----------- Net cash used for operating activities...................... (932,549) (1,024,187) (243,803) (2,387,424) ---------- ----------- --------- ----------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of property and equipment....... (811,969) (3,443,544) (996,684) (448,245) Payment of organization costs............. 0 0 (165) (4,000) ---------- ----------- --------- ----------- Net cash used for investing activities...................... (811,969) (3,443,544) (996,849) (452,245) ---------- ----------- --------- ----------- CASH FLOWS FROM FINANCING ACTIVITIES: Advances (payments) from shareholder...... 637,221 (415,103) (67,185) (99,357) Net increase in short-term notes payable................................ 0 2,500,000 0 300,000 Proceeds from issuance of bank note....... 0 1,000,000 0 0 Issuance of convertible notes payable..... 0 150,000 100,000 0 Proceeds from issuance of equity.......... 724,980 2,552,580 0 1,868,446 Principal repayments on bank note......... 0 (5,785) 0 (28,925) Payments received on stock subscriptions.......................... 830,000 945,500 915,000 90,000 ---------- ----------- --------- ----------- Net cash provided by financing activities...................... 2,192,201 6,727,192 947,815 2,130,164 ---------- ----------- --------- ----------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS............................... 447,683 2,259,461 (292,837) (709,505) CASH AND CASH EQUIVALENTS, BEGINNING........ 417 448,100 448,100 2,707,561 ---------- ----------- --------- ----------- CASH AND CASH EQUIVALENTS, ENDING........... $ 448,100 $ 2,707,561 $ 155,263 $ 1,998,056 ========== =========== ========= =========== SUPPLEMENTAL CASH FLOWS INFORMATION: Cash paid for interest.................... $ 60,000 $ 45,000 $ 0 $ 65,787 Cash paid for income taxes................ $ 0 $ 0 $ 0 $ 0
See accompanying notes F-5 42 HOTEL DISCOVERY, INC. NOTES TO THE FINANCIAL STATEMENTS DECEMBER 29, 1996 AND DECEMBER 31, 1995 1. DESCRIPTION OF THE BUSINESS AND FORMATION OF THE COMPANY Hotel Discovery, Inc. (the "Company") owns and operates one restaurant in Cincinnati Ohio (the "Kenwood Unit"). Prior to the opening of this restaurant on December 19, 1996, the Company was in the development stage. In August 1997, the Company reincorporated in the State of Minnesota and changed its name from Hotel Mexico, Inc. to Hotel Discovery, Inc. and increased the number of authorized shares to 100,000,000. On November 13, 1996, the Company was reorganized after Hotel Mexico, Inc. was incorporated in the state of Ohio and became the owner of Hotel Mexico, Inc.-predecessor and all the net assets of Kenwood Restaurant Limited Partnership. The result of the reorganization is that the owners of Hotel Mexico, Inc.-predecessor and the Partnership became the owners of all the outstanding stock of Hotel Mexico, Inc.-successor. The reincorporation and reorganization have been reflected retroactively and all share and per share amounts have been adjusted. A demonstration and test restaurant, owned by the principal shareholder of the Company, which opened in June 1994, was used in the development of the Hotel Discovery concept. This restaurant operates using the Hotel Mexico name under a license agreement with the Company. 2. SIGNIFICANT ACCOUNTING POLICIES INTERIM FINANCIAL DATA The unaudited balance sheet as of June 29, 1997 and the related statements of operations, cash flows and shareholders' equity for the twenty-six week period ended June 29, 1997 have been prepared in accordance with the accounting policies in effect as of December 29, 1996 and for the two years ended December 29, 1996. In the opinion of management such interim financial statements contain all adjustments (all of which are normal and recurring in nature) necessary to present fairly the Company's financial position and results of operations and cash flows. The results of operations for the twenty-six week period ended June 29, 1997 is not necessarily indicative of the results to be expected for the full year. FISCAL YEAR The Company has adopted a 52/53 week accounting period ending on the Sunday nearest December 31 of each year. CASH AND CASH EQUIVALENTS Cash and cash equivalents includes cash on hand, bank deposits and liquid money market investments with maturities of 90 days or less. INVENTORY Restaurant food and supplies inventories are stated at the lower of cost (determined using the first-in first-out method) or market. ADVERTISING COSTS The Company expenses advertising costs as incurred. Advertising expense was $0 and $98,673 for 1995 and 1996. F-6 43 HOTEL DISCOVERY, INC. NOTES TO THE FINANCIAL STATEMENTS (CONTINUED) 2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) PRE-OPENING AND DEVELOPMENT COSTS Pre-opening costs such as staff training, advertising, rent, and concept development, menu design, consultant and similar costs of a development nature are expensed as incurred. PROPERTY AND EQUIPMENT Property and equipment acquired are recorded at cost and includes interest on funds borrowed to finance construction. Capitalized interest in 1996 was $45,000. Improvements are capitalized, while repair and maintenance expenses are charged to operations as incurred. Leasehold improvements are being amortized using the straight line method over the shorter of the estimated useful life or the lease term. Furniture and equipment are being depreciated on a straight-line method over 5 to 15 years. INCOME TAXES The Company accounts for income taxes using the liability method to recognize deferred income tax assets and liabilities. Deferred income taxes are determined based upon the temporary differences between the financial statement carrying amounts and the tax basis of assets and liabilities. STOCK OPTIONS As permitted by Statement of Financial Accounting Standards No. 123, Accounting for Stock Based Compensation, the Company has chosen to account for stock option grants using the intrinsic value method prescribed in APB opinion No. 25, Accounting for Stock Issued to Employees. No options were granted during the two years ended December 29, 1996. RECENTLY ISSUED ACCOUNTING STANDARDS During 1996 the Company adopted Financial Accounting Standards Board Statement No. 121 "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of" (Statement 121). Statement 121 establishes accounting standards for the recognition and measurement of impairment of long-lived assets, certain identifiable intangibles, and goodwill either to be held or disposed of. The adoption of Statement 121 did not have an impact on the Company's financial position or results of operations. USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and the accompanying notes. Actual results could differ from the estimates. NET LOSS PER COMMON SHARE Net loss per common share is computed by dividing net loss by the weighted average number of common shares outstanding and dilutive common equivalent shares assumed to be outstanding during each period. Common equivalent shares consist of dilutive options to purchase common stock. However, pursuant to certain rules of the Securities and Exchange Commission, the calculation also includes equity securities, including options and warrants, issued within one year of an initial public offering with an issue price less than the initial public offering price, even if the effect is anti-dilutive. The treasury stock method was used in determining the dilutive effect of such issuances. F-7 44 HOTEL DISCOVERY, INC. NOTES TO THE FINANCIAL STATEMENTS (CONTINUED) 2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) The Company will adopt in the fiscal year ending December 28, 1997, Statement of Financial Accounting Standards No. 128 "Earnings per Share" (SFAS No. 128), which was issued in February 1997. SFAS No. 128 requires disclosures of basic earnings per share (EPS) and diluted EPS, which replaces the existing primary EPS and fully diluted EPS, as defined by APB No. 15. Basic EPS is computed by dividing net income by the weighted average number of shares of Common Stock, outstanding during the year. Dilutive EPS is computed similar to EPS as previously reported provided that, when applying the treasury stock method to common equivalent shares, the Company must use its average share price for the period rather than the more dilutive greater of the average share price or end-of-period share price required by APB No. 15. 3. DEBT The Company borrowed $1,000,000 in August 1996 under a leasehold mortgage term loan from a bank. The loan bears interest at 9.06%, payments of principal and interest are due monthly in the amount of $5,785 through October 1999 at which time the remaining balance is due in full. In December 1996, the Company borrowed an additional $2,500,000 under a mortgage term loan from a bank. The loan bears interest at 5.94%, payments of interest only are due through January 1998 at which time the entire principal is due. The loan has been classified as short-term as it was repaid in full in January 1997. The loans are secured by the leasehold mortgage and substantially all assets of the Kenwood Unit. Additionally the principal shareholder has personally guaranteed the loans. Related loan agreements require minimum working capital, tangible net worth and debt coverage ratios and restrict additional indebtedness or asset sales. The fair value of the Company's debt approximates market. Aggregate maturities of long-term debt are as follows: 1997........................................................ $ 69,420 1998........................................................ 69,420 1999........................................................ 855,375 -------- $994,215 ========
In May and June 1997, the Company borrowed $2,800,000 under loan agreements with banks. The loans have been classified as short-term as they were repaid in full in July 1997. 4. CONVERTIBLE PROMISSORY NOTES PAYABLE In June and July 1996, the Company executed three convertible promissory notes in the total amount of $150,000. The notes mature on July 1, 1999, bearing interest at 8.01% per annum. The notes are convertible into 39,600 shares of the Company's common stock at maturity, at the payee's option. 5. INCOME TAXES Deferred tax assets and liabilities are recognized based on the difference between financial statement amounts and tax carrying values of assets and liabilities. Due to the limited history of the Company's operations, a valuation allowance was established for the net deferred tax assets. For the two years ending F-8 45 HOTEL DISCOVERY, INC. NOTES TO THE FINANCIAL STATEMENTS (CONTINUED) 5. INCOME TAXES (CONTINUED) December 29, 1996, the Company did not record a benefit from income taxes. Significant components of the Company's deferred tax assets and liabilities are as follows at December 29, 1996: Deferred tax assets: Net operating loss carryforward........................... $ 685,700 Deferral of pre-opening expenses.......................... 336,200 Other tax deferred items.................................. 67,200 ---------- Total deferred tax assets................................... 1,089,100 Less: valuation allowance................................... 1,089,100 ---------- Net deferred tax assets..................................... -0- Deferred tax liabilities.................................... -0- ---------- Net deferred tax assets..................................... $ -0- ==========
The Company's net operating loss carryforward expires in 2011. The following is a reconciliation of the tax expense recorded in these financial statements to the expected tax rate based on statutory rates.
FOR THE YEARS ENDED --------------------------------- DECEMBER 29, DECEMBER 31, 1996 1995 ------------ ------------ Net loss.......................................... $(2,327,602) $(940,466) Expected rate..................................... 40% 40% ----------- --------- Expected tax benefit.............................. (931,000) (376,200) Tax loss attributable to predecessor entities..... -- 218,100 Valuation allowance............................... 931,000 158,100 ----------- --------- Tax benefit recognized............................ $ -0- $ -0- =========== =========
6. SHAREHOLDERS' EQUITY STOCK OPTION PLAN In January 1997, the Board of Directors adopted the 1997 Stock Option and Incentive Compensation Plan (the "Plan") and reserved 500,000 common shares for issuance under the Plan. The Plan is administered by a stock option committee of the Board of Directors which has the discretion to determine the number of shares granted, the price of the option, the term of the option and the time period over which the option may be exercised. As of August 20, 1997 the Company had granted 452,666 options to purchase the Company's stock for $3.00 per share under the Plan. Additionally, 25,000 options have been granted to a Director outside of the Plan at $3.34 per share. As of August 20, 1997, 50,000 options are exercisable, the remaining options become exercisable over the next three years. The total options that will be exercisable at each year end are: 1997--50,000, 1998--315,999, 1999--459,332 and 2000--477,666. WARRANTS In 1997, the Company granted 214,995 warrants. The warrants are immediately exercisable at a price of $3.75 per share and expire in five years. F-9 46 HOTEL DISCOVERY, INC. NOTES TO THE FINANCIAL STATEMENTS (CONTINUED) 6. SHAREHOLDERS' EQUITY (CONTINUED) CAPITAL STOCK In June 1997, in connection with the Company's reincorporation in Minnesota, the authorized capital of the Company increased to 100,000,000 shares. As allowed under Minnesota law the Board of Directors is authorized to designate and issue shares in such classes or series (including classes or series of preferred stock) as it deems appropriate and to establish the rights, preferences, and privileges of such shares. 7. COMMITMENTS AND CONTINGENCIES The Company has entered into a long-term operating ground lease, which expires in 2012, for the Kenwood Unit. The agreement requires the Company to pay all maintenance, taxes, operating expenses and a percentage (4%) of sales over stated thresholds. The future minimum base rent payments are: 1997........................................................ $ 153,996 1998........................................................ 153,996 1999........................................................ 153,996 2000........................................................ 153,996 2001........................................................ 153,996 Thereafter.................................................. 1,770,960 ---------- $2,540,940 ==========
On August 14, 1997, the Company entered into a twelve year lease with Mall of America Company for a 16,000 square-foot restaurant space in Mall of America. The minimum annual rent is $405,375 plus a percentage rent for a total annual rent of up to 6% of gross sales. The minimum rent has been waived for the first year. 8. RELATED PARTY TRANSACTIONS The principal shareholder, director and executive officer provided essentially all of the Company's working capital in the development stage. The working capital was provided by direct advances to the Company and reimbursement for various business costs and expenses incurred by the shareholder on behalf of the Company. During the years ended December 29,1996 and December 31, 1995 the maximum amount of such indebtedness outstanding at any time was $1,213,469, and $862,891, respectively. At December 29,1996 and December 31, 1995, the amount outstanding of such indebtedness was $447,787 and $862,891. Included in these amounts were concept development costs reimbursed to a demonstration restaurant owned and operated by the principal shareholder in the amount of $278,101 for the year ended December 29, 1996 and $433,996 for the year ended December 31, 1995. The Company pays interest at 11.5% on these advances. There are no fixed repayment terms on the advances. 9. SALE OF SHARES AND PROPOSED TRANSACTION In July 1997, the Company sold an additional 499,804 common shares at $3.00 per share. The Board of Directors has authorized the completion of a public offering of up to 2,530,000 Units each consisting of one share of common stock and one detachable warrant. F-10 47 Picture 1 - a photograph of a Hotel Discovery billboard, showing a rhinoceros, hourglass, dove and sailing ship bursting from huge wooden doors. Caption: "Eat. Drink. Be Enlightened. Hotel Discovery. Across from Kenwood Towne Center." [PHOTOGRAPHS] 48 ====================================================== NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS IN CONNECTION WITH THE OFFER MADE BY THIS PROSPECTUS, AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR THE UNDERWRITER. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL UNDER ANY CIRCUMSTANCES CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER OR SOLICITATION BY ANYONE IN ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION IS NOT AUTHORIZED OR IN WHICH THE PERSON MAKING SUCH OFFER OR SOLICITATION IS NOT QUALIFIED TO DO SO OR TO ANYONE TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. --------------------------- TABLE OF CONTENTS
PAGE ---- Prospectus Summary...................... 3 Risk Factors............................ 6 Use of Proceeds......................... 11 Dilution................................ 12 Dividend Policy......................... 13 Capitalization.......................... 13 Management's Discussion and Analysis of Financial Condition and Results of Operations............................ 14 Business................................ 17 The Kenwood Unit........................ 21 The Mall of America Unit................ 22 Management.............................. 24 Reorganization.......................... 26 Certain Transactions.................... 26 Principal Shareholders.................. 28 Description of Securities............... 29 Underwriting............................ 32 Legal Matters........................... 33 Experts................................. 33 Additional Information.................. 34 Index to Financial Statements........... F-1
---------------------------- UNTIL , 1997 (25 DAYS AFTER THE DATE OF THE PROSPECTUS), ALL DEALERS EFFECTING TRANSACTIONS IN THE REGISTERED SECURITIES, WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS. ====================================================== ====================================================== HOTEL DISCOVERY, INC. LOGO HOTEL DISCOVERY, INC. 2,200,000 UNITS CONSISTING OF 2,200,000 SHARES OF COMMON STOCK AND 2,200,000 REDEEMABLE CLASS A WARRANTS ------------------------------ PROSPECTUS ------------------------------ RJ STEICHEN & COMPANY LOGO , 1997 ====================================================== 49 PART II INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS. The Company is governed by Minnesota Statutes Chapter 302A. Minnesota Statutes Section 302A.521 provides that a corporation shall indemnify any person made or threatened to be made a party to any proceeding by reason of the former or present official capacity of such person against judgments, penalties, fines, including, without limitation, excise taxes assessed against such person with respect to an employee benefit plan, settlements, and reasonable expenses, including attorney's fees and disbursements, incurred by such person in connection with the proceeding, if, with respect to the acts or omissions of such person complained of in the proceeding, such person has not been indemnified by another organization or employee benefit plan for the same expenses with respect to the same acts or omissions; acted in good faith; received no improper personal benefit and Section 302A.255, if applicable, has been satisfied; in the case of a criminal proceeding, had no reasonable cause to believe the conduct was unlawful; and in the case of acts or omissions by persons in their official capacity for the corporation, reasonably believed that the conduct was in the best interests of the corporation, or in the case of acts or omissions by persons in their capacity for other organizations, reasonably believed that the conduct was not opposed to the best interests of the corporation. As permitted by Section 302A.251 of the Minnesota Statutes, the Articles of Incorporation of the Company provide that a director shall have no personal liability to the Company and its shareholders for breach of his fiduciary duty as a director, to the fullest extent permitted by law. The Underwriting Agreement contains provisions under which the small business issuer on the one hand, and the Underwriter, on the other hand, have agreed to indemnify each other (including officers and directors of the small business issuer and the Underwriter and any person who may be deemed to control the small business issuer or the Underwriter) against certain liabilities, including liabilities under the Securities Act of 1933, as amended. ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION. The estimated expenses in connection with the issuance and distribution of the securities registered hereby, other than underwriting discounts and fees, are set forth in the following table: SEC registration fee........................................ $ 8,817 NASD filing fee............................................. 3,410 Nasdaq listing fee.......................................... 10,000 Legal fees and expenses..................................... 75,000 Accounting fees and expenses................................ 40,000 Blue Sky fees and expenses.................................. 20,000 Transfer agent fees and expenses............................ 1,000 Printing and engraving expenses............................. 45,000 Miscellaneous............................................... 16,773 -------- Total..................................................... $220,000 ========
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES. In connection with the initial capitalization of the Company in January 1994, the Company sold an aggregate of 1,750 shares of Common Stock to two "accredited investors" as defined in Regulation D of the Securities Act of 1933, as amended (the "Securities Act") for nominal consideration. Such shares were split 825-to-1 in November 1996, and now represent 1,443,750 shares of the Company. The Company believes that such sale of such Common Stock was exempt from registration pursuant to Section 4(2) of the Securities Act and Rules 505 and/or 506 under Regulation D of the Securities Act. II-1 50 In October 1995, the Company and Kenwood Restaurant Limited Partnership, an Ohio limited partnership formed in June 1995, raised gross proceeds of $2.5 million in a private placement of 250 shares of Common Stock of the Company (which shares were split 825-to-1 in November 1996, and now represent 206,250 shares of the Company) and limited partnership interests in the Kenwood Restaurant Limited Partnership to 19 "accredited investors." In a reorganization of the Company which occurred in November 1996, the Kenwood Restaurant Limited Partnership contributed all of its assets to the Company, including the Kenwood Unit, in exchange for 1,350,000 shares of Common Stock of the Company. The Company believes that such sale of such securities was exempt from registration pursuant to Section 4(2) of the Securities Act and Rules 505 and/or 506 under Regulation D of the Securities Act. From November 1996 through July 1997, the Company completed private placements to "accredited investors" of an aggregate of 2,392,889 shares of Common Stock at $3.00 per share. The net proceeds to the Company were approximately $5.9 million. The Company believes that such sales of Common Stock were exempt from registration pursuant to Section 4(2) of the Securities Act and Rule 506 under Regulation D of the Securities Act. II-2 51 ITEM 27. EXHIBITS. EXHIBIT INDEX 1.1 Form of Underwriting Agreement (with form of Underwriter's Warrant) 3.1 Articles of Incorporation 3.2 By-laws 4 Form of Warrant Agreement 5 Opinion of Maslon Edelman Borman & Brand, LLP 10.1 Indenture of Lease dated November 9, 1994 between Phillip E. Stephens, Trustee and Kenwood Restaurant, Inc.; First Amendment to Lease dated May 3, 1995 by and between Phillip E. Stephens, Trustee and Kenwood Restaurant, Inc.; by Second Amendment to Lease dated 1996 between Phillip E. Stephens, Trustee and Kenwood Restaurant Limited Partnership; Second Amendment to Agreement dated October 18, 1996 between Phillip E. Stephens, Trustee and Kenwood Restaurant Limited Partnership; and Addendum to Second Amendment to Lease dated October 18, 1996 between Phillip E. Stephens, Trustee and Kenwood Restaurant Limited Partnership (Kenwood Unit) 10.2 Lease dated August 4, 1997 between Mall of America Company and Hotel Mexico, Inc. (Mall of America Unit) 10.3 Loan Agreement by and among Kenwood Restaurant Limited Partnership and PNC Bank, Ohio, National Association 10.4 Company's 1997 Stock Option and Compensation Plan 10.5 Employment Agreement between the Company and Ronald K. Fuller dated March 17, 1997 24.1 Consent of Maslon Edelman Borman & Brand, LLP (included in Exhibit 5) 24.2 Consent of Ernst & Young LLP 25 Powers of Attorney (included on page II-5) 27.1 Financial Data Schedule
II-3 52 ITEM 28. UNDERTAKINGS. Insofar as indemnification for liabilities arising under the Act may be permitted to directors, officers and controlling persons of the small business issuer pursuant to the foregoing provisions or otherwise, the small business issuer has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the small business issuer of expenses incurred or paid by a director, officer or controlling person of the small business issuer 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 small business issuer will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue. The undersigned small business issuer hereby undertakes that it will: (1) File, during any period in which it offers or sells securities, a post-effective amendment to this registration statement to (i) include any prospectus required by Section 10(a)(3) of the Securities Act; (ii) reflect in the prospectus any facts or events which, individually or together, represent a fundamental change in the information in the registration statement; and (iii) include any additional or changed material information on the plan of distribution. (2) For determining any liability under the Securities Act, treat the information omitted from the form of prospectus filed as part of this registration statement in reliance upon Rule 430A and contained in a form of prospectus filed by the small business issuer under Rule 424(b)(1) or (4) or Rule 497(h) under the Securities Act as part of this registration statement as of the time the Commission declared it effective. (3) For determining any liability under the Securities Act, treat each post-effective amendment that contains a form of prospectus as a new registration statement for the securities offered in the registration statement, and that offering of the securities at that time as the initial bona fide offering of those securities. The small business issuer hereby undertakes to provide to the Underwriter at the closing specified in the Underwriting Agreement certificates in such denominations and registered in such names as required by the Underwriter to permit prompt delivery to each purchaser. II-4 53 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 has authorized this registration statement to be signed on its behalf by the undersigned, thereunto duly authorized in the City of Minneapolis, State of Minnesota, on August 22, 1997. HOTEL DISCOVERY, INC. By /s/ STEPHEN D. KING -------------------------------------- Stephen D. King Chairman of the Board and Chief Executive Officer POWER OF ATTORNEY Each person whose signature appears below constitutes and appoints Stephen D. King, Ronald K. Fuller or William M. Mower, each or any of them, such person's true and lawful attorney-in-fact and agent with full power of substitution and resubstitution for such person and in such person's name, place and stead, in any and all capacities, to sign any and all amendments (including post-effective amendments) to this registration statement, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorney-in-fact and agent full power and authority to do and perform each and every act and thing necessary or desirable to be done in and about the premises, as fully to all intents and purposes as such person, hereby ratifying and confirming all that said attorney-in-fact and agent, or his substitute or substitutes, may lawfully do or cause to be done by virtue hereof. 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/ STEPHEN D. KING Chairman of the Board and Chief August 22, 1997 - ------------------------------------- Executive Officer Stephen D. King /s/ RONALD K. FULLER President, Chief Operating Officer August 22, 1997 - ------------------------------------- and Director (Chief Financial and Ronald K. Fuller Chief Accounting Officer) /s/ THOMAS W. ORR Director August 22, 1997 - ------------------------------------- Thomas W. Orr
II-5 EX-1.1 2 UNDERWRITING AGREEMENT & WARRANT 1 EXHIBIT 1.1 2,200,000 UNITS CONSISTING OF 2,200,000 SHARES OF COMMON STOCK AND 2,200,000 REDEEMABLE CLASS A COMMON STOCK PURCHASE WARRANTS HOTEL DISCOVERY, INC. UNDERWRITING AGREEMENT ____________, 1997 R. J. Steichen & Company One Financial Plaza 120 South Sixth Street Minneapolis, MN 55402 Ladies and Gentlemen: Hotel Discovery, Inc., an Minnesota corporation (the "COMPANY"), proposes to issue and sell to you (the "UNDERWRITER"), an aggregate of 2,200,000 Units ("UNITS"), each Unit consisting of one share of Common Stock ("COMMON STOCK") and one Redeemable Class A Common Stock Purchase Warrant (the "WARRANT") exercisable for a period of four (4) years commencing on the effective date of the Registration Statement to purchase one share of Common Stock of the Company at a price of $6.50 per share. The Warrants shall be immediately exercisable and are detachable and transferable commencing ten (10) trading days after the effective date of the Registration Statement under the Act or at any earlier time agreed to by the Underwriter and the Company. The Warrants shall be redeemable at the option of the Company at $.01 per Warrant at any time ninety (90) days after the effective date and upon thirty (30) days' prior notice in writing of the Company's intention to redeem, provided that the average closing bid price for the Common Stock exceeds $7.00 per share (subject to adjustment) for any 14 consecutive trading days prior to such notice, on such other terms set forth in the Preliminary Prospectus (defined herein). The 2,200,000 Units to be purchased from the Company are referred to herein as the "FIRM UNITS." In addition, solely for the purpose of covering overallotments with respect to the Firm Units, the Company proposes to grant to the Underwriter, for its account, the option to purchase up to an additional 330,000 Units (the "OPTION UNITS"). The Firm Units and any Option Units purchased pursuant to this Underwriting Agreement are herein referred to as the "UNITS." 2 The Company hereby confirms its agreement with respect to the purchase of the Units by the Underwriter. 1. REPRESENTATIONS AND WARRANTIES OF THE COMPANY. The Company represents and warrants to, and agrees with, the Underwriter as follows: (a) The Company has prepared in conformity in all material respects with the requirements of the Securities Act of 1933, as amended (the "ACT"), and the applicable rules and regulations of the Securities and Exchange Commission (the "COMMISSION") thereunder, and has filed with the National Office of the Commission in Washington, D.C., a registration statement on Form SB-2, File No. 333-_________, including a Prospectus relating to the Units, and will file with the Commission before the effective date of the registration statement one or more amendments thereto. Copies of such registration statement and amendments (including all forms of the preliminary prospectus) have been delivered to you. Any such preliminary prospectus (as described in Rule 430 under the Act) included at any time as part of such registration statement is herein called a "PRELIMINARY PROSPECTUS." As used herein, the term "REGISTRATION STATEMENT" shall, except where the context otherwise requires, mean said registration statement (and all exhibits thereto) as amended by all amendments filed prior to its effective date; and the term "PROSPECTUS" shall, except where the context otherwise requires, mean said final prospectus on file with the Commission when the Registration Statement becomes effective (except that, if the prospectus filed by the Company pursuant to Rule 424(b) under Act shall differ from the prospectus included in the Registration Statement, the term "PROSPECTUS" shall, except where the context otherwise requires, mean the prospectus so filed pursuant to Rule 424(b) from and after the date on which it shall have been first used.) Reference herein to the Registration Statement, to any Preliminary Prospectus, to the Prospectus or to any amendment of or supplement to the Prospectus includes all documents and information incorporated therein by reference. (b) The Commission has not issued any order preventing or suspending the use of any Preliminary Prospectus, and each Preliminary Prospectus, at the time of filing thereof with the Commission, did not contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading; PROVIDED, HOWEVER, that none of the representations and warranties in this subparagraph shall apply to statements in, or omissions from, any Preliminary Prospectus which are based upon and conform to written information furnished to the Company by or on behalf of you specifically for use in the preparation thereof. (c) When the Registration Statement becomes effective and at all times subsequent thereto up to each Closing Date (defined hereinafter) and upon the effective date of any post-effective amendment to the Registration Statement, the Registration Statement and the Prospectus, and any amendments thereof or supplements thereto, will in all material respects conform to the requirements of the Act and of the applicable rules 2 3 and regulations of the Commission thereunder (the "RULES AND REGULATIONS"). When the Registration Statement becomes effective and at all times subsequent thereto, up to each Closing Date and the effective date of any post-effective amendment to the Registration Statement, neither the Registration Statement (as amended, if the Company shall have filed with the Commission any post-effective amendment thereto), nor the Prospectus, will include an untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading; PROVIDED, HOWEVER, that the Company makes no representations or warranties as to information contained in or omitted from the Registration Statement or the Prospectus, or any such amendment or supplement, in reliance upon and in conformity with written information furnished to the Company by you specifically for use in the preparation thereof. There is no contract or document required to be described in the Registration Statement or Prospectus, or to be filed as an exhibit to the Registration Statement, which was not described or filed as required. (d) [Deleted] (e) Ernst & Young, LLP, the accountants who have examined certain financial statements and schedules of the Company, filed and to be filed with the Commission as part of the Registration Statement and the Prospectus, are independent public accountants within the meaning of the Act and the Rules and Regulations. The financial statements of the Company, together with related notes and summaries thereof, set forth in the Registration Statement and Prospectus, in all material respects present fairly the financial position and results of operations and changes in financial position of the Company as of the dates and for the periods indicated. All such financial statements (including the related notes) have been prepared in accordance with generally accepted accounting principles consistently applied throughout the periods concerned except as may be otherwise stated therein. (f) Subsequent to the respective dates as of which information is given in the Registration Statement and Prospectus, and other than as described in the Registration Statement and Prospectus, (i) the Company has not incurred any material liabilities or obligations, contingent or otherwise, or entered into any material transaction, except obligations incurred in the ordinary course of business that in the aggregate are not material; (ii) the Company has not paid or declared any dividend or other distribution on its Common Stock; (iii) there has not been any change in the Common Stock or increase in the long-term debt of the Company (including any capitalized lease obligation), or any issuance of options, warrants, or rights to purchase Common Stock of the Company, or any material adverse change in the business, financial position, results of operations, key personnel, capitalization, properties, or net worth of the Company, considered as a whole; and (iv) no material loss or damage (whether or not insured) to the property of the Company has been sustained. 3 4 (g) The Company has been duly incorporated and is validly existing as a corporation in good standing under the laws of its jurisdiction of incorporation, with full power and authority to own its properties and conduct its business as it is currently being carried on and as described in the Prospectus and is duly qualified to do business as a foreign corporation and is in good standing in all states or jurisdictions in which the ownership or lease of property or the conduct of its business requires such qualification and in which the failure to so qualify would have a material adverse effect on its business condition (financial or other), or properties. The Company has all necessary and material authorizations, approvals and orders of and from all governmental regulatory officials and bodies to own its properties and conduct its business as described in the Prospectus and is conducting its business in substantial compliance with all applicable laws, rules and regulations of the jurisdictions in which it is conducting business. (h) The Company is not in violation of its articles of incorporation, bylaws, or other governing documents and is not in default in the performance of any obligation, agreement or condition contained in any lease agreement or in any bond, debenture, note or any other evidence of indebtedness or in any material contract, indenture, loan agreement or license where such default would have a material adverse effect on the business condition (financial or other) or properties of the Company, considered as a whole which violation or default has not been waived. The consummation of the transactions herein contemplated and the fulfillment of the terms hereof will not conflict with or result in a material breach of any of the terms or provisions of, or constitute a material default under, the articles of incorporation or bylaws, or other governing documents of the Company, or any indenture, mortgage, agreement or other instrument to which the Company is a party or by which it is bound, or to which any property of the Company is subject, or conflict with or violate any law or any order, rule or regulation, applicable to the Company of any court, or of any federal or state regulatory body or administrative agency, having jurisdiction over the Company or any of its properties which conflict, breach or default has not been waived. (i) The Company will, as of each Closing Date, have the duly authorized and outstanding capitalization set forth in the Prospectus. The outstanding Common Stock of the Company is duly authorized and validly issued, fully paid and nonassessable. The Common Stock of the Company conform in all material respects in substance to all statements in relation thereto contained in the Registration Statement and the Prospectus. The Company has all requisite power and authority (corporate and other) to issue, sell, and deliver the Units, including the Common Stock issuable upon exercise of the Warrants in accordance with and upon the terms and conditions set forth in this Agreement and in the Registration Statement and Prospectus; and all corporate action required to be taken by the Company for the due and proper authorization, issuance, sale, and delivery of the Units, including the Common Stock issuable upon exercise of the Warrants, has been validly and sufficiently taken. 4 5 (j) The Company has full legal power, right and authority (corporate and other) to enter into this Underwriting Agreement and to perform and discharge its obligations hereunder, and this Underwriting Agreement has been duly authorized, executed and delivered on behalf of the Company and is the valid and binding obligation of the Company, subject, as to the enforcement of remedies, to applicable bankruptcy, insolvency, moratorium and other laws affecting the rights of creditors generally, and except as enforceability of the indemnification or contribution provisions may be limited by federal or state securities laws or principles of public policy. (k) The Company will apply the proceeds of the sale of the Units by it substantially to the purposes set forth in the Prospectus. (l) To the best of the Company's knowledge, no approval, authorization, consent or order of any public board or body (other than in connection with or in compliance with the provisions of the Act and the securities or Blue Sky laws of various jurisdictions) is legally required for the sale of the Units by the Company. (m) The Company has no subsidiaries. (n) The Company has good and marketable title, free and clear of all liens, encumbrances, equities, charges or claims, to all of the property, real and personal, described in the Registration Statement and Prospectus as being owned by it, except as otherwise set forth in the Registration Statement and Prospectus and except for such as are not in the aggregate material in relation to the property of the Company considered as a whole and do not materially affect the value of such property, and, except as otherwise stated in the Registration Statement and Prospectus, has valid and binding leases to the real and/or personal property described in the Registration Statement and Prospectus as under lease to it with such exceptions as could not materially interfere with the conduct of the business. (o) There are no actions, suits or proceedings or investigations pending before any court or governmental agency, authority or body to which the Company is a party or of which the business or property of the Company is the subject which, if decided adversely, would have a material adverse effect on the general affairs, condition (financial or other), business, properties, net worth, or results of operations of the Company, and, to the best of the Company's knowledge, no such actions, suits or proceedings are threatened. (p) The Company has not taken or will not take, directly or indirectly, any action designed to or which has constituted or which might reasonably be expected to cause or result in stabilization or manipulation as defined in the Securities Exchange Act of 1934, as amended, of the price of the Company's securities to facilitate the sale or resale of the Units. 5 6 (q) The Company has not, directly or indirectly, at any time during the past five years (i) made any contributions to any candidate for political office, or failed to disclose fully any contribution in violation of law, or (ii) made any payment to any state, Federal or foreign governmental officer or official, or other person charged with similar public or quasi-public duties, other than payments required or permitted by applicable law. (r) Except as described in the Prospectus and to the best knowledge of the Company, the Company owns or possesses the right to utilize all the patents, patent applications, trademarks, service marks, trade names, trademark registrations, service mark registrations, copyrights, licenses, inventions, trade secrets, and similar rights necessary for the present conduct of its business as described in the Prospectus, without any known conflict with the asserted rights of others in respect of such matters. Except as may be stated in the Prospectus, the Company has not received any notice of any infringement of, or license or similar fees for, any patents, patent applications, trademarks, service marks, trade names, trademark registrations, service mark registrations, copyrights, licenses, inventions, trade secrets, or other similar rights of others, or any claim with respect thereto, which would have a material adverse effect on the business of the Company. (s) The Company has filed all necessary federal, state and foreign income and franchise tax returns or if not filed, has obtained all necessary extensions and has paid all taxes as shown as due on any such returns; and the Company has no knowledge of any material tax deficiency which has been asserted against the Company, and, to the best of the Company's knowledge, the Company has no material obligation to pay any taxes except as may be stated in the Prospectus. (t) All prior offers or sales of the securities of the Company were exempt from registration under the Act and all applicable state blue sky laws. (u) No securities of the Company have been sold within three years prior to the date hereof, except as set out in Item 26 of Part II of the Registration Statement. (v) The Company knows of no outstanding claims for services in the nature of a finder's fee or origination fee with respect to the sale of the Units or Underwriter's Warrants (defined hereinafter) hereunder resulting from its acts for which the Underwriter may be responsible. The Company will indemnify the Underwriter for and hold the Underwriter harmless against any claim for such finder's fees or origination fees. (w) All material contracts or agreements are properly filed as an exhibit to the Registration Statement. Each contract to which the Company is a party and which is filed as a part of or incorporated by reference into the Registration Statement has been duly and validly executed, is in full force and effect in all material respects in accordance with its terms, and none of such contracts have been assigned by the Company, and the Company knows of no present situation or condition or fact which would prevent compliance by the Company with the terms of such contracts, as amended to date. Except for amendments 6 7 or modifications of such contracts in the ordinary course of business, the Company has no intention of exercising any right which it may have to cancel any of its obligations under any of such contracts, and has no knowledge that any other party to any of such contracts has any intention not to render full performance under such contracts. (x) The Company maintains insurance which is in full force and effect, of the types and in an amount, in the judgment of the Company and except as otherwise disclosed in the Prospectus, which is reasonable for its present business taking into account its operations and assets, including, but not limited to, insurance covering all personal property owned or leased by the Company against theft, damage, destruction, acts of vandalism and all other risks customarily insured against. (y) The Company maintains a system of internal accounting controls sufficient to provide reasonable assurances that (i) transactions are executed in accordance with management's general or specific authorizations, (ii) transactions are recorded as necessary to permit preparation of financial statements in conformity with generally accepted accounting principles and to maintain accountability for assets, (iii) access to assets is permitted only in accordance with management's general or specific authorization, and (iv) the recorded accountability for assets is compared with existing assets at reasonable intervals and appropriate action is taken with respect to any differences. (z) All material transactions between the Company and its officers, directors, promoters, and its shareholders who beneficially own 5% or more of any class of the Company's voting securities required to be disclosed in the Prospectus have been accurately disclosed in the Prospectus, and the terms of each such transaction are fair to the Company and no less favorable to the Company than the terms that could have been obtained from unrelated parties. 2. PURCHASE OF THE UNITS BY THE UNDERWRITER. (a) On the basis of the representations and warranties herein contained, but subject to the terms and conditions herein set forth, the Company agrees to sell to the Underwriter, and the Underwriter agrees to purchase from the Company, the Firm Units. The purchase price for each Firm Unit shall be $4.60 per Unit. (b) The Company hereby grants to the Underwriter, for its account, an option to purchase from the Company, solely for the purpose of covering overallotments in the sale of Firm Units, all or any portion of an aggregate of 330,000 Option Units for a period of 45 days from the date hereof at the same purchase price per Option Unit as the purchase price per Firm Unit set forth in Section 2(a) above. 3. DELIVERY OF AND PAYMENT FOR UNITS. Delivery of certificates for the Firm Units and payment therefor shall be made at the offices of Maslon Edelman Borman & Brand, PLLP (or such other place as mutually may be agreed upon), at 10:00 a.m., Minneapolis, Minnesota 7 8 time, on or before the third full business day following the effective date of the Registration Statement (the "FIRST CLOSING DATE"). The option to purchase Option Units granted in Section 2(b) hereof may be exercised at any time (but not more than once) during the 45-day term thereof by written notice to the Company from you. Such notice shall set forth the aggregate number of Option Units as to which the option is being exercised, and the time and date, not earlier than either the First Closing Date or the second business day after the day on which the option shall have been exercised but not later than the third full business day after the date of such exercise, as determined by you, when the Option Units are to be delivered (the "SECOND CLOSING DATE"). Delivery and payment for such Option Units to be purchased by you are to be at the offices set forth above for delivery and payment of the Firm Units. The First Closing Date and the Second Closing Date are sometimes herein individually called the "CLOSING DATE" and collectively called the "CLOSING DATES." Delivery of facsimile certificates for the Units shall be made by or on behalf of the Company to you against payment by you of the purchase price therefor by wire transfer or certified or official bank check in clearing house funds to the order of the Company. The certificates for such Units shall be registered in such names and denominations as you shall have requested at least two full business days prior to the applicable Closing Date. Time shall be of the essence and delivery at the time and place specified in this Agreement is a further condition to your obligations hereunder. 4. COVENANTS OF THE COMPANY. The Company covenants and agrees with each Underwriter that: (a) The Company will use its best efforts to cause the Registration Statement to become and remain effective, up to each Closing Date. The Company will notify you promptly of any request by the Commission for any amendment of or supplement to the Registration Statement or the Prospectus or for additional information, will prepare and file with the Commission, promptly upon your request, any amendments of or supplements to the Registration Statement or Prospectus which, in your reasonable opinion, may be necessary or advisable in connection with the distribution of the Units; and will not file any amendments and supplements to the Registration Statement as originally filed with the Commission unless it shall first have delivered copies of such amendments or supplements to you, or file any such amendment or supplement to which you shall have reasonably objected in writing to the Company. The Company will immediately advise you by telephone, confirming such advice in writing (i) when notice is received from the Commission that the Registration Statement has become effective, (ii) of any order suspending the effectiveness of the Registration Statement or of any proceedings or examination under the Act, as soon as the Company is advised thereof, and (iii) of any order or communication of any public authority addressed to the Company suspending or threatening to suspend qualification of the Units for sale in any state. The Company will use its best efforts to prevent the issuance of any stop order or other such order, and, 8 9 should a stop order or other such order be issued, to obtain as soon as possible the lifting thereof. (b) If, at any time when a prospectus relating to the Units is required to be delivered under the Act, any event shall have occurred as a result of which, in the opinion of counsel for the Company or in the reasonable opinion of counsel for you, the Prospectus, as then amended or supplemented, includes an untrue statement of a material fact or omits to state a material fact required to be stated therein or necessary to make the statements therein not misleading, or if it is necessary at any time to amend or supplement the Prospectus to comply with the Act, the Company will notify you promptly and prepare and file with the Commission an appropriate amendment or supplement. (c) The Company will use its best efforts to take or cause to be taken all necessary action and furnish to whomever you may reasonably direct such information as may be required in qualifying the Units for offering and sale under the Blue Sky or securities laws of such states as you and the Company shall designate. The Company shall not, however, be required to register or qualify as a foreign corporation or as a dealer in securities or, except as to matters and transactions related to the offering or sale of the Units, consent to service of process in any state. (d) The Company will furnish to the Underwriter, from time to time and without charge, copies of the Registration Statement, each Preliminary Prospectus, the Prospectus (including all documents from which information is incorporated by reference), and all amendments of and supplements to any of such documents, in each case as soon as available and in such quantities as you may from time to time reasonably request for the purposes contemplated by the Act. The Company authorizes the Underwriter and all dealers to whom any of the Units may be sold by the Underwriter to use the Preliminary Prospectuses and Prospectuses supplied, as from time to time amended or supplemented, in connection with the sale of the Units as and to the extent permitted by federal and applicable state and local securities laws. (e) The Company will furnish to you two copies of the Registration Statement and all amendments thereof which are signed and include all exhibits and schedules. (f) The Company will, for a period of two (2) years after the Effective Date, furnish directly to you as soon as the same shall be sent to shareholders generally, copies of all annual or interim shareholder reports of the Company, and will, for the same period, also furnish you with the following: (i) two copies of any report, application, or document (other than exhibits, which, however, will be furnished on request) which the Company shall file with the Commission or any securities exchange; 9 10 (ii) as soon as the same shall be sent to shareholders generally, copies of each communication which shall be sent to shareholders; and (iii) from time to time such other information concerning the Company as you may reasonably request, provided that the Company shall not be required to furnish any information pursuant hereto that is not furnished to its shareholders or not otherwise made publicly available. (g) The Company will, for a period of two (2) years after the Effective Date, furnish directly to you, quarterly profit and loss statements, reports of the Company's cash flow filed by the Company with the Commission. (h) The Company will make generally available to its security holders as soon as practicable, but in any event not later than eighteen months after the effective date of the Registration Statement, a statement of earnings of the Company (which need not be audited) complying with Section 11(a) of the Act and the rules and regulations of the Commission thereunder (including, at the option of the Company, Rule 158). (i) Whether or not this Agreement becomes effective or is terminated or cancelled or the sale of the Units to you is consummated, and regardless of the reason for or cause of any such termination, cancellation, or failure to consummate, the Company will pay or cause to be paid (A) all expenses (including any transfer taxes) incurred in connection with the delivery to you of the Units, (B) all expenses and fees (including, without limitation, fees and expenses of the Company's accountants and counsel, excluding, however, fees of the Underwriter' counsel) in connection with the preparation, printing, filing, delivery, and shipping of the Registration Statement (including the financial statements therein and all amendments, schedules, and exhibits thereto), each Preliminary Prospectus, the Prospectus, and any amendment thereof or supplement thereto, (C) all fees and expenses, including all Company counsel fees, (D) fees and expenses of the Underwriter's counsel, incurred in connection with the qualification of the Units for offering and sale by the Underwriter or by dealers under the securities or Blue Sky laws of the states and other jurisdictions which you and the Company mutually shall designate in accordance with Section 4(c) hereof, (E) subject to the further provisions of this Section 4(i), all fees and expenses, including all counsel fees, excluding, however, fees of the Underwriter's counsel, incurred in connection with the review of the offering by the National Association of Securities Dealers, Inc. and listing fees, if any, (F) all costs and expenses incident to qualification with The Nasdaq SmallCap Market, (G) postage and express charges and other expenses in connection with delivery of the Preliminary and Final Prospectus to the Underwriter, and (H) all other costs and expenses incident to the performance of the Company's obligations hereunder that are not otherwise specifically provided for herein. In addition to and not in lieu of the foregoing, the Company shall pay to the Underwriter on each Closing Date, for out-of-pocket expenses (including fees of Underwriter's counsel), a nonaccountable expense allowance equal to two percent (2%) of the aggregate purchase price for the Units sold to the Underwriter on each Closing 10 11 Date. If the Underwriter withdraws from the sale of the Units as herein proposed for any reason other than its inability to sell the Units and through no other fault of its own, or if the sale of the Units as herein proposed is abandoned by the Company, the Company will reimburse the Underwriter in the amount of all accountable expenses (including fees and disbursements of counsel) incurred by the Underwriter in connection with the contemplated purchase, offer, and sale of the Units, including without limitation, expenses incurred in their investigation, preparation to market, and marketing of the Units, and in contemplation of performing and in performance of its obligations hereunder, up to an aggregate of $30,000, such expenses and fees to be evidenced by appropriate receipts, invoices, or other documentation. (j) The Company will cause each officer and director of the Company to furnish to the Underwriter, on or prior to the date of this Agreement, a letter or letters, in form and substance satisfactory to counsel for the Underwriter, pursuant to which each such person shall agree not to offer for sale, sell, distribute or otherwise dispose of any securities of the Company for a period of 180 days from the date hereof. The Company will use its best efforts to cause each significant Shareholder of the Company (as reasonably determined by the Underwriter) to furnish to the Underwriter, on or prior to the date of this Agreement, a letter or letters, in form and substance satisfactory to counsel for the Underwriter, pursuant to which each such Shareholder shall agree not to offer for sale, sell, distribute or otherwise dispose of any securities of the Company for a period of 90 days from the date hereof. (k) The Company will not, during the 180 days following the effective date of the Registration Statement, except with your prior written consent, offer for sale, sell, distribute, or otherwise dispose of any Common Stock or sell or grant options, rights, or warrants with respect to any Common Stock (except for the grants, options, rights, warrants or convertible securities pursuant to the Company's 1997 Stock Option and Incentive Compensation Plan), otherwise than in accordance with this Agreement or as contemplated by the Prospectus. (l) The Company authorizes the Underwriter and all dealers to whom any of the Units may be sold by the Underwriter in connection with the distribution of the Units, to use the Prospectus as from time to time amended or supplemented in connection with the offering and sale of the Units and in accordance with the applicable provisions of the Act and the applicable Rules and Regulations and applicable state Blue Sky or securities laws. (m) The Company shall not request an effective date nor allow the Registration Statement to be declared effective without the prior approval of the Underwriter. (n) Within the time during which the Prospectus is required to be delivered under the Act, the Company will comply, at its own expense, with all requirements imposed upon it by the Act, by the Rules and Regulations, by the Exchange Act, and by any order of the Commission, so far as necessary to permit the continuance of sales or dealings in the Units. (o) The Company shall file an application and take all other steps necessary to have the Units actually listed on The Nasdaq SmallCap Market on or prior to the effective date of the Registration Statement under the Act. 11 12 (p) The Company will reserve and keep available that maximum number of its authorized but unissued shares of Common Stock which are issuable upon exercise of Warrants and the Underwriter's Warrant during the term of the Warrants and the Underwriter's Warrant. (q) Prior to the Closing Date, no discussions will be held by officers, directors or any other affiliate or associate of the Company with any member of the news media and no news release or other publicity about the Company will be permitted without prior approval of the Company's and the Underwriter's respective legal counsel. (r) The Company shall have obtained a CUSIP number for the Units (and its components) prior to the effective date of the Registration Statement under the Act. (s) The Company shall supply to the Underwriter, and its legal counsel, at the Company's cost, one complete bound volume of all of the documents relating to the public offering, within a reasonable time after the Closing Date, not to exceed four (4) months. The volume shall be hard cover bound in book format. (t) The Company will apply the proceeds from the sale of the Units by it to the purposes and in the manner set forth in the Registration Statement and, pending such application, shall invest such net proceeds only in one or more of the following, except as otherwise provided by prior written consent of the Underwriter: (i) interest-bearing obligations issued by the United States Government or issued by an agency or instrumentality of the United States Government and guaranteed by the United States Government and having a maturity not in excess of one year, (ii) interest-bearing domestic commercial paper having a maturity of not more than 365 days and, at the time of purchase by the Company, rated investment grade by Moody's Investors Service, Inc. or Standard & Poor's Corporation, (iii) interest-bearing certificates of deposit issued by a commercial bank chartered by the United States Government or by any state of the United States having shareholders' equity of at least $500,000,000 except that the foregoing notwithstanding, the Company may invest no more than $100,000 of such net proceeds in certificates of deposit issued by any such commercial bank regardless of shareholders' equity, and (iv) shares or other units of interest in a registered open-ended investment company the assets of which aggregate at least $200,000,000 and are invested solely in so-called "money market" obligations. 5. CONDITIONS OF UNDERWRITER'S OBLIGATIONS. The obligations of the Underwriter herein shall be subject to the accuracy of the representations and warranties on the part of the Company herein as of the date hereof, and as of each Closing Date, to the accuracy of the written statements of Company officers made pursuant to the provisions hereof, to the performance by the Company of its obligations hereunder and to the following additional conditions: 12 13 (a) The Registration Statement shall have become effective not later than 5:00 P.M., Minneapolis, Minnesota time, on the date of this Agreement or on such later time and date as shall be satisfactory to the Underwriter, no stop order suspending the effectiveness of the Registration Statement or any amendment thereof or supplement or the qualification of the Units for offering or sale shall have been issued and no proceedings for that purpose shall have been instituted or shall be pending or shall be threatened by the Commission or by any state securities authority, and any request of the Commission for additional information (to be included in the Registration Statement or the Prospectus or otherwise) shall have been complied with to the Underwriter's satisfaction. (b) The Underwriter shall not have advised the Company that the Registration Statement or Prospectus, or any amendment thereof or supplement thereto, contains an untrue statement of fact that, in the Underwriter's reasonable opinion, is material, or omits to state a fact that, in your reasonable opinion, is material and is required to be stated therein or is necessary to make the statements therein not misleading provided that this Section 5(b) shall not apply to statements in, or omissions from, the Registration Statement or Prospectus, or any amendment thereof or supplement thereto that are based upon and conform to written information provided by the Underwriter specifically for use in the Registration Statement or Prospectus. (c) On or prior to each Closing Date, the form and validity of the Units, the legality and sufficiency of the corporate proceedings and matters relating to the incorporation of the Company and other matters incident to the issuance of the Units, the form of the Registration Statement and the Prospectus and of any amendments thereof or supplements thereto filed prior to such Closing Date (other than financial statements and schedules and other financial or statistical data included therein), the authorization, execution, and delivery of this Agreement and the description of the Units contained in the Prospectus shall have been reasonably approved by the Underwriter. In connection with such determination, the Company shall have furnished to the Underwriter such documents as you may have requested for the purpose of enabling the Underwriter to pass upon such matters. (d) On each Closing Date there shall have been furnished to the Underwriter, the favorable opinion (addressed to the Underwriter) of Maslon Edelman Borman & Brand, a Professional Limited Liability Partnership, counsel for the Company, dated such Closing Date, and in form reasonably satisfactory to counsel for the Underwriter, to the effect that: (i) The Company is a corporation duly incorporated, validly existing and in good standing under the laws of the State of Minnesota, with corporate power and authority to own or lease its properties and conduct its business as described in the Prospectus. The Company has no subsidiaries other than as described in the Prospectus. 13 14 (ii) The authorized capital stock of the Company as of the date of this Agreement is as set forth in the Prospectus. The outstanding shares of the Common Stock of the Company have been duly authorized and validly issued and are fully paid and nonassessable. The Units (and their components) have been duly authorized and, upon issuance, delivery and payment therefor as described in this Agreement, will be validly issued, fully paid and nonassessable. The shares of Common Stock underlying the Warrants have been duly authorized and reserved for issuance and when issued, sold and delivered in accordance with the terms of the Warrant, will be validly issued, fully paid and nonassessable. The issuance, sale and delivery of the Underwriter's Warrant has been duly authorized and the shares (the "WARRANT SHARES") of Common Stock issuable upon the exercise thereof have been reserved for issuance upon such exercise. The Warrant Shares, when issued, sold and delivered in accordance with the terms of the Underwriter's Warrant, will be validly issued, fully paid and nonassessable. No preemptive rights of, or rights of refusal in favor of, stockholders of the Company exist with respect to the Units (or any component thereof), the Underwriter's Warrant or the Warrant Shares, or the issue and sale thereof, pursuant to the Company's Articles of Incorporation or Bylaws. (iii) The authorized securities of the Company conform as to legal matters in all material respects to the description thereof set forth in the Prospectus under the caption "Description of Securities." The certificates representing the Warrants and the Common Stock are in proper form under the Minnesota Business Corporation Act. (iv) The Registration Statement has become effective under the Securities Act and, to such counsel's knowledge, no stop order suspending the effectiveness of the Registration Statement or suspending or preventing the use of the Prospectus is in effect and, to our knowledge, no proceedings for that purpose have been instituted or are pending by the Commission. (v) The Registration Statement and the Prospectus comply as to form in all material respects with the requirements of the Securities Act and with the Rules and Regulations, except the financial statements, the notes thereto and the related schedules and other financial and statistical data contained therein, as to which we express no opinion. (vi) Counsel knows of no contracts, leases, documents or pending legal proceedings that are required to be described in the Prospectus or to be filed as exhibits to the Registration Statement that are not so described or filed. (vii) The Underwriting Agreement, the Warrant Agreement and the Underwriter's Warrant have been duly authorized by all requisite corporate action, 14 15 executed and delivered by the Company and constitute the valid and binding obligations of the Company enforceable in accordance with their respective terms. (viii) The execution and delivery of the Underwriting Agreement and the issue and sale of the Underwriter's Warrant, the Units (and their components) and the shares underlying the Warrant will not violate or conflict with the Articles of Incorporation or the Bylaws of the Company or any material provision of any material contract or instrument filed as an exhibit to the Registration Statement to which the Company is a party or by which the Company is bound (other than any violation of or conflict with any financial tests or covenants contained therein, as to which counsel need express no opinion) or any law of the United States or the State of Minnesota, any rule or regulation of any governmental authority or regulatory body of the United States or the State of Minnesota, or any judgment, order or decree known to us and applicable to the Company of any court or governmental authority. (ix) No holders of capital stock of the Company, or securities convertible into capital stock of the Company, have the right to cause the Company to include such holder's capital stock in the Registration Statement pursuant to the Company's Articles of Incorporation or Bylaws or any contract or agreement. (x) No consent, approval, authorization or order of, and no notice to or filing with, any governmental agency or body or any court is required to be obtained or made by the Company for the issue and sale of the Units pursuant to the Underwriting Agreement, except such as have been obtained or made and such as may be required under applicable state securities or blue sky laws or by the National Association of Securities Dealers, Inc., as to which we express no opinion. Although counsel to the Company cannot guarantee the accuracy and completeness of the statements contained in the Registration Statement or in the Prospectus, on the basis of discussions and meetings with officers of the Company, representatives of the Company's independent auditors, the Underwriter and counsel to the Underwriter, our participation in the preparation of the Registration Statement and the Prospectus, our examination of the documents referred to in the Registration Statement and in the Prospectus, and our procedures forming the basis of the opinions expressed above, nothing came to our attention that led us to believe that the Registration Statement, as of the date it was declared effective, contained an untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary to make the statements therein not misleading, or that the Prospectus, as of its date or on the date hereof, contained or contains an untrue statement of a material fact or omitted or omits to state a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading (provided that we express no view with respect to the content of financial statements, the 15 16 notes thereto and the related schedules and other financial or statistical data included in the Registration Statement or the Prospectus or as to statements in the Registration Statement or Prospectus which are based on and conform to written information furnished to the Company by or on your behalf specifically for use in the preparation thereof). In rendering such opinion, such counsel may rely (A) as to questions of the law of jurisdictions other than the State of Minnesota or the United States upon an opinion or opinions (dated the Closing Date, addressed to the Underwriter and in form satisfactory to the Underwriter) of counsel acceptable to the Underwriter and (B) as to matters of fact, to the extent they deem proper, on certificates of appropriate officers of the Company, of the transfer agent and registrar for the Units and of public officials; PROVIDED, such opinions and certificates must be attached to the opinion of counsel. (e) At the time of execution of this Agreement, the Underwriter shall have received from Ernst & Young, LLP, a letter dated the date of such execution, in form and substance satisfactory to the Underwriter, to the effect that they are independent accountants with respect to the Company within the meaning of the Act and the applicable published instructions, and Regulations thereunder, and further stating in effect that: (i) In their opinion, the audited financial statements included in the Registration Statement and Prospectus covered by their report included therein, comply as to form in all material respects with the applicable requirements of the Act and the published instructions, and Regulations, thereunder. (ii) On the basis of (A) a reading of the minutes of the shareholders' and directors' meetings of the Company since inception, (B) inquiries of certain officials of the Company responsible for financial and accounting matters, (C) a reading of the Company's monthly operating statements subsequent to December 31, 1996, and (D) other specified procedures and inquiries (but not an audit in accordance with generally accepted auditing standards), nothing came to their attention causing them to believe that: (1) that the unaudited financial statements of the Company, contained in the Prospectus and any amendment thereof or supplement thereto, do not comply as to form, in all material respects, with the applicable accounting requirements of the Act and the published Rules and Regulations or were not prepared in conformity with generally-accepted accounting principles and practices applied on a basis consistent in all material respects with those followed in the preparation of, the audited financial statements of the Company included therein; or (2) that the unaudited amounts of revenues, income before provision for income taxes, net income and ratio of earnings to fixed charges of the Company contained in the Prospectus, or any amendment 16 17 thereof or supplement thereto, were not derived from financial statements prepared in conformity with generally-accepted accounting principles and practices applied on a basis consistent in all material respects with those followed in the preparation of the audited financial statements of the Company included therein; or (3) that the unaudited pro forma financial statements of the Company and recently-acquired companies, if any, contained in the Prospectus or any amendment thereof or supplement thereto, were not properly compiled in accordance with generally-accepted accounting principles or did not provide for all adjustments necessary for a fair presentation of the information purported to be shown thereby; or (4) with respect to the period subsequent to December 31, 1996, there were, at a specified date, not more than five (5) business days prior to the date of the letter, any changes or any material increases or decreases in capital stock, long-term or short-term debt or shareholders' equity, decreases in net assets, net current assets, or net worth or any material decrease, as compared with the corresponding period of the prior year, in revenues or net income of the Company as compared with the amounts shown in the December 31, 1996 balance sheet included in the Registration Statement, except as disclosed or referred to in the Prospectus and Registration Statement. (iii) Certain information set forth on the cover of the Prospectus, and in the Prospectus under the headings "Prospectus Summary," "Summary Financial Information," "Risk Factors," "Use of Proceeds," "Dilution," "Capitalization," "Management's Discussion and Analysis of Financial Condition and Results of Operations," "Business," "Management," "Reorganization," "Certain Transactions," "Principal Shareholders" and "Description of Securities" and that are expressed in dollars (or percentages derived from dollar amounts) or numbers have been compared to accounting records of the Company which were subject to the internal accounting controls of the Company and are in agreement with such records or computations made therefrom, excluding any questions of legal interpretation. (f) The Underwriter shall have received from Ernst & Young, LLP, a letter dated as of each Closing Date, to the effect that such accountants reaffirm, as of such Closing Date, and as though made on such Closing Date, the statements made in the letter furnished by such accountants pursuant to subparagraph (e) of this Section 5, except that the specified date referred to in such letter will be a date not more than five (5) business days prior to such Closing Date. 17 18 (g) At each Closing Date, the Company shall have performed all material obligations and satisfied all material conditions on its part to be performed or satisfied on or prior thereto (except any condition satisfaction of which shall have been waived as herein provided) and compliance with the provisions of this subparagraph (g) shall be evidenced by a certificate of an executive officer of the Company. (h) On each Closing Date there shall have been furnished to you a certificate, dated as of such Closing Date and addressed to the Underwriter, signed by the principal executive officer and principal financial officer of the Company to the effect that: (i) the representations and warranties and covenants of the Company in this Agreement are true and correct in all material respects as if made at and as of such Closing Date and the Company has complied in all material respects with all the agreements and satisfied all the material conditions on its part to be performed or satisfied hereunder at or prior to such Closing Date; (ii) no stop order or other order suspending the effectiveness of the Registration Statement or any amendment or supplement thereto or the qualification of the Units for offering or sale has been issued and, to the Company's knowledge, no proceedings for that purpose have been instituted or are pending or, to the knowledge of the respective signers thereof, are threatened by the Commission or any state or regulatory body; (iii) neither the Registration Statement, as of the date it was declared effective, nor the Prospectus, as of its date and the Closing Date, included any untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading; (B) since the effective date of the Registration Statement, no event has occurred which should have been set forth in an amendment or supplement to the Prospectus which has not been set forth in such an amendment or supplement; (C) subsequent to the respective dates as of which information is given in the Registration Statement and Prospectus and except as set forth in or contemplated by the Prospectus, the Company has not incurred any material liability or obligation, direct or contingent, whether or not in the ordinary course of business, or entered into any material transaction, outside of the ordinary course of business, and there has not been any material change in the Common Stock, or any increase in the short-term or long-term debt, including any capitalized lease obligation (other than in the ordinary course of its business and in an amount which is not material) or any issuance of options, warrants, convertible securities or other rights to purchase the Common Stock of the Company or any material adverse change in the general affairs, business, key personnel, capitalization or financial position of the Company considered as a whole (other than the issuance of Common Stock pursuant to existing options); and subsequent to the date of the Underwriting Agreement, the Company has not 18 19 sustained any material loss or damage to its property or interference with its business by strike, fire, flood, accident or other calamity, whether or not any of the foregoing is insured, that would have a material adverse effect upon the Company considered as a whole, (D) the projection of the Company previously presented to the Underwriter showing that the Company will be able to meet the maintenance requirements for listing on The Nasdaq SmallCap Market for a period of 24 months from the date hereof, were prepared in good faith and continue to represent the signers' best present estimate of the Company's financial condition following the Closing of the sale of the Units. (i) The Underwriter shall receive a Blue Sky Memorandum reasonably satisfactory to the Underwriter from Doherty, Rumble & Butler, P.A., confirming that all requisite action for the offer and sale of the Units in all jurisdictions requested has been taken. (j) The Underwriter shall have received "lock up" agreements, in form and substance acceptable to the Underwriter, from (i) all directors and officers of the Company restricting the sale, assignment or other conveyance of any securities of the Company without the prior written consent of the Underwriter for a period of 180 days from the effective date of the Registration Statement under the Act, and (ii) from all significant shareholders of the Company (as reasonably determined by the Underwriter) restricting the sale, assignment or other conveyance of any securities of the Company without the prior written consent of the Underwriter for a period of 90 days from the effective date of the Registration Statement under the Act. (k) The Company's Units (and the securities comprising the Units) shall be listed on The Nasdaq SmallCap Market on or prior to the effective date of the Registration Statement under the Act. (l) Prior to the First Closing, the number of issued and outstanding shares of common stock of the Company shall not exceed 5,399,289 shares, and there shall be no change in the capitalization of the Company without the prior written consent of the Underwriter. (m) The Company's Units (and the securities comprising the Units) shall be registered under the Securities Exchange Act of 1934, as amended, pursuant to Form 8-A, on or prior to the effective date of the Registration Statement under the Act. (n) The Company shall have furnished to the Underwriter and Doherty, Rumble & Butler, P.A., counsel for the Underwriter, such further certificates and documents as the Underwriter's counsel may reasonably request, relating to the fulfillment of the conditions set forth in this Section 5. All such opinions, certificates, letters and documents will be in compliance with the provisions hereof only if they are reasonably satisfactory to the Underwriter and to counsel for the Underwriter. The Company will furnish you with such conformed copies of such opinions, certificates, letters, and other documents as you shall reasonably request. The Underwriter may 19 20 waive in writing the performance of any one or more of the conditions specified in this Section 5 or extend the time for their performance. If any of the conditions specified in this Section 5 shall not have been fulfilled when and as required by this Agreement to be fulfilled, this Agreement and all obligations of the Underwriter hereunder may be cancelled by the Underwriter at, or at any time prior to, each Closing Date. Any such cancellation shall be without liability of the Underwriter to the Company or any liability of the Company to the Underwriter, except pursuant to Section 4(i) hereof. Notice of such cancellation shall be given to the Company in writing, or by telefax or telephone confirmed in writing. The Underwriter may waive in writing the performance of any one or more of the foregoing conditions or extend the time for their performance. 6. EFFECTIVE DATE AND TERMINATION. (a) This Agreement shall become effective at immediately after the time at which the Registration Statement shall have become effective under the Act. (b) Until the First Closing Date, this Agreement may be terminated by you by giving notice to the Company, if (i) the Company shall have sustained a loss or damage by fire, flood, accident, or other calamity which is material to the property, business, or condition (financial or other) of the Company considered as a whole, any properties of the Company shall have become a party or subject to litigation material to the Company considered as a whole, or there shall have been, since the respective dates as of which information is given in the Registration Statement or the Prospectus, any material adverse change or development in the general affairs, condition (financial or other), business, key personnel, capitalization, properties, results of operations or net worth, of the Company considered as a whole, whether or not arising in the ordinary course of business, which loss, damage, or change, in your judgment, shall render it inadvisable to proceed with the delivery of the Units, whether or not such loss shall have been insured, (ii) trading in securities generally on the New York Stock Exchange, the American Stock Exchange, The Nasdaq National Market, The Nasdaq SmallCap Market or the over-the-counter market shall have been suspended or minimum prices shall have been established on such exchange or market by the Commission or by such exchange, (iii) a general banking moratorium shall have been declared by federal or state authorities, or (iv) there shall have been such a serious, unusual and material adverse change in general economic, political, or financial conditions or the effect of international conditions on the financial markets in the United States shall be such as, in your reasonable judgment, makes it inadvisable to proceed with the delivery of the Units. Any termination of this Agreement pursuant to this Section 6 shall be without liability of the Company to the Underwriter, except as otherwise provided in Sections 4(i), 7 and 8 hereof, and without liability of the Underwriter to the Company, except as provided in Sections 7 and 8 hereof. 20 21 (c) Any notice referred to in this Section 6 may be given at the address specified in Section 11 hereof in writing or by telegraph or telephone, and if by telegraph or telephone, shall be immediately confirmed in writing. 7. INDEMNIFICATION. (a) The Company agrees to indemnify and hold harmless the Underwriter and each person, if any, who controls the Underwriter within the meaning of the Act against any losses, claims, damages or liabilities, joint or several, to which such Underwriter or such controlling person may become subject, under the Act or otherwise, insofar as such losses, claims, damages or liabilities (or actions in respect thereof) arise out of or are based upon (i) any untrue statement or alleged untrue statement of a material fact made by the Company in Section l hereof or contained (A) in the Registration Statement, any Preliminary Prospectus, or the Prospectus, or any amendment thereof or supplement thereto, or (B) in any Blue Sky application or other document executed by the Company specifically for that purpose or based upon and conforming to written information furnished by the Company filed in any state or other jurisdiction in order to qualify any or all of the Units under the securities laws thereof (any such application, document or information being hereinafter called a "BLUE SKY APPLICATION"), or (ii) the omission or alleged omission to state in the Registration Statement, any Preliminary Prospectus, or the Prospectus, or any amendment thereof or supplement thereto, or in any Blue Sky Application a material fact required to be stated therein or necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading; and will reimburse the Underwriter, its officers and directors and each such controlling person for any legal or other expenses reasonably incurred by the Underwriter, its officers and directors or such controlling person in connection with investigating or defending any such loss, claim, damage, liability or action; provided, however, that the Company will not be liable in any such case to the extent, but only to the extent, that any such loss, claim, damage or liability arises out of or is based upon an untrue statement or alleged untrue statement or omission or alleged omission made in reliance upon and in conformity with written information furnished to the Company through you or on your behalf specifically for use in the preparation of the Registration Statement or any amendment thereof or supplement thereto, or any such Blue Sky Application or any such Preliminary Prospectus or the Prospectus or any such amendment thereof or supplement thereto; and provided, further, that the foregoing indemnity agreement is subject to the condition that, insofar as it relates to any untrue statement, alleged untrue statement, omission or alleged omission made in any Preliminary Prospectus but eliminated or remedied in the Prospectus (as amended or supplemented), such indemnity agreement shall not inure to the benefit of the Underwriter (or to the benefit of any person who controls the Underwriter), if the person asserting any loss, liability, claim or damage purchased the Units which are the subject thereof and a copy of the Prospectus (as then supplemented or amended) was not sent or given to such person with or prior to the written confirmation of the sale of such Units to such person. 21 22 (b) The Underwriter will indemnify and hold harmless the Company, each of its directors, each of its officers who has signed the Registration Statement, and each person, if any, who controls the Company within the meaning of the Act, against any losses, claims, damages or liabilities, joint or several, to which the Company or any such director or officer, or controlling person, may become subject, under the Act or otherwise, insofar as such losses, claims, damages or liabilities (or actions in respect thereof) arise out of or are based upon (i) any untrue statement or alleged untrue statement of a material fact contained (A) in the Registration Statement, any Preliminary Prospectus, or the Prospectus, or any amendment thereof or supplement thereto, or (B) in any Blue Sky Application, or (ii) the omission or alleged omission to state in the Registration Statement, any Preliminary Prospectus, the Prospectus or any amendment thereof or supplement thereto or in any Blue Sky Application a material fact required to be stated therein or necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading, in each case to the extent, but only to the extent, that such untrue statement or alleged untrue statement or omission or alleged omission was made in reliance upon and in conformity with written information furnished to the Company through you specifically for use with reference to the Underwriter in the preparation of the Registration Statement or any amendment thereof or supplement thereto or any such Blue Sky Application or any such Preliminary Prospectus or the Prospectus or any such amendment thereof or supplement thereto; and will reimburse the Company, any such director or officer, or controlling person, for any legal or other expenses reasonably incurred by the Company or any such director or officer, or controlling person, in connection with investigating or defending any such loss, claim, damage, liability or action. This indemnity agreement will be in addition to any liability which the Underwriter may otherwise have. (c) Promptly after receipt by an indemnified party under this Section 7 of notice of the commencement of any action, such indemnified party will, if a claim in respect thereof is to be made against any indemnifying party under this Section 7, notify in writing the indemnifying party of the commencement thereof; no indemnification shall be available to any party who shall fail to give notice as provided in this Section 7(c) if the party to whom notice was not given was unaware of the proceeding to which such notice would have related and was prejudiced by the failure to give such notice, but the omission so to notify such indemnifying party of any such action, suit or proceeding shall not relieve it from any liability that it may have to any indemnified party for contribution or otherwise than under this section. In case any such action is brought against any indemnified party, and the indemnified party notifies an indemnifying party of the commencement thereof, the indemnifying party will be entitled to participate therein, and, to the extent that it may wish, jointly with any other indemnifying party similarly notified, to assume the defense thereof, with counsel who shall be to the reasonable satisfaction of such indemnified party, and (notwithstanding subparagraphs (a) and (b) of this Section 7) after notice from the indemnifying party to such indemnified party of its election so to assume the defense thereof, the indemnifying party will not be liable to such indemnified party under this Section 7 for any legal or other expenses subsequently incurred by such indemnified party 22 23 in connection with the defense thereof other than reasonable costs of investigation except as provided below. The indemnified party shall have the right to employ its counsel in any such action, but the fees and expenses of such counsel shall be at the expense of such indemnified party unless (i) the employment of counsel by such indemnified party has been authorized in writing by the indemnifying parties, (ii) the indemnified party shall have reasonably concluded that there may be a conflict of interest between the indemnifying parties, or any of them, and the indemnified party in the conduct of the defense of such action (in which case the indemnifying parties shall not have the right to direct the defense of such action on behalf of the indemnified party) or (iii) the indemnifying parties shall not have employed counsel to assume the defense of such action within a reasonable time after notice of the commencement thereof, in each of which cases the fees and expenses of counsel shall be at the expense of the indemnifying parties; provided, however, that the indemnifying parties shall not be liable for the fees and expenses of more than one counsel for the indemnified parties. Any such indemnifying party shall not be liable to any such indemnified party on account of any settlement of any claim or action effected by the indemnified party without the consent of such indemnifying party. 8. CONTRIBUTION. In order to provide for just and equitable contribution in circumstances in which indemnification provided for in Section 7 is unavailable, each indemnifying party shall contribute to the aggregate losses, claims, damages, expenses and liabilities to which the indemnified parties may be subject in such proportion so that the Underwriter is responsible for that portion (the "UNDERWRITING PORTION") represented by the percentage that the underwriting commissions appearing on the cover page of the Prospectus bear to the public offering price (net of Underwriting Commissions) appearing thereon and the Company is responsible for the remaining portion (the "RESIDUAL PORTION"); provided, however, (i) that no person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Act) will be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation; and (ii) if such allocation is not permitted by applicable law, then the relative fault of the Company, its directors, officers and controlling persons, on the one hand, and the Underwriter, its officers, directors and its controlling persons, on the other, in connection with the statements or omissions which resulted in such damages and other relevant equitable considerations shall also be considered. The relative fault shall be determined by reference to, among other things, whether in the case of an untrue statement of a material fact or the omission to state a material fact, such statement or omission relates to information supplied by the Company or by the Underwriter and the parties' relative intent, knowledge, access to information, and opportunity to correct or prevent such untrue statement or omission. The Company and the Underwriter agree that it would not be just and equitable if the respective obligations of the Company on the one hand, and the Underwriter, on the other, to contribute pursuant to this Section 8 were to be determined by pro rata or per capita allocation of the aggregate damages (even if the Underwriter, its officers, directors and its controlling persons in the aggregate were treated as one entity for such purpose) or by any other method of allocation that does not take account of the equitable considerations referred to in this Section 8. For purposes of this Section 8, the term "DAMAGES" shall include any legal or other expense reasonably incurred by the indemnified party in connection with investigating or defending any action or claim that is the 23 24 subject of the contribution provisions of this Section 8. Notwithstanding the provisions of this Section 8, the Underwriter, its officers, directors and its controlling persons in the aggregate shall not be required to contribute any amount in excess of the amount by which the total purchase price of the Units purchased by it, directly or indirectly, from the Company pursuant to this Agreement exceeds the amount of any damages that the Underwriter, its officers, directors and its controlling persons in the aggregate have otherwise been required to pay by reason of such untrue statement or omission. For purposes of this Section 8, each person, if any, who controls the Underwriter within the meaning of the Act shall have the same rights to contribution as the Underwriter, and each person, if any, who controls the Company within the meaning of the Act, each officer who shall have signed the Registration Statement and each director of the Company shall have the same rights to contribution as the Company. Each party entitled to contribution agrees that, upon the service of a summons or other initial legal process upon it in any action instituted against it in respect of which contribution may be sought, it will promptly give written notice of such service to the party or parties from whom contribution may be sought, but the omission so to notify such party or parties of any such service shall not relieve the party from whom contribution may be sought from any obligation it may have hereunder or otherwise. In case any such action, suit, or proceeding is brought against any party, and such person so notifies a contributing party of the commencement thereof, the contributing party will be entitled to participate therein with the notifying party and any other contributing party similarly notified. 9. SURVIVAL OF INDEMNITIES, CONTRIBUTION, WARRANTIES AND REPRESENTATIONS. The respective indemnity and contribution agreements of the Company and the Underwriter contained in Sections 7 and 8 hereof, the representations, warranties, and covenants of the Company contained in Sections 1 and 4 hereof and the representations and warranties of the Underwriter contained in Section 14 hereof shall remain operative and in full force and effect, regardless of any termination or cancellation of this Agreement or any investigation made by or on behalf of the Underwriter or the Company or any of their respective directors or officers, or any controlling person referred to in said Sections 7 and 8, and shall survive the delivery of, and payment for, the Units. 10. NOTICES. Except as otherwise expressly provided in this Agreement, all notices and other communications hereunder shall be in writing and, if given to the Underwriter, shall be mailed, delivered or telefaxed to R. J. Steichen & Company, One Financial Plaza, 120 South Sixth Street, Minneapolis, MN 55402, Attention: President, with a copy to Girard P. Miller, Doherty, Rumble & Butler, P.A., 150 South Fifth Street, Suite 3500, Minneapolis, MN 55402, or if given to the Company, shall be mailed, delivered or telefaxed to it at Hotel Discovery, Inc., 7701 France Avenue South, Suite 217, Edina, MN 55435, Attention: President, with a copy to William M. Mower, Maslon Edelman Borman & Brand, a Professional Limited Liability Partnership, 90 South Seventh Street, Suite 3300, Minneapolis, MN 55402. 11. UNDERWRITER'S WARRANTS. Upon payment of a purchase price of $50 by the Underwriter, the Company will issue and deliver to R. J. Steichen & Company, for its account, Warrants to purchase Common Stock in an amount equal to 220,000 shares of Common Stock. Such Warrants shall be issued on the Closing Date and shall be dated as of the Closing Date. 24 25 Such Warrants shall be exercisable commencing one (1) year after the Effective Date for a period of four years thereafter at a price per share of $6.00. Such Warrant shall contain such terms and conditions as contained in the form of Underwriter's Warrant attached hereto and labeled Appendix A. 12. INFORMATION FURNISHED BY UNDERWRITER. The statements relating to stabilization activities of the Underwriter on the inside front cover of the Preliminary Prospectus and the Prospectus, and under the caption "UNDERWRITING" in any Preliminary Prospectus and in the Prospectus, and, to the extent the same relate to you, in any Blue Sky application, constitute the written information furnished by or on behalf of you referred to in Section 1 hereof and in paragraphs (a) and (b) of Section 7 hereof. 13. PARTIES. This Agreement is made solely for the benefit of the Underwriter, the Company, any director, officer, or controlling person referred to in Sections 7 and 8 hereof, and their respective personal representatives, successors and assigns, and no other person shall acquire or have any right by virtue of this Agreement. The term "personal representatives, successors and assigns," as used in this Agreement, shall not include any purchaser of Units (as such purchaser) from the Underwriter. 14. REPRESENTATIONS, WARRANTIES AND COVENANTS OF THE UNDERWRITER. The Underwriter represents, warrants to and agrees with the Company that: (a) The Underwriter is a corporation duly incorporated and validly existing in good standing under the laws of the jurisdiction in which it is incorporated. (b) The Underwriter is duly registered as a broker-dealer under the Securities Exchange Act of 1934, as amended, and under the securities laws of Minnesota and of such other states in which it intends to offer or sell the Units, if such registration is required in any such other state, and is a member in good standing of the National Association of Securities Dealers, Inc., and no proceedings have been initiated or threatened to suspend any such registration or membership. (c) The execution, delivery and performance of this Agreement by the Underwriter, and the consummation of the transactions contemplated hereby, have been duly authorized by the Underwriter, and at the time of its execution, performance, or consummation, will not constitute or result in any breach or violation of any of the terms, provisions or conditions of, or constitute a default under, any federal statute or regulation (including, without limitation, the net capital requirements under Rule 15c-1 of the Securities Exchange Act of 1934) or any statute or regulation of any state in which it intends to offer or sell the Units, or any order, judgment, decree, rule or regulation of any court or governmental agency or body having jurisdiction over the Underwriter or any of its activities or property; and other than registration of the Units under the Act and applicable states securities laws and subject to the favorable review by the National Association of Securities Dealers, Inc., no consent, approval, authorization or order of any 25 26 court or governmental agency or body is required for the consummation of the transactions contemplated hereby. (d) There is not now pending or threatened against the Underwriter or any control person of the Underwriter any action or proceeding either in any court of competent jurisdiction or before the Commission, National Association of Securities Dealers, Inc. or the securities authorities of any state, based upon any action or failure to act on the part of the Underwriter or any controlling person of an Underwriter that would restrict the Underwriter's ability to perform its obligations hereunder. (e) The Units will be offered by the Underwriter only to persons resident in Minnesota and such other states as are mutually designated by the Underwriter and the Company pursuant to Section 4(c) hereof. All of such persons shall be persons and entities for whom the purchase of the Units is a suitable investment and the Underwriter shall employ or engage no Selected Dealer, sales person, agent or representative in the offer or sale of the Units, which Selected Dealer, sales person, agent or representative is not properly registered and licensed for the purpose of such offer or sale. All such registrations and licenses shall remain in full force and effect until after the Closing Dates. (f) The Underwriter agrees that neither the Underwriter nor any officer or other person employed by the Underwriter or any Selected Dealer will provide any information or make any representations to offerees of the Units, other than such information and representations as are either contained in the Prospectus or the Registration Statement or are not inconsistent with information set forth in the Prospectus or the Registration Statement. (g) The Underwriter agrees that in the event the Underwriter learns of any circumstances or fact which it believes would make any Preliminary Prospectus, the Prospectus, or the Registration Statement inaccurate or misleading in any material respect, it will immediately bring such circumstances or facts to the attention of the Company. 15. GOVERNING LAW. This Agreement shall be governed by and construed and enforced in accordance with the laws of the State of Minnesota. HOTEL DISCOVERY, INC. By _____________________________ Its ______________________ "COMPANY" 26 27 The foregoing Agreement is hereby confirmed and accepted as of the date first above written: R. J. STEICHEN & COMPANY By _________________________________ Authorized Officer ____________________________________ Print Name "UNDERWRITER" 27 28 APPENDIX A UNDERWRITER'S WARRANT 29 HOTEL DISCOVERY, INC. COMMON STOCK PURCHASE WARRANT Hotel Discovery, Inc., an Minnesota corporation (the "COMPANY"), hereby agrees that, for value received, R. J. STEICHEN & COMPANY, or its assigns, is entitled, subject to the terms set forth below, to purchase from the Company at any time or from time to time after ____________, 1998, and before 4:30 p.m., Minneapolis, Minnesota time, on __________, 2002 Two Hundred Twenty Thousand (220,000) shares of the $.01 par value Common Stock of the Company, at an exercise price of $6.00 per Share, subject to adjustment as provided herein. 1. EXERCISE OF WARRANT. The purchase rights granted by this Warrant shall be exercised (in minimum quantities of 100 shares) by the holder surrendering this Warrant with the form of exercise attached hereto duly executed by such holder, to the Company at its principal office, accompanied by payment, in cash or by cashier's check payable to the order of the Company, of the purchase price payable in respect of the Shares being purchased. If less than all of the Shares purchasable hereunder is purchased, the Company will, upon such exercise, execute and deliver to the holder hereof a new Warrant (dated the date hereof) evidencing the number of Shares not so purchased. As soon as practicable after the exercise of this Warrant and payment of the purchase price, the Company will cause to be issued in the name of and delivered to the holder hereof, or as such holder may direct, a certificate or certificates representing the Shares purchased upon such exercise. The Company may require that such certificate or certificates contain on the face thereof a legend substantially as follows: "The transfer of the shares represented by this certificate is restricted pursuant to the terms of a Common Stock Purchase Warrant dated____________, 1997, issued by Hotel Discovery, Inc., a copy of which is available for inspection at the offices of Hotel Discovery, Inc. Transfer may not be made except in accordance with the terms of the Common Stock Purchase Warrant. In addition, no sale, offer to sell or transfer of the shares represented by this certificate shall be made unless a Registration Statement under the Securities Act of 1933, as amended (the "ACT"), with respect to such shares is then in effect or an exemption from the registration requirements of the Act is then in fact applicable to such shares." ___________________________ THIS WARRANT IS SUBJECT TO THE RESTRICTIONS ON TRANSFER SET FORTH AT THE BOTTOM OF PAGE 8 HEREOF. 30 2. NEGOTIABILITY AND TRANSFER. This Warrant is issued upon the following terms, to which each holder hereof consents and agrees: (a) Except where directed by a court of competent jurisdiction pursuant to the dissolution or liquidation of a corporate holder hereof, for the period ending one year from _______________, 1997, title to this Warrant may not be sold, transferred, assigned or hypothecated, except that within such one-year period title to this Warrant may be transferred only to R. J. Steichen & Company (the "UNDERWRITER"), or to a person who is both an officer and shareholder, or both an officer and employee, of the Underwriter, or to a successor (or both an officer and shareholder, or both an officer and employee) in interest to the business of the Underwriter, by endorsement (by the holder hereof executing the form of assignment attached hereto) and delivery in the same manner as in the case of a negotiable instrument transferable by endorsement and delivery subject to the requirements of Section 4 hereof. (b) Until this Warrant is duly transferred on the books of the Company, the Company may treat the registered holder of this Warrant as absolute owner hereof for all purposes without being affected by any notice to the contrary. (c) Each successive holder of this Warrant, or of any portion of the rights represented thereby, shall be bound by the terms and conditions set forth herein. 3. ANTIDILUTION ADJUSTMENTS. If the Company shall at any time hereafter subdivide or combine its outstanding shares of Common Stock, or declare a dividend payable in Common Stock, the exercise price in effect immediately prior to the subdivision, combination or record date for such dividend payable in Common Stock shall forthwith be proportionately increased, in the case of combination, or proportionately decreased, in the case of subdivision or declaration of a dividend payable in Common Stock, and the number of Shares purchasable upon exercise of this Warrant, immediately preceding such event, shall be changed to the number determined by dividing the then current exercise price by the exercise price as adjusted after such subdivision, combination or dividend payable in Common Stock and against the number of Shares purchasable upon the exercise of this Warrant immediately preceding such event, so as to achieve an exercise price and number of Shares purchasable after such event proportional to such exercise price and number of Shares purchasable immediately preceding such event. No adjustment in exercise price shall be required unless such adjustment would require an increase or decrease of at least five cents ($0.05) in such price; PROVIDED, HOWEVER, that any adjustments which are not require to be so made shall be carried forward and taken into account in any subsequent adjustment. All calculations hereunder shall be made to the nearest cent or to the nearest one-hundredth of a share, as the case may be. 2 31 No fractional Shares are to be issued upon the exercise of the Warrant, but the Company shall pay a cash adjustment in respect of any fraction of a Share which would otherwise be issuable in an amount equal to the same fraction of the market price per share of Common Stock on the day of exercise as determined in good faith by the Company. In case of any capital reorganization or any reclassification of the Common Stock of the Company, or in the case of any consolidation with or merger of the Company into or with another corporation, or the sale of all or substantially all of its assets to another corporation, which is effected in such a manner that the holders of Common Stock shall be entitled to receive stock, securities or assets with respect to or in exchange for Common Stock, then, as a part of such reorganization, reclassification, consolidation, merger or sale, as the case may be, lawful provision shall be made so that the holder of the Warrant shall have the right thereafter to receive, upon the exercise hereof, the kind and amount of shares of stock or other securities or property which the holder would have been entitled to receive if, immediately prior to such reorganization, reclassification, consolidation, merger or sale, the holder had held the number of Shares which were then purchasable upon the exercise of the Warrant. In any such case, appropriate adjustment (as determined in good faith by the Board of Directors of the Company) shall be made in the application of the provisions set forth herein with respect to the rights and interest thereafter of the holder of the Warrant, to the end that the provisions set forth herein (including provisions with respect to adjustments of the exercise price) shall thereafter be applicable, as nearly as reasonably may be, in relation to any shares of stock or other property thereafter deliverable upon the exercise of the Warrant. When any adjustment is required to be made in the exercise price, initial or adjusted, the Company shall forthwith determine the new exercise price, and (a) prepare and retain on file a statement describing in reasonable detail the method used in arriving at the new exercise price; and (b) cause a copy of such statement to be mailed to the holder of the Warrant as of a date within ten (10) days after the date when the circumstances giving rise to the adjustment occurred. 4. REGISTRATION RIGHTS. Prior to making any disposition of the Warrant or of any Shares purchased upon exercise of the Warrant, the holder will give written notice to the Company describing briefly the manner of any such proposed disposition. The holder will not make any such disposition until (i) the Company has notified him that, in the opinion of its counsel, registration under the Act is not required with respect to such disposition, or (ii) a Registration Statement covering the proposed distribution has been filed by the Company and has become effective. The Company agrees that, upon receipt of written notice from the holder hereof with respect to such proposed distribution, it will use its best efforts, in the consultation with the holder's counsel, to ascertain as promptly as possible whether or not registration is required, and will advise the holder promptly with respect thereto, and the holder will cooperate in providing the Company with information necessary to make such determination. 3 32 If, at any time prior to the expiration of seven (7) years from the date hereof, the Company shall propose to file any Registration Statement (other than any registration on Forms S-4, S-8 or any other similarly inappropriate form or Registration Statement with respect to an initial public offering in which there are no selling shareholders) under the Securities Act of 1933, as amended, covering a public offering of the Company's Units or shares, it will notify the holder hereof at least thirty (30) days prior to each such filing and will include in the Registration Statement (to the extent permitted by applicable regulation), the shares purchased by the holder or purchasable by the holder upon the exercise of the Warrant to the extent requested by the holder hereof. Notwithstanding the foregoing, the number of shares of the holders of the Warrants proposed to be registered thereby shall be reduced pro rata with any other selling shareholder (other than the Company) upon the reasonable request of the managing underwriter of such offering. If the Registration Statement or Offering Statement filed pursuant to such thirty (30) day notice has not become effective within six months following the date such notice is given to the holder hereof, the Company must again notify such holder in the manner provided above. At any time prior to the expiration of five (5) years from the date hereof, and provided that a registration statement on Form S-3 (or its equivalent) is then available to the Company, and on a one-time basis only, if the holders of 50% or more of the Warrants and/or the Shares acquired upon exercise of the Warrants request the registration of the Shares on Form S-3 (or its equivalent), the Company shall promptly thereafter use its best efforts to effect the registration under the Securities Act of 1933, as amended, of all such shares which such holders request in writing to be so registered, and in a manner corresponding to the methods of distribution described in such holders' request. All expenses of any such registrations referred to in this Section 4, except the fees of counsel to such holders and underwriting commissions or discounts, filing fees, and any transfer or other taxes applicable to such shares, shall be borne by the Company. Upon effectiveness of a Registration Statement which includes Common Stock purchased or purchasable upon the exercise of this Warrant in accordance with a valid demand under this Section 4, the rights under this Warrant of all holders to make another such demand shall terminate. Each purchaser or transferee of a portion of this Warrant is responsible to determine whether his or her demand rights under this paragraph have been terminated by such an exercise. Any Warrants issued upon transfers subsequent to such an exercise shall have all of the demand registration provisions under this Section 4 deleted. The Company will mail to each record holder, at the last known post office address, written notice of any exercise of the rights granted under this paragraph 4, by certified or registered mail, return receipt requested, and each holder shall have twenty (20) days from the date of deposit of such notice in the U.S. Mail to notify the Company in writing whether such holder wishes to join in such exercise. The Company will furnish the holder hereof with a reasonable number of copies of any prospectus included in such filings and will amend or supplement the same as required during the 4 33 period of required use thereof. The Company will maintain, at its expense, the effectiveness of any Registration Statement or the Offering Statement filed by the Company, whether or not at the request of the holder hereof, for at least six (6) months following the effective date thereof. In the case of the filing of any Registration Statement, and to the extent permissible under the Securities Act of 1933, as amended, and controlling precedent thereunder, the Company and the holder hereof shall provide cross indemnification agreements to each other in customary scope covering the accuracy and completeness of the information furnished by each. The holder of the Warrant agrees to cooperate with the Company in the preparation and filing of any such Registration Statement or Offering Statement, and in the furnishing of information concerning the holder for inclusion therein, or in any efforts by the Company to establish that the proposed sale is exempt under the Act as to any proposed distribution. 5. RIGHT TO CONVERT. (a) The holder of this Warrant shall have the right to require the Company to convert this Warrant (the "CONVERSION RIGHT"), at any time after ________________, 1998 and prior to its expiration, into Common Stock as provided for in this Section 5. Upon exercise of the Conversion Right, the Company shall deliver to the holder (without payment by the holder of any exercise price) that number of shares of Common Stock equal to the quotient obtained by dividing (x) the value of the Warrant at the time the Conversion Right is exercised (determined by subtracting the exercise price for one Warrant Share in effect immediately prior to the exercise of the Conversion Right from the Fair Market Value (as determined below) for one Warrant Share immediately prior to the exercise of the Conversion Right) by (y) the Fair Market Value of one share of Common Stock immediately prior to the exercise of the Conversion Right. (b) The Conversion Right may be exercised by the holder, at any time or from time to time, prior to its expiration, on any business day, by delivering a written notice (the "CONVERSION NOTICE") to the Company at the offices of the Company exercising the Conversion Right and specifying (i) the total number of shares of Common Stock the Warrantholder will purchase pursuant to such conversion, and (ii) a place, and a date not less than five (5) nor more than twenty (20) business days from the date of the Conversion Notice, for the closing of such purchase. (c) At any closing under Section 5(b) hereof, (i) the holder will surrender the Warrant, (ii) the Company will deliver to the holder a certificate or certificates for the number of shares of Common Stock issuable upon such conversion, together with cash, in lieu of any fraction of a share, and (iii) the Company will deliver to the holder a new Warrant representing the 5 34 number of shares, if any, with respect to which the Warrant shall not have been converted. (d) "FAIR MARKET VALUE" of a share of Common Stock as of a particular date (the "DETERMINATION DATE") shall mean: (i) If the Company's Common Stock is traded on an exchange or is quoted on The Nasdaq National Market or The Nasdaq SmallCap Market, then the average closing or last sale prices, respectively, reported for the ten (10) business days immediately preceding the Determination Date. (ii) If the Company's Common Stock is not traded on an exchange or on The Nasdaq National Market or The Nasdaq SmallCap Market, but is traded in the over-the-counter market, then the average of the closing bid and asked prices reported for the ten (10) business days immediately preceding the Determination Date. (iii) If the Company's Common Stock is not publicly traded and there has been a bona fide sale for cash on an arm's-length basis within 45 days prior to the Determination Date of such Common Stock by the Company privately to one or more investors unaffiliated with the Company (a "Qualifying Sale"), then the most recent such sales price; and (iv) If the Company's Common Stock is not publicly traded and there has been no Qualifying Sale, then the appraised fair market value of such stock, as determined by mutual agreement of the Company and the holder of the Warrant; or if the parties cannot agree to such valuation, then each of the Company and the holder shall select an arbitrator and such arbitrators shall select a third, and such three arbitrators shall determine (in accordance with the Commercial Arbitration Rules of the American Arbitration Association, such expenses to be borne equally by the parties) the fair market value (without any discount for lack of marketability or minority interest) of a share of Common Stock of the Company. 6. NOTICES. The Company shall mail to the registered holder of the Warrant, at his or her last known post office address appearing on the books of the Company, not less than fifteen (15) days prior to the date on which (a) a record will be taken for the purpose of determining the holders of Common Stock entitled to dividends (other than cash dividends) or subscription rights, or (b) a record will be taken (or in lieu thereof, the transfer books will be closed) for the purpose of determining the holders of common stock entitled to notice of and to vote at a meeting of shareholders at which any capital reorganization, reclassification of common stock, consolidation, 6 35 merger, dissolution, liquidation, winding up or sale of substantially all of the Company's assets shall be considered and acted upon. 7. RESERVATION OF COMMON STOCK. A number of shares of Common Stock sufficient to provide for the exercise of the Warrant and the shares of Common Stock included therein upon the basis herein set forth shall at all times be reserved for the exercise thereof. 8. MISCELLANEOUS. Whenever reference is made herein to the issue or sale of shares of Common Stock, the terms "COMMON STOCK" or "SHARES" shall include any stock of any class of the Company other than preferred stock that has a fixed limit on dividends and a fixed amount payable in the event of any voluntary or involuntary liquidation, dissolution or winding up of the Company. The Company will not, by amendment of its Articles of Incorporation or through reorganization, consolidation, merger, dissolution or sale of assets, or by any other voluntary act or deed, avoid or seek to avoid the observance or performance of any of the covenants, stipulations or conditions to be observed or performed hereunder by the Company, but will, at all times in good faith, assist, insofar as it is able, in the carrying out of all provisions hereof and in the taking of all other action which may be necessary in order to protect the rights of the holder hereof against dilution. Upon written request of the holder of this Warrant, the Company will promptly provide such holder with a then current written list of the names and addresses of all holders of warrants originally issued under the terms of, and concurrent with, this Warrant. The representations, warranties and agreements herein contained shall survive the exercise of this Warrant. References to the "holder of" include the immediate holder of shares purchased on the exercise of this Warrant, and the word "holder" shall include the plural thereof. This Common Stock Purchase Warrant shall be interpreted under the laws of the State of Minnesota. All Shares or other securities issued upon the exercise of the Warrant shall be validly issued, fully paid and non-assessable, and the Company will pay all taxes in respect of the issuer thereof. Notwithstanding anything contained herein to the contrary, the holder of this Warrant shall not be deemed a stockholder of the Company for any purpose whatsoever until and unless this Warrant is duly exercised. 7 36 IN WITNESS WHEREOF, this Warrant has been duly executed by Hotel Discovery, Inc., this_____day of_________, 1997. HOTEL DISCOVERY, INC. By _____________________________ Its ____________________ THE SECURITIES EVIDENCED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, OR APPLICABLE STATE SECURITIES LAW. THESE SECURITIES HAVE BEEN ACQUIRED FOR INVESTMENT AND MAY NOT BE OFFERED FOR SALE, SOLD, ASSIGNED, TRANSFERRED, PLEDGED, ASSIGNED OR OTHERWISE DISPOSED OF, AND NO TRANSFER OF THE SECURITIES WILL BE MADE BY THE COMPANY OR ITS TRANSFER AGENT, IN THE ABSENCE OF SUCH REGISTRATION OR AN OPINION OF COUNSEL ACCEPTABLE TO THE COMPANY THAT SUCH REGISTRATION IS NOT REQUIRED. 8 37 WARRANT EXERCISE FORM To be signed only upon exercise of Warrant. The undersigned, the holder of the within Warrant, hereby irrevocably elects to exercise the purchase right represented by such Warrant for, and to purchase thereunder,_________________ shares of Common Stock of Hotel Discovery, Inc. to which such Warrant relates and herewith makes payment of $_________ therefor in cash or by certified check, and requests that such shares be issued and be delivered to,_______________, the address for which is set forth below the signature of the undersigned. Dated:____________ __________________________ _____________________________________ (Taxpayer's I.D. Number) Signature) _____________________________________ (Address) _____________________________________ _________________ ASSIGNMENT FORM To be signed only upon authorized transfer of Warrant. FOR VALUE RECEIVED, the undersigned hereby sells, assigns, and transfers unto ________ the right to purchase shares of Common Stock of Hotel Discovery, Inc. to which the within Warrant relates and appoints ____________, attorney, to transfer said right on the books of Hotel Discovery, Inc. with full power of substitution in the premises. Dated: ________________________ _____________________________________ (Signature) _____________________________________ (Address) _____________________________________ 38 CASHLESS EXERCISE FORM (To be executed upon exercise of Warrant pursuant to Section 5) The undersigned hereby irrevocably elects a cashless exercise of the right of purchase represented by the within Common Stock Purchase Warrant for, and to purchase thereunder, ______________________ shares of Common Stock, as provided for in Section 5 therein. If said number of shares shall not be all the shares purchasable under the within Common Stock Purchase Warrant, a new Warrant is to be issued in the name of said undersigned for the balance remaining of the shares purchasable thereunder rounded up to the next higher number of shares. Please issue a certificate or certificates for such Common Stock in the name of, and pay any cash for any fractional shares to: NAME ________________________________________________________ (Please Print Name) ADDRESS ________________________________________________________ ________________________________________________________ SOCIAL SECURITY NO. ______________________________________________________ SIGNATURE ____________________________________________________________ NOTE: The above signature should correspond exactly with the name on the first page of this Common Stock Purchase Warrant or with the name of the assignee appearing in the assignment form on the preceding page. EX-3.1 3 ARTICLES OF INCORPORATION 1 EXHIBIT 3.1 ARTICLES OF INCORPORATION OF HOTEL DISCOVERY, INC. The undersigned hereby creates a corporation under Chapter 302A of the Minnesota Statutes and adopts the following Articles of Incorporation. ARTICLE 1 NAME The name of the Corporation is HOTEL DISCOVERY, INC. ARTICLE 2 REGISTERED OFFICE The address of the registered office of the Corporation is 3300 Norwest Center, 90 South Seventh Street, Minneapolis, Minnesota 55402. ARTICLE 3 CAPITAL A. The Corporation is authorized to issue one hundred million (100,000,000) shares of capital stock, having a par value of one cent ($.01) per share in the case of common stock, and having a par value as determined by the Board of Directors in the case of preferred stock, to be held, sold and paid for at such times and in such manner as the Board of Directors may from time to time determine in accordance with the laws of the State of Minnesota. B. In addition to any and all powers conferred upon the Board of Directors by the laws of the State of Minnesota, the Board of Directors shall have the authority to establish by resolution more than one class or series of shares, either preferred or common, and to fix the relative rights, restrictions and preferences of any such different classes or series, and the authority to issue shares of a class or series to another class or series to effectuate share dividends, splits or conversion of the Corporation's outstanding shares. C. The Board of Directors shall also have the authority to issue rights to convert any of the Corporation's securities into shares of stock of any class or classes, the authority to issue options to purchase or subscribe for shares of stock of any class or classes, and the authority to issue share purchase or subscription warrants or any other evidence of such option rights which set forth the terms, provisions and conditions thereof, including the price or prices at which such shares may be subscribed for or purchased. Such options, warrants and rights, may be transferable or nontransferable and separable or inseparable from other securities of the Corporation. The Board of Directors is authorized to fix the terms, 2 provisions and conditions of such options, warrants and rights, including the conversion basis or bases and the option price or prices at which shares may be subscribed for or purchased. ARTICLE 4 SHAREHOLDER RIGHTS A. No shareholder of the Corporation shall have any preemptive rights. B. No shareholder of the Corporation shall have any cumulative voting rights. ARTICLE 5 INCORPORATOR The name and address of the incorporator, who is a natural person of full age, is: William M. Mower 3300 Norwest Center 90 South Seventh Street Minneapolis, Minnesota 55402-4140 ARTICLE 6 WRITTEN ACTION BY LESS THAN ALL OF THE DIRECTORS Any action required or permitted to be taken at a Board meeting, other than an action requiring shareholder approval, may be taken by written action of the Board of Directors if signed by the number of directors that would be required to take the same action at a meeting at which all directors were present. ARTICLE 7 LIMITED LIABILITY OF DIRECTORS To the fullest extent permitted by law, a director shall have no personal liability to the Corporation or its shareholders for breach of fiduciary duty as a director. Any amendment to or repeal of this Article 7 shall not adversely affect any right or protection of a director of the Corporation for or with respect to any acts or omissions of such director occurring prior to such amendment or repeal. IN WITNESS WHEREOF, I have signed my name this 31st day of July, 1997. /s/ William M. Mower ------------------------------------ William M. Mower, Incorporator 2 EX-3.2 4 BY-LAWS 1 EXHIBIT 3.2 BY-LAWS OF HOTEL DISCOVERY, INC. ARTICLE 1 OFFICES 1.1 Registered Office. The registered office of the Corporation shall be located within the State of Minnesota as set forth in the Articles of Incorporation. The Board of Directors shall have authority to change the registered office of the Corporation and a statement evidencing any such change shall be filed with the Secretary of State of Minnesota as required by law. 1.2 Offices. The Corporation may have other offices, including its principal business office, either within or without the State of Minnesota. ARTICLE 2 CORPORATE SEAL 2.1 Corporate Seal. The Board of Directors shall determine whether or not the Corporation will adopt a corporate seal. If a corporate seal is adopted, inscribed on the corporate seal shall be the name of the Corporation and the words "Corporate Seal," and when so directed by the Board of Directors, a duplicate of the seal may be kept and used by the Secretary of the Corporation. ARTICLE 3 SHAREHOLDERS 3.1 Regular Meetings. Regular meetings of the shareholders shall be held at the Corporation's registered office or at such other place within or without the State of Minnesota as is designated by the Board of Directors. Regular meetings may be held annually or on a less frequent periodic basis, as established by a resolution of the Board of Directors, or may be held on call by the Board of Directors from time to time as and when the Board determines. At each regular meeting, the shareholders shall elect qualified successors for directors who serve for an indefinite term or whose terms have expired or are due to expire within six (6) months after the date of the meeting, and may transact such other business which properly comes before them. Notwithstanding the foregoing, if a regular meeting of the shareholders has not been held for a 2 period of fifteen (15) months, a shareholder or group of shareholders holding three percent (3%) or more of the issued and outstanding voting shares of the Corporation may demand that a regular meeting of the shareholders be held by giving written notice to the Chief Executive Officer or Treasurer of the Corporation. Within thirty (30) days after receipt of the notice, the Board shall cause a regular meeting of the shareholders to be called and held within ninety (90) days after receipt of the notice. Any regular meeting held pursuant to such a demand by a shareholder or shareholders shall be held within the county where the principal executive office of the Corporation is located. 3.2 Special Meeting. Special meetings of the shareholders may be called by the Chief Executive Officer, by a Vice-President in the absence of the Chief Executive Officer, by the Treasurer, or by the Board of Directors or any two or more members thereof. Special meetings may also be called by one or more shareholders holding ten percent (10%) or more of the issued and outstanding voting shares of the Corporation by delivering to the Chief Executive Officer or Treasurer a written demand for a special meeting, which demand shall state the purposes of such meeting. Within thirty (30) days after receipt of the written demand, the Board of Directors shall call a special meeting of the shareholders to be held within ninety (90) days after receipt of the written demand. Any special meeting held pursuant to such written demand shall be held within the county where the principal executive office of the Corporation is located. 3.3 Quorum. Business may be transacted at any duly held meeting of the shareholders at which a quorum is present. The holders of a majority of the voting power of the shares entitled to vote at a meeting are a quorum. The shareholders present at the meeting may continue to transact business until adjournment, even though a number of shareholders withdraw leaving less than a quorum. If a quorum is not present at any meeting, those shareholders present have the power to adjourn the meeting from time to time until the requisite number of voting shares are present. The date, time and place of the reconvened meeting shall be announced at the time of adjournment and notice of the reconvened meeting shall be given to all shareholders who were not present at the time of adjournment. Any business which might have been transacted at the meeting which was adjourned may be transacted at the reconvened meeting. 3.4 Voting. At each shareholders' meeting, every shareholder having the right to vote is entitled to vote in person or by proxy. Shareholders have one (1) vote for each share having voting power standing in their name on the books of the Corporation, unless otherwise provided in the Articles of Incorporation, or these By-Laws, or in the terms of the shares. All elections and questions shall be decided by a majority vote of the number of shares entitled to vote and represented at any meeting at which there is a quorum, except as otherwise required by statute, the Articles of Incorporation, these By-Laws, or by agreement among the shareholders. 3.5 Notice of Meeting. Notice of regular or special meetings of the shareholders shall be given by an officer or agent of the Corporation to each shareholder shown on the books of the Corporation to be the holder of record of shares entitled to vote at the meeting. If the notice is to be mailed, then the notice must be mailed to each shareholder at the shareholder's address as -2- 3 shown on the books of the Corporation at least five (5) calendar days prior to the meeting. If the notice is not mailed, then the notice must be given at least forty-eight (48) hours prior to the meeting. The notice must contain the date, time and place of the meeting, and in the case of a special meeting, must also contain a statement of the purpose of the meeting. In no event shall notice be given more than sixty (60) days prior to the meeting. If a plan of merger, exchange, sale or other disposition of all or substantially all of the assets of the Corporation is to be considered at a meeting of shareholders, notice of such meeting shall be given to every shareholder, whether or not entitled to vote, not less than fourteen (14) days prior to the date of such meeting. 3.6 Proxies. At all meetings of shareholders, a shareholder may vote by proxy executed in writing by the shareholder or by his duly authorized attorney-in-fact. Such proxies must be filed with an officer of the Corporation before or at the time of the meeting. No proxy shall be valid after eleven (11) months from the date of its execution, unless otherwise provided in the proxy. 3.7 Closing Transfer Books. The Board of Directors may close the stock transfer books for a period of time which does not exceed sixty (60) days preceding any of the following: the date of any meeting of shareholders; the payment of dividends; the allotment of rights; or the change, conversion, or exchange of shares. 3.8 Record Date. In lieu of closing the stock transfer books, the Board of Directors may fix in advance a date, not exceeding sixty (60) days preceding the date of any of the events described in Section 3.7, as a record date for the determination of which shareholders are entitled (i) to notice of and to vote at any meeting and any meeting subsequent to adjournment, (ii) to receive any dividend or allotment of rights, or (iii) to exercise the rights in respect to any change, conversion, or exchange of shares. If a record date is fixed by the Board of Directors, only those shareholders of record on the record date shall be entitled to receive notice of and to vote at the meeting and any meeting subsequent to adjournment or to exercise such rights, as the case may be, notwithstanding any transfer of any shares on the books of the Corporation after the record date so fixed. If the share transfer books are not closed and no record date is fixed for determination of the shareholders of record, then the date on which notice of the meeting is mailed or the date of adoption of a resolution of the Board of Directors declaring a dividend, allotment of rights, change, conversion or exchange of shares, as the case may be, shall be the record date for such determination. 3.9 Presiding Officer. The Chief Executive Officer of the Corporation shall preside over all meetings of the shareholders. In the absence of the Chief Executive Officer, the shareholders may choose any person present to act as presiding officer. 3.10 Written Action by Shareholders. Any action which may be taken at a meeting of the shareholders may be taken without a meeting and notice if a consent in writing, setting forth -3- 4 the action so taken, is signed by all of the shareholders entitled to notice of a meeting for such purpose. ARTICLE 4 DIRECTORS 4.1 General Powers. The property, affairs and business of the Corporation shall be managed by the Board of Directors which shall initially consist of four (4) directors. In addition to the powers and authorities by these By-Laws expressly conferred upon it, the Board may exercise all such powers of the Corporation and do all such lawful acts and things as are not by law, the Articles of Incorporation or these By-Laws directed or required to be exercised or done by the shareholders. 4.2 Number. The number of directors may be either increased or decreased by resolution of the shareholders at their regular meetings or at a special meeting called for that purpose. The number of directors may be increased by resolution adopted by the affirmative vote of a majority of the Board of Directors. Any newly created directorships established by the Board of Directors shall be filled by a majority vote of the directors serving at the time of increase. 4.3 Qualifications and Term of Office. Directors need not be shareholders or residents of the State of Minnesota. The Board of Directors shall be elected by the shareholders at their regular meeting and at any special shareholders' meeting called for that purpose. A director shall hold office until the annual meeting for the year in which his or her term expires and until the director's successor is elected and qualifies, or until the earlier death, resignation, removal, or disqualification of the director. 4.4 Quorum. A majority of the Board of Directors constitutes a quorum for the transaction of business; provided, however, that if any vacancies exist by reason of death, resignation, or otherwise, a majority of the remaining directors constitutes a quorum. If less than a quorum is present at any meeting, a majority of the directors present may adjourn the meeting from time to time without further notice. 4.5 Action of Directors. The acts of a majority of the directors present at a meeting at which a quorum is present are the acts of the Board of Directors. 4.6 Meetings. Meetings of the Board of Directors may be held from time to time at any place, within or without the State of Minnesota, that the Board of Directors may select. If the Board of Directors fails to select a place for a meeting, the meeting shall be held at the principal executive office of the Corporation. The Chief Executive Officer or any director may call a meeting of the Board of Directors by giving notice to all directors of the date, time and place of the meeting. If the notice is to be mailed, then the notice must be mailed to each director -4- 5 at least five (5) calendar days prior to the meeting. If the notice is not to be mailed, then the notice must be given at least forty-eight (48) hours prior to the meeting. If the date, time and place of the meeting of the Board of Directors has been announced at a previous meeting of the Board of Directors, no additional notice of such meeting is required, except that notice shall be given to all directors who were not present at the previous meeting. Notice of the meeting of the Board of Directors need not state the purpose of the meeting. A director may orally or in writing waive notice of the meeting. Attendance by a director at a meeting of the Board of Directors also constitutes a waiver of notice of such meeting, unless the director objects at the beginning of the meeting to the transaction of business because the meeting allegedly is not lawfully called or convened and such director does not participate thereafter in the meeting. 4.7 Meeting by Electronic Communications. A conference among directors by any means of communication through which the directors may simultaneously hear each other during the conference constitutes meeting of the Board of Directors if the number of directors participating in the conference would be sufficient to constitute a quorum at a meeting, and if the same notice is given of the conference as would be required for a Board of Directors meeting under these By-Laws. In any Board of Directors meeting, a director may participate by any means of communication through which the director, other directors so participating, and all directors physically present at the meeting may simultaneously hear each other during the meeting. 4.8 Compensation. Directors may receive such compensation as may be determined from time to time by resolution of the Board of Directors. 4.9 Committee. By the affirmative vote of a majority of the directors, the Board of Directors may establish a committee or committees having the authority of the Board of Directors in the management of the business of the Corporation to the extent provided in the resolution adopted by the Board of Directors. A committee shall consist of one or more persons, who need not be directors, that have been appointed by affirmative vote of a majority of the directors present. A majority of the members of the committee present at any meeting of the committee is a quorum for the transaction of business, unless a larger or smaller proportion or number is provided in the resolution approved by the Board of Directors. Minutes of any meetings of committees created by the Board of Directors shall be available upon request to members of the committee and to any director. 4.10 Action by Absent Director. A director may give advance written consent or opposition to a proposal to be acted upon at a Board of Directors meeting by giving a written statement to the Chief Executive Officer, Treasurer, or any director which sets forth the proposal to be voted on and contains a statement of the director's voting preference with regard to the proposal. An advance written statement does not constitute presence of the director for purposes of determining a quorum, but the advance written statement shall be counted in the vote on the subject proposal provided that the proposal acted on at the meeting is substantially the same or has substantially the same effect as the proposal set forth in the advance written statement. The -5- 6 advance written statement by a director on a proposal shall be included in the records of the Board of Directors' action on the proposal. 4.11 Removal of Directors by Board of Directors. Any director who has been elected by the Board of Directors to fill a vacancy on the Board of Directors, or to fill a directorship created by action of the Board of Directors, and who has not subsequently been reelected by the shareholders, may be removed by a majority vote of all directors constituting the Board, exclusive of the director whose removal is proposed. 4.12 Vacancies. Any vacancy on the Board of Directors may be filled by vote of the remaining directors, even though less than a quorum. 4.13 Written Action by Less than All of the Directors. Any action which may be taken at a meeting of the Board of Directors may be taken without a meeting and notice thereof if a consent in writing setting forth the action taken is signed by the number of directors required to take the same action at a duly held meeting of the Board of Directors at which all of the directors are present. If a written action is signed by less than all the directors, any director not signing the action will be notified as soon as reasonably possible of the content of the action and the effective date of the action. Failure to provide the notice does not invalidate the written action. A director who does not sign or consent to the written action has no liability for the action or actions so taken. 4.14 Dissent from Action. A director of the Corporation who is present at a meeting of the Board of Directors at which any action is taken shall be presumed to have assented to the action taken unless the director objects at the beginning of the meeting to the transaction of business because the meeting is not lawfully called or convened and does not participate thereafter, or unless the director votes against the action at the meeting, or is prohibited from voting on the action. ARTICLE 5 OFFICERS 5.1 Election of Officers. The Board of Directors shall from time to time, elect a Chief Executive Officer, who may also be designated as President, and a Chief Financial Officer, who may also be designated as Treasurer. The Board of Directors may elect, but shall not be required to elect, a Secretary, one or more Vice Presidents, and a Chairman of the Board. In addition, the Board of Directors may elect such other officers and agents as it may deem necessary. The officers shall exercise such powers and perform such duties as are prescribed by applicable statutes, the Articles of Incorporation, the By-Laws, or as may be determined from time to time by the Board of Directors. Any number of offices may be held by the same person. -6- 7 5.2 Term of Office. The officers shall hold office until their successors are elected and qualify; provided, however, that any officer may be removed with or without cause by the affirmative vote of a majority of the directors present at a Board of Directors meeting at which a quorum is present. 5.3 Chief Executive Officer. The Chief Executive Officer shall: (a) Have general active management of the business of the Corporation; (b) When present, preside at all meetings of the shareholders; (c) When present, and if there is not a Chairman of the Board, preside at all meetings of the Board of Directors; (d) See that all orders and resolutions of the Board of Directors are carried into effect; (e) Sign and deliver in the name of the Corporation any deeds, mortgages, bonds, contracts or other instruments pertaining to the business of the Corporation, except in cases in which the authority to sign and deliver is required by law to be exercised by another person or is expressly delegated by the Articles of Incorporation or By-Laws or by the Board of Directors to some other officer or agent of the Corporation; (f) Maintain records of and, whenever necessary, certify all proceedings of the Board of Directors and the shareholders; and (g) Perform all other duties prescribed by the Board of Directors. All other officers shall be subject to the direction and authority of the Chief Executive Officer. 5.4 Chief Financial Officer. The Chief Financial Officer or Treasurer shall: (a) Keep accurate financial records for the Corporation; (b) Deposit all money, drafts and checks in the name of and to the credit of the Corporation in the banks and depositories designated by the Board of Directors; (c) Endorse for deposit all notes, checks and drafts received by the Corporation as ordered by the Board of Directors, making proper vouchers therefor; (d) Disburse corporate funds and issue checks and drafts in the name of the Corporation, as ordered by the Board of Directors; -7- 8 (e) Render to the Chief Executive Officer and the Board of Directors, whenever requested, an account of all transactions by the Chief Financial Officer and of the financial condition of the Corporation; and (f) Perform all other duties prescribed by the Board of Directors or by the Chief Executive Officer. 5.5 Vice President. Each Vice President, if any, shall have such powers and perform such duties as may be specified in these By-Laws or prescribed by the Board of Directors. If the Chief Executive Officer is absent or disabled, the Vice President shall succeed to the President's powers and duties. If there are two or more Vice Presidents, the order of succession shall be determined by seniority of election or as otherwise prescribed by the Board of Directors. 5.6 Secretary. The Secretary, if any, shall attend all meetings of the shareholders and the Board of Directors. The Secretary shall act as clerk and shall record all the proceedings of the meetings in the minute book of the Corporation and shall give proper notice of meetings of shareholders and the Board of Directors. The Secretary shall keep the seal of the Corporation, if any, and shall affix the seal to any instrument requiring it and shall attest the seal, and shall perform such other duties as may be prescribed from time to time by the Board of Directors. 5.7 Chairman of the Board. The Chairman of the Board, if any, shall preside at all meetings of the Board of Directors and shall perform such other duties as may from time to time be assigned by the Board of Directors. 5.8 Assistant Officers. In the event of absence or disability of any Vice President, Secretary or the Chief Financial Officer, the assistant to such officer, if any, shall succeed to the powers and duties of the absent officer until the principal officer resumes his duties or a replacement is elected by the Board of Directors. If there are two or more assistants, the order of succession shall be determined through seniority by the order in which elected or as otherwise prescribed by the Board of Directors. The assistant officers shall exercise such other powers and duties as may be delegated to them from time to time by the Board of Directors or the principal officer under whom they serve, but at all times shall remain subordinate to the principal officers they are designated to assist. ARTICLE 6 INDEMNIFICATION The Corporation shall indemnify its officers, directors, employees and agents to the full extent permitted by the laws of the State of Minnesota, as now in effect, or as the same may be hereafter modified. -8- 9 ARTICLE 7 SHARES AND THEIR TRANSFER 7.1 Certificates of Shares. Unless the Board of Directors has provided that the Corporation's shares are to be uncertified, every owner of shares of the Corporation shall be entitled to a certificate, to be in such form as the Board of Directors prescribes, certifying the number of shares owned by such shareholder. The certificates for shares shall be numbered in the order in which they are issued and shall be signed in the name of the Corporation by the Chief Executive Officer or a Vice President and by the Secretary or Assistant Secretary, or the Chief Financial Officer, or any other officer of the Corporation authorized by the Board of Directors and shall have the corporate seal, if any, affixed thereto. A record shall be kept of the name of the person owning the shares represented by each certificate, the respective issue dates thereof, and in the case of cancellation, the respective dates of cancellation. Except as provided in Section 7.5 of this Article 7, every certificate surrendered to the Corporation for exchange or transfer shall be cancelled, and no other certificate shall be issued in exchange for any existing certificate until such existing certificate is cancelled. 7.2 Uncertificated Shares. The Board of Directors by a majority vote of directors present at a duly called meeting may provide that any or all shares of classes or series of shares are to be uncertificated shares. In that case, any shareholder who is issued uncertificated shares shall be provided with the information legally required to be disclosed in a certificate. 7.3 Issuance of Shares. The Board of Directors is authorized to issue shares of the capital stock of the Corporation up to the number of shares authorized by the Articles of Incorporation. Shares may be issued for any consideration (including, without limitation, money or other tangible or intangible property received by the Corporation or to be received by the Corporation under a written agreement, or services rendered to the Corporation or to be rendered to the Corporation under a written agreement) which is authorized by a resolution approved by the affirmative vote of a majority of the directors present, valuing all nonmonetary consideration and establishing a price in money or other consideration, or a minimum price, or a general formula or method by which the price will be determined. Upon authorization by resolution approved by the affirmative vote of a majority of the directors present, the Corporation may, without any new or additional consideration, issue shares of its authorized and unissued capital stock in exchange for or in conversion of its outstanding shares, or issue its own shares pro rata to its shareholders or the shareholders of one or more classes or series, to effectuate share dividends or splits, including reverse share splits. No shares of a class or series shall be issued to the holder of the shares of another class or series, unless issuance is either expressly provided for in the Articles of Incorporation or is approved at a meeting by the affirmative vote of the holders of a majority of the voting power of all shares of the same class or series as the shares to be issued. -9- 10 7.4 Transfer of Shares. Transfer of shares on the books of the Corporation may be authorized only by the shareholder named in the certificates or the shareholder's representative or duly authorized attorney-in-fact and only upon surrender for cancellation of the certificate for such shares. The shareholder in whose name shares stand on the books of the Corporation shall be considered the owner thereof for all purposes regarding the Corporation. 7.5 Lost Certificates. Any shareholder claiming a certificate for shares has been lost or destroyed shall make an affidavit or affirmation of that fact in such form as the Board of Directors may require and shall, if the directors so require, give the Corporation a bond of indemnity in form and with one or more sureties satisfactory to the Board of Directors and in an amount determined by the Board of Directors, to indemnify the Corporation against any claim that may be made against it on account of the alleged loss or destruction of the certificate. A new certificate may then be issued in the same tenor for the same number of shares as the one alleged to have been lost or destroyed. 7.6 Transfer Agent and Registrar. The Board of Directors may appoint one or more transfer agents or transfer clerks and one or more registrars and may require all certificates for shares to bear the signature or signatures of any of them. 7.7 Facsimile Signature. When any certificate is manually signed by a transfer agent, a transfer clerk, or a registrar appointed by the Board of Directors to perform such duties, a facsimile or engraved signature of the officers and a facsimile corporate seal, if any, may be inscribed on the certificate in lieu of the actual signatures and seal. ARTICLE 8 FINANCIAL AND PROPERTY MANAGEMENT 8.1 Checks. All checks, drafts, other orders for the payment of money, notes or other evidences of indebtedness issued in the name of the Corporation shall be signed by the Chief Executive Officer or Treasurer, or any other officer or officers, agent or agents of the Corporation, as may from time to time be determined by resolution of the Board of Directors. 8.2 Deposits. All funds of the Corporation not otherwise employed shall be deposited from time to time to the credit of the Corporation in such banks, trust companies, or other depositories as the Board of Directors may select. 8.3 Voting Securities Held by Corporation. The Chief Executive Officer, or other officer or agent designated by the Board of Directors, shall have full power and authority on behalf of the Corporation to attend, act at, and vote at any meeting of security or interest holders of other corporations or entities in which the Corporation may hold securities or interests. At the meeting, the Chief Executive Officer or other designated agent shall possess and exercise any and -10- 11 all rights and powers incident to the ownership of the securities or interest which the Corporation holds. ARTICLE 9 AMENDMENTS The Board of Directors of the Corporation is expressly authorized to make By-Laws of the Corporation and from time to time to adopt, amend or repeal By-Laws so made to the extent and in the manner prescribed in the Minnesota Statutes. The Board of Directors shall not adopt, amend, or repeal a By-Law fixing a quorum for meetings of shareholders, prescribing procedures for removing directors or filling vacancies in the Board of Directors, or fixing the number of directors or their classifications, qualifications, or terms of office, but may adopt or amend a By-Law to increase the number of directors. The authority in the Board of Directors is subject to the power of the voting shareholders to adopt, change or repeal the By-Laws by a vote of shareholders holding a majority of the shares entitled to vote and present or represented at any regular meeting or special meeting called for that purpose. Date of Adoption: August 1, 1997 /s/ Stephen D. King ------------------------------- Stephen D. King, Secretary -11- EX-4 5 WARRANT AGREEMENT 1 EXHIBIT 4 WARRANT AGREEMENT WARRANT AGREEMENT dated as of _________, 1997 by and between Hotel Discovery, Inc., a Minnesota corporation (the "Company"), and Norwest Bank Minnesota, National Association, as Warrant Agent (the "Warrant Agent"). A. The Company proposes to issue up to 2,200,000 Redeemable Class A Warrants (the "Warrants") evidencing the right to purchase an aggregate of up to 2,200,000 authorized but previously unissued shares of Common Stock, $.01 par value per share, of the Company (the "Common Stock"). The Warrants would be issued in connection with the issuance by the Company of up to 2,200,000 Units, each Unit consisting of one share of Common Stock and one Warrant, in connection with the Company's Registration Statement on Form SB-2. B. The Company desires the Warrant Agent to act on behalf of the Company, and the Warrant Agent desires so to act, in connection with the issuance, registration, transfer, exchange and exercise of the Warrants. NOW THEREFORE, it is agreed as follows: ARTICLE I. APPOINTMENT OF WARRANT AGENT; ISSUANCE, FORM AND EXECUTION OF WARRANT CERTIFICATES Section 1.1. Appointment of Warrant Agent. The Company hereby appoints the Warrant Agent to act as agent for the Company, and the Warrant Agent hereby accepts the agency established herein and agrees to perform its agency duties in accordance with the terms and conditions of this Warrant Agreement. Section 1.2. Warrant Certificates. The Company shall execute and deliver to the Warrant Agent certificates which the Company has authorized to represent the Warrants ("Warrant Certificates"). The Warrant Certificates shall be substantially as set forth in Exhibit A hereto and may have such legends, summaries or endorsements printed, lithographed or engraved thereon as the Company may deem appropriate and as are not inconsistent with the provisions of this Warrant Agreement, or as may be required to comply with any law or with any rule or regulation relating to listing of the Warrants on the Nasdaq stock market, including the SmallCap Market System, or on any stock exchange or to conform to usage. The Warrant Certificates shall be dated with the date of their issuance. Section 1.3. Execution of Warrant Certificates. The Warrant Certificates shall be executed on behalf of the Company by a duly authorized officer of the Company, either manually or by facsimile signature printed thereon. The Warrant Certificates shall be manually countersigned by the Warrant Agent and shall not be valid for any purpose unless so countersigned. Any Warrant Certificate may be signed on behalf of the Company by the person who at the actual date of the signing of such Warrant Certificate shall have been the proper officer 2 of the Company, although at the date of issuance of such Warrant Certificate any such person has ceased to be such officer of the Company. ARTICLE II. EXERCISE OF WARRANTS Section 2.1. Exercise. Any or all of the Warrants represented by each Warrant Certificate may be exercised by the holder thereof on or before 5:00 p.m., Minneapolis time, on _________, 2001, unless extended by the Company, by surrender of the Warrant Certificate with the Purchase Form, which is printed on the reverse thereof (or a reasonable facsimile thereof) duly executed by such holder, to the Warrant Agent at its principal office in Minneapolis, Minnesota, accompanied by payment, in cash or by certified or official bank check payable to the order of the Company, in an amount equal to the product of the number of shares of Common Stock issuable upon exercise of the Warrant represented by such Warrant Certificate, as adjusted pursuant to the provisions of Article III hereof, multiplied by the exercise price of $6.50, as adjusted pursuant to the provisions of Article III hereof (such price as so adjusted from time to time being herein called the "Exercise Price"), and such holder shall be entitled to receive such number of fully paid and nonassessable shares of Common Stock, as so adjusted, at the time of such exercise. Section 2.2. Time of Exercise. Each exercise of Warrants shall be deemed to have been effective immediately prior to the close of business on the business day on which the Warrant Certificate relating to such Warrants shall have been surrendered to the Warrant Agent as provided in Section 2.1, and at such time the person or persons in whose name or names any certificate or certificates for shares of Common Stock shall be issuable upon such exercise as provided in Section 2.3, shall be deemed to have become the holder or holders of record thereof. Section 2.3. Issuance of Shares of Common Stock; No Fractional Shares. As soon as practicable after the exercise of any Warrant, and in any event within ten (10) days after receipt by the Warrant Agent of the notice of exercise under Section 2.1, the Company at its expense (including the payment by it of any applicable issue taxes) will cause to be issued in the name of and delivered to the holder thereof or as such holder (upon payment by such holder of any applicable transfer taxes) may direct, (a) a certificate or certificates for the number of fully paid and nonassessable shares of Common Stock to which such holder shall be entitled upon such exercise plus, in lieu of any fractional share to which such holder would otherwise be entitled, an amount in cash equal to such fraction multiplied by the then current value of a share of Common Stock, such current value to be determined as follows: (i) if the Common Stock shall be listed or admitted to unlisted trading privileges on any single national securities exchange, then such current value shall be computed on the basis of the last reported sale price of the Common Stock on such exchange on the last business day prior to the date 2 3 of the exercise of such Warrant upon which a sale shall have been effected; or (ii) if the Common Stock shall not be so listed or admitted to unlisted trading privileges and bid and asked prices therefor in the over-the-counter market shall be reported by Nasdaq, including the SmallCap Market System, then such current value shall be the last reported sale on the last business day prior to the date of the exercise of such Warrant, or, in the event the last reported sale is unavailable, the average of the closing bid and asked prices on the last business day prior to the date of the exercise of such Warrant as so reported; or (iii) if the Common Stock shall be listed or admitted to unlisted trading privileges on more than one national securities exchange or one or more national securities exchanges and in the over-the-counter market, then such current value shall, if different as a result of calculation under the applicable method(s) described above in this Section, be deemed to be the higher number calculated in connection therewith; or (iv) if the Common Stock shall not be so listed or admitted to unlisted trading privileges and such bid and asked prices shall not be so reported, then such current value shall be computed on the basis of the book value of Common Stock as of the close of business on the last day of the month immediately preceding the date upon which such Warrant was exercised, as determined by the Company, and (b) in case such exercise includes only part of the Warrants represented by any Warrant Certificate, a new Warrant Certificate or Warrant Certificates of like tenor, calling in the aggregate on the face or faces thereof for the number of shares of Common Stock equal (without giving effect to any adjustment therein) to the number of such shares called for on the face of such Warrant Certificate minus the number of such shares designated by the holder for such exercise as provided in Section 2.1. Warrants, represented by a properly assigned Warrant Certificate, may be exercised by a new holder without first having a new Warrant Certificate issued. Section 2.4. Extension of Exercise Period; Change of Exercise Price. The Company may, upon notice given to the Warrant Agent, and without the consent of the holders of the Warrant Certificates, (i) reduce the Exercise Price during all or any portion of the originally stated exercise period, or (ii) extend the period over which the Warrants are exercisable beyond ________, 2001 and increase the Exercise Price for any period the Warrant exercise period is extended. In the case of the extension of the exercise period or a change in the Exercise Price, the Company must provide the Warrant Agent and the Warrantholders of record notice of such extension of the exercise period, specifying, as the case may be, the time to which such exercise period is 3 4 extended, or specifying the new Exercise Price and the periods for which such new Exercise Price is in effect, a reasonable time prior to the date such extension or new Exercise Price is to take effect, such reasonable time to be commercially reasonable and consistent with applicable securities laws and regulations. ARTICLE III. ANTIDILUTION PROVISIONS Section 3.1. Adjustment of Exercise Price. (a) The Exercise Price shall be subject to the following adjustments. In the event that: (i) any dividends on any class of stock of the Company payable in Common Stock or securities convertible into Common Stock shall be paid by the Company; (ii) the Company shall subdivide its then outstanding shares of Common Stock into a greater number of shares; or (iii) the Company shall combine outstanding shares of Common Stock, by reclassification or otherwise; then, in any such event, the Exercise Price in effect immediately prior to such event shall (until adjusted again pursuant hereto) be adjusted immediately after such event to a price (calculated to the nearest full cent) determined by dividing (A) the number of shares of Common Stock outstanding immediately prior to such event, multiplied by the then existing Exercise Price, by (B) the total number of shares of Common Stock outstanding immediately after such event (including the maximum number of shares of Common Stock issuable in respect of any securities convertible into Common Stock), and the resulting quotient shall be the adjusted Exercise Price per share. (b) No adjustment of the Exercise Price shall be made if the amount of such adjustments shall be less than one cent per share, but in such case any adjustment that would otherwise be required to be made shall be carried forward and shall be made at the time and together with the next subsequent adjustment which, together with any adjustment or adjustments so carried forward, shall amount to not less than one cent per share. Section 3.2. Adjustment of Number of Shares Purchasable on Exercise of Warrants. Upon each adjustment of the Exercise Price pursuant to Section 3.1, the registered holder of each Warrant shall thereafter (until another such adjustment) be entitled to purchase at the adjusted Exercise Price the number of shares, calculated to the nearest full share, obtained by multiplying the number of shares specified in such Warrant (as adjusted as a result of all adjustments in the Exercise Price in effect prior to such adjustment) by the Exercise Price in effect prior to such adjustment and dividing the product so obtained by the adjusted Exercise Price. 4 5 Section 3.3. Notice as to Adjustment. Upon any adjustment of the Exercise Price and an increase or decrease in the number of shares of Common Stock purchasable upon the exercise of the Warrants, then, and in each such case, the Company shall within ten (10) days after the effective date of such adjustment give written notice thereof, by first class mail, postage prepaid, addressed to each registered Warrantholder at the address of such Warrantholder as shown on the books of the Company, which notice shall state the adjusted Exercise Price and the increased or decreased number of shares purchasable upon the exercise of the Warrants, setting forth in reasonable detail the method of calculation and the facts upon which such calculation is based. Section 3.4. Effect of Reorganization, Reclassification, Merger, Etc. If at any time while any Warrant is outstanding there should be any capital reorganization or reclassification of the capital stock of the Company (other than the issue of any shares of Common Stock in subdivision of outstanding shares of Common Stock by reclassification or otherwise and other than a combination of shares provided for in Section 3.1 hereof) or any consolidation or merger of the Company with another corporation or any sale, conveyance, lease or other transfer by the Company of all or substantially all of its assets to any other corporation, the holder of any Warrant shall, during the remainder of the period such Warrant is exercisable, be entitled to receive, upon payment of the Exercise Price, the number of shares of stock or other securities or property of the Company, or of the successor corporation resulting from such consolidation or merger, or of the corporation to which the assets of the Company has been sold, conveyed, leased or otherwise transferred, as the case may be, to which the Common Stock (and any other securities and property) of the Company, deliverable upon the exercise of such Warrant, would have been entitled upon such capital reorganization, reclassification of capital stock, consolidation, merger, sale, conveyance, lease or other transfer if such Warrant had been exercised immediately prior to such capital reorganization, reclassification of capital stock, consolidation, merger, sale, conveyance, lease or other transfer; and, in any such case, appropriate adjustment (as determined by the Board of Directors of the Company) shall be made in the application of the provisions set forth in this Warrant Agreement with respect to the rights and interests thereafter of the Warrantholders to the end that the provisions set forth in this Warrant Agreement (including the adjustment of the Exercise Price and the number of shares issuable upon the exercise of the Warrants) shall thereafter be applicable, as near as may be reasonably practicable, in relation to any shares or other property thereafter deliverable upon the exercise of the Warrants as if the Warrants had been exercised immediately prior to such capital reorganization, reclassification of capital stock, such consolidation, merger, sale, conveyance, lease or other transfer and the Warrantholders had carried out the terms of the exchange as provided for by such capital reorganization, reclassification, consolidation or merger. The Company shall not effect any such capital reorganization, consolidation, merger or transfer unless, upon or prior to the consummation thereof, the successor corporation or the corporation to which the property of the Company has been sold, conveyed, leased or otherwise transferred shall assume by written instrument the obligation to deliver to the holder of each Warrant such shares of stock, securities, cash or property as in accordance with the foregoing provisions such holder shall be entitled to purchase. 5 6 Section 3.5. Prior Notice as to Certain Events. In case at any time: (a) The Company shall pay any dividend upon its Common Stock payable in stock or make any distribution (other than cash dividends) to the holders of its Common Stock; or (b) The Company shall offer for subscription pro rata to the holders of its Common Stock any additional shares of stock of any class or any other rights; or (c) There shall be any capital reorganization or reclassification of the capital stock of the Company, or consolidation or merger of the Company with, or sale, conveyance, lease or other transfer of all or substantially all of its assets to, another corporation; or (d) There shall be a voluntary or involuntary dissolution, liquidation or winding up of the Company; then in any one or more of such cases, the Company shall give prior written notice, by first class mail, postage prepaid, addressed to each registered Warrantholder at the address of such Warrantholder as shown on the books of the Company, of the date on which (i) the books of the Company shall close or a record shall be taken for such stock dividend, distribution or subscription rights or (ii) such reorganization, reclassification, consolidation, merger, sale, dissolution, liquidation or winding up shall take place, as the case may be. Such notice shall also specify the date as of which the holders of the Common Stock of record shall participate in such dividend, distribution or subscription rights or shall be entitled to exchange their Common Stock for securities or other property deliverable upon such reorganization, reclassification, consolidation, merger, sale, dissolution, liquidation, or winding up, as the case may be. Such written notice shall be given at least twenty (20) days prior to the action in question and not less than twenty (20) days prior to the record date or the date on which the Company's transfer books are closed in respect thereto. Section 3.6. Certain Obligations of the Company. The Company will not, by amendment of its articles of incorporation or through any reorganization, transfer of assets, consolidation, merger, dissolution, issue or sale of securities or any other voluntary action, avoid or seek to avoid the observance or performance of any of the terms of this Warrant Agreement or the Warrant Certificate, but will at all times in good faith assist in the carrying out of all such terms. Without limiting the generality of the foregoing, the Company (a) will take all such action as may be necessary or appropriate in order that the Company may validly and legally issue fully paid and nonassessable shares of such stock upon the exercise of all Warrants from time to time outstanding, and (b) will not (i) transfer all or substantially all of its properties and assets to any other person or entity, or (ii) consolidate with or merge into any other entity where the Company is not the continuing or surviving entity, or (iii) permit any other entity to consolidate with or merge into the Company where the Company is the continuing or surviving entity but, in connection with such consolidation or merger, the Common Stock then issuable upon the exercise of the Warrants shall be changed into or exchanged for shares or other securities or property of any other entity unless, in any such case, the other entity acquiring such properties and assets, 6 7 continuing or surviving after such consolidation or merger or issuing or distributing such shares or other securities or property, as the case may be, shall expressly assume in writing and be bound by all the terms of this Warrant Agreement and the Warrant Certificates. Section 3.7. Reservation and Listing of Common Stock. The Company will at all times reserve and keep available, solely for issuance and delivery upon the exercise of the Warrants, all shares of Common Stock from time to time issuable upon such exercise. All such shares shall be authorized and, when issued upon such exercise, shall be validly issued, fully paid and nonassessable with no liability on the part of the holder thereof. The Company, at its expense, will list on each national securities exchange on which any Common Stock may at any time be listed, subject to official notice of issuance, and will maintain such listing of, the shares of Common Stock from time to time issuable upon the exercise of the Warrants. Section 3.8. Registration or Exemption for Common Stock. The Company will use its best efforts (a) at all times the Warrants are exercisable to maintain an effective registration statement under the Securities Act of 1933, as amended (the "Act"), covering Common Stock issuable upon exercise of the Warrants, (b) from time to time to amend or supplement the prospectus contained in such registration statement to the extent necessary in order to comply with applicable law, (c) to qualify for exemption from the registration requirements of the Act the Common Stock issuable upon exercise of the Warrants, and (d) to maintain exemptions or qualifications, in those jurisdictions in which the original registration statement relating to the Warrants was initially qualified, to permit the exercise of the Warrants and the issuance of the Common Stock pursuant to such exercise. The Warrant Agent shall have no responsibility for the maintenance of such exemptions or qualifications or for liabilities arising from the exercise or attempted exercise of Warrants in jurisdictions where exemptions or qualifications have not been maintained or are otherwise unavailable. ARTICLE IV. REDEMPTION OF WARRANTS Section 4.1. Redemption Price. The Warrants may be redeemed at the option of the Company, at any time after the date hereof following a period of 14 consecutive trading days where the per share average closing bid price of the Common Stock exceeds $7.00, on notice as set forth in Section 4.2, and at a redemption price equal to $.01 per Warrant. For purposes of this Section, the closing bid price of the Common Stock shall be determined by the closing bid price as reported by Nasdaq so long as the Common Stock is quoted on Nasdaq and, if the Common Stock is listed on a national securities exchange, shall be determined by the last reported sale price on the primary exchange on which the Common Stock is traded. Section 4.2. Notice of Redemption. In the case of any redemption of Warrants, the Company or, at its request, the Warrant Agent in the name of and at the expense of the Company shall give notice of such redemption to the holders of the Warrants to be redeemed as hereinafter provided in this Section 4.2. Notice of redemption to the holders of Warrants shall be given by mailing by first-class mail a notice of such redemption not less than 30 days prior to the date fixed 7 8 for redemption. Any notice which is given in the manner herein provided shall be conclusively presumed to have been duly given, whether or not the holder receives the notice. In any case, failure duly to give such notice, or any defect in such notice, to the holder of any Warrant Certificate shall not affect the validity of the proceedings for the redemption of Warrants represented by any other Warrant Certificate. Each such notice shall specify the date fixed for redemption, the place of redemption and the redemption price of $.01 at which each Warrant is to be redeemed, and shall state that payment of the redemption price of the Warrants will be made on surrender of the Warrants at such place of redemption, and that if not exercised by the close of business on the date fixed for redemption, the exercise rights of the Warrants identified for redemption shall expire unless extended by the Company. Such notice shall also state the current Exercise Price and the date on which the right to exercise the Warrants will expire unless extended by the Company. Section 4.3. Payment of Warrants on Redemption; Deposit of Redemption Price. If notice of redemption shall have been given as provided in Section 4.2, the redemption price of $.01 per Warrant shall, unless the Warrant is theretofore exercised pursuant to the terms hereof, become due and payable on the date and at the place stated in such notice. On and after such date of redemption, provided that cash sufficient for the redemption thereof shall then be deposited by the Company with the Warrant Agent for that purpose, the exercise rights of the Warrants identified for redemption shall expire. On presentation and surrender of Warrant Certificates at such place of payment in such notice specified, the Warrants identified for redemption shall be paid and redeemed at the redemption price of $.01 per Warrant. Prior to the date fixed for redemption, the Company shall deposit with the Warrant Agent an amount of money sufficient to pay the redemption price of all the Warrants identified for redemption. Any monies which shall have been deposited with the Warrant Agent for redemption of Warrants and which are not required for that purpose by reason of exercise of Warrants shall be repaid to the Company upon delivery to the Warrant Agent of evidence satisfactory to it of such exercise. ARTICLE V. CERTAIN OTHER PROVISIONS RELATING TO RIGHTS OF HOLDERS OF WARRANT CERTIFICATES Section 5.1. No Rights of Shareholders. The Warrant Certificates shall be issued in registered form only. No Warrant Certificate shall entitle the holder thereof to any of the rights of a holder of shares of Common Stock of the Company, including, without limitation, the right to vote, to receive dividends and other distributions, or to receive any notice of, or to attend, meetings of holders of Common Stock or any other proceedings of the Company. Section 5.2. Loss, Theft, Destruction or Mutilation of Warrant Certificates. Upon receipt by the Warrant Agent of evidence reasonably satisfactory to the Warrant Agent of the loss, theft, destruction or mutilation of any Warrant Certificate, and (a) in the case of any such loss, theft, or destruction, upon delivery to the Warrant Agent of an indemnity bond in form and amount, and issued by a bonding company, reasonably satisfactory to the Company, or (b) in the case of any such mutilation, upon surrender to and cancellation by the Warrant Agent of such Warrant 8 9 Certificate, the Company at its expense will execute and cause the Warrant Agent to countersign and deliver, in lieu thereof, a new Warrant Certificate of like tenor. Section 5.3. Transfer Agent; Cancellation of Warrant Certificates; Unexercised Warrants. Norwest Bank Minnesota, National Association (and any successor), as transfer agent (the "Transfer Agent"), is hereby irrevocably authorized and directed at all times to reserve such number of authorized and unissued shares of Common Stock as shall be sufficient to permit the exercise in full of all Warrants from time to time outstanding. The Company will keep a copy of this Agreement on file with the Transfer Agent. The Warrant Agent, and any successor thereto, is hereby irrevocably authorized to requisition from time to time from the Transfer Agent certificates for shares of Common Stock required for exercise of Warrants. The Company will supply the Transfer Agent with duly executed certificates for shares of Common Stock for such purpose and will make available any cash required in settlement of fractional share interests. All Warrant Certificates surrendered upon the exercise or redemption of Warrants shall be cancelled by the Warrant Agent and shall thereafter be delivered to the Company; such cancelled Warrant Certificates, with the Purchase Form on the reverse thereof duly filled in and signed, shall constitute conclusive evidence as between the parties hereto of the numbers of shares of Common Stock which shall have been issued upon exercises of Warrants. Promptly after the last day on which the Warrants are exercisable (set forth in Section 2.1 above), the Warrant Agent shall certify to the Company the aggregate number of Warrants then outstanding and unexercised. No shares of Common Stock shall be subject to reservation with respect to Warrants not exercised prior to the time and date identified in Section 2.1 above as the last time and date at which Warrants may be exercised. ARTICLE VI. TRANSFER AND EXCHANGE OF WARRANT CERTIFICATES Section 6.1. Warrant Register; Transfer or Exchange of Warrant Certificates. The Warrant Agent shall cause to be kept at the principal office of the Warrant Agent a register (the "Warrant Register") in which, subject to such reasonable regulations as the Company may prescribe, provisions shall be made for the registration of transfers and exchanges of Warrant Certificates. Upon surrender for transfer or exchange of any Warrant Certificates, properly endorsed, to the Warrant Agent, the Warrant Agent at the Company's expense will issue and deliver to or upon the order of the holder thereof a new Warrant Certificate or Warrant Certificates of like tenor, in the name of such holder or as such holder (upon payment by such holder of any applicable transfer taxes) may direct, calling in the aggregate on the face or faces thereof for the number of shares of Common Stock called for on the face of the Warrant Certificate so surrendered. Any Warrant Certificate surrendered for transfer or exchange shall be cancelled by the Warrant Agent and shall thereafter be delivered to the Company. Section 6.2. Identity of Warrantholders. Until a Warrant Certificate is transferred in the Warrant Register, the Company and the Warrant Agent may treat the person in whose name the Warrant Certificate is registered as the absolute owner thereof and of the Warrants represented thereby for all purposes, notwithstanding any notice to the contrary, except that, if and when any 9 10 Warrant Certificate is properly assigned in blank, the Company and the Warrant Agent may (but shall not be obligated to) treat the bearer thereof as the absolute owner of the Warrant Certificate and of the Warrants represented thereby for all purposes, notwithstanding any notice to the contrary. ARTICLE VII. CONCERNING THE WARRANT AGENT Section 7.1. Taxes. The Company will, from time to time, promptly pay to the Warrant Agent, or make provision satisfactory to the Warrant Agent for the payment of, all taxes and charges that may be imposed by the United States or any State upon the Company or the Warrant Agent upon the transfer or delivery of shares of Common Stock upon the exercise of Warrants, but the Company shall not be obligated to pay any tax imposed in connection with any transfer involved in the delivery of a certificate for shares of Common Stock in any name other than that of the registered holder of the Warrant Certificate surrendered in connection with the purchase thereof. Section 7.2. Replacement of Warrant Agent in Certain Circumstances. (a) The Warrant Agent may resign its duties and be discharged from all further duties and liabilities hereunder after giving thirty (30) days' notice in writing to the Company, except that such shorter notice may be given as the Company shall, in writing, accept as sufficient. The Company may discharge the Warrant Agent at any time with or without reason, effective upon thirty (30) days written notice to the Warrant Agent or such shorter period as the Warrant Agent shall, in writing, accept as sufficient. If the office of Warrant Agent becomes vacant by resignation, discharge, incapacity to act or otherwise, the Company shall appoint in writing a new Warrant Agent, the principal office of which shall be in Minnesota. If the Company shall fail to make such appointment within a period of thirty (30) days after it has been notified in writing of such resignation or incapacity by the resigning or incapacitated Warrant Agent or by the holder of a Warrant Certificate, then the holder of any Warrant Certificate may apply to any court of competent jurisdiction for the appointment of a new Warrant Agent. Any new Warrant Agent, whether appointed by the Company or by such a court, shall be a corporation organized and doing business under the laws of the United States or of the State of Minnesota, of good standing, and having its principal office in Minnesota, which is authorized under such laws to exercise corporate trust powers and is subject to supervision or examination by Federal or State authority. Any new Warrant Agent appointed hereunder shall execute, acknowledge and deliver to the Company an instrument accepting such appointment hereunder and thereupon such new Warrant Agent without any further act or deed shall become vested with all the rights, powers, duties and responsibilities of the Warrant Agent hereunder with like effect as if it had been named as the Warrant Agent; but if for any reason it becomes necessary or expedient to have the former Warrant Agent execute and deliver any further assurance, conveyance, act or deed, the same shall be done and shall be legally and validly executed and delivered by the former Warrant Agent. Not later than the effective date of any such 10 11 appointment the Company shall file notice thereof with the former Warrant Agent. The Company shall promptly give notice of any such appointment to the holders of the Warrant Certificates by mail to their addresses as shown in the Warrant Register. Failure to file or give such notice, or any defect therein, shall not affect the legality or validity of the appointment of the successor Warrant Agent. (b) Any company into which the Warrant Agent or any new Warrant Agent may be merged or converted or with which it may be consolidated or any company resulting from any merger, conversion or consolidation to which the Warrant Agent shall be a party shall be the successor Warrant Agent under this Warrant Agreement without any further act; provided that if such company would not be eligible for appointment as a successor Warrant Agent under the provisions of paragraph (a) of this Section 7.2 the Company shall forthwith appoint a new Warrant Agent in accordance with such provisions. Any such successor Warrant Agent may adopt the prior countersignature of any predecessor Warrant Agent and deliver Warrant Certificates countersigned and not delivered by such predecessor Warrant Agent or may countersign Warrant Certificates either in the name of any predecessor Warrant Agent or the name of the successor Warrant Agent. Section 7.3. Remuneration of Warrant Agent. The Company will pay the Warrant Agent reasonable remuneration for its services as Warrant Agent hereunder and will reimburse the Warrant Agent upon demand for all expenditures that the Warrant Agent may reasonably incur in the execution of its duties hereunder. Section 7.4. Further Assurances. The Company will perform, exercise, acknowledge and deliver or cause to be performed, executed, acknowledged and delivered all such further and other acts, instruments and assurances as may reasonably be required by the Warrant Agent for the carrying out or performing by the Warrant Agent of the provisions of this Warrant Agreement. Section 7.5. Limitations on Liabilities of the Warrant Agent. (a) The Warrant Agent may consult with legal counsel (who may be legal counsel for the Company), and the opinion of such counsel shall be full and complete authorization and protection of the Warrant Agent as to any action taken or omitted by it in good faith and in accordance with such opinion. (b) Whenever, in the performance of its duties under this Warrant Agreement, the Warrant Agent shall deem it necessary or desirable that any matter be proved or established, or that any instructions with respect to the performance of its duties hereunder be given, by the Company prior to taking or suffering any action hereunder, such matter (unless other evidence in respect thereof be herein specifically prescribed) may be deemed to be conclusively proved and established, or such instructions may be given, by a certificate or instrument signed by an officer of the Company and delivered to the Warrant Agent; and such certificate or instrument shall be full authorization to the Warrant Agent for any action taken or suffered in good faith by it under the provisions of this Warrant Agreement in 11 12 reliance upon such certificate or instrument; but in its discretion the Warrant Agent may in lieu thereof accept other evidence of such matter or may require such further or additional evidence as it may deem reasonable. (c) The Warrant Agent shall be liable hereunder only for its own negligence or willful misconduct. The Warrant Agent shall act hereunder solely as agent, and its duties shall be determined solely by the provisions hereof. The Company agrees to indemnify the Warrant Agent and save it harmless against any and all liabilities, including judgments, costs and counsel fees, for anything done or omitted by the Warrant Agent in the execution of this Warrant Agreement except as a result of the Warrant Agent's negligence or willful misconduct. (d) The Warrant Agent shall not be liable for or by reason of any of the statements of fact or recitals contained in this Warrant Agreement or in the Warrant Certificates (except its countersignature thereof) or be required to verify the same, but all such statements and recitals are and shall be deemed to have been made by the Company only. (e) The Warrant Agent shall not be under any responsibility in respect to the validity or execution of any Warrant Certificate (except its countersignature thereof); nor shall it be responsible for any breach by the Company of any covenant or condition contained in this Warrant Agreement or in any Warrant Certificate; nor shall it be responsible for the making of any adjustment in the Exercise Price, or number of shares issuable upon exercise of the Warrant Certificates or responsible for the manner, method or amount of any such adjustment or the facts that would require any such adjustment; nor shall it by any act hereunder be deemed to make any representation or warranty as to the authorization or reservation of any shares of Common Stock to be issued pursuant to this Warrant Agreement or any Warrant Certificate or as to whether any shares of Common Stock or other securities are or will be validly authorized and issued and fully paid and nonassessable. Section 7.6. Amendment and Modification. The Warrant Agent may, without the consent or concurrence of the holders of the Warrant Certificates, by supplemental agreement or otherwise, join with the Company in making any changes or corrections in this Warrant Agreement that they shall have been advised by counsel (a) are required to cure any ambiguity or to correct any defective or inconsistent provision or clerical omission or mistake or manifest error herein contained, (b) add to the obligations of the Company in this Warrant Agreement further obligations thereafter to be observed by it, or surrender any right or power reserved to or conferred upon the Company in this Warrant Agreement, or (c) do not or will not adversely affect, alter or change the rights, privileges or immunities of the holders of Warrant Certificates not provided for under this Warrant Agreement; provided, however, that any term of this Warrant Agreement or any Warrant Certificate may be changed, waived, discharged or terminated by an instrument in writing signed by each party against which enforcement of such change, waiver, discharge or termination is sought, or by which the same is to be performed or observed. 12 13 ARTICLE VIII. OTHER MATTERS Section 8.1. Successors and Assigns. All the covenants and provisions of this Warrant Agreement by or for the benefit of the Company or the Warrant Agent shall bind and inure to the benefit of their respective successors and assigns. Section 8.2. Notices. Any notice or demand authorized by this Warrant Agreement to be given or made by the Warrant Agent or by the holder of any Warrant Certificate to or on the Company shall be sufficiently given or made if sent by first class or registered mail, postage prepaid, addressed (until another address is filed in writing by the Company with the Warrant Agent) as follows: Hotel Discovery, Inc. 7701 France Avenue South, Suite 217 Edina, MN 55435 Any notice or demand authorized by this Warrant Agreement to be given or made by the holder of any Warrant Certificate or by the Company to or on the Warrant Agent shall be sufficiently given or made if sent by first class or registered mail, postage prepaid, addressed (until another address is filed in writing by the Warrant Agent with the Company) as follows: Norwest Bank Minnesota, National Association Shareholder Services 161 North Concord Exchange P.O. Box 738 South St. Paul, MN 55075-0738 Section 8.3. Governing Law. This Warrant Agreement and the Warrant Certificates are being delivered in the State of Minnesota and shall be construed and enforced in accordance with and governed by the laws of such State. Section 8.4. No Benefits Conferred. Nothing in this Warrant Agreement expressed and nothing that may be implied from any of the provisions hereof is intended, or shall be construed, to confer upon, or give to, any person or corporation other than the Company, the Warrant Agent, and the holders of the Warrant Certificates, any right, remedy or claim under or by reason of this Agreement or of any covenant, condition, stipulation, promise or agreement herein; and all covenants, conditions, stipulations, promises and agreements in this Warrant Agreement contained shall be for the sole and exclusive benefit of the Company, the Warrant Agent, their respective successors and the holders of the Warrant Certificates. Section 8.5. Headings. The descriptive headings used in this Warrant Agreement are inserted for convenience only and shall not control or affect the meaning or construction of any of the provisions hereof. 13 14 IN WITNESS WHEREOF, this Warrant Agreement has been duly executed by the parties hereto as of the day and year first above written. HOTEL DISCOVERY, INC. By ___________________________________ Its Chairman of the Board NORWEST BANK MINNESOTA, NATIONAL ASSOCIATION By ___________________________________ Its _______________________________ 14 15 EXHIBIT A No. _____________ Certificate for ______ Warrants THIS WARRANT CERTIFICATE MAY BE TRANSFERRED SEPARATELY FROM THE COMMON STOCK CERTIFICATE WITH WHICH IT IS INITIALLY ISSUED EXERCISABLE ON OR BEFORE, AND VOID AFTER, 5:00 P.M. MINNEAPOLIS TIME, ____________, 2001 HOTEL DISCOVERY, INC. WARRANTS TO PURCHASE COMMON STOCK OF HOTEL DISCOVERY, INC. INCORPORATED UNDER THE LAWS OF THE STATE OF MINNESOTA THIS CERTIFIES that CUSIP _________ or assigns, is the owner of the number of Warrants set forth above, each of which represents the right to purchase from Hotel Discovery, Inc., a Minnesota corporation (the "Company"), at any time on or before 5:00 Minneapolis time, ___________, 2001, upon compliance with and subject to the conditions set forth herein and in the Warrant Agreement hereinafter referred to, one share (subject to adjustments referred to below) of the Common Stock of the Company (such shares or other securities or property purchasable upon exercise of the Warrants being herein called the "Shares"), by surrendering this Warrant Certificate, with the Purchase Form on the reverse side duly executed, at the principal office of Norwest Bank Minnesota, National Association, or its successor, as warrant agent (the "Warrant Agent"), and by paying in full, in cash or by certified or official bank check payable to the order of the Company, the exercise price of $6.50 per share. Upon any exercise of less than all the Warrants evidenced by this Warrant Certificate, there shall be issued to the holder a new Warrant Certificate in respect of the Warrants as to which this Warrant Certificate was not exercised. Upon the surrender for transfer or exchange hereof, properly endorsed, to the Warrant Agent, the Warrant Agent at the Company's expense will issue and deliver to the order of the holder hereof, a new Warrant Certificate or Warrant Certificates of like tenor, in the name of such holder or as such holder (upon payment by such holder of any applicable transfer taxes) may direct, calling in the aggregate on the face or faces thereof for the number of shares of Common Stock called for on the face hereof. 16 The Warrant Certificates are issued only as registered Warrant Certificates. Until this Warrant Certificate is transferred in the Warrant Register, the Company and the Warrant Agent may treat the person in whose name this Warrant Certificate is registered as the absolute owner hereof and of the Warrants represented hereby for all purposes, notwithstanding any notice to the contrary. This Warrant Certificate is issued under the Warrant Agreement dated as of _________, 1997 between the Company and the Warrant Agent. The Warrant Agreement is hereby incorporated by reference into this Warrant Certificate and this Warrant Certificate is subject to the terms and provisions contained in said Warrant Agreement, to all of which terms and provisions the registered holder of this Warrant Certificate consents by acceptance hereof. Copies of said Warrant Agreement are on file at the principal office of the Warrant Agent in Minneapolis, Minnesota, and may be obtained by writing to the Warrant Agent. The number of Shares receivable upon the exercise of the Warrants represented by this Warrant Certificate and the exercise price per share are subject to adjustment upon the happening of certain events specified in the Warrant Agreement. No fractional Shares of the Company's Common Stock will be issued upon the exercise of Warrants. As to any final fraction of a share which a holder of Warrants exercised in the same transaction would otherwise be entitled to purchase on such exercise, the Company shall pay a cash adjustment in lieu of any fractional Share determined as provided in the Warrant Agreement. The Warrants may be redeemed at the option of the Company, at any time following a period of 14 consecutive trading days where the per share average closing bid price of the Common Stock exceeds $7.00, on notice as set forth in the Warrant Agreement, and at a redemption price equal to $.01 per Warrant. If notice of redemption shall have been given as provided in the Warrant Agreement and cash sufficient for the redemption be deposited by the Company for that purpose, the exercise rights of the Warrants identified for redemption shall expire at the close of business on such date of redemption unless extended by the Company. This Warrant Certificate shall not entitle the holder hereof to any of the rights of a holder of Common Stock of the Company, including, without limitation, the right to vote, to receive dividends and other distributions, to exercise any preemptive right, or to receive any notice of, or to attend meetings of holders of Common Stock or any other proceedings of the Company. This Warrant Certificate shall be void and the Warrants and any rights represented hereby shall cease unless exercised on or before 5:00 p.m. Minneapolis time on ___________, 2001, unless extended by the Company. 17 This Warrant Certificate shall not be valid for any purpose until it shall have been countersigned by the Warrant Agent. WITNESS the facsimile signatures of the Company's duly authorized officers. HOTEL DISCOVERY, INC. By ______________________________ Chairman of the Board By ______________________________ Secretary COUNTERSIGNED AND REGISTERED: as Warrant Agent NORWEST BANK MINNESOTA, NATIONAL ASSOCIATION By ______________________________ Authorized Officer 18 [REVERSE OF WARRANT CERTIFICATE] THE CORPORATION WILL FURNISH ANY SHAREHOLDER UPON REQUEST AND WITHOUT CHARGE, A COPY OF THE ARTICLES OF INCORPORATION AND A FULL STATEMENT OF THE DESIGNATIONS, PREFERENCES, LIMITATIONS, AND RELATIVE RIGHTS OF THE SHARES OF EACH CLASS OR SERIES AUTHORIZED TO BE ISSUED, SO FAR AS THEY HAVE BEEN DETERMINED, AND THE AUTHORITY OF THE BOARD TO DETERMINE THE RELATIVE RIGHTS AND PREFERENCES OF SUBSEQUENT CLASSES OR SERIES. TO: Hotel Discovery, Inc. c/o Norwest Bank Minnesota, National Association Warrant Agent PURCHASE FORM (To be Executed by the Registered Holder in Order to Exercise of Warrant Certificates) The undersigned hereby irrevocably elects to exercise ________________* of the Warrants represented by the Warrant Certificate and to purchase for cash the Shares issuable upon the exercise of said Warrants and requests that certificates for such Shares shall be issued in the name of PLEASE INSERT SOCIAL SECURITY OR OTHER IDENTIFYING NUMBER OF REGISTERED HOLDER OF CERTIFICATE ______________________________________________________________________________ (Print Name) ______________________________________________________________________________ (Address) ______________________________________________________________________________ Dated: __________________________ Signature: ___________________________ * Insert here the number of Warrants evidenced on the face of this Warrant Certificate (or, in the case of a partial exercise, the portion thereof being exercised), in either case without making any adjustment for additional Common Stock or any other securities or property or cash which, pursuant to the adjustment provisions referred to in this Warrant Certificate, may be deliverable upon exercise. 19 ASSIGNMENT FORM (To be Executed by the Registered Holder in Order to Transfer Warrant Certificates) PLEASE INSERT SOCIAL SECURITY OR OTHER IDENTIFYING NUMBER OF ASSIGNEE FOR VALUE RECEIVED, the undersigned hereby sells, assigns, and transfers ____________________________________ of the Warrants to purchase shares of Common Stock represented by this Warrant Certificate unto ______________________________________________________________________________ (Please print or typewrite name and address including postal zip code of assignee) ______________________________________________________________________________ ______________________________________________________________________________ and does hereby irrevocably constitute and appoint ____________________________________ Attorney to transfer this Warrant Certificate on the records of the Company with full power of substitution in the premises. Dated:________________________ Signature(s) _________________________ SIGNATURE(S) GUARANTEED: ______________________________ NOTICE The signature(s) to the Purchase Form or the Assignment Form must correspond to the name as written upon the face of this Warrant Certificate in every particular without alteration or enlargement or any change whatsoever. EX-5 6 OPINION-MASLON 1 EXHIBIT 5 August 22, 1997 Hotel Discovery, Inc. 7701 France Avenue South, Suite 217 Edina, Minnesota 55435 Re: Registration Statement on Form SB-2 Ladies and Gentlemen: We have acted on behalf of Hotel Discovery, Inc. (the "Company") in connection with a Registration Statement on Form SB-2 (the "Registration Statement") filed by the Company with the Securities and Exchange Commission relating to Units (the "Units"), each consisting of one share (the "Unit Shares") of Common Stock, $.01 par value (the "Common Stock") of the Company and one Class A Warrant (the "Warrants") to purchase one share of the Common Stock, and shares (the "Warrant Shares") of the Common Stock issuable upon exercise of the Warrants, all of which are to be issued by the Company. Upon examination of such corporate documents and records as we have deemed necessary or advisable for the purposes hereof and including and in reliance upon certain certificates by the Company, it is our opinion that: 1. The Company is a validly existing corporation in good standing under the laws of the State of Minnesota. 2. The Units, the Unit Shares, the Warrants and the Warrant Shares, when issued and sold as contemplated in the Registration Statement, will be validly issued, fully paid and non-assessable. We hereby consent to the filing of this opinion as an exhibit to the Registration Statement. Very truly yours, /s/ Maslon Edelman Borman & Brand, LLP EX-10.1 7 INDENTURE OF LEASE 1 EXHIBIT 10.1 INDENTURE OF LEASE THIS INDENTURE OF LEASE, made on the 9th day of November, 1994 between PHILLIP E. STEPHENS, TRUSTEE (hereinafter called "Landlord"), with an address for receipt of payments at: P.O. Box 930525, Atlanta, Georgia 31193, and an address for receipt of notices at 5775 Peachtree Dunwoody Road, Suite 200-D, Atlanta, Georgia 30342, Attn: Counsel, and KENWOOD RESTAURANT, INC., an Ohio Corporation trading as Hotel Mexico (hereinafter called "Tenant") with a notice address of: 3655 Michigan Avenue, Cincinnati, Ohio 45208 Attn: President and an address for receipt of invoices of: 3655 Michigan Avenue, Cincinnati, Ohio 45208 Attn: Accounts Payable. WITNESSETH: I. Leased Premises. Landlord hereby leases to Tenant and Tenant hereby rents from Landlord the store premises (hereinafter referred to as the "Premises" or designated on the plan attached as Exhibit "A" hereto as Store Number 14 (Main level) erected as part of a shopping center presently known as Sycamore Plaza at Kenwood (hereinafter referred to as the "Shopping Center" and presently comprising the area shown on Exhibit "A") located at 7800 Montgomery Road, Cincinnati, Ohio 45236, being measured and described by the following dimensions which are measured from the outside building lines of each wall of the Premises or, in the case of those walls separating the Premises from other stores in the Shopping Center, from the center lines of such walls: Frontage: irregular feet --------- Depth: irregular feet --------- Total Area: 7,700 square feet --------- together with the right to the non-exclusive use in common with others entitled to use same of all such automobile parking areas, driveways, malls, courts, corridors, footpaths, sidewalks, loading facilities and other facilities as may be designated by Landlord from time to time, as more fully set forth in and subject to the terms and conditions of this Indenture of Lease and the Lease Agreement (hereinafter collectively referred to as the "Lease"), and to such reasonable rules and regulations for the use thereof as may be prescribed from time to time by the Landlord in accordance with Section 11.04 of the Lease. The floor area of the Premises as indicated above shall be subject to confirmation by Landlord's architect, whose determination shall be binding upon the parties; if Landlord's architect determines that the actual floor area of the Premises, as constructed, is different from that set forth above, the Fixed Minimum Rent and other charges hereunder shall be adjusted accordingly. II. Term of Lease. (See Rider #1 - Option to Extend) Tenant's obligation to pay rent and occupy the premises in accordance with the terms of the Lease shall commence on the earlier of the following dates (such earlier date being hereinafter called the "Commencement Date"): (1) six (6) months after delivery of possession by Landlord ("Construction Period"); or (2) the date on which Tenant shall first open the Premises for business with the public. The term of this Lease shall be a period of fifteen (15) years, plus the period, if any, between the Commencement Date if it falls on a day other than the first day of the month and the first day of the calendar month in the term (such period being hereinafter referred to as the "Original Term"). III. Fixed Minimum Rent. Tenant shall pay to Landlord, in monthly installments, a guaranteed annual minimum rent ("Fixed Minimum Rent") for each of the following periods during the term of this Lease, as follows:
TIME PERIOD ANNUAL AMOUNT MONTHLY AMOUNT Commencement Date to end of Year 5 $ 154,000.00 $ 12,833.33 Year 6 to end of Year 10 $ 169,400.00 $ 14,116.67 Year 11 to end of Year 15 $ 184,800.00 $ 15,400.00 Year 16 to end of Year 20 (option) $ 200,200.00 $ 16,683.33 Year 21 to end of Year 25 (option) $ 215,600.00 $ 17,966.67
Each such installment shall be due and payable on or before the first day of each calendar month in the Original Term of this Lease, in advance, at the address set forth above, or at such other place as may be designated by Landlord from time to time, without any prior demand therefor and without any deduction, reduction, recoupment or set off whatsoever; the first installment shall be paid on the Commencement Date whether or not the Commencement Date shall be a day other than the first day of a calendar month. Tenant's first payment of Fixed Minimum Rent shall be prorated for the fractional month between the Commencement Date and the first day of the first full calendar month in the term hereof (if any), on a per diem basis (calculated on a thirty [30] day month). Indenture of Lease Hotel Mexico Page 1 of 4 2 IV. Percentage Rent. In addition to the Fixed Minimum Rent, Tenant, in accordance with Section 2.01 of the Lease, shall pay to Landlord, as additional rent hereunder and as part of the consideration for this Lease, for each Lease Year in the Original Term of this Lease a sum equal to four percent (4 %) of that portion of Gross Sales (as defined in Section 2.02 of the Lease) during such Lease Year which is in excess of the applicable Percentage Rent Gross Sales Base (hereinafter referred to as "Percentage Rent"). The Percentage Rent Gross Sales Base for the following periods within each Lease Year shall be: PERCENTAGE RENT TIME PERIOD GROSS SALES BASE Commencement Date to end of Year 5 $ 3,850,000.00 Year 6 to end of Year 10 $ 4,235,000.00 Year 11 to end of Year 15 $ 4,620,000.00 Year 16 to end of Year 20 (option) $ 5,004,999.00 Year 21 to end of Year 25 (option) $ 5,390,000.00 V. HVAC Charge. NO HVAC CHARGE APPLIES: Tenant is responsible for providing, installing, operating, and maintaining its own individual HVAC unit in accordance with Landlord's specifications. VI. Taxes. In accordance with and subject to the adjustments set forth in Article III of the Lease, for each "Tax Year" (as defined in Section 3.04) during the Term, Tenant shall pay Landlord on account of Tenant's share of any "Taxes" (as defined in such Section), the annual amount (payable in equal monthly installments) of One and 40/100 Dollars ($1.40) multiplied by the number of square feet of floor area contained within the Premises. VII. Costs of Maintenance and Operations. In accordance with and subject to the adjustments set forth in Section 4.03 of the Lease, for each "Accounting Period" (as defined in Section 4.03) during the Term, Tenant shall pay Landlord on account of Tenant's share of "Operating Costs" (as defined in Section 4.02), the annual amount (payable in equal monthly installments) of Two and 50/100 Dollars ($2.50) multiplied by the number of square feet of floor area contained within the Premises. VIII. Marketing and Advertising. In accordance with and subject to the adjustments set forth in Article IX of the Lease, for each year during the Term, Tenant shall pay to Landlord the annual amount (payable in equal monthly installments) of Zero and 10/100 Dollars ($.10) multiplied by the number of square feet of floor area contained within the Premises (hereinafter referred to as the "Marketing Service Charge"). IX. Proportionate Insurance. In accordance with and subject to the adjustments set forth in Section 3.05 of the Lease, for each Accounting Period during the Term, Tenant shall pay Landlord on account of Tenant's share of the cost of Landlord's policies of insurance (with such extended coverage as the Landlord may deem appropriate) insuring portions of the Shopping Center, the annual amount (payable in equal monthly installments) of Zero and 25/100 Dollars ($.25) multiplied by the number of square feet of floor area contained within the Premises (hereinafter referred to as the "Insurance Charge"). X. Use of Premises. [See Rider #3] Subject to the provisions of Article XI of the Lease, Tenant shall use the Premises solely for the following purpose, and for no other purpose whatsoever: For the operation of a full-service restaurant under the name Hotel Mexico, selling items shown on the menu attached as Exhibit G. Indenture of Lease Hotel Mexico Page 2 of 4 3 XI. Shopping Center Hours of Operation. Tenant shall have the Premises open for business with the public for the following minimum hours: Monday 11:00 A.M. to 9:00 P.M. Tuesday 11:00 A.M. to 9:00 P.M. Wednesday 11:00 A.M. to 9:00 P.M. Thursday 11:00 A.M. to 9:00 P.M. Friday 11:00 A.M. to 9:00 P.M. Saturday 11:00 A.M. to 9:00 P.M. Sunday 12:00 Noon to 9:00 P.M. Tenant may remain open as late as 2:30 a.m., subject to Rider #14 XII. Tenant Improvements. [See Rider #2 - Construction Allowance] In accordance with the provisions of Section 10.02 of the Lease, Tenant shall complete its Tenant Improvements to the Premises, as therein defined, not later than six (6) months after delivery of possession by Landlord. XIII. Security Deposit. [INTENTIONALLY DELETED] XIV. Lease Documents. In addition to the Indenture of Lease and the Lease Agreement, consisting of 4 and 24 printed pages, respectively, the following are attached to the Lease and are hereby incorporated and made part of the Lease as fully as though set forth at length in the Lease: Exhibit "A" Lease plan of Shopping Center indicating / / Exhibit 11.05- exception from competition clause general location of premises Rider Exhibit "B" Tenant/Landlord Work Guaranty (individual) Exhibit "C" Electricity Redistribution Charges / / Guaranty (corporate) / / Exhibit "D" HVAC Charges Other: Exhibit G- Menu Exhibit "E" Rules and Regulations Exhibit II - Decorative Stone Wall Exhibit "F" Sign Criteria Exhibit 1.01 Commencement Certification
IN WITNESS WHEREOF, the parties hereto, intending to be legally bound hereby, have caused this Lease to be duly executed as of the day and year first above written. LANDLORD: STRATEGIC RETAIL TRUST (Formerly Kenwood Mall Trust) By: Phillip E. Stephens -------------------------------------- Phillip E. Stephens, Trustee Witness: [SIG] -------------------------------- Print Name: [SIG] -------------------- Witness: Kimberly R. Poe -------------------------------- Print Name: Kimberly R. Poe -------------------- TENANT: KENWOOD RESTAURANT, INC. trading as Hotel Mexico By: Stephen D. King -------------------------------------- witness: Gregory E. Land Title: President -------------------------------- ------------------------------- Print Name: Gregory E. Land -------------------- Attest: Stephen D. King ---------------------------------- Witness: Laurie J. Hayden Title: Secretary -------------------------------- --------------------------- Print Name: Laurie J. Hayden [CORPORATE SEAL] --------------------
4 ACKNOWLEDGMENTS FOR LANDLORD: STATE OF GEORGIA ) S.S. COUNTY OF FULTON ) On the 11th day of November, 1994, before me, a Notary Public in and for the jurisdiction aforesaid, personally appeared Phillip E. Stephens, to me personally known, who by me duly sworn did say that he is the Trustee of Strategic Retail Trust (Formerly Kenwood Mall Trust); and that the foregoing instrument was signed by him in his capacity as Trustee; and that he acknowledged execution of said instrument to be his voluntary act and deed. (Notarial Seal) [SIG] -------------------------------------- Notary Public My Commission Expires: Notary Public, Fulton County, Georgia My Commission Expires August 22, 1998 FOR TENANT (corporate): STATE OF OHIO ) S.S. COUNTY OF HAMILTON ) On the 7th day of November, 1994, before me, a Notary Public in and for the jurisdiction aforesaid, personally appeared Steven D. King to me personally known, who by me duly sworn did say that (s)he is the President of Kenwood Restaurant, Inc., an Ohio corporation, and that the foregoing instrument was signed on behalf of said corporation by authority of its Board of Directors and that (s)he acknowledged execution of said instrument to be the voluntary act and deed of said company. (Notarial Seal) Laurie J. Hayden ----------------------------- Notary Public My Commission Expires: LAURIE J. HAYDEN Notary Public, State of Ohio My Commission Expires July 31, 1999 5 LEASE AGREEMENT INDEX
ARTICLE OR SECTION TITLE PAGE ARTICLE I TERM 1.01 Confirmation of the Term ...................................................................................... 1 1.02 Expiration; Holding Over ...................................................................................... 1 ARTICLE II PERCENTAGE RENT 2.01 Lease Year and Payment ........................................................................................ 1 2.02 Gross Sales Defined ........................................................................................... 2 2.03 Percentage Rent Statements .................................................................................... 2 2.04 Failure of Tenant to Operate .................................................................................. 2 ARTICLE III TAXES AND INSURANCE 3.01 Taxes Defined ................................................................................................. 2 3.02 Payment as Additional Rent .................................................................................... 3 3.03 Excluded Areas, Leasable Floor Area Defined ................................................................... 3 3.04 Tax Year Defined .............................................................................................. 3 3.05 Proportionate Insurance ....................................................................................... 3 ARTICLE IV COMMON AREAS 4.01 Definition; Control ........................................................................................... 4 4.02 Operating Costs Defined ....................................................................................... 4 4.03 Payment of Tenant's Shares of Operating Costs ................................................................. 5 ARTICLE V ADDITIONAL RENT-GENERAL PROVISIONS 5.01 Additional Rent Defined ....................................................................................... 5 5.02 Late Charges; Bad Checks ...................................................................................... 5 ARTICLE VI ACCOUNTING 6.01 Tenant's Records .............................................................................................. 6 6.02 Audit ......................................................................................................... 6 ARTICLE VII INSURANCE 7.01 Tenant's Insurance ............................................................................................ 6 7.02 Notice to Landlord ............................................................................................ 7 ARTICLE VIII UTILITIES 8.01 Utility Service, Consumption and Charges ...................................................................... 7 ARTICLE IX MARKETING SERVICES 9.01 Marketing Service Charge ...................................................................................... 7 9.02 Merchants' Association ........................................................................................ 8 9.03 Initial Marketing Charge ...................................................................................... 8 ARTICLE X CONDITION AND REMODELING 10.01 Condition of Premises ......................................................................................... 8 10.02 Remodeling of the Premises .................................................................................... 8 10.03 Trade Fixtures ................................................................................................ 10 10.04 Signs, Awnings and Canopies ................................................................................... 10 10.05 Alterations and Mandatory Refurbishment ....................................................................... 11 10.06 Changes and Additions to the Center ........................................................................... 11 ARTICLE XI CONDUCT OF BUSINESS 11.01 Use of Premises ............................................................................................... 12 11.02 Storage on Premises ........................................................................................... 12 11.03 General Condition of Use ...................................................................................... 12 11.04 Rules and Regulations ......................................................................................... 13 11.05 Competition ................................................................................................... 14 11.06 Parking Facilities ............................................................................................ 14 ARTICLE XII MAINTENANCE AND REPAIR; SURRENDER OF PREMISES 12.01 Repairs and Maintenance by Tenant ............................................................................. 14 12.02 Structural Repairs ............................................................................................ 14 12.03 Surrender of Premises ......................................................................................... 15 ARTICLE XIII INDEMNIFICATION; SURROGATION 13.01 Indemnification and Waiver of Claim ........................................................................... 15 13.02 Subrogation ................................................................................................... 15 ARTICLE XIV DESTRUCTION OF PREMISES 14.01 Total or Partial Destruction .................................................................................. 16 14.02 Partial Destruction of Shopping Center ........................................................................ 16
(i) 6 ARTICLE XV EMINENT DOMAIN 15.01 Total Condemnation of Premises ...................................................... 16 15.02 Partial Condemnation of Premises .................................................... 17 15.03 Condemnation of Shopping Center ..................................................... 17 15.04 Condemnation Awards ................................................................. 17 ARTICLE XVI ESTOPPEL CERTIFICATES; SUBORDINATION AND ATTORNMENT 16.01 Execution of Estoppel Certificates .................................................. 17 16.02 Subordination and Attornment ........................................................ 17 ARTICLE XVII ASSIGNMENT AND SUBLETTING 17.01 Transfers Requiring Landlord Consent ................................................ 18 17.02 Grant of Concessions ................................................................ 18 ARTICLE XVIII PAYMENTS AND NOTICES 18.01 Delivery of Payments and Notices; Notice Requirements ............................... 19 ARTICLE XIX EVENTS OF DEFAULT; LANDLORD'S REMEDIES 19.01 Events of Default ................................................................... 19 19.02 Termination ......................................................................... 19 19.03 Right of Possession ................................................................. 19 19.04 Additional Remedies of Landlord ..................................................... 19 19.05 Waivers by Tenant ................................................................... 20 ARTICLE XX SECURITY DEPOSIT 20.01 Security Deposit .................................................................... 20 ARTICLE XXI MISCELLANEOUS PROVISIONS 21.01 Access by Landlord .................................................................. 21 21.02 Excuse of Performance ............................................................... 21 21.03 Successors .......................................................................... 21 21.04 Quiet Enjoyment ..................................................................... 21 21.05 Waiver .............................................................................. 21 21.06 Custom and Usage .................................................................... 22 21.07 Accord and Satisfaction ............................................................. 22 21.08 Performance of Tenant's Covenants ................................................... 22 21.09 Entire Agreement .................................................................... 22 21.10 Relationship of Parties ............................................................. 22 21.11 Captions ............................................................................ 22 21.12 Tenant Defined; Use of Pronoun ...................................................... 22 21.13 Negation of Personal Liability ...................................................... 23 21.14 Liability of Landlord's Management Agent ............................................ 22 21.15 Governmental Limitation on Rents and Other Charges .................................. 23 21.16 Partial Invalidity; Separate Covenants .............................................. 23 21.17 Recording ........................................................................... 23 21.18 Brokerage Commission ................................................................ 23 21.19 Construction ........................................................................ 23 21.20 Hazardous Material .................................................................. 24 21.21 Tenant-Requested Documentation ...................................................... 24 21.22 Warranties of Tenant ................................................................ 24 21.23 Submission of Lease to Tenant ....................................................... 24
EXHIBITS: As listed on the Indenture of Lease (ii) 7 LEASE AGREEMENT ARTICLE I TERM SECTION 1.01 CONFIRMATION OF THE TERM. (a) Within a reasonable time after the Commencement Date of the Lease, the Tenant shall execute and deliver to Landlord a Commencement Certification, in the form attached hereto as Exhibit 1.01. Upon execution by Landlord, a copy of the Commencement Certification shall be sent to Tenant for its records. (b) The period commencing on the date hereof and terminating on the date immediately prior to the Commencement Date is herein referred to as the "Pre-Commencement Period". For the purposes of this Lease, the word "Term" shall be deemed to mean the Pre-Commencement Period and the Original Term of this Lease and all extensions or renewals thereof. During the Pre-Commencement Period, all of the terms, covenants and conditions hereof shall be in full force and effect, but Tenant's rental payment obligations hereunder shall be abated until the Commencement Date. SECTION 1.02. EXPIRATION; HOLDING OVER. (a) This Lease and the tenancy hereby created shall create and terminate at the end of the Term without the necessity of any notice from either Landlord or Tenant to terminate the same. Tenant hereby waives notice to vacate the Premises and agrees that Landlord shall be entitled to the benefit of all provisions of law respecting the summary recovery of possession of Premises from a tenant holding over to the same extent as if statutory notice had been given. (b) Should Tenant hold over in possession of the Premises after the expiration of the Term without the execution of a new lease agreement of extension or renewal agreement, Tenant, at the option of Landlord, shall be deemed to be occupying the Premises from month to month, subject to such occupancy being terminated by either party upon at least thirty (30) days written notice, at one hundred fifty percent (150%) of the rental, including, but not limited to, Fixed Minimum Rent, Percentage Rent, Tax Rent, Tenant's proportionate share of Operating Costs, the HVAC Charge, Marketing Service Charge, and additional charges provided for herein, all calculated, from time to time, as though the Term had continued and otherwise subject to all of the other terms, covenants and conditions of the Lease insofar as the same may be applicable to a month to month tenancy. ARTICLE II PERCENTAGE RENT SECTION 2.01. LEASE YEAR AND PAYMENT. (a) Percentage Rent shall be payable without prior demand and without any recoupment, setoff or deduction whatsoever at the times set forth hereinafter at the place then fixed for the payment of Fixed Minimum Rent. (b) Not later than thirty (30) days after the expiration of the first "Lease Year" (hereinafter defined) of the Term, and thereafter not later than thirty (30) days after the expiration of each subsequent Lease Year in the Term, Tenant shall pay to Landlord the Percentage Rent due for the Lease Year in question. (c) Whenever used in this Lease the words "Lease Year" shall mean the twelve (12) full calendar months of the Term commencing with January 1st immediately following the Commencement Date and ending December 31st of such calendar year, and each succeeding twelve (12) month period; provided, however, that the first Lease Year shall commence on the Commencement Date and terminate on the immediately following thirty-first (31st) day of December and the last Lease Year shall terminate on the last day of the Term. In the event that the first or last Lease Year shall consist of other than twelve (12) full calendar months, the Percentage Rent Gross Sales Base for such Lease Year shall be multiplied by a fraction, the numerator of which shall be the number of days contained in such Lease Year and the denominator of which shall be three hundred sixty-five (365). In the event the amount of the Percentage Rent Gross Sales Base set forth herein is subject to adjustments during the Term, and the date on which any such adjustment is to occur (hereinafter referred to as the "Rental Adjustment Date") is other than the first day of a Lease Year, the Percentage Rent Gross Sales Base for the Lease Year in which the Rental Adjustment Date shall fall shall be the sum of: (1) the lesser Percentage Rent Gross Sales Base set forth in the Indenture of Lease multiplied by a fraction, the numerator of which shall be the number of days in the period commencing on the first day of the Lease Year in which the Rental Adjustment Date shall fall and ending on the day immediately prior to the Rental Adjustment Date and the denominator of which shall be three hundred sixty-five (365); and (2) the greater Percentage Rent Gross Sales Base set forth in the Indenture of Lease multiplied by a fraction, the numerator of which shall be the number of days in the period commencing on the Rental Adjustment Date and ending on the last day of the Lease Year in which the Rental Adjustment Date shall fall and the denominator of which shall be three hundred sixty-five (365). (d) If pursuant to any other section of this Lease, Tenant should be entitled to an abatement, apportionment or suspension of the Fixed Minimum Rent payable hereunder, Tenant shall continue to pay to Landlord the Percentage Rent during the period in which the Fixed Minimum Rent shall have been abated, apportioned, suspended; and during any and all Lease Years in which there shall be one or more such periods, the Percentage Rent Gross Sales Base shall be reduced in the same proportion as the Fixed Minimum Rent shall have abated, apportioned or suspended. If during any Lease Year the Premises shall not be open for business on one or more days on which Tenant is obligated to conduct business pursuant to this Lease and for which days Tenant shall not be entitled to an abatement, apportionment or suspension of the Fixed Minimum Rent, the Percentage Rent Gross Sale Base shall be deemed to be reduced to zero 1 8 for such days. In the event that any reduction of the Percentage Rent Gross Sales Base is applicable to one or more days during a Lease Year, the Percentage Rent Gross Sales Base to be used in calculating the Percentage Rent for such Lease Year shall be determined by averaging on a daily basis the Percentage Rent Gross Sales Base applicable during such Lease Year. SECTION 2.02 Gross Sales Defined. (a) The words "Gross Sales" as used herein shall mean the gross amount of all revenue generated by sales, rental, performance of services, or otherwise by Tenant and/or by any subtenant, licensee or concessionaire made or originating in, at or from the Premises (including, but not limited to, catalogue sales made at or from the Premises), whether for cash, credit or other consideration (with such other consideration being determined at fair market value) and financing charges on all Gross Sales (without reserve or deduction for inability or failure to collect). Gross Sales also shall include all deposits not refunded to purchasers. Each sale upon installment or credit shall be treated as a sale for the full price in the month during which such sale shall be made, irrespective of the time when Tenant shall receive payment therefor. (b) The following shall be excluded from Gross Sales, or if originally included therein, deducted from Gross Sales, provided separate records are supplied supporting such deductions or exclusions: (1) any exchange of merchandise between stores of Tenant where such exchange is made solely for the convenient operation of Tenant's business and not for the purpose of consummating a sale made in, at or from the Premises; (2) returns to shippers or manufacturers; (3) cash or credit refunds to customers on transactions otherwise included in Gross Sales; (4) sales of fixtures, machinery and equipment after use thereof in the conduct of Tenant's business in the Premises (except where Tenant is in the business of selling such fixtures, machinery or equipment); (5) amounts collected and paid by Tenant for any sales tax imposed by any duly constituted governmental authority, provided such tax is both added to the selling price as a separate and distinct amount in addition to the regular price of Tenant's merchandise and paid to the taxing authority by Tenant (but not by any vendor of Tenant); (6) the amount of any discount on sales to employees; and (7) receipts from the permitted pay telephone and vending machines referred to in Section 11.03(q). No value added tax, franchise tax, capital stock tax, income, gross receipts or similar tax based upon income, profits or gross receipts shall be deducted from Gross Sales. SECTION 2.03. Percentage Rent Statements. (a) Not later than the fifteenth (15th) day after the end of each calender quarter during the Term, Tenant shall submit to Landlord an itemized and accurate written statement signed by Tenant, its duly authorized officer or duly authorized representative, reflecting the full amount of Gross Sales made during the preceding calender month. If the Commencement Date hereof shall not be the first day of a calender quarter the period between the Commencement Date and the first day of the first full calender quarter in the Term and Tenant's Gross Sales during such period shall be added to the first calendar quarter for both the purpose of the computation of Percentage Rent and the purpose of reporting of Gross Sales. Quarterly statements shall be submitted at the end of March, June, September, and December. (b) Not later than the date set forth in Section 2.01(b) hereof, Tenant shall submit to Landlord a complete written statement of Tenant's Gross Sales for the preceding Lease Year in such reasonable detail as requested by Landlord, accompanied by a statement signed and certified by Tenant, or its duly authorized officer or representative stating that the Gross Sales reported by Tenant are in accord with the amount thereof set forth on Tenant's regularly maintained books and records. Simultaneously with the delivery of the statement referred to in the preceding sentence, Tenant shall pay to Landlord the Percentage Rent due and payable for such Lease Year, if any. (c) The acceptance by Landlord of payments of Percentage Rent or reports thereof shall be without prejudice, and shall in no event constitute a waiver of Landlord's rights to claim a deficiency of such Percentage Rent or to audit Tenant's books and records as set forth in Section 6.01 hereof. (d) If Tenant shall fail to deliver the statement required by Section 2.03(b) within the period set forth therein and such failure shall continue for ten (10) days after the date of written notice of such failure from Landlord, Landlord shall have the right thereafter to employ as accountant to make such examination of Tenant's books and records as may be necessary to certify the amount of Tenant's Gross Sales for said Lease Year. The certification so made shall be binding upon Tenant and Tenant shall promptly pay to Landlord the cost of the examination, together with the full balance of Percentage Rent due and payable for said Lease Year, if any. In the event such certification reveals a refund due to Tenant, the cost of such examination shall reduce such refund and, if not fully paid by such reduction, shall be promptly paid by Tenant to Landlord. SECTION 2.04. Failure of Tenant to Operate. It is expressly understood and agreed that Percentage Rent expected from Tenant will not be effectively generated unless the Tenant continuously operates its business during all hours required by this Lease. In the event Tenant fails to do so, Tenant shall pay to Landlord, as liquidated damages and not as a penalty, an amount equal to $500.00 per day for each day or fraction of a day that Tenant is not open, in addition to all other amounts due and payable under this Lease. Notwithstanding the payment of such damages, as Tenant's failure to operate also causes damages to other tenants and to the public image of the Shopping Center, if such event reoccurs after written notice from Landlord, Landlord shall have the right to treat such event as an Event of Default hereunder. ARTICLE III TAXES AND INSURANCE SECTION 3.01. Taxes Defined. For the purposes of this Section, the word "Taxes" shall include: all taxes attributable to improvements now or hereafter made to the Shopping Center or any part thereof; or to the present or future installation in the Shopping Center or any part thereof of fixtures, machinery or equipment; all real estate taxes, assessments, water and sewer and other governmental impositions and charges of every kind 2 9 and nature whatsoever, nonrecurring as well as recurring, special or extraordinary as well as ordinary, foreseen, and unforeseen, and each and every installment thereof, which shall or may during the term of this Lease be levied, assessed or imposed, or become due and payable or become liens upon, or arise in connection with the use, occupancy or possession of, or any interest in, the Shopping Center or any part thereof, or any land, buildings or other improvements there, less amounts paid, if any, as taxes to Landlord or the taxing authority by the occupants of any "Excluded Areas" (as hereinafter defined in Section 3.03). The word "Taxes" shall not include any charge, such as water meter charge and sewer rent based thereon, which is measured by the consumption by the actual user of the item or service for which the charge is made. If at any time during the term of this Lease, under the laws of any one or more jurisdictions in which the Shopping Center is located, a tax, imposition, charge, assessment, levy, excise or license fee is levied on, imposed against or measured, computed or determined, in whole or in part, by: (1) rents payable hereunder (Fixed Minimum, Percentage, Tax and/or additional); or (2) the value of any lien placed against the Shopping Center or against the real property comprising the Shopping Center or any obligations secured thereby; or if any other tax (except income tax), imposition, charge, assessment, levy, excise or license fee, however described or denoted, shall be levied or imposed by any such jurisdiction, to the extent that the cost of any of the foregoing shall be imposed, either directly or indirectly, on Landlord, such tax, imposition, charge, assessment, levy, excise or license fee, shall be deemed to be included as "Taxes" for the purposes of this Section 3.01. In the event the Landlord shall retain any consultant to negotiate the amount of taxes, tax rate, assessed value and/or other factors influencing the amount of Taxes, and/or shall institute any administrative and/or legal proceedings challenging the tax rate, assessed value or other factors influencing the amount of taxes, whether or not such action results in a reduction in the amount of taxes, Taxes shall include all such reasonable fees, reasonable attorneys' and appraisers' fees and all disbursements, court costs and other similar items paid or incurred by Landlord during the applicable Tax Year with respect to such proceedings. Tenant shall not institute any proceedings with respect to the assessed valuation of the Shopping Center or any part thereof for the purpose of seeking or securing a tax reduction. SECTION 3.02. Payment as Additional Rent. For each "Tax Year" (as hereinafter defined) during the Original Term of this Lease, Tenant shall pay to Landlord as additional rent (hereinafter called "Tax Rent"), the amount obtained by multiplying the total of all Taxes payable during such Tax Year by a fraction, the numerator of which shall be the square feet of floor area of the Premises and the denominator of which shall be the total amount of square feet of "Leasable Floor Area" (as defined and computed pursuant to Section 3.03 hereof) in the Shopping Center in effect at the time of such proration. Tenant shall pay monthly, in advance, as additional rent, together with each monthly installment of Fixed Minimum Rent, without demand or setoff, Tax Rent in an amount equal to one-twelfth (1/12th) of the annual amount payable as Tax Rent, as set forth in the paragraph of the Indenture of Lease entitled "Taxes", for each square foot of floor area contained within the Premises. Such amount may be adjusted by Landlord at any time during the Term to an amount equal to one-twelfth (1/12th) of the Tax Rent payable by Tenant for the preceding Tax Year. If Tenant's payment of Tax Rent for any Tax Year exceeds the actual amount payable by Tenant as Tax Rent for such Tax Year (for whatever reason, including receipt by Landlord of any refund of amounts paid, which amount shall be reduced by Landlord's costs in obtaining such refund), Landlord shall refund such excess to Tenant within thirty (30) days, provided Tenant has fully performed all of its obligations under this Lease, is not indebted to Landlord and, if such Tax Year is the last Tax Year in the Term, further provided that Tenant has vacated the Premises in accordance with the provisions hereof. In the event Tenant is indebted to Landlord for any reason whatsoever, Landlord may deduct such amount owed from such overpayment. Tenant shall pay any balance of its Tax Rent for any Tax Year within thirty (30) days' after receipt of notice from Landlord of the amount due. In the event of any dispute as to amounts owed, a copy of the invoice, bill, assessment, levy or notice of imposition from the applicable taxing authority shall be conclusive evidence and binding on the parties. SECTION 3.03. Excluded Areas, Leasable Floor Area Defined. As used in this Lease, the term "Excluded Areas" shall mean portions of the Shopping Center used as office space, storage areas and mezzanines, basement space, outdoor sales areas, corridors and hallways, mechanical, electrical and other utility service areas and equipment rooms, loading dock areas, out-parcels and any buildings thereon, and any portions of additions to the Shopping Center referred to in Section 10.06(b) which Landlord hereafter designates as an Excluded Area. Further, for the purpose of allocating liability for Operating Costs relating directly to the interior common areas, Excluded Areas shall include the floor area of any tenant in excess of 60,000 square feet, and any tenant in excess of 20,000 square feet not having an entrance on the enclosed mall. For purposes of this Lease, the words "Leasable Floor Area" shall mean the square feet of floor area in enclosed buildings which are erected on portions of the Shopping Center, other than Excluded Areas. In the event of any dispute as to the floor area or Leasable Floor Area in the Shopping Center or any portion thereof (other than the Premises which shall be determined by the provisions of the Indenture of Lease), the determination of Landlord shall be binding upon the parties. SECTION 3.04. Tax Year Defined. For the purpose of this Lease, the words "Tax Year" shall mean the twelve (12) full calendar months of the term commencing with the January 1st immediately following the Commencement Date and ending December 31st of such calendar year, and each succeeding twelve (12) month period thereafter commencing in the Term; provided, however, the first Tax Year shall commence on the Commencement Date and terminate on the immediately succeeding December 31st. If the Original Term hereof commences or terminates (other than by reason of Tenant's default) on a day other than the first or last day, respectively, of a Tax Year, Tenant's Tax Rent for such Tax Year shall be equitably prorated. SECTION 3.05. Proportionate Insurance. For each "Accounting Period" (as hereinafter defined in Section 4.03[f]) or portion thereof during the Term hereof, Tenant shall pay to Landlord, as additional rent, as Tenant's share of the cost of Landlord's policy or policies of fire insurance with extended coverage insuring the Shopping Center, other than such cost relating to the Common Areas (as hereinafter defined in Section 4.01) a sum equal to the number of square feet of floor area of the Premises multiplied by the charge per square foot set forth in the paragraph of the Indenture of Lease captioned "Proportionate Insurance" (such charge being referred to hereinafter as the "Insurance Charge"). The Insurance Charge shall be paid to Landlord on the first day of each calendar month in the Term, in advance without demand, recoupment or setoff, in equal monthly installments. If the Term commences or terminates (other than by reason of Tenant's default) on a date other 3 10 than the first or last day, respectively, of an Accounting Period, Tenant's Insurance Charge shall be equitably prorated for such period. Landlord may adjust the Insurance Charge amount at any time during an Accounting Period to reflect Landlord's actual cost of such insurance per square foot of Leasable Floor Area and, upon receipt of such notice, Tenant shall commence payment of such increased sum and shall continue to pay the same until a subsequent adjustment is made hereunder. Although Tenant shall pay the Insurance Charge, as aforesaid, in addition to, and not as a component of, its share of Operating Costs (as hereinafter defined in Section 4.02), for the purpose of Article XIX and Sections 1.02(b) and 17.01 of this Lease, the words "Operating Costs" shall be deemed to include such Insurance Charge. ARTICLE IV COMMON AREAS SECTION 4.01. Definition; Control. All areas, space, facilities, equipment and signs, to the extent made available from time to time by Landlord for the common and joint use and benefit of Landlord, Tenant and other tenants and occupants of the Shopping Center, and their respective employees, agents, subtenants, concessionaires, licensees, customers and other invitees, are collectively referred to herein as the "Common Areas". If and to the extent made available by Landlord, Common Areas shall include, but not be limited to, the sidewalks, parking areas, access roads and drives, driveways, entranceways, parking decks, bridges, landscaped areas, truck service ways, tunnels, loading docks, open and enclosed pedestrian walkways, corridors and malls, courts, stairs, ramps, elevators, escalators, comfort and first aid stations, public washrooms, community hall or auditorium, parcel pick-up stations, utility lines and utility rooms. All Common Areas in or about the Shopping Center shall be subject to the exclusive control of Landlord. Landlord shall operate, manage, equip, police, light, surface, repair and maintain the Common Areas all in such manner as Landlord, in its sole discretion, may determine from time to time (including, without limitation, the right to keep any enclosed mall open only during the hours designated by Landlord) and Landlord shall have the sole right and exclusive authority to employ and discharge all personnel with respect thereto. Landlord hereby expressly reserves the right from time to time to construct, maintain and operate lighting and other facilities, equipment and signs on all of the Common Areas; to police and maintain security for the Common Areas; to use and allow others to use the Common Areas for any purpose; to change the size, area, level, location and arrangement of the Common Areas; to build multi-story and/or subterranean parking facilities; to regulate parking by tenants and other occupants of the Shopping Center and their respective employees, agents, subtenants, concessionaires and licensees; to enforce parking charges (by operation of meters or otherwise) with appropriate provisions for parking ticket validation for tenants; to close temporarily all or any portion of the Common Areas for the purpose of making repairs, changes or alterations thereto or performing necessary maintenance in connection with any emergency, in connection with closings resulting from adverse weather conditions or for any other purpose whatsoever, whether such purpose is similar or dissimilar to the foregoing; to discourage non-customer parking; to establish, modify and enforce reasonable rules and regulations with respect to the Common Areas and the use to be made thereof. For the Term, Tenant is hereby given the non-exclusive license in common with all others to whom Landlord has or may hereafter grant rights to use the Common Areas as they may from time to time exist; provided, however, that if such license shall at any time be revoked, in whole or in part, or the size, area, level, location or arrangement of such Common Areas or if the type of facilities shall at any time forming a part thereof be changed, altered, rearranged or diminished, Landlord shall not be subject to any liability therefor, nor shall Tenant be entitled to any compensation or diminution or abatement of rent therefor, nor shall such alteration, rearrangement, revocation, change or diminution of such Common Areas be deemed a constructive or actual eviction or otherwise be grounds for terminating or modifying this Lease. In order to establish that the Shopping Center or any portion thereof is and will continue to remain private property and to prevent a dedication thereof or the accrual of any rights to any person or to the public therein, Landlord hereby reserves the unrestricted right, in Landlord's sole discretion, to close all or any portion of the Common Areas to such extent as, in the opinion of the Landlord's counsel, may be legally sufficient to prevent such dedication thereof or accrual of any rights to any person or the public therein; provided, however, Landlord reserves the right at any time and from time to time to dedicate to public use part or all of the ring roads, access roads, drives and utility lines, together with all easements required to effectuate such dedications, as it may see fit. SECTION 4.02. Operating Costs Defined. Subject to reimbursement as set forth in Section 4.03, Landlord will at its expense operate and maintain, or cause to be operated and maintained, the Common Areas. For the purposes of this Lease, "Operating Costs" shall be those costs of operating, repairing, maintaining, upgrading, improving, and replacing the Common Areas in a manner deemed by Landlord to be reasonable and appropriate including, but not limited to, all costs and expenses, whether expended or incurred, of operating, repairing, replacing, lighting, cleaning, painting and maintaining (including, but not limited to preventive maintenance) such Common Areas and the Shopping Center and insuring the same with such policies and companies and in such limits as selected by Landlord (including, but not limited to, fire insurance with extended coverage, liability insurance covering personal injury, deaths and property damage with a personal injury endorsement covering false arrest, detention or imprisonment, malicious prosecution, libel and slander, and wrongful entry or eviction, worker's compensation insurance, plate glass insurance, contractual liability insurance and fidelity bonds, plus the amount of any deductible paid by Landlord, but excluding the insurance referred to in Section 3.05 hereof); removing snow, ice, rubbish and debris; inspecting, policing, providing security and regulating traffic; rental of sweepers, trucks and other equipment; depreciation (over a period not exceeding sixty [60] months) of machinery and equipment and other non-real estate assets used in the operation and maintenance of the Shopping Center; repairing and/or replacing of paving, parking areas, roofs, curbs, walkways, entranceways, landscaping, drainage, on-site water lines, sanitary sewer lines, storm water lines, heating, ventilating and air-conditioning systems, floors, floor coverings, canopies, skylights, lighting fixtures, lamps, decorative coverings, fountains, escalators, electrical lines and other equipment serving the property on which the Shopping Center or any part thereof is constructed; heating, ventilating and air-conditioning enclosed Common Areas at the same rate Landlord charges to tenants; uniforms and replacement of uniforms; the rental of music programs, services and loudspeaker systems including the furnishing of electricity therefor; all costs incurred by Landlord in compliance with any environmental or other similar laws, rules, regulations, guidelines or orders, including the cost of removing hazardous materials from the Shopping Center; the cost of obtaining and operating public transportation or shuttle bus systems used in connection with bringing customers to the Shopping Center; the gross compensation and fringe benefits of the mall manager, the mall office personnel and all other on-site personnel required to supervise and accomplish 4 11 the foregoing; and an administrative charge equal to fifteen percent (15%) of the total of all Operating Costs (exclusive of such administrative charge). Operating Costs shall not include depreciation other than as specifically referred to herein. In the event of any dispute as to whether an item represents an expense or a capital item, Landlord's accounting practices shall be determinative and binding on the parties and Landlord reserves the right to amortize, without interest, any item or group of related items of substantial expense over a period not to exceed sixty (60) months if Landlord deems such amortization to be in the best interests of the Shopping Center or its tenants. In the event of such amortization, Tenant shall be responsible for its share of same notwithstanding that the actual cost to which it relates may have been incurred prior to the commencement of the Term. SECTION 4.03. Payment of Tenant's Share of Operating Costs. (a) For each "Accounting Period" (as defined in Section 4.03(f) during the Term, Tenant shall pay to Landlord, as additional rent, Tenant's share of the Operating Costs in an amount equal to the product obtained by multiplying (1) the total Operating Costs for such Accounting Period, less all contributions thereto actually made by occupants of any Excluded Areas, by (2) a fraction, the numerator of which shall be the square feet of floor area of the Premises, and the denominator of which shall be the total amount of square feet of Leasable Floor Area in the Shopping Center in effect on the last day of such Accounting Period. (b) On the first day of each calendar month during that portion of the Term falling within the first Accounting Period during the Term hereof, Tenant shall pay to Landlord, in advance, without demand and without any setoff, offset, deduction or recoupment, as an estimated payment on account of Tenant's share of the Operating Costs, an amount equal to one-twelfth (1/12th) of the sum obtained by multiplying the number of square feet of floor area of the Premises by the minimum annual charge per square foot set forth in the paragraph of the Indenture of Lease captioned "Costs of Maintenance and Operation". If the Commencement Date hereof shall not be the first day of a calendar month, Tenant's payment of its proportionate share of Operating Costs for the fractional month between the Commencement Date and the first day of the first full calendar month in the Term shall be prorated on a per diem basis (calculated on a thirty [30] day month) and shall be paid together with the first payment of Fixed Minimum Rent. (c) After the first Accounting Period, Tenant shall continue to pay such estimated amount of Tenant's proportionate share of Operating Costs on the first day of each month in advance without demand and without any setoff, offset, recoupment or deduction, but the aforesaid estimated amount of Tenant's share of Operating Costs may be adjusted and revised by Landlord after the end of each Accounting Period during the Term on the basis of either, in Landlord's sole discretion, the actual Operating Costs for the immediately preceding Accounting Period, or the budgeted Operating Costs for the current Accounting Period. Upon receipt by Tenant of a statement from Landlord setting forth such revised estimated Operating Costs, Tenant shall pay to Landlord such revised estimated share in equal monthly installments, each such installment to be a sum equal to one-twelfth (1/12th) of such revised estimated share of Operating Costs, in advance on the first day of each calendar month thereafter until the next succeeding revision in such estimate. (d) Following the end of each Accounting Period, Landlord shall furnish to Tenant a written statement in reasonable detail covering the most recently expired Accounting Period showing the total Operating Costs for such Accounting Period, the amount of Tenant's share thereof and payments made by Tenant with respect thereto. All subsequent monthly payments on account of Tenant's share of Operating Costs made by Tenant during such Accounting Period after receipt of such statement shall be applied by Landlord as payment on account of Tenant's obligation for its share of Operating Costs for the next ensuing Accounting Period and shall not reduce Tenant's obligation to pay the balance due Landlord pursuant to such statement. In making the computation as aforesaid, Landlord's statement shall be presumptive evidence of Operating Costs. See Rider. (e) If Tenant's share of Operating Costs exceeds Tenant's payments with respect to any Accounting Period, Tenant shall pay the deficiency to Landlord within thirty (30) days after the date of the furnishing of the statement by Landlord; if Tenant's payments exceed Tenant's share of the Operating Costs and Tenant is not in default hereunder or otherwise indebted to Landlord, Landlord shall apply such excess to future payments due to Landlord from Tenant for Operating Costs or other rent items and shall give notice to Tenant of such application; provided, if such overpayment is for the last Accounting Period, Landlord shall refund to Tenant the amount of such overpayment at such time and only in the event Tenant has fully performed all of its obligations under this Lease, is not indebted to Landlord and has vacated in accordance with the provisions of this Lease. In the event Tenant is indebted to Landlord for any reason whatsoever, Landlord may deduct such amount owed from such overpayment. (f) For the purpose of this Lease, the words, "Accounting Period" mean the period consisting of twelve (12) consecutive calendar months, commencing on a date determined by Landlord from time to time and each succeeding twelve (12) calendar month period during the Term. If the Term commences or terminates (other than by reason of an Event of Default by Tenant) during an Accounting Period, Tenant's obligation for Tenant's proportionate share of Operating Costs for such Accounting Period shall be equitably prorated. ARTICLE V ADDITIONAL RENT - GENERAL PROVISIONS SECTION 5.01. Additional Rent Defined. All sums of money or charges required to be paid by Tenant under this Lease, but not limited to Tax Rent, Percentage Rent, Fixed Minimum Rent, Proportionate Insurance, HVAC Charge, Operating Costs, Marketing Service Charge, and charges for utilities, whether or not the same are designated "additional rent", shall be additional rent and shall for all purposes hereunder be deemed to be, and shall be paid by Tenant as, rent without recoupment, deduction or setoff. SECTION 5.02. Late Charges, Bad Checks. If such amounts or rent or charges are not paid at the time provided in this Lease, they shall nevertheless, if not paid when due, be collectible as rent with the next installment of Fixed Minimum Rent thereafter falling due hereunder together with a late charge equal 5 12 to two percent (2%) of the amount outstanding for each month or part of a month from the due date thereof to the date of payment; provided that Landlord shall not be obligated to accept any late payment and further provided that Landlord shall not be deemed to have waived such late charge by acceptance of any subsequent rent payment which fails to include such charge. In the event any check tendered by Tenant to Landlord is not honored on initial presentation, Tenant shall pay Landlord the greater of Twenty Five Dollars ($25.00) or the amount Landlord's bank charges Landlord for processing such returned check. All past due rent shall, in addition, bear interest at the rate of twelve percent (12%) per annum or, if less, the highest rate allowed by law. ARTICLE VI ACCOUNTING SECTION 6.01. Tenant's Records. Tenant covenants and agrees that the business records of Tenant and of any subtenant, licensee or concessionaire upon the Premises shall be maintained in accordance with generally accepted accounting practices. Furthermore, Tenant shall keep at all times during the Term, at the Premises or at the central offices of Tenant, full, complete and accurate books of account and records in accordance with generally accepted accounting practices with respect to all operations of the business to be conducted in or from the Premises including, without limitation, the recording of Gross Sales and the receipt of all merchandise into and the shipment of all merchandise from the Premises during the Term. Tenant shall retain such books and records, copies of all tax reports submitted to the appropriate taxing authorities, as well as copies of contracts, vouchers, checks, inventory records, dated cash register tapes and other documents and papers in any way relating to the operation of such business (all of which are hereinafter collectively referred to as "books and records") for at least three (3) years from the end of the Lease Year to which they are applicable, or, if an audit is commenced or if a controversy should arise between the parties hereto regarding the rent payable hereunder, until such audit or controversy is terminated even though such retention period may be after the expiration of the Term of, or earlier termination of, this Lease. Such books and records shall be open at all reasonable times during the aforesaid retention period, after prior written notice to Tenant, to the inspection of Landlord or its duly authorized representatives, who shall have full and free access to such books and records, the right to audit such books and records and the right to require of Tenant, its agents and employees, such information or explanation with respect to such books and records as may be necessary for a proper examination and/or audit thereof. If for any reason Tenant does not fully comply with the above obligations on the date designated by Landlord for an inspection and/or audit of Tenant's books and records, and Landlord agrees to reschedule such inspection and/or audit, Tenant shall reimburse Landlord, on demand, for Landlord's out of pocket expenses relating to such rescheduling, if any. SECTION 6.02. Audit. If the examination and/or audit referred to in Section 6.01 discloses that Tenant has understated its Gross Sales by three percent (3%) or more for any Lease Year during the period being examined, Tenant shall pay to Landlord, upon demand, the cost of such examination and/or audit, in addition to the deficiency in Percentage Rent, which shall be payable in any event. In addition, Landlord may treat the existence of such liability as an Event of Default. ARTICLE VII INSURANCE SECTION 7.01. Tenant's Insurance. (a) Tenant will keep in force with companies licensed to do business in the state where the Shopping Center is located, at Tenant's expense, at all times during the Term, and during such other times as Tenant occupies the Premises or any part thereof: (1) comprehensive general liability insurance with respect to the Premises, the sidewalks, if any, abutting and adjoining the Premises, and the business operated by Tenant and any subtenants, licensees and concessionaires of Tenant in or from the Premises, with minimum limits of One Million Dollars ($1,000,000.00) on account of bodily injuries to or death of one person, and Two Million Dollars ($2,000,000.00) on account of bodily injuries to or death of more than one person as the result of any one accident or disaster, and property damage insurance with minimum limits of One Hundred Thousand Dollars ($100,000.00). If the nature of Tenant's operation is such as to place any or all of its employees under the coverage of local worker's compensation or similar statutes, Tenant shall also keep in force, at its own expense, worker's compensation or similar insurance affording statutory coverage and containing statutory limits. Such liability insurance shall, in addition, extend to any liability of Tenant arising out of the indemnities provided in this Lease; and (2) Fire insurance, with standard broad form extended coverage endorsement covering: (i) all of Tenant's stock in trade, trade fixtures, furniture, furnishings, and such equipment as is not affixed to the Premises: and (ii) Tenant's interest in all of the improvements and betterments installed in the Premises by or for Tenant; in each case to the extent of at least eighty percent (80%) of their collective insurable value, without co-insurance. (b) Upon request, Tenant will deposit with Landlord policies of insurance required by the provisions of this Section 7.01 or certificates thereof, together with satisfactory evidence of the payment of the required premium or premiums therefor. The insurance required hereby may be maintained by means of a policy or policies of blanket insurance so long as the provisions of this Section 7.01 are fully satisfied. The insurance company or companies providing the insurance for Tenant as required by this Section 7.01 shall be subject to the reasonable approval of Landlord. (e) If for any reason whatsoever Tenant fails to provide and keep in force any or all of the insurance policies set forth in Section 7.01 hereof, then in such event Tenant shall indemnify and hold Landlord harmless against any loss which would have been covered by such insurance. Such failure shall constitute an Event of Default. 6 13 SECTION 7.02. Notice to Landlord. All policies of insurance required to be carried by Tenant shall provide that the policy shall not be subject to cancellation, termination or change except after not less than twenty (20) days' prior written notice to Landlord, and the policy referred to in Section 7.01(a)(1) shall name Landlord and Landlord's management agent (and any other person or entity as may be requested by Landlord in writing) as named insureds as their respective interests may appear, and shall be primary, non-contributory, and not in excess of any other coverage maintained by Landlord or any other party. In addition, such policies of insurance shall contain a provision substantially as follows: "It is understood and agreed that the insurance afforded by this policy or policies for more than one named insured shall not operate to increase the limits of the companies' liability, but otherwise shall not operate to link or void the coverage of any one named insured as respects claims against the same named insured by any other named insured or the employees of such other named insured." ARTICLE VIII UTILITIES; CONSUMPTION AND CHARGES SECTION 8.01. Utility Service; Consumption and Charges. (a) Tenant shall make all appropriate applications to the local utility companies at such times as shall be necessary to ensure that utilities are available at the Premises no later than the Commencement Date, and shall pay all required deposits, connection fees and/or charges for meters within the applicable time period set by the local utility company. (b) Tenant shall be solely responsible for and promptly pay all charges for heat, water, electricity, sewer rents or charges, and any other utility used or consumed in the Premises or in providing heating and air-conditioning to the Premises, including in each instance, all sales and other taxes applicable to the sale or supply of such utilities, said responsibility commencing on the earlier of the Commencement Date or the date Tenant first enters the Premises for any reason. Should Landlord elect or be required to supply or make available any utility used or consumed at the Premises, Tenant agrees to purchase and pay for same, as additional rent, every month during the Term. During the Term, Tenant agrees to purchase from Landlord and pay for electricity to be used by Tenant at the Premises in accordance with Exhibit "C" attached hereto. During the Term, Tenant agrees to purchase from Landlord and pay for the heating and/or cooling medium supplied by Landlord to the Premises, to be used by Tenant for heating and air-conditioning the Premises, as additional rent, upon presentation of bills therefor, at the rate set forth in the paragraph in the Indenture of Lease captioned "HVAC Charge", subject to adjustment in accordance with Landlord's Charge Rate Adjustment Schedule attached hereto as Exhibit "D". (c) In the event that Tenant does not have a water meter installed in the Premises, Tenant will pay to Landlord, as additional rent, every month during the Term, the minimum charge for the size of the water line installed in the Premises in accordance with the rates established from time to time by the company or authority supplying water to the Premises. In the event that the local authority, municipality, utility or other body collects for the water and/or sewerage or sanitary service and/or consumption, as aforesaid, Tenant covenants and agrees to pay the water and sewer rent charge (both minimum and otherwise) and any other tax, rent, levy, connection fee or meter or other charge which now or hereafter is assessed, imposed or may become a lien upon the Premises, or the realty of which they are a part, pursuant to law, order or regulation made or issued in connection with the use, consumption, maintenance or supply of water, or the water or sewerage connection or system. (d) Tenant must install and operate heating and cooling equipment in accordance with Landlord's Design Criteria to maintain the Premises at such temperatures as will prevent the freezing or bursting of pipes and the draining of heated and chilled air from any enclosed sections of the Shopping Center. (e) Landlord may, after thirty (30) days notice to Tenant, cease to furnish any one or more of the utility services to the Premises, without any responsibility to Tenant, except to connect, at Tenant's sole cost and expense, Tenant's distribution facilities therefor with another source for the utility service so disconnected. (f) In no event shall Landlord be liable to Tenant in damages or otherwise for any interruption, curtailment or suspension of any of the foregoing utility services whether resulting from an Event of Default by Tenant under this Lease, repair or maintenance activity at the Premises or the Shopping Center, actions of any third party not controlled by Landlord, accident, action of public authority, strikes, acts of God or public enemy, or any other cause, whether similar or dissimilar to the aforesaid. See Rider ARTICLE IX MARKETING SERVICES SECTION 9.01. Marketing Service Charge. Landlord shall establish a marketing service (hereinafter referred to as the "Marketing Service") to furnish and maintain sales promotion and advertising efforts for the benefit of the Shopping Center. Tenant shall pay, as its share of the cost of the Marketing Service for each Year, the amount set forth in Article VIII of the Indenture (hereinafter referred to as the "Marketing Service Charge"). The Marketing Service Charge for any partial Lease Year shall be determined by multiplying Tenant's Marketing Service Charge by a fraction, the numerator of which shall be the number of days contained in such partial year and the denominator of which shall be three hundred sixty-five (365). Tenant shall contribute to the Marketing Service, in advance, without demand, recoupment, deduction or offset, one-twelfth (1/12th) of the Marketing Service Charge (as adjusted at the time and in the manner provided below) on the first day of each calendar month throughout the Term. Tenant's Marketing Service Charge may be increased by Landlord, in its sole and absolute discretion, once per Lease Year during the Term by the greater of (i) eight percent (8%) of the previous year's payment, or (ii) the increase in the actual marketing expenditures for the previous year over the next previous year. The Marketing Service Charge shall be used to pay all costs and expenses associated with the formulation and execution of an ongoing program for the promotion and advertising of the Shopping Center, as determined by Landlord in its sole discretion and control. The Marketing Service Charge may be used to 7 14 defray the cost of administration of such marketing activities, including the salary or payments and reimbursements due such organizations and personnel, rent, travel expenses and other business expenses. Such reasonable amount of space within the Shopping Center as may be necessary to carry out the Marketing Service will be assessed in line with the rentals for similarly sized commercial office space. SECTION 9.02. Merchants' Association. Landlord may, from time to time in Landlord's sole discretion, require that Tenant participate in a merchants' association for the Shopping Center sponsored or designated by Landlord. In such case: (1) Tenant shall participate as an active member in such association; (2) Tenant shall continue to pay the Marketing Service Charge to Landlord and such Marketing Service Charge shall be deemed to satisfy any obligations of Tenant to pay regular monthly dues to such association; (3) Landlord shall turn over such Marketing Service Charge to the association or, at Landlord's option, shall continue to use the same or a portion thereof in conjunction with or on behalf of the association for the purpose of promoting, advertising and marketing the Shopping Center; and (4) Tenant shall pay any special assessments and participate in any joint advertising or promotional events sponsored by such association and shall comply with all other requirements of the association. SECTION 9.03. Initial Marketing Charge. In addition to the Marketing Service Charge, Tenant shall also pay to Landlord within sixty (60) days before the date that Landlord has set for the Grand Opening or Grand Re-Opening of the Shopping Center (hereinafter the "Grand Opening Date"), or upon execution of the Lease if less than sixty (60) days prior to the Grand Opening Date, or if after the Grand Opening Date (or if no Grand Opening or Grand Re-Opening is scheduled), upon the Commencement Date, an initial advertising charge (hereinafter referred to as the "Initial Marketing Charge") in an amount equal to Fifteen Cents ($0.15) per square foot of floor area in the Premises. Said payment by the Tenant shall be due and payable regardless of whether Tenant is obligated to be open for business on the Grand Opening Date. Nothing herein shall require Landlord to expend more in advertising and promoting such Grand or Grand Re-Opening than the amount equal to that which Landlord collects from occupants of the Shopping Center for such promotion. Landlord may charge all costs and expenses of promoting the Grand Opening or Re-Opening against such aggregate sum. The failure of any other tenant to pay the Initial Marketing Charge shall not affect Tenant's obligations hereunder. ARTICLE X CONDITION AND REMODELING SECTION 10.01. Condition of Premises. *, subject to the completion of Landlord's Work, as described in the Rider Tenant has had the opportunity to examine the Premises and hereby agrees to accept them in the "as is" condition existing on the Commencement Date*. Tenant further acknowledges that Landlord has not made any representations as to the present or future condition of the Premises, the presence or absence of Hazardous Materials (as hereinafter defined in Section 21.20) therein or what items the prior occupant of such Premises is required to or may leave in the Premises. Landlord shall not be liable for any inability to deliver possession of the Premises to Tenant by the Commencement Date, except that any such inability shall extend the Commencement Date by a period of time equal to the period between the Commencement Date and the date Landlord delivers possession; provided, however, if Landlord has not turned over possession by a date which is one year from the date hereof, at either party's option, this Lease shall be null and void and neither party shall have any liability hereunder to the other. Notwithstanding any conversations which may have taken place prior to the negotiation and execution of this Lease regarding the condition of the Premises, Tenant understands and accepts that it is solely responsible for securing such contractors, inspectors, architects or such other agents as Tenant may deem necessary or appropriate to ascertain the condition of the Premises, the utilities serving the Premises and any facilities contained within the Premises for connection thereto and the suitability of the Premises for the construction of Tenant's improvements. This obligation of Tenant set forth above shall not in any manner limit the right of Landlord to approve Tenant's plans and specifications or to require changes thereto as Landlord deems appropriate or necessary for the Premises, nor shall Landlord's voluntary furnishings of any as-built drawings, architectural or engineering reports or similar information regarding the construction or condition of the Premises in any manner relieve Tenant of its responsibility hereunder. See Rider SECTION 10.02. Remodeling of the Premises. See Rider (a) Tenant shall fully and completely remodel the Premises in accordance with the plans and specifications referred to below, such work to be completed by the date specified in the paragraph of the Indenture of Lease captioned "Tenant Improvements". Such work shall include installation of a new storefront and a complete refurbishment of the interior of the Premises to the extent specified by Landlord and shall be consistent with Landlord's design criteria. Not later than thirty (30) days after the date hereof, Tenant shall deliver to Landlord detailed plans and specifications (which shall include cooling and heating load calculations, electrical panelboard schedules and loads and such other details as may be required by Landlord's engineer) prepared by Tenant's licensed architect, disclosing the remodeling of the Premises. Landlord shall review such plans and specifications and advise Tenant of any changes required by Landlord; Tenant shall promptly revise such plans and specifications to incorporate Landlord's required changes and redeliver revised plans to Landlord within twenty (20) days after being advised of Landlord's changes. Landlord may require further changes in such plans and Tenant shall similarly revise and resubmit the same to Landlord within an additional period of twenty (20) days. Tenant shall commence such renovations within ten (10) days after Landlord has approved Tenant's plans and specifications and has turned over possession of the Premises. All such work shall be promptly commenced and thereafter continued with due diligence to the end that it shall be fully completed and the Premises opened for business in accordance with the provisions hereof not later than the Commencement Date. Tenant shall perform no work in the Premises until such plans and specifications have been approved by Landlord. Together with the initial submission of plans and specifications (i) for the remodeling required by this Lease and (ii) relating to any other work in the Premises which Tenant desires or is required to perform, Tenant shall pay Landlord or Landlord's management agent, as directed, the "Plan Review Charge" set forth below to defray the cost of reviewing Tenant's plans and specifications. The Plan Review Charge shall be equal to Fifty Cents ($.50) per square foot of floor area in the Premises, with a minimum charge of Five Hundred Dollars ($500.00) and a maximum 8 15 charge of Two Thousand Dollars ($2,000.00). The foregoing Plan Review Charge shall not apply to the initial construction of the Premises. (b) All work required under this Section 10.02 and all other alterations to the Premises performed by Tenant pursuant to this Lease (including, without limitation, any work required by Section 21.20) are collectively referred to as "Tenant's Work". All of Tenant's Work shall be completed at Tenant's sole cost and expense. In performing Tenant's Work, Tenant shall comply with the following requirements: 1. In addition to, and not in lieu of the other policies of insurance required by this Lease, at all times between the start and completion of Tenant's Work (such period is herein referred to as "Tenant's Construction Period"), Tenant, at its own cost and expense, shall maintain in effect with an insurance company reasonably acceptable to Landlord, a policy of "All Risk" Builder's Risk Insurance in the standard form for the State of Ohio. Said insurance shall cover the full replacement value of all work done and fixtures and equipment installed or to be installed at the Premises by Tenant, without co-insurance and without any deductible clauses, and shall list Landlord and Landlord's management agent as additional insureds as their respective interests may appear. 2. At all times during Tenant's Construction Period, Tenant's contractors and subcontractors shall maintain in effect worker's compensation insurance as required by the laws of the State of Ohio. Tenant's contractor shall also provide to Landlord proof of general liability insurance in an amount not less than $500,000.00 per person and $1,000,000.00 per occurrence. 3. Repair and/or reconstruction of all or any portion of Tenant's Work damaged or destroyed by any casualty occurring during Tenant's Construction Period shall be commenced by Tenant as soon as possible after such casualty; provided that if all or any portion of Landlord's Work (as defined in Exhibit "B" attached hereto; if no such Exhibit "B" is attached, Landlord's Work shall be deemed to be only structural portions of the Premises), if any, is also damaged or destroyed by such casualty, Landlord shall notify Tenant when repairs or reconstruction of Landlord's Work is substantially completed and, within fifteen (15) days after receipt of such notice, Tenant shall diligently pursue such repair and/or reconstruction to completion. 4. Any approval of or consent to any or all of Tenant's criteria, systems, plans, specifications or drawings shall neither constitute an assumption of responsibility by Landlord for any aspect of such criteria, systems, plans, specifications or drawings including, but not limited to, their accuracy or efficiency, nor obligate Landlord in any manner with respect to Tenant's Work, and Tenant shall be solely responsible for any deficiency in design or construction of all portions of Tenant's Work. 5. Tenant shall obtain and pay for all necessary permits and shall pay all other fees required by public authorities or utility companies with respect to Tenant's Work. 6. Tenant shall maintain the Premises and the Common Areas adjoining the same in a clean and orderly condition during construction. Tenant shall promptly remove all unused construction materials, equipment shipping containers, packaging, debris and waste from the Shopping Center, and deposit it in receptacles, if any, provided by Landlord or otherwise remove the same from the Shopping Center. Tenant shall contain all construction materials, equipment, fixtures, merchandise, shipping containers and debris within the Premises. Arcades, public corridors, service corridors and the exterior of the Shopping Center shall be clear of Tenant's equipment, merchandise, refuse, and debris at all times. 7. To the end that there shall be no labor disputes which would interfere with any construction occurring in the Shopping Center or the operation thereof, or any part thereof including, but not limited to, the Premises, in performing any Tenant's Work, Tenant agrees to engage the services of only such contractors or subcontractors as will work in harmony and without causing any labor dispute with each other, with Landlord's employees, contractors and subcontractors and with the employees, contractors and subcontractors of all others working in or upon the Shopping Center or any part thereof, and Tenant shall require its contractors and subcontractors to employ only such labor as will work in harmony and without causing any labor dispute with each other, with Landlord's employees, contractors and subcontractors and with the employees, contractors, and subcontractors of all others working in or upon the Shopping Center or any part thereof. Furthermore, only those contractors and subcontractors as have been duly licensed by the authority having jurisdiction over the appropriate profession and which have been approved in writing by Landlord may perform any portion of Tenant's Work for Tenant in or upon the Premises. Nothing contained herein shall require Tenant to utilize union labor in connection with its construction of the Premises. 8. At any time, and from time to time, during the performance of Tenant's Work, Landlord, Landlord's management agent, Landlord's architect and/or Landlord's general contractor may enter upon the Premises and inspect the work being performed by Tenant and take such steps as they may deem necessary or desirable to assure the proper performance by Tenant of Tenant's Work and/or for the protection of the Shopping Center and/or any premises adjacent to the Premises. In addition, Tenant's Work shall be performed in a thoroughly first-class and workmanlike manner, shall incorporate only new materials which are free from asbestos or other hazardous material and shall be in good and usable condition at the date of completion. 9. Tenant's Work shall be coordinated with all work being performed or to be performed by Landlord and other occupants of the Shopping Center to the end that Tenant's Work will not interfere with the operation of the Shopping Center or interfere with or delay the completion of any other construction within the Shopping Center, and each such contractor and subcontractor shall comply with all procedures and regulations prescribed by Landlord for integration of Tenant's Work with that to be performed in connection with any construction in the Shopping Center and with the operation of the Shopping Center. 10. Neither Tenant nor its contractors or subcontractors may use any space within the Shopping Center (except the Premises) for storage, handling and moving of materials and equipment, and if Tenant or such contractors and/or subcontractors shall use any space in the Shopping Center (except the Premises) for any of the aforesaid purposes without obtaining Landlord's prior written consent thereto, Landlord shall have the right to terminate such use or remove all of Tenant's and such contractor's or subcontractor's material, equipment and other property from such space without Landlord being liable to Tenant and/or such contractors or subcontractors, and the cost of such termination and/or removal shall be paid by Tenant to Landlord promptly upon demand therefor. It shall be Tenant's 9 16 responsibility to cause each contractor and subcontractor to maintain continuous protection of adjacent property and improvements against damage by reason of Tenant's Work. No materials delivered to the Premises for Tenant's Work shall be delivered through the public areas of the Shopping Center during the normal operating hours of the Shopping Center. 11. Tenant shall promptly pay all contractors and materialmen so as to minimize the possibility of a lien or claim of lien being filed with respect to the Premises or the Shopping Center, and should any such lien be made or filed, Tenant shall cause the same to be discharged by bond or otherwise within thirty (30) days after written request by Landlord. If Tenant shall fail to cause such lien or claim of lien to be bonded against or to be discharged within the period aforesaid, then, in addition to any other right or remedy which Landlord may have under this Lease, at law or in equity, Landlord may, but shall not be obligated to, discharge the same either by paying the amount claimed to be due or by procuring the discharge of such lien of claim of lien by deposit or by bonding proceedings and, in any event, Landlord shall be entitled, if Landlord so elects, to compel the prosecution of any action for the foreclosure of such lien or claim of lien by the lienor with interest, costs and expenses. Any amount so paid by Landlord and all costs and expenses incurred by Landlord in connection therewith or in connection with insuring the title to the Shopping Center or any interest herein free of such lien or claim of lien together with interest at the rate of fifteen percent (15%) per annum from the respective dates of Landlord's making of the payment and incurring of the cost and expense, shall constitute additional rent payable by Tenant under this Lease and shall be paid by Tenant to Landlord on demand. 12. Landlord shall supply to Tenant, or directly to Tenant's contractor, a copy of the rules, regulations and requirements of the Shopping Center pertaining to Tenant's Work. Tenant agrees to make its best effort to secure its contractor's acknowledgement of receipt of such rules, regulations and requirements and to ensure the contractor's compliance therewith. 13. In the event the fire protection (sprinkler) system in place in the Shopping Center has to be or is shut down, whether intentionally or inadvertently, by Tenant or its contractors, subcontractors, agents or employees, more than once during construction of Tenant's Work, Tenant shall pay to Landlord, upon demand, a shut down fee of $100.00 for each such event. (c) Within thirty (30) days after initially opening the Premises for business with the public, Tenant shall supply to Landlord the following: 1. An executed and acknowledged final waiver and release of mechanics' liens with respect to the Premises executed by Tenant's general contractor and by every subcontractor and supplier of labor and/or materials engaged in Tenant's Work. 2. Properly issued certificates evidencing acceptance or approval of the Premises by appropriate governmental authorities, including the underwriter's approval of Tenant's sprinkler installation and electrical system. 3. A set of "as-built" plans and specifications for Tenant's Work prepared and sealed by Tenant's architect, together with names and addresses of Tenant's electrical, plumbing, and other contractors. (d) Nothing in this Lease shall be construed as in any way constituting a consent or request by Landlord, express or implied, by inference or otherwise, to any contractor, subcontractor, laborer, or materialman for the performance of any labor or the furnishing of any materials for any specific or general improvement, alteration, or repair of or to the Premises or to any buildings or improvements thereon, or to any part thereof. Notwithstanding anything in this Lease, or in any other writing signed by Landlord to the contrary, neither this Lease nor any other writing signed by Landlord shall be construed as evidencing, indicating, or causing an appearance that any erection, construction, alteration or repair to be done, or caused to be done, by Tenant is or was in fact for the immediate use and benefit of Landlord. SECTION 10.03. Trade Fixtures. All trade fixtures, signs and other personalty hereafter installed by Tenant in the Premises shall be new or reconditioned and "like new", shall be and remain the property of Tenant and shall be removed by Tenant at the expiration or earlier termination of the Term, provided that: (a) Tenant shall not at such time be in default under this Lease; and (b) Tenant shall promptly restore the damage done to the Premises by the installation and/or removal thereof. Should Tenant fail to so remove Tenant's trade fixtures and/or to so restore the Premises, Landlord may at Landlord's option, do so, collecting the cost and expense thereof, as additional rent, upon demand. Any such trade fixtures which are not removed by Tenant at or prior to any termination of this Lease, including, but not limited to, a termination by Landlord pursuant to an Event of Default by Tenant hereunder, unless Landlord gives Tenant notice to remove any or all of such trade fixtures, shall be and become the property of Landlord (without any obligation by Landlord to pay compensation for such trade fixtures). In the event Landlord gives Tenant such notice to remove any or all of such trade fixtures, Tenant shall promptly remove such of the trade fixtures as may be specified by Landlord in such notice. Notwithstanding anything herein contained to the contrary or any decision of any court to the contrary, the term "trade fixtures" shall not include any air-conditioning, heating, lighting, electrical and plumbing equipment installed by Tenant in the Premises, nor any wiring or other apparata related thereto. SECTION 10.04. Signs, Awnings and Canopies. (a) Tenant shall neither place nor maintain nor suffer to be placed or maintained on the exterior of the Premises, or on the glass of any window or door of the Premises which shall be visible from the exterior thereof (other than neatly lettered signs of reasonable size placed on the floor of the display window identifying articles offered for sale and the price thereof) any sign, awning, canopy, decoration, lettering, advertising matter or any other thing without in each instance first obtaining Landlord's written approval thereof; and Tenant further agrees to design and to maintain such sign, decoration, lettering, advertising matter or other thing as may be approved in good condition and repair at all times in compliance with the requirements of the "Sign Criteria" attached hereto, made a part hereof and marked Exhibit "F". Notwithstanding the provisions of Sections 10.03 and 10.04, Tenant's plans and specifications, once approved by Landlord, shall deemed to be in compliance with the Lease provisions. 10 17 (b) Tenant shall not paint or decorate any part of the exterior of the Premises, or any part of the Premises which shall be visible from the exterior thereof, without first obtaining Landlord's written approval of such painting or decoration. (c) Tenant shall install and maintain at all times, subject to the other provisions of this Section 10.04, displays of seasonable merchandise in the show windows (if any) of the Premises; and Tenant further agrees that all articles and the arrangement, style, color and general appearance thereof, in the interior of the Premises which shall be visible from the exterior thereof, including, but not limited to, window displays, advertising matter, signs, merchandise and store fixtures, shall be maintained in the Premises so as to be in keeping with the character and standards of the Shopping Center. SECTION 10.05. Alterations and Mandatory Refurbishment. (a) Tenant may, without Landlord's consent, make alterations to the interior of the Premises which do not alter, modify or in any other manner whatsoever affect the structural portions of the Premises and/or the roof of the building of which the Premises shall form a part and/or the exterior of the Premises (included, but not limited to, the storefront) and/or the structural integrity of the building of which the Premises shall form a part, and/or the plumbing, electrical, heating, ventilating, air-conditioning, or mechanical systems and installations in the Premises, provided that any such single alteration (or series of such related alterations) does not involve a cost in excess of Fifty Thousand Dollars ($50,000.00), provided that Tenant shall give Landlord notice of any alterations which include changes to the wall, floor or ceiling materials within the Premises. Tenant agrees that it will not make any other alterations (whether structural or otherwise), improvements, additions or changes to the interior or exterior of the Premises (including, but not limited to, the storefront of the Premises) during the term of this Lease without in each instance obtaining Landlord's prior written consent. Furthermore, Tenant will not, except for installation of fixtures or other work specified on Tenant's approved plans and specifications referred to in Section 10.02 hereof or to the extent permitted by the first sentence of this Section 10.05(a), cut or drill into or secure any fixture, apparatus or equipment of any kind to any part of the Premises without in each instance first obtaining Landlord's written consent. Together with each request for such consent, Tenant shall present to Landlord detailed plans and specifications for such proposed alterations, improvements, additions or changes as required by Section 10.02 hereof and Tenant shall comply with such section in performing such approved alterations. See Rider SECTION 10.06. Changes and Additions to the Center. (a) Landlord hereby reserves the exclusive right at any time, and from time to time, to use all or any part of the roof, exterior walls and air space above the finished ceiling of the Premises for any purpose; to erect scaffolds, protective barriers or other aids to construction on, around and about the exterior of the Premises, provided that access to the Premises shall not be substantially denied. Landlord also reserves the right, after written notice to Tenant, to enter the Premises (except that in the event of an emergency, no notice shall be required), at any time, and from time to time, for the following purposes: to make such repairs, additions or alterations as it may deem necessary or desirable to the Premises, to the building in which the Premises is contained, or to the Shopping Center in general; to shore the foundations and/or walls thereof and/or to install, maintain, use, repair, inspect and replace foundations, columns, pipes, ducts, conduits and wires leading through or located adjacent to the Premises and serving other parts of the Shopping Center. Landlord shall use reasonable efforts to install such pipes, ducts, conduits or wires in the space above Tenant's finished ceiling (or if Tenant does not have finished ceiling, then in the space above the height where, in Landlord's opinion, a finished ceiling would otherwise exist) or another location which does not materially interfere with Tenant's use of the Premises. Tenant shall not remove or tamper with any such pipes or other apparatus installed by Landlord and agrees to cooperate with Landlord in effecting any such maintenance or improvements, including providing store personnel on hand during extended hours if Landlord reasonably deems such presence to be in the best interest of the Premises, the Tenant or the Shopping Center. Landlord's rights hereunder may be exercised by Landlord's designee. (b) Landlord hereby reserves the right at any time to make alterations or additions to, and to build additional stories on, and to build adjoining any buildings in the Shopping Center, including the building in which the Premises are contained, and to construct other buildings or improvements in the Shopping Center, and Tenant shall have no interest of any kind whatsoever in the said additions or additional stories, adjoining buildings or other expansions of the Shopping Center. Landlord also reserves the right to reduce or enlarge the area of the Shopping Center by excluding portions of the ground therefrom or adding additional ground thereto from time to time and, whether or not so reduced or enlarged, to construct multi-deck, elevated or subterranean parking facilities, and to make changes in access roads, entryways or other physical characteristics of the Shopping Center. Landlord may also change the name of the Shopping Center at any time in its sole and absolute discretion. (c) If any excavation shall be made or authorized to be made upon land adjacent to the Premises, Tenant shall afford to the person causing or authorized to cause such excavation, license to enter upon the Premises for the purpose of doing such work as Landlord shall deem necessary to preserve the walls or the building of which the Premises form a part from injury or damage and to support the same by proper foundations, without any claim for damages or indemnification against Landlord or diminution or abatement of rent. See Rider 11 18 ARTICLE XI CONDUCT OF BUSINESS SECTION 11.01. Use of Premises. (a) Except as otherwise specifically provided herein, commencing on the Commencement Date and thereafter for the balance of the Term, Tenant shall continuously occupy and use the Premises solely for conducting the business specified in the Indenture of Lease as the permitted use, and will not use or permit or suffer the use of the Premises for any other business or purpose. In addition, Tenant agrees that Tenant shall not operate or cause or permit to be operated any catalogue, mail, or telephone order sales in or from the Premises except the incidental sale of merchandise which Tenant is permitted to sell over the counter to customers in the Premises pursuant to the permitted use set forth in the Indenture of Lease, nor shall Tenant divert elsewhere any business which would ordinarily be transacted by Tenant at, in, on or from the Premises. The authorization of the use of the Premises for the business purposes set forth in the Indenture of Lease does not constitute a representation or warranty by Landlord that any particular use of the Premises is now or will continue to be permitted under applicable laws or regulations. Tenant shall secure and, at all times during the Term, maintain any and all licenses, permits or other registrations required by any municipality, state or federal government or any other regulatory body for the proper operation of Tenant's business in the Premises. (b) Tenant shall not permit, allow or cause to be conducted in the Premises any public or private auction, or any sale which would indicate to the public that Tenant is bankrupt, is going out of business, or has lost its lease. Tenant shall not use or permit any use of the Premises, except in a manner consistent with the general high standards of merchandising in the Shopping Center, nor shall Tenant's advertising indicate or imply that Tenant is operating its business in a manner which is not consistent with the general high standards of merchandising in the Shopping Center. Nothing contained in this Section 11.01(b) shall affect or is intended to affect Tenant's pricing policies. (c) Notwithstanding anything contained herein to the contrary, including the provisions of the clause of the Indenture of Lease captioned "Use of Premises", Tenant is specifically prohibited from selling or distributing tobacco papers, pipes of the type and nature commonly associated with the smoking of marijuana (e.g. "water pipes"), "roach clips", cocaine spoons and other types of smoker's novelty items, materials or paraphernalia which are, or may reasonably be construed to be, intended for use in connection with narcotics or other unlawful substances; any print, visual, audio or other materials which are or could be reasonably considered pornographic under any applicable municipal, state or federal law or any other items which are in violation of any municipal, state or federal law, ordinance or regulation. (d) Because the adequacy of the rental hereunder is dependent upon Tenant's Gross Sales whether or not Percentage Rent is payable hereunder, Tenant agrees that commencing with the Commencement Date and thereafter throughout the Term, Tenant will continuously, actively and diligently operate or cause the permitted business to be operated in good faith and in an efficient, businesslike and respectable manner, maintaining in the Premises a full staff of employees and a full stock of seasonable merchandise of the quality, kind, type and breadth which Tenant usually sells, and employing Tenant's best continual efforts and abilities to the end that the maximum Gross Sales which can reasonably be produced from the Premises shall be produced. (e) Throughout the Term, Tenant shall cause its store to remain open each day of the week during at least the hours set forth in the paragraph of the Indenture of Lease captioned "Shopping Center Hours of Operation". Tenant acknowledges that Landlord may specifically require that the Premises be closed on certain days or during certain hours (other than the hours on the Indenture). (f) Tenant shall operate and advertise the business operated at or from the Premises only under the trade name set forth in the first page of the Indenture of Lease, unless and until the use of another trade name is permitted in writing by Landlord. SECTION 11.02. Storage on Premises. Tenant shall warehouse, store and/or stock in the Premises only such goods, wares and merchandise as Tenant is permitted and intends to offer for sale at retail, at or from the Premises. This shall not preclude occasional transfers of merchandise to other stores of Tenant, if any, not located within the Shopping Center. SECTION 11.03. General Conditions of Use. Tenants covenants and agrees that Tenant, at its own cost and expense: (a) will keep all exterior and interior storefront surfaces clean and will maintain the rest of the Premises and all corridors and loading areas immediately adjoining the Premises in a clean and orderly condition and free of insects, rodents, vermin and other pests; (b) will not permit accumulation of any refuse, but will remove the same and keep such refuse in odor-proof, rat-proof containers within the interior of the Premises shielded from the view of the general public (or in such other area designated specifically by Landlord for such use) until removed and will not burn any refuse whatsoever but will cause all such refuse to be removed by such persons or companies, including Landlord, as may be designated in writing by Landlord and will pay all charges therefor, which shall in all events be competitive within the same geographical area for similar services performed by a reputable person or company; provided however, that Landlord may decline to designate any such person or company in which event all such refuse shall be removed by such person or company as Tenant, subject to Landlord's prior written approval, shall select. In the event that Landlord institutes a recycling program in the Shopping Center as to any refuse produced or disposed of by Tenant, Tenant agrees to participate in and cooperate with Landlord and other tenants in such program if and when so requested; 12 19 (c) will replace promptly with glass of a like kind and quality any plate glass or window glass of the Premises which may become cracked or broken; (d) will not, without the Landlord's prior written consent, place or maintain any merchandise or other articles in any vestibule or entry of the Premises or the footwalks adjacent thereto or elsewhere on the exterior thereof; (e) will not use or permit the use of any apparatus for sound reproduction or transmission, or any musical instrument, in such manner that the sound so reproduced, transmitted or produced shall be audible beyond the confines of the Premises, and will not use any other advertising medium, including without limitation flashing lights or search lights, which may be heard or experienced outside of the Premises; (f) will keep all mechanical apparatus free of vibration and noise which may be transmitted beyond the confines of the Premises; (g) will not cause or permit objectionable odors to emanate or be dispelled from the Premises; (h) will not solicit business, distribute handbills or other advertising matter or hold demonstrations in the parking areas or other Common Areas; (i) will not permit the parking of delivery vehicles so as to interfere with the use of any driveway, walk, parking area, or other portion of the Common Areas in the Shopping Center; (j) will comply with all laws, rules, regulations, guidelines, orders and ordinances of applicable federal, state and local governmental authorities, commissions, boards and agencies with respect to this Lease, the use of the Premises, the removal of asbestos, asbestos containing material or any other hazardous material from the Premises, or any work to be performed in the Premises by Tenant, and Tenant shall secure and keep in force all permits, licenses and approvals required for Tenant's use of the Premises. In addition, Tenant shall comply with all recommendations of the Association of Fire Underwriters, Factory Mutual Insurance Companies, the Insurance Services Organization, or other similar body establishing standards for fire insurance ratings with respect to the use or occupancy of the Premises by Tenant, and will participate in periodic fire brigade instruction and drills at the request of Landlord and will supply, maintain, repair and replace for the Premises any fire extinguishers or other fire prevention equipment and safety equipment (including installation of approved hoods and ducts if cooking activity is conducted on the Premises) required by the aforementioned rules, regulations and recommendations in order to obtain insurance at the lowest available premium rate throughout the term of this Lease; (k) will not receive or ship articles of any kind except through the facilities provided for that purpose by Landlord and will not permit any delivery of goods, supplies, merchandise, or fixtures to or from the Premises to be made through any of the enclosed malls unless the Premises have no entrance other than on such a mall, in which latter case Tenant shall use its best efforts to schedule such deliveries outside Shopping Center business hours, except with Landlord's approval in emergency situations; (l) will light the show windows of the Premises and exterior signs each day of the year to the extent which shall be required by Landlord but in no event later than one hour after the close of the Shopping Center; (m) will keep the sidewalk in front of Tenant's entrance (but limited to the area within ten feet of the door to the Premises) free from ice and snow and Tenant hereby agrees that Tenant is solely liable for any accidents occurring on said sidewalk areas due or alleged to be due to any accumulation of ice and snow; (n) will refer to the name of the Shopping Center in all advertising done to promote sales at its store or stores in the geographical area in which the Shopping Center is located; (o) will not use the plumbing facilities for any other purpose than that for which they are constructed and will not permit any foreign substance of any kind to be thrown therein, and the expense of repairing any breakage, stoppage, seepage or damage, whether occurring on or off the Premises, resulting from a violation of this provision by Tenant or Tenant's employees, agents or invitees shall be borne by Tenant. All grease traps and other plumbing traps shall be kept clean and operable by Tenant at Tenant's own cost and expense. Tenant shall keep the floor of the Premises and all penetrations through said floor properly sealed and caulked so that water or other substances in use in the Premises shall not leak from the premises to any Common Area or adjoining premises or premises located below the Premises; (p) will not permit any shopping carts in the Common Areas even if taken there by customers; and (q) will not place or cause or permit to be placed within the Premises, pay telephones, vending machines (except those for the exclusive use of Tenant's employees) or amusement devices of any kind without the prior written consent of Landlord. SECTION 11.04. Rules and Regulations. (a) Landlord reserves the right from time to time to adopt and promulgate reasonable rules and regulations applicable to the Premises and the Shopping Center and to amend and supplement such rules and regulations. Notice of such rules and regulations and of any amendment and supplements thereto shall be given to Tenant and Tenant agrees thereupon to comply with and observe all such rules and regulations, provided that, to the extent practicable, the same shall be applied uniformly to substantially all non-department store retail tenants of the Shopping Center. The rules and regulations, if any, in effect as of the date of execution of this Lease, are attached hereto as Exhibit "E" and made a part of this agreement. No changes may be made in the rules and regulations which materially adversely affect the operation of Tenant's business or which changes the economic Terms of the Lease. (b) Landlord's rights and remedies in the event Tenant shall fail to comply with and observe such rules and regulations shall be the same as though such rules and regulations were set forth in Section 11.03 of this Lease. 13 20 SECTION 11.05. Competition. (a) Tenant acknowledges that Landlord's ability to obtain a fair and equitable rental is dependent upon Tenant concentrating all of its business efforts within the geographical area in which the Shopping Center is located upon Tenant's business at the Premises so as to maximize Tenant's Gross Sales, and Tenant further acknowledges that any activity by Tenant within such geographical area in operating or participating in the operation of a similar or competing business must necessarily have an adverse effect on the volume of Gross Sales by Tenant at the Premises to the detriment of Landlord and will deprive Landlord of the fair rental to which the parties agreed. Accordingly, in the event that during the Term either Tenant or Tenant's management, or any person or entity controlled by Tenant or controlling Tenant, or controlled by the same person or entity or persons or entities who control Tenant, directly or indirectly owns, operates, is employed in, directs or serves any other place of business, the same, or similar to, or competitive with, Tenant's business as set forth herein, within a radius of four (4) miles from the outside boundary of the Shopping Center (measured from the boundary nearest to such other location), which distance shall be measured in a straight line without reference to road mileage, then Landlord may: (a) cancel this Lease upon thirty (30) days prior written notice to Tenant; or (b) include the Gross Sales of any such other place of business in the Gross Sales made from the Premises to determine the Percentage Rent due under this Lease, as fully as though such Gross Sales had actually been made from the Premises; or (c) increase the annual amount of Fixed Minimum Rent payable thereafter, and each component thereof if the Fixed Minimum Rent is otherwise subject to increase, by an amount equal to the highest Percentage Rent payable by Tenant in any calender year prior to the opening of such other business. In the event Landlord so elects, all of the provisions of Articles II and VI hereof shall be applicable to the Gross Sales of, and all the books and records pertaining to, such competing store. (B) Any permitted exceptions to this Section for presently existing or anticipated stores shall be specifically identified by Tenant on a list to be attached hereto as Exhibit 11.05 if approved by Landlord. SECTION 11.06. Parking Facilities. Tenant and its employees shall park their cars only in those portions of the parking area designated for that purpose by Landlord. Tenant shall furnish Landlord with automobile license numbers assigned to Tenant's car and cars of its employees within five (5) days after each and every request therefor. ARTICLE XII MAINTENANCE AND REPAIR; SURRENDER OF PREMISES SECTION 12.01. Repairs and Maintenance by Tenant. (a) Tenant, at all times, at its own expense, shall keep and maintain all portions of the Premises not required to be maintained by Landlord pursuant to Section 12.02 hereof, in good order and repair and in a neat, safe, clean and orderly condition, including, but not limited to, reasonable periodic painting and making all non-structural, ordinary and extraordinary, foreseen and unforeseen repairs and replacements to the Premises and its component systems. The foregoing sentence shall obligate Tenant to repair, maintain and replace, without limitation, all entrances to the Premises, the storefront, the glass in all doors and windows of the Premises, all interior portions of the Premises, all trade fixtures, fixtures, signs and all walls thereof (except to the extent set forth in Section 12.02[a]), as well as plumbing, electrical, sprinkler, heating, ventilation and air conditioning systems, escalators and elevators, if any, mechanical systems, and sewer lines within the Premises or under the floor slab thereof, including free flow to the main sewer line, as well as all other apparatus or equipment which were installed by Tenant outside the Premises. Tenant shall not overload the electrical wiring serving the Premises or within the Premises, and will install, at its own expense, but only after obtaining Landlord's written approval, any additional electrical wiring which may be required in connection with the Premises. If Landlord, Landlord's management agent or affiliates thereof elect to provide heating, ventilating and air-conditioning inspection, adjustment, cleaning and repair services to Tenant, Tenant shall utilize such services and pay for the same at rates which are competitive within the same geographical area for similar services performed by others; if Landlord elects not to perform such services, the Tenant shall contract for such services with a qualified service contractor. (b) Tenant will repair promptly at its own expense any damage (whether structural or non-structural) to the Premises caused by any construction or alterations performed by Tenant or bringing into the Premises any property for Tenant's use, or by the installation or removal of such property, regardless of fault or by whom such damage shall be caused, unless caused solely by the negligence of Landlord or its servants or employees. SECTION 12.02. Structural Repairs. (a) Except as otherwise provided by 12.01(b), structural columns, structural portions of the floors (excluding floor tile, carpet or other floor coverings), the roof of the Shopping Center and exterior walls thereof will be repaired by Landlord, provided Tenant gives Landlord notice specifying the need for and nature of such repairs. Notwithstanding the foregoing, if Landlord is required to make any repairs to such portions of the Premises by reason, in whole or in part, of the negligent act or failure to act by Tenant or Tenant's agents, servants, employees, contractors or subcontractors, or by reason of any unusual use of the Premises by Tenant (whether or not such use is a permitted use hereunder), Landlord may collect the cost of such repairs, as additional rent, upon demand. For the purpose of this Lease, any difference in floor level, shifting of floor slab, or deviation in finished floor height resulting from the insertion or construction of an expansion joint strip in the floor slab shall not be deemed a structural defect requiring repair by Landlord, but rather, a normal construction practice which shall be Tenant's responsibility to appropriately plan for in its construction and use of the Premises. The provisions of this subsection shall not apply in the case of any casualty or condemnation in which event the provisions of Articles XIV or XV, as the case may be, shall control. (b) If, without Landlord's prior written consent, Tenant performs any alterations, additions, improvements, changes, affixations or chattels or other work which affects the structural portions of the Premises and/or the roof of the building of which the Premises are a part and/or that portion of the exterior of the Shopping Center which Landlord is obligated to repair pursuant to Section 12.02(a) or 14 21 which affects the structural integrity of the building of which the Premises shall form a part, such action by Tenant shall release and discharge Landlord as of the commencement of such alteration, addition, improvement, affixation or other work of and from such repair obligation, and thereafter Tenant agrees to be solely responsible for the maintenance, repair and replacement of any or all such structural portions, roof, exterior and building which have been affected as aforesaid, provided, in the event Tenant shall default in the performance, to Landlord's satisfaction, of such responsibilities, Landlord, in addition to Landlord's other remedies under this Lease, at law or in equity, may (but shall not be obligated to) cure such default at Tenant's cost without any liability of Landlord, its agents, servants, employees, contractors or subcontractors for damage to Tenant's merchandise, fixtures or other property or to Tenant's business by reason thereof. For the purposes of the foregoing, if Tenant performs any such alterations, additions, improvements, changes, affixations or other work in a manner not consistent with Landlord's prior written consent thereto, such work shall be deemed to have been performed without Landlord's consent. SECTION 12.03. Surrender of Premises. (a) At the expiration of the Term or earlier termination of this Lease, Tenant shall peaceably surrender the Premises, broom clean, free of debris, in good order, condition and state of repair as required hereby, ordinary wear and tear excepted to the extent the Premises is not required to be repaired and/or maintained by Tenant and damage by unavoidable casualty excepted to the extent that the same is covered by Landlord's fire insurance policy with extended coverage endorsement, and Tenant shall surrender all keys for the Premises to Landlord and shall notify Landlord in writing of all combinations of locks, safes and vaults, if any, in the Premises. Tenant shall comply with the provisions of Section 10.03 respecting the removal of its trade fixtures before surrendering the Premises as aforesaid. Any property remaining in the Premises after the expiration or early termination of this Lease shall be deemed abandoned by the Tenant and may be disposed of by Landlord without any liability to Tenant. Tenant hereby indemnifies and agrees to hold harmless Landlord from any actions resulting from said disposal. (b) Whether or not approved by or subject to approval of Landlord, all alterations, improvements, additions, or changes made by Tenant and all air-conditioning, heating, lighting, electrical and plumbing equipment and fixtures, and all wiring and other apparatus related to air-conditioning, heating, lighting, electrical and plumbing equipment installed by Tenant (whether such be installed prior to or subsequent to the Commencement Date) at the Premises (whether or not such equipment and fixtures are affixed to the Premises as to be removable without destroying the chattels themselves or the property to which they are affixed, and whether or not such equipment and fixtures are real property or personalty) shall remain upon the Premises at the expiration of the Term or earlier termination of this Lease and shall become the property of Landlord immediately upon the installation thereof and shall remain the property of the Landlord without any obligation of Landlord to pay compensation therefor. ARTICLE XIII INDEMNIFICATION; SUBROGATION SECTION 13.01. Indemnification and Waiver of Claim. See Rider (a) Tenant will defend and will indemnify Landlord and Landlord's management agent and save them harmless from and against any and all claims, actions, damages, liability and expense (including, but not limited to, reasonable attorneys' fees and disbursements) in connection with any and all loss of life, personal injury or damage to property or business arising from, related to, or in connection with the performance of Tenant's Work, the occupancy of the Premises or any part of Landlord's property or the Shopping Center, or occasioned wholly or in part by any act or omission of Tenant, its contractors, subcontractors, subtenants, licensees or concessionaires, or its or their respective agents, servants or employees. Tenant shall not, however, be liable for damages or injury occasioned by the negligence or willful acts of Landlord, or Landlord's management agent, or their respective agents, employees, or servants, unless such damage or injury arises from perils against which Tenant is required by this Lease to insure. Tenant shall also pay all costs, expenses and reasonable attorneys' fees that may be expended or incurred by Landlord and/or Landlord's management agent in successfully enforcing the covenants and agreements of this Lease. (b) Unless, and then solely to the extent that, such damage is caused by the negligent acts or omissions of Landlord, or Landlord's management agent, or their respective principals, agents, servants, contractors and employees, neither Landlord nor Landlord's management agent, nor their respective principals, agents, servants, employees or contractors, shall be liable for, and Tenant, in consideration of Landlord's execution of this Lease, hereby waives and releases all claims for loss of life, personal injury or damage to property or business sustained by Tenant or any person claiming through Tenant resulting from any fire, accident, occurrence or condition in or upon the Shopping Center or any part thereof (including, without limitation, the Premises and the building of which the same is a part), including, but not limited to, such claims for loss of life, personal injury or damage resulting from (1) any defect in or failure of plumbing, heating or air conditioning equipment, electrical wiring or installation thereof, water pipes, stairs, railings or walks; (2) any equipment or appurtenances being out of repair; (3) the bursting, leaking or running of any tank, washstand, water closet, waste pipe, drain or any other pipe or tank in, upon or about the Shopping Center, (4) the backing up of any sewer pipe; (5) the escape of steam or hot water; (6) water, snow or ice being upon or coming through the roof or any other place upon or near the Premises or the building of which the same is a part or otherwise; (7) the falling of any fixture, plaster, ceiling tile or stucco; (8) broken glass; and (9) any act or omission of other tenants or other occupants of the Shopping Center. SECTION 13.02. Subrogation. In the event the Premises or its contents are damaged or destroyed by fire or other insured casualty: (a) Landlord, to the extent of the coverage of Landlord's policies of fire insurance with extended coverage endorsements, hereby waives its rights, if any, against Tenant with respect to such damage or destruction, even if said fire or other casualty shall have been caused, in whole or in part, by the negligence of Tenant, its agents, servants or employees; and (b) Tenant, to the extent of coverage of Tenant's policies of fire insurance with extended coverage endorsements, hereby waives its rights, if any, against Landlord with respect to such damage or destruction, even if said fire or other casualty shall have been caused, in whole or in part, by the negligence of Landlord, its agents, servants or employees; 15 22 provided however, such waivers of subrogation shall only be effective with respect to loss or damage occurring during such time as Landlord's or Tenant's policies of fire insurance with extended coverage endorsements (as the case may be) shall contain a clause or endorsement providing in substance that the aforesaid waiver of subrogation shall not prejudice the type and amount of coverage under such policies or the right of Landlord or Tenant (as the case may be) to recover thereunder. If, at any time, Landlord's or Tenant's insurance carrier refuses to write insurance which contains a consent to the foregoing waiver of subrogation, Landlord or Tenant, as the case may be, shall notify the other party thereof in writing, and upon the giving of such notice, the provisions of this Section 13.02 shall be null and void as to any casualty which occurs after such notice. ARTICLE XIV DESTRUCTION OF PREMISES SECTION 14.01. Total or Partial Destruction. (a) If the Premises shall be damaged by fire or other casualty covered by Landlord's policies of fire and broad form extended coverage insurance but are not thereby rendered untenantable in whole or in part, subject to the limitations hereafter set forth, Landlord, at its own expense, shall cause such damage to be repaired, and the rent due hereunder shall not be abated. If, by reason of such occurrence, the Premises shall be rendered untenantable in whole or in part, subject to the limitations hereafter set forth, Landlord, at its own expense, shall cause the damage to be repaired and the Fixed Minimum Rent shall be abated proportionately as to the portion of the Premises rendered untenantable until the completion of Landlord's repairs thereto. If the Premises shall be damaged or destroyed by a fire or casualty not covered by Landlord's policies of fire and broad form extended coverage insurance and the Landlord, at its option, decides not to repair and restore the Premises, Landlord shall have the right, to be exercised by notice in writing delivered to Tenant within sixty (60) days from and after the occurrence of such damage or destruction, to cancel and terminate this Lease. Either party shall have the right, to be exercised by notice in writing, delivered to the other within thirty (30) days from and after any occurrence which renders the Premises wholly untenantable to cancel this Lease, if said destruction of the Premises occurs within the last three (3) years of the Term, said cancellation to take effect ninety (90) days from and after the receipt of such notice by the other party, and in such event the Lease and the tenancy hereby created shall cease as of the aforesaid date (except that such cancellation shall not affect the obligations of the parties which have accrued theretofore and remain unpaid) and the rent due hereunder shall be adjusted as of such date; provided, however, that if Landlord shall commence repairs or reconstruction of the destroyed Premises during the period prior to the cancellation date, the tenancy shall remain in effect and said notice of cancellation shall be considered void. In no event shall Landlord be obligated to expend for any repairs or reconstruction pursuant to this Section 14.01 an amount in excess of the insurance proceeds recovered by Landlord and allocable to the damage to the Premises, after deducting therefrom Landlord's reasonable expenses in obtaining such proceeds and any amounts required to be paid to Landlord's Mortgagee (as defined in Section 16.02 below). Nothing in this Section 14.01 shall be construed to permit the abatement in whole or in part of the Percentage Rent, and the calculation of Percentage Rent shall be governed solely by Section 2.01 hereof. The provisions hereof are subject to the terms of Section 14.02 below. (b) If the Landlord is required to repair or reconstruct the Premises pursuant to the provisions of this Section, its obligation shall be limited to the construction of the structural demising walls (without drywall) and roof of the Premises. Tenant shall submit to Landlord for Landlord's approval detailed plans and specifications for all other work not required to be done by Landlord. Upon approval of such plans and specifications, and within fifteen (15) days after the Tenant has been notified that the Landlord has completed its work on the Premises, Tenant shall re-enter the Premises and diligently pursue to completion such work at Tenant's expense, and immediately after completion Tenant shall commence doing business, all in accordance with the provisions of this Lease. Landlord shall not be liable for delays occasioned by adjustment of losses with insurance carriers or by any other cause, so long as Landlord shall proceed in good faith. (c) Notwithstanding anything set forth herein to the contrary, Tenant shall be responsible for all repairs and replacements of damage and/or destruction of the Premises necessitated by burglary or attempted burglary, or any other illegal or forcible entry into the Premises. (d) Tenant covenants that it will give notice to Landlord of any accident or damage, whether such damage is caused by insured or uninsured casualty, occurring in, on or about the Premises as soon as possible but in no event later than seventy-two (72) hours after Tenant has knowledge of such accident or damage. If Tenant breaches its covenant set forth in this Section 14.01(d), Landlord, in addition to all other rights and remedies under this Lease, at law or in equity shall, at its option, be relieved of any of its obligations under Section 14.01. SECTION 14.02. Partial Destruction of Shopping Center. In the event that fifty percent (50%) or more of the Leasable Floor Area of the Shopping Center shall be damaged or destroyed by fire or other cause, notwithstanding that the Premises may be unaffected by such fire or other cause, Landlord shall have the right, to be exercised by notice in writing delivered to Tenant within sixty (60) days after said occurrence, to cancel and terminate this Lease. Upon the giving of such notice, the Term shall expire by lapse of time upon the fifteenth (15th) day after such notice is given and Tenant shall vacate the Premises and surrender the same to Landlord. ARTICLE XV EMINENT DOMAIN SECTION 15.01. Total Condemnation of Premises. If the whole of the Premises shall be taken by any public or quasi-public authority under the power of eminent domain, condemnation or expropriation or in the event of a conveyance in lieu thereof, then this Lease shall terminate as of the date on which possession of the Premises is required to be surrendered to the condemning authority, and Tenant shall have no claim against Landlord or the condemning authority for the value of the unexpired Term. 16 23 SECTION 15.02. Partial Condemnation of Premises. If any part of the Premises shall be taken or conveyed, and if such partial taking or conveyance shall render the Premises unsuitable for the business of Tenant, then the Term shall cease and terminate as of the date on which possession of the Premises is required to be surrendered to the condemning authority and Tenant shall have no claim against Landlord or the condemning authority for the value of the unexpired Term. In the event such partial taking or conveyance is not extensive enough to render the Premises unsuitable for the business of Tenant, this Lease shall continue in full force and effect except that the Fixed Minimum Rent and the Percentage Rent Gross Sales Base shall each be reduced in the same proportion that the floor area of the Premises so taken or conveyed bears to such floor area immediately prior to such taking or conveyance, such reduction commencing as of the date Tenant is required to surrender possession of such portion and, with respect to the days during which the Premises are not open for business, the calculation of Percentage Rent shall be adjusted in accordance with Section 2.01(d) hereof. Landlord shall promptly restore the Premises, to the extent of condemnation proceeds available for such purpose, as nearly as practicable to a condition comparable to their condition at the time of such condemnation less the portion lost in the taking or conveyance, and Tenant shall promptly make all necessary repairs, restoration and alterations of Tenant's fixtures, equipment and furnishings and shall promptly re-enter the Premises and commence doing business in accordance with the provisions of this Lease. For purposes of determining the amount of funds available for restoration of the Premises from the condemnation award, said amount will be deemed to be that part of the award which remains after payment of Landlord's reasonable expenses incurred in recovering same and of any amounts due to any Mortgagee of Landlord, and which represents a portion of the total sum so available (excluding any award or other compensation for land) which is equitably allocable to the Premises. SECTION 15.03. Condemnation of Shopping Center. If: (a) more than one-third (1/3) of the Leasable Floor Area of the Shopping Center or more than one-third (1/3) of the Common Areas shall be so taken or conveyed; or (b) if any part of the parking area in the Shopping Center is so taken or conveyed and, as a result of such partial taking or conveyance the size, layout or location of the remaining parking facilities will violate the requirements of the applicable zoning or similar law (or any permitted variance or exception thereto), then in any or all such events, notwithstanding the fact that the Premises are not so taken or conveyed, Landlord shall have the right and power, at its option to be exercised by written notice to Tenant, to terminate this Lease effective either the date title vests in the condemning authority or the date Landlord is required to deliver possession of the part so taken or conveyed; provided, however, in the event of a taking or conveyance described in clause (b) above, if Landlord shall take immediate steps towards eliminating such violation, this Lease shall be unaffected and remain in full force and effect. In any event, Tenant shall have no claim against Landlord or the condemning authority for the value of any unexpired Term. SECTION 15.04 Condemnation Awards. In the event of any condemnation or taking as hereinabove provided, whether whole or partial and whether the award is based on diminution of the leasehold or fee, Tenant shall not be entitled to any part of the award as damages or otherwise for such condemnation and Landlord and any Mortgagee of Landlord are to receive the full amount of such award, as their respective interests may appear. Tenant hereby expressly waives any right or claim to any part thereof and assigns to Landlord any such right or claim to which Tenant might become entitled. Notwithstanding the above, Tenant shall have the right, to the extent that same shall not diminish the Landlord's or such mortgagee's award, to claim and recover from the condemning authority, but not from Landlord or such Mortgagee, such compensation as may be separately awarded or recoverable by Tenant under the applicable eminent domain code in effect where the Shopping Center is located in Tenant's own right for or on account of, and limited solely to, any cost that Tenant incurs in removing Tenant's merchandise, furniture, fixtures and equipment. ARTICLE XVI ESTOPPEL CERTIFICATES; SUBORDINATION AND ATTORNMENT SECTION 16.01. Execution of Estoppel Certificates. At any time, and from time to time, upon the written request of Landlord or any Mortgagee (as defined in Section 16.02), Tenant, within twenty (20) days of the date of such written request, shall execute and deliver to Landlord and/or such Mortgagee, without charge and in a form satisfactory to Landlord and/or such Mortgagee, a written statement, to the extent true: (a) ratifying this Lease; (b) confirming the commencement and expiration dates of the Term; (c) certifying that Tenant is in occupancy of the Premises, and that the Lease is in full force and effect and has not been modified, assigned, supplemented or amended except by such writings as shall be stated; (d) certifying that all conditions and agreements under this Lease to be satisfied or performed by Landlord have been satisfied and performed except as shall be stated; (e) certifying that Landlord is not in default under the Lease and there are no defenses or offsets against the enforcement of this Lease by Landlord, or stating the defaults and/or defenses claimed by Tenant; (f) reciting the amount of advance rent, if any, paid by Tenant and the date to which such rent has been paid; (g) reciting the amount of security deposited with Landlord, if any; and (h) any other information which Landlord or the Mortgagee shall reasonably require. SECTION 16.02 Subordination and Attornment See Rider Tenant agrees: (a) that except as hereinafter provided, this Lease is, and all of Tenant's rights hereunder are and shall always be, subject and subordinate to any first mortgage, ground lease pursuant to which Landlord has derived its interest in the Shopping Center, installment sales agreement or other instrument of encumbrance heretofore or hereafter placed upon any or all of the estate of the Landlord or Landlord's lessor(s) in the Shopping Center and all renewals, replacements, consolidations, amendments and extensions thereof (collectively called "Mortgage") and to all advances made or to be made thereunder and to the interest thereon; and (b) that, in the event Landlord's interest under the Mortgage shall terminate for any reason, and if the holder of any such Mortgage (hereinafter called the "Mortgagee"), the grantee of a deed in lieu of foreclosure, or if the purchaser at any foreclosure sale or at any sale under a power of sale contained in any Mortgage shall at its sole option so request, Tenant will attorn to and recognize such Mortgagee, grantee or purchaser, as the case may be, as Landlord under this Lease for the balance then remaining of the Term, subject to all terms and conditions of this 17 24 Lease; and (c) that the aforesaid provisions shall be self operative and no further instrument or document shall be necessary unless required by any such Mortgagee, grantee or purchaser. Notwithstanding anything to the contrary set forth above, any Mortgagee may at any time subordinate its Mortgage to this Lease, without Tenant's consent, by execution of a written document subordinating such Mortgage to this Lease to the extent set forth therein, and thereupon this Lease shall be deemed prior to such Mortgage to the extent set forth in such written document, without regard to their respective dates of execution, delivery and/or recording. In that event, to the extent set forth in such written document, such Mortgagee shall have the same rights with respect to this Lease as though this Lease had been executed and a memorandum thereof recorded prior to the execution, delivery and recording of the Mortgage and as though this Lease had been assigned to such Mortgagee. Should Landlord or any Mortgagee, grantee or purchaser desire confirmation of either such subordination or such attornment, as the case may be, Tenant, upon written request and from time to time, will execute and deliver, without charge and in form satisfactory to Landlord, the Mortgagee, grantee or purchaser all instruments and/or documents in recordable form that may be requested to acknowledge such subordination and/or agreement to attorn. ARTICLE XVII ASSIGNMENT AND SUBLETTING SECTION 17.01. Transfers Requiring Landlord Consent. See Rider (a) Tenant shall not voluntarily, involuntarily, or by operation of law, assign, transfer, mortgage or otherwise encumber this Lease or any interest of Tenant herein, in whole or in part, nor sublet the whole or any part of the Premises, nor permit the Premises or any part thereof to be used or occupied by others (herein collectively referred to as an "Assignment"), without first obtaining in each and every instance the prior written consent of Landlord which consent may be given or withheld in Landlord's sole and absolute discretion. Any consent by Landlord to an Assignment shall be held to apply only to the specific transaction thereby authorized and shall not constitute a waiver of necessity for such consent to any subsequent Assignment, including, but not limited to, a subsequent Assignment by any trustee, receiver or liquidator, or personal representative of Tenant, nor shall the references anywhere in this Lease to subtenants, licensees and concessionaires be construed as a consent by Landlord to an Assignment. If this Lease or any interest herein is assigned or if the Premises or any part thereof is sublet or used or occupied by anyone other than Tenant, whether Landlord's consent is required hereby or has been given or denied for such Assignment, Landlord may nevertheless collect rent (including, but not limited to, Fixed Minimum Rent, Percentage Rent, HVAC Charge, Tax Rent, Tenant's proportionate share of Landlord's Operating Costs, and additional rent) from the assignee, subleasee, user or occupant and apply the net amount collected to the rents herein reserved. In any event, Tenant shall pay to Landlord monthly, as additional rent, the excess of the consideration received or to be received during such month for such Assignment (whether or not denoted as rent) over the rental reserved for such month in this Lease applicable to such portion of the Premises subject to the Agreement. No such Assignment and/or collection shall be deemed a waiver of the covenant herein against Assignment, or the acceptance of the assignee, subtenant, user or occupant as Tenant hereunder, or constitute a release of Tenant from the further performance by Tenant of the terms and provisions of this Lease. If this Lease or any interest of Tenant herein is assigned, or if the whole or any part of the Premises be sublet or used or occupied by others, Tenant, after having obtained Landlord's prior written consent thereto, shall nevertheless remain fully liable for the full performance of all obligations under this Lease to be performed by Tenant, and Tenant shall not be released therefrom in any manner. In addition to the rights above, Landlord may condition its consent on the payment by Tenant to Landlord's management agent of a reasonable amount, but not less than Five, Hundred Dollars ($500.00), to defray Landlord's management agent's administrative costs, overhead and counsel fees in connection with the consideration, review or document preparation in connection with any Assignment. (b) If, at any time during the Term, any part or all of the corporate shares of Tenant, or of a parent corporation of which the Tenant is a direct or indirect subsidiary, shall be transferred by sale, assignment, bequest, inheritance, operation of law or other disposition so as to result in a change in the present effective voting control of Tenant or of such parent corporation by the person or persons owning or controlling a majority of the shares of Tenant or of such parent corporation on the date of this Lease, Tenant shall promptly notify Landlord in writing of such change, and such change in voting control shall constitute an Assignment of this Lease for all purposes of this Section 17.01; provided, however that this provision shall not apply in the event that over fifty percent (50%) of the voting power of the Tenant corporation or of such parent corporation is held by fifty (50) or more unrelated shareholders or distributed to such number of unrelated shareholders in a public distribution of securities. (c) If Tenant is a partnership and if at any time during the Term any person who at the time of the execution of this Lease directly or through control of a corporation or other partnership owns a general partner's interest ceases to own such general partner's interest, such cessation of ownership shall constitute an Assignment of this Lease for all purposes of this Section 17.01. (d) Upon the occurrence of any such events as described in Section 17.01(a), 17.01(b), or 17.01(c) hereof, whether voluntary, involuntary, by operation of law, or otherwise, without the prior written consent of Landlord (whether or not Tenant shall have given notice thereof to Landlord), Landlord may treat any such occurrence as an Event of Default. (e) Tenant's sole remedy for Landlord's failure or refusal to consent to a proposed assignment or sublease shall be to seek specific performance or injunctive or declaratory relief, Tenant hereby waiving any claims for damages claimed to arise therefrom. SECTION 17.02. GRANT OF CONCESSIONS The provision against subletting above shall be applicable so as to prohibit Tenant from granting concessions without the consent of Landlord for the operation of one or more departments of the business of Tenant, and any grant of concessions consented to by Landlord shall be subject to the conditions that: (a) each such concession which may be granted by Tenant shall be subject to all the terms and provisions of this Lease; (b) the Gross Sales from the operation of each such concession shall be deemed to be a part of the Gross Sales of Tenant for the purpose of determining the Percentage Rent payable to Landlord; (c) all of the provisions hereof applying to the business of Tenant including, but not limited to, the provisions of Articles II and VI shall apply to each such concession; (d) unless otherwise approved in writing by Landlord, such department or departments shall be operated only as part of the business operation 18 25 generally conducted by Tenant on the Premises and under the advertised trade name of Tenant; and (c) at least seventy-five percent (75%) of the sales floor area of the Premises shall at all times be operated directly by Tenant. ARTICLE XVIII PAYMENTS AND NOTICES Section 18.01. Delivery of Payments and Notices; Notice Requirements. All payments of rent and any and all other monetary obligations of Tenant accruing hereunder, whether or not denoted as rent, shall be payable at the address set forth in the Indenture of Lease above for such purpose, unless and until Tenant is notified otherwise in writing, and all notices given to Landlord hereunder shall be in writing and forwarded to Landlord at the address set forth in the Indenture of Lease for such purpose, unless and until Tenant is notified otherwise in writing. All notices shall be sent by registered or certified mail, postage pre-paid, return receipt requested or by expedited delivery services such as Federal Express. All notices to Tenant shall be forwarded to it at the address set forth in the Indenture of Lease by postage prepaid, registered or certified mail, return receipt requested or by expedited deliver service such as Federal Express or by delivery in person and in the event of a delivery in person, the affidavit of the person making such delivery shall be conclusive proof of the delivery and of the date and time of such delivery. All changes of notice address requested by Tenant shall only be valid and binding on Landlord if executed by a duly authorized officer, partner or owner of Tenant and acknowledged in writing by an officer of Landlord or Landlord's management agent. All notices shall be deemed to have been given three (3) business days after the date when deposited with the U.S. Postal Service (as evidenced by the postmark affixed thereto) as aforesaid or, in the case of notices delivered by expedited delivery service, when received or in the case of notices delivered in person to Tenant, when so delivered. Notices by the Landlord may be given on its behalf by Landlord's management agent or by any attorney for Landlord or Landlord's management agent. ARTICLE XIX EVENTS OF DEFAULT; LANDLORD'S REMEDIES Section 19.01. Events of Default. The following shall constitute Events of Default under this Lease: (a) if Tenant defaults in the payment of any sum of money (whether Fixed Minimum Rent, Percentage Rent, Tax Rent, Tenant's proportionate share of Operating Costs, the HVAC Charge, Marketing Service Charge, additional rent or otherwise) and fails to cure such default for a period in excess of ten (10) days following written notice from Landlord; or (b) except as to acts, defaults, omissions and/or occurrences specified in subsections (a) and (c) of this Section 19.01, if Tenant defaults in fulfilling any of the other covenants of this Lease on Tenant's part to be performed hereunder and such default shall continue for the period within which performance is required to be made by specific provision of this Lease, or, if no such period is so provided, for twenty (20) days after the date of written notice from Landlord to Tenant specifying the nature of said default, or, if the default so specified shall be of such a nature that the same cannot be reasonably cured or remedied within said twenty (20) day period, if Tenant shall not in good faith commence to cure or remedy such default within such twenty (20) day period and thereafter diligently proceed to completion; or (c) if any execution or attachment shall be issued against Tenant or any of Tenant's property and shall not be discharged or vacated within thirty (30) days after the issuance thereof. SECTION 19.02. Termination. Upon or after the occurrence of any one or more of such Events of Default, if the Term shall have not commenced, Landlord may immediately cancel this Lease by written notice to Tenant, or if the Term shall have commenced, Landlord may serve upon Tenant a written notice that this Lease will terminate on a date specified therein, and in either event, Tenant shall have no right to avoid the cancellation or termination by payment of any sum due or by other performance of any condition, term or covenant broken. Upon the date specified in the aforesaid notice of termination, this Lease shall terminate and come to an end as fully and completely as if such date were the day herein definitely fixed for the end and expiration of this Lease, and Tenant shall then quit and surrender the Premises to Landlord, but notwithstanding any statute, rule of law, or decision of any court to the contrary, Tenant shall remain liable as set forth hereinafter. Section 19.03. Right of Possession. Upon or after any one or more Events of Default, or if the notice provided for above in Section 19.02 hereof shall have been given and this Lease shall be terminated, or if the Premises become vacant or deserted, then in all or any of such events, in addition to, and not in lieu of, all other remedies of Landlord, Landlord may without notice terminate all services (including, but not limited to, the furnishing of utilities) and/or re-enter the Premises, either by force or otherwise, and/or by summary proceedings or otherwise dispossess Tenant and the legal representative of Tenant or other occupant of the Premises, and remove their effects and repossess and enjoy the Premises, together with all alterations, additions and improvements, all without being liable to prosecution or damages therefor. Section 19.04. Additional Remedies of Landlord. (a) In the event of any Event of Default, re-entry, termination and/or dispossession by summary proceedings or otherwise, in addition to, and not in lieu of, all other remedies which Landlord has under this Lease, at law or in equity: (i) the Fixed Minimum Rent 19 26 and all additional rent shall become due thereupon and be paid up to the time of such re-entry, dispossession and/or expiration: (ii) Landlord may relet the Premises or any part or parts thereof, either in the name of Landlord or otherwise, for a term which may at Landlord's option be less than or exceed the period which would otherwise have constituted the balance of the Term, and may grant concessions or free rent: (iii) Tenant or the legal representative of Tenant shall also pay Landlord, at Landlord's option and whether or not Landlord has terminated or cancelled this Lease, as liquidated damages for the failure of Tenant to observe and perform said Tenant's covenants herein contained, for each month of the period which would otherwise have constituted the balance of the Term, the excess, if any, of the sum of one monthly installment of Fixed Minimum Rent, one-twelfth (1/12th) of the annual average Percentage Rent payable hereunder for the three (3) Lease Years immediately preceding (or for the entire preceding portion of the Term if less than three (3) Lease Years), the monthly portion of the payment of Tax Rent that would have been payable for the period in question but for such re-entry or termination, the HVAC Charge payable for such month computed on the basis of the average monthly charge for the said three (3) preceding Lease Years or the entire preceding portion of the Term, as the case may be, the monthly payment of Tenant's current proportionate share of Operating Costs, the Marketing Service Charge computed on a monthly basis over the net amount, if any, of the rents actually collected on account of the lease or leases of the Premises for such month; and Tenant shall also pay Landlord the unamortized amount of sums extended by Landlord and not repaid by Tenant in connection with preparing or improving the Premises to Tenant's specifications. Such payment shall be in an amount equal to the unamortized balance of such sums on the date of said default, determined by multiplying the total amount actually expended by Landlord times a fraction, the numerator of which shall be the number of full calendar months remaining in the Term from the date of default and the denominator of which shall be the number of full calendar months in the Original Term. The refusal, failure or inability of Landlord to relet the Premises or any part or parts thereof shall not release or affect Tenant's liability for damages, the Tenant hereby specifically waiving any duty on the part of Landlord to mitigate damages that may be imposed by law. In computing such liquidated damages, there shall be added to the said deficiency all expenses Landlord may incur in connection with reletting, such as court costs, reasonable attorneys fees and disbursements, brokerage and management fees and commissions, cost of putting and keeping the Premises in good order and costs of preparing the Premises for reletting as hereinafter provided. Any such liquidated damages shall be paid in monthly installments by Tenant on the day specified in this Lease for the payment of Fixed Minimum Rent and any action brought to collect the amount of deficiency for any month shall not prejudice in any way either the rights of Landlord to collect the deficiency for any subsequent month by a similar proceeding, or the rights of Landlord to elect to collect liquidated damages calculated by the formula set forth in Section 19.04(b) hereof. Landlord, at Landlord's option, may make such alterations, repairs, replacements and/or decorations in the Premises as Landlord, in Landlord's sole judgment, considers advisable and necessary for the purpose of reletting the Premises; and the making of such alterations and/or decorations shall not operate or be construed to release Tenant from liability hereunder as aforesaid. Landlord shall in no event be liable in any way whatsoever for failure to relet the Premises, or in the event that the Premises are relet, for failure to collect the rent under such reletting. (b) In any of the circumstances mentioned in the foregoing Section 19.04(a) in which Landlord shall have the right to hold Tenant liable as therein provided, Landlord shall have the election, in place and instead of holding Tenant so liable, forthwith to recover against Tenant, as liquidated damages for loss of the bargain and not as a penalty, a sum equal to the monthly amount of Fixed Minimum Rent and all additional rent multiplied by the number of months and fractional months which would have constituted the balance of the Term but not longer than two (2) years (or such lesser time period specified by Landlord), all discounted to present worth at the then-current prime lending rate of Provident National Bank, together with costs and reasonable attorneys' fees. Notwithstanding the formulas set forth in Section 19.04(a) and the preceding sentence, in the event the Landlord has not recovered from Tenant the total incurred by Landlord for improvements to the Premises, in no event shall the liquidated damages recovered by Landlord be less than the balance due therefrom together with all other actual costs incurred by Landlord relating to the Premises or Tenant's occupancy or use thereof. (c) In the event of a breach or threatened breach by Tenant of any of the covenants or provisions hereof, Landlord shall have the right of injunction and the right to invoke any remedy allowed at law or in equity as if re-entry, summary proceedings and other remedies were not herein provided for. Mention in this Lease of any particular remedy shall not preclude Landlord from any other remedies under this Lease, or now or hereafter existing at law or in equity or by statute. The provisions of this Section 19.04(c) shall not apply to Landlord's rights under Section 11.05 which shall be limited to the provisions set forth therein. (d) Tenant hereby expressly waives the service of notice of intention to re-enter or to institute legal proceedings to that end and any and all rights of redemption granted by or under any present or future laws in the event of Tenant being evicted or dispossessed for any cause, or in any event of Landlord obtaining possession of the Premises by reason of the violation by Tenant of any of the covenants and conditions of this Lease or otherwise. The words "re-enter" and "re-entry" as used in this Lease are not restricted to their technical legal meaning. (e) In the event legal action by Landlord is required to enforce performance by Tenant of any condition, obligation or requirement of this Lease, Tenant agrees to pay all actual attorneys' fees and costs so expended by or charged to Landlord. SECTION 19.05. Waivers by Tenant. Tenant expressly waives: the right to assert any non-compulsory counterclaim in connection with any action by Landlord for possession of the Premises. ARTICLE XX SECURITY DEPOSIT SECTION 20.01. Security Deposit. Tenant shall pay to Landlord, promptly after execution of this Lease and prior to the Commencement Date, the sum set forth 20 27 in the Indenture of Lease to be held as security for the payment of any rent and all other sums of money payable by Tenant under this Lease and for the faithful performance of all covenants of Tenant hereunder. The amount of such security deposit, without interest, shall be refunded to Tenant after termination of this Lease, provided Tenant shall have made all such payments and performed all such covenants. Upon any default by Tenant hereunder, all or part of such security deposit may, at Landlord's option, be applied on account of such default, and thereafter Tenant shall restore the resulting deficiency in such security deposit upon demand. Tenant hereby waives the benefit of any provision of law requiring such security deposit to be held in escrow or in trust, and such security deposit shall be deemed to be the property of Landlord and may be commingled with Landlord's other funds. Landlord may deliver the security deposit to any purchaser of Landlord's interest in the Premises, in the event that such interest is sold, and thereupon Landlord shall be discharged from any further liability with respect to such security deposit, and Tenant agrees to look solely to such purchaser for the return of such security deposit. ARTICLE XXI MISCELLANEOUS PROVISIONS SECTION 21.01. Access by Landlord. Landlord, Landlord's management agent and their employees and representatives may at all reasonable times during the Term enter to inspect the Premises and/or may show the Premises, and the building of which the Premises form a part, to others. At any time within ninety (90) days immediately preceding the expiration of the Term, and at any time after Tenant has received a notice of default or termination. Landlord and Landlord's management agent shall have the right to show the Premises and all parts thereof to prospective tenants between the hours of 9:00 A.M. and 9:00 P.M. on any day except days on which Tenant shall be closed for business as permitted by this Lease. SECTION 21.02. Excuse of Performance. Notwithstanding anything in this Lease to the contrary, if Tenant shall be delayed or hindered in or prevented from performance of any act required hereunder by reason of any strike, lock-out, labor dispute, civil commotion, warlike operation, invasion, rebellion, hostilities, military or usurped power, sabotage, governmental regulations or controls, failure of power, inability to obtain any material or service, Act of God or other reasons of a like nature not related to the fault of Tenant, then performance of such act by Tenant shall be excused for the period of such delay, provided, however, that Tenant shall give Landlord written notices of the reason for and extent of such delay within a reasonable time after its resolution and provided, further, that the foregoing shall not excuse Tenant from the prompt payment of Fixed Minimum Rent, Percentage Rent, Tax Rent, additional rent or any other payments required by the terms of this Lease, nor delay the date on which Tenant's obligation to commence such payment shall begin. Notwithstanding anything in this Lease to the contrary, Landlord shall not be deemed in default with respect to the performance of any of the terms, covenants and conditions of this Lease if Landlord's failure to perform such terms, covenants and conditions is due to any strike, lockout, labor dispute, civil commotion, war-like operation, invasion, rebellion, hostilities, military or usurped power, sabotage, governmental regulations or controls, failure of power, inability to obtain any material, service or financing, Act of God, fire or other casualty or other cause, whether similar or dissimilar to those enumerated in this Section 21.02. which is beyond the reasonable control of Landlord. SECTION 21.03. Successors. All rights, obligations and liabilities herein given to or imposed upon the respective parties hereto shall extend to and bind the several respective heirs, executors, administrators, trustees, receivers, legal representatives, successors and assigns of the said parties; and if there shall be more than one Tenant, they shall all be bound jointly and severally by the terms, covenants and agreements herein. No rights, however, shall inure to the benefit of any assignee, legal representative, trustee, receiver, legates or other personal representative of Tenant unless the Assignment to such party has been approved by Landlord in writing as provided in Section 17.01(a) hereof. Landlord shall have the unrestricted right to assign this Lease and upon any such assignment, Landlord shall automatically be released from all liability hereunder from and after the date of such assignment. All of Tenant's obligations accruing during the Term pursuant to Sections 2.01, 2.03, 3.02, 3.05, 4.03, 6.01, 10.02, 10.03, 13.01 and 21.22 shall survive the expiration of the Term or earlier termination of this Lease. SECTION 21.04. Quiet Enjoyment. So long as Tenant shall pay the rents herein provided within the respective times provided therefor, and provided and so long as Tenant observes and performs all the covenants, terms and conditions on Tenant's part to be observed and performed hereunder, Tenant shall peaceably and quietly hold and enjoy the Premises for the Term without hindrance or interruption by Landlord or any other person or persons lawfully claiming by, through or under Landlord, subject, nevertheless, to the terms and conditions of this Lease. Landlord's liability under this Section 21.04 shall cease upon a conveyance by Landlord of the Premises. SECTION 21.05. Waiver. The waiver by Landlord any breach of any term, covenant or condition herein contained shall not be deemed to be a waiver of any subsequent breach of the same or a waiver of any other term, covenant or condition herein contained. The subsequent acceptance by Landlord of rent due hereunder or any or all other monetary obligations of Tenant hereunder, whether or not denoted as rent hereunder, shall not be deemed to be waiver of any preceding breach by Tenant of any term, covenant or condition of this Lease, other than the failure of Tenant to make the particular payment so accepted, regardless of Landlord's knowledge of such preceding breach at the time of acceptance of such rent. No covenant, term or condition of this Lease shall be deemed to have been waived by Landlord, unless such waiver be in writing and executed by Landlord. 28 SECTION 21.06. Custom and Usage. Any law, usage or custom to the contrary notwithstanding, Landlord shall have the right at all times to enforce the covenants and conditions of this Lease in strict accordance with the terms hereof, notwithstanding any conduct or custom on the part of Landlord in refraining from so doing at any time or times with respect to the Tenant hereunder or with respect to other tenants of the Shopping Center. The failure of Landlord at any time to enforce its rights under said covenants and provisions strictly in accordance with the same shall not be construed as having created a custom in any way or manner contrary to specific terms, provisions and covenants of this Lease or as having in any way or manner modified the same. SECTION 21.07. Accord and Satisfaction. No payment by Tenant or receipt by Landlord of a lesser amount than any payment of rent or additional rent herein stipulated shall be deemed to be other than on account of the earliest stipulated rent or additional rent then due and payable. Tenant is hereby advised that Landlord may instruct Tenant to forward all sums due Landlord to a "lock box" account maintained by Landlord which will result in such checks being automatically deposited to Landlord's account without review or inspection prior to the same being deposited. Accordingly, Tenant agrees that Landlord shall not be bound by any endorsement or statement on any check or any letter accompanying any check or payment and no such endorsement, statement or letter shall be deemed an accord and satisfaction, whether such check or letter is forwarded to Landlord's "lock box" or directly to Landlord, Landlord's management agent or elsewhere, and Landlord or Landlord's bank may accept such check or payment without prejudice to Landlord's right to recover the balance of such rent or pursue any other remedy provided in this Lease, at law or in equity. SECTION 21.08. Performance of Tenant's Covenants. Tenant covenants and agrees that it will perform all agreements and observe all covenants herein expressed on its part to be performed and observed and that it will promptly, upon receipt of written notice specifying action required by this Lease, comply with such notice, and further, that if Tenant shall not comply with any such notice to the satisfaction of Landlord prior to the date on which such non-compliance would constitute an Event of Default, in addition to, and not in lieu of or in limitation of any other remedy which Landlord may have pursuant to this Lease, at law or in equity, Landlord may, but shall not be obligated to, enter upon the Premises and do the things specified in such notice. Landlord shall have no liability to Tenant for any loss or damage resulting in any way from such action and Tenant agrees to pay upon demand, as additional rent, any sums or costs incurred by Landlord in taking such action, plus administrative costs of Landlord in an amount equal to twenty percent (20%) of such sums and/or costs. Notwithstanding the foregoing, Landlord's performance of any or all of Tenant's covenants shall not release Tenant from liability for non-performance. SECTION 21.09. Entire Agreement. The Indenture of Lease, the Lease Agreement, the Exhibits, Rider and Guaranty, if any, attached hereto set forth all the covenants, agreements, conditions, representations, promises and understandings between Landlord and Tenant concerning the Premises and there are no covenants, agreements, conditions, representations, promises or understandings, either oral or written, between them other than as herein set forth. All prior communications, negotiations, arrangements, representations, agreements and understandings, whether oral, written or both, between the parties hereto, and their representatives, are merged herein and extinguished, this Lease superseding and cancelling the same. Except as herein otherwise provided, no subsequent alteration, amendment, change or addition to this Lease shall be binding upon Landlord or Tenant unless reduced to writing and executed by both parties. If any provision contained in any rider hereto is inconsistent with any printed provisions of this Lease, the provision contained in such rider shall supersede said printed provision. Tenant hereby acknowledges that: (a) this Lease contains no restrictive covenants or exclusives in favor of Tenant; (b) this Lease shall not be deemed or interpreted to contain, by implication or otherwise, any warranty, representation or agreement on the part of Landlord that any department store or regional or national chain store or any other merchant shall open for business or occupy or continue to occupy any premises in or adjoining the Shopping Center during the Term or any part thereof and Tenant hereby expressly waives all claims with respect thereto and acknowledges that Tenant is not relying on any such warranty, representation or agreement by Landlord either as a matter of inducement in entering into this Lease or as a condition of this Lease or as a covenant by Landlord. SECTION 21.10. Relationship of Parties. Landlord does not, in any way or for any purpose, become a partner of Tenant in the conduct of its business, or otherwise, or joint venturer or a member of a joint enterprise with Tenant. The provisions of this Lease relating to the Percentage Rent payable hereunder are included solely for the purpose of providing a method whereby adequate rent is to be measured and ascertained. No estate shall pass out of Landlord as a result of this Lease; Tenant has only a usutruct which is not subject to levy and sale and is not assignable by Tenant except as expressly herein set forth. SECTION 21.11. Captions. The captions appearing in this Lease are inserted only as a matter of convenience and in no way define, limit, construe or describe the scope or intent of such sections or articles of this Lease nor in any way affect this Lease. SECTION 21.12. Tenant Defined; Use of Pronoun. The word "Tenant" shall be deemed and taken to mean each and every person or party mentioned as a Tenant herein, whether the same shall be one or more; and if there shall be more than one Tenant, any notice required or permitted by the terms of this Lease may be given by or to any one thereof, and shall have the same force and effect as if given by or to all thereof. The use of the neuter singular pronoun to refer to Landlord or Tenant shall be deemed a proper reference even though Landlord or Tenant may be an individual, a partnership, a corporation, or a group of two or more individuals or corporations. The necessary grammatical change required to make 22 29 the provisions of this Lease apply in the plural number where there is more than one Landlord or Tenant and to either corporations, associations, partnerships or individuals, males or females, shall in all instances be assumed as though in each case fully expressed. SECTION 21.13. Negation of Personal Liability. Notwithstanding anything contained herein to the contrary, Tenant agrees that Landlord shall have no personal liability with respect to any of the provisions of this Lease and Tenant shall look solely to the estate and property of Landlord in the land and buildings comprising the Shopping Center of which the Premises forms a part for the satisfaction of Tenant's remedies, including without limitation, the collection of any judgment or the enforcement of any other judicial process requiring the payment or expenditure of money by Landlord in the event of any default or breach by Landlord with respect to any of the terms and provisions of this Lease to be observed and/or performed by Landlord, subject, however, to the prior rights of any holder of any Mortgage covering all or part of the Shopping Center, and no other assets of Landlord or any principal of Landlord shall be subject to levy, execution or other judicial process for the satisfaction of Tenant's claim and in the event Tenant obtains a judgment against Landlord, the judgment docket shall be so noted. This Section 21.13 shall inure to the benefit of Landlord's successors and assigns and their respective principals. SECTION 21.14. Liability of Landlord's Management Agent. Landlord's management agent shall act as agent only and in such capacity shall not in any event be held liable to the Landlord or to Tenant for the fulfillment or non-fulfillment of any of the terms, covenants or conditions of this Lease or for any action or proceedings that may be taken by Landlord against Tenant, or by Tenant against Landlord. Any waiver of Landlord's liability hereunder, including any waiver of subrogation rights, shall apply with equal force and effect to such agent. SECTION 21.15. Governmental Limitation on Rents and Other Charges. In the event that any law, decision, rule or regulation of any governmental body having jurisdiction shall have the effect of limiting for any period of time the amount of rent or other charges payable by Tenant to any amount less than that otherwise provided by this Lease, the following amounts shall nevertheless be payable by Tenant: (a) throughout such period of limitation, Tenant shall remain liable for the maximum amount of rent and other charges which are legally payable (without regard to any limitation of the amount hereof expressed in this Lease, except that all amounts payable by reason of this Section 21.15 shall not in the aggregate exceed the total of all amounts which would otherwise be payable by Tenant pursuant to the terms of this Lease for the period of limitation); (b) at the termination of such period of limitation, Tenant shall pay to Landlord, on demand but only to the extent legally collectible by Landlord, any amounts which would have been due from the Tenant during the period of limitation but which were not paid because of such limiting law, decision, rule or regulation; and (c) for the balance of the Term following the period of limitation, Tenant shall pay to Landlord all amounts due for such portion of the Term in accordance with the terms hereof, calculated as though there had been no intervening period of limitation. SECTION 21.16. Partial Invalidity; Separate Covenants. If any term, covenant or condition of this Lease or the application thereof to any person or circumstance shall be invalid or unenforceable, to any extent, the remainder of this Lease or the application of such term, covenant or condition to persons or circumstances other than those as to which it is held invalid or unenforceable shall not be affected thereby, and each term, covenant and condition of this Lease shall be valid and be enforced to the fullest extent permitted by law. Furthermore, each covenant, agreement, obligation and other provision contained in this Lease is, and shall be, deemed and construed as a separate and independent covenant of the party bound by, undertaking or making the same, and not dependent on any other provision of this Lease unless expressly so provided. SECTION 21.17. Recording. Tenant shall not record this Lease without the written consent of Landlord. If Landlord requests, the parties shall execute and acknowledge a short form of lease for recording purposes which shall be recorded at Landlord's expense. SECTION 21.18. Brokerage Commission. Each party represents and warrants to the other that the representing party has had no dealing, negotiations or consultations with respect to the Premises, the Shopping Center or this transaction with any broker or finder except Landlord's management agent and that, with the exception of Landlord's management agent, no broker or finder called the Premises or any other spaces in the Shopping Center to Tenant's attention for lease. In the event that any other broker or finder other than Landlord's management agent claims to have submitted the Premises or any other space in the Shopping Center to Tenant, to have induced Tenant to lease the Premises or to have taken part in any dealings, negotiations or consultations with respect to the Premises, the Shopping Center or this transaction, Tenant will be responsible for and will defend, indemnify and save Landlord and Landlord's management agent harmless from and against all costs, fees (including without limitation attorneys' fees), expenses, liabilities and claims incurred or suffered by Landlord and/or Landlord's management agent as a result thereof, unless such party claims to have acted on behalf of Landlord, in which case Landlord shall similarly indemnify Tenant. SECTION 21.19. Construction. It is the intent of the parties hereto that if any term, covenant, condition or agreement of this Lease is capable of two or more constructions, one or more of which would render the provision void, and the other or others of which would render the provision valid, then the provision shall have the meaning or meanings which would render it valid. Although the printed provisions of this Lease were drawn by Landlord, this Lease shall not be construed for or against Landlord or Tenant, but shall be interpreted in accordance with the 23 30 general tenor of the language in an effort to reach the intended result. The Landlord and Tenant agree that time is of the essence with respect to the performance of the respective obligations set forth in this Lease. SECTION 21.20. Hazardous Material. (a) As used herein, the term "Hazardous Material" means any hazardous or toxic substance, material or waste (including, without limitation, asbestos) which, now or in the future, is determined by any state, federal or local governmental authority to be capable of posing a risk of injury to health, safety or property and/or the use and/or disposal of which is regulated by any governmental authority, including any hazardous substance or waste as defined by the Resource Conservation and Recovery Act, 42 U.S.C. Sections 6901, et seq., as amended ("RCRA") or the Comprehensive Environmental Response, Compensation and Liability Act., 42 U.S.C. Sections 9601 et seq., as amended ("CERCLA"), and any rules and regulations now or hereafter promulgated under either of such acts. If the Premises, any equipment, trade fixtures or other mechanical apparatus therein contains any Hazardous Material, Landlord, at its election, shall have the right to (i) cause Tenant to remove and properly dispose of same, all at Tenant's sole cost and expense and in compliance with the provisions hereof, or (ii) perform the removal and disposal thereof itself, in which event Tenant shall reimburse Landlord, on demand, for the cost incurred by Landlord in doing so and securing the certifications referred to below. Tenant shall not cause or permit any Hazardous Material to be brought upon, generated, treated, kept or used in or about the Premises by Tenant, its agents, employees, contractors or invitees. (b) If Landlord requires Tenant to remove the Hazardous Material, Tenant shall retain the services of any environmental engineer and contractor, both of whom must be previously approved in writing by Landlord. Tenant shall submit to Landlord for approval the insurance certificates of Tenant's environmental engineer and contractor, a written removal plan and detailed plans and specifications which shall disclose, without limitation, the dates on which such work is to be performed and the steps to be taken to protect the public, all public areas in the Shopping Center, and the HVAC, water, sanitary and storm systems from contamination during the removal and disposal process. No work disclosed in the removal plan shall be commenced until Landlord has approved all aspects of such removal and disposal process and Tenant shall only perform such work in strict accordance with the process as approved by Landlord. Tenant shall close for business while such work is being performed. Landlord reserves the right to monitor the performance of such work from time to time and, if Landlord believes that such work is being done in a manner which permits Hazardous Material to escape from the Premises or otherwise constitutes an unsafe condition, at Landlord's direction, Tenant shall immediately cease such work until such problem has been corrected to Landlord's satisfaction. Tenant shall replace any contaminated equipment or materials removed from the Premises with new equipment or material performing the same function. If asbestos is removed from the Premises, prior to replacing the asbestos with an approved fire retardant material, Tenant shall cause its consulting engineer to perform an air quality test in the Premises and to certify the results thereof in a letter directed from such engineer to Landlord. Tenant shall not install such fire retardant or reopen for business until the results of such air quality test are accepted by Landlord. Tenant shall perform such further acts as may be required to make such results acceptable to Landlord. Upon Landlord's acceptance of the air quality test, Tenant shall install the fire retardant material and promptly reopen for business. (c) If Landlord elects to perform the removal of the Hazardous Material from the Premises, Landlord shall so notify Tenant of Landlord's anticipated commencement date of such work and Tenant shall close for business not later than such date and remain closed until notified by Landlord to reopen, whereupon Tenant shall promptly reopen for business. If Landlord performs such work, it shall do so in compliance with all applicable codes, laws and governmental requirements. If directed to do so by Landlord, Tenant shall remove such of its merchandise, personal property and trade fixtures as shall be required by Landlord for the completion of such work or Landlord, its contractors and subcontractors, may relocate the same within the Premises or elsewhere in the Shopping Center during the performance of such work; neither Landlord, Landlord's management agent, nor their contractors of subcontractors shall be liable to Tenant in any regard for any damage to or loss of such item or for any other acts occurring in the Premises during the performance of such work. SECTION 21.21. Tenant-Requested Documentation. In the event Tenant shall request an amendment to this Lease, or in the event Tenant shall request a subordination of any rights of Landlord, or the rights of any Mortgagee or ground lessor, or any other documentation requiring review and/or execution by Landlord, in addition to having the independent discretion to approve or reject any such request, Landlord shall have the further right to condition approval upon the payment by Tenant, in advance, of a reasonable fee, in the minimum amount of Five Hundred and no/100 Dollars ($500.00), to reimburse Landlord for Landlord's administrative expense in handling such request and obtaining legal review of all documents submitted. SECTION 21.22. Warranties of Tenant. If Tenant is a corporation or partnership, Tenant warrants and represents that the person signing this Lease on behalf of Tenant has full power and authority to do so and that Tenant is qualified to do business in the jurisdiction in which the Shopping Center is located. SECTION 21.23. Submission of Lease of Tenant. THE SUBMISSION BY LANDLORD TO TENANT OF THIS LEASE SHALL HAVE NO BINDING FORCE OR EFFECT, SHALL NOT CONSTITUTE AN OPTION FOR THE LEASING OF THE PREMISES, NOR CONFER ANY RIGHTS OR IMPOSE ANY OBLIGATIONS UPON EITHER PARTY UNTIL THE EXECUTION THEREOF BY LANDLORD AND THE DELIVERY OF AN EXECUTED ORIGINAL COPY THEREOF TO TENANT OR ITS REPRESENTATIVE. 24 31 [PICTURE] Landlord reserves the right, at any time and from time to time, to alter, or otherwise modify the locations and/or dimensions of all buildings, parking areas, roads, entrances, exits, malls, other common area of the Shopping Center, landscaping, decorative items, and structures and areas for retail sales and promotional activities, and to construct, lease, operate and maintain buildings, structures, and other facilities not shown on this Exhibit "A", provided, however, that Landlord does not violate any rights expressly reserved to Tenant in this Lease. 32 EXHIBIT B LANDLORD/TENANT WORK In lieu of Exhibit B, "Tenant Design Criteria Manual" for Sycamore Plaza at Kenwood, Issue #1, dated March 2, 1994, is hereby incorporated by reference to this Lease. Notwithstanding anything to the contrary contained in the Design Manual, Landlord shall deliver the Premises to Tenant with the following work complete: an earthen slab, graded to within one foot of final grade, and ready for Tenant's construction. Landlord shall make utilities available within one hundred feet of the Premises lease line. 33 EXHIBIT C Electricity Redistribution Charges Tenant's Electric Charge shall be based on Tenant's actual consumption as confirmed by sub-meter readings. Tenant shall pay based on Landlord's Electricity Redistribution Rate Schedule, as modified from time to time, but the rates charged by Landlord shall not exceed the rate schedule that would be applied by the public utility company or authority to Tenant's level of consumption, together with any fuel adjustment charges, taxes, surcharges, and all other charges, no matter how denoted, that Tenant, as a retail customer, would be required to pay to the public utility company or authority to obtain electricity service, whether such utility company or authority would retain such charge, tax, surcharge or other sum, or would be required to pay all or any part thereof to any governmental body, taxing authority or other governmental or quasi-governmental agency or authority. Landlord may adjust the Electricity Redistribution Rate Schedule, and Tenant's Electric Charge, at any time throughout the term to reflect any rate increases or other additional taxes, charges, surcharges, or other costs or liabilities imposed on Landlord by the public utility company or authority. Tenant shall pay the Electric Charge in advance in equal monthly installments due on the first day of each month. The first year's Electric Charge shall be based on Landlord's good-faith estimate of Tenant's projected annual consumption of electricity. Landlord shall use reasonable efforts to deliver to Tenant notice of the amount of the first-year Electric Charge on or before the Commencement Date. At the end of each Accounting Period, Landlord shall deliver to Tenant a statement of Tenant's actual consumption, the total amount to be charged to Tenant, the amount paid to date, and any amount due to or from Tenant. If Tenant has overpaid, Landlord shall credit the excess against Tenant's future Electric Charges, or (for the final Accounting Period in the Term only) shall refund the excess to Tenant promptly, after deducting any amounts owed to Landlord under this Lease. Any amount due to Landlord shall be paid within fifteen (15) days after the date of Landlord's invoice. Thereafter, Tenant shall pay its Electric Charge for the then-current Accounting Period based on the actual electric consumption for the previous Accounting Period. Together with its payment of any shortfall for the previous Accounting Period, Tenant shall also submit payment to reflect the increased monthly estimate for the then-current Accounting Period, applied retroactively to the beginning of the Accounting Period. Tenant shall be responsible for maintenance of its electric service lines to the nearest common utility server, including the submeter. Landlord shall be responsible for maintenance of electric lines into the common utility server. 34 RULES AND REGULATIONS 1. Tenant shall advise and cause its vendors to deliver all merchandise before noon on Mondays through Fridays, not at other times. 2. All deliveries are to be made to designated service or receiving areas and Tenant shall request delivery trucks to approach their service or receiving areas by designated service routes and drives. 3. Tractor Trailers which must be unhooked or parked must use steel plates under dolly wheels to prevent damage to the asphalt paving surface. In addition, wheel blocking must be available for use. Tractor trailers are to be removed from the loading areas after unloading. No parking or storing of such trailers will be permitted in the Shopping Center. 4. Except for small parcel packages, no deliveries will be permitted through the malls unless the Tenant does not have a rear service door. In such event, prior arrangements must be made with the Resident Mall Supervisor for delivery at such Premises. Merchandise being received shall immediately be moved into Tenant's Premises and not be left in the service or receiving areas. 5. Tenant is responsible for storage and removal of his trash, refuse and garbage. Tenant shall not dispose of the following items in sinks or commodes: plastic products (plastic bags, straws, boxes); sanitary napkins; tea bags; cooking fats, cooking oils; any meat scraps or cutting residue; petroleum products (gasoline, naphtha, kerosene, lubricating oils); paint products (thinner, brushes); or any other item which the same are not designed to receive. All Store Floor Area of Tenant, including vestibules, entrances and returns, doors, fixtures, windows and plate glass, shall be maintained in a safe, neat and clean condition. 6. Other than as permitted under the provisions of Section 10.4 or Exhibit "F", Tenant shall not permit or suffer any advertising medium to be placed on mall walls, on Tenant's mall or exterior windows, on standards in the mall, on the sidewalks or on the parking lot areas or light poles. No permission, expressed or implied, is granted to exhibit or display any banner, pennant, sign, and trade or seasonal decoration of any size, style or material within the shopping center, outside the Premises. 7. Tenant shall not permit or suffer the use of any advertising medium which can be heard or experienced outside of the Premises, including, without limiting the generality of the foregoing, flashing lights, searchlights, loud speakers, phonographs, radios or television. No radio, television, or other communication antenna equipment or device is to be mounted, attached, or secured to any part of the roof, exterior surface, or anywhere outside the Premises, unless Landlord has previously given its written consent. 8. Tenant shall not permit or suffer merchandise of any kind at any time to be placed, exhibited or displayed outside its Premises, nor shall Tenant use the exterior sidewalks or exterior walkways of its Premise to display, store or place any merchandise. No sale of merchandise by tent sale, truck load sale or the like, shall be permitted on the parking lot or other common areas. 9. Tenant shall not permit or suffer any portion of the Premises to be used for loading purposes. 10. Tenant shall not, in or on any part of the Common Area: (a) Vend, peddle or solicit orders for sale or distribution of any merchandise, device, service, periodical, book, pamphlet or other matter whatsoever. (b) Exhibit any sign, placard, banner, notice or other written material, except for activities as approved by Landlord. (c) Distribute any circular, booklet, handbill, placard or other material, except for activities as approved by Landlord. (d) Solicit membership in any organization, group or association or contribution for any purpose. (e) Create a nuisance. (f) Use any Common Area (including the Enclosed Mall) for any purpose when none of the other retail establishments within the Center is open for business or employment, except for activities as approved by landlord. (g) Throw, discard or deposit any paper, glass or extraneous matter of any kind except in designated receptacles, or create litter or hazards of any kind. (h) Deface, damage or demolish any sign, light standard or fixture, landscaping materials or other improvement within the Center, or the property of customers, business invitees or employees situated within the Center. EXHIBIT "E" 35 EXHIBIT F Sign Criteria In lieu of Exhibit F, "Tenant Design Criteria Manual" for Sycamore Plaza at Kenwood, Issue #1, dated March 2, 1994, is hereby incorporated by reference to this Lease. 36 Mall: Landlord: Tenant: Premises: Certification This document is executed pursuant to Section 1.01(a) of the Lease Agreement among the parties dated ________________, 19__ (the "Lease") for the purpose of certifying the following: 1. The Lease is in full force and effect as of this date; 2. The Commencement Date, as defined in the Lease (being the earlier of an identified date or the date on which the Tenant opens for business) is: ______________________________________________________; 3. The Lease has an Original Term of _____ years, plus the number of days from the Commencement Date to the first day in the next calendar month, if any, and therefore the Original Term of Lease terminates on __________________, ______. 4. Tenant certifies that all of Tenant's Work, as defined in the Lease, has been completed and paid for in full by Tenant and Tenant knows of no contractor, subcontractor or supplier claiming or possessing any lien against the Premises. Tenant: By: ______________________________ Title: ___________________ Date: ____________________________ Landlord: By: ______________________________ Title: ___________________ Date: ____________________________ EXHIBIT 1.01 37 RIDER TO LEASE This Rider to Lease ("Rider") is attached to and forms a part of that certain Lease, dated November 9th, 1994, by and between PHILLIP E. STEPHENS, TRUSTEE ("Landlord") and KENWOOD RESTAURANT, INC. trading as Hotel Mexico ("Tenant"), with respect to Space No. 14 at SYCAMORE PLAZA AT KENWOOD, Cincinnati, Ohio. 1. RIDER TO INDENTURE, ARTICLE II (Extension of Term) Provided that Tenant is not in default under the Lease at the time of exercise of the respective options, Tenant shall have two (2) additional options to extend the term of the Lease for periods of five (5) years each. The second option may not be exercised unless the first option has been exercised. Each of the options must be exercised, if at all, not earlier than twelve (12) months nor later than six (6) months prior to the expiration of the initial term or first option period, as applicable, by written notice delivered to Landlord, TIME BEING OF THE ESSENCE. All terms and conditions of this Lease shall continue to apply through the option term(s). 2. RIDER TO INDENTURE, ARTICLE II (Contingency Period) (a) Provided that Tenant uses diligent efforts to satisfy the Contingencies (defined hereinbelow), Tenant shall have a period of not less than one hundred thirty (130) days from the date of this Lease until the commencement of the Construction Period ("Contingency Period"). The Contingencies shall be: (i) Tenant has received zoning board approval, if required; (ii) Tenant has received building permits; (iii) Landlord has approved Tenant's plans and specification, including signage (provided that Landlord shall be under no obligation to approve any items which are inconsistent with the Tenant Design Criteria Manual); and (iv) Tenant has obtained a commitment for Financing (defined hereinbelow). (b) As used herein, the term "Financing" shall mean equity or debt financing, or a combination of the two, in the amount of up to eighty percent (80%) of the total construction cost of Tenant's improvements to the Premises, but not more than Two Million Dollars ($2,000,000.00). (c) In the event that the Contingencies have not been satisfied or waived by Tenant within the Contingency Period, despite Tenant's diligent efforts, then the commencement of the Construction Period shall be delayed for a period of up to fourteen (14) days for the Contingencies to be satisfied. At the end of the 14-day period, Landlord may terminate this Lease upon written notice delivered at any time prior to receipt of written notice from Tenant that the Contingencies have been satisfied or waived by Tenant. In the event that the Contingencies have not been satisfied or waived by Tenant within sixty (60) days following the expiration of the Contingency Period, despite Tenant's diligent efforts, then Tenant shall have the right to terminate this Lease by delivery of written notice within ten (10) days following the end of the 60-day period. RIDER Hotel Mexico Page 1 of 7 38 (d) In the event that the parties are unable to agree on the initial plans and specifications for the Premises within the Contingency Period, then either party may terminate this Lease within thirty (30) days following the expiration of the Contingency Period. The parties agree to negotiate in good faith to resolve any disputes regarding disapproval of plans by Landlord. 3. RIDER TO INDENTURE, ARTICLE X (Use of Premises) (a) Notwithstanding Article X, Tenant may change the specific items sold on the menu provided that (i) the theme of the restaurant shall not change and (ii) no exclusive granted to another Tenant of the Shopping Center is violated. Further, Tenant may change the trade name and use to any high-end restaurant concept, provided that (i) Landlord receives at least sixty (60) days prior written notice of such change, including the proposed trade name and menu, and (ii) no exclusive granted to another Tenant of the Shopping Center is violated. Tenant hereby acknowledges the exclusive granted to Johnny Rockets for any use expected to derive more than twenty percent (20%) of its Gross Sales from the sale of hamburgers. (b) Provided that Tenant continuously operates its business, as required by this Lease, under the Hotel Mexico trade name, Landlord shall lease no other space in the Shopping Center to any tenant whose primary use shall be the sale of Mexican food items ("Tenant's Exclusive"). In the event that Landlord violates Tenant's Exclusive, and fails to cure such default within sixty (60) days after notice from Tenant, then Tenant may pay four percent (4%) of Gross Sales in lieu of Fixed Minimum Rent and Percentage Rent ("Alternate Rent"), retroactive to the date of Tenant's notice, until such default on the part of Landlord is cured. Alternate Rent shall be payable monthly in arrears by the twentieth (20th) of each month. If Landlord fails to cure such default within one (1) year from the date of Tenant's notice, and Tenant's Gross Sales have fallen ten percent (10%) or more during such one-year period, as compared with the previous twelve months, then Tenant may terminate this Lease upon not less than one hundred eighty (180) days prior written notice delivered within sixty (60) days following the end of such twelve-month period. Tenant acknowledges that the Max & Erma's use shall not be a violation of Tenant's Exclusive. 4. RIDER TO INDENTURE, ART. XI (Shopping Center Hours of Operation) Landlord shall have the right to demand reimbursement from Tenant for Tenant's proportionate share (based on floor area and opening hours of the other tenants also open beyond normal hours) of the additional Operating Costs associated with Tenant's extended hours beyond normal Shopping Center operating hours. Tenant shall pay any such amount within thirty (30) days after receipt of an invoice therefor. 5. RIDER TO SECTION 3.01 (Taxes) Landlord agrees to reasonably cooperate with Tenant (at no expense to Landlord) in any appeal of Taxes or assessments, provided that Tenant has presented to Landlord a petition signed by tenants occupying not less than sixty percent (60%) of the leasable floor area of the Shopping Center supporting such appeal. Tenant shall be entitled to its proportionate share of any refund or reduction obtained through such appeal, and shall be responsible RIDER Hotel Mexico Page 2 of 7 39 for the full amount of any increase in Taxes or assessments made as a result of such appeal. Except as set forth herein, Tenant shall have no right to appeal Taxes or assessments. 6. RIDER TO SECTION 3.03 (Leasable Floor Area) In the event that Landlord constructs new buildings or enlarges existing buildings in the Shopping Center, such expansion areas shall be included in Leasable Floor Area upon the initial imposition by the taxing authority of additional Tax liability with respect thereto; no such area, once completed, may be excluded from Leasable Floor Area, even though the area may not be actually leased or offered for lease. 7. RIDER TO SECTION 4.01 (Common Areas) Landlord shall use reasonable efforts to maintain the Common Areas in a clean and orderly condition, consistent with first-class "power centers" in the Cincinnati metropolitan area. 8. RIDER TO SECTION 4.03 (Cap on Increases in Operating Costs) Notwithstanding the provisions of the Lease, Tenant's share of Operating Costs shall not be increased in any Accounting Period (after the first full Accounting Period) by greater than eight percent (8%) over the previous year's charge, provided that if charge increases by less than eight percent (8%) in any Accounting Period, such unused portion of the "cap" may be carried forward to subsequent Accounting Period(s) so that Tenant's share of Operating Costs may be increased by greater than eight percent (8%) over the previous year's charges in such future Accounting Period(s); and provided further that if Tenant's proportionate share (before applying the eight percent cap) increases more than eight percent (8%) in any given year, then the excess of Tenant's proportionate share before applying the "cap" amount may be carried over to be charged to Tenant in future Accounting Period(s) to the extent that Tenant's proportionate share of Operating Costs for such future Accounting Period(s) does not exceed 108% of the previous year's charge. However, it is the intention of the parties that the average increase over the term of the Lease (after the first full Accounting Period) shall not be greater than eight percent (8%) per Accounting Period. 9. RIDER TO SECTION 7.01 (Dram Shop Insurance) If Tenant is permitted to engage in the sale of beer, wine or other alcoholic beverages, in addition to the insurance coverage mentioned under the provisions of Article VII, Tenant shall (except as hereinafter provided) also secure and keep in force, commencing as of the date Tenant opens for business with the public, Liquor Liability (dram shop) Insurance with a minimum limit of liability in an amount of Three Million Dollars ($3,000,000.00) on an occurrence basis, covering all bodily injury and death to one or more persons, and Five Hundred Thousand Dollars ($500,000.00) in connection with property damages. Tenant may carry such insurance as $1,000,000.00 primary coverage and $2,000,000.00 excess liability coverage. Neither the provisions of this Rider nor the failure of the Landlord to enforce the provisions hereof shall be deemed to impose any liability upon Landlord, its managing agent, employees, agents or contractors to any other party claiming a benefit under the requirements of this Rider or the obligations arising hereunder. RIDER Hotel Mexico Page 3 of 7 40 10. RIDER TO SECTION 8.01(f) (Utility Interruptions) Notwithstanding Section 8.01(f), in the event that utilities are interrupted for a period in excess of twenty-four (24) consecutive hours due to the negligence or willful misconduct of Landlord, and such interruption in utilities prevents Tenant from operating, then Fixed Minimum Rent shall abate until service is restored. 11. RIDER TO SECTION 10.02 (Construction Allowance) Landlord agrees to reimburse to Tenant, as consideration for certain alterations and improvements which Tenant will make to the Premises pursuant to Tenant's approved plans and specifications (hereinafter referred to as "Tenant's Work"), an amount equal to up to TWO HUNDRED THOUSAND AND 00/100 Dollars ($200,000.00) (such amount hereinafter referred to as "Construction Allowance"). The Construction Allowance shall be paid within thirty (30) days after all of the following conditions have been satisfied: (a) Tenant is not in default under this Lease, (b) the Premises are open for business, (c) Tenant's Work has been fully completed, and (d) Tenant has submitted to Compass Retail, Inc. ("Agent"), as managing agent for Landlord, the following information and materials together with its request for payment: (i) a summary of all costs, certified by an authorized officer of Tenant and the Tenant's general contractor; (ii) a copy of Tenant's certificate of occupancy for the Premises and any other licenses or permits necessary for Tenant to open and operate its business at the Premises; (iii) final lien waivers and releases (in such form as has been approved by Landlord), properly executed by Tenant's general contractor and all subcontractors and suppliers indicating that all amounts due to the general contractor, subcontractors and suppliers have been paid in full; (iv) if requested by Landlord, copies of all invoices, work orders or other evidence of amounts claimed to be spent in completion of Tenant's Work; and (v) any additional documentation reasonably requested by Landlord. Notwithstanding anything to the contrary contained herein, Landlord hereby reserves the right to have Landlord's or Agent's architect confirm Tenant's statement as to the amount of work completed within the Premises prior to making any payment to Tenant. Landlord shall not be liable for any amounts incurred by Tenant in excess of the Construction Allowance. The Construction Allowance, or any portion thereof, may be used by Landlord to offset any amounts to be paid from Tenant to Landlord that are past due under this Lease. RIDER Hotel Mexico Page 4 of 7 41 12. RIDER TO SECTION 10.05 (Alterations and Mandatory Refurbishment) Tenant shall replace all worn surfaces (including without limitation, paint and wall coverings, carpet and floor coverings, trade fixtures and signage) as necessary throughout the Term, and shall make such other alterations as are necessary or appropriate to maintain the premises in a first-class condition and appearance. 13. RIDER TO SECTION 10.06 (Common Areas) (a) Except as shown on Exhibit A, Landlord shall construct no permanent buildings in the "No-Build-Area" identified on Exhibit A. Tenant acknowledges that Landlord plans to construct a decorative stone wall, as shown on Exhibit H, in certain portions of the No-Build Area. (b) In exercising its rights in the Common Areas, Landlord shall take no action which materially adversely affects the availability of parking in the No Build Area. (c) In exercising its rights in the Common Areas, Landlord shall use reasonable efforts to avoid material interference with the operation of Tenant's business. 14. RIDER TO ARTICLE XI (Operation of Business) Tenant shall be responsible for the acts of Tenant's patrons in the Common Areas. In acknowledgement of Tenant's extended hours and alcoholic beverage service, Tenant shall use diligent efforts to prevent any unruliness, violence or disturbances on the part of its patrons in the Common Areas. Tenant shall supply, at sole cost and expense, additional security services to implement the provisions of this Rider, upon written request by Landlord supported by a reasonable demonstration of the need therefor. 15. RIDER TO SECTION 13.01 (Indemnification) Landlord will indemnify and hold harmless Tenant and its principals, agents and employees from loss, claims, actions, liability, expense or damage, including reasonable attorney fees and court costs (collectively "Claims") arising out of Landlord's negligence in connection with the use, operation and maintenance of the Common Areas, except to the extent such Claims are caused by the negligence of Tenant or its agents, employees, licensees, subtenants or contractors. Such indemnity shall be conditioned upon Tenant providing to Landlord prompt notice of any such potential Claim and permitting Landlord to assume the defense of such Claim, including settlement and compromise of such Claim, in the sole discretion of Landlord. 16. RIDER TO SECTION 14.02 (Partial Destruction of Shopping Center) In the circumstances contemplated by Section 14.02, if Landlord fails to terminate this Lease, Tenant shall have the right to terminate if Landlord has not substantially completed reconstruction of the Shopping Center "base building" construction (subject to Landlord's right to reconfigure the Shopping Center) within twelve (12) months following such event of casualty. Upon written request by Tenant following such event of casualty, Landlord shall notify Tenant whether Landlord reasonably expects to be able to complete such work within the stipulated time period. RIDER Hotel Mexico Page 5 of 7 42 If Landlord does not expect to be able to complete such work within such period, Tenant may terminate this Lease. Tenant's notice to terminate pursuant to this Rider shall be delivered within thirty (30) days following (a) the end of the twelve-month period or (b) receipt of Landlord's notice that it does not reasonably expect to complete the work, as the case may be. 17. RIDER TO SECTION 16.02 (Subordination and Non-disturbance) In the event that a Mortgage is recorded subsequent to the effective date of this Lease, Landlord, upon request by Tenant, shall use reasonable efforts to obtain from such Mortgagee a written agreement, in form and substance reasonably satisfactory to Tenant, that such Mortgagee shall not disturb Tenant's possession so long as Tenant is not in default hereunder beyond any applicable cure period. Tenant's obligation to subordinate this Lease to any Mortgage shall be conditioned upon such Mortgagee delivering to Tenant a written non-disturbance agreement providing that Tenant's rights under this Lease shall be recognized by such Mortgage upon foreclosure and Tenant's possession shall not be disturbed so long as Tenant is not in default hereunder, subject to the provisions of this Lease. 18. RIDER TO SECTION 17.01 (Assignment) (a) Tenant may execute a collateral assignment of this lease to secure loans for construction of the Premises without imposition of the rights of Landlord pursuant to this Section 17.01. (b) Tenant shall have the right to assign this Lease to any corporation acquiring all of the assets of Tenant, provided that such assignee corporation has a tangible net worth as of the date of assignment in the amount of not less than Five Hundred Thousand Dollars ($500,000.00), as demonstrated in certified financial statements audited by certified public accountants reasonably acceptable to Landlord, and provided further that the parties promptly deliver to Landlord written notice of such assignment, together with an instrument in which the assignee agrees to assume the obligations of Tenant hereunder and to be bound thereafter by all terms and conditions of the Lease. 19. RIDER TO ARTICLE XIX (Landlord Default) In the event that Landlord fails to perform any of the repairs and maintenance required by Section 12.02, or fails to perform repairs and maintenance to the No-Build-Area, consistent with the Rider to Section 4.01, and such failure continues for twenty (20) days after written notice from Tenant (or such longer period as may be required to complete such work, provided that Landlord diligently pursues such work to completion) and materially adversely affects the operation of Tenant's business, then thereafter Fixed Minimum Rent shall abate, until such condition is cured, in proportion to the extend that the Premises are not usable. 20. RIDER TO SECTION 21.22 (Hazardous Materials) (a) Notwithstanding the provisions of Section 21.22, Tenant shall not be responsible for abatement of Hazardous Materials (a) introduced into the Premises by Landlord or its agents, or (b) present in the Premises as of the date of delivery of possession and discovered during the performance of Tenant's Work as approved by Landlord pursuant to Section 10.02. In the event that such RIDER Hotel Mexico Page 6 of 7 43 Hazardous Materials are present in the Premises, Landlord shall be responsible for removal of such Hazardous Materials to the extent required by applicable legal requirements, and Fixed Minimum Rent and all other charges under this Lease shall abate for the period that Tenant is required to be closed for such abatement. (b) Tenant acknowledges receipt of that certain Environmental Site Assessment, prepared for Compass Retail, Inc. by ATEC Environmental Consultants on September 30, 1993. RIDER Hotel Mexico Page 7 of 7 44 UNCONDITIONAL GUARANTY OF PAYMENT AND PERFORMANCE OF LEASE OBLIGATIONS (Individual Guarantor) For and in consideration of, and as a material inducement for, the granting, execution and delivery by Phillip E. Stephens, Trustee, ("Landlord", which term shall be deemed to include the named Landlord and its successors, successors-in-title and assigns), of that certain Lease Agreement, dated ___________, 1994 (the "Lease"), between Landlord and Kenwood Restaurant, Inc., an Ohio corporation trading as Hotel Mexico (individually and collectively, if more than one, "Tenant"), covering certain premises in Sycamore Plaza at Kenwood (formerly Kenwood Mall) located in Cincinnati, Ohio, and in further consideration of the sum of One Dollar ($1.00) and other good and valuable consideration paid by Landlord to the undersigned, the receipt and sufficiency of which are hereby acknowledged, Steve King, an unmarried resident of the State of Ohio (individually and collectively, if more than one, "Guarantor"), Guarantor, jointly and severally, if more than one, hereby unconditionally and absolutely guarantees to Landlord the full and prompt payment when due of all sums now or hereafter payable by Tenant to Landlord pursuant to the terms of the Lease, including, without limitation, all "Fixed Minimum Rent", "Percentage Rent", additional rent and all other sums, fees and charges of every description payable by Tenant under the terms of the Lease (collectively, the "Rents"), and the full and prompt performance of all obligations, covenants, and conditions to be observed and performed by Tenant under the terms of the Lease. If at any time Tenant shall default in the payment of any Rents, or in the performance and observance of any of the obligations, covenants and conditions set forth in the Lease, Guarantor shall immediately pay such Rents to Landlord, and shall immediately and faithfully perform and fulfill all of such obligations, covenants and conditions, and also shall pay to Landlord all damages that may arise in consequence of any default by Tenant under the Lease, including, without limitation, all reasonable attorney's fees and expense suffered or incurred by Landlord and resulting from, incident to, or otherwise arising out of or in connection with a default by Tenant under the Lease, or the enforcement of the Lease or the enforcement of this Guaranty. This Guaranty shall be a continuing guaranty, and the liability of Guarantor hereunder shall not be affected, modified or diminished in any way by reason of (a) any modification, amendment, assignment, subletting, extension or renewal of the Lease; (b) any release, compromise or indulgence now or hereafter granted by Landlord with respect to the Lease, or to any person or entity now or hereafter liable thereunder or hereunder; (c) any consent, action, inaction or omission under or in respect of the Lease; (d) any bankruptcy, insolvency, reorganization, liquidation, arrangement, assignment for the benefit of creditors, receivership, trusteeship or similar proceeding affecting Tenant; or (e) the assertion or the failure to assert by Landlord against Tenant of any of the rights or remedies reserved to Landlord pursuant to the Lease, or which otherwise may be available to a landlord at law or in equity. No such action which Landlord shall take or fail to take in connection with the Lease, nor any course of dealing with Tenant or any other person, shall release Guarantor's obligations hereunder, affect this Guaranty in any way or afford Guarantor any recourse against Landlord. The provisions of this Guaranty shall extend and be applicable to all renewals, extensions, amendments, modifications, assignments and subleases of the Lease, and any and all references herein to the Lease shall be deemed to include any such renewals, extensions, amendments, modifications, assignments and subleases thereof. This Guaranty is an absolute and unconditional guaranty of payment and performance of all obligations of Tenant to Landlord under the Lease, and not of collection. The liability of Guarantor under the Guaranty shall be direct and immediate and not conditioned or contingent upon the pursuit of any remedies against Tenant or any other person. Guarantor expressly agrees that this Guaranty shall be enforceable against Guarantor without the necessity of any suit or proceeding on Landlord's part of any kind or nature whatsoever against Tenant and without the necessity of any notice of nonpayment, nonperformance or nonobservance or any notice of acceptance of this Guaranty or of any other notice or demand to which Guarantor might otherwise be entitled, all of which Guarantor hereby expressly waives. In the event of a default under the Lease or this Guaranty, Landlord shall have the right to enforce its rights, powers and remedies thereunder or hereunder in any order, and all rights, powers and remedies available to Landlord in such event shall be nonexclusive and cumulative of all other rights, powers and remedies now or hereafter provided thereunder or hereunder or by law or in equity; and no exercise or partial exercise of any such right or remedy under the Lease or this Guaranty is or shall be construed to be exclusive of or a waiver of any other right or remedy. No delay on the part of Landlord in exercising any right, power or privilege under the Lease or this, Guaranty, or failure to exercise the same, shall operate as a waiver of or otherwise affect any such right, power or privilege, nor shall any single or partial exercise thereof preclude any other or further exercise thereof or the exercise of any other right, power or privilege. If the obligations guaranteed hereby are partially paid by reason of the election of Landlord to pursue any of the remedies available to Landlord, or if such obligations are otherwise partially paid or performed, this Guaranty shall nevertheless remain in full force and effect, and Guarantor shall remain liable for the entire unpaid balance of the Rents and the performance of all other obligations of Tenant guaranteed hereby, even though any rights which Guarantor may have against Tenant may be destroyed or diminished by the exercise of any such remedy. Until all of the obligations of Tenant to Landlord under the Lease have been paid and performed in full, Guarantor shall have no right of subrogation to Landlord against Tenant, and Guarantor hereby waives any rights to enforce any remedy which Landlord may have against Tenant. Guarantor warrants and represents to Landlord that all financial statements heretofore and hereafter delivered by him or her to Landlord are and shall be true, correct and complete in all respects, and fully and accurately present the financial condition of Guarantor as of the date(s) thereof. Upon the request of Landlord, Guarantor agrees to deliver to Landlord a current financial statement of Guarantor, which shall be prepared in all reasonable detail and in accordance with generally accepted accounting principles consistently applied. Guarantor shall, at any time and from time to time, upon ten (10) days' written request from Landlord, execute, acknowledge and deliver to Landlord or its designee(s) a statement certifying that this Guaranty is unmodified and in full force and effect (or if there have been modifications, that the same is in full force and effect as modified, and stating such modifications). Guarantor agrees that any such certificate may be relied upon by Landlord and its designee(s), including any prospective purchaser or any existing or prospective mortgagee of Landlord's interest in the "Shopping Center" (as such term is defined in the Lease) or any part thereof. If Guarantor defaults in the performance or observance of any provision contained herein, or breaches any warranty or representation contained herein, or makes a general assignment for the benefit of creditors, or petitions or applies to any tribunal for the appointment of a trustee or receiver of the whole or any substantial part of the business, estate or assets of Guarantor, or commences any proceedings relating to Guarantor under any bankruptcy, reorganization, arrangement, insolvency, readjustment of debt, dissolution or liquidation law of any jurisdiction, whether now or hereafter in effect, or if any such petition or application is filed or any such proceedings are commenced against Guarantor and Guarantor by any act consents thereto or acquiesces therein, or an order is entered appointing any such trustee or receiver, or adjudicating Guarantor bankrupt or insolvent, or approving a petition in any such proceedings, and such order remains in effect for more than sixty (60) days, then, at the option of Landlord, and in addition to constituting a default hereunder, the same shall constitute an "Event of Default" under and as defined in the Lease, and Landlord shall thereupon have all remedies contemplated under the Lease upon the occurrence of an Event of Default thereunder. This Guaranty may not be changed orally, and no obligation of Guarantor can be released or waived by Landlord or any officer or agent of Landlord, except by a writing signed by a duly authorized officer of Landlord and bearing the seal of Landlord; nor shall any 45 such release or waiver be applicable except in the specific instance for which given. This Guaranty shall be irrevocable by Guarantor so long as the Lease shall remain in effect and until all obligations guaranteed hereby have been paid and performed in full in accordance with the terms of the Lease. In the event a court of competent jurisdiction shall find that Tenant is not liable under the Lease because the act of creating the obligations thereunder is ultra vires, or the officers or persons creating same acted in excess of their authority, and for these reasons, any sums due to Landlord or obligations required to be performed pursuant to the Lease cannot be enforced against Tenant, such fact shall in no manner affect Guarantor's liability hereunder, but Guarantor shall be liable to the same extent as Guarantor would have been if all of the terms, conditions, covenants and agreements of said Lease had been enforceable against Tenant. If for any reason Landlord is required to refund or pay the amount of any payment paid by Tenant to Landlord to any other party, such payment paid or due from Tenant to Landlord shall not constitute a release of Guarantor from any liability hereunder, but Guarantor agrees to pay such amount to Landlord upon demand. This Guaranty shall be governed and construed in accordance with the law of the State or Commonwealth in which the Shopping Center is located. Guarantor hereby submits to personal jurisdiction in the State or Commonwealth in which the Shopping Center is located for the enforcement of this Guaranty, and waives any and all personal rights under the law of any state to object to jurisdiction within such State for the purposes of litigation to enforce this Guaranty. Nothing contained herein, however, shall prevent Landlord from bringing any action or exercising any rights against Guarantor, or against any property of Guarantor, within any other state. If any provision of this Guaranty or the application thereof to any person or circumstance shall be held void, invalid or unenforceable to any extent, the remainder of this Guaranty, and the application of such provision to persons or circumstances other than those as to which it is held void, invalid or unenforceable, shall not be affected thereby, and each provision of this Guaranty shall be valid and enforceable to the fullest extent permitted by law. The liability of Guarantor hereunder is co-extensive with that of Tenant under the Lease, and with any other guarantor who may have guaranteed or who hereafter may guarantee the obligations of Tenant under the Lease, and Landlord may release or settle with any one or more such guarantors at any time or from time to time without affecting the continuing liability of Guarantor hereunder. This Guaranty shall in no event be impaired by any change which may arise by reason of this dissolution, liquidation or merger of Tenant, if a corporation or partnership, or the death of Tenant or Guarantor, if individuals. Nothwithstanding the foregoing, Guarantor's liability hereunder shall be limited to rent and charges for a period of two (2) years following recovery of possession of the Premises by Landlord. This Guaranty shall terminate upon notice from Guarantor following delivery to Landlord of financial statements of Tenant, certified as true and correct by independent certified public accountants reasonably acceptable to Landlord, demonstrating that Tenant has attained a tangible net worth of more than Five Hundred Thousand Dollars ($500,000.00). IN WITNESS WHEREOF, Guarantor has caused this Guaranty to be executed under seal as of the 7th day of Nov., 1994. [Sig] [Sig] (SEAL) - ----------------------- ----------------------- Witness Print or Type Name: Steve King, an unmarried resident of the state of Ohio Lauri Mayden Social Security Number: 298420423 - ----------------------- ----------------- Witness Address: -------------------------------- ----------------------------------------- ----------------------------------------- ----------------------------------------- 46 FIRST AMENDMENT TO LEASE THIS FIRST AMENDMENT TO LEASE is made this 3rd day of May, 1995 between PHILLIP E. STEPHENS, TRUSTEE (hereinafter called "Landlord") and KENWOOD RESTAURANT, INC., an Ohio corporation (hereinafter called "Tenant"). 1. Recitals. On November 9, 1994 Landlord and Tenant entered into an Indenture of Lease (the "Lease"), including a Rider to Lease of the same date (the "Rider"), with respect to Store No. 14 in a shopping center known as Sycamore Plaza at Kenwood located at 7800 Montgomery Road, Cincinnati, Ohio 45236. Landlord and Tenant have agreed to certain modifications to the Lease as provided herein. 2. Terms of Addendum. The Landlord and Tenant hereby agree as follows: (a) Landlord hereby waives its right to terminate the Lease pursuant to Sections 2(c) and 2(d) of the Rider. (b) Tenant hereby waives the contingencies contained in Section 2(a)(i), (ii) and (iii) of the Rider and its rights to terminate the Lease for failure of such contingencies to be satisfied. Section 2(a)(iv) is the sole remaining contingency under Section 2 of the Rider. (c) Notwithstanding Article II of the Lease, the "Commencement Date" of the Lease shall be the earlier of the opening of the Premises for business with the public or November 1, 1995. The designation of the "Commencement Date" herein does not waive or alter tenant's right to terminate the Lease pursuant to Section 2(a)(iv) of the Rider. 3. No Other Amendment. Except as specifically provided in this Addendum, all of the other terms and conditions of the Lease shall remain in full force and effect without amendment or modification. LANDLORD: STRATEGIC RETAIL TRUST (formerly Kenwood Mall Trust) Laura S. Collins By: Phillip E. Stephens - -------------------------- -------------------------- Witness Phillip E. Stephens, Trustee Kevin B. Polston - -------------------------- Kevin B. Polston Witness 47 TENANT: KENWOOD RESTAURANT, INC. [SIG] By: Stephen D. King - -------------------- -------------------------- Witness Stephen D. King, President Rosa L. Williams - -------------------- Witness STATE OF GEORGIA ) ) SS: COUNTY OF FULTON ) Sworn to before me and subscribed in my presence this 5th day of May, 1995 by Phillip E. Stephens, Trustee. Yolanda L. Smith ---------------------------- Notary Public Notary Public, Dekkalb County, Georgia My Commission Expires Jan. 5, 1999 STATE OF OHIO ) ) SS: COUNTY OF HAMILTON ) Sworn to before me and subscribed in my presence this 3rd day of May, 1995 by Stephen D. King, President of Kenwood Restaurant, Inc. Suzanne P. Land ---------------------------- Notary Public [SEAL] Suzanne P. Land, Attorney at Law Notary Public - State of Ohio My Commission has No Expiration Date Section 147.03 -2- 48 FIRST AMENDMENT TO LEASE THIS FIRST AMENDMENT TO LEASE is made this 3rd day of May, 1995 between PHILLIP E. STEPHENS, TRUSTEE (hereinafter called "Landlord") and KENWOOD RESTAURANT, INC., an Ohio corporation (hereinafter called "Tenant"). 1. Recitals. On November 9, 1994 Landlord and Tenant entered into an Indenture of Lease (the "Lease"), including a Rider to Lease of the same date (the "Rider"), with respect to Store No. 14 in a shopping center known as Sycamore Plaza at Kenwood located at 7800 Montgomery Road, Cincinnati, Ohio 45236. Landlord and Tenant have agreed to certain modifications to the Lease as provided herein. 2. Terms of Addendum. The Landlord and Tenant hereby agree as follows: (a) Landlord hereby waives its right to terminate the Lease pursuant to Sections 2(c) and 2(d) of the Rider. (b) Tenant hereby waives the contingencies contained in Section 2(a)(i), (ii) and (iii) of the Rider and its rights to terminate the Lease for failure of such contingencies to be satisfied. Section 2(a)(iv) is the sole remaining contingency under Section 2 of the Rider. (c) Notwithstanding Article II of the Lease, the "Commencement Date" of the Lease shall be the earlier of the opening of the Premises for business with the public or November 1, 1995. The designation of the "Commencement Date" herein does not waive or alter tenant's right to terminate the Lease pursuant to Section 2(a)(iv) of the Rider. 3. No Other Amendment. Except as specifically provided in this Addendum, all of the other terms and conditions of the Lease shall remain in full force and effect without amendment or modification. LANDLORD: STRATEGIC RETAIL TRUST (formerly Kenwood Mall Trust) Laura S. Collins Phillip E. Stephens - -------------------- ---------------------------- Laura S. Collins Phillip E. Stephens, Trustee Witness Kevin B. Polston - -------------------- Kevin B. Polston Witness 49 TENANT: KENWOOD RESTAURANT, INC. [SIG] - --------------------------- BY: Stephen D. King Witness -------------------------- Stephen D. King, President Rosa L. Williams - --------------------------- Witness STATE OF GEORGIA) ) SS: COUNTY OF FULTON) Sworn to before me and subscribed in my presence this 5th day of May, 1995 by Phillip E. Stephens, Trustee. Yolanda L. Smith ---------------------------- Notary Public Dekalb County, Georgia My Commission Expires Jan 5, 1999 STATE OF OHIO ) ) ss: COUNTY OF HAMILTON) Sworn to before me and subscribed in my presence this 3rd day of May, 1995 by Stephen D. King, President of Kenwood Restaurant, Inc. [NOTARIAL SEAL STATE OF OHIO] SUZANNE P. LAND ----------------------------- Notary Public -2- 50 SECOND AMENDMENT TO LEASE This Agreement entered into as of _________________, 1996, by and between PHILLIP E. STEPHENS, Trustee (hereinafter called "Landlord"), with an address for receipt of payments at P.O. Box 930525, Atlanta, Georgia 31193, and an address for receipt of notices at 5775 Peachtree, Dunwoody Road, Suite 200-D, Atlanta, Georgia 30342, Attention: Counsel, and KENWOOD RESTAURANT LIMITED PARTNERSHIP, an Ohio limited partnership, lease assignee of KENWOOD RESTAURANT, INC., an Ohio corporation, d/b/a Hotel Mexico (hereinafter called "Tenant"), with a notice address of 3655 Michigan Avenue, Cincinnati, Ohio 45202, Attention: President, and an address for receipt of invoices of 3655 Michigan Avenue, Cincinnati, Ohio 45208, Attention Accounts Payable. RECITALS A. Landlord and Tenant entered into a certain Lease Agreement and Indenture of Lease, each dated November 9, 1994, under which Landlord let certain premises known as Store No. 14 (main level) within the retail complex known as Sycamore Plaza at Kenwood, which retail complex is more particularly described as Schedule A attached hereto and made a part hereof, as amended by a certain First Amendment to Lease dated May 3, 1995, by and between Landlord and Tenant, together with certain side letter agreement referenced in the Landlord's Statement delivered to Tenant concurrent with this Second Amendment to Lease, which are incorporated herein and made a part hereof. (collectively the "Lease"). B. Tenant has requested PNC Bank, Ohio National Association ("PNC") to extend financing for the construction of Tenant's Improvements, as hereinafter defined, and other expenses incurred in the preparation of the Premises its conduct of business therein (the "PNC Financing"). C. PNC, among other things, has required certain amendments to the Lease, as one condition of several, to extending the PNC Financing to Tenant. D. Landlord and Tenant have agreed to make said amendments to the Lease as hereinafter provided. NOW, THEREFORE, in consideration of Ten Dollars ($10.00) and other good and valuable consideration, the receipt and sufficiency of which are irrevocably acknowledged, Landlord and Tenant hereby agree as follows: 1. Section 10.05 contained in the Lease Agreement is hereby amended by the addition of the following provision: Notwithstanding anything contained herein to the contrary, in the event that Lender or a Lender Party, as either term is hereinafter defined, acquires Tenant's interest in the Premises, by foreclosure, deed in lieu of foreclosure or otherwise, or takes possession of the Premises, it shall be entitled to make 51 interior changes to the Premises consistent with the intended purpose which the Premises shall be used, and to replace all identification signs with those for any successor occupant of the Premises, without the prior written consent of Landlord, provided that such alterations and signage are otherwise in compliance with the provisions of the Lease. 2. Section 11.01 of the Lease Agreement and Article X of the Indenture of Lease are hereby amended by the addition of the following provision: In the event that Tenant, after the expiration of any grace period, ceases its business operations within the Premises or otherwise violates the provisions of Section 11.01(e) of the Lease Agreement, then the continuous operation covenant contained in Section 11.01(e) of the Lease Agreement shall be suspended for up to six (6) months from the date of closing so long as Lender, or a Lender Party, as hereinafter defined, is diligently taking action to foreclose its leasehold mortgage, or to effect a transfer in lieu of foreclosure, and gives Landlord written notice, and makes the rent payments to the Landlord and performs or causes to be performed all other obligations required of the Tenant under the Lease during such period, which can reasonably be performed while Lender (or a Lender Party) is not in possession of the Premises. If the Lender, or a Lender Party, takes occupancy of the Premises and resumes business within such six (6) month period, the cessation of business operations by the Tenant shall not constitute a default under the Lease Agreement. If the Lender, or a Lender Party, is unable to obtain occupancy of the Premises and resume business operations within such six (6) month period and during such six (6) month period or thereafter Landlord terminates the Lease, then Landlord shall offer to enter into a new lease with Lender or Lender Party, upon the same terms and conditions of the Lease, including any renewal terms, for the remainder of the term of the Lease, including without limitation, any renewal terms; provided that Lender pay all sums which would have been otherwise due and payable by Tenant under the Lease, if it had not been terminated, up to the date the new lease becomes effective. Lender shall have fourteen (14) days after receiving such offer to accept or reject the offer in writing. Lender shall be entitled to extend said fourteen (14) day period by two (2) successive thirty (30) day periods immediately thereafter by written notice of its election to utilize said thirty (30) day period, and payment of Fixed Minimum Rent and all additional rents for said thirty (30) day period equal to that payable immediately prior to the termination of the Lease, which notice and payment must be sent to Landlord prior to the commencement of each applicable thirty (30) day period. If Lender fails to give Landlord written notice of acceptance of the offer within such period, the Lender's rights under this paragraph shall cease and be void, time being of the essence. At the time the new lease becomes effective, such lease of the Premises shall include all of the Improvements, subject to Landlord's reversionary interest therein effective upon the expiration of termination of the new lease. If this -2- 52 Lease terminates or expires, Landlord shall not demolish or materially alter any of the Improvements during the applicable time period during which Lender may enter into a new lease with Landlord as provided herein. In the event that Lender, a Lender Party or its designee shall take occupancy of the Premises as provided in this paragraph or pursuant to Article XVII(b) hereof, then the use clause provided in Section 11.01 shall be amended pursuant to Section 8(i) of that certain Second Amendment to Lease dated ______________, 1996, by and between Landlord and Tenant. Notwithstanding anything contained herein to the contrary, the fee simple title to the Improvements of the Tenant shall automatically be extinguished, and shall revert to Landlord, effective upon the termination or expiration of this Lease, subject to the rights and interest of Lender therein as provided in this Section 11.01. 3. Article XV of the Lease Agreement is hereby deleted in its entirety and the following are substituted in lieu thereof: Section 15.01. In the event that more than 25% of the Premises by area as is taken by reason or is under threat of eminent domain proceedings ("Condemnation") and Tenant in good faith and in its reasonable business judgement determines that the Premises as a result thereof are unsatisfactory for its continued use, Tenant may terminate this Lease by giving Landlord written notice of termination within thirty (30) days after the taking, time being of the essence. The term "Condemnation" shall include conveyances made in anticipation or lieu of an actual taking. If the lease is not terminated by reason of Condemnation, the Fixed Minimum Rent shall be reduced by the ratio that the square footage of the area of the affected portion of the Premises taken bears to the total square footage of Premises existing prior to the Condemnation. In such an event, Landlord and Tenant, within thirty (30) days after a Condemnation, shall enter into a lease amendment, in form and substance reasonably satisfactory to Landlord and Tenant, modifying the Fixed Minimum Rent for and legal description of the Demised Premises to reflect such a reduction in area. All other provisions of the Lease shall remain in full force and force and effect and shall not be affected by the lease amendment. Section 15.02. Notwithstanding termination of the Lease in accordance with Section 15.01, any award or payment ("Award") from a Condemnation which covers the Tenant's Improvements and all other improvements made by Tenant to the Premises, (collectively, the "Improvements") shall be paid to Tenant and any Award which covers Landlord's interest in the balance of the Shopping Center shall be paid to Landlord. If the Award fails to make an allocation to the value of the Improvements, such value shall be the unamortized cost to Tenant of such Improvements depreciated on a straight-line basis over the Original Term of the Lease. Section 15.03. Any Award received by Landlord, which is allocable to the Premises shall be used to restore the affected portion of the Premises to the extent reasonably practicable and to the extent such Award is not applied by the Mortgagee to retire indebtedness secured by the Mortgage. -3- 53 4. Section 16.02 of the Lease Agreement, and all references thereto, are hereby revised by the addition of the following provision: Notwithstanding anything contained in Section 16.02 to the contrary, if Tenant is not in default of this Lease beyond the applicable grace period, Mortgagee shall not disturb Tenant's use and enjoyment of the Premises and its rights in and to the Common Area in accordance with this Lease, and shall recognize any Security Documents, as hereinafter defined, for the benefit of Lender, and this Lease shall remain in full force and effect, notwithstanding the enforcement of any of the rights, remedies or interests of Mortgagee under the Mortgage or any deed in lieu of foreclosure or other transfer of Landlord's interest in the Shopping Center to Mortgagee or any party claiming through Mortgagee. Landlord, at Tenant's or Lender's request, shall furnish an agreement, in form and substance reasonably satisfactory to Mortgagee and Tenant or Lender, as applicable, under which Mortgagee shall confirm the provisions of this non-disturbance agreement, which may be incorporated into a Subordination, Non-Disturbance and Attornment Agreement which shall be executed by and among Landlord, Tenant, Lender and Mortgagee. 5. Article XVII is hereby amended by the addition of the following provision: (a) Landlord acknowledges that Tenant may encumber the Improvements with a mortgage, deed of trust or other lien ("Security Documents") offered as security for financing or refinancing ("Financing") the construction or alteration of the Improvements, and/or its leasehold interest in the Improvements. In such an event, Tenant shall furnish Landlord with the name and address of the holder of the Security Documents ("Lender"). Any party that claims an interest in the Premises through Lender (including without limitation an assignee from the Lender following a foreclosure, a purchaser in a foreclosure proceeding, or a transferee in lieu of foreclosure) is referred to herein as a "Lender Party". Landlord shall have the right to first approve the identity of a Lender Party, except in the case of a subsidiary or parent of Lender or a subsidiary of Lender's parent, if the Lender Party succeeds to the interest of Lender and takes assignment of Tenant's interest in this Lease; provided that such approval shall not be unreasonably withheld or delayed (not to exceed thirty (30) days after receipt of notice of the name and identity of the Lender Party, including financial condition and operating experience, and such other information as may be reasonably requested by Landlord), and further provided no such approval shall be required if the Lender Party complies with the provisions of clause 8(ii) hereof; in which case, only prior written notice shall be required. Nothing contained herein shall obligate Landlord to encumber its fee simple interest in the Premises to the lien of any Security Documents. (b) If Tenant is in default of the Lease, Landlord shall give Lender written notice at least thirty (30) days prior to terminating the Lease. So long as Lender commences action to foreclose its leasehold mortgage, or to effect a transfer in lieu of foreclosure, within such thirty (30) day period, gives Landlord written notice thereof, and thereafter makes the rent payments -4- 54 to Landlord and performs or caused to be performed all obligations required of the Tenant under the Lease, which can reasonably be performed while Lender (or a Lender Party) is not in possession of the Premises, the Landlord's right to terminate the Lease shall be suspended for up to six (6) months from the date of Landlord's notice of default to the Lender as provided herein. If Lender or a Lender Party takes occupancy of the Premises during such six (6) month period and thereafter performs the duties of the Tenant under the Lease, Landlord's right to terminate in connection with such prior default by Tenant shall be waived. If the Lender, or a Lender Party, is unable to obtain occupancy of the Premises and resume business operations within such six (6) month period, and during such six (6) month period or thereafter Landlord terminates the Lease, Landlord shall offer to enter into a new lease with Lender or Lender Party upon the same terms and conditions of the Lease, including any renewal terms, for the remainder of the term of the Lease; provided that Lender or Lender Party pay all sums which would have been otherwise due and payable by Tenant under the Lease, if it had not been terminated, up to the date the new lease becomes effective. Lender shall have thirty (30) business days after receiving such offer to accept or reject the offer in writing. If Lender fails to give Landlord written notice of acceptance of the offer within such period, the Lender's rights under this paragraph shall cease and be void, time being of the essence. At the time the new lease becomes effective, Landlord shall execute a bill of sale or other instrument, in form and substance reasonably satisfactory to Lender, which conveys to Lender the Landlord's interest in the Improvements, subject to Landlord's reversionary interest therein effective upon the expiration or termination of the new lease. (c) In the event that the Lease is terminated prior to the expiration of the term then in effect for any reason whatsoever, including without limitation, rejection or disaffirmance in accordance with any law affecting bankruptcy or creditor's right, Landlord shall furnish Lender written notice and a statement of any and all sums which would have been due under the Lease but for its termination. Lender shall be entitled to enter into a new lease with the Landlord upon the same terms and conditions of the Lease, including any renewal terms, for the remainder of the term of the Lease, provided that Lender Pay all sums under the Lease up to the date the new lease becomes effective. Lender may elect to enter into such new lease by giving Landlord written notice thereof within thirty (30) business days after Lender receives written notice from Landlord of the rejection or disaffirmance of the Lease. If Lender fails to give Landlord written notice within such period, the Lender's right under this paragraph shall cease and be void, time being of the essence. At the time the new lease becomes effective Landlord shall execute a bill of sale or other instrument, in form and substance reasonably satisfactory to Lender, which conveys to Lender Landlord's interest in the Improvements, subject to Landlord's reversionary interest therein effective upon the expiration or termination of the new lease. (d) Landlord shall serve Lender with a copy of all notices, including a notice of default, under the Lease at the address with which Landlord has been previously furnished. Landlord shall have no right to pursue any termination of this Lease unless Lender has received a copy of the notice of default and the applicable grace period provided in the Lease has lapsed, without the curing of such default, and any grace period for Lender's benefit shall not commence until Lender has received such copy. -5- 55 (e) Except as otherwise provided in the Lease, the Lease shall not be modified, cancelled or surrender, without the prior written approval of the Lender. (f) If Landlord or Tenant acquires the interest of the other in the Premises, there shall be no merger of the leasehold estate into the fee simple estate in the Premises. (g) In the event that Lender or Lender Party acquires Tenant's interest in the Premises its liability under this Lease shall be nonrecourse and shall be limited to its interest in the Improvements, net income from operation of the Improvements on the Premises, and proceeds from any sale of Lender's interest in the Improvements or leasehold in the Premises. (h) Each party hereto, at the request of the other party, Lender or a Lender Party, shall execute and return to the other party, Lender or Lender Party, a certificate, in form and substance satisfactory to the parties, confirming that the Lease is in full force and effect and free of default by either party within twenty (2) days after receipt of same, provided that the matters contained in the certificate are true and correct, and stating the particulars of any matter under the Lease which is in default by a party hereto, and further provided that Landlord shall not be required to deliver estoppel certificates more often than twice in any 12 month period. 6. In the event that the Lender, or a Lender Party, or its designee as provided above succeeds to the interest of Tenant under this Lease, it may undertake, without the prior consent of Landlord but with prior written notice, (i) a change in the use of the Premises to a different upscale, casual restaurant which is directed to a market similar to the other restaurant-tenants of the Shopping Center and which is not similar in concept or substantially similar in menu items to the other restaurant-tenants of the Shopping Center; and (ii) an assignment of the Lease to another person or entity, or principal thereof, which has at least comparable experience in restaurant management as that of Stephen D. King, and a net worth of One Million Dollars ($1,000,000.00) or more. Otherwise, it must obtain the prior approval of Landlord to any assignment of this Lease to another person or entity, other than Lender's parent or subsidiary, or a subsidiary of Lender's parent, which approval shall not be unreasonably withheld or delayed (not to exceed thirty (30) days after receipt of the name and identity of the proposed lease assignee). The failure by Landlord to approve or disapprove a proposed lease assignee within said thirty (30) day period shall constitute Landlord's approval of such lease assignee. 7. The Lease, except as amended herein, remains unmodified and is in full force and effect. Landlord and Tenant represent and warrant to the other party that neither party is in default of the Lease. WITNESSES: LANDLORD: [SIG] Phillip E. Stephens - ------------------------------------- ---------------------------- Print Name: [SIG] Phillip E. Stephens, Trustee -6- 56 [SIG] - ------------------------ Print Name: [SIG] TENANT: ------------ KENWOOD RESTAURANT LIMITED PARTNERSHIP, By: Kenwood Restaurant, Inc, Its General Partner [SIG] - ------------------------ By: [SIG] Print Name: [SIG] --------------------------------- ------------ Print Name: [SIG] ------------------------- Title: [SIG] ------------------------------ STATE OF GEORGIA ) ) SS: COUNTY OF FULTON ) The foregoing instrument was acknowledged before me, a notary public, this 8th day of October, 1996 by PHILLIP E. STEPHENS, Trustee. [SIG] -------------------------------------- Notary Public, DeKalb County, Georgia My Commission Expires Jan. 5, 1999 STATE OF OHIO ) ) SS: COUNTY OF HAMILTON ) The foregoing instrument was acknowledged before me, a notary public, this 10th day of October, 1996 by Stephen D. King, the President of Kenwood Restaurant, Inc. the G.P. of KENWOOD RESTAURANT LIMITED PARTNERSHIP, By: Kenwood Restaurant, Inc., Its General Partner on behalf of such limited partnership. [SIG] ---------------------------------- Notary Public [SEAL] 57 SECOND AMENDMENT TO AGREEMENT This Amendment is entered into this 18th day of October, 1996 by and between Phillip E. Stephens, Trustee ("Landlord") and Kenwood Restaurant Limited Partnership, an Ohio limited partnership ("Tenant"). 1. Landlord and Tenant are parties to an Indenture of Lease dated November 9, 1994 with respect to Store No. 14 of the Sycamore Plaza at Kenwood, 7800 Montgomery Road, Cincinnati, Ohio 45236 (the "Premises"). On June 28, 1996, the parties entered into an Agreement (the "Agreement") concerning the completion date for a restaurant building being constructed on the Premises by the Tenant (the "Building"). On September 20, 1996, the parties entered into an Amendment to Agreement (the "Amendment"). The parties wishing to further amend the Agreement, as previously modified by the Amendment, as provided herein. 2. Sections 3(a), (b) and (c) of the Lease are hereby revised to read in their entirety as follows: (a) Tenant agrees that construction of the Building not including fixtures, interior decoration, trim or design shall be completed on or before November 30, 1996. In the event such construction is not completed by August 31, 1996 (notwithstanding the later completion date stated above) Tenant shall pay to Landlord liquidated damages of $250.00 per day for each day until completion of such items for each day after August 31, 1996 up to September 11, 1996, the liquidated damages shall be $500.00 per day for each day after September 10, 1996 up to October 31, 1996. If such completion does not occur by November 1, 1996, the liquidated damages shall be $1,000.00 per day for each day after October 31, 1996 until completion of such items. (b) Tenant agrees that the furnishings, fixtures and equipment for the restaurant to be operated in the Building shall be completed and installed on or before December 15, 1996 and a certificate of occupancy (permanent or temporary) shall be issued. In the event that such installation and completion is not performed and a certificate of occupancy is not issued by October 31, 1996 (notwithstanding the later completion date stated above), Tenant shall pay to Landlord liquidated damages of $250.00 per day for each day after October 31, 1996 that such certificate of occupancy is not issued until November 10, 1996. If a certificate of occupancy is not issued by November 10, 1996, the liquated damages shall be $500.00 per day for each day after November 10, 1996 up to November 15, 1996 until issuance of such certificate of occupancy. If such certificate of occupancy 58 is not issued by November 15, 1996, the liquidated damages shall be $1,000.00 per day for each day after November 15, 1996 until issuance of such certificate of occupancy. (c) Tenant agrees that the restaurant to be located in the Building shall open on or before December 31, 1996. In the event that the opening does not occur by November 15, 1996 (notwithstanding the later opening date stated above), Tenant shall pay to Landlord liquidated damages of $500.00 per day for each day after November 15, 1996 up to November 25, 1996. If such opening does not occur by November 25, 1996, the liquidated damages shall be $1,000.00 per day for each day after November 25, 1996 until such opening. 3. In consideration for this Amendment, the Tenant agrees to pay to Landlord the sum of $58,000.00 as a credit against liquidated damages due under Section 2 above. In the event that an amount in excess of such sum is payable under this Agreement, Tenant shall promptly pay to Landlord such additional sums. In the event that less than such sum is due under the Agreement. Tenant shall be entitled to a refund of the balance. This Section 3 shall supersede and render void Section 3 of the Amendment. 4. Except as provided herein, there shall be no further amendments or modifications to the Agreement. KENWOOD RESTAURANTS INC. KENWOOD RESTAURANT LIMITED PARTNERSHIP BY: KENWOOD RESTAURANTS, INC., its general partner By: [SIG] --------------------- Stephen D. King, President By: [SIG] --------------------------- Stephen D. King, President [SIG] -------------------------------- Stephen D. King [SIG] -------------------------------- Phillip E. Stephens, Trustee -2- 59 ADDENDUM TO SECOND AMENDMENT TO LEASE This Addendum to Second Amendment to Lease is entered into as of October 18, 1996 by and between Phillip E. Stephens, Trustee (hereinafter called "Landlord"), and Kenwood Restaurant Limited Partnership, an Ohio limited partnership (hereinafter called "Tenant"). 1. Recitals. Landlord and Tenant entered into a certain Lease Agreement and Indenture of Lease (including a Rider attached thereto), each dated November 9, 1994 (the "Lease"), under which Landlord let certain premises known as Store 14 (main level) within the retail complex known as Sycamore Plaza at Kenwood, as amended by a certain First Amendment of Lease dated May 3, 1995. On __________, 1996, Landlord and Tenant entered into a Second Amendment to Lease (the "Second Amendment"), and the parties wish to make an Addendum to the Second Amendment as provided herein. All of the capitalized terms used herein which are not otherwise defined, shall have the same definitions as the Second Amendment. 2. Section 18(b) of the Rider to Lease between Landlord and Tenant dated November 9, 1994 is hereby amended to read in its entirety as follows: (b) Tenant shall have the right to assign this Lease to any corporation acquiring all the assets of Tenant, provided that such assignee corporation has a tangible net worth as of the date of assignment in the amount of not less than $500,000.00 in the event that the personal guaranty of the Lease by Stephen D. King (the "King Guaranty") is in effect as of the date of such assignment, or $2,500,00.00 in the event that the King Guaranty is not in effect on such date, as demonstrated in certified financial statements audited by certified public accountants reasonably acceptable to Landlord, and provided further that the parties promptly deliver to Landlord written notice of such assignment, together with an instrument in which the assignee agrees to assume the obligation of Tenant hereunder and be bound thereunder by all terms and conditions of the Lease. Nothing contained herein shall be considered a limitation, modification or amendment to the rights of the Lender, a Lender Party, or its designee to make assignments as provided in Section 6 of the Second Amendment to Lease. 60 3. The parties acknowledge that Landlord has approved the installation of additional improvements in the area in front of the Premises and the relocation of the access road to the Shopping Center in connection therewith (collectively, "Drive Lane Reconfiguration"). Such approval is reflected in that certain letter from John Schupp to Stephen D. King, dated August 13, 1996, based on conceptual plans submitted by Tenant's architect, RamFx. Tenant acknowledges that Landlord has disclosed that certain other tenants of the Shopping Center may have rights to control changes in the area affected by the Drive Lane Reconfiguration. Landlord agrees to use reasonable, good-faith efforts to resolve any dispute with such third-party tenants that may arise as a result of the Drive Lane Reconfiguration. In the event that Landlord is unable to resolve any such dispute, despite such efforts, Tenant agrees, promptly upon demand by Landlord, to remove the Drive Lane Reconfiguration and restore the area to its original condition. Such restoration shall be performed in accordance with plans and specifications submitted by Tenant for Landlord's approval, and in such a manner as to minimize disruption to the operation of the Shopping Center to the extent reasonably practicable. 4. No other amendments or changes are made to the Lease or the Second Amendment. [SIG] [SIG] - -------------------- ------------------------------ [SIG] Phillip E. Stephens, Trustee - -------------------- Print Name [SIG] - -------------------- [SIG] - -------------------- Print Name KENWOOD RESTAURANT LIMITED PARTNERSHIP BY: KENWOOD RESTAURANTS INC., its General Partner [SIG] By: [SIG] - --------------------- --------------------------- [SIG] Stephen D. King, President - --------------------- Print Name [SIG] - --------------------- [SIG] - --------------------- Print Name -2- 61 STATE OF Georgia, Fulton COUNTY, SS. On this 17th day of October, 1996, before me, a Notary Public in and for said County, personally came Phillip E. Stephens, Trustee, the Landlord in the foregoing Addendum to Second Amendment to Lease, and acknowledged the signing thereof to be his voluntary act and deed. Witness my official signature and seal on the day last above mentioned [SEAL] Julie Choppee ------------- Notary Public STATE OF Ohio, Hamilton COUNTY, SS. On this 18 day of October, 1996, before me, a Notary Public in and for said County, personally came Kenwood Restaurant Limited Partnership, the Tenant in the foregoing Addendum to Second Amendment to Lease, by Stephen D. King, the President of Kenwood Restaurants Inc., it General Partner, and acknowledged the signing thereof to be his voluntary act and deed. Witness my official signature and seal on the day last above mentioned. Monica Leavitt -------------- Notary Public [SEAL] M. MONICA LEAVITT NOTARY PUBLIC, STATE OF OHIO MY COMMISSION EXPIRES OCT. 18, 1999 EX-10.2 8 LEASE 1 EXHIBIT 10.2 LEASE BY AND BETWEEN MALL OF AMERICA COMPANY, A MINNESOTA GENERAL PARTNERSHIP AND HOTEL MEXICO, INC., d/b/a HOTEL DISCOVERY 2 Mall of America Lease THIS LEASE made this 4th day of August, 1997, by and between MALL OF AMERICA COMPANY, a Minnesota General Partnership, ("Landlord"), and HOTEL MEXICO, INC., d/b/a HOTEL DISCOVERY ("Tenant"): WITNESSETH THAT, in consideration of the rents, covenants and agreements hereinafter set forth, such parties enter into the following agreement: ARTICLE I EXHIBITS The exhibits listed below and attached to this Lease are incorporated herein by this reference: EXHIBIT "A" Legal description of real estate to be developed by the Landlord as a mixed use project, consisting of a retail mail and entertainment center ("Retail Space") and a hotel ("Hotel Space"), as well as a parking deck ("Parking Space") (hereinafter called "Total Tract"). The Total Tract with existing and future improvements being hereinafter called the "Center". EXHIBIT "B" Plot Plan of that area of the Retail Space upon which is located the space herein leased to Tenant. This Exhibit is provided for informational purposes only, and shall not be deemed to be a warranty, representation or agreement by Landlord that the Center or buildings and/or any stores will be exactly as indicated on the Exhibit, or that the other tenants which may be drawn on said Exhibit will be occupants in the center. Landlord reserves unto itself the unlimited right to modify the configuration of Total Tract at any time for the purpose of incorporating additional department stores and other buildings within the Center. EXHIBIT "C" Description of Tenant's Work. EXHIBIT "D" Rules and Regulations applicable to Tenant. EXHIBIT "E" Sign Criteria applicable to Tenant. EXHIBIT "F" INTENTIONALLY DELETED. Notwithstanding Exhibits A or B or anything else in this Lease contained, Landlord reserves the right to change or modify and add to or subtract from the size and dimensions of the Center or any part thereof, the number, location and dimensions of buildings and stores, the size and configuration of the parking areas, entrances, exits and parking aisle alignments, dimensions of hallways, malls and corridors, the number of floors in any building, the location, size and number of tenants' spaces and kicsks which may be erected in or fronting on any mall or otherwise, the identity, type and location of other stores and tenants, and the size, shape, location and arrangement of common Areas (hereinafter defined), and to design and decorate any portion of the Center as it desires, but the general character of the Center, the approximate location, access, visibility and identification of the Premises (as hereinafter defined) in relation to the major department stores shall not be substantially changed. ARTICLE II LEASED PREMISES AND TERM Section 2.1 Leased Premises Landlord hereby leases to Tenant and Tenant hereby rents from Landlord the space (in the Center) designated as Space S-320 outlined in red on Exhibit "B" (hereinafter called "the Premises"), measured to the center line of all party or common walls, to the exterior faces of all other walls and to the building line where there is no wall, containing approximately 16,215 square feet. When the Premises are completed, Landlord shall deliver to Tenant a certificate stating Landlord's determination of the actual number of square feet in the Premises (hereinafter called the "Store Floor Area"). Provided, however, within sixty (60) days of Tenant's receipt of such certificate, Tenant's architect may remeasure the Store Floor Area in the Premises. In the event of a dispute as to the Store Floor Area in the premises, the parties agree to have the Store Floor Area remeasured by a mutually acceptable, independent, third-party architect or engineer whose determination as to Store Floor Area shall be final, binding and conclusive absent manifest error. The fee for such third-party architect or engineer shall be shared equally by the parties. Section 2.2 Roof and Walls Landlord shall have the exclusive right to use all or any part of the roof, side and rear walls of the Premises for any purpose, including but not limited to erecting signs or other structures on or over all or any part of the same, erecting scaffolds and other aids to the construction and installation of the same, and installing, maintaining, using, repairing and replacing pipes, ducts, conduits and wires leading through, to or from the Premises and serving other parts of the Center in locations which do 1 3 not materially interfere with Tenant's use of the Premises. Tenant shall have no right whatsoever in the exterior of exterior walls or the roof of the Premises. In all non-stockroom areas of the Premises, Landlord agrees that all pipes, ducts, conduits and wires leading through, to or from the Premises will be located above the finished ceiling, within columns, within walls or under the finished floor. Further, should Landlord erect any scaffolds or other aids to construction which adversely interferes with access to the Premises, visibility of the Premises or identification of the Premises for a period of more than five (5) consecutive business days, then rent shall thereafter abate until such time as such interference is removed. Section 2.3 Lease Term. The term of this Lease (hereinafter called "Lease Term") shall commence upon the earlier of (a) the day following the last day allowed herein to Tenant for completion of Tenant's Work (hereinafter defined) hereinafter called "Required Completion Date." or (b) the day on which Tenant opens for business, the applicable date being hereinafter called "Commencement Date." The term of this Lease shall end on the last day of the twelfth (12th) Lease Year (hereinafter defined) after the Commencement Date unless sooner terminated as herein provided. NOTWITHSTANDING ANYTHING CONTAINED IN THIS LEASE TO THE CONTRARYS TENANT IS REQUIRED TO OPEN FOR BUSINESS TO THE PUBLIC IN THE PREMISES ON OR BEFORE NOVEMBER XXXXXX Section 2.4. Lease Year Defined. "Lease Year," as used herein, means a period of twelve (12) consecutive calendar months during the Lease Term commencing on the Commencement Date. If the Commencement Date is other than February 1, then the first Lease Year shall commence on the Commencement Date and end on the last day of January which shall be more than six (6) months but not more than eighteen (18) months after the Commencement Date. "Partial Lease Year" means that portion of the Lease Term prior to the first Lease Year. Section 2.5 Relocation of Premises. INTENTIONALLY DELETED. ARTICLE III TENANT'S WORK Section 3.1 Tenant's Work. Tenant agrees to accept delivery of the Premises in its present "AS IS, WHERE IS" condition except that Tenant is to completely remodel the Premises at Tenant's expense not later than the Required Completion Date (hereinafter defined) in accordance with plans and specifications submitted by Tenant and approved by Landlord (hereinafter referred to as "Tenant's Plans") which plans shall become a part hereof by this reference as Exhibit "C-2". Further alterations to the Premises, if any, shall be performed by Tenant (hereinafter called "Tenant's Work") including but not limited to all work designated as Tenant's Work in Exhibit "C", and Tenant shall do and perform at its expense all of Tenant's Work diligently and promptly and in accordance with the following provisions. Section 3.2. Tenant's Obligations Before Commencement Date. As soon as reasonably possible hereafter, Landlord shall deliver to Tenant a drawing of the Premises and a copy of the Tenant Handbook prepared by Landlord's architect (hereinafter referred to as "Tenant Handbook"). Within sixty (60) days after the date of this Lease, Tenant will submit to Landlord one (1) reproducible set (sepia) and 4 copies of Tenant's Plans and specifications, prepared by a registered architect or engineer, of all Tenant's Work to be done within the Premises, prepared in conformity with Exhibit "C" and the Tenant Handbook. Within thirty (30) days after receipt of Tenant's Plans, Landlord shall notify Tenant of any failures of Tenant's Plans to conform to Exhibit "C," the Tenant Handbook or otherwise to meet with Landlord's approval. Tenant shall within thirty (30) days after receipt of any such notice cause Tenant's Plans to be revised to the extent necessary to obtain Landlord's approval and resubmitted for Landlord's approval. When Landlord has approved the original or revised Tenant's Plans, Landlord shall initial and return one (1) set of approved Tenant's Plans to Tenant and the same shall become a part hereof by this reference as Exhibit "C-2." Approval of plans and specifications by Landlord shall not constitute the assumption of any responsibility by Landlord for their accuracy or sufficiency, or compliance with applicable codes and Tenant shall be solely responsible for such plans and specifications. Tenant shall not commence any of Tenant's Work until Landlord has approved Exhibit "C-2," unless prior Landlord approval has been obtained in writing. Landlord's review and approval of Tenant's Plans shall not be unreasonably withheld or delayed. Within fifteen (15) days after the later of the date of this Lease or the date Tenant's Plans have been approved by Landlord, Landlord shall notify Tenant that Tenant can commence Tenant's Work; and Tenant shall commence such work not later than the date specified in such notice, complete the same in strict accordance with Exhibits "C" and "C-2," install all store and trade fixtures, equipment, stock in trade, merchandise and inventory, and open for business therein not later than the 150th day after the last to occur of the following: (i) a fully-executed copy of this Lease has been delivered to Tenant, (ii) Tenant's Plans have been approved by Landlord provided Tenant timely submits the same to Landlord for Landlord's review, (iii) Landlord has notified Tenant that the Premises are ready for the commencement of Tenant's Work, (iv) Tenant has received a building permit provided Tenant promptly applies for such building permit and diligently pursues such application for approval, and (v) Tenant has received an On-Sale Liquor License from the City of Bloomington provided Tenant promptly applies for such liquor license and diligently pursues such application for approval, which applicable day shall be the Required Completion Date. Tenant hereby releases Landlord and its contractors from any claim whatsoever for damages against Landlord or its contractors for any delay in the date on which the Premises shall be ready for delivery to Tenant or for any delay in commencing or completing any work Landlord is to perform or is authorized by Tenant to perform under Exhibit "C", or with respect to the Center or any other part or all of the Total 2 4 Tract. Notwithstanding anything herein which may be to the contrary, in the event of any conflict between Exhibit "C" and Tenant's Plans, as approved by Landlord, Tenant's Plans, as approved by Landlord shall take precedence over Exhibit "C" in resolving such conflict. Section 3.3. Failure of Tenant to Perform. Because of the difficulty or impossibility of determining Landlord's damages resulting from Tenant's failure to open for business fully fixtured, stocked and staffed by the Required Completion Date, including, but not limited to, damages from loss of Percentage Rent (hereinafter defined) from Tenant and other tenants, diminished saleability, leaseability, mortgageability or economic value of the Center, if Tenant fails to commence Tenant's Work within the time provided above and proceed with the same diligently, or to open for business fully fixtured, stocked and staffed on or before the Required Completion Date or to perform any of its obligations to be performed prior to the Required Completion Date, Landlord may, with notice in addition to the right to exercise any other remedies and rights herein or at law provided, collect rent from the Required Completion Date in an amount equal to the Minimum Annual Rent (hereinafter defined) and other additional rent and other amounts payable by Tenant hereunder, and, in addition thereto, if Tenant shall fail to open for business in the Premises within thirty (30) days after the Required Completion Date, Tenant shall also pay to Landlord an amount equal to $150.00 per day for each day thereafter that Tenant has failed to open for business. In addition, commencing on the thirty-first (31st) day after the Required Completion Date and provided Tenant has failed to open for business in the Premises by such date, Landlord may thereafter (a) do and perform any of Tenant's Work or other obligations of Tenant hereunder, at Tenant's expense, preparing such drawings and doing such things as Landlord deems advisable, collecting all of Landlord's expenses pursuant to this Section. All remedies in this Lease or at law provided shall be cumulative and not exclusive and shall survive the expiration of the Lease Term or the earlier termination of this Lease. Notwithstanding the foregoing, Tenant shall not be liable or responsible for any delays and applicable periods for performance shall be extended accordingly due to strikes, lockouts, riots, acts of God, shortages of labor or materials, national emergency, acts of a public enemy, governmental restrictions, including but not limited to, the Tenant being able to obtain all necessary governmental licenses (provided Tenant timely applies for the same and diligently pursues such license applications for approval), or any other cause or causes, whether similar or dissimilar to those enumerated, beyond Tenant's reasonable control. Section 3.4. Condition of Premises. Tenant's taking possession of the Premises shall be conclusive evidence of Tenant's acceptance thereof in good order and satisfactory condition. Provided, however, Tenant shall have the right, to be exercised within thirty (30) days after the date possession of the Premises has been delivered to Tenant with Landlord's Work therein completed, to submit to Landlord a punchlist of incomplete or defective construction within the Premises, and Landlord will perform such punchlist to the extent the listed items were Landlord's Work under Exhibit "C" and were not performed by Landlord in accordance therewith. Tenant agrees that no representations respecting the condition of the Premises or the existence or non-existence of Hazardous Materials (hereinafter defined) in, on or about the Premises, no warranties or guarantees, expressed or implied, with respect to workmanship or any defects in material, and no promise to decorate, alter, repair or improve the Premises either before or after the execution hereof, have been made by Landlord or its agents to Tenant unless the same are contained herein. ARTICLE IV RENT Section 4.1. Minimum and Percentage Rent. Tenant covenants and agrees to pay to Landlord, without notice or demand, at Landlord's address for notice (Landlord's and Tenant's notice addresses being the addresses specified in Section 24.7 hereof), as rent for the Premises: (i) A "Minimum Annual Rent" of $25.00 per square foot of Store Floor Area, or Four Hundred Five Thousand Three Hundred Seventy Five and no/100 Dollars ($405,375.00) per annum (based upon the approximated Store Floor Area set forth in Section 2.1 hereof), payable in equal monthly installments, in advance upon the first day of each and every month of the Lease Term commencing upon the Commencement Date (such monthly installment being hereinafter called "Minimum Monthly Rent"); and (ii) The amount by which six percent (6%) of Gross Sales (hereinafter defined) during each Lease Year or Partial Lease Year exceeds the Minimum Monthly Rent for such period (hereinafter call "Percentage Rent"). When Store Floor Area is determined in accordance with Section 2.1, the Minimum Annual Rent and Minimum Monthly Rent shall be deemed automatically increased or decreased based upon the Store Floor Area as thus determined, and any overpayments or underpayments of Minimum Monthly Rent to Landlord shall be adjusted accordingly. 5 Tract. Notwithstanding anything herein which may be to the contrary, in the event of any conflict between Exhibit "C" and Tenant's Plans, as approved by Landlord, Tenant's Plans, as approved by Landlord, shall take precedence over Exhibit "C" in resolving such conflict. Section 3.3. Failure of Tenant to Perform. Because of the difficulty or impossibility of determining Landlord's damages resulting from Tenant's failure to open for business fully fixtured, stocked and staffed by the Required Completion Date, including, but not limited to, damages from loss of Percentage Rent (hereinafter defined) from Tenant and other tenants, diminished saleability, leaseability, mortgageability or economic value of the Center, if Tenant fails to commence Tenant's Work within the time provided above and proceed with the same diligently, or to open for business fully fixtured, stocked and staffed on or before the Required Completion Date or to perform any of its obligations to be performed prior to the Required Completion Date. Landlord may, with notice, in addition to the right to exercise any other remedies and rights herein or at law provided, collect rent from the Required Completion Date in an amount equal to the Minimum Annual Rent (hereinafter defined) and other additional rent and other amounts payable by Tenant hereunder, and, in addition thereto, if Tenant shall fail to open for business in the Premises within thirty (30) days after the Required Completion Date, Tenant shall also pay to Landlord an amount equal to $150.00 per day for each day thereafter that Tenant has failed to open for business. In addition, commencing on the thirty-first (31st) day after the Required Completion Date and provided Tenant has failed to open for business in the Premises by such date, Landlord may thereafter (a) do and perform any of Tenant's Work or other obligations of Tenant hereunder, at Tenant's expense, preparing such drawings and doing such things as Landlord deems advisable, collecting all of Landlord's expenses pursuant to this Section. All remedies in this Lease or at law provided shall be cumulative and not exclusive and shall survive the expiration of the Lease Term or the earlier termination of this Lease. Notwithstanding the foregoing, Tenant shall not be liable or responsible for any delays and applicable periods for performance shall be extended accordingly due to strikes, lockouts, riots, acts of God, shortages of labor or materials, national emergency, acts of a public enemy, governmental restrictions, including but not limited to, the Tenant being able to obtain all necessary governmental licenses (provided Tenant timely applies for the same and diligently pursues such license applications for approval), or any other cause or causes, whether similar or dissimilar to those enumerated, beyond Tenant's reasonable control. Section 3.4. Condition of Premises. Tenant's taking possession of the Premises shall be conclusive evidence of Tenant's acceptance thereof in good order and satisfactory condition. Provided, however, Tenant shall have the right, to be exercised within thirty (30) days after the date possession of the Premises has been delivered to Tenant with Landlord's Work therein completed, to submit to Landlord a punchlist of incomplete or defective construction within the Premises, and Landlord will perform such punchlist to the extent the listed items were Landlord's Work under Exhibit "C" and were not performed by Landlord in accordance therewith. Tenant agrees that no representations respecting the condition of the Premises or the existence or non-existence of Hazardous Materials (hereinafter defined) in, on or about the Premises, no warranties or guarantees, expressed or implied, with respect to workmanship or any defects in material, and no promise to decorate, alter, repair or improve the Premises either before or after the execution hereof, have been made by Landlord or its agents to Tenant unless the same are contained herein. ARTICLE IV RENT Section 4.1 Minimum and Percentage Rent. Tenant covenants and agrees to pay to Landlord, without notice or demand, at Landlord's address for notice (Landlord's and Tenant's notice addresses being the addresses specified in Section 24.7 hereof), as rent for the Premises: (i) A "Minimum Annual Rent" of $25.00 per square foot of Store Floor Area, or Four Hundred Five Thousand Three Hundred Seventy Five and no/100 Dollars ($405,375.00) per annum (based upon the approximated Store Floor Area set forth in Section 2.1 hereof), payable in equal monthly installments, in advance upon the first day of each and every month of the Lease Term commencing upon the Commencement Date (such monthly installment being hereinafter called "Minimum Monthly Rent"): and (ii) The amount by which six percent (6%) of Gross Sales (hereinafter defined) during each Lease Year of Partial Lease Year exceeds the Minimum Monthly Rent for such period (hereinafter called "Percentage Rent"). When Store Floor Area is determined in accordance with Section 2.1 the Minimum Annual Rent and Minimum Monthly Rent shall be deemed automatically increased or decreased based upon the Store Floor Area as thus determined, and any overpayments or underpayments of Minimum Monthly Rent to Landlord shall be adjusted accordingly. 3 6 Notwithstanding anything herein in this Section 4.1 which may be to the contrary, so long as Tenant is not in default hereunder beyond any applicable grace period and provided no liens have attached or may attach to the Premises or the Center or Landlord's interest therein as a result of Tenant's Work in the Premises (with reasonable time for Tenant to satisfy or bond over), Tenant may retain the sum of Twenty Five and no/100 Dollars ($25.00) per square foot of Store Floor Area as Landlord's contribution to Tenant's Work in the Premises. Such sum shall only be retained from the Minimum Monthly Rent due and payable by Tenant to Landlord hereunder until such time as the entire sum of Twenty Five and no/100 Dollars ($25.00) per square foot of Store Floor Area and no more has been retained by Tenant. Thereafter, no amount otherwise due and payable by Tenant to Landlord hereunder as rent may be retained by Tenant. For purposes of calculating Percentage Rent, if any, during the period of time Tenant is allowed to retain the Minimum Monthly Rent as hereinabove provided, the Minimum Monthly Rent paid by Tenant shall be deemed to be the Minimum. Monthly Rent amount determined in accordance with Section 4.1 (l) notwithstanding Tenant's right to retain such Minimum Monthly Rent pursuant to this paragraph. Additional rent shall be paid as and when due in accordance with the other terms and conditions of this Lease. The foregoing sum of Twenty Five and no/100 Dollars ($25.00) per square foot of Store Floor Area which Tenant is allowed to retain from Minimum Monthly Rent is in addition to the amount set forth as Landlord's contribution to Tenant's Work set forth in Section 24.20 below. Section 4.2 Miscellaneous Rent Provisions. Any rent or other amounts to be paid by Tenant which are not paid when due shall bear interest as of the tenth (10th) day after the date on which any sum is due and owing at the maximum rate of interest permitted in the State of Minnesota, or if there is no such maximum, at a rate equal to two percent (2%) over the prime rate announced by Citibank, N.A. If the Commencement Date is other than the first day of a month, Tenant shall pay on the Commencement Date a prorated partial Minimum Monthly Rent for the period prior to the first day of the next calendar month, and thereafter Minimum Monthly Rent payments shall be made not later than the first day of each calendar month. For the purposes of this Lease, a "Major Tenant" is herein defined as a single tenant occupying at least 40,000 contiguous square feet of floor area. Section 4.3. Percentage Rent. Tenant shall (i) not later than the fifteenth (15th) day after the close of each calendar month, deliver to Landlord a written statement certified under oath by Tenant or an officer of Tenant, showing Gross Sales made in such calendar month; and (ii) no later than sixty (60) days after the end of each Lease Year or Partial Lease Year, deliver to Landlord a statement of Gross Sales for such Lease Year or Partial Lease Year the correctness of which is certified to by Tenant's Chief Financial Officer. If Tenant fails to prepare and deliver any statement of Gross Sales required hereunder, within the time or times specified above, then Landlord shall have the right, in addition to the other right and remedies set forth in this Lease, (a) to collect from Tenant a sum which shall be $100.00 per calender day for each day that Gross Sales reports are not so submitted, and (b) to estimate Tenant's Gross Sales for any non-reported period and bill Tenant's Percentage Rent accordingly. Landlord reserves the right, at Landlord's option, to adjust Percentage Rent billings when actual Gross sales reports are received. Landlord agrees that any information obtained by Landlord as a result of such audit or examination of Tenant's Gross Sales shall be held in strict confidence by Landlord, except in any litigation or arbitration proceedings, and except further, that Landlord may disclose such financial information to its mortgagee or mortgagees and to prospective buyers and lenders. On or before the fifteenth (15th) day of each May, August, November and February, Tenant shall pay Landlord the amount by which six percent (6%) of Gross Sales of Tenant during the three (3) months (or less in a Partial Lease Year) ending on the last day of the month preceding such payment date exceeds the total Minimum Monthly Rent Tenant was obligated to pay for such period. Within thirty (30) days after the later of (i) the due date for Tenant's annual report of Gross Sales, or (ii) the date of Landlord's receipt of such annual report, if Tenant has paid Landlord for such Lease Year or Partial Lease Year Percentage Rent greater than Tenant is obligated to pay for such period, Landlord shall refund such excess, and if Tenant has paid less than the Percentage Rent required to be paid for such period, Tenant shall pay Landlord such difference. Tenant will preserve for at least three (3) years at Tenant's notice address all original books and records disclosing information pertaining to Gross Sales and such other information respecting Gross Sales as Landlord requires, including, but not limited to, all computerized records routinely kept by the Tenant in the ordinary course of Tenant's business (and provided such computerized records are kept in accordance with generally accepted accounting principles), gross income and sales tax returns, bank deposit records, sales journals and other supporting data. Landlord and its agents shall have the right upon prior written notice to Tenant during business hours to examine and audit such books and records preserved by Tenant. If such examination or audit discloses a liability for Percentage Rent 5% or more in excess of the Percentage Rent paid by Tenant for any period or if Tenant's Gross Sales cannot be verified due to the insufficiency or inadequacy of Tenant's records. Tenant shall promptly pay landlord the cost of said audit. Tenant shall, in any event, pay to Landlord the amount of any deficiency in rents which is disclosed by such audit plus interest at two percent (2%) over the prime rate announced by Citibank, N.A. as of the first day of the month on which any sum was due and owing. Section 4.4. Gross Sales Defined. As used herein, Gross Sales means the sale prices of all goods, wares and merchandise sold and the charges for all services performed by Tenant or any other person or entity in, at, or from the Premises for cash, credit or otherwise, without reserve or deduction for uncollected amounts except as hereinafter specifically provided, including but not limited to sales and services (i) where the orders originate in, at or from the Premises, regardless from whence delivery or performance is made, (ii) pursuant to mail, telephone, telegraph or otherwise received or filled at the Premises, (iii) resulting from transactions originating in, at or from the Premises, and deposits not refunded to customers. Excluded from Gross Sales shall be: (i) 7 exchanges of merchandise between Tenant's stores made only for the convenient operation of Tenant's business and not to consummate a sale made in, at or from the Premises, (ii) returns to manufacturers, (iii) refunds or allowances made on merchandise claimed to be defective or unsatisfactory to customers (but only to the extent included in Gross Sales), (iv) sales of fixtures, machinery and equipment after use in Tenant's business in the Premises, (v) all sales to employees of Tenant while on duty which sales shall be at no less than any discounted price allowed employees in accordance with Tenant's then-existing policies, provided, however, the discounted portion of such sales to employees not included in Gross Sales shall not exceed two percent (2%) of Tenant's annual Gross Sales, (vi) bad debts, not to exceed two percent (2%) of Tenant's annual Gross Sales, provided such bad debts were originally included in Gross Sales when made and provided, further, any subsequent collection or recovery thereof shall be included in Gross Sales in the year of collection or recovery, and (vii) sales, excise or similar tax imposed by governmental authority and collected from customers and paid out by Tenant. No other taxes shall be deducted from Gross Sales. Gross Sales from vending devices located on the Premises shall be limited to net proceeds from such vending devices received by Tenant. Section 4.5. Real Estate Taxes. A. Definition. Landlord shall pay or cause to be paid all Real Estate Taxes (as hereinafter defined) assessed or imposed upon the Center and the Total Tract which become due or payable during the Lease Term. As used in this Section 4.5 the term Real Estate Taxes shall mean and include all real estate taxes, public and governmental charges and assessments, including all extraordinary or special assessments, or assessments against any of Landlord's personal property now or hereafter located in the Center, all costs, expenses and attorney's fees incurred by Landlord in contesting or negotiating with public authorities (Landlord having the sole authority to conduct such a contest or enter into such negotiations) as to any of the same and all sewer and other taxes and charges, but shall not include taxes on Tenant's business in the Premises, machinery, equipment, inventory or other personal property or assets of Tenant. Tenant agreeing to pay, before delinquency, all taxes upon or attributable to such excluded items without apportionment. B. Tenant's Share. Tenant shall pay to Landlord, as Additional Rent, its proportionate share of all Real Estate Taxes upon the Center and the Total Tract which become due or payable during the Lease Term, such proportionate share to be prorated for periods at the beginning and end of the Lease Term which do not constitute full calendar months or calendar years. Landlord shall endeavor to have the Retail Space and Hotel Space separately assessed. If this cannot be accomplished then Landlord, in its sole discretion, shall allocate Real Estate Taxes among the Retail Space and Hotel Space based on its determination of the assessed value of each such Space. This determination shall control except in case of manifest error. Real Estate Taxes allocated by Landlord to the Retail Space are referred to herein as "Retail Space Real Estate Taxes". Tenant's proportionate share of any such Retail Space Real Estate Taxes shall be that portion of such Retail Space Real Estate Taxes which bears the same ratio to the total Retail Space Real Estate Taxes as the Store Floor Area bears to the Rentable Floor Area rented or occupied in the Retail Space (hereinafter called "Retail Rentable Floor Area") as of the Commencement Date or the first day of the calendar year in which such taxes are due or payable. The floor area of (i) a Major Tenant, (ii) any tenant in a free standing Premises who is obligated to pay real estate taxes specifically upon specific improvements or specific parcel of land, and (iii) Common Areas, as hereinafter defined, shall not be included in the Retail Rentable Floor Area, and any contributions to Real Estate Taxes received by Landlord from such tenants shall be deducted from Retail Space Real Estate Taxes prior to the calculation of Tenant's proportionate share. C. Payment by Tenant. Tenant's proportionate share of Retail Space Real Estate Taxes shall be paid in monthly installments commencing with the Commencement Date, in amounts initially estimated by Landlord, one (1) such installment being due on the first day of each full or partial month of each full or partial calendar year during the Lease Term. Such monthly installments shall increase or decrease upon notice from Landlord given after the actual or anticipated amounts of Real Estate Taxes due or payable in a particular calendar year are determined. Following the close of each full or partial calendar year during the Lease Term, the actual amount of Retail Space Real Estate Taxes due or payable shall be computed by Landlord and any excess paid by Tenant during such calendar year over the actual amount Tenant is obligated to pay hereunder shall be credited to Tenant within thirty (30) days, and within thirty (30) days after written notice from Landlord any deficiency owed shall be paid in full by Tenant. Tenant acknowledges and stipulates that Landlord has made no representation or agreement of any kind as to the total dollar amount of such real estate taxes, actual or estimated, or Tenant's dollar share thereof. D. Other Taxes. Tenant's proportionate share of any governmental tax or charge (other than income tax, penalties, fines or additional interest which are incurred as a result of Landlord's acts or omissions) levied, assessed, or imposed on account of the payment by Tenant or receipt by Landlord, or based in whole or in part upon, the rents in this Lease reserved or upon the Center or the value thereof shall be paid by Tenant. E. Larger Parcel. If the land under the Center is a part of a larger parcel of land for assessment purposes (the "Larger Parcel"), the taxes and assessments allocable to the land in the Center for the purpose of determining Real Estate Taxes under this Section shall be deemed a fractional portion of the taxes and assessments levied against the Larger Parcel, the numerator of which is the acreage in the Center and the denominator of which is the acreage in the Larger Parcel. Section 4.6. Sprinkler System. Landlord has installed and will maintain a sprinkler system in the Premises and Tenant shall pay to Landlord as additional rent twenty-five cents (25c) per square foot of Store Floor Area per Lease Year, prorated for Partial Lease Years, in equal monthly installments in advance on the first day of each full calendar month during the Lease Term. Section 4.7. Additional Rent. All amounts required or provided to be paid by Tenant under this Lease other than Minimum Annual Rent and Percentage Rent shall be deemed additional rent and Minimum Annual Rent, Percentage Rent and additional rent shall in all events be deemed rent. 5 8 Section 4.8. Landlord's Expenses. If Landlord pays any monies or incurs any expenses to correct a breach of this Lease as defined in Section 18.1 of this Lease by Tenant or to do anything in this Lease required to be done by Tenant, or incurs any expense (including, but not limited to reasonable attorneys' fees and court costs), as a result of Tenant's failure to perform any of Tenant's obligations under this Lease, all amounts so paid or incurred shall, on written notice to Tenant, be considered additional rent payable in full by Tenant with the first Minimum Monthly Rent installment thereafter becoming due and payable, and may be collected as by law provided in the case of rent. ARTICLE V PARKING AND COMMON AREAS AND FACILITIES Section 5.1. Common Areas. All parking areas, access roads and facilities furnished, made available or maintained by Landlord in or near the Center, including employee parking areas, truck ways, driveways, loading docks and areas, delivery areas, multi-story parking facilities, package pickup stations, elevators, escalators, pedestrian sidewalks, malls, including the Enclosed Mall (as indicated for identification purposes on Exhibit "B"), courts and ramps, landscaped areas, retaining walls, stairways, bus stops, first-aid and comfort stations, lighting facilities, sanitary systems, utility lines, water filtration and treatment facilities and other areas in the Center (all herein called "Common Areas") shall at all times be subject to the exclusive control and management of Landlord, and Landlord shall have the right, from time to time, to establish, modify and enforce reasonable rules and regulations with respect to all Common Areas. Tenant agrees to comply with all rules and regulations set forth in Exhibit "D" attached hereto and all reasonable and uniformly enforced amendments thereto. Provided, however, in exercising its rights hereunder, Landlord shall not permanently reduce the parking areas below code requirements. Landlord shall have the right from time to time to: change or modify and add to or subtract from the sizes, locations, shapes and arrangements of parking areas, entrances, exits, parking aisle alignments and other Common Areas; restrict parking by Tenant's employees to designated areas; construct surface, sub-surface or elevated parking areas and facilities; establish and from time to time change the level or grade of parking surfaces; enforce parking charges (by meters or otherwise); add to or subtract from the buildings in the Center; and do and perform such other acts in and to said Common Areas as Landlord in its sole discretion, reasonably applied, deems advisable for the use thereof by tenants and their customers. Provided, however, in exercising its rights hereunder, Landlord shall not adversely and materially affect access to the Premises, visibility of the Premises or identification of the Premises. Section 5.2. Use of Common Areas. Tenant and its business invitees, employees and customers shall have the nonexclusive right, in common with Landlord and all others to whom Landlord has granted or may hereafter grant rights, to use the Common Areas subject to such reasonable regulations as Landlord may from time to time impose and the rights of Landlord set forth above. Tenant agrees to fully advise its employees of Landlord's parking rules, regulations and restrictions and possible ensuing consequences in the event of a violation thereof and to cooperate with Landlord in enforcing the obligation of Tenant's employees to park their vehicles in designated employee parking areas. Landlord may tow or cause to be towed any car of Tenant, a concessionaire, employee or agent of Tenant from the Center that is parked outside any area designated by Landlord for employee parking and Tenant shall indemnify and hold Landlord harmless with respect thereto. Tenant shall abide by all rules and regulations and cause its concessionaires, officers, employees and agents to abide thereby. Landlord may at any time close temporarily any Common Areas to make repairs or changes, prevent the acquisition of public rights therein, discourage noncustomer parking, or for other reasonable purposes. Tenant shall furnish Landlord license numbers and descriptions of cars used by Tenant and its concessionaires, officers and employees. Tenant shall not interfere with Landlord's or other tenants' rights to use any part of the Common Areas. ARTICLE VI COST AND MAINTENANCE OF COMMON AREAS Section 6.1. Expense of Operating and Maintaining the Common Facilities. Landlord will operate, manage, maintain and repair or cause to be operated, managed, maintained or repaired, the Common Areas of the Center to the extent the same is not done by any Major Tenant. "Landlord's Common Area Costs" shall mean all costs of operating and maintaining the Common Areas in a manner deemed by Landlord appropriate for the best interests of tenants and other occupants in the Center. Included among the costs and expenses which constitute Landlord's Common Area Costs, but not limited thereto, shall be, at the option of Landlord, all costs and expenses of protecting, operating, managing the Center (including attorneys' fees and other professional fees), repairing, repaving, lighting, cleaning, painting, striping, insuring (including but not limited to fire and extended coverage insurance on Common Areas, insurance protecting Landlord against liability for personal injury, death and property damage and workers' compensation insurance), removing of snow, ice and debris, police protection, security and security patrol, fire protection, regulating traffic, inspecting, repairing and maintaining of machinery and equipment, depreciation of machinery and equipment, providing heating, ventilating and air conditioning machinery and equipment, depreciation of machinery and equipment, providing heating, ventilating and air conditioning for the interior Common Areas initially determined and thereafter adjusted in the manner described in Section 7.2 herein, cost and expense of inspecting, maintaining, repairing and replacing storm and sanitary drainage systems, sprinkler and other fire protection systems, electrical, gas, water, telephone and irrigation systems, cost and 6 9 expense of maintaining, repairing and replacing the Enclosed Mall and the exterior of the buildings in the Center, including, but not limited to floors, roofs, skylights, escalators, elevators, walls, stairs and signs, cost and expense of installing, maintaining and repairing burglar or fire alarm systems on the Retail Space, if installed, cost and expense of landscaping and shrubbery, expenses of utilities, and administrative and overhead costs equal to fifteen percent (15%) of all of the foregoing and all other of Landlord's Common Area Costs. Notwithstanding the foregoing, Tenant's Share of Landlord's Common Area Costs shall not include the following: 1. Interest and financing charges on any debt service, amortization payments on any mortgage and rent under any ground lease; 2. Wages, salaries, fees and fringe benefits paid or provided to administrative or executive personnel or officers or partners of Landlord above the grade of mall manager unless employed at competitive rates as independent contractors, and except there may be included wages, salaries, fees and fringe benefits of regional management of the Common Areas to the extent the same are reasonable and proportionate to the services rendered; 3. Costs of decorating, redecorating or special planning or other services provided to an individual tenant and not provided to substantially all tenants of the Center; 4. Landlord's income taxes, excess profits taxes, franchise taxes or similar taxes on Landlord's business; 5. Costs relating to activities for the solicitation and execution of leases of space in the Center including, but not limited to, leasing commissions and attorneys' fees; 6. The costs of correcting defects in the construction of the Center or in the equipment servicing the Center, except that conditions (not occasioned by construction defects) resulting from ordinary wear and tear will not be deemed defects for purposes hereof; 7. The costs of any repairs made by Landlord because of the total or partial destruction of the Center or the condemnation of a portion of the Center to the extent such costs are covered by Landlord's insurance or by a damage award in a condemnation proceeding; 8. Any insurance premium to the extent Landlord is entitled to be reimbursed for such insurance premium by Tenant under any other Section of this Lease; 9. The costs of any items for which Landlord is reimbursed by insurance or otherwise compensated by parties other than tenants of the Center; 10. The costs of any repairs, alterations, additions, changes, replacements and any other items which under generally accepted accounting principles are properly classified as expenditures for capital improvements to the extent they upgrade or improve the Center as opposed to repairing or replacing existing items which have worn out except for capital improvements required: (i) by one of Landlord's insurance carriers then insuring some aspect of the Center; (ii) by any law, statute, rule, regulation, code, ordinance or order of a governmental authority having jurisdiction over the Center; or (iii) to reduce Landlord's Common Area Costs, but only to the extent Tenant's proportionate share of Landlord's Common Area Costs is thereby decreased. The cost of any such capital improvement which is included in Landlord's Common Area Costs shall be amortized over the useful life of such improvement. The cost of the repair or replacement of an existing capital item that is included in Landlord's Common Area Costs need not be amortized but may be included in its entirety in the calendar year in which incurred. 11. Any operating expense representing an amount paid to a related corporation, entity or person which is in excess of the amount which would have been paid in the absence of such relationship; 12. The cost of overtime or other expense to Landlord in curing its defaults or performing work expressly provided for in this Lease to be borne at Landlord's expense. Section 6.2. Tenant to Bear Pro Rata Share of Expenses. Tenant will pay Landlord, in addition to all other amounts in this Lease provided, such portion of Landlord's Common Area Costs for each calendar year during the Lease Term (pro rated accordingly for a partial calendar year) which bears the same ratio to the total of Landlord's Common Area Costs as fifty percent (50%) of the Store Floor Area at the commencement of such calendar year bears to all Rentable Floor Area rented or occupied by tenants in the Retail Space. The floor area of (i) a Major Tenant, (ii) any tenant in a freestanding Premises who is obligated to maintain specific areas or a specific parcel of land, and (iii) Common Areas shall not be included in Rentable Floor Area, and any contributions to Landlord's Common Area Costs received by Landlord from such tenants shall be deducted from Landlord's Common Area Costs prior to the calculation of Tenant's proportionate share. Tenant's share of Landlord's Common Area Costs shall be paid in monthly installments in amounts estimated from time to time by Landlord, one (1) such installment being due on the first day of each month of each calendar year. After the end of each calendar year the total Landlord's Common Area Costs for such year (and at the end of the Lease Term, the total Landlord's Common Area Costs for the period since the end of the immediately next preceding calendar year) shall be determined by Landlord and Tenant's share paid for such period shall immediately, upon such determination, be adjusted by credit of any excess or payment of any deficiency. Within ninety (90) days after the end of each calendar year, Landlord 7 10 shall deliver to Tenant a statement showing Landlord's Common Area Costs for the immediately preceding year including calculations showing how tenant's share of Landlord's Common Area Costs was determined. Tenant may audit Landlord's Common Area Costs in order to verify the accuracy thereof, provided that: (a) Tenant specifically designates the year Tenant intends to audit, which shall be a year during the Lease Term that is also within three (3) years of the date of the audit; (b) such audit is conducted only during regular business hours at the office where Landlord maintains expense records of Landlord's Common Area Costs; (c) Tenant gives Landlord fourteen (14) days prior written notice of Tenant's request to audit and Tenant shall deliver to Landlord a copy of the results of such audit within ten (10) days of its receipt by Tenant; (d) such audit must be conducted by Tenant's employees or an independent nationally recognized accounting firm that is not being compensated on a contingency fee basis; (e) no audit shall be conducted if Tenant has previously conducted an audit for the same time period; (f) such audit shall be at Tenant's sole cost and expense; and (g) any financial or other information provided by Landlord or obtained by Tenant as a result of such audit shall only be pursuant to duly executed confidentiality agreements between Landlord, Tenant and Tenant's agents and employees to whom disclosure is made. Tenant acknowledges that the Landlord considers its financial and other operating information to be confidential and will not disclose such information to any third party without Landlord's prior written consent except to prospective buyers or lenders, Tenant's accountants and attorneys, or in the case of compliance with a subpoena or other legal process provided Tenant gives Landlord at least ten (10) days prior written notice of Tenant's receipt of such subpoena or legal process and Tenant's intent to disclose pursuant thereto. If the audit discloses that Tenant has underpaid, Tenant shall promptly reimburse Landlord any amount owed. If the audit accurately discloses that Tenant has overpaid, Landlord shall promptly refund such excess. ARTICLE VII UTILITIES AND SERVICES Section 7.1. Utilities. Tenant shall not install any equipment which can exceed the capacity of any utility facilities serving the Center and if any equipment installed by Tenant requires additional utility facilities, the same shall be installed at Tenant's expense in compliance with all code requirements and plans and specifications which must be approved in writing by Landlord which consent shall not be unreasonably withheld or delayed. Tenant shall be solely responsible for and promptly pay all charges for its use or consumption of sewer, gas, electricity, water and all other utility services. Landlord may make electrical service available to the Premises as provided in Exhibit "C," and so long as Landlord continues to provide such electrical service Tenant agrees to purchase the same from Landlord and pay Landlord for the electrical service (based upon Landlord's determination from time to time of Tenant's consumption of electricity), as additional rent, on the first day of each month in advance (and prorated for partial months), commencing on the Commencement Date at the same cost as would be charged to Tenant from time to time by the utility company which otherwise would furnish such services to the Premises if it provided such services and metered the same directly to the Premises, but in no event at a cost which is less than the cost Landlord must pay in providing such electrical service. Landlord may supply water and other utilities to the Premises, and so long as Landlord continues to provide water or such other utilities Tenant shall pay Landlord for same at the same cost as would be charged to Tenant by the utility company which otherwise would furnish such service to the Premises if it provided such service and metered the same directly to the Premises, but in no event at a cost which is less than the cost Landlord must pay in providing such service, and in no event less than the minimum monthly charge which would have been charged by the utility company in providing such service. Subject to the applicable rules and regulations of the Minnesota Public Service Commission, Landlord may provide a shared tenant telephone service to the Premises and so long as Landlord continues to provide such telephone service Tenant agrees to purchase the same from Landlord and pay Landlord for the telephone service at the same cost as would be charged to Tenant by the utility company which otherwise would furnish such service to the Premises if it provided such service directly to the Premises, but in no event at a cost which is less than the cost Landlord must pay in providing such telephone service. Landlord may make additional services, including but not limited to, pest control, trash compactor/trash removal, cleaning, and security, available to the Premises and, in such event Tenant shall utilize such services, at Tenant's expense. Tenant shall operate its heating and air conditioning so that the temperature in the Premises will be the same as that in the adjoining mall, and set Tenant's thermostat at the same temperature as that thermostat in the mall which is nearest the Premises. Tenant shall be responsible for the installation, maintenance, repair and replacement of air conditioning, heating and ventilation systems within and specifically for the Premises, including all components such as air handling units, air distribution systems, motors, controls, grilles, thermostats, filters and all other components. Tenant shall operate ventilation so that the relative air pressure in the Premises will be the same as or less than that in the adjoining mall as required by the Landlord. In the event Tenant requires the use of telecommunication services, including, but not limited to, credit card verification and/or other data transmission, then Tenant shall contract for such services with one of the service providers available at the Center, provided such cost is competitive in the industry in the geographic location of the Center. Section 7.2. Air Conditioning of Premises. Landlord will provide and maintain a central plant and a system of chilled media to the Premises installed at a point determined by Landlord. Tenant agrees to purchase the chilled media services from Landlord and pay Landlord annually therefor as additional rent, in equal monthly installments, in advance on the first day of each month the current Adjusted HVAC Plant Charge (which shall consist of the Minimum Charge of $1.95 per square foot of Store Floor Area per year, increased in the manner hereinafter provided). 8 11 The Adjusted HVAC Plant Charge shall be recalculated from time to time on dates selected by the Landlord (but no less often annually, each time the Landlord's utility costs are changed, and/or each time field verification indicates that Tenant's use of the system has changed.) The current Adjusted HVAC Plant Charge shall be calculated by multiplying the Minimum Charge by a series of adjusting multipliers as follows: Adjusted HVAC Plant Charge = Minimum Charge xM xM xM xM 1 2 3 4 (a) M = Capacity Multiplier 1 The capacity multiplier shall be the greater of 1 or the multiplier arrived at by applying the following formula: M = 1+[0.6[BTUH/33-1]] 1 The factor "BTUH" shall mean BTUH/per Sq. Ft. of Store Floor Area and shall be the calculated peak design total heat gain as determined in accordance with ASHRAE procedures. Tenant's outdoor air or exhaust that is derived via the Landlord's system, and total heat gain from the roof, lights, fan motors and other items, shall be included in calculating the BTUH/per Sq. Ft. factor of this section for purposes of determining the capacity multiplier. The peak total heat gain shall be calculated using the same sun time hour as is used by Landlord in determining the peak building heat gain. (Typically 1600 hours). (b) M = Hours Multiplier 2 The hours multiplier shall be the greater of 1 or the multiplier arrived at by applying the following formula: M = 1+[Extra Hours/Regular Hours] 2 The term "Extra Hours" shall mean Tenant's hours use of system during times other than the originally established regular weekly hours of the Center. The term "Regular Hours" shall mean originally established regular weekly hours of the Center. (c) M = Utility Cost Multiplier 3 The utility cost multiplier shall be the multiplier arrived at by applying the following formula: M = 1+[0.5[Current Cost/Original Cost-1]] 3 The term "Current Cost" shall mean "Utility Cost" based on rates in effect on the selected date. The term "Original Cost" shall mean Utility Cost based on rates in effect on March 31, 1994. The term "Utility Cost" shall mean the cost to Landlord of the utilities necessary for furnishing chilled media to the Premises, including all charges made to Landlord by the public utilities furnishing the same and based on the original consumption and demands estimated for the Central HVAC System and building. (d) M = Maintenance Cost Multiplier 4 The Maintenance Cost Multiplier shall be the greater of 1 or the multiplier arrived at by applying the following formula: M = 1+[0.1[Current CPI/Original CPI-1]] 4 The term "Current CPI" shall mean the "Consumer Price Index" on the selected date. The term "Original CPI" shall mean the "Consumer Price Index" for February 1, 1996. The term "Consumer Price Index" as used in this Section 7.2 and in Section 14.1 herein shall mean the Consumer Price Index All Items for All Urban Consumers (CPI-U, 1982-4=100)" published by the Bureau of Labor Statistics of the U.S. Department of Labor. If the publication of the Consumer Price Index of the U.S. Bureau of Labor Statistics is discontinued, comparable statistics on the purchasing power of the consumer dollar published by a responsible financial periodical selected by Landlord shall be used for making such computations. Section 7.3. Enforcement and Termination In the event of any default by Tenant, Landlord reserves the right, upon at least ten (10) days prior written notice to Tenant, in addition to all other rights and remedies available to Landlord, to cut off and discontinue, without notice or liability to Tenant, any utilities or services provided in accordance with the provisions of this Article VII. Landlord shall not be liable to Tenant in damages or otherwise if any utilities or services, whether or not furnished by Landlord hereunder, are interrupted or terminated because of repairs, installation or improvements, or any cause beyond Landlord's reasonable control, nor shall any such termination relieve Tenant of any of its obligations under this Lease. Tenant shall operate the Premises in such a way as shall note waste fuel, energy or natural resources. If Landlord provides any utilities or services under Section 7.1 or 7.2 of this Lease to tenants. Landlord may, upon written direction, require Tenant to obtain such services from a third party provider without liability for the same. No discontinuance of any utilities or services shall constitute a constructive eviction. Notwithstanding anything in this Section 7.3 to the contrary, if any utility or service provided by Landlord is interrupted by Landlord (other than due to Tenant's default) for a period of more than three (3) consecutive business days, rent shall be fairly and equitably abated to the extent such interruption in service adversely affects Tenant's business operation in the 9 12 Premises. Such abatement period shall be retroactive to the date the respective utility or service was initially interrupted and continue until such time as such utility or service is restored or an adequate alternate utility or service is provided. Rent shall not abate if the interruption in such utility or service is three (3) consecutive business days or less in duration. ARTICLE VIII CONDUCT OF BUSINESS BY TENANT Section 8.1. Use of Premises. The Premises shall be occupied and used by Tenant solely for the purpose of conducting therein the business of a full service sit-down restaurant with a predominantly "adventure" or "discovery" theme, including the sale of liquor for on-premises consumption. Tenant's menu will feature American, International, and Mexican entrees. Tenant shall not use or permit or suffer the use of the Premises for any other business or purpose. Tenant is hereby specifically prohibited from selling, offering for sale, giving away or displaying Mall of America merchandise or any other merchandise or items that bear the Mall of America name, trademark, service mark or logo thereon without Landlord's prior written consent thereto which consent may be given or withheld by Landlord in Landlord's sole and absolute discretion and Landlord's failure to give such consent shall not be deemed unreasonable. Section 8.2. Prompt Occupancy and Use. Tenant will occupy the Premises upon the Commencement Date and thereafter continuously operate and conduct in one hundred percent (100%) of the Premises during each hour of the entire Lease Term when Tenant is required under this Lease to be open for business the business permitted under Section 8.1 hereof, with a full staff and full stock of merchandise, using only such minor portions of the Premises for storage and office purposes as are reasonably required. The parties agree that: Landlord has relied upon Tenant's occupancy and operation in accordance with the foregoing provisions; because of the difficulty or impossibility of determining Landlord's damages which would result from Tenant's violation of such provisions, including but not limited to damages from loss of Percentage Rent from Tenant and other tenants, and diminished saleability, mortgageability and economic value, Landlord shall be entitled to liquidated damages if it elects to pursue such remedy; therefore for any day that Tenant does not fully comply with the provisions of this Section 8.2 the Minimum Annual Rent, prorated on a daily basis, shall be increased by twenty-five percent (25%), such increased sum representing the damages which the parties agree Landlord will suffer by Tenant's noncompliance. In addition to all other remedies, Landlord shall have the right to obtain specific performance by Tenant upon Tenant's failure to comply with the provisions of this Section 8.2. Notwithstanding the foregoing, Tenant may temporarily cease operating its business in the Premises for reasonable periods as approved by Landlord (which approval shall not be unreasonably withheld) in which Tenant is carrying on remodeling activities (which includes the repair or replacement of equipment), provided Tenant gives Landlord's Center manager at least ten (10) days prior notice of the anticipated dates Tenant will be closed and provided such remodeling activities have Landlord's prior approval. Rent shall not abate while Tenant is closed for remodeling. Section 8.3. Conduct of Business. Such business shall be conducted (a) under the name HOTEL DISCOVERY unless another name is previously approved in writing by the Landlord; and (b) in such manner as shall assure the transaction of a maximum volume of business in and at the Premises. Tenant's store shall be and remain open at least from 10:00 A.M. until 9:00 P.M. each day of the week (except Tenant may remain open until Midnight with Landlord's prior approval), except Sunday, on Sunday from 12:00 P.M. until 6:00 P.M., and in addition, during all days, nights and hours (including Sundays as permitted by law) but, in any event, not before 10:00 A.M., that any Major Tenant in the Center (as referred to in Section 4.2 above) is open for business, and such other days, nights and hours as Landlord shall require or approve in writing. Section 8.4. Operation by Tenant. Tenant covenants and agrees that it will: not place or maintain any merchandise, vending machines or other articles in any vestibule or entry of the Premises or outside the Premises; store garbage, trash, rubbish and other refuse in rat-proof and insect-proof containers inside the Premises, and remove the same frequently and regularly and, if directed by Landlord, by such means and methods and at such times and intervals as are designated by Landlord, all at Tenant's expense; not permit any sound system audible, or objectionable advertising medium visible, outside the Premises; keep all mechanical equipment free of vibration and noise and in good working order and condition; not commit or permit waste or a nuisance upon the Premises; not permit or cause noxious odors to emanate or be dispelled from the Premises; not solicit business in the Common Areas nor distribute advertising matter to, in or upon any Common Areas; not permit the loading or unloading or the parking or standing of delivery vehicles outside any area designated therefor, nor permit any use of vehicles which will interfere with the use of any Common Areas; comply with all laws, recommendations, ordinances, rules and regulations of governmental, public, private and other authorities and agencies, including those with authority over insurance rates, with respect to the use or occupancy of the Premises, and including but not limited to the Williams-Steiger Occupational Safety and Health Act; light the show windows of the Premises and all signs each night of the year for not less than one (1) hour after the Premises is permitted to be closed; not permit any noxious, toxic or corrosive fuel or gas, dust, dirt or fly ash on the Premises; not place a load on any floor in the Center which exceeds the floor load per square foot which such floor was designed to carry. Section 8.5. Storage. Tenant shall store in the Premises only merchandise which Tenant intends to sell at, in or from the Premises, within a reasonable time after receipt thereof. 10 13 Section 8.6. Painting, Decorating, Displays, Alterations. Tenant will not paint, decorate or change the architectural treatment of any part of the exterior of the Premises nor any part of the interior of the Premises visible from the exterior nor make any structural alterations, additions or changes in the Premises without Landlord's written approval thereto, and will promptly remove any paint, decoration, alteration, addition or changes applied or installed without Landlord's approval and restore the Premises to an acceptable condition or take such other action with respect thereto as Landlord directs. Notwithstanding the foregoing, Tenant shall be permitted to paint, decorate, alter, add or change the interior of the Premises (but not change the general "adventure" or "discovery" theme) without Landlord's prior approval thereto provided such work does not exceed Twenty Thousand and 00/100 Dollars ($20,000.00) in cost in any twelve (12) month period and provided further such work shall be non-storefront, non-mechanical, non-utility and non-structural in nature. Tenant will install and maintain at all times, subject to the other provisions of this Section 8.6, merchandise displays in any show windows on the Premises; the arrangement, style, color and general appearance thereof and of displays in the interior of the Premises which are visible from the exterior, including, but not limited to, window displays, advertising matter, signs, merchandise and store fixtures, shall be maintained in keeping with the character and standards of the Center. Section 8.7. Other Operations. If during the Lease Term Tenant directly or indirectly operates, manages or has any interest whatsoever in any other store or business operated for a purpose or business substantially similar to the business permitted under Section 8.1 hereof within a radius of five (5) miles of the Center (excluding downtown Minneapolis), it will injure Landlord's ability and right to receive Percentage Rent (such ability and right being a major consideration for this Lease and the construction of the Center). Accordingly, if Tenant operates, manages or has such interest in any such store or business within such radius, 100% of all sales made from any such other store or business shall be included in the computation of Gross Sales for the purpose of determining Percentage Rent under this Lease as though said Gross Sales had actually been made at, in or from the Premises. Landlord shall have all rights of inspection of books and records with respect to such stores or businesses as it has with respect to the Premises; and Tenant shall furnish to Landlord such reports with respect to Gross Sales from such other store or business as it is herein required to furnish with respect to the Premises. Section 8.8. Emissions and Hazardous Materials. Tenant shall not, without the prior written consent of Landlord, cause or permit, knowingly or unknowingly, any Hazardous Material (hereinafter defined) to be brought or remain upon, kept, used, discharged, leaked, or emitted in or about, or treated at the Premises or the Center. As used in this Lease, "Hazardous Material(s)" shall mean any hazardous, toxic or radioactive substance, material, matter or waste which is or becomes regulated by any federal, state or local law, ordinance, order, rule, regulation, code or any other governmental restriction or requirement, and shall include asbestos, petroleum products and the terms "Hazardous Substance" and "Hazardous Waste" as defined in the Comprehensive Environmental Response, Compensation and Liability Act ("CERCLA"), as amended, 42 U.S.C. Section 9601 et seq., and the Resource Conservation and Recovery Act ("RCRA"), as amended, 42 U.S.C. Section 6901 et seq. However, "Hazardous Materials" shall not include substances which are used in the ordinary course of a business similar to Tenant's business as permitted pursuant to Section 8.1 of this Lease provided, however, that such substances are used, handled, transported, stored and disposed of in strict compliance with any applicable federal, state or local law, statute, rule, regulation, code, ordinance or any other governmental restriction or requirement. If such substances are not so used, handled, transported, stored or disposed of then they shall be deemed "Hazardous Materials" for purposes of this Lease. To obtain Landlord's consent, Tenant shall prepare an "Environmental Audit" for Landlord's review. Such Environmental Audit shall list: (1) the name(s) of each Hazardous Material and a Material Safety Data Sheet (MSDS) as required by the Occupational Safety and Health Act; (2) the volume proposed to be used, stored and/or treated at the Premises (monthly); (3) the purpose of such Hazardous Material; (4) the proposed on-premises storage location(s); (5) the name(s) of the proposed off-premises disposal entity; and (6) an emergency preparedness plan in the event of a release. Additionally, the Environmental Audit shall include copies of all required federal, state, and local permits concerning or related to the proposed use, storage, or treatment of any Hazardous Material(s) at the Premises. Tenant shall submit a new Environmental Audit whenever it proposes to use, store, or treat a new Hazardous Material at the Premises or when the volume of existing Hazardous Materials to be used, stored, or treated at the Premises expands by ten percent (10%) during any thirty (30) day period. If Landlord in its reasonable judgment finds the Environmental Audit acceptable, then Landlord shall deliver to Tenant Landlord's written consent. Notwithstanding such consent, Landlord may revoke its consent upon: (1) Tenant's failure to remain in full compliance with applicable environmental permits and/or any other requirements under any federal, state, or local law, ordinance, order, rule, regulation, code or any other governmental restriction or requirement (including but not limited to the Comprehensive Environmental Response, Compensation and Liability Act ("CERCLA"), as amended, 42 U.S.C. Section 9601 et seq., and the Resource Conservation and Recovery Act ("RCRA"), as amended, 42 U.S.C. Section 6901 et seq.) related to environmental safety, human health, or employee safety; (2) the Tenant's business operations pose or potentially pose a human health risk to other Tenants; or (3) the Tenant expands its use, storage, or treatment of any Hazardous Material(s) in a manner inconsistent with the safe operation of a shopping center. Should Landlord consent in writing to Tenant bringing, using, storing or treating any Hazardous Material(s) in or upon the Premises or the Center, Tenant shall strictly obey and adhere to any and all federal, state or local laws, ordinances, orders, rules, regulations, codes or any other governmental restrictions or requirements (including but not limited to the Comprehensive Environmental Response, Compensation and Liability Act ("CERCLA"), as amended, 42 U.S.C. Section 9601 et seq., and the Resource Conservation and Recovery Act ("RCRA"), as amended, 42 U.S.C. Section 6901 et seq.) which in any way regulate, govern or impact Tenant's possession, use, storage, treatment or disposal of said Hazardous Material(s). In addition, Tenant represents and warrants to Landlord that (1) Tenant shall apply for and remain in compliance with any and all federal, state or local permits in regard to Hazardous Materials; (2) Tenant shall report to any and all applicable governmental authorities any release of reportable quantities of any Hazardous Material(s) as required by any and all federal, state or local laws, ordinances, orders, rules, regulations, codes or any other governmental restrictions or requirements; (3) Tenant, within five (5) days of receipt, shall send to Landlord a copy of any notice, order, inspection report, or other document issued by any governmental authority relevant to the Tenant's compliance status with environmental or 11 14 health and safety laws; and (4) Tenant shall remove from the Premises all Hazardous Materials at the termination of this Lease. In addition to, and in no way limiting, Tenant's duties and obligations as set forth in Section 11.6 of this Lease, should Tenant breach any of its duties and obligations as set forth in this Section 8.8 of this Lease, or if the presence of any Hazardous Material(s) on the Premises results in contamination of the Premises, the Center, any land other than the Center, the atmosphere, or any water or waterway (including groundwater), or if contamination of the Premises or of the Center by any Hazardous Material(s) otherwise occurs for which Tenant is otherwise legally liable to Landlord for damages resulting therefrom. Tenant shall indemnify, save harmless and, at Landlord's option and with attorneys approved in writing by Landlord, defend Landlord, and its contractors, agents, employees, partners, officers, directors, and mortgagees, if any, from any and all claims, demands, damages, expenses, fees, costs, fines, penalties, suits, proceedings, actions, causes of action, and losses of any and every kind and nature (including, without limitation, diminution in value of the Premises or the Center, damages for the loss or restriction on use of the rentable or usable space or of any amenity of the Premises or the Center, damages arising from any adverse impact on marketing space in the Center, and sums paid in settlement of claims and for attorney's fees, consultant fees and expert fees, which may arise during or after the Lease Term or any extension thereof as a result of such contamination). This includes, without limitation, costs and expenses, incurred in connection with any investigation of site conditions or any cleanup, remedial, removal or restoration work required by any federal, state or local governmental agency or political subdivision because of the presence of Hazardous Material(s) on or about the Premises or the Center, or because of the presence of Hazardous Material(s) anywhere else which came or otherwise emanated from Tenant or the Premises. Without limiting the foregoing, if the presence of any Hazardous Material(s) on or about the Premises or the Center caused or permitted by Tenant results in any contamination of the Premises or the Center, Tenant shall, at its sole expense, promptly take all actions and expense as are necessary to return the Premises and/or the Center to the condition existing prior to the introduction of any such Hazardous Material(s) to the Premises or the Center; provided, however, that Landlord's approval of such actions shall first be obtained in writing. Section 8.9. Sales and Dignified Use. No public or private auction or any fire, "going out of business," bankruptcy or similar sales or auctions shall be conducted in or from the Premises and the Premises shall not be used except in a dignified and ethical manner consistent with the general high standards of merchandising in the Center and not in a disreputable or immoral manner or in violation of national, state or local laws. The foregoing shall not, however, restrict Tenant from conducting periodic sales of retail merchandise from the Premises. ARTICLE IX MAINTENANCE OF LEASED PREMISES Section 9.1. Maintenance by Landlord. Landlord shall keep or cause to be kept the foundations, roof and structural portions of the walls of the Premises in good order, repair and condition except for damage thereto due to the acts or omissions of Tenant, its agents, employees or invitees. Landlord shall commence required repairs as soon as reasonably practicable after receiving written notice from Tenant thereof. This Section 9.1 shall not apply in case of damage or destruction by fire or other casualty or condemnation or eminent domain, in which events the obligations of Landlord shall be controlled by Article XVI and XVII. Except as provided in this Section 9.1 Landlord shall not be obligated to make repairs, replacements or improvements of any kind upon the Premises unless caused by the negligent or intentional acts or omissions of Landlord, or to any equipment, merchandise, stock in trade, facilities or fixtures therein, all of which shall be Tenant's responsibility, but Tenant shall give Landlord prompt written notice of any accident, casualty, damage or other similar occurrence in or to the Premises or the Common Areas of which Tenant has knowledge. In performing its work hereunder, Landlord agrees that it shall comply with all laws, ordinance, rules, regulations and orders of governmental bodies and agencies having jurisdiction thereover applicable as of the date such work is performed or caused to be performed by Landlord. Section 9.2. Maintenance by Tenant. Tenant shall at all times keep the Premises (including all entrances and vestibules) and all partitions, window and window frames and mouldings, glass, store fronts, doors, door openers, fixtures, equipment and appurtenances thereof (including lighting, heating, electrical, plumbing, ventilating and air conditioning fixtures and systems and other mechanical equipment and appurtenances) and all parts of the Premises, and parts of Tenant's Work not on the Premises, not required herein to be maintained by Landlord, in good order, condition and repair and clean, orderly, sanitary and safe, damage by unavoidable casualty excepted, (including but not limited to doing such things as are necessary to cause the Premises to comply with applicable laws, ordinances, rules, regulations and orders of governmental and public bodies and agencies, such as but not limited to the Williams-Steiger Occupational Safety and Health Act). If replacement of equipment, fixtures and appurtenances thereto is necessary, Tenant shall replace the same with new or completely reconditioned equipment, fixtures and appurtenances, and repair all damages done in or by such replacement. If Tenant fails to perform its obligations hereunder, Landlord with notice may, but shall not be obligated to, perform Tenant's obligations or perform work resulting from Tenant's acts, actions or omissions and add the cost of the same to the next installment of Minimum Monthly Rent due hereunder to be repaid in full. Section 9.3. Surrender of Premises. At the expiration or earlier termination of the Lease Term, Tenant shall surrender the Premises in the same condition as they were required to be in on the Required Completion Date, reasonable wear and tear and damage by unavoidable casualty excepted, and deliver all keys for, and all combinations on locks, safes and vaults in, the Premises to Landlord at Landlord's notice address as specified in Section 24.7 or, at Landlord's option, to the office of the Center's general manager. 12 15 ARTICLE X SIGNS, AWNINGS, CANOPIES, FIXTURES, ALTERATIONS Section 10.1. Fixtures. All fixtures installed by Tenant shall be new. At least every five (5) years, upon the request of Landlord, Tenant shall refurbish all or any portion of the interior of the Premises so that the furnishings, furniture, flooring, wall fixtures and coverings, equipment and other appurtenances in the Premises shall be in keeping with the contemporary decor of the Center. Section 10.2. Removal and Restoration by Tenant. All alterations, changes and additions and all improvements (excluding Tenant's furniture, trades fixtures and equipment and other personal property not belonging to Tenant), including leasehold improvements, made by Tenant, or made by Landlord on Tenant's behalf, whether part of Tenant's Work or not and whether or not paid for wholly or in part by Landlord, shall remain Tenant's property for the Lease Term. Any alterations, changes, additions and improvements shall immediately upon the termination of this Lease become Landlord's property, be considered part of the Premises, and not be removed at or prior to the end of the Lease Term without Landlord's written consent. If Tenant fails to remove any shelving, decorations, equipment, trade fixtures or personal property from the Premises prior to the end of the Lease Term, they shall become Landlord's property and Tenant shall repair or pay for the repair of any damage done to the Premises resulting from removing same but not for painting or redecorating the Premises. Section 10.3. Tenant's Liens. A. Tenant shall not suffer any mechanics' or materialmen's lien to be filed against the Premises or the Center by reason of work, labor, services or materials performed or furnished to Tenant or anyone holding any part of the Premises under Tenant. If any such lien shall at any time be filed as aforesaid. Tenant may contest the same in good faith, but, notwithstanding such contest, Tenant shall, within thirty (30) days (or such shorter period of time as may be reaonably necessary if Landlord's or Landlord's mortgagee's interest in the Premises or the Center is in immediate jeopardy or if Landlord's ability to sell, finance or re-finance the Center or any portion thereof is adversely affected as a result of such lien) after the filing thereof, cause such lien to be released of record by payment, bond, order of a court of competent jurisdiction, or otherwise in a manner satisfactory to Landlord and its mortgagee. In the event of Tenant's failure to release of record any such lien within the aforesaid period, Landlord, any affiliate of Landlord or any party who delivered a guaranty with respect to any financing of the Center or the Premises may remove said lien by paying the full amount thereof or by bonding or in any other manner Landlord, any affiliate of Landlord or any party who delivered a guaranty with respect to any financing of the Center or the Premises deems appropriate, without investigating the validity thereof, and irrespective of the fact that Tenant may contest the propriety or the amount thereof, and Tenant, upon demand, shall pay Landlord the amount so paid out by Landlord in connection withe the discharge of said lien, together with interest thereon at the rate set forth in Section 4.2 herein and reasonable expenses incurred in connection therewith, including reasonable attorneys' fees, which amounts are due and payable in full to Landlord as additional rent on the first day of the next following month. Nothing contained in this Lease shall be construed as a consent on the part of Landlord to subject Landlord's estate in the Premises to any lien or liability under the lien laws of the State of Minnesota. Tenant's obligation to observe and perform any of the provisions of this Section 10.3 shall survive the expiration of the Lease Term or the earlier termination of this Lease. B. Tenant shall not create or suffer to be created a security interest or other lien against any improvements, additions or other construction made by Tenant in or to the Premises or against any equipment or fixtures installed by Tenant therein (other than Tenant's property), and should any security interest be created in breach of the foregoing, Landlord, any affiliate of Landlord or any party who delivered a guaranty with respect to any financing of the Center or the Premises shall be entitled to discharge the same by exercising the rights and remedies afforded it under paragraph A of this Section. Notwithstanding anything herein in this Section 10.3B, which may be to the contrary, Tenant shall have the right, at any time during the Lease Term, to grant to a bona-fide third party lender or other financial institution a lien or security interest on all or a part of Tenant's personal property, furniture, inventory, trade fixtures (but not permanently affixed leasehold improvements which by the terms of this Lease become Landlord's property), business equipment and other chattels for fianancing purposes. Landlord hereby waives any lien or security interest it may have in Tenant's personal property, furniture, inventory, trade fixtures (but not permanently affixed leasehold improvements which by the terms of this Lease become Landlord's property), business equipment and other chattels used by Tenant as collateral or security for financing purposes, and upon Tenants, written request, if no default exists hereunder, Landlord agrees to execute an instrument confirming the same. In no event shall Tenant be permitted to use the Lease as collateral or security for financing purposes and in no event whatsoever shall Landlord be obligated or required to consent to or recognize a collateral assignment of this Lease by Tenant. Section 10.4. Signs, Awnings and Canopies. Tenant will not place or permit on any exterior door or window or any exterior wall of the Premises any sign, awning, canopy, advertising matter, decoration, lettering or other thing of any kind which does not comply with the Sign Criteria set forth in Exhibit "E" attached hereto. ARTICLE XI INSURANCE Section 11.1. By Landlord. Landlord shall carry public liability insurance on those portions of the Common Areas included in the Total Tract providing coverage of not less than $5,000,000.00 against liability for bodily injury including death and personal injury for 13 16 any one (1) occurrence and $1,000,000.00 property damage insurance, or combined single limit insurance in the amount of $5,000,000.00. Landlord shall also carry insurance for fire, extended coverage, vandalism, malicious mischief and other endorsements deemed advisable by Landlord, insuring all improvements on the Total Tract, including the Premises and all leasehold improvements thereon and appurtenances thereto (excluding Tenant's merchandise, trade fixtures, furnishings, equipment, personal property and excluding plate glass) for the full insurable value thereof, with such deductibles as Landlord deems advisable, such insurance coverage to include improvements provided by Tenant as set forth in Exhibit "C" and "C-2" as Tenant's Work (excluding wall covering, floor covering, carpeting and drapes) and Landlord's Work as defined in Exhibit "C"; Tenant agrees to pay Landlord, as additional rent, 25 cents per year for each square foot of Store Floor Area payable in equal installments on the first day of every calendar month during the Lease Term, as Tenant's share of the cost of the premiums for such insurance described above in this sentence. At the end of the first Partial Lease Year and each Lease Year thereafter, the amount thus to be paid by Tenant shall be adjusted upward or downward (but shall never be less than the above amount) in direct ratio to the increase or decrease in the cost of the premiums paid by Landlord for such insurance coverage. Upon Tenant's written request therefor, Landlord shall provide Tenant with a copy of the bill for Landlord's insurance premiums. Section 11.2. By Tenant. Tenant agrees to carry public liability insurance on the Premises during the Lease Term, covering the Tenant and naming the Landlord, Simon DeBartolo Group, Inc. and M.S. Management Associates, Inc., as additional named insured, with terms and companies satisfactory to Landlord, for limits of not less than $5,000,000.00 for bodily injury, including death, and personal injury for any one (1) occurrence, $1,000,000.00 property damage insurance or a combined single limit of $5,000,000.00. Tenant's insurance will include contractual liability coverage recognizing this Lease, products and completed operations liability and providing that Landlord and Tenant shall be given a minimum of sixty (60) days written notice by the insurance company prior to cancellation, termination or change in such insurance. Tenant also agrees to carry insurance against fire and such other risks as are from time to time required by Landlord, including, but not limited to, a standard "All-Risk" policy of property insurance protecting against all risk of physical loss or damage, including without limitation, sprinkler leakage coverage and plate glass insurance covering all plate glass in the Premises (including store fronts), in amounts not less than the actual replacement cost, covering all of Tenant's merchandise, trade fixtures, furnishing, wall covering, floor covering, carpeting, drapes, equipment and all items of personal property of Tenant located on or within the Premises. Tenant shall provide Landlord with certificates evidencing that such insurance is in full force and effect and stating the terms thereof. The minimum limits of the comprehensive general liability policy of insurance shall in no way limit or diminish Tenant's liability under Section 11.6 hereof and shall be subject to increase at any time, and from time to time. Within ten (10) days after demand therefor by Landlord, Tenant shall furnish Landlord with evidence that it has complied with such demand. Section 11.3. Mutual Waiver of Subrogation Rights. Landlord and Tenant and all parties claiming under them mutually release and discharge each other from all claims and liabilities arising from or caused by any casualty or hazard covered or required hereunder to be covered in whole or in part by insurance on the Premises or in connection with property on or activities conducted on the Premises, and waive any right of subrogation which might otherwise exist in or accrue to any person on account thereof and evidence such waiver by endorsement to the required insurance policies, provided that such release shall not operate in any case where the effect is to invalidate or increase the cost of such insurance coverage (provided, that in the case of increased cost, the other party shall have the right, within thirty (30) days following written notice, to pay such increased cost, thereby keeping such release and waiver in full force and effect). Section 11.4. Waiver. Except for the intentional misconduct or negligence of Landlord, its agents or employees, Landlord, its agents and employees, shall not be liable for, and Tenant waives all claims for, damage, including but not limited to consequential damages, to person, property or otherwise, sustained by Tenant or any person claiming through Tenant resulting from any accident or occurrence in or upon any part of the Center including, but not limited to, claims for damage resulting from: (a) any equipment or appurtenances becoming out of repair; (b) Landlord's failure to keep any part of the Center in repair; (c) injury done or caused by wind, water, or other natural element; (d) any defect in or failure of plumbing, heating or air conditioning equipment, electric wiring or installation thereof, gas, water, and steam pipes, stairs, porches, railings or walks; (e) broken glass; (f) the backing up of any sewer pipe or downspout; (g) the bursting, leaking or running of any tank, tub, washstand, water closet, waste pipe, drain or any other pipe or tank in, upon or about the Premises; (h) the escape of steam or hot water; (i) water, snow or ice upon the Premises; (j) the falling of any fixture, plaster or stucco; (k) damage to or loss by theft or otherwise of property of Tenant or others; (l) acts or omissions of persons in the Premises, other tenants in the Center, occupants of nearby properties, or any other persons; and (m) any act or omission of owners of adjacent or contiguous property. All property of Tenant kept in the Premises shall be so kept at Tenant's risk only and Tenant shall save Landlord harmless from claims arising out of damage to the same, including subrogation claims by Tenant's insurance carrier. Section 11.5. Insurance - Tenant's Operation. Tenant will not do or suffer to be done anything which will contravene Landlord's insurance policies or prevent Landlord from procuring such policies in amounts and companies selected by Landlord. If anything done, omitted to be done or suffered to be done by Tenant in, upon or about the Premises shall cause the rates of any insurance effected or carried by Landlord on the Premises or other property to be increased beyond the regular rate from time to time applicable to the Premises for use for the purpose permitted under this Lease, or such other property for the use or uses made thereof, Tenant will pay the amount of such increase promptly upon Landlord's demand and Landlord shall have the right to correct any such condition at Tenant's expense. In the event that this Lease so permits and Tenant engages in the preparation of food or packaged foods or engages in the use, sale or storage of inflammable or combustible material, Tenant shall install chemical 14 17 extinguishing devices (such as ansul) approved by Underwriters Laboratories and Factory Mutual and the installation thereof must be approved by the appropriate local authority. Tenant shall keep such devices under service as required by such organizations. If gas is used in the Premises, Tenant shall install gas cut-off devices (manual and automatic). Section 11.6. Indemnification. Except to the extent caused by the negligent act or intentional misconduct of Landlord, its partners, agents, employees or property manager, Tenant shall save harmless, indemnify, and at Landlord's option, defend Landlord, its agents and employees, and mortgagee, if any, from and against any and all liability, liens, claims, demands, damages, expenses, fees (including reasonable attorneys' fees), costs, fines, penalties, suits, proceedings, actions and causes of action of any and every kind and nature arising or growing out of or in any way connected with Tenant's use, occupancy, management or control of the Premises or Tenant's operations, conduct or activities in the Center. Except to the extent caused by the negligent act or intentional misconduct of Tenant, its partners, agents, employees or store manager, and except for claims waived by Tenant pursuant to Section 11.4 above, Landlord shall save harmless, indemnify, and at Tenant's option, defend Tenant, its agents and employees from and against any and all liability, liens, claims, demands, damages, expenses, fees (including reasonable attorneys' fees), costs, fines, penalties, suits, proceedings, actions and causes of action of any and every kind and nature arising or growing out of or in any way connected with Landlord's use, occupancy, management or control of the Common Areas or Landlord's operations, conduct or activities in the Center. Section 11.7. Dramshop Insurance. The Tenant agrees that it will purchase and maintain so-called "dramshop" insurance insuring both Landlord and Tenant with adequate limits in the event the State of Minnesota now has, or hereafter enacts a statute which provides that a judgment obtained against a retailer, or any other person or entity, who dispenses alcoholic beverages to unauthorized persons, as defined by said statute, shall be a lien against the real estate from which said alcoholic beverages were illegally dispensed (sometimes referred to as a dram shop act). ARTICLE XII OFFSET STATEMENT, ATTORNMENT, SUBORDINATION Section 12.1. Offset Statement. With ten (10) days after either party's written request the other party shall deliver, executed in recordable form a declaration to any person designated by such party (a) ratifying this Lease; (b) stating the commencement and termination dates; and (c) certifying (i) that this Lease is in full force and effect and has not been assigned, modified, supplemented or amended (except by such writings as shall be stated), (ii) that all conditions under this Lease to be performed by Landlord or Tenant (as the case may be) have been satisfied (stating exceptions, if any), (iii) that to the best of such party's knowledge, without further inquiry, no defenses or offsets against the enforcement of this Lease by Landlord exist (or stating those claimed): (iv) as to advance rent, if any, paid by Tenant, (v) the date to which rent has been paid, (vi) as to the amount of security deposited with Landlord, and such other information as the requesting party reasonably requires. Persons receiving such statements shall be entitled to rely upon them. Section 12.2. Attornment. Tenant shall, in the event of a sale or assignment of Landlord's interest in the Premises or the building in which the Premises is located or this Lease or the Total Tract, or if the Premises or such building comes into the hands of a mortgagee, ground lessor or any other person whether because of a mortgage foreclosure, exercise of a power of sale under a mortgage, termination of the ground lease, or otherwise, attorn to the purchaser or such mortgagee or other person and recognize the same as Landlord hereunder. Tenant shall execute, at Landlord's request, any reasonable attornment agreement required by any mortgagee, ground lessor or other such person to be executed, containing such provisions as such mortgagee, ground lessor or other person reasonably requires so long as Tenant's rights under this Lease are not reduced or obligations increased. Section 12.3. Subordination. A. Mortgage. This Lease shall be secondary, junior and inferior at all times to the lien of any mortgage and to the lien of any deed of trust or other method of financing or refinancing (hereinafter collectively referred to as "mortgage") now or hereafter existing against all or a part of the Total Tract, and to all renewals, modifications, replacements, consolidations and extensions thereof, and Tenant shall execute and deliver all reasonable documents requested by any mortgagee or security holder to effect such subordination so long as Tenant's rights under this Lease are not reduced or obligations increased. B. Construction, Operation and Reciprocal Easement Agreements. This Lease is subject and subordinate to one (1) or more construction, operation, reciprocal easement or similar agreements (hereinafter referred to as "Operating Agreements") entered into or hereafter to be entered into between Landlord and other owners or lessees of real estate (including but not limited to owners and operators of department stores) within or near the Center (which Operating Agreements have been or will be recorded in the official records of the County wherein the Center is located) and to any and all easements and easement agreements which may be or have been entered into with or granted to any persons heretofore or hereafter, whether such persons are located within or upon the Center or not, and Tenant shall execute such reasonable instruments as Landlord requests to evidence such subordination. 15 18 Section 12.4 Failure to Execute Instruments. Tenant's failure to execute instruments or certificates provided for in this Article XII within thirty (30) days after the mailing by Landlord of a written request shall be a default under this Lease. Section 12.5. Non-Disturbance. Upon Tenant's written request, Landlord agrees to request from its mortgagee or other security holder whose interest in the Premises is superior to Tenant's interest therein a non-disturbance agreement which shall provide that in the event Landlord defaults under such mortgage or other security instrument, Tenant's possession of the Premises shall not be disturbed so long as Tenant is not in breach of or default of this Lease. Landlord shall not be liable or responsible for any fees or expenses charged by such mortgagee or security holder in attempting to secure such non-disturbance agreement. Further, any mortgagee's or security holder's failure or refusal to execute a non-disturbance shall not be deemed to be a breach or default of this Lease by Landlord. ARTICLE XIII ASSIGNMENT, SUBLETTING AND CONCESSIONS Section 13.1. Consent Required. Tenant shall not sell, assign, mortgage, pledge or in any manner transfer this Lease or any interest therein, nor sublet all or any part of the Premises, nor license concessions nor lease departments therein, without Landlord's prior written consent in each instance which consent shall not be unreasonably withheld or delayed, provided Tenant and its proposed assignee, sublessee or other transferee comply with and satisfy the terms, conditions and provisions of subparagraphs #1 through #6 below. Consent by Landlord to any assignment or subletting shall not waive the necessity for consent to any subsequent assignment or subletting. This prohibition shall include a prohibition against any subletting or assignment by operation of law. If this Lease is assigned or the Premises or any part sublet or occupied by anybody other than Tenant, Landlord may collect rent from the assignee, subtenant or occupant and apply the same to the rent herein reserved, but no such assignment, subletting, occupancy or collection of rent shall be deemed a waiver of any restrictive covenant contained in this Section 13.1 or the acceptance of the assignee, subtenant or occupant as tenant, or a release of Tenant from the performance by Tenant of any covenants on the part of Tenant herein contained. Any assignment (a) as to which Landlord has consented; or (b) which is required by reason of a final nonappealable order of a court of competent jurisdiction; or (c) which is made by reason of and in accordance with the provisions of any law or statute, including, without limitation, the laws governing bankruptcy, insolvency or receivership shall be subject to all terms and conditions of this Lease, and shall not be effective or deemed valid unless, at the time of such assignment: 1. Each assignee or sublessee shall agree, in a written agreement satisfactory to Landlord, to assume and abide by all of the terms and provisions of this Lease, including those which govern the permitted uses of the Premises described in Article VIII herein; and 2. Each assignee or sublessee has submitted a current financial statement, prepared by a certified public accountant, showing a net worth at least equal to Tenant's net worth as of the date of this Lease or the date immediately preceding the date of such assignment or subletting, whichever is greater; and 3. Each assignee or sublessee has submitted, in writing, evidence satisfactory to Landlord of retailing or restaurant experience in regional shopping centers; and 4. The business reputation of each assignee or sublessee shall meet or exceed generally acceptable commercial standards; and 5. The use of the Premises by each assignee or sublessee shall not violate, or create any potential violation of applicable laws, codes or ordinances, nor violate any other agreements affecting the Premises, Landlord or other tenants in the Center. 6. Tenant shall pay Landlord an Assignment Fee as reimbursement for administrative and legal expenses incurred by Landlord in connection with any assignment or subletting. The Assignment Fee initially will be One Thousand and 00/100 Dollars ($1,000.00) and shall increase by One Hundred and 00/100 Dollars ($100.00) at the end of each full Lease Year of the Lease Term. In the event of any assignment or subletting as provided above, there shall be paid to Landlord, in addition to the Minimum Annual Rent and other charges due Landlord pursuant to this Lease, such additional consideration as shall be attributable to the right of use and occupancy of the Premises, whenever the same is receivable by Tenant, together with, as additional rent, the excess, if any, of the rent and other charges payable by the assignee or sublessee over the Minimum Annual Rent and other charges payable under the Lease to Landlord by Tenant pursuant to this Lease. Such additional rent shall be paid to Landlord concurrently with the payments of Minimum Annual Rent required under this Lease, and Tenant shall remain primarily liable for such payments. Notwithstanding any assignment or subletting, Tenant shall remain fully liable on this Lease and for the performance of all terms, covenants and provisions of this Lease. 16 19 Anything contained in the foregoing provisions of this Section to the contrary notwithstanding, neither Tenant nor any other person having an interest in the possession, use, occupancy or utilization of the Premises shall enter into any lease, sublease, license, concession or other agreement for use, occupancy or utilization of space in the Premises which provides for rental or other payment for such use, occupancy or utilization based, in whole or part, on the net income or profits derived by any person from the Premises leased, used, occupied, or utilized (other than an amount based on a fixed percentage or percentages of receipts or sales), and any such purported lease, sublease, license, concession or other agreement shall be absolutely void and ineffective as a conveyance of any right or interest in the possession, use, occupancy or utilization of any part of the Premises. Section 13.2. Change in Ownership. If Tenant or the guarantor of this Lease, if any, is a corporation the stock of which is not traded on any national securities exchange (as defined in the Securities Exchange Act of 1934, as amended) or the NASDAQ Stock Market, then the following shall constitute an assignment of this Lease for all purposes of this Article XIII: (i) the merger, consolidation or reorganization of such corporation; and/or (ii) the sale, issuance, or transfer, cumulatively or in one transaction, of any voting stock, by Tenant or the guarantor of this Lease or the stockholders of record of either as of the date of this Lease, which results in a change in the voting control of Tenant or the guarantor of this Lease, except any such transfer by inheritance or testamentary disposition. If Tenant or the guarantor of this Lease, if any, is a joint venture, partnership, or other association, then for all purposes of this Article XIII, the sale, issuance or transfer, cumulatively or in one transaction, of either voting control or of a fifty percent (50%) interest, or the termination of any joint venture, partnership or other association, shall constitute an assignment, except any such transfer by inheritance or testamentary disposition. ARTICLE XIV MARKETING FUND AND ADVERTISING Section 14.1. Provisions Relating to Marketing Fund. Landlord may, at its option, create and maintain a marketing fund (hereinafter referred to as the "Fund"), the primary purpose of which is to provide sums necessary for professional marketing services which benefit the tenants in the Center. In the event Landlord does create and maintain the Fund, Tenant agrees to contribute to such Fund, beginning upon the later to occur of (a) the Commencement Date, or (b) the date the Fund is created, $0.50 per square foot of Store Floor Area, during each calendar year of the Lease Term (hereinafter referred to as "Fixed Contribution") payable in equal monthly installments, in advance, on the first day of each and every month (pro rated for partial months). Landlord shall contribute an amount equal to 1/4 of the monies collected from all tenants in the Center during each calendar year, which sum may be paid in whole or in part by Landlord, at its option, by providing the services of a Marketing Director or other person or persons under Landlord's exclusive control to help organize and implement marketing programs using assets from the Fund. Any overpayment or underpayment of such amount by Landlord shall be adjusted annually. The Fixed Contribution shall be increased annually commencing with the creation of the Fund based upon the increase of the Consumer Price index (as defined in Section 7.2 above) during the preceding twelve (12) month period. In addition to its other obligations contained herein, Tenant agrees that it shall participate and cooperate in all special sales and promotions sponsored by the Fund. The failure of any other tenant or any department store to contribute to the Fund shall not affect Tenant's obligations hereunder. Section 14.2. Advertising. Tenant shall furnish to Landlord an annual statement at the end of each Lease Year showing the amounts spent by Tenant on white space advertising, other advertising media, and local store marketing or promotions. Each such annual statement shall be made a part of the Gross Sales annual report required to be furnished by Tenant under Section 4.3. If Tenant's annual statement shows that Tenant has expended for such advertising, during the preceding Lease Year, less than one percent (1%) of its Gross Sales for said period, Tenant shall within thirty (30) days after the required delivery date of its annual statement contribute to the Marketing Fund referred to in Section 14.1 above the difference between the amount actually expended for such advertising and one percent (1%) of such Gross Sales. Contributions or other payments payable by Tenant to the said Marketing Fund shall not be deemed an amount expended for advertising within the meaning of this Section 14.2. All expenditures made by Tenant for advertising in connection with Tenant's other stores, if any, within a fifteen (15) mile radius from the nearest perimeter boundary of the whole Center, may be included by Tenant to comply with this Section 14.2, provided such advertising in all instances includes the Premises and encompasses or is distributed to the geographical trade area in which the whole Center is located. Section 14.3. Media Fund. Landlord may, at its option, create and maintain a Media Fund, the exclusive purpose of which shall be to pay all costs and expenses associated with the purchase of electronic, print or outdoor advertising for the promotion of the Center. In the event Landlord does create and maintain the Media Fund, Tenant agrees to contribute to such Fund, beginning upon the later to occur of (a) the Commencement Date or (b) the date the Media Fund is created, a sum equal to $0.50 per square foot of Store Floor Area during each calendar year of the Lease Term (hereinafter referred to as "Media Fund Charge"), payable in equal monthly installments, in advance, on the first day of each and every month (pro rated for partial months). The Media Fund Charge shall be adjusted annually by a percentage equal to the percentage increase or decrease in the electronic, print and outdoor advertising rates of the media used for advertising and promotions in the preceding calendar year in the media market in which the Center is located, provided, however that said charge shall not be less than as originally set forth herein. Within ninety (90) days following the close of each calendar year, Landlord shall furnish Tenant a statement for the preceding calendar year showing the amounts expended by Landlord for media advertising. Tenant hereby authorizes Landlord to use Tenant's trade name and a brief description of Tenant's business in connection with any media advertising purchased pursuant to this Section. 17 20 Section 14.4. Merchants' Association. Landlord may, at its option, create and maintain a Merchants' Association (the "Association") in lieu of the Fund and the Media Fund. In that event, Tenant agrees to contribute to the Association, beginning upon the later to occur of (a) the Commencement Date or (b) the date the Association is created, the sum of the amounts Tenant would be obligated to contribute to the Fund and the Media Fund under Section 14.1 and 14.3 had Landlord created and maintained the Fund and the Media Fund. Such amount shall be payable by Tenant to the Association in equal monthly installments, in advance, on the first day of each and every month (prorated for partial months). Landlord shall contribute to the Association during each calendar year an amount equal to the amount Landlord would otherwise be required to contribute to the Fund in accordance with Section 14.1 above. Any overpayment or underpayment of such amount by Landlord shall be adjusted annually. ARTICLE XV SECURITY DEPOSIT Section 15.1. Amount of Deposit. INTENTIONALLY DELETED. ARTICLE XVI DAMAGE AND DESTRUCTION If the premises are hereafter damaged or destroyed or rendered partially untenantable for their accustomed use by fire or other casualty insured under the coverage which Landlord is obligated to carry pursuant to Section 11.1 hereof, Landlord shall promptly repair the same to substantially the condition which they were in immediately prior to the happening of such casualty (excluding stock in trade, fixtures, furniture, furnishings, carpeting, floor covering, wall covering, drapes, ceiling and equipment), and from the date of such casualty until the Premises are so repaired and restored, the Minimum Monthly Rent payments payable hereunder shall abate in such proportion as the part of said Premises thus destroyed or rendered untenantable bears to the total Premises; and in the event the kitchen area in the Premises is rendered unusable as a result of such damage or destruction, all rent, except Real Estate Taxes, shall abate (unless such damage or destruction was caused by the Tenant, its agents, employees or contractors in which event rent shall not abate) until the kitchen area is again rendered usable; provided, however, that Landlord shall not be obligated to repair and restore if such casualty is not covered by the insurance which Landlord is obligated to carry pursuant to Section 11.1 hereof and no portion of the Minimum Monthly Rent and other payments payable hereunder shall abate, and provided, further, that Landlord shall not be obligated to expend for any repair or restoration an amount in excess of the insurance proceeds recovered by Landlord therefor, and provided, further, that if the Premises be damaged, destroyed or rendered untenantable for their accustomed uses by fire or other casualty to the extent of more than fifty percent (50%) of the cost to replace the Premises during the last three (3) years of the Lease Term, then Landlord or Tenant shall have the right to terminate this Lease effective as of the date of such casualty by giving to the other party within sixty (60) days after the happening of such casualty, written notice of such termination. If such notice be given, this Lease shall terminate and Landlord shall promptly repay to Tenant any rent theretofore paid in advance which was not earned at the date of such casualty. Any time that Landlord repairs or restores the Premises after damage or destruction, then Tenant shall promptly repair or replace its stock in trade, fixtures, furnishings, furniture, carpeting, wall covering, floor covering, drapes, ceiling and equipment to the same condition as they were in immediately prior to the casualty, and if Tenant has closed its business, Tenant shall promptly reopen for business upon the completion of such repairs. Notwithstanding anything to the contrary set forth herein, in the event all or any portion of the Center shall be damaged or destroyed by fire or other cause (notwithstanding that the Premises may be unaffected thereby), to the extent the cost of restoration thereof would exceed fifteen percent (15%) of the amount it would have cost to replace the Center in its entirety at the time such damage or destruction occurred, then Landlord may terminate this Lease by giving Tenant thirty (30) days prior notice of Landlord's election to do so, which notice shall be given, if at all, within ninety (90) days following the date of such occurrence. In the event of the termination of this Lease as aforesaid, this Lease shall cease thirty (30) days after such notice is given, and the rent and other charges hereunder shall be adjusted as of that date. Notwithstanding anything to the contrary set forth herein, in the event all or any portion of the Center shall be damaged or destroyed by fire or other cause (notwithstanding that the Premises may be unaffected thereby), to the extent the cost of restoration thereof would exceed thirty-five percent (35%) of the amount it would have cost to replace the Center in its entirety at the time such damage or destruction occurred, then Tenant may terminate this Lease by giving Landlord thirty (30) days prior notice of Tenant's election to do so, which notice shall be given, if at all, within ninety (90) days following date of such occurrence. In the event of the termination of this Lease as aforesaid, this Lease shall cease thirty (30) days after such notice is given, and the rent and other charges hereunder shall be adjusted as of that date. ARTICLE XVII EMINENT DOMAIN Section 17.1. Condemnation. If ten percent (10%) or more of the Store Floor Area or fifteen percent (15%) or more of the Center (excluding land not currently developed) shall be acquired or condemned by right of eminent domain for any public or quasi public use or purpose, or if an Operating Agreement is terminated as a result of such an acquisition or condemnation, then Landlord or Tenant at its election may terminate this Lease by giving notice to Tenant of its election, and in such event rentals shall be apportioned and adjusted as of the date of termination. If the Lease shall not be terminated as aforesaid, then it shall continue 18 21 in full force and effect, and Landlord shall within a reasonable time after possession is physically taken (subject to delays due to shortage of labor, materials or equipment, labor difficulties, breakdown of equipment, government restrictions, fires, other casualties or other causes beyond the reasonable control of Landlord) repair or rebuild what remains of the Premises for Tenant's occupancy; and a just proportion of the Minimum Annual Rent shall be abated, according to the nature and extent of the injury to the Premises until such repairs and rebuilding are completed and thereafter for the balance of the Lease Term. Section 17.2. Damages. Landlord reserves, and Tenant assigns to Landlord, all rights to damages on account of any taking or condemnation or any act of any public or quasi public authority for which damages are payable. Tenant shall execute such instruments of assignment as Landlord requires, join with Landlord in any action for the recovery of damages, if requested by Landlord, and turn over to Landlord any damages recovered in any proceeding. If Tenant fails to execute instruments required by Landlord, or undertake such other steps as requested. Landlord shall be deemed the duly authorized irrevocable agent and attorney-in-fact of Tenant to execute such instruments and undertake such steps on behalf of Tenant. However, Landlord does not reserve any damages payable for trade fixtures installed by Tenant at its own cost which are not part of the realty. However, Landlord shall not be entitled to the award made to Tenant for loss of business, relocation, depreciation to and costs of removal of stock and fixtures installed by Tenant at its own cost which are not part of the realty or other losses Tenant may be entitled to recover other than diminution in value of the leasehold; provided, however, any claim for the same is made against the condemning authority and not against the Landlord or Landlord's mortgagee and provided, further, Tenant's claim for losses or damages shall not diminish any award made to Landlord or Landlord's mortgagee therefor. ARTICLE XVIII DEFAULT BY TENANT Section 18.1. Right to Re-Enter. The following shall be considered for all purposes to be defaults under and breaches of this Lease: (a) any failure of Tenant to pay any rent or other amount within five (5) days after Tenant's receipt of written notice from Landlord that the same is past due hereunder; (b) any failure by Tenant to perform or observe any other of the terms, provisions, conditions and covenants of this Lease for more than thirty (30) days after written notice of such failure or such longer period of time as may be reasonably required provided Tenant has commenced to cure the same within such thirty (30) day period and is diligently pursuing such cure to completion; (c) a determination by Landlord that Tenant has submitted any materially false report required to be furnished hereunder; (d) anything done by Tenant upon or in connection with the Premises or the construction of any part thereof which directly or indirectly interferes in any way with, or results in a work stoppage in connection with, construction of any part of the Center or any other tenant's space and Tenant fails to promptly take such action as Landlord shall specify, orally or in writing from Landlord or Landlord's authorized representative, in order to promptly prevent, avoid or terminate such interference or work stoppage (or the threat thereof) in connection with construction of any part of the Center or any other tenant's space; (e) the bankruptcy or insolvency of Tenant or the filing by or against Tenant of a petition in bankruptcy or for reorganization or arrangement or for the appointment of a receiver or trustee of all or a portion of Tenant's property, or Tenant's assignment for the benefit of creditors; (f) if Tenant abandons or vacates or does not do business in the Premises when required to do so under this Lease, or (g) this Lease or Tenant's interest herein or in the Premises or any improvements thereon or any property of Tenant are executed upon or attached; or (h) the Premises come into the hands of any person other than expressly permitted under this Lease (i) repetition or continuation of any failure to pay rent or other sums due hereunder where such failure shall continue or be repeated for two consecutive months or a total of four months in any period of twelve consecutive months. In any such event, and without any additional grace period (except as provided in this Lease), demand or notice (the same being hereby waived by Tenant), Landlord, in addition to all other rights or remedies it may have, shall have the right thereupon or at any time thereafter to terminate this Lease by giving notice to Tenant stating the date upon which such termination shall be effective, and shall have the right, either before or after any such termination, to re-enter and take possession of the Premises, remove all persons and property from the Premises, store such property at Tenant's expense, and sell such property if necessary to satisfy any deficiency in payments by Tenant as required hereunder, all without notice or resort to legal process and without being deemed guilty of trespass or constructive eviction or becoming liable for any loss or damage occasioned thereby. Nothing herein shall be construed to require Landlord to give any notice before exercising any of its rights and remedies provided for in Section 3.3 of this Lease. Notwithstanding anything to the contrary herein contained, if Tenant commits any non-monetary default hereunder for or precedent to which or with respect to which notice is herein required, and commits such defaults within twelve (12) months thereafter, no notice shall thereafter be required to be given by Landlord as to or precedent to any such subsequent default during such twelve (12) month period (as Tenant hereby waiving the same) before exercising any or all remedies available to Landlord. Section 18.2. Right to Relet. If Landlord re-enters the Premises as above provided, or if it takes possession pursuant to legal proceedings or otherwise, it may either terminate this Lease or it may, from time to time, without terminating this Lease, make such alterations and repairs as it deems advisable to relet the Premises, and relet the Premises or any part thereof for such term or terms (which may extend beyond the Lease Term) and at such rentals and upon such other terms and conditions as Landlord in its sole discretion deems advisable; upon each such reletting all rentals received by Landlord therefrom shall be applied, first, to any indebtedness other than rent due hereunder from Tenant to Landlord; second, to pay any costs and expenses of reletting, including without limitation, brokers and attorneys' fees and costs of advertising, alterations and repairs; third, to rent due hereunder, and the residue, if any, shall be held by Landlord and applied in payment of future rent as it becomes due hereunder. If rentals received from such reletting during any month are less than that to be paid during that month by Tenant hereunder, Tenant shall immediately pay any such deficiency to Landlord. No re-entry or taking possession of the Premises by 19 22 Landlord shall be construed as an election to terminate this Lease unless a written notice of such termination is given by Landlord. Notwithstanding any such reletting without termination, Landlord may at any time thereafter terminate this Lease for any prior breach or default. If Landlord terminates this Lease for any breach, or otherwise takes any action on account of Tenant's breach or default hereunder, in addition to any other remedies it may have, it may recover from Tenant all damages incurred by reason of such breach or default, all costs of retaking the Premises and including the excess, if any, of the total rent and charges reserved in this Lease for the remainder of the Lease Term over the then reasonable rental value of the Premises for the remainder of the Lease Term, all of which shall be immediately due and payable by Tenant to Landlord. Further, if Tenant defaults in the performance or observance of any of the terms, conditions, covenants or obligations contained in this Lease and Landlord places the enforcement of all or any part of this Lease, the collection of any rent due or to become due or the recovery of possession of the Premises in the hands of an attorney, or if Landlord incurs any fees or out-of-pocket costs in any litigation, negotiation or transaction in which Tenant causes Landlord to be involved or concerned, Tenant agrees to reimburse Landlord for the reasonable attorneys' fees and costs incurred thereby, whether or not suit is actually filed. In determining the rent payable by Tenant hereunder subsequent to default, the Minimum Annual Rent for each year of the unexpired portion of the Lease Term shall equal the average Minimum Annual and Percentage Rents which Tenant was obligated to pay from the commencement of the Lease Term to the time of default, or during the preceding three (3) full calendar years, whichever period is shorter. Section 18.3. Counterclaim. If Landlord commences any proceedings for non-payment of rent (Minimum Annual Rent, Percentage Rent or additional rent), Tenant will not interpose any counterclaim of any nature or description in such proceedings. This shall not, however, be construed as a waiver of Tenant's right to assert such claims in a separate action brought by Tenant. The covenants to pay rent and other amounts hereunder are independent covenants and Tenant shall have no right to hold back, offset or fail to pay any such amounts for default by Landlord or any other reason whatsoever, it being understood and acknowledged by Tenant that Tenant's only recourse is to seek an independent action against Landlord. Section 18.4. Waiver of Rights of Redemption. To the extent permitted by law, Tenant waives any and all rights of redemption granted by or under any present or future laws if Tenant is evicted or dispossessed for any cause, or if Landlord obtains possession of the Premises due to Tenant's default hereunder or otherwise. Section 18.5. Waiver of Trial by Jury. To the extent permitted by applicable law, Tenant hereby waives trial by jury in any summary action or proceeding brought by Landlord against Tenant, the only issue in such summary action or proceeding being the non-payment of rent by Tenant. Section 18.6. Bankruptcy. A. Assumption of Lease. In the event Tenant shall become a Debtor under Chapter 7 of the Bankruptcy Code ("Code") or a petition for reorganization or adjustment of debts is filed concerning Tenant under Chapters 11 or 13 of the Code, or a proceeding is filed under Chapter 7 and is transferred to Chapters 11 or 13, the Trustee or Tenant, as Debtor and as Debtor-in-Possession, may not elect to assume this Lease unless, at the time of such assumption, the Trustee or Tenant has: 1. Cured or provided Landlord "Adequate Assurance" (as defined below) that: (a) Within ten (10) days from the date of such assumption the Trustee or Tenant will cure all monetary defaults under this Lease and compensate Landlord for any actual pecuniary loss resulting from any existing default, including without limitation, Landlord's reasonable costs, expenses, accrued interest as set forth in Section 4.2 of the Lease, and attorneys' fees incurred as a result of the default; (b) Within thirty (30) days from the date of such assumption the Trustee or Tenant will cure all non-monetary defaults under this Lease; and (c) The assumption will be subject to all of the provisions of this Lease. 2. For purposes of this Section 18.6. Landlord and Tenant acknowledge that, in the context of a bankruptcy proceeding of Tenant, at a minimum "Adequate Assurance" shall mean: (a) The Trustee or Tenant has and will continue to have sufficient unencumbered assets after the payment of all secured obligations and administrative expenses to assure Landlord that the Trustee or Tenant will have sufficient funds to fulfill the obligations of Tenant under this Lease, and to keep the Premises stocked with merchandise and properly staffed with sufficient employees to conduct a fully-operational, actively promoted business in the Premises; and (b) The Bankruptcy Court shall have entered an Order segregating sufficient cash payable to Landlord and/or the Trustee or Tenant shall have granted a valid and preferred first lien and security interest and/or mortgage in property of Trustee or Tenant acceptable as to value and kind to Landlord, to secure to Landlord the obligation of the Trustee or Tenant to cure the monetary and/or non-monetary defaults under this Lease within the time periods set forth above; and 20 23 (c) The Trustee or Tenant at the very least shall deposit a sum, in addition to the Security Deposit, equal to one (1) month's rent to be held by Landlord (without any allowance for interest thereon) to secure Tenant's future performance under the Lease. B. Assignment of Lease. If the Trustee or Tenant has assumed the Lease pursuant to the provisions of this Section 18.6 for the purpose of assigning Tenant's interest hereunder to any other person or entity, such interest may be assigned only after the Trustee, Tenant or the proposed assignee have complied with all of the terms, covenants and conditions of Section 13.1 herein, including, without limitation, those with respect to additional rent and the use of the Premises only as permitted in Article VIII herein; Landlord and Tenant acknowledging that such terms, covenants and conditions are commercially reasonable in the context of a bankruptcy proceeding of Tenant. Any person or entity to which this Lease is assigned pursuant to the provisions of the Code shall be deemed without further act or deed to have assumed all of the obligations arising under this Lease on and after the date of such assignment. Any such assignee shall upon request execute and deliver to Landlord an instrument confirming such assignment. C. Adequate Protection. Upon the filing of a petition by or against Tenant under the Code, Tenant, as Debtor and as Debtor-in-Possession, and any Trustee who may be appointed agree to adequately protect Landlord as follows: (1) To perform each and every obligation of Tenant under this Lease until such time as this Lease is either rejected or assumed by Order of the Bankruptcy Court; and (2) To pay all monetary obligations required under this Lease, including without limitation, the payment of Minimum Monthly Rent, and such other additional rent charges payable hereunder which is considered reasonable compensation for the use and occupancy of the Premises; and (3) Provide Landlord a minimum 30 days prior written notice, unless a shorter period is agreed to in writing by the parties, of any proceeding relating to any assumption of this Lease or any intent to abandon the Premises, which abandonment shall be deemed a rejection of this Lease; and (4) To perform to the benefit of Landlord otherwise required under the Code. The failure of Tenant to comply with the above shall result in an automatic rejection of this Lease. D. Accumulative Rights. The rights, remedies and liabilities of Landlord and Tenant set forth in this Section 18.6 shall be in addition to those which may now or hereafter be accorded, or imposed upon, Landlord and Tenant by the Code. ARTICLE XIX DEFAULT BY LANDLORD Section 19.1. Default Defined, Notice. Landlord shall in no event be charged with default in any of its obligations hereunder unless and until Landlord shall have failed to perform such obligations within thirty (30) days (or such additional time as is reasonably required to correct any such default) after written notice as set forth in Section 24.7 to Landlord by Tenant, specifically describing such failure. Section 19.2. Notice to First Mortgagee. If the holder of the first mortgage covering the Premises shall have given written notice to Tenant of the address to which notices to such holder are to be sent, Tenant shall give such holder written notice simultaneously with any notice given to Landlord of any default of Landlord, and if Landlord fails to cure any default asserted in said notice within the time provided above, Tenant shall notify such holder in writing of the failure to cure, and said holder shall have the right but not the obligation, within thirty (30) days after receipt of such second notice and within thirty (30) days of receipt thereof, to cure such default before Tenant may take any action by reason of such default. ARTICLE XX TENANT'S PROPERTY Section 20.1. Taxes on Leasehold. Tenant shall be responsible for and shall pay before delinquent all municipal, county, federal or state taxes whether enacted now or in the future coming due during or after the Lease Term against Tenant's interest in this Lease or against personal property of any kind owned or placed in, upon or about the Premises by Tenant. Section 20.2. Assets of Tenant. INTENTIONALLY DELETED. ARTICLE XXI ACCESS BY LANDLORD Section 21.1. Right of Entry. Landlord, its agents and employees shall have the right to enter the Premises from time to time at reasonable times upon at least two (2) hours oral notice to Tenant's store manager (no notice shall be required in an emergency) to examine 21 24 the same, show them to prospective purchasers and other persons, and make such repairs, alterations, improvements or additions as Landlord deems desirable. Rent shall not abate while any such repairs, alterations, improvements, or additions are being made. In addition, during any apparent emergency, Landlord or its agents may enter the Premises forcibly without liability therefor and without in any manner affecting Tenant's obligations under this Lease. Nothing herein contained, however, shall be deemed to impose upon Landlord any obligation, responsibility or liability whatsoever, for any care, maintenance or repair except as otherwise herein expressly provided. ARTICLE XXII HOLDING OVER, SUCCESSORS Section 22.1. Holding Over. If Tenant holds over or occupies the Premises beyond the Lease Term (it being agreed there shall be no such holding over or occupancy without Landlord's written consent), Tenant shall pay Landlord for each day of such holding over a sum equal to the greater of (a) twice the Minimum Monthly Rent prorated for the number of days of such holding over, or (b) Minimum Annual Rent plus Percentage Rent prorated for the number of days of such holding over, plus, whichever of (a) or (b) is applicable, a prorata portion of all other amounts which Tenant would have been required to pay hereunder had this Lease been in effect. If Tenant holds over with or without Landlord's written consent Tenant shall occupy the Premises on a tenancy at sufferance but all other terms and provisions of this Lease shall be applicable to such period. Section 22.2. Successors. All rights and liabilities herein given to or imposed upon the respective parties hereto shall bind and inure to the several respective heirs, successors, administrators, executors and assigns of the parties and if Tenant is more than one (1) person, they shall be bound jointly and severally by this Lease except that no rights shall inure to the benefit of any assignee or subtenant of Tenant unless the assignment or sublease was approved by Landlord in writing as provided in Section 13.1 hereof. Landlord, at any time and from time to time, may make an assignment of its interest in this Lease and, in the event of such assignment, Landlord and its successors and assigns (other than the assignee of Landlord's interest in this Lease) shall be released from any and all liability thereafter accruing hereunder. ARTICLE XXIII QUIET ENJOYMENT Section 23.1. Landlord's Covenant. If Tenant pays the rents and other amounts herein provided, observes and performs all the covenants, terms and conditions hereof, Tenant shall peaceably and quietly hold and enjoy the Premises for the Lease Term without interruption by Landlord or any person or persons claiming by, through or under Landlord, subject, nevertheless, to the terms and conditions of this Lease. ARTICLE XXIV MISCELLANEOUS Section 24.1. Waiver. No waiver by Landlord or Tenant of any breach of any term, covenant or condition hereof shall be deemed a waiver of the same or any subsequent breach of the same or any other term, covenant or condition. The acceptance of rent by Landlord shall not be deemed a waiver of any earlier breach by Tenant of any term, covenant or condition hereof, regardless of Landlord's knowledge of such breach when such rent is accepted. No covenant, term or condition of this Lease shall be deemed waived by Landlord or Tenant unless waived in writing. Section 24.2. Accord and Satisfaction. Landlord is entitled to accept, receive and cash or deposit any payment made by Tenant for any reason or purpose or in any amount whatsoever, and apply the same at Landlord's option to any obligation of Tenant and the same shall not constitute payment of any amount owed except that to which Landlord has applied the same. No endorsement or statement on any check or letter of Tenant shall be deemed an accord and satisfaction or otherwise recognized for any purpose whatsoever. The acceptance of any such check or payment shall be without prejudice to Landlord's right to recover any and all amounts owed by Tenant hereunder and Landlord's right to pursue any other available remedy. Section 24.3. Entire Agreement. There are no representations, covenants, warranties, promises, agreements, conditions or undertakings, oral or written, between Landlord and Tenant other than herein set forth. Except as herein otherwise provided, no subsequent alteration, amendment, change or addition to this Lease shall be binding upon Landlord or Tenant unless in writing, signed by them and approved by Landlord's mortgagee. Section 24.4. No Partnership. Landlord does not, in any way or for any purpose, become a partner, employer, principal, master, agent or joint venturer of or with Tenant. 22 25 Section 24.5. Force Majeure. If either party hereto shall be delayed or hindered in or prevented from the performance of any act required hereunder by reason of strikes, lockouts, labor troubles, inability to procure material, failure of power, restrictive governmental laws or regulations, riots, insurrection, war or other reason of a like nature not the fault of the party delayed in performing work or doing acts required under this Lease, the period for the performance of any such act shall be extended for a period equivalent to the period of such delay. Notwithstanding the foregoing, the provisions of this Section 24.5 shall at no time after the Commencement Date (as the same may be extended pursuant to Section 3.3 above) operate to excuse Tenant from any obligations for payment of Minimum Annual Rent, Percentage Rent, additional rent or any other payments required by the terms of this Lease when the same are due, and all such amounts shall be paid when due. Section 24.6. Submission of Lease. Submission of this Lease to Tenant does not constitute an offer to lease; this Lease shall become effective only upon execution and delivery thereof by Landlord and Tenant. Upon execution of this Lease by Tenant, Landlord is granted an irrevocable option for fifteen (15) days to execute this Lease within said period and thereafter return a fully executed copy to Tenant. The effective date of this Lease shall be the date filled in on Page 1 hereof by Landlord, which shall be the date of execution by the last of the parties to execute the Lease. Section 24.7. Notices. All notices from Tenant to Landlord required or permitted by any provision of this agreement shall be directed to Landlord as follows: MALL OF AMERICA COMPANY c/o M.S. Management Associates Inc. National City Center 115 W. Washington Street Indianapolis, Indiana 46204 Prior to the Commencement Date such notices shall only be effective if given to Landlord at the address shown above and to Landlord at the address shown below: MALL OF AMERICA COMPANY c/o M.S. Management Associates Inc. Construction Department National City Center 115 W. Washington Street Indianapolis, Indiana 46204 All notices from Landlord to Tenant required or permitted hereunder shall be directed as follows, namely: Hotel Discovery, Inc. 8260 North Creek Drive Suite 140 Cincinnati, Ohio 45236 All notices to be given hereunder by either party shall be written and sent by registered or certified mail, return receipt requested, postage pre-paid or by an express mail delivery service, addressed to the party intended to be notified at the address set forth above. Either party may, at any time, or from time to time, notify the other in writing of a substitute address for that above set forth, and thereafter notices shall be directed to such substitute address. Notice given as aforesaid shall be sufficient service thereof and shall be deemed given as of the date received, as evidenced by the return receipt of the registered or certified mail or the express mail delivery receipt, as the case may be. A duplicate copy of all notices from Tenant shall be sent to any mortgagee as provided for in Section 19.2. Section 24.8. Captions and Section Numbers. This Lease shall be construed without reference to titles of Articles and Sections, which are inserted only for convenience of reference. Section 24.9. Number and Gender. The use herein of a singular term shall include the plural and use of the masculine, feminine or neuter genders shall include all others. Section 24.10. Objection to Statements. Notwithstanding the provisions of Section 24.1, Tenant's failure to object to any statement, invoice or billing rendered by Landlord within a period of thirty (30) days after receipt thereof shall constitute Tenant's acquiescence with respect thereto and shall render such statement, invoice or billing an account stated between Landlord and Tenant. Section 24.11. Representation by Corporate Tenant. If Tenant is or will be a corporation, the persons executing this Lease on behalf of Tenant hereby covenant and warrant that Tenant is a duly qualified corporation authorized to do business in the State of Minnesota, that all franchise and corporate taxes have been paid to date and all future forms, reports, fees and other documents necessary to comply with 23 26 applicable laws will be filed when due, and the person signing this Lease on behalf of the corporation is an officer of Tenant and is duly authorized to sign and execute this Lease. Section 24.12. Joint and Several Liability. If Tenant is a partnership or other business organization the members of which are subject to personal liability, the liability of each such member shall be deemed to be joint and several. Section 24.13. Limitation of Liability. Anything to the contrary herein contained, notwithstanding there shall be absolutely no personal liability on persons, firms or entities who constitute Landlord with respect to any of the terms, covenants, conditions and provisions of this Lease, and Tenant shall, subject to the rights of any first mortgagee, look solely to the interest of Landlord, its successors and assigns, in Landlord's Tract for the satisfaction of each and every remedy of Tenant in the event of default by Landlord hereunder; such exculpation of personal liability is absolute and without any exception whatsoever. Section 24.14. Broker's Commission. Each party represents and warrants that it has caused or incurred no claims for brokerage commissions or finder's fees in connection with the execution of this Lease, and each party shall indemnify and hold the other harmless against and from all liabilities arising from any such claims caused or incurred by it (including without limitation, the cost of attorneys' fees in connection therewith). Section 24.15. Partial Invalidity. If any provision of this Lease or the application thereof to any person or circumstance shall to any extent be invalid or unenforceable, the remainder of this Lease, or the application of such provision to persons or circumstances other than those as to which it is invalid or unenforceable, shall not be affected thereby and each provision of this Lease shall be valid and enforceable to the fullest extent permitted by law. Section 24.16. Recording. The parties agree not to place this Lease of record but each party shall, at the request of the other, execute and acknowledge so that the same may be recorded a Short Form Lease or Memorandum of Lease, indicating the Lease Term, but omitting rent and other terms and an Agreement specifying the date of commencement and termination of the Lease Term; provided, however, that the failure to record said Short Form Lease, Memorandum of Lease or Agreement shall not affect or impair the validity and effectiveness of this Lease. Tenant shall pay all costs, taxes, fees and other expenses in connection with or prerequisite to recording. Section 24.17. Applicable Law. This Lease shall be construed under the laws of the State of Minnesota. Section 24.18. Mortgagee's Approval. INTENTIONALLY DELETED. Section 24.19. Reservation of Air Rights. There has been no representation or warranty by the Landlord and Tenant acknowledges that there is no inducement or reliance to lease the Premises on the basis that the existing access to light, air and views from the Premises would continue unabated. Tenant acknowledges and understands that it shall have no rights to the airspace above the Retail Space and those rights shall be the sole property of Landlord. Section 24.20. Landlord's Contribution Toward Tenant's Work. When Tenant has completed all of Tenant's Work in substantial accordance with Exhibit "C" and "C-2" and furnishes evidence satisfactory to Landlord of such completion including the total cost thereof as certified by Tenant in a form reasonably acceptable to Landlord, and that all of Tenant's Work has been paid for in full and no liens have attached or may attach as the result thereof, and no default in, breach of, or failure to perform this Lease exists and Tenant has paid or reimbursed Landlord all amounts owed to Landlord pursuant to Sections 3.3 and 4.1 hereof or otherwise and has opened its operation for business. Landlord shall pay to Tenant as Landlord's contribution toward Tenant's Work the sum of $100.00 per square foot of Store Floor Area, determined as provided for in Section 2.1 hereof and no more. Provided Tenant fulfills the requirements of this Section 24.20 by the 10th day of a calendar month, Landlord shall pay Tenant's contribution by the fifteenth (15th) day of the following calendar month. Section 24.21. Unrelated Business Taxable Income. A. If at any time and from time to time during the term of this Lease Landlord is advised by its counsel or counsel to an exempt partner of Landlord or of the managing partner of Landlord (an "Exempt Partner") that any provision of this Lease, including without limitation the provisions relating to the payment of rent and additional rent, or the absence of any provision might give rise to unrelated business taxable income within the meaning of section 512 of the Internal Revenue Code of 1986, as amended, or the regulations issued thereunder, or may jeopardize the ability of an Exempt Partner to obtain or retain its tax-exempt status, then this Lease may be unilaterally amended by Landlord in such manner as shall meet the requirements specified by such counsel, and Tenant agrees that it will execute all documents or instruments necessary to effect such amendment or amendments, provided that no such amendment shall result on an estimated basis in Tenant having to pay 24 27 in the aggregate more money on account of its occupancy of the Premises than it would be required to pay under the terms of this Lease, or having to receive fewer services or services of a lesser quality than it is presently entitled to receive under this Lease. B. Any services which Landlord is required to furnish pursuant to the provisions of this Lease may, at Landlord's option, be furnished from time to time, in whole or in part, by employees of Landlord or the managing agent of the Project or its employees or by one or more third persons hired by Landlord or the managing agent of the Project. Tenant agrees that upon Landlord's written request it will enter into direct agreements with the managing agent of the Project or other parties designated by Landlord for the furnishing of any such services required to be furnished by Landlord hereunder, in form and content approved by Landlord, provided however that no such contract shall result on an estimated basis in Tenant having to pay in the aggregate more money on account of its occupancy of the Premises under the terms of this Lease, or having to receive fewer services or services of a lesser quality than it is presently entitled to receive under this Lease. IN WITNESS WHEREOF, Landlord and Tenant have signed and sealed this Lease as of the day and year first above written. (LANDLORD) MALL OF AMERICA COMPANY, a Minnesota General Partnership By: MOAC LIMITED PARTNERSHIP, a Minnesota Limited Partnership, its General Partner By: MALL OF AMERICA ASSOCIATES, a Minnesota General Partnership, its General Partner By: SI-MINN DEVELOPERS LIMITED PARTNERSHIP, an Indiana Limited Partnership, its General Partner By: SI-MINN, INC., an Indiana Corporation, its General Partner By: /s/ Herbert Simon --------------------------------- Herbert Simon, President (TENANT) If Corporation HOTEL MEXICO, INC., d/b/a/ Hotel Discovery By: [SIG] --------------------------------------- Attest: [SIG] ----------------------------------- 25 28 LEGAL DESCRIPTION MALL OF AMERICA Lots 1 through 5, Block 1, Mall of America - 3rd Addition according to the plat thereof on file as of record as Document No. 2211073 in the office of the Registrar of Titles for Hennepin County, Minnesota. That part of Lot 1, Block 1, Mall of America 4th Addition except that part embraced within that part of the Northwest Quarter of the Southeast Quarter of Section 1, Township 27, Range 24 described as follows: Beginning at the Northeast corner of said Northwest Quarter of the Southeast Quarter of said Section 1, thence West along the North line of said Northwest Quarter, 660 feet; thence South 330 feet, thence East and parallel with the North line of said Northwest Quarter of Southeast Quarter 660 feet to the East line of Northwest Quarter of Southeast Quarter of said Section 1, thence North to the point of beginning, according to the plat thereof on file or of record in the office of the Registrar of Titles in and for said County. That part of Lot 1, Block 1, Mall of America 4th Addition embraced within that part of the Northwest Quarter of the Southeast Quarter of Section 1, Township 27, Range 24 described as follows: Beginning at the Northeast corner of said Northwest Quarter of the Southeast Quarter of said Section 1, thence West along the North line of said Northwest Quarter, 660 feet; thence South 330 feet, thence East and parallel with the North line of said Northwest Quarter of Southeast Quarter 660 feet to the East line of Northwest Quarter of Southeast Quarter of said Section 1, thence North to the point of beginning, according to the plat thereof on file or of record in the office of the Registrar of Titles in and for said County. EXHIBIT "A" Page 1 29 [MAP OF MALL] EXHIBIT "B" Level 3 30 DESCRIPTION OF TENANT'S WORK TENANT'S WORK - The following work required to complete and place the premises in finished condition ready to open for business is to be performed by the Tenant at the Tenant's own expense and shall be in addition to any work described in the Tenant Handbook and Tenant Contractor's Handbook. In the event there is any conflict between the provisions of this Exhibit "C" and the Tenant Handbook or the Tenant Contractor's Handbook, the provisions of the Tenant Handbook and Tenant Contractor's Handbook shall control. Tenant's Work includes, but is not limited to, the following: A. GENERAL PROVISIONS All work done by Tenant shall be governed in all respects by, and be subject to, the following: 1. Landlord shall have the right to require Tenant to furnish payment and performance bonds or other security in form satisfactory to Landlord for the prompt and faithful performance of Tenant's Work, assuring completion of Tenant's Work and conditioned that Landlord will be held harmless from payment of any claim either by way of damages or liens on account of bills for labor or material in connection with Tenant's Work. Tenant's Work shall at all times be conducted consistent with the Project Labor Agreement for the Center and in such manner so that Tenant shall not be in violation of Section 18.1 of the Lease. 2. It is understood and agreed between Landlord and Tenant that costs incurred by Landlord, if any, as a result of Tenant's failure or delay in providing the information as required in this Exhibit and in the Lease to which this Exhibit is attached, shall be the sole responsibility of Tenant and he will pay such costs, if any, promptly upon Landlord's demand. 3. All Tenant's Work shall conform to applicable statutes, ordinances, regulations and codes and the requirements of Factory Mutual and all rating bureaus and the Tenant Handbook which contains the basic architectural, electrical and mechanical information necessary for the preparation of Tenant's Plans, and which by this reference is incorporated into and made a part of this Lease. Tenant shall obtain and convey to Landlord all approvals with respect to electrical, water, sewer, heating, cooling and telephone work, all as may be required by any agency or utility company. 4. No approval by Landlord shall be deemed valid unless in writing and signed by Landlord. 5. Prior to commencement of Tenant's Work and until completion thereof, or commencement of the Lease Term, whichever is the last to occur, Tenant shall effect and maintain Builder's Risk Insurance covering Landlord, Tenant, Tenant's contractors and Tenant's subcontractors, as their interest may appear, against loss or damage by fire, vandalism and malicious mischief and such other risks as are customarily covered by a standard "All Risk" policy of insurance protecting against all risk of physical loss or damage to all Tenant's Work in place and all materials stored at the site of Tenant's Work, and all materials, equipment, supplies and temporary structures of all kinds incidental to Tenant's Work, and equipment, all while forming a part of or contained in such improvements or temporary structures, or while on the premises or within the Total Tract, all to the actual replacement cost thereof at all times on a completed value basis. In addition, Tenant agrees to indemnify and hold Landlord harmless against any and all claims for injury to persons or damage to property by reason of the use of the premises for the performance of Tenant's Work, and claims, fines, and penalties arising out of any failure of Tenant or its agents, contractors and employees to comply with any law, ordinance, code requirement, regulations or other requirement applicable to Tenant's Work and Tenant agrees to require all contractors and subcontractors engaged in the performance of Tenant's Work to effect and maintain and deliver to Tenant and Landlord, certificates evidencing the existence of, and covering Landlord, City of Bloomington, Minnesota, Port Authority of the City of Bloomington, Simon DeBartolo Group, Inc., M.S. Management Associates, Inc., Tenant and Tenant's contractors, prior to commencement of Tenant's Work and until completion thereof, the following insurance coverages: a. Workmen's Compensation and Occupational Disease Insurance in accordance with the laws of the State in which the property is located, including Employer's insurance to the limit of $100,000. b. Comprehensive or Commercial General Liability insurance affording limits of not less than $5,000,000 per occurrence for bodily injury, personal injury and death, and for not less than $1,000,000 per occurrence for property damage, or not less than $5,000,000 per occurrence. Combined Single Limit. Such insurance shall include protection arising from contractual liability, completed operations, independent contractors, as well as for the hazards of underground, collapse and explosion. c. Comprehensive Automobile Insurance, including "non-owned" automobiles, against bodily injury, including death resulting therefrom, in the limits of $1,000,000 for any one occurrence and $250,000 property damage or a combined single limit of $1,000,000. d. Owners and contractors protective liability coverage for an amount not less than $5,000,000. EXHIBIT "C" Page 1 31 6. Tenant agrees that the contract of every contractor, subcontractor, mechanic, journeyman, laborer, material supplier or other person or entity performing labor upon, or furnishing materials or equipment to, the Premises in connection with Tenant's Work shall contain the following provision: "Contractor acknowledges that this provision is required under Tenant's lease of the premises to be improved under this Contract (Lease Premises) from Mall of America Company (Lease). In consideration of Tenant's engagement of Contractor to perform the work hereunder, and as an inducement to Tenant to enter into this Contract with Contractor, Contractor acknowledges, covenants and agrees that any mechanic's lien which it may hereafter file, claim, hold or assert with respect to the work hereunder (i) shall attach only to Tenant's interest in the Lease Premises under the Lease and (ii) shall be subject, subordinate and inferior to the lien of any mortgage(s) now or hereafter held upon and against the Mall of America by any lender(s) now or hereafter providing funds for the financing for the Mall of America, notwithstanding that any such mortgage(s) may be recorded after the commencement of the work hereunder and that Contractor's mechanic's lien otherwise might be entitled to priority over any such mortgage(s). For such purposes, Contractor also shall execute, acknowledge and deliver a separate subordination agreement upon request by Tenant, Mall of America Company, or any such lender(s), prior to making any application or request for payment hereunder and as a condition precedent to Contractor's right to receive any payment hereunder. Contractor likewise shall cause the liens and lien rights of all subcontractors, sub-subcontractors, materialmen, suppliers, laborers and all other persons furnishing work, labor, materials, equipment and services on or in connection with the Lease Premises to be limited to the Tenant's interest in the Lease Premises under the Lease and to be subordinated to such mortgage(s), and Contractor shall obtain and deliver to Tenant a similar subordination agreement duly executed and acknowledged by each such subcontractor, sub-subcontractor, materialman, supplier, laborer and other person prior to making any application or request for payment hereunder and as a condition precedent to Contractor's right to receive any payment hereunder. Contractor shall indemnify, defend and hold harmless Tenant, Mall of America Company, and such lender(s) from and against any and all loss, costs, damage, expense (including, without limitation, reasonable attorney fees), liability, suits, actions and judgments arising or resulting from Contractor's failure to cause all such mechanic's and materialmen's liens to be limited to Tenant's interest in the Lease Premises under the Lease and to be subordinated to said mortgage(s) as herein provided, in addition to all other indemnities contained herein with respect to such liens." Tenant shall indemnify, defend and hold harmless Landlord and such lender(s) from and against any and all loss, costs, damage, expense (including, without limitation, reasonable attorney fees), liability, suits, action and judgments arising or resulting from Tenant's failure to cause all such mechanic's and materialmen's liens to be limited to Tenant's interest in the Premises under this Lease and to be subordinated to said mortgage(s) as herein provided, in addition to all other indemnities contained herein with respect to such liens. B. FLOOR SLAB No penetrations shall be allowed for electrical outlets in floor slabs. All tenants with restroom facilities or food preparation areas shall install a floor slab waterproofing membrane in the Premises. All floor penetrations must be sleeved and waterproofed. C. SECURITY SCREEN OR MALL FRONTAGE 1. Mall frontages shall be designed and constructed in accordance with the requirements outlined in the Tenant Handbook. Security for "open fronts" shall be by means of anodized aluminum roll up grilles or anodized aluminum sliding and/or sliding glass doors. No mall frontage shall be constructed without the written approval of Landlord. 2. All materials employed in the construction of mall frontage shall be as approved by Landlord and as defined by applicable building codes. 3. Mall Frontage Colors - It is the desire of the Landlord to give Tenant the greatest practicable freedom in the choice of mall frontage colors; but: a. Colors must harmonize with the color scheme of the Center itself. b. Colors must harmonize with the color scheme of the surrounding stores. To assist Tenant, a general color range will be developed, with a sufficiently large selection to permit a reasonable latitude for individual expression. EXHIBIT "C" Page 2 32 4. All swinging entrance doors must be recessed in such a manner that the door, when open, will not project beyond the lease line. 5. Tenants with exterior glazing must install show window or display. D. CEILING 1. All ceilings and coves shall not exceed 12'0" above the finished floor, unless otherwise approved by Landlord on Tenant's Plans. 2. Tenant's ceilings shall be suspended by adequate suspension systems to conform to final requirements of governing authorities and Landlord. 3. The space above the ceiling line, which is not occupied or allotted to Landlord's Work (structural members, duct work, piping, etc.) may be used for the installation of suspended ceiling, recessed lighting fixtures and duct work. Under no circumstances will Tenant's Work be hung or suspended from non-structural construction. Any Tenant Work involving the hanging or suspension of construction shall be accomplished only by methods, in locations and by use of assemblies approved by Landlord. 4. Tenant shall provide ceiling access panels in the ceiling of the Premises as required by Landlord to service Landlord equipment. E. WALLS. All interior walls and curtain walls within the premises, including all interior lath and plastering and gypsum board thereon, and including lath and plastering, and/or dry wall on Landlord's exposed masonry or stud party wall partitions. Dividing wall between premises shall meet Code requirements and be continuous from floor to the underside of the roof or floor deck. Tenant shall provide and install bracing and/or studs and/or blocking as necessary to support wall mounted fixtures. Cracks, joints and openings in walls to be filled with appropriate fire resistant materials. Return air openings shall be provided in the dividing walls between premises as required for proper air movement. Tenant shall install insulation on the exterior walls of the Premises. F. DOORS. Doors and vestibules to Service Courts and Corridors - where required, a vestibule and a door 3'0" in width, with hardware, shall be provided and installed by Tenant at Tenant's expense, between the Premises and the service courts or between the Premises and a public corridor or mall leading to the service courts. G. INTERIOR PAINTING All interior painting and decoration. H. FLOOR COVERINGS All floor coverings and floor finishes including recesses for special floor finishes. It is Tenant's responsibility to join neatly to the mall finish. Floor Tile and Base - Tenant will install floor tile and base in accordance with the materials and applications specified in the Tenant Handbook along the storefront of the Premises, the width of which shall be determined by Landlord. I. SHOW WINDOW BACKGROUNDS All show window backgrounds, show windows, show window floors and ceilings, and show window lighting installations. All show windows shall be adequately ventilated. J. FURNITURE, FIXTURES AND SIGNS All furnishings, trade fixtures, signs, and related parts, including installation. Location and design of all signs subject to prior written consent of Landlord. K. PLUMBING All plumbing and plumbing fixtures as required by applicable codes except utility service to the area, including a properly sized water meter if the same is required by Landlord, in which latter event Tenant shall make any required utility deposits. L. HOT WATER HEATER EXHIBIT "C" Page 3 33 Domestic electric hot water heater, where required, including final connections. M. TOILET ROOM FIXTURES Furnishing and installation of wiring, lighting fixtures, mechanical toilet exhaust systems, towel cabinets, soap dishes, hand driers, deodorizers, mirrors and other similar items in toilet rooms within the premises or as additionally required by code. N. HEATING, VENTILATING AND AIR CONDITIONING 1. Complete HVAC Systems shall be designed, furnished and installed within the premises by the Tenant. The HVAC systems, calculations, designs and installations shall be as recommended in ASHRAE Publications and the Landlord's Tenant Finish Mechanical Criteria. Tenant's systems and ventilation shall meet all codes and ASHRAE standards. Tenant shall furnish Landlord with complete load calculations including information as to Tenant's lighting load in watts and Tenant's estimated store population (employees and customers). 2. Tenant's cooling system shall be adequate for cooling the premises to 75 degrees Fahrenheit DB and 50% RH based on the latest ASHRAE guide outdoor design dry bulb and design wet bulb temperatures for the area as tabulated in the 2-1/2% columns, with a rise of not more than 3 degrees Fahrenheit DB during peak periods. 3. Tenant's heating method shall be adequate for heating the premises to 55 degrees Fahrenheit DB during times other than regular business hours based on the latest ASHRAE guide outdoor design temperature for the area as tabulated in the 99% column. The Tenant's heating method shall be independent of the central cooling system. The Tenant's lighting system shall be used to heat the sales area during regular business hours in the heating season. The Tenant's lighting system may be used to maintain the required sales area minimum temperature level during other then regular business hours in the heating season. 4. Tenant's exhaust systems shall provide the required exhaust air capacities and shall be independent of the central cooling system. The Tenant's exhaust systems shall be inoperative during other than regular business hours. Replacement air for the Tenant's exhaust will be provided through the Tenant's air supply system up to the design air supply quantity. Any additional replacement air required will be drawn from the mall. Independent air make-up air systems shall not be installed by the Tenant. 5. Tenant's HVAC systems shall be complete with air distribution systems, ventilating systems, control systems, insulation and all other components required to make a complete system. Tenant's systems shall be specifically designed to coordinate with variable air volume cooling temperature control. Tenant's HVAC system components shall be installed in locations as designated by the Landlord. 6. Tenant shall provide and install fire dampers, in accordance with all codes, in the right hand side (as viewed when facing the rear of the Premises) demising partition of its Premises if its Premises adjoin another tenant space. Tenant shall also provide and install fire dampers where the Tenant's ductwork passes through service corridor walls or other fire separations. Tenant's installation shall include complete access and access panels to all valves, dampers and similar service devices (including the Landlord's) required for testing, balancing and servicing. Tenant shall utilize only fire damper products as specified by the Tenant Handbook. 7. Tenant shall connect to Landlord's central cooling system and shall use Landlord's Design Criteria in designing systems and controls. Alterations to the Landlord's central system required due to Tenant's design shall be done by Landlord at Tenant's sole expense. 8. If directed to do so by Landlord, Tenant shall paint and/or screen from ground level view by parapet walls or other appropriate screening, all of Tenant's outdoor equipment. Any such painting or screening must be done at Tenant's sole expense and approved in advance by Landlord. O. MECHANICAL EQUIPMENT All mechanical equipment including dumb-waiters, elevators, escalators, freight elevators, conveyors, and their shafts and doors, located within the premises, including electrical work for these items. Locations, size and design of roof vents, HVAC equipment, units, hoods and caps shall be approved by Landlord. Landlord reserves the right of disapproval of any equipment to be placed on the roof. Tenant shall install equipment at locations where structural reinforcements are provided. All changes in structural design caused by Tenant's equipment shall be made by Landlord and paid for by Tenant. Any roof cuts or openings required to be made pursuant to Tenant's Plans shall be performed by a contractor designated by Landlord at Tenant's expense. In addition, all cant strips, base furnishings and other work necessary to complete permanent weather proofing of Landlord's roof as a result of roof cuts or openings required by Tenant shall be performed by a contractor designated by Landlord at Tenant's expense. EXHIBIT "C" Page 4 34 P. ELECTRICAL 1. All interior distribution panels, lighting panels, power panels, conduits, outlet boxes, switches, outlets and wires within the premises. Tenant shall provide electric conduit and boxes in the ceiling and walls, including all electrical service panels, pull boxes and equipment. 2. All electrical fixtures, including lighting fixtures and equipment, and installation thereof. Lighting systems (except security and emergency lighting) must be controlled by lighting contactors. The lighting contactors will be inter-locked with the Landlord's Energy Management System for automatic control during other than regular business hours. 3. All systems, where required for intercommunication, music antenna, material handling or conveyor, burglar alarm, vault wiring, fire protection alarm, time clock and demand control. 4. All conduit for necessary telephone wires in the premises. 5. Feeder conductors from Landlord's facilities to the Premises, including the connections to Tenant's equipment. 6. Final connection to the Landlord's switch gear shall be done by a contractor designated by Landlord at Tenant's expense. Tenant's contractor will be responsible for the feeder conductors and connections to tenant's equipment and for supplying proper fuses to Landlord's designated contractor at the time of final connection. Q. TEMPORARY SERVICES Any temporary services required by Tenant during its construction period, including heat, water or electrical service shall be secured by the Tenant, at Tenant's sole cost and expense. R. SUBSEQUENT REPAIRS AND ALTERATIONS Landlord reserves the right to require changes in Tenant's Work when necessary by reason of code requirements. S. SIGNS In order to assure orderly and aesthetically coordinated signing, plans for all Tenant's signs must conform to Exhibit "E" hereto attached and the applicable Mall criteria and before installation must be approved by Landlord. No permission is granted, expressed or implied to permit Tenant to erect an exterior sign of any type. T. DOORS AND EXITING REQUIREMENTS 1. Tenant will be responsible for adherence to exiting codes. 2. Tenant will maintain a clear exiting path through the stockroom to Tenant's rear door for those premises that contain a rear door. U. CONSTRUCTION ACTIVITIES 1. During premises interior construction Tenant shall use rear opening to premises for moving in/out of materials, for those premises that contain a rear door. 2. If any roof cuts or penetrations are required by Tenant, all curbs, supports, blocking, temporary flashing, counterflashing or other work necessary for installation shall be provided and installed by Tenant at its expense. Tenant shall promptly notify Landlord in advance, of the need for such cuts or penetrations and shall utilize Landlord's designated roofing contractor for this work. Tenant's contractor shall be responsible for contracting with Landlord's roofing contractor to perform this work. 3. 4. Landlord shall be responsible for the installation of the temporary store front or barricade shielding the interior of the Premises from the Mall, at Tenant's expense. 5. Tenant acknowledges that its construction activities in the Premises and the Center are subject to a certain Project Labor Agreement for Construction of the Mall of America executed on or about the 19th day of November, 1985, by and among Triple Five Corporation, P.C.L. Construction Services, Inc., and The Minneapolis Building and Construction Trades Council. Such Project Labor Agreement is fully incorporated herein by reference. As a material consideration of Landlord entering into and executing this Lease with Tenant, Tenant agrees to abide by the terms, conditions and provisions of EXHIBIT "C" Page 5 35 the Project Labor Agreement as such Project Labor Agreement effects Tenant's construction activities in the Premises and the Center. Tenant's failure to abide by the same may be deemed a default of this Lease if such failure results, either directly or indirectly, in a work stoppage or interference or the threat of the same in the construction activities in the Center or any other tenant's space. Landlord or Landlord's authorized representative may take such action as Landlord or its authorized representative deems necessary in order to immediately enforce the terms of the Project Labor Agreement and in order to prevent, avoid or terminate any interference or work stoppage (or the threat thereof) in connection with the construction of any part of the Center or any other tenant's space. Such action may include, but shall not be limited to, the issuance of a cease and desist directive to Tenant. Tenant shall reimburse Landlord or any other tenant in the Center for any losses, fees, expenses or damages suffered or incurred by Landlord or such other tenant in the Center as a result of Tenant's failure to comply with the Project Labor Agreement. EXHIBIT "C" Page 6 36 RULES AND REGULATIONS 1. Tenant shall advise and cause its vendors to deliver all merchandise before noon on Mondays through Fridays, not at other times. 2. All deliveries are to be made to designated service or receiving areas and Tenant shall request delivery trucks to approach their service or receiving areas by designated service routes and drives. 3. Tractor trailers which must be unhooked or parked must use steel plates under dolly wheels to prevent damage to the asphalt paving surface. In addition, wheel blocking must be available for use. Tractor trailers are to be removed from the loading areas after unloading. No parking or storing of such trailers will be permitted in the Center. 4. Except for small parcel packages, no deliveries will be permitted through the malls unless Tenant does not have a rear service door. In such event, prior arrangements must be made with the Resident Mall Supervisor for delivery. Merchandise being received shall immediately be moved into Tenant's Premises and not be left in the service or receiving areas. 5. Tenant is responsible for storage and removal of its trash, refuse and garbage. Tenant shall not dispose of the following items in drains, sinks or commodes: plastic products (plastic bags, straws, boxes); sanitary napkins; tea bags; cooking fats, cooking oils; any meat scraps or cutting residue; petroleum products (gasoline, naptha, kerosene, lubricating oils); paint products (thinner, brushes); or any other item which the same are not designed to receive. All Store Floor Area of Tenant, including vestibules, entrances and returns, doors, fixtures, windows and plate glass, shall be maintained in a safe, neat and clean condition. 6. Other than as permitted under the provisions of Section 10.4 or Exhibit "E," Tenant shall not permit or suffer any advertising medium to be placed on mall walls, on Tenant's mall or exterior windows, on standards in the mall, on the sidewalks or on the parking lot areas or light poles. No permission, expressed or implied, is granted to exhibit or display any banner, pennant, sign, and trade or seasonal decoration of any size, style or material within the Center, outside the Premises. 7. Tenant shall not permit or suffer the use of any advertising medium which can be heard or experienced outside of the Premises, including, without limiting the generality of the foregoing, flashing lights, searchlights, loud speakers, phonographs, radios or television. No radio, television, or other communication antenna equipment or device is to be mounted, attached, or secured to any part of the roof, exterior surface, or anywhere outside the Premises, unless Landlord has previously given its written consent. 8. Tenant shall not permit or suffer merchandise of any kind at any time to be placed, exhibited or displayed outside its Premises, nor shall Tenant use the exterior sidewalks or exterior walkways of its Premises to display, store or place any merchandise. No sale of merchandise by tent sale, truck load sale or the like, shall be permitted on the parking lot or other common areas. 9. Tenant shall not permit or suffer any portion of the Premises to be used for lodging purposes, nor conduct or permit any unusual firing, explosion or other damaging or dangerous hazard within the Premises or the Common Area. 10. Tenants shall not permit or suffer any portion of the Premises to be used for any warehouse operation, or any assembling, manufacturing, distilling, refining, smelting, industrial, agricultural, drilling or mining operation, adult bookstore or cinema, peepshow, entertainment or sale of products of an obscene or pornographic nature or predominately sexual nature. 11. Tenant shall not, in or on any part of the Common Area: (a) Vend, peddle or solicit orders for sale or distribution of any merchandise, device, service, periodical, book, pamphlet or other matter whatsoever. (b) Exhibit any sign, placard, banner, notice or other written material, except for activities as approved in writing by Landlord. (c) Distribute any circular, booklet, handbill, placard or other material, except for activities as approved in writing by Landlord. (d) Solicit membership in any organization, group or association or contribution for any purpose. (e) Create a nuisance. (f) Use any Common Areas (including the Enclosed Mall) for any purpose when none of the other retail establishments within the Center is open for business or employment, except for activities as approved in writing by Landlord. (g) Throw, discard or deposit any paper, glass or extraneous matter of any kind except in designated receptacles, or create litter or hazards of any kind. EXHIBIT "D" Page 1 37 (h) Deface, damage or demolish any sign, light standard or fixture, landscaping materials or other improvement within the Center, or the property of customers, business invitees or employees situated within the Center. EXHIBIT "D" Page 2 38 SIGN CRITERIA Tenant will not erect any signs except in conformity with the following policy: (a) Wording on storefront signs shall be limited to store or trade name only. Each party's customary signature or logo, hallmark, insignia, or other trade identification will be respected. (b) Signs of the flashing, blinking, rotating, moving, or animated types or audible type signs are not permitted except for portions of East Broadway. (c) The size of all Tenant's signs shall be limited. The scale and concept of the enclosed mall requires the use of signs which are not larger than necessary to be legible from within the mall. Thus, except for department store signs, Tenant's signs shall be located within the limits of its storefront and shall not project more than 6 inches beyond the storefront and shall conform to the following proportionate height criteria: (1) 30' storefront: 18" capitals 12" body (2) 30' to 60' storefront: 24" capital 18" body (3) 60' and over storefront: 30" capital 24" body In addition to complying with the above criteria, signs in the enclosed malls shall be limited in length to 70% of Tenant's frontage on the mall, and shall in no case exceed a length of 30 feet. (d) Secondary blade signs may be installed at right angles to the mall storefront(s) provided they are adjacent to the Tenant's premises and otherwise conform to the provisions of the Tenant Handbook Criteria. (e) Signs on the building's exterior are strictly prohibited. (f) Public safety decals or artwork on glass in minimum sizes to comply with applicable Code, subject to the approval of Landlord, may be used, as required by building codes or other governmental regulations. (g) Paper signs, stickers, banners or flags are prohibited. (h) No exposed raceways, ballast boxes or electrical transformers will be permitted except as required by Code. (i) Sign company names or stamps shall be concealed (Code permitting). (j) Except as otherwise approved in writing by Landlord and by a Major Tenant with respect to stores within one hundred fifty feet (150') of the entrance of such Major Tenant's Building, only one (1) primary sign and one (1) secondary blade sign for a Tenant's location will be permitted within the Enclosed Mall areas; provided, however, that if a Tenant has (a) more than sixty feet (60') of storefront and (b) more than one (1) entrance, such Tenant will be permitted one (1) primary sign and one (1) secondary blade sign for each of its entrances. Corner Tenants may have one (1) primary sign and one (1) secondary blade sign on each side of the corner Tenant's location fronting the Mall. (k) Signs and identifying marks shall be placed entirely within the boundaries of Tenant's Premises except blade signs as specified in paragraph (d) above with no part higher than 13 feet above the finished floor line, or lower than 8 feet to the finished floor line. (l) Sign letters may be back-lighted with lamps or tubes entirely concealed within the depth of the letter or may be opaque or translucent plastic face with no visible openings. Maximum brightness allowed for interior (enclosed mall) signs will be 100 foot lamberts taken at the letter face and must comply with all building and electrical codes. (m) Exposed sign illumination or illuminated sign cabinets or modules are not permitted. (n) Tenant shall not install any roof top signs. (o) Tenant shall not install any pylon signs. (p) All signs shall be subject to the Landlord's written approval before fabrication. (q) Three (3) complete sets of sign drawings must be submitted to the Landlord for written approval before fabrication. Tenant's sign drawings must include the following: 1. Elevation view of storefront showing sign (drawn to accurate scale) with dimensions of height of letters and length of sign. 2. Color sample of sign panel. 3. Color sample of sign letters. EXHIBIT "E" Page 1 39 4. Cross section view through sign letter and sign panel showing location of sign relative to the storefront line and showing the dimensioned projection of the face of the letter from the storefront face. The Landlord shall not be responsible for the cost of refabrication of signs fabricated, ordered or constructed, that do not conform to the Tenant Handbook Signage Criteria. EXHIBIT "E" Page 2 EX-10.3 9 LOAN AGREEMENT 1 EXHIBIT 10.3 LOAN AGREEMENT KENWOOD RESTAURANT LIMITED PARTNERSHIP, an Ohio limited partnership ("Borrower"), and PNC BANK, OHIO, NATIONAL ASSOCIATION, a national banking association ("Lender"), hereby agree as follows: 1. DEFINITIONS. The following terms as used herein will have the following meanings: 1.1 AGREEMENT. This Loan Agreement, including any amendments, extensions, renewals or modifications made thereto from time to time. 1.2 ATTORNEYS' FEES. The reasonable value of the services (and all costs and expenses related thereto) of the attorneys (and all paralegals and other staff employed by such attorneys) employed by Lender from time to time to: (i) take any action in or with respect to any suit or proceedings (bankruptcy or otherwise) relating to the Collateral or this Agreement; (ii) protect, collect, lease or sell, any of the Collateral; (iii) attempt to enforce any lien on any of the Collateral or to give any advice with respect to such enforcement; (iv) enforce any of Lender's rights to collect any of the Obligations; and (v) give Lender advice with respect to this Agreement, including but not limited to with respect to any default or to prepare any amendments, restatements, or waivers to this Agreement or any of the documents executed in connection with any of the Obligations. 1.3 BUDGET. The detailed for the construction and development costs of the Project, including site improvements, buildings and other improvements, interest expense, professional fees, and all other costs incurred in connection with the Project, broken down into expense categories and showing a projected expenditure for each category. A copy of the Budget is attached hereto as Exhibit A. 1.4 CLOSING. The execution and delivery of the documents listed on the Closing Memo. 1.5 CLOSING DATE. The date on which this Agreement is executed. 1.6 CLOSING MEMO. The Closing Memorandum between Borrower and Lender in connection with the transactions represented by this Agreement. 1.7 COLLATERAL. Any property, real or personal, tangible or intangible, now or in the future securing the Obligations, including but not limited to the Collateral secured by the Security Documents. 1.8 COMPLETION DATE. For purposes of this Agreement, the completion date will be December 31, 1996, by which date Borrower will have complied with the requirements contained in the Section of this Agreement entitled Requirements Prior to Final Disbursement. 2 1.9 CURRENT FINANCIAL STATEMENTS. For purposes of making the representations and warranties contained in Section 5, the following financial statements of Borrower: (none for current year), and the following financial statements of Guarantor: (dated June 30, 1996). For purposes of any future date on which the representations and warranties contained in Section 5 are deemed to be remade, the most current financial statements, tax returns or other documents with respect to Borrower or any Guarantor (as applicable) delivered to Lender in accordance with Section 6. 1.10 DEFAULT RATE. The rate of interest otherwise payable under the Note plus 4% per annum, but not higher than the highest rate permitted under applicable law. 1.11 ENVIRONMENTAL REPORT. The environmental site assessment of the Property in Proper Form delivered to Lender in connection with the Closing. 1.12 EVENT OF DEFAULT. Any of the events listed in Section 8. 1.13 GUARANTOR(S), Stephen D. King, Kenwood Restaurant, Inc., and any other Person in the future guaranteeing all or any part of the Obligations, jointly and severally. 1.14 IN BALANCE. When the undistributed proceeds of the Loan equal or exceed the amount necessary, based upon Lender's estimate, in its sole discretion, of the cost of construction from time to time, to pay for all work, labor and materials for the completion of the construction of the Project in accordance with the Plans and Specifications, including the payment of all retainages, the installation of all fixtures, equipment and finishes, and also to pay amounts necessary for the estimated or actual costs of start-up expenses, interest and all other non-construction costs associated with the Project. 1.15 INDEBTEDNESS. Without duplication: (i) all obligations (including capitalized lease obligations) which in accordance with generally accepted accounting principles would be shown on a balance sheet as a liability; (ii) all obligations for borrowed money or for the deferred purchase price of property or services; and (iii) all guarantees, reimbursement, payment or similar obligations, absolute, contingent or otherwise, under acceptance, letter of credit or similar facilities. 1.16 INSPECTOR. The architect, engineer and/or inspector employed by Lender, whether or not a licensed professional, at the expense of Borrower to: (i) review for Lender the Plans and Specifications, (ii) to review for Lender work performed on and materials furnished in connection with the monthly construction draws for the Project and (iii) advise Lender from time to time regarding the Project. 1.17 LEASES. Will have the meaning given that term in the Mortgage. 1.18 LOAN. The Loan in the amount of $1,000,000 evidenced by the Note, to be used solely for the construction, development and operation of the Project. -2- 3 1.19 LOAN DOCUMENTS. The documents listed on the Closing Memo and all amendments thereto and restatements thereof. 1.20 MORTGAGE. The Open-End Mortgage, Assignment of Rents and Leases and Security Agreement (Leasehold Estate) dated August 23, 1996 from Borrower to Lender, and all amendments thereto and restatements thereof, encumbering the Project and securing payment of the Note. The Mortgage is filed in Book 7133, Page 1338, Registered Land Certificate Number 160105, of the Hamilton County, Ohio records, which shall be amended by a certain First Amendment to Open-End Mortgage, Assignment of Rents and Lease and Security Agreement, of even date herewith. 1.21 NOTE. Borrower's promissory note of even date herewith evidencing the Loan, and all extensions, amendments, modifications and restatements thereof. 1.22 OBLIGATIONS. All loans, advances, debts, liabilities, obligations, covenants and duties owing to Lender from Borrower of any kind or nature, present or future, whether or not evidenced by any note, guaranty or other instrument, whether arising under this Agreement or under any other agreement, instrument or document, whether or not for the payment of money, whether arising by reason of an extension of credit, opening of a letter of credit, loan, guaranty, indemnification or in any other manner, whether direct or indirect (including those acquired by assignment, participation, purchase, negotiation, discount or otherwise), absolute or contingent, joint or several, due or to become due, now existing or hereafter arising and whether contemplated by Borrower or Lender as of the execution of this Agreement. The term includes, without limitation, all obligations under this Agreement, the Loan, the Note and all charges, expenses, fees, Attorneys' Fees and any other sums chargeable to Borrower under this Agreement or any other agreement with Lender. 1.23 ORGANIZATIONAL DOCUMENTS. With respect to any Person that is a limited liability company, the articles or certificate of organization and the limited liability company agreement or operating agreement of such limited liability company; with respect to any Person that is a corporation, the articles or certificate of incorporation, and bylaws or regulations of such corporation; with respect to any Person that is a partnership, the partnership agreement establishing such partnership; with respect to any Person that is a joint venture, the joint venture agreement establishing such joint venture; and with respect to any Person that is a trust, the instrument establishing such trust; in each case including any and all modifications thereof as of the date of the Loan Document referring to such Organizational Document, and any and all future amendments thereto and restatements thereof which are consented to by Lender. 1.24 PERMITTED EXCEPTIONS. Those exceptions listed on the title insurance commitment for the Property delivered in connection with the Closing (and not deleted by the Title Insurance Company in connection with the Closing) and such other exceptions approved from time to time by Lender in writing. -3- 4 1.25 PERSON. An individual, partnership, joint venture, trust, unincorporated association, corporation, limited liability company or other entity, as applicable. 1.26 PLANS AND SPECIFICATIONS. The final plans and specifications for the Project, to be submitted to and approved by Lender. The Plans and Specifications, and all modifications thereto made in accordance with this Agreement, the Project when completed in accordance with the Plans and Specifications, and the contemplated use of the Property will be in full compliance in all material respects with all federal, state, and municipal laws, statutes, ordinances, regulations and restrictions affecting the Project, including those dealing with building, zoning, environmental impact, setbacks, safety, pollution control, the Americans with Disabilities Act, and flood area regulation. 1.27 PROJECT. The retail building to be constructed on the Real Estate in substantial accordance with the Plans and Specifications and all improvements in connection therewith, including but not limited to site improvements, utility services and parking areas. 1.28 PROPER FORM. Any document that is in form, substance, and, if applicable, executed by a Person, satisfactory to Lender. 1.29 PROPERTY. The Property as defined in the Mortgage. 1.30 REAL ESTATE. The Real Estate as defined in the Mortgage. 1.31 RESTAURANT LEASE. The Lease Agreement and Indenture of Lease, each dated November 9, 1994, as amended by a certain First Amendment to Lease dated May 3, 1995, and further amended by a certain Second Amendment to Lease, by and between Philip E. Stevens, Trustee, and Borrower, as now Lessor and Lessee respectively, together with all amendments thereto hereafter expressly approved, in writing, by Lender in accordance with the provisions of this Agreement. 1.32 REQUEST(S) FOR ADVANCE. A statement in Proper Form of Borrower, and of the architect or professional engineer and the contractor for the Project, in the form of attached Exhibit B or such other form required by Lender which statement will include an AIA Form G702/G703 or such other form required by Lender, accurately reflecting the current status of construction funds, setting forth the amount of the Loan requested to be disbursed and containing such other statements and certifications as Lender may require. 1.33 SECURITY DOCUMENTS. The agreements, pledges, mortgages, guarantees, or other documents delivered by Borrower or any person or entity to Lender previously, now or in the future to encumber the Collateral in favor of Lender, including but not limited to those listed on the Closing Memo, and all amendments thereto and restatements thereof. 1.34 SURVEY. INTENTIONALLY DELETED. -4- 5 1.35 TITLE COMPANY. The title insurance company acceptable to Lender in its sole discretion that issues the Title Insurance Policy. 1.36 TITLE INSURANCE POLICY. An ALTA Mortgagee's title insurance policy, including such endorsements as Lender may designate, in Proper Form to be issued by the Title Company in the amount of the Loan insuring the lien of the Mortgage as a first lien on the Property subject only to Permitted Exceptions (the standard exceptions, including those for mechanics liens and survey, being deleted from such policy). 2. THE LOAN. 2.1 THE LOAN. Borrower will borrow from Lender and Lender will lend to Borrower the Loan for the purposes and subject to the terms, provisions and conditions of this Agreement. The Loan will be for the term, bear interest and be payable as provided in the Note. 2.2 LOAN FEES. Borrower agrees to pay to Lender a construction fee equal to one percent (1%) of the principal amount of the Loan ($10,000) (the "Construction Fee"). The Construction Fee will be paid to Lender at Closing. 2.3 CLOSING COSTS. Borrower agrees to pay to Lender at Closing a reasonable sum for expenses and Attorneys Fees incurred by Lender in connection with the preparation, execution and delivery of this Agreement and the attendant documents and the consummation of the transactions contemplated hereby together with all recording fees and taxes, tax and title search charges, title insurance premiums and costs, and real property taxes. 2.4 EXPENSES AND ADVANCES SECURED BY MORTGAGE. All disbursements, advances or payments made by Lender hereunder or under the other Loan Documents will be secured by the Mortgage. Lender and Borrower acknowledge and agree that the Mortgage has been executed and recorded prior to the effective date of this Agreement and the extension of the Loan by and between a Lender and Borrower, and that all disbursements of the Loan in accordance with this Agreement constitute future advances for the purpose of Section 7.1 of the Mortgage and the other provisions thereof. Such disbursements shall be secured by the Mortgage with the original priority entitled thereof, effective the recordation date of the Mortgage. Nothing contained in the Loan Documents shall in any manner affect the original priority entitled of the Mortgage, it being understood that the Loan Documents have been executed in furtherance of the provisions of the Mortgage. 2.5 ADDITIONAL COSTS. On written demand, together with written evidence of the justification therefor, Borrower agrees to pay Lender all direct costs incurred and any losses suffered or payments made by Lender as a consequence of making the Loan by reason of any change in law or regulation or its interpretation imposing any reserve, deposit, allocation of capital or similar requirement (including without limitation, Regulation D of the Board of -5- 6 Governors of the Federal Reserve System) on Lender, its holding company or any of their respective assets. 2.6 MECHANIC'S LIENS. Lender and Borrower acknowledge that construction of the Project commenced approximately during the month of November, 1995 prior to the effective date of this Agreement or the extension of the Loan to Borrower. Nothing herein shall constitute, or be deemed to be, a waiver by Lender of any of the provisions contained in this Agreement as to the obligation to discharge any lien, claim or suit filed with respect to the Project or Borrower's agreement to indemnify and save harmless Lender therefrom as provided in this Section. It shall be the responsibility of Borrower to strictly comply with all the provisions of this Section and the other provisions of this Agreement with respect to the filing of any lien, claim or suit with respect to the Project. Borrower acknowledges and agrees that any mechanic's or other lien filed against the Project or any claim for payment made by any contractor, subcontractor or materialman will be Borrower's sole responsibility to satisfy. Borrower agrees to immediately discharge or to bond-off of record any lien, claim or suit filed against the Project. Borrower further agrees to indemnify and save harmless Lender from all claims, losses, damages and expenses including without limitation, reasonable attorney fees and court costs arising out of any lien, claim or suit filed with respect to the Project or otherwise. In the event that there is a lien or claim for payment filed against the Project, Lender will be entitled to suspend any further disbursements until the same is discharged or bonded in accordance with the Section. 3. REQUIREMENT FOR DISBURSEMENTS. 3.1 REQUIREMENTS FOR INITIAL DISBURSEMENTS. Lender will not be required to make any disbursements under the Loan unless and until Borrower will have furnished or delivered to Lender, in Proper Form, the documents listed on the Closing Memorandum, including but not limited to all the following: 3.1.1 APPRAISAL. At Borrower's expense, Lender has required an appraisal, indicating the combined aggregate value of the Property following the completion of the Project of not less than $2,250,000. The appraisal reports and procurement process therefor will be made in accordance with the current regulations of the Department of the Treasury, Office of the Comptroller of the Currency, 12 C.F.R., Part 34, Subpart C, Appraisals with respect to the Loan, as the same may be amended. In no event will the loan-to-value ratio with respect to the Loan at any time exceed 50%. Lender will have the right to reappraise the Property and the Project at any time and from time to time: (i) after the occurrence of an Event of Default, (ii) if Lender reasonably believes that the value of the Project has decreased by more than 10% from the last appraisal received by it or (iii) Lender is required to do so by applicable regulatory standards. The appraisal and any reappraisal of the Property will be addressed to Lender. The cost of the appraisal and any reappraisal obtained after the occurrence and during the continuance of an Event of Default will be paid by Lender and immediately reimbursed by Borrower. All other reappraisals elected by Lender will be at Lender's expense. The appraisal -6- 7 and any reappraisal will be in Proper Form and any appraiser will meet all Federal and state standards as well as Lender's internal standards. 3.1.2 ENVIRONMENTAL. Borrower at its expense will provide a "Phase I" environmental site assessment for the Property in Proper Form. Such report will indicate that the Property is not and has not been affected by the presence of any toxic or hazardous substance or waste, or underground storage tanks, or any other pollutants that could be detrimental to the Project or the Property, or to human health or to the environment, that the Property and is not in violation of any local, state or federal laws or regulations and that no environmental problems exist with respect to the Property. Borrower hereby certifies to Lender that except as disclosed in the Environmental Report: (i) the Property shows no visible signs of the presence of toxic or hazardous substances or water, underground storage tanks, or environmental problems, and (ii) Borrower has no reason to believe that any such substance or waste, or underground storage tanks or any environmental problems exist. Borrower also will provide evidence satisfactory to Lender, which evidence will be prepared by an environmental engineer approved by Lender, that the Property does not contain any areas which constitute wetlands as that term is defined by applicable federal or state law, and that there has been no unpermitted filling of wetlands at the Property. 3.1.3 FLOOD INSURANCE. Evidence that the Property is not located in a flood zone. If the Property is located in a flood zone, then Borrower, prior to any disbursement under the Loan for vertical improvements at the Project, Borrower must either (i) provide flood insurance coverage for the Project in Proper Form or (ii) undertake such action necessary to have the location of all improvements at the Property removed from the flood zone. 3.1.4 EQUITY CONTRIBUTION. Evidence in Proper Form that Borrower has expended its equity requirement for the Project of at least $2,500,000.00 (or such greater amount as indicated by the excess of all costs for the Project as shown on the Budget over the amount of the Loan), including a schedule of costs incurred and paid to meet such equity requirement. Such equity requirement must be expended prior to any advance under the Loan. 3.1.5 CONSTRUCTION CONTRACT. Provide to Lender executed copies of the contract between the general contractor for the Project and Borrower (the "Construction Contract"), which will be a guaranteed maximum price contract; the general contractor's qualification statement in Proper Form, and assignment and acknowledgment of the assignment, of such contract to Lender; and, if requested by Lender, executed copies of all subcontracts between any general contractors and all of their subcontractors and suppliers, including contracts, subcontracts and purchase orders for all fixtures and equipment to be installed as are required for the completion of the Project. If in the judgment of Lender such contracts do not cover all of the work necessary for completion of the Project, Borrower will cause to be furnished firm bids, estimates and other information satisfactory to Lender, for the work not so covered, to enable Lender to ascertain the total estimated cost of all work to be done. -7- 8 3.1.6 INSPECTION REPORT. Lender will receive a report from the Inspector concerning the existing condition of the Property and the status of construction of the Project, construction documentation related to the Project, adequacy of the Budget, the value of the work performed and materials furnished, the construction schedule for the remaining construction work and such other matters as Lender may elect to review, all of which will be satisfactory to Lender in its sole discretion. Lender and/or the Inspector may reinspect the Project from time to time, in Lender's sole discretion at Borrower's expense, to determine among other things, the progress of redevelopment, to verify the percentage of completion and to determine whether the work has been performed in accordance with the Plans and Specifications. 3.1.7 RESTAURANT LEASE. Evidence that the Restaurant Lease is in full force and effect and the Lessor and Borrower thereunder are in full compliance with the provisions of the Restaurant Lease. 3.1.8 BONDS. INTENTIONALLY DELETED. 3.1.9 STATUS OF CONSTRUCTION. Evidence that the construction of the Project is in full compliance with all applicable local, state and federal laws and the requirements of the Restaurant Lease and that all laborers, suppliers, equipment lessors, contractors and other parties who have furnished materials, labor, work or equipment through September 1996, have been fully paid, except for retainage held by Borrower in accordance with the applicable agreement for such work, labor, materials and equipment. 3.2 REQUIREMENTS FOR EACH DISBURSEMENT. In addition to the requirements for initial disbursements hereunder, Lender will not be required to make any disbursements under the Loan unless and until it has received a Request for Advance relating to such disbursement and each of the following conditions have been satisfied for each disbursement: 3.2.1 GENERAL. All warranties and representations made under this Agreement will remain true and correct as of the effective date of the disbursement, and, subject to the terms of the Mortgage with regard to casualty and condemnation, there will have been no condemnation of or material damage to the Property or the Project unless there are available condemnation or insurance proceeds sufficient, in the sole judgment of Lender, to effect the satisfactory restoration of the Project and/or the Property and to permit the completion of the Project prior to the Completion Date, and no Event of Default will have occurred under this Agreement which has not been cured. 3.2.2 TITLE ENDORSEMENT. Lender will have received an ALTA title endorsement to the Title Insurance Policy in Proper Form increasing the amount of the title insurance on the Property to the amount that will have been disbursed by Lender under the Note after the pending Request for Advance and insuring that the Mortgage is a first lien on the Property subject only to Permitted Exceptions. -8- 9 3.2.3 APPROVAL BY INSPECTOR. Lender will have received a certificate from the Inspector stating that the work covered by the Request for Advance has been performed in all material respects in accordance with the Plans and Specifications, that the amount of the Request for Advance is accurate and proper in accordance with this Agreement and that the percentage of the work shown on the Request for Advance has been completed. 3.2.4 FOUNDATION SURVEY. INTENTIONALLY DELETED. 3.2.5 LOAN-IN-BALANCE. The Loan will be In Balance. 3.2.6 NOTICE OF FURNISHING. Borrower, and Borrower's designee on the filed Notice of Commencement, will provide to Lender, at the time of each request for disbursement, copies of all Notices of Furnishing received under Ohio Revised Code Section 1311.05. Borrower will provide lien waivers and such other documentation as Lender may reasonably request in Proper Form from all Persons delivering a Notice of Furnishing and any other Persons furnishing labor or materials to the Project. 3.2.7 BORROWER'S CERTIFICATE: BUDGET. At least 10 business days prior to the date of the requested disbursement, Lender will have received a certificate from Borrower stating that Borrower has paid or actually incurred the construction costs for which the Request for Advance is made, and Lender will have received an updated Budget showing the remaining projected expenditure for each category of construction and development costs of the Project. Borrower will obtain from each contractor and subcontractor, as requested, and will furnish to Lender bills, invoices, or other written memoranda of services performed or materials supplied by the proposed payee, before being entitled to such disbursement. 3.2.8 AFFIDAVITS, WAIVERS, ETC. Lender will have received such affidavits, supporting affidavits, certificates of suppliers and lien waivers and releases for the work and materials covered by the Request for Advance from such contractors, subcontractors, suppliers and laborers as Lender may require, together with a certification of Borrower identifying all contractors, subcontractors and suppliers who have performed work on or furnished materials to the Project. Lender further will receive such additional certificates, affidavits and other documents as Lender, from time to time, may require of Borrower in Lender's sole discretion. 3.3 REQUIREMENTS PRIOR TO FINAL DISBURSEMENT. The following requirements, in addition to the other requirements of this Section 3, will have been met prior to a final disbursement under the Loan: 3.3.1 COMPLETION OF WORK. The Project will have been substantially completed and equipped in all material respects in accordance with the Plans and Specifications, and the Restaurant Lease, free and clear of mechanics' liens, encumbrances and security interests other than the lien of the Security Documents. -9- 10 3.3.2 ARCHITECT AND CONTRACTOR'S CERTIFICATES. Lender will have received written certification from Borrower's architect or professional engineer and general contractor in Proper Form to the effect that the Project has been completed in all material respects in accordance with the Plans and Specifications and the certificate of the architect or professional engineer also will certify that the Project and the Property comply with all applicable zoning ordinances, building and use regulations and codes and has received all licenses, permits and city approvals necessary for the lawful use and operation of the Project and the Property. In addition, Lender may request that such certificates be verified by the Inspector. 3.3.3 CERTIFICATE OF OCCUPANCY. Borrower will have furnished to Lender unconditional certificates of occupancy for the Project from the governmental authorities having jurisdiction over the Project and Borrower. 3.3.4 INSURANCE. The builder's risk insurance on the Property will have been converted to casualty and other insurance as required by the Security Documents. 3.3.5 PERMITS, LICENSES. Borrower will have received all licenses, permits, franchises, authorizations and approvals necessary or desirable in connection with the operation of Borrower's business on the Property, including but not limited to all health department licenses and permits, liquor licenses, and business licenses, and all such licenses, permits, franchises, authorizations and approvals shall be in full force and effect. 3.3.6 LESSOR APPROVAL. The Lessor under the Restaurant Lease will have approved the Project and all other work involved in the Project and Borrower's conduct of business therein. Further, such Lessor will have provided Lender with an estoppel certificate, in Proper Form, confirming Lessor's acceptance of the Project, Borrower's compliance with the provisions of the Restaurant Lease and such additional matters as Lender may require. 3.3.7 ADDITIONAL DOCUMENTS. Borrower will have delivered such other information and documentation as Lender may reasonably request. 3.3.8 FOUNDATION SURVEY. An as-built survey of the Project, in Proper Form, prepared for the benefit of Borrower and Lender. 4. DISBURSEMENTS. 4.1 LENDER'S OBLIGATION TO DISBURSE. Lender agrees, so long as Borrower is in compliance with all conditions precedent to disbursements hereunder and provided the Loan is In Balance and no Event of Default has occurred, to make disbursements of the Loan as provided in the Loan Documents. Amounts disbursed and repaid will not be available for redisbursement to Borrower. Borrower will utilize all disbursements made by Lender hereunder in accordance with the provisions of this Agreement. -10- 11 4.2 MONTHLY PAYOUTS. Disbursements of the Loan will be made from time to time upon delivery of a Request for Advance in Proper Form as construction of the Project progresses, but Lender has no obligation to make disbursements more frequently than once in any 30 day period. Each Request for Advance will be delivered to Lender in Proper Form at least 10 business days prior to the requested disbursement date. 4.3 AMOUNT OF DISBURSEMENT. Disbursements for construction of the Project will be limited to: (a) the cost of all work, materials and labor incorporated into the Project and materials stored on the Property (collectively, "Hard Costs"), which Hard Costs will be determined by Lender or the Inspector, less the Retainage (as described below), the aggregate amount of all previous disbursements for Hard Costs and Borrower's total equity requirement, and (b) 100% of all non-Hard Costs relating to the Project, to the extent provided for in the Budget and supported by invoices not more than 90 days old, less the aggregate amount of all previous disbursements for non-Hard Costs. All disbursements for Hard Costs will be subject to a retainage equal to the greater of (a) 5% or (b) the percentage being withheld in all payments from Borrower to the general contractor for non-Hard Costs. The Retainage will be 5% of Hard Costs. No disbursements will be made for materials or personal property not delivered to the Project. The retained Hard Costs will be disbursed by Lender when the requirements under the Section captioned Requirements Prior to Final Disbursement have been met. All such costs for which disbursement is made will be costs shown for such item on the approved Budget. No disbursements will be made for fees, profit and overhead of Borrower or any contractor. Lender will have no obligation to disburse amounts shown in the Budget as a "contingency" except as Lender may approve from time to time, regardless of the percentage of completion of the Project. 4.4 DISBURSEMENT THROUGH TITLE COMPANY. Disbursements of proceeds of the Loan, at Lender's election, may be made through the Title Company. Borrower agrees to execute such documents and pay such fees as the Title Company may require to authorize such disbursements. 4.5 DIRECT PAYMENT OF DISBURSEMENTS. Without liability to Borrower, Lender or the Title Company, at their sole option, may make any or all disbursements directly to any contractor or subcontractor or materialman irrespective of whether there is a dispute between Borrower and contractor as to such payment, and such disbursement will be binding on Borrower. The execution of this Agreement by Borrower constitutes an irrevocable direction and authorization to make such direct disbursements. Notwithstanding the foregoing, Lender at its option may make disbursements to Borrower's construction account with Lender and Borrower will be responsible for making all payments due to any contractor, subcontractor or materialman. 4.6 ACQUIESCENCE NOT A WAIVER. To the extent that Lender may have acquiesced in noncompliance with any requirements precedent to the disbursement of the proceeds of the Loan, such acquiescence will not constitute a waiver by Lender and Lender at any time after such acquiescence may require Borrower to comply with all such requirements. -11- 12 4.7 INTEREST PAYMENTS. Notwithstanding anything to the contrary contained herein, if a disbursement is not properly presented by Borrower and processed by Lender before the tenth day of each month, Lender may, without further authorization, draw on the Loan to pay interest due and payable on the Loan if such interest has not been paid prior to such date. 4.8 LOAN-IN-BALANCE. Anything in this Agreement to the contrary notwithstanding, it is expressly understood and agreed that the Loan at all times will be In Balance. If for any reason the Loan ceases to be In Balance, regardless of how such condition may be caused, Borrower, within ten (10) days after written request by Lender, will deposit with Lender a sum sufficient to place the Loan In Balance, which deposit will first be exhausted before any further disbursements under the Loan will be made. 5. WARRANTIES AND REPRESENTATIONS. To induce Lender to make the Loan, Borrower hereby represents and warrants to Lender, and each Request for Advance will constitute a reaffirmation, that as to itself and each Guarantor: 5.1 ORGANIZATION. It is duly constituted and qualified to transact business in all jurisdictions where required by the conduct of its business or ownership of its assets except where the failure to so qualify would not have a material adverse effect on its condition, financial or otherwise, and has the power and authority to own and operate its assets and to conduct its business as is now done. 5.2 LATEST FINANCIALS. Its Current Financial Statements as delivered to Lender are true, complete and accurate in all material respects and fairly present its financial condition, assets and liabilities, whether accrued, absolute, contingent or otherwise and the results of its operations for the periods specified therein. The annual financial statements of all business entities included in the Current Financial Statements have been prepared in accordance with generally accepted accounting principles applied consistently with preceding periods subject to any comments and notes contained therein. 5.3 RECENT ADVERSE CHANGES. Since the dates of its Current Financial Statements, it has not suffered any damage, destruction or loss which has materially and adversely affected its business or assets and no event or condition of any character has occurred which has materially and adversely affected its assets, liabilities, business or financial condition, and it has no knowledge of any event or condition which may materially and adversely affect its assets, liabilities, business, or financial condition. 5.4 RECENT ACTIONS. Since the dates of its Current Financial Statements, its business has been conducted in the ordinary course and it has not: (i) incurred any obligations or liabilities, whether accrued, absolute, contingent or otherwise, other than liabilities incurred and obligations under contracts entered into in the ordinary course of business and other than liabilities to Lender; (ii) discharged or satisfied any lien or encumbrance or paid any obligations, absolute or contingent, other than current liabilities, in the ordinary course of business; (iii) mortgaged, pledged or subjected to lien or any other encumbrance any of its assets, tangible or -12- 13 intangible, or cancelled any debts or claims except in the ordinary course of business; or (iv) made any loans or otherwise conducted its business other than in the ordinary course. 5.5 TITLE. It has good and marketable title to the assets reflected on its Current Financial Statements, free and clear from all liens and encumbrances except for: (i) current taxes and assessments not yet due and payable, (ii) liens and encumbrances, if any, reflected or noted on said balance sheet or notes, (iii) any security interests, pledges or mortgages to Lender in connection with the closing of this Agreement, (iv) assets disposed of in the ordinary course of business, and (v) Permitted Exceptions. 5.6 RESTAURANT LEASE. The Restaurant Lease is a legal, valid and binding obligation of the parties thereto enforceable against them in accordance with its terms and is in full force and effect and Borrower is not, and to Borrower's knowledge the landlord thereunder is not, in default of any term or provision thereof, including without limitation Borrower's compliance with the construction schedule contained therein. There have been no threatened cancellations of the Restaurant Lease nor any material disputes thereunder. A true and complete copy of the Restaurant Lease is attached hereto as Schedule 5.6 and made a part hereof, and there are no modifications, supplements or waivers of any provision contained therein. 5.7 FRANCHISE AGREEMENT. The License Agreement dated June 28, 1995, by and between Hotel Mexico, Inc., as licensor, and Borrower, as licensee, is in full force and effect, is a legal, valid and binding obligation of the parties thereto enforceable against them in accordance with its terms, and Borrower is not, and to Borrower's knowledge, Hotel Mexico, Inc. is not, in default of any term or provision thereof. A true and complete copy of said Franchise Agreement is attached hereto as Schedule 5.7 and made a part hereof, and there are no modifications, supplements or waivers of any provision contained therein. 5.8 CONSTRUCTION. From the date of commencement of construction of the Project through the date hereof, the Project has been constructed in all material respects in accordance with the Plans and Specifications and in compliance with all applicable zoning ordinances, building and use regulations and codes, and all other applicable laws and regulations. Neither Borrower nor any Guarantor has received any notice, citation, or other communication from any governmental authority relating to the Project that could reasonably be anticipated to have an adverse effect on the Project or the construction thereof, and there is no basis known to it for any such notices, citations or other communications. To Borrower's knowledge, there have been no material disputes among any contractors, subcontractors, suppliers, materialmen or other similar parties relating to the Project. 5.9 LITIGATION, ETC. There are no judicial or administrative actions, suits or proceedings (including without limitation any judgments, garnishments or attachments) pending, or to the best of its knowledge, threatened against, affecting or involving it involving a claim in excess of $10,000 and there is no basis known to it for any such actions, suits, proceedings or investigations. -13- 14 5.10 TAXES. Except as to taxes not yet due and payable, it has filed all returns and reports that are now required to be filed by it in connection with any federal, state, or local tax, duty or charge levied, assessed or imposed upon it or its property, including unemployment, social security and similar taxes; and all of such taxes have been either paid or adequate reserve or other provision has been made therefor. It has filed for no extension of time for the payment of any tax or for the filing of any tax return. 5.11 AUTHORITY. It has full power and authority to enter into the transactions provided for in the Loan Documents. The Loan Documents to be executed by it, when executed and delivered by it will constitute the legal, valid and binding obligations of it enforceable in accordance with their respective terms except as such enforceability may be limited by applicable bankruptcy, reorganization, insolvency, moratorium or similar laws in effect from time to time affecting the rights of creditors generally and except as such enforceability may be subject to general principles of equity (regardless of whether such enforceability is considered in a proceeding in law or in equity). 5.12 OTHER DEFAULTS. There does not now exist any default or violation by it of or under any of the terms, conditions or obligations of: (i) its Organizational Documents (ii) any indenture, mortgage, deed of trust, franchise, permit, contract, agreement, or other instrument to which it is a party or by which it is bound; or (iii) any law, regulation, ruling, order, injunction, decree, condition or other requirement applicable to or imposed upon it by any law or by any governmental authority, court or agency; and the transactions contemplated by this Agreement and the Loan Documents will not result in any such default or violation. 5.13 NO MECHANIC'S LIENS. Borrower has, as of the date hereof, permitted no work on the Property which could give rise to a lien on the Property, or if such work has commenced, has provided such waivers, indemnities and other information as may be requested by the Title Company so the Title Insurance Policy and the endorsements thereto may be issued without exceptions for mechanics liens. 5.14 LICENSES, ETC. Borrower has obtained, or will obtain when appropriate as construction progresses, any and all licenses, permits franchises or other governmental authorizations necessary for the ownership of its properties and the conduct of its business. Borrower possesses adequate licenses, patents, patent applications, copyrights, trademarks, trademark applications, and trade names to continue to conduct its business as heretofore conducted by it, without any conflict with the rights of any other person or entity. 5.15 REGULATION U. No part of the proceeds of the Loan will be used to purchase or carry any margin stock (as such term is defined in Regulation U of the Board of Governors of the Federal Reserve System). 5.16 CLOSING MEMO. The information contained in each of the documents listed on the Closing Memo to be executed or delivered by it or relating to it is complete and correct in all material respects. -14- 15 5.17 ACCURACY OF INFORMATION. Neither this Agreement, the Current Financial Statements, nor any certificate, opinion or document furnished or to be furnished to Lender by or on behalf of Borrower or any Guarantor pursuant to or in connection with the transactions contemplated hereby contains any untrue statement of a material fact or omits to state a material fact necessary to make the statements contained herein or therein not misleading. 6. AFFIRMATIVE COVENANTS. Borrower covenants and agrees with Lender that as long as the Loan remains outstanding, it will: 6.1 COSTS AND EXPENSES. Pay all costs and expenses required to satisfy the conditions of this Agreement, including but not limited to all taxes and recording expenses, Lender's Attorneys' Fees, surveys, appraisals, construction inspections, engineering studies, title insurance, title updates, inspection fees, mortgage taxes, real estate taxes, document or intangibles tax, and insurance policy fees. 6.2 EASEMENTS. Submit to Lender for Lender's approval, all easements, covenants, restrictions or plats affecting the Property, accompanied by a drawing or survey showing the exact location thereof prior to the execution and/or filing thereof and comply with all restrictive covenants and easements affecting the Property. 6.3 INSPECTIONS. Permit Lender, Inspector and their representatives to enter upon the Project at all reasonable times to inspect the Property and the Project and the construction thereof and all materials, fixtures and articles used or to be used in the construction and to examine all detailed plans, shop drawings, specifications and other records which relate to the Project or the Property and will cooperate, and cause all contractors, subcontractors and materialmen to cooperate, with Lender to enable it to perform its functions hereunder. 6.4 CONSTRUCTION OF PROJECT. Cause the construction of the Project to be promptly commenced and to be prosecuted with due diligence and continuity, and will substantially complete the same by the Completion Date in all material respects in accordance with the Plans and Specifications. 6.5 BROKERS. Indemnify and hold harmless Lender from and against all claims of brokers and agents arising by reason of the execution of this Agreement or the consummation of the transactions contemplated hereby, except for claims arising solely from the actions of Lender. 6.6 CORRECTION OF DEFECTS. Upon demand of Lender, diligently correct all defects in the Project and correct any departures from the Plans and Specifications not approved by Lender, which results in an increase or decrease in the cost of the Project in an amount in excess of $10,000. 6.7 BOOKS, INFORMATION AND ACCESS TO THE COLLATERAL. Deliver to Lender such information regarding Borrower, the Project, or any Guarantor as Lender may reasonably -15- 16 request and give representatives of Lender access thereto at all reasonable times, including permission to examine, copy and make abstracts from any of such books and records and deliver such other information as it may from time to time reasonably request, and maintain proper books of account and other records and enter therein complete and accurate entries and records of all if its transactions. It will give Lender reasonable access to the Collateral for the purposes of examining the Collateral and verifying its existence. It will make available to Lender for examination copies of any reports, statements or returns which Borrower may make to or file with any governmental department, bureau or agency, federal or state. In addition, it will be available to Lender, or cause its partners or officers or such partners' officers, as applicable, to be available from time to time upon reasonable notice to discuss the status of the Loan, its business and any statements, records or documents furnished or made available to Lender in connection with this Agreement. 6.8 FINANCIAL STATEMENTS. 6.8.1 MONTHLY STATEMENTS. Furnish Lender within 30 days after the end of each month internally prepared financial statements of Borrower with respect to such month, which financial statements will: (i) be in reasonable detail and in Proper Form; (ii) include a balance sheet as of the end of such period, profit and loss and surplus statements for such period and a statement of cash flows for such period; (iii) include prior year comparisons; and (iv) be on a consolidating and consolidated basis for Borrower and for any entity in which Borrower's financial information is consolidated in accordance with generally accepted accounting principles. Following the Completion Date, Borrower will furnish Lender with operating statements of the Project in Proper Form within 30 days after the end of each month. 6.8.2 ANNUAL STATEMENTS. Furnish Lender within 90 days after the end of each calendar year annual compiled financial statements of Borrower and Kenwood Restaurant, Inc. which, for each such Person, will: (i) include a balance sheet as of the end of such year, profit and loss and surplus statements and a statement of cash flows for such year; and (ii) be in Proper Form. 6.8.3 FINANCIAL STATEMENTS OF GUARANTOR. Require each Guarantor to furnish Lender a copy of his, her or its filed tax return immediately after such filings are made with the Internal Revenue Service, and provide Lender with a financial statement prepared by the Guarantor or the Guarantor's accountant in form and substance acceptable to Lender. 6.9 TAXES. Pay and discharge when due all indebtedness and all taxes, assessments, charges, levies and other liabilities imposed upon it, its income, profits, property or business, except those which currently are being contested in good faith by appropriate proceedings and for which it has set aside adequate reserves or made other adequate provision with respect thereto, but any such disputed item will be paid forthwith upon the commencement of any proceeding for the foreclosure of any lien which may have attached with respect thereto, unless Lender has received an opinion in form and substance and from legal counsel acceptable -16- 17 to it that such proceeding is without merit. Borrower will furnish Lender with each federal and state tax return filed for a calendar year within thirty (30) days after filing. 6.10 OPERATIONS. Continue its business operations in substantially the same manner as at present, except where such operations are rendered impossible by a fire, strike or other events beyond its control; keep its real and personal properties in good operating condition and repair; make all necessary and proper repairs, renewals, replacements, additions and improvements thereto and comply with the provisions of all leases to which it is a party or under which it occupies or holds real or personal property so as to prevent any loss or forfeiture thereof or thereunder. 6.11 INSURANCE. Comply with the insurance requirements of the Security Documents. 6.12 COMPLIANCE WITH LAWS. Comply in all material respects with all laws and regulations applicable to it and to the operation of its business, including without limitation those relating to environmental matters, and do all things necessary to maintain, renew and keep in full force and effect all rights, permits, licenses, zoning certificates, clearances and franchises (including but not limited to those relating to a "Hotel Mexico" restaurant) necessary to enable Borrower to continue Borrower's business and construct and operate the Project. 6.13 ENVIRONMENTAL VIOLATIONS. Immediately notify Lender of any violation by Borrower of any rule, regulation, statute, ordinance, or law relating to public health or the environment, and of complaints or notifications received by Borrower with regard to any environmental or safety and health rule, regulation, statute, ordinance or law. 6.14 ENVIRONMENTAL AUDIT AND OTHER ENVIRONMENTAL INFORMATION. Provide copies of all environmental reports, audits, studies, data, results, and findings obtained by Borrower from work conducted by it or any other person or entity (including, but not by way of limitation, the United States Environmental Protection Agency and any state Environmental Protection Agency and their agents, representatives, and contractors) on the Property or property adjacent thereto as soon as such reports, audits, studies, data, results, and findings become available to it. If the submissions are considered inadequate or insufficient in order for Lender to adequately consider the status of environmental compliance by it or if the submissions are in error, then Lender may require Borrower, at Borrower's sole expense, to engage an independent engineering firm acceptable to Lender to conduct a complete environmental report, study, finding or audit in as timely a fashion as is reasonably possible. In addition, it will provide Lender with information related to remedial action at the Property or adjacent to the Property as soon as such information becomes available to Borrower (such information will include but not be limited to a copy of the remedial investigation/feasibility study for that property). 6.15 ACCOUNTS. Until final disbursement of the Loan, Borrower will maintain a construction disbursement account relating to the Project at Lender. Such account will be subject to Lender's normal and customary charges. -17- 18 6.16 NOTICE OF DEFAULT. Notify Lender in writing immediately after it knows or has reason to know of the occurrence of an Event of Default. 6.17 AGREEMENTS. Comply with all the terms of, and take all actions necessary to comply with and keep in full force and effect, the construction contract with the general contractor on the Project and will not terminate or modify any such agreement or release any party thereto without the prior written consent of Lender. Borrower will promptly notify Lender of any claim of breach of default by any party under any such agreement. 6.18 WARRANTIES. Upon request by Lender from time to time, promptly deliver to Lender a true, correct and complete copy of each warranty, guaranty, project manual, operating instructions, or similar document issued in connection with the Project. 6.19 CHANGES. Immediately notify Lender of (a) any change in the name under which Borrower conducts business, (b) any change in the location of Borrower's principal place of business, or (c) the opening or closing of any place from which Borrower conducts business. 6.20 SUBCONTRACTS. Provide to Lender, upon Lender's request, copies of all major subcontracts in connection with the development and construction of the Project and such financial information with respect to such subcontractors under such subcontracts as Lender may reasonably require, all of which subcontracts will be subject to Lender's reasonable approval. 6.21 LEASES. Comply with all requirements of the Mortgage and the other Loan Documents with respect to the Leases. 6.22 PUBLICITY. Provided that Borrower is permitted to erect such sign under the Restaurant Lease, permit Lender to erect one or more signs on the Property indicating that Lender is financing the Project, and Borrower will permit Lender to release articles for publicity purposes regarding Borrower and the financing of the Project. 6.23 USE OF PROPERTY. Use the Property solely as a Hotel Mexico Restaurant in accordance with the Restaurant Lease and the Franchise Agreement. 6.24 PERFORMANCE OF OBLIGATIONS. Perform each and every obligation of the Restaurant Lease imposed on the Lessee thereunder. Borrower promptly shall furnish Lender with any notice of default received from the Lessor under the Restaurant Lease. 7. NEGATIVE COVENANTS. Borrower covenants and agrees with Lender that as long as the Loan remains outstanding, Borrower will not: 7.1 DEBT. Incur any Indebtedness other than: (i) the Loan and any subsequent Indebtedness to Lender; (ii) open account obligations incurred in the ordinary course of business having maturities of less than 90 days; and (iii) except for the rental payable under the Restaurant Lease, rental and lease payments for real or personal property whose aggregate -18- 19 annual rental payments would exceed $25,000.00 when added to Borrower's rental or lease agreements existing on the date hereof. 7.2 LIENS. Incur, create, assume, become or be liable in any way, or suffer to exist any mortgage, pledge, lien, charge or other encumbrance of any nature whatsoever on the Collateral, other than Permitted Exceptions and utility easements appropriate to the Project. 7.3 GUARANTEES. Guarantee, endorse or become contingently liable for the obligations of any Person except in connection with the endorsement and deposit of checks in the ordinary course of business for collection. 7.4 CHANGES. Make: (i) any changes to the Budget, and (ii) changes in the Plans and Specifications or approve orders for extra work which individually or in the aggregate modify the costs of the Project by more than $10,000, without the prior written approval of Lender, and in accordance with, but subject to, that certain Conditional Assignment of Construction Contract of even date herewith, by and among Lender, Borrower and the general contractor for the Project. Any request for change orders will be made on AIA Form G701 and copies submitted promptly to Lender. 7.5 RESTAURANT LEASE AND FRANCHISE AGREEMENT. Amend any of the terms or provisions of either the Restaurant Lease or Franchise Agreement, or terminate or permit the termination of, either such agreement, without the prior written consent of Lender. 7.6 INVESTMENTS. Purchase or hold beneficially any stock, other securities or evidences of indebtedness of, or make any investment or acquire any interest whatsoever in, any other Person other than short term investments of excess working capital invested in one or more of the following: (i) investments in direct or guaranteed obligations of the United States, or any agencies thereof; (ii) investments in certificates of deposit of banks or trust companies organized under the laws of the United States or any jurisdiction thereof, provided that such banks or trust companies are insured by the Federal Deposit Insurance Corporation and have capital in excess of $25,000,000 and (iii) investments made by Lender acting on behalf of Borrower. 7.7 MERGER, ACQUISITION OR SALE OF ASSETS. Without the Lender's consent to be withheld in its sole discretion, merge or consolidate with any other entity, acquire all or substantially all the assets of any Person, or sell, lease or otherwise dispose of any of its assets, except for dispositions in the ordinary course of business. 7.8 ADVANCES AND LOANS. Lend money, give credit or make advances (other than advances not to exceed $10,000 in the aggregate and other reasonable and ordinary advances to cover reasonable expenses of employees, such as travel expenses) to any Person, including, without limitation, officers, directors, partners, employees or affiliates of Borrower or any Guarantor without the prior written consent of Lender. 7.9 RELATED ENTITIES. Enter into any partnership or joint venture agreements. -19- 20 7.10 TRANSFER OF COLLATERAL. Transfer, or permit the transfer, to another location of any of the Collateral or the books and records related to any of the Collateral; provided, however, that it may transfer the Collateral or the books and records related thereto to another location with the prior written consent of Lender and if Borrower has provided to Lender prior to such transfer an opinion addressed to Lender in form and substance and written by counsel acceptable to Lender to the effect that Lender's perfected security interest in the Collateral will not be affected by such move or if it will be affected, setting forth the steps necessary to continue Lender's perfected security interest together with the commencement of such steps by Borrower at Borrower's expense. 7.11 CONVEYANCES. Voluntarily or involuntarily mortgage, sell, convey, pledge, grant a security interest in, execute an installment sale contract, or otherwise dispose of, further encumber or suffer the encumbrance of, whether by operation of law or otherwise, any or all of its interest in the Collateral, or any part thereof, without the prior written consent of Lender. The occurrence of any of the following events (each, a "Transfer") without Lender's prior written consent will be deemed a violation of the foregoing covenant: (i) the transfer, conveyance, contract for sale, assignment or pledge of any partnership interest in Borrower, (ii) the failure of Kenwood Restaurant, Inc. at any time to remain the sole general partner of Borrower, or (iii) the dissolution of Borrower or any Guarantor. 7.12 SALE AND LEASEBACK. Directly or indirectly enter into any arrangement to sell or transfer all or any part of its fixed assets then owned by it and thereupon or within one year thereafter rent or lease the assets so sold or transferred. 7.13 POST-CLOSING MATTERS. Fail to deliver to Lender in Proper Form the documents, if any, noted as post-closing items on the Closing Memo on or before the date specified in the Closing Memo. 7.14 LINE OF BUSINESS. Enter into any lines or areas of business substantially different from the business or activities in which Borrower is presently engaged. 7.15 WAIVERS. Waive any right or rights of substantial value which, singly or in the aggregate, is or are material to its condition (financial or otherwise), properties or business. 7.16 ASSIGNMENT. Assign the Restaurant Lease, or sublet any portion of the Property, without the express written consent of Lender, which consent Lender may withhold in its sole discretion. 8. DEFAULT. 8.1 EVENTS OF DEFAULT BY BORROWER. The occurrence of any one or more of the following with respect to Borrower will constitute an "Event of Default" as such term is used herein: -20- 21 8.1.1 The non-payment when due, whether by acceleration or otherwise of any principal, interest, late charges on the Note or any other amount due Lender under the Loan Documents. 8.1.2 The default in the due observance of any other covenant or agreement to be kept or performed by it under the terms of this Agreement or any of the other Loan Documents and the failure or inability of it to cure such default within 30 days of the occurrence thereof; provided that such 30 day grace period will not apply to: (i) any default which in Lender's good faith determination is incapable of cure, (ii) any default that has previously occurred, (iii) any default in any negative covenants or (iv) any failure to maintain insurance or permit inspection of the Collateral or its books and records. 8.1.3 Any representation or warranty made by it in this Agreement, in any of the other Loan Documents or in any report, certificate, opinion, financial statement or other document furnished in connection with the Obligations is false or erroneous in any material respect or any material breach thereof has been committed. 8.1.4 Except as provided in Sections 8.1.1, 8.1.2, and 8.1.3, the default by it in the due observance of any covenant, negative covenant or agreement to be kept or performed by it under the terms of this Agreement, the Loan Documents or any document now or in the future executed in connection with any of the Obligations and the lapse of any applicable cure period provided therein with respect to such default, or, if so defined therein, the occurrence of any Event of Default or Default (as such terms are defined therein). 8.1.5 The occurrence of any default or Event of Default (as defined therein) under any agreement or instrument evidencing, guaranteeing, or otherwise relating to any loan or extension of credit by Lender to Hotel Mexico, Inc. 8.1.6 The termination or cancellation for any reason of the Restaurant Lease. 8.1.7 It or any Guarantor that is not an individual: (i) dissolves or is the subject of any dissolution, a winding up or liquidation; (ii) makes a general assignment for the benefit of creditors; or (iii) files or has filed against it a petition in bankruptcy, for a reorganization or an arrangement, or for a receiver, trustee or similar creditors' representative for its property or assets or any part thereof, or any other proceeding under any federal or state insolvency law, and if filed against it, the same has not been dismissed or discharged within 60 days thereof. 8.1.8 The commencement of any foreclosure proceedings, proceedings in aid of execution, attachment actions, levies against, or the filing by any taxing authority of a lien against it or against any of the Collateral, except those liens being diligently contested in good faith which in the aggregate do not exceed $25,000. -21- 22 8.1.9 A discontinuance or abandonment of the construction of the Project, or any occurrence resulting in a delay in the construction of the Project so that the same may not, in Lender's sole judgment, be completed on or before the Completion Date. 8.1.10 The disapproval of Lender at any time of any construction work because of the failure of such work to comply with the Plans and Specifications, as approved by Lender, applicable zoning or building codes,or the contracts or subcontracts for such work or the failure of such work to be merchantable or of such quality as is normally acceptable in the construction trades and the failure of Borrower to cause the same to be corrected to the satisfaction of Lender within the earlier of: (i) thirty (30) days after written notice from Lender or (ii) the Completion Date. 8.1.11 The failure of Borrower or any Guarantor by payment, bond or otherwise to satisfy, remove or cause the Title Company to endorse the Title Insurance Policy to affirmatively insure over, within thirty (30) days after the date of filing thereof, any lien or claim of lien filed against the Property for the performance of work, the supplying of materials or labor, the performance of services, or the payment of local, state or federal taxes. 8.1.12 The bankruptcy or insolvency of any general contractor or subcontractor and failure of Borrower to procure a contract or subcontract in Proper Form with a new substitute contractor or subcontractor so that the Project may not, in Lender's sole judgment, be completed on or before the Completion Date. 8.1.13 Unless in the opinion of Lender that the same is adequately insured or bonded, the entry of a final judgment for the payment of money involving more than $25,000 against it and the failure by it to discharge the same, or cause it to be discharged, within 10 days from the date of the order, decree or process under which or pursuant to which such judgment was entered, or to secure a stay of execution pending appeal of such judgment; the entry of one or more final monetary or non-monetary judgments or order which, singly or in the aggregate, does or could reasonably be expected to: (i) cause a material adverse change in the value of the Collateral or its condition (financial or otherwise), operations, properties or prospects, (ii) have a material adverse effect on its ability to perform its obligations under this Agreement or the Loan Documents, or (iii) have a material adverse effect on the rights and remedies of Lender under this Agreement, the Note or any Loan Document. 8.1.14 Lender in its sole discretion, determines in good faith that a material adverse change has occurred in its financial condition. 8.1.15 The modification or termination of the Lease, Franchise Agreement, or construction contract for the Project, without Lender's prior written consent. 8.1.16 The validity or effectiveness of any Security Document or its transfer, grant, pledge, mortgage or assignment by the party executing it in favor of Lender is impaired; any party to a Security Document asserts that any Security Document is not a legal, -22- 23 valid and binding obligation of it enforceable in accordance with its terms; the security interest or lien purporting to be created by any of the Security Documents ceases to be or is asserted by any party to any Security Document (other than Lender) not to be a valid, perfected lien subject to no liens other than liens not prohibited by this Agreement or any Security Document; or any Security Document is amended, subordinated, terminated or discharged, or any person is released from any of its covenants or obligations except to the extent that Lender expressly consents in writing thereto. 8.1.17 The death of any Guarantor who is an individual. 8.1.18 A default with respect to any evidence of Indebtedness in excess of $25,000 by it (other than to Lender pursuant to this Agreement), if the effect of such default is to accelerate the maturity of such Indebtedness or to permit the holder thereof to cause such Indebtedness to become due prior to the stated maturity thereof, or if any Indebtedness of it in excess of $25,000 (other than to Lender pursuant to this Agreement) is not paid when due and payable, whether at the due date thereof or a date fixed for prepayment or otherwise (after the expiration of any applicable grace period). 8.1.19 The revocation of any permit or license required in the operation of the Hotel Mexico Restaurant on the Property. 8.2 LENDER'S REMEDIES IN THE EVENT OF DEFAULT. Upon the occurrence of any Event of Default, Lender, in addition to all remedies conferred upon Lender by law or equity and by the terms of the Loan Documents, may, in its sole discretion, pursue any one or more of the following remedies concurrently or successively, it being the intent hereof that none of such remedies will be to the exclusion of any other: 8.2.1 Take possession of the Property and complete the construction and equipping of the Project and do anything in Lender's sole judgment to fulfill the obligations of Borrower hereunder, any expense incurred by Lender being deemed to be part of the Obligations of Borrower pursuant to the Loan, including the right to procure performance of existing contracts or let contracts with the same contractors or others. Without restricting the generality of the foregoing and for purposes aforesaid, Borrower hereby appoints and constitutes Lender its lawful attorney-in-fact with full power of substitution in the premises to complete construction and equipping of the Project in the name of Borrower; to use unadvanced funds remaining under the Loan or which may be reserved or escrowed for any purpose hereunder to complete the Project; to make changes in the Plans and Specifications necessary or desirable to complete the Project; to retain or employ new general contractors, subcontractors, architects and inspectors as will be required for such purposes; to pay, settle, or compromise all existing bills and claims which may become a lien on the Property or as may be necessary or desirable for the completion of the construction of the Project or for the clearance of title; to negotiate, enter into, execute, deliver and collect rents under any lease or leases for all or any portion of the Project or the Property; to provide for and cause the completion of any tenant work tenant furnishings and/or tenant improvements for all or any portion of the Project or the Property; and -23- 24 to do any and every act which Borrower might do in its own behalf to prosecute and defend all actions or proceedings in connection with the Project or the Property; to take such action and require such performance as Lender deems necessary under any of the bonds which may be furnished hereunder and to make settlements and compromises with any surety or sureties thereunder, and in connection therewith, to execute instruments of release and satisfaction; it being understood and agreed that this power of attorney will be a power coupled with an interest and cannot be revoked; 8.2.2 Withhold further disbursement of the proceeds of the Loan; 8.2.3 Declare the entire indebtedness evidenced by the Note, including all payments for taxes, assessments, insurance premiums, liens, costs, expenses and Attorneys' Fees herein specified, without demand or notice of any kind (which are hereby expressly waived) to be due and payable at once and, in that event, such indebtedness and the Obligations will become immediately due and payable, provided, however that upon occurrence of any of the events described in Section 8.1.5, such acceleration will occur automatically and without any notice or other action on the part of Lender; and to 8.2.4 Offset and apply to all or any part of the Loan, all money, credits and other property of any nature whatsoever of Borrower now or at any time hereafter in the possession, in transit to or from, under the control or custody of, or on deposit with Lender (whether held by Borrower individually or jointly with another party). 8.2.5 Request the appointment of a receiver of the Collateral. Such appointment may be made without notice, and without regard to (i) the solvency or insolvency, at the time of application for such receiver, of the person or persons, if any, liable for the payment of the Obligations; and (ii) the value of the Collateral at such time. Such receiver will have the power to take possession, control and care of the Collateral and to collect all accounts resulting therefrom. Notwithstanding the appointment of any receiver, trustee, or other custodian, Lender will be entitled to the possession and control of any cash, or other instruments at the time held by, or payable or deliverable under the terms of this Loan Agreement or any Security Documents to Lender. 8.3 Advances to Cure Default. In the event that Borrower fails to perform any of Borrower's convenants or agreements under this Agreement, Lender may, but will not be required to, perform any or all of such covenants and agreements after ten (10) days written notice to Borrower (unless in Lender's judgment the sending of a ten (10) day notice may impair the security of the Loan Documents or the Project or the Property), and any amounts expended by Lender in so doing will constitute additional indebtedness under this Agreement and under the Mortgage and will be repaid as provided therein. 8.4 Marketing of Project. In the event that there is an occurrence of an Event of Default, Lender will be entitled to publicize the Project for sale and to furnish rent rolls, operating statement and all other information pertaining to the Project in the possession -24- 25 of Lender to prospective purchasers and their lenders in anticipation of, or concurrent with, Lender's enforcement of its rights and remedies under the Loan Documents and/or acquisition of the Project by foreclosure, deed in lieu of foreclosure or otherwise and will be entitled to engage a real estate broker for such purpose. All such marketing activities and brokerage arrangements under in connection with such marketing of the Project will be the sole expense of Borrower. 9. GENERAL COVENANTS. 9.1 INDEMNITY. Borrower will indemnify, defend and hold harmless, Lender, its directors, officers, counsel and employees, from and against all claims, demands, liabilities, judgements, losses, damages, costs and expenses, joint or several (including all accounting fees and Attorneys' Fees reasonably incurred), that Lender or any such indemnified party may incur arising under or by reason of this Agreement or any act hereunder or with respect hereto or thereto including but not limited to any of the foregoing relating to any act, mistake or failure to act in perfecting, maintaining, protecting or realizing on any collateral or lien thereon except the willful misconduct or gross negligence of such indemnified party. Without limiting the generality of the foregoing, Borrower agrees that if, after receipt by Lender of any payment of all or any part of the Obligations, demand is made at any time upon Lender for the repayment or recovery of any amount or amounts received by it in payment or on account of the Obligations and Lender repays all or any part of such amount or amounts by reason of any judgement, decree or order of any court or administrative body, or by reason of any settlement or compromise of any such demand, this Agreement will continue in full force and effect and Borrower will be liable, and will indemnify, defend and hold harmless Lender for the amount or amounts so repaid. The provisions of this Section will be and remain effective notwithstanding any contrary action which may have been taken by Borrower in reliance upon such payment, and any such contrary action so taken will be without prejudice to Lender's rights under this Agreement and will be deemed to have been conditioned upon such payment having become final and irrevocable. The provisions of this Section will survive the expiration or termination of this Agreement or the release of the Security Documents. 9.2 CONTINUING AGREEMENT. This Agreement is and is intended to be a continuing agreement and will remain in full force and effect until the Loan is finally and irrevocably paid in full and this Agreement is terminated by a writing signed by Lender specifically terminating this Agreement. 9.3 NO THIRD PARTY BENEFICIARIES. Nothing express or implied herein is intended or will be construed to confer upon or give any Person, other than the parties hereto, any right or remedy hereunder or by reason hereof. 9.4 NO PARTNERSHIP OR JOINT VENTURE. Nothing contained herein or in any of the agreements or transactions contemplated hereby is intended or will be construed to create any relationship other than as expressly stated herein or therein and will not create any joint venture, partnership or other relationship. -25- 26 9.5 WAIVER. No delay or omission on the part of Lender to exercise any right or power arising from any Event of Default will impair any such right or power or be considered a waiver of any such right or power or a waiver of any such Event of Default or an acquiescence therein nor will the action or nonaction of Lender in case of such Event of Default impair any right or power arising as a result thereof or affect any subsequent default or any other default of the same or a different nature. No disbursement of the Loan hereunder will constitute a waiver of any of the conditions to Lender's obligation to make further disbursements; nor, in the event that Borrower is unable to satisfy any such condition, will any such disbursement have the effect of precluding Lender from thereafter declaring such inability to be an Event of Default. 9.6 NOTICES. All notices, demands, requests, consents, approvals and other communications required or permitted hereunder will be in writing and will be conclusively deemed to have been received by a party hereto and to be effective if delivered personally to such party, or sent by telex, telecopy (followed by written confirmation) or other telegraphic means, or by overnight courier service, or by certified or registered mail, return receipt requested, postage prepaid, addressed to such party at the address set forth below or to such other address as any party may give to the other in writing for such purpose: To Lender: PNC Bank, Ohio, National Association 201 East Fifth Street Cincinnati, Ohio 45202 Attention: Commercial Real Estate To Borrower: Kenwood Restaurant Limited Partnership 8260 North Creek Drive, Suite 140 Cincinnati, Ohio 45236 Attention: Mr. Stephen D. King All such communications, if personally delivered, will be conclusively deemed to have been received by a party hereto and to be effective when so delivered, or if sent by telex, telecopy or telegraphic means, on the day on which transmitted, or if sent by overnight courier service, on the day after deposit thereof with such service, or if sent by certified or registered mail, on the third business day after the day on which deposited in the mail. 9.7 SUCCESSORS AND ASSIGNS. This Agreement will be binding upon and inure to the benefit of Borrower and Lender and their respective successors and assigns, provided, however, that Borrower may not assign this Agreement in whole or in part without the prior written consent of Lender and Lender at any time may assign this Agreement in whole or in part. 9.8 MODIFICATIONS. This Agreement, the Note and the Loan Documents, and the documents listed on the Closing Memo, constitute the entire agreement of the parties and supersede all prior agreements and understandings regarding the subject matter of this -26- 27 Agreement, including but not limited to any proposal or commitment letters. No modification or waiver of any provision of this Agreement, the Note, any of the Loan Documents or any of the documents listed on the Closing Memo, nor consent to any departure by Borrower therefrom, will be established by conduct, custom or course of dealing; and no modification, waiver or consent will in any event be effective unless the same is in writing and specifically refers to this Agreement, and then such waiver or consent will be effective only in the specific instance and for the purpose for which given. No notice to or demand on Borrower in any case will entitle Borrower to any other or further notice or demand in the same, similar or other circumstance. 9.9 REMEDIES CUMULATIVE. No single or partial exercise of any right or remedy by Lender will preclude any other or further exercise thereof or the exercise of any other right or remedy. All remedies hereunder and in any instrument or document evidencing, securing, guaranteeing or relating to the Loan or now or hereafter existing at law or in equity or by statute are cumulative and none of them will be exclusive of the others or any other remedy. All such rights and remedies may be exercised separately, successively, concurrently, independently or cumulatively from time to time and as often and in such order as Lender may deem appropriate. 9.10 EXTENT OF LENDER'S REVIEW. The review and approval of the Plans and Specifications by Lender or any of its professionals will not constitute a representation or warranty as to the engineering or architectural design in the preparation of the Plans and Specifications, the quality of materials or workmanship covered by the Plans and Specifications or the Project's compliance with applicable federal, state or local laws and policies. It will be the sole responsibility of Borrower and its professionals to confirm all such matters and Borrower will not be entitled to rely on Lender or its professionals for such purpose. 9.11 ILLEGALITY. If fulfillment of any provision hereof or any transaction related hereto or of any provision of the Note or the Loan Documents, at the time performance of such provision is due, involves transcending the limit of validity prescribed by law, then ipso facto, the obligation to be fulfilled will be reduced to the limit of such validity; and if any clause or provisions herein contained (other than the provisions hereof pertaining to repayment of the Obligations) operates or would prospectively operate to invalidate this Agreement in whole or in part, then such clause or provision only will be void, as though not herein contained, and the remainder of this Agreement will remain operative and in full force and effect; and if such provision pertains to repayment of the Obligations, then, at the option of Lender, all of the Obligations of Borrower to Lender will become immediately due and payable. 9.12 GENDER, ETC. Whenever used herein, the singular number will include the plural, the plural the singular and the use of the masculine, feminine or neuter gender will include all genders. 9.13 HEADINGS. The headings in this Agreement are for convenience only and will not limit or otherwise affect any of the terms hereof. -27- 28 9.14 TIME. Time is of the essence in the performance of this Agreement. 9.15 GOVERNING LAW AND JURISDICTION; NO JURY TRIAL. THIS AGREEMENT WILL BE INTERPRETED AND THE RIGHTS AND LIABILITIES OF THE PARTIES HERETO DETERMINED IN ACCORDANCE WITH THE LAWS OF THE STATE OF OHIO, WITHOUT REGARD TO CONFLICTS OF LAW PRINCIPLES, AND BORROWER HEREBY AGREES TO THE JURISDICTION OF ANY STATE OR FEDERAL COURT LOCATED WITHIN HAMILTON COUNTY, OHIO AND CONSENTS THAT ALL SERVICE OF PROCESS BE MADE BY CERTIFIED MAIL DIRECTED TO BORROWER AT BORROWER'S ADDRESS SET FORTH HEREIN FOR NOTICES AND SERVICE SO MADE WILL BE DEEMED TO BE COMPLETED FIVE (5) BUSINESS DAYS AFTER THE SAME HAS BEEN DEPOSITED IN U.S. MAILS, POSTAGE PREPAID; PROVIDED THAT NOTHING CONTAINED HEREIN WILL PREVENT LENDER FROM BRINGING ANY ACTION OR EXERCISING ANY RIGHTS AGAINST ANY SECURITY OR AGAINST BORROWER INDIVIDUALLY, OR AGAINST ANY PROPERTY OF BORROWER, WITHIN ANY OTHER STATE OR NATION. BORROWER WAIVES ANY OBJECTION BASED ON FORUM NON CONVENIENS AND ANY OBJECTION TO VENUE IN ANY ACTION INSTITUTED HEREUNDER. BORROWER AND LENDER EACH WAIVE ANY RIGHT TO TRIAL BY JURY IN ANY ACTION OR PROCEEDING RELATING TO THIS AGREEMENT, ANY DOCUMENTS EVIDENCING ANY OF THE OBLIGATIONS, OR ANY TRANSACTION CONTEMPLATED IN ANY OF SUCH AGREEMENTS. Executed on October 9, 1996. BORROWER: KENWOOD RESTAURANT LIMITED PARTNERSHIP By: Kenwood Restaurant, Inc., its General Partner By: Stephen D. King --------------------- Stephen D. King President -28- 29 LENDER: PNC BANK, OHIO, NATIONAL ASSOCIATION By: Wendy Gaskic --------------------- Print Name: Wendy Gaskic -------------- Title: Loan Officer ------------------ -29- 30
CONSTRUCTION INC. CONCEPTUAL ESTIMATE (CONFIDENTIAL) PG 1 OF 3 - -------------------------------------------------------------------------------------------------------------------------------- HOTEL MEXICO DURATION GROSS BLDG AREA MAY 18,1995 -------- --------------- ----------- SYCAMORE PLAZA START DATE Bsmt. AREA* 4,015 SF EST# E5004 KENWOOD MALL COMPL DATE 1st FL AREA* 7,729 SF File: HTL MEX WC2 -------------------- 6.00% SALES TAX TOTAL MOCNS 7.5 2nd NET AREA 4,767 SF SITE PERIM ------ ---- ----- Y BLDRS RISK INSUR (Y OR N) TOTAL WEEKS TOTAL 16,511 SF ACRES LF* N PERFORMANCE BOND (Y OR N OR ALT) - ------------------------------------------------------------------------------------------------------------------------------------ Mat Lab Sub Cs ITEM DESCRIPTION QTY U @ @ @ MATL LABOR SUB TOTAL COST/SF - ------------------------------------------------------------------------------------------------------------------------------------ 2100 Site Demolition 1 LS 1600 1,600 1,600 0.10 - ------------------------------------------------------------------------------------------------------------------------------------ 2150 Selective Demolition N - ------------------------------------------------------------------------------------------------------------------------------------ 2210 Site Grading W/2100 2000 - ------------------------------------------------------------------------------------------------------------------------------------ 2220 Bldg Excavation & BF 1 3100 6470 N 8188 6,858 8,188 15,046 0.91 - ------------------------------------------------------------------------------------------------------------------------------------ 2220 domy Fdtns 1 4200 N - ------------------------------------------------------------------------------------------------------------------------------------ 2220 do Basement 1 WBA 8130 7326 8349 8,618 7,326 8,349 24,293 1.47 - ------------------------------------------------------------------------------------------------------------------------------------ 2220 do Earth Spolis 1 WBA 11149 11,149 11,149 0.68 - ------------------------------------------------------------------------------------------------------------------------------------ 2221 S-O-G Gran Drng Crs 1 3300 1719 N 499 1,822 499 2,321 0.14 - ------------------------------------------------------------------------------------------------------------------------------------ 2221 do- Site Walks 1 ORIG 522 171 553 171 724 0.04 - ------------------------------------------------------------------------------------------------------------------------------------ 2240 Soil Stabilization N - ------------------------------------------------------------------------------------------------------------------------------------ 2250 Termite Control 1 3300 1391 1,391 1,391 0.08 - ------------------------------------------------------------------------------------------------------------------------------------ 2350 Drift Caissons (Incl. Casing) 5 DAYS 1500 7,500 7,500 0.45 - ------------------------------------------------------------------------------------------------------------------------------------ 2505 Foundation Drainage 1 3100 636 576 674 576 1,250 0.08 - ------------------------------------------------------------------------------------------------------------------------------------ 2505 do Basement 1 WBA 636 1440 674 1,440 2,114 0.13 - ------------------------------------------------------------------------------------------------------------------------------------ 2510 Storm Sewer 1 LS 1000 1,000 1,000 0.06 - ------------------------------------------------------------------------------------------------------------------------------------ 2520 Sanitary Sewer 1 LS 2500 2,500 2,500 0.15 - ------------------------------------------------------------------------------------------------------------------------------------ 2550 Water Serv. - Domestic 1 LS 1500 1,500 1,500 0.09 - ------------------------------------------------------------------------------------------------------------------------------------ 2560 Fire Line 1 LS 3000 3,000 3,000 0.18 - ------------------------------------------------------------------------------------------------------------------------------------ 2580 Gas Service 1 LS 1000 1,000 1,000 0.06 - ------------------------------------------------------------------------------------------------------------------------------------ 2600 Asphalt Paving (Patch) 600 SY 18 10,800 10,800 0.65 - ------------------------------------------------------------------------------------------------------------------------------------ 2650 Site Concrete B/O ORIG 3527 5586 - ------------------------------------------------------------------------------------------------------------------------------------ 2700 Site Improvements N - ------------------------------------------------------------------------------------------------------------------------------------ 2710 Fencers & Gates N - ------------------------------------------------------------------------------------------------------------------------------------ 2750 Lawn Irrigation System N - ------------------------------------------------------------------------------------------------------------------------------------ 2800 Landscaping B/O 2000 - ------------------------------------------------------------------------------------------------------------------------------------ 3100 Bldg Conc-Foundtns 1 3100 19471 24624 20,638 24,624 45,263 2.74 - ------------------------------------------------------------------------------------------------------------------------------------ 3100 do Basement 1 WB3 15492 42469 16,422 42,469 58,891 3.57 - ------------------------------------------------------------------------------------------------------------------------------------ 3150 Caissons - Concrete 60 CY 45.5 66.6667 2,894 4,000 6,894 0.42 - ------------------------------------------------------------------------------------------------------------------------------------ 3150 Caissons - Reber 4 TON 500 W/Abov 2,120 2,120 0.13 - ------------------------------------------------------------------------------------------------------------------------------------ 3100 Conc Ftgs a Msy Fdtns 1 4200 N - ------------------------------------------------------------------------------------------------------------------------------------ 3300 Bldg Conc-Flatwork SOG 1 3300 7973 N 6527 8,451 6,527 14,978 0.91 - ------------------------------------------------------------------------------------------------------------------------------------ 3300 do Basement 1 WB3 3868 3325 4,100 3,325 7,425 0.45 - ------------------------------------------------------------------------------------------------------------------------------------ 3300 do- SOD - 2nd Floor 1 3300 4917 5078 767 5,212 5,078 767 11,057 0.67 - ------------------------------------------------------------------------------------------------------------------------------------ 3300 do- SOD - Roof 1 3300 4069 3340 627 4,313 3,340 627 8,280 0.50 - ------------------------------------------------------------------------------------------------------------------------------------ 3300 Seal Conc Floors 1 5000 - ------------------------------------------------------------------------------------------------------------------------------------ 3400 Precast Concrete N - ------------------------------------------------------------------------------------------------------------------------------------ 3500 Cementious Decks N - ------------------------------------------------------------------------------------------------------------------------------------ 4200 Masonry 1 W42 44412 44,412 44,412 2.69 - ------------------------------------------------------------------------------------------------------------------------------------ 5100 Structural Steel 1 5000 73984 N 19917 78,423 19,917 98,340 5.96 - ------------------------------------------------------------------------------------------------------------------------------------ 5100 do Basement 1 ORIG 4802 1867 5,090 1,867 6,957 0.42 - ------------------------------------------------------------------------------------------------------------------------------------ 5200 Steel Joists 1 5000 12715 N 4979 13,478 4,979 18,457 1.12 - ------------------------------------------------------------------------------------------------------------------------------------ 5200 do Basement 1 ORIG 5107 1867 5,413 1,867 7,280 0.44 - ------------------------------------------------------------------------------------------------------------------------------------ 5300 Metal Roof Deck 1 5000 8972 N 2858 9,510 2,858 12,368 0.75 - ------------------------------------------------------------------------------------------------------------------------------------ 5350 Metal Form Deck W/ABOV - ------------------------------------------------------------------------------------------------------------------------------------ 5350 do Over Basement 1 ORIG 1995 598 2,115 598 2,713 0.16 - ------------------------------------------------------------------------------------------------------------------------------------ 5400 Lt Ga Metal Framing W/6100 - ------------------------------------------------------------------------------------------------------------------------------------ 5500 Misc Steel Fabrications N - ------------------------------------------------------------------------------------------------------------------------------------ 5510 Metal Stairs & Railings 26 RIS 150 3,900 3,900 0.24 - ------------------------------------------------------------------------------------------------------------------------------------ 5510 do Basement 20 RIS 150 3,000 3,000 0.18 - ------------------------------------------------------------------------------------------------------------------------------------ 5515 Roof Ladder N - ------------------------------------------------------------------------------------------------------------------------------------ 5800 Guard Rail N - ------------------------------------------------------------------------------------------------------------------------------------ 6100 R. Carpentry-Exter Walls 1 6100 27228 15810 28,862 15,810 44,672 2.71 - ------------------------------------------------------------------------------------------------------------------------------------ 6100 do Eurred Walls 1 6100 1630.8 1667 1,729 1,667 3,396 0.21 - ------------------------------------------------------------------------------------------------------------------------------------
31
CONSTRUCTION INC. CONCEPTUAL ESTIMATE (CONFIDENTIAL) PG 2 OF 3 - -------------------------------------------------------------------------------------------------------------------------------- HOTEL MEXICO DURATION GROSS BLDG AREA MAY 18,1995 SYCAMORE PLAZA -------- --------------- ----------- KENWOOD MALL START DATE Bsmt. AREA* 4,015 SF EST # E5004 COMPL DATE 1st FL AREA* 7,728 SF File: HTL MEX WC2 TOTAL MONS ----------------- TOTAL WEEKS 7.5 2nd NET AREA* 4,767 SF SITE PERIM 6.00% SALES TAX ------ ---- ----- Y BLDRS RISK INSUR (Y OR N) TOTAL* 16,511 SF ACRES LF* N PERFORMANCE BOND (Y OR N OR ALT) - -------------------------------------------------------------------------------------------------------------------------------- Mat Lab Sub C# ITEM DESCRIPTION QTY U @ @ @ MATL LABOR SUB TOTAL COST/SF - ------ ---------------------------- --------- -------- --------- ---------- -------- --------- ------- ------- -------- ------------ 6100 do- Inter Partns 1 6100 15163.2 8254 16,073 8,254 24,327 1.47 - ------ ---------------------------- --------- -------- --------- ---------- -------- --------- ------- ------- -------- ------------ 6100 do- Roof Frmg 1 6100 1918.8 1676 2,034 1,676 3,710 0.22 - ------ ---------------------------- --------- -------- --------- ---------- -------- --------- ------- ------- -------- ------------ 6200 FRP Panel/ Kitchen 3000 SF 1.5 0.75 4,770 2,250 7,020 0.43 - ------ ---------------------------- --------- -------- --------- ---------- -------- --------- ------- ------- -------- ------------ 6190 Wood Trusses 1 6100 - ------ ---------------------------- --------- -------- --------- ---------- -------- --------- ------- ------- -------- ------------ 6200 Finish Carpentry 1 6400 - ------ ---------------------------- --------- -------- --------- ---------- -------- --------- ------- ------- -------- ------------ 6200 PLAM Wdw Stools 1 6400 1297 459 1,375 459 1,834 0.11 - ------ ---------------------------- --------- -------- --------- ---------- -------- --------- ------- ------- -------- ------------ 6400 Prefab Cabinets + Shlvg 1 6400 1674 374 1,774 374 2,148 0.13 - ------ ---------------------------- --------- -------- --------- ---------- -------- --------- ------- ------- -------- ------------ 7100 Waterproofing N - ------ ---------------------------- --------- -------- --------- ---------- -------- --------- ------- ------- -------- ------------ 7150 Dampproofing 1 7000 1250 1,250 1,250 0.08 - ------ ---------------------------- --------- -------- --------- ---------- -------- --------- ------- ------- -------- ------------ 7150 do Basement 1 OMG 6264 6,264 6,244 0.30 - ------ ---------------------------- --------- -------- --------- ---------- -------- --------- ------- ------- -------- ------------ 7210 Insulation - Batt 1 7000 8100 8,100 8,100 0.40 - ------ ---------------------------- --------- -------- --------- ---------- -------- --------- ------- ------- -------- ------------ 7220 Sound - Batt 1 7000 628 628 628 0.04 - ------ ---------------------------- --------- -------- --------- ---------- -------- --------- ------- ------- -------- ------------ 7240 EIFS/ Dryvtt 1 7000 39537 39,537 39,537 2.39 - ------ ---------------------------- --------- -------- --------- ---------- -------- --------- ------- ------- -------- ------------ 7250 Perim + U/slab Insul 1 7000 684 306 725 306 1,031 0.06 - ------ ---------------------------- --------- -------- --------- ---------- -------- --------- ------- ------- -------- ------------ 7300 Roof Shingles + Sht Met 1 7000 - ------ ---------------------------- --------- -------- --------- ---------- -------- --------- ------- ------- -------- ------------ 7400 Preform Roof + Siding W/Belo - ------ ---------------------------- --------- -------- --------- ---------- -------- --------- ------- ------- -------- ------------ 7600 Singl Ply Roof, SM+Acc 1 7000 65700 65,700 65,700 3.96 - ------ ---------------------------- --------- -------- --------- ---------- -------- --------- ------- ------- -------- ------------ 7630 Gutters & DS W/Abov - ------ ---------------------------- --------- -------- --------- ---------- -------- --------- ------- ------- -------- ------------ 7800 Roof Accessories N - ------ ---------------------------- --------- -------- --------- ---------- -------- --------- ------- ------- -------- ------------ 7810 Skylights N - ------ ---------------------------- --------- -------- --------- ---------- -------- --------- ------- ------- -------- ------------ 7830 Roof Hatches N - ------ ---------------------------- --------- -------- --------- ---------- -------- --------- ------- ------- -------- ------------ 7900 Sealants + Caulking 1 7000 19 43 20 43 63 0.00 - ------ ---------------------------- --------- -------- --------- ---------- -------- --------- ------- ------- -------- ------------ 8100 H.M.Doors + Frames 1 8000 893 238 947 236 1,185 0.07 - ------ ---------------------------- --------- -------- --------- ---------- -------- --------- ------- ------- -------- ------------ 8200 Wood Doors 1 8000 477 216 506 216 722 0.04 - ------ ---------------------------- --------- -------- --------- ---------- -------- --------- ------- ------- -------- ------------ 8300 Special Doors/Entry Doors B/RAM EA 1600 288 - ------ ---------------------------- --------- -------- --------- ---------- -------- --------- ------- ------- -------- ------------ 8360 Overhead Doors N - ------ ---------------------------- --------- -------- --------- ---------- -------- --------- ------- ------- -------- ------------ 8400 Entrances + Storefronts B/RAM 8000 900 - ------ ---------------------------- --------- -------- --------- ---------- -------- --------- ------- ------- -------- ------------ 8500 Metal / Alum Windows N - ------ ---------------------------- --------- -------- --------- ---------- -------- --------- ------- ------- -------- ------------ 8600 Wood Windows N - ------ ---------------------------- --------- -------- --------- ---------- -------- --------- ------- ------- -------- ------------ 8700 Finish Hardware 1 8000 2134 622 2,262 622 2,884 0.17 - ------ ---------------------------- --------- -------- --------- ---------- -------- --------- ------- ------- -------- ------------ 8710 ADA Requirements W/ABOV - ------ ---------------------------- --------- -------- --------- ---------- -------- --------- ------- ------- -------- ------------ 8800 Glass & Glazing 1 8000 57307 57,307 57,307 3.47 - ------ ---------------------------- --------- -------- --------- ---------- -------- --------- ------- ------- -------- ------------ 9250 Drywall 1 9000 26950 26,950 26,950 1.63 - ------ ---------------------------- --------- -------- --------- ---------- -------- --------- ------- ------- -------- ------------ 9260 Metal Studs - Exter Walls W/6100 6100 27228 15810 - ------ ---------------------------- --------- -------- --------- ---------- -------- --------- ------- ------- -------- ------------ 9280 do- Inter Partns W/6100 6100 15163.2 8254 - ------ ---------------------------- --------- -------- --------- ---------- -------- --------- ------- ------- -------- ------------ 9300 Tile- Ceramic, Quarry 1 9000 40616 40,616 40,616 2.46 - ------ ---------------------------- --------- -------- --------- ---------- -------- --------- ------- ------- -------- ------------ 9300 Marble & Slate Tile N - ------ ---------------------------- --------- -------- --------- ---------- -------- --------- ------- ------- -------- ------------ 9600 Acoustical Ceilings 1 9000 6306 6,306 6,306 0.38 - ------ ---------------------------- --------- -------- --------- ---------- -------- --------- ------- ------- -------- ------------ 9650 Vinyl Tile W/9680 9000 - ------ ---------------------------- --------- -------- --------- ---------- -------- --------- ------- ------- -------- ------------ 9660 Vinyl Base 1 9000 1171 1,171 1,171 0.07 - ------ ---------------------------- --------- -------- --------- ---------- -------- --------- ------- ------- -------- ------------ 9660 Resil Sheet Flooring N - ------ ---------------------------- --------- -------- --------- ---------- -------- --------- ------- ------- -------- ------------ 9680 Carpet 1 9000 14103 14,103 14,103 0.85 - ------ ---------------------------- --------- -------- --------- ---------- -------- --------- ------- ------- -------- ------------ 9700 Special Flooring N - ------ ---------------------------- --------- -------- --------- ---------- -------- --------- ------- ------- -------- ------------ 9800 Special Coatings N - ------ ---------------------------- --------- -------- --------- ---------- -------- --------- ------- ------- -------- ------------ 9900 Painting 1 9000 16804 16,804 16,804 1.02 - ------ ---------------------------- --------- -------- --------- ---------- -------- --------- ------- ------- -------- ------------ 10160 Toilet Partitions 1 10000 2400 2,400 2,400 0.15 - ------ ---------------------------- --------- -------- --------- ---------- -------- --------- ------- ------- -------- ------------ 10200 Louvers + Vents N - ------ ---------------------------- --------- -------- --------- ---------- -------- --------- ------- ------- -------- ------------ 10350 Flagpoles N - ------ ---------------------------- --------- -------- --------- ---------- -------- --------- ------- ------- -------- ------------ 10390 Fire Exting + Cabinets 1 10000 657 696 696 0.04 - ------ ---------------------------- --------- -------- --------- ---------- -------- --------- ------- ------- -------- ------------ 10400 Signage - Interior N - ------ ---------------------------- --------- -------- --------- ---------- -------- --------- ------- ------- -------- ------------ 10420 Signage - Exterior N - ------ ---------------------------- --------- -------- --------- ---------- -------- --------- ------- ------- -------- ------------ 10500 Lockers N - ------ ---------------------------- --------- -------- --------- ---------- -------- --------- ------- ------- -------- ------------ 10600 Toilet Room Access 1 10000 1172 298 1,242 298 1,540 0.09 - ------ ---------------------------- --------- -------- --------- ---------- -------- --------- ------- ------- -------- ------------
32
CONSTRUCTION INC. CONCEPTUAL ESTIMATE (CONFIDENTIAL) PG 3 OF 3 - -------------------------------------------------------------------------------------------------------------------------------- HOTEL MEXICO DURATION GROSS BLDG AREA MAY 18,1995 -------- --------------- ----------- SYCAMORE PLAZA START DATE Bsmt. AREA* 4,015 SF EST# E5004 KENWOOD MALL COMPL DATE 1st FL AREA* 7,728 SF File: HTL MEX WC2 -------------------- 6.00% SALES TAX TOTAL MONS 7.5 2nd NET AREA 4,767 SF SITE PERIM ------ ---- ----- Y BLDRS RISK INSUR (Y OR N) TOTAL WEEKS TOTAL 16,511 SF ACRES LF* N PERFORMANCE BOND (Y OR N OR ALT) - ------------------------------------------------------------------------------------------------------------------------------------ Mat Lab Sub Cs ITEM DESCRIPTION QTY U @ @ @ MATL LABOR SUB TOTAL COST/SF - ------------------------------------------------------------------------------------------------------------------------------------ 11000 Equipment N - ------------------------------------------------------------------------------------------------------------------------------------ 11050 Install Owner Furn Equip N - ------------------------------------------------------------------------------------------------------------------------------------ 11630 Laundry Equip N - ------------------------------------------------------------------------------------------------------------------------------------ 11900 Appliances N - ------------------------------------------------------------------------------------------------------------------------------------ 12000 Furnishings N - ------------------------------------------------------------------------------------------------------------------------------------ 12500 Window Treatment N - ------------------------------------------------------------------------------------------------------------------------------------ 12570 Rugs + Mats N - ------------------------------------------------------------------------------------------------------------------------------------ 14000 Conveying Systems N - ------------------------------------------------------------------------------------------------------------------------------------ 15400 Plumbing 1.6 15400 25500 40,800 40,800 2.47 - ------------------------------------------------------------------------------------------------------------------------------------ 15450 Limited Sprinkler Sys N - ------------------------------------------------------------------------------------------------------------------------------------ 15500 Fire Sprinkler System 16511 SF 1.6625 27,450 27,450 1.66 - ------------------------------------------------------------------------------------------------------------------------------------ 15600 Gas Piping (House) W/BELO - ------------------------------------------------------------------------------------------------------------------------------------ 15800 H.V.A.C. 1 15800 156580 156,580 156,580 9.48 - ------------------------------------------------------------------------------------------------------------------------------------ 15050 Electrical Service W/BELO - ------------------------------------------------------------------------------------------------------------------------------------ 16100 Electrical Work 1 16000 102648 102,648 102,648 6.22 - ------------------------------------------------------------------------------------------------------------------------------------ 16100 do Basement 1 CRIG 5672 5,672 5,672 0.34 - ------------------------------------------------------------------------------------------------------------------------------------ 16720 Fire Alarm System W/16100 - ------------------------------------------------------------------------------------------------------------------------------------ 16730 Detection System N - ------------------------------------------------------------------------------------------------------------------------------------ 16750 Telephone System N - ------------------------------------------------------------------------------------------------------------------------------------ 16770 PA System N - ------------------------------------------------------------------------------------------------------------------------------------ 16780 Television System N - ------------------------------------------------------------------------------------------------------------------------------------ 16790 Telecomm Sys N - ------------------------------------------------------------------------------------------------------------------------------------ SUB-TOTAL SITE & BLDG. ESTIM. COST= 260,394 49,973 884,670 1,155,037 69.96 PROOF= 1,155,037 69.96 1000 GELN COND 57,021 3.45 - ------------------------------------------------------------------------------------------------------------------------------------ 1000 A/E +CIVIL A/E FEES B/O - ------------------------------------------------------------------------------------------------------------------------------------ 1,212,058 TOTAL ESTIMATED COST 1,212,058 73.41 OH+P 108,000 6.54 228 CALANDAR DAYS 1,320,058 SUB-TOTAL 1,328,058 79.95 1000 Insurance & Bond BLDRS RISK= BY OWNER - ------------------------------------------------------------------------------------------------------------------------------------ 1000 PERF BOND= NONE - ------------------------------------------------------------------------------------------------------------------------------------ TOTAL BID= $1,320,058 79.95 BID TENDERED= 1,320,058 79.95 C: R.WADE - ------------------------------------------------------------------------------------------------------------------------------------ M. RUPE/ CONTRACT FILE & COST SU LASCHAELS ALT BID/ + PERF BOND NA 06/19/95 MARVIN SPRADLING, RAM fx - ------------------------------------------------------------------------------------------------------------------------------------ 06/19/95 STEVE KING, HOTEL MEXICO - ------------------------------------------------------------------------------------------------------------------------------------ Previous Estimates Comparison 02/07/96 2-Story (No Basement) $982,978 03/13/95 Revised Basement 174,000 Previous Total $1,156,978 Difference this Estimate Add $ 163,080 ------ APPROVED BY: --------------------- DATE: --------------------- - ------------------------------------------------------------------------------------------------------------------------------------
EX-10.4 10 STOCK OPTION & COMPENSATION PLAN 1 EXHIBIT 10.4 HOTEL MEXICO, INC. 1997 STOCK OPTION AND COMPENSATION PLAN 1. Purpose. The purpose of this Hotel Mexico, Inc. (the "Company") 1997 Stock Option and Compensation Plan (the "Plan") is to increase stockholder value and to advance the interests of the Company by furnishing a variety of economic incentives ("Incentives") designed to attract, retain and motivate employees and certain key consultants. Incentives may consist of opportunities to purchase or receive shares of Common Stock, without par value, of the Company ("Common Stock"), monetary payments, or both, on terms determined under this Plan. 2. Administration. The Plan shall be administered by the stock option committee (the "Committee") of the board of directors of the Company (the "Board"). Subject to any provisions of state law which may require that the Committee consist of a larger number of members, if the Company stock is privately held, the Committee shall consist of one or more directors of the Company as shall be appointed from time to time by the Chairman of the Board. If the Company stock becomes the subject of a public offering, the Committee shall then consist of not less than two directors who shall be appointed from time to time by the Board, each of which such appointees shall be a "disinterested person" within the meaning of Rule 16b-3 of the Securities Exchange Act of 1934, and the regulations promulgated thereunder (the "1934 Act"), and the Board may from time to time appoint members of the Committee in substitution for, or in addition to, members previously appointed, and may fill vacancies, however caused, in the Committee. If more than one person is on the Committee, the following shall apply: (a) the Committee shall select one of its members as its chairman and shall hold its meetings at such times and places as it shall deem advisable; (b) a majority of the Committee's members shall constitute a quorum; (c) all action of the Committee shall be taken by the majority of its members; and (d) any action may be taken by a written instrument signed by majority of the members and actions so taken shall be fully effective as if they had been made by a majority vote at a meeting duly called and held. The Committee may appoint a secretary, shall keep minutes of its meetings and shall make such rules and regulations for the conduct of its business as it shall deem advisable. The Committee shall have complete authority to award Incentives under the Plan, to interpret the Plan, and to make any other determination which it believes necessary and advisable for the proper administration of the Plan. The Committee's decisions and matters relating to the Plan shall be final and conclusive on the Company and its participants. 3. Eligible Participants. Employees of or consultants to the Company or its subsidiaries or affiliates (including officers and directors, but excluding directors who are not also employees of or consultants to the Company or its subsidiaries or affiliates), shall become eligible to receive Incentives under the Plan when designated by the Committee. Participants may be designated individually or by groups or categories (for example, by pay grade) as the Committee deems appropriate. Participation by officers of the Company or its subsidiaries or affiliates and any performance objectives relating to such officers must be approved by the Committee. Participation 2 by others and any performance objectives relating to others may be approved by groups or categories (for example, by pay grade) and authority to designate participants who are not officers and to set or modify such targets may be delegated. 4. Types of Incentives. Incentives under the Plan may be granted in any one or a combination of the following forms: (a) incentive stock options and non-statutory stock options (section 6); (b) stock appreciation rights ("SARs") (section 7); (c) stock awards (section 8); (d) restricted stock (section 8); (e) performance shares (section 9); and (f) cash awards (section 10). 5. Shares Subject to the Plan. 5.1 Number of Shares. Subject to adjustment as provided in Section 11.6, the number of shares of Common Stock which may be issued under the Plan shall not exceed 500,000 shares of Common Stock. 5.2 Cancellation. To the extent that cash in lieu of shares of Common Stock is delivered upon the exercise of a SAR pursuant to Section 7.4, the Company shall be deemed, for purposes of applying the limitation on the number of shares, to have issued the greater of the number of shares of Common Stock which it was entitled to issue upon such exercise or on the exercise of any related option. In the event that a stock option or SAR granted hereunder expires or is terminated or cancelled unexercised as to any shares of Common Stock, such shares may again be issued under the Plan either pursuant to stock options, SARs or otherwise. In the event that shares of Common Stock are issued as restricted stock or pursuant to a stock award and thereafter are forfeited or reacquired by the Company pursuant to rights reserved upon issuance thereof, such forfeited and reacquired shares may again be issued under the Plan, either as restricted stock, pursuant to stock awards or otherwise. The Committee may also determine to cancel, and agree to the cancellation of, stock options in order to make a participant eligible for the grant of a stock option at a lower price than the option to be cancelled. 5.3 Type of Common Stock. Common Stock issued under the Plan in connection with stock options, SARs, performance shares, restricted stock or stock awards, may be authorized and unissued shares. 6. Stock Options. A stock option is a right to purchase shares of Common Stock from the Company. Each stock option granted by the Committee under this Plan shall be subject to the following terms and conditions: 6.1 Price. The option price per share shall be determined by the Committee, subject to adjustment under Section 11.6. 6.2 Number. The number of shares of Common Stock subject to the option shall be determined by the Committee, subject to adjustment as provided in Section 11.6. The number of shares of Common Stock subject to a stock option shall be reduced in the same -2- 3 proportion that the holder thereof exercises a SAR if any SAR is granted in conjunction with or related to the stock option. 6.3 Duration and Time for Exercise. Subject to earlier termination as provided in Section 11.4, the term of each stock option shall be determined by the Committee but shall not exceed ten years and one day from the date of grant. Each stock option shall become exercisable at such time or times during its term as shall be determined by the Committee at the time of grant. The Committee may accelerate the exercisability of any stock option. Subject to the foregoing and with the approval of the Committee, all or any part of the shares of Common Stock with respect to which the right to purchase has accrued may be purchased by the Company at the time of such accrual or at any time or times thereafter during the term of the option. 6.4 Manner of Exercise. A stock option may be exercised, in whole or in part, by giving written notice to the Company, specifying the number of shares of Common Stock to be purchased and accompanied by the full purchase price for such shares. The option price shall be payable in United States dollars upon exercise of the option and may be paid by cash; uncertified or certified check; bank draft; by delivery of shares of Common Stock in payment of all or any part of the option price, which shares shall be valued for this purpose at the Fair Market Value on the date such option is exercised; by instructing the Company to withhold from the shares of Common Stock issuable upon exercise of the stock option shares of Common Stock in payment of all or any part of the option price, which shares shall be valued for this purpose at the Fair Market Value or in such other manner as may be authorized from time to time by the Committee. Prior to the issuance of shares of Common Stock upon the exercise of a stock option, a participant shall have no rights as a stockholder. 6.5 Incentive Stock Options. Notwithstanding anything in the Plan to the contrary, the following additional provisions shall apply to the grant of stock options which are intended to qualify as Incentive Stock Options, as such term is defined in Section 422A of the Internal Revenue Code of 1986, as amended (the "Code"): (a) The aggregate Fair Market Value (determined as of the time the option is granted) of the shares of Common Stock with respect to which Incentive Stock Options are exercisable for the first time by any participant during any calendar year (under all of the Company's plans) shall not exceed $100,000. (b) Any Incentive Stock Option certificate authorized under the Plan shall contain such other provisions as the Committee shall deem advisable, but shall in all events be consistent with and contain all provisions required in order to qualify the options as Incentive Stock Options. -3- 4 (c) All Incentive Stock Options must be granted within ten years from the earlier of the date on which this Plan was adopted by the Board or the date this Plan was approved by the stockholders. (d) Unless sooner exercised, all Incentive Stock Options shall expire no later than 10 years after the date of grant. (e) The option price for Incentive Stock Options shall be not less than the Fair Market Value of the Common Stock subject to the option on the date of grant. (f) No Incentive Stock Options shall be granted to any participant who, at the time such option is granted, would own (within the meaning of Section 422A of the Code) stock possessing more than ten percent (10%) of the total combined voting power of all classes of stock of the employer corporation or of its parent or subsidiary corporation. 7. Stock Appreciation Rights. A SAR is a right to receive, without payment to the Company, a number of shares of Common Stock, cash or any combination thereof, the amount of which is determined pursuant to the formula set forth in Section 7.4. A SAR may be granted (a) with respect to any stock option granted under this Plan, either concurrently with the grant of such stock option or at such later time as determined by the Committee (as to all or any portion of the shares of Common Stock subject to the stock option), or (b) alone, without reference to any related stock option. Each SAR granted by the Committee under this Plan shall be subject to the following terms and conditions: 7.1 Number. Each SAR granted to any participant shall relate to such number of shares of Common Stock as shall be determined by the Committee, subject to adjustment as provided in Section 11.6. In the case of a SAR granted with respect to a stock option, the number of shares of Common Stock to which the SAR pertains shall be reduced in the same proportion that the holder of the option exercises the related stock option. 7.2 Duration. Subject to earlier termination as provided in Section 11.4, the term of each SAR shall be determined by the Committee but shall not exceed ten years and one day from the date of grant. Unless otherwise provided by the Committee, each SAR shall become exercisable at such time or times, to such extent and upon such conditions as the stock option, if any, to which it relates is exercisable. The Committee may in its discretion accelerate the exercisability of any SAR. 7.3 Exercise. A SAR may be exercised, in whole or in part, by giving written notice to the Company, specifying the number of SARs which the holder wishes to exercise. Upon receipt of such written notice, the Company shall, within ninety (90) days thereafter, deliver to the exercising holder certificates for the shares of Common Stock or cash or both, as determined by the Committee, to which the holder is entitled pursuant to Section 7.4. -4- 5 7.4 Payment. Subject to the right of the Committee to deliver cash in lieu of shares of Common Stock (which, as it pertains to officers and directors of the Company, shall comply with all requirements of the 1934 Act), the number of shares of Common Stock which shall be issuable upon the exercise of a SAR shall be determined by dividing: (a) the number of shares of Common Stock as to which the SAR is exercised multiplied by the amount of the appreciation in such shares (for this purpose, the "appreciation" shall be the amount by which the Fair Market Value of the shares of Common Stock subject to the SAR on the exercise date exceeds (1) in the case of a SAR related to a stock option, the purchase price of the shares of Common Stock under the stock option or (2) in the case of a SAR granted alone, without reference to a related stock option, an amount which shall be determined by the Committee at the time of grant, subject to adjustment under Section 11.6); by (b) the Fair Market Value of a share of Common Stock on the exercise date. In lieu of issuing shares of Common Stock upon the exercise of a SAR, the Committee may elect to pay the holder of the SAR cash equal to the Fair Market Value on the exercise date of any or all of the shares which would otherwise be issuable. No fractional shares of Common Stock shall be issued upon the exercise of a SAR; instead, the holder of the SAR shall be entitled to receive a cash adjustment equal to the same fraction of the Fair Market Value of a share of Common Stock on the exercise date or to purchase the portion necessary to make a whole share at its Fair Market Value on the date of exercise. 8. Stock Awards and Restricted Stock. A stock award consists of the transfer by the Company to a participant of shares of Common Stock, without other payment therefor, as additional compensation for services to the Company. A share of restricted stock consists of shares of Common Stock which are sold or transferred by the Company to a participant at a price determined by the Committee (which price shall be at least equal to the minimum price required by applicable law for the issuance of a share of Common Stock) and subject to restrictions on their sale or other transfer by the participant. The transfer of Common Stock pursuant to stock awards and the transfer and sale of restricted stock shall be subject to the following terms and conditions: 8.1 Number of Shares. The number of shares to be transferred or sold by the Company to a participant pursuant to a stock award or as restricted stock shall be determined by the Committee. 8.2 Sale Price. The Committee shall determine the price, if any, at which shares of restricted stock shall be sold to a participant, which may vary from time to time and among participants and which may be below the Fair Market Value of such shares of Common Stock at the date of sale. -5- 6 8.3 Restrictions. All shares of restricted stock transferred or sold hereunder shall be subject to such restrictions as the Committee may determine, including, without limitation any or all of the following: (a) a prohibition against the sale, transfer, pledge or other encumbrance of the shares of restricted stock, such prohibition to lapse at such time or times as the Committee shall determine (whether in annual or more frequent installments, at the time of the death, disability or retirement of the holder of such shares, or otherwise); (b) a requirement that the holder of shares of restricted stock forfeit, or (in the case of shares sold to a participant) resell back to the Company at his or her cost, all or a part of such shares in the event of termination of his or her employment or consulting engagement during any period in which such shares are subject to restrictions; (c) such other conditions or restrictions as the Committee may deem advisable. 8.4 Escrow. In order to enforce the restrictions imposed by the Committee pursuant to Section 8.3, the participant receiving restricted stock shall enter into an agreement with the Company setting forth the conditions of the grant. Shares of restricted stock shall be registered in the name of the participant and deposited, together with a stock power endorsed in blank, with the Company. Each such certificate shall bear a legend in substantially the following form: The transferability of this certificate and the shares of Common Stock represented by it are subject to the terms and conditions (including conditions of forfeiture) contained in the 1997 Stock Option and Compensation Plan of Hotel Mexico, Inc. (the "Company"), and an agreement entered into between the registered owner and the Company. A copy of the Plan and the agreement is on file at the office of the secretary of the Company. 8.5 End of Restrictions. Subject to Section 11.5, at the end of any time period during which the shares of restricted stock are subject to forfeiture and restrictions on transfer, such shares will be delivered free of all restrictions to the participant or to the participant's legal representative, beneficiary or heir. 8.6 Stockholder. Subject to the terms and conditions of the Plan, each participant receiving restricted stock shall have all the rights of a stockholder with respect to shares of stock during any period in which such shares are subject to forfeiture and restrictions on transfer, including without limitation, the right to vote such shares. Dividends paid in cash or property other than Common Stock with respect to shares of restricted stock shall be paid to the participant currently. -6- 7 9. Performance Shares. A performance share consists of an award which shall be paid in shares of Common Stock, as described below. The grant of performance share shall be subject to such terms and conditions as the Committee deems appropriate, including the following: 9.1 Performance Objectives. Each performance share will be subject to performance objectives for the Company or one of its operating units to be achieved by the end of a specified period. The number of performance shares granted shall be determined by the Committee and may be subject to such terms and conditions, as the Committee shall determine. If the performance objectives are achieved, each participant will be paid in shares of Common Stock or cash. If such objectives are not met, each grant of performance shares may provide for lesser payments in accordance with formulas established in the award. 9.2 Not Stockholder. The grant of performance shares to a participant shall not create any rights in such participant as a stockholder of the Company, until the payment of shares of Common Stock with respect to an award. 9.3 No Adjustments. No adjustment shall be made in performance shares granted on account of cash dividends which may be paid or other rights which may be issued to the holders of Common Stock prior to the end of any period for which performance objectives were established. 9.4 Expiration of Performance Share. If any participant's employment or consulting engagement with the Company is terminated for any reason other than normal retirement, death or disability prior to the achievement of the participant's stated performance objectives, all the participant's rights on the performance shares shall expire and terminate unless otherwise determined by the Committee. In the event of termination by reason of death, disability, or normal retirement, the Committee, in its own discretion may determine what portions, if any, of the performance shares should be paid to the participant. 10. Cash Awards. A cash award consists of a monetary payment made by the Company to a participant as additional compensation for his or her services to the Company. Payment of a cash award will normally depend on achievement of performance objectives by the Company or by individuals. The amount of any monetary payment constituting a cash award shall be determined by the Committee in its sole discretion. Cash awards may be subject to other terms and conditions, which may vary from time to time and among participants, as the Committee determines to be appropriate. 11. General. 11.1 Effective Date. The Plan will become effective upon its adoption by the Board. -7- 8 11.2 Duration. The Plan shall remain in effect until all Incentives granted under the Plan have either been satisfied by the issuance of shares of Common Stock or the payment of cash or been terminated under the terms of the Plan and all restrictions imposed on shares of Common Stock in connection with their issuance under the Plan have lapsed. No Incentives may be granted under the Plan after the tenth anniversary of the date the Plan is approved by the stockholders of the Company. 11.3 Non-transferability of Incentives. No stock option, SAR, restricted stock or performance award may be transferred, pledged or assigned by the holder thereof except, in the event of the holder's death, by will or the laws of descent and distribution or pursuant to a qualified domestic relations order as defined by the Code or Title I of the Employee Retirement Income Security Act, or the rules thereunder, and the Company shall not be required to recognize any attempted assignment of such rights by any participant. Notwithstanding the preceding sentence, stock options may be transferred by the holder thereof to family members, trusts or charities. During a participant's lifetime, an Incentive may be exercised only by him or her, by his or her guardian or legal representative or, in the case of stock options, by the transferees permitted by the preceding sentence. 11.4 Effect of Termination or Death. In the event that a participant ceases to be an employee of or consultant to the Company for any reason, including death, any Incentives may be exercised or shall expire at such times as may be determined by the Committee. 11.5 Additional Condition. Notwithstanding anything in this Plan to the contrary: (a) the Company may, if it shall determine it necessary or desirable for any reason, at the time of award of any Incentive or the issuance of any shares of Common Stock pursuant to any Incentive, require the recipient of the Incentive, as a condition to the receipt thereof or to the receipt of shares of Common Stock issued pursuant thereto, to deliver to the Company a written representation of present intention to acquire the Incentive or the shares of Common Stock issued pursuant thereto for his or her own account for investment and not for distribution; and (b) if at any time the Company further determines, in its sole discretion, that the listing, registration or qualification (or any updating of any such document) of any Incentive or the shares of Common Stock issuable pursuant thereto is necessary on any securities exchange or under any federal or state securities or blue sky law, or that the consent or approval of any governmental regulatory body is necessary or desirable as a condition of, or in connection with the award of any Incentive, the issuance of shares of Common Stock pursuant thereto, or the removal of any restrictions imposed on such shares, such Incentive shall not be awarded or such shares of Common Stock shall not be issued or such restrictions shall not be removed, as the case may be, in whole or in part, unless such listing, registration, qualification, consent or approval shall have been effected or obtained free of any conditions not acceptable to the Company. 11.6 Adjustment. In the event of any merger, consolidation or reorganization of the Company with any other corporation or corporations, there shall be substituted for each -8- 9 of the shares of Common Stock then subject to the Plan, including shares subject to restrictions, options, or achievement of performance share objectives, the number and kind of shares of stock or other securities to which the holders of the shares of Common Stock will be entitled pursuant to the transaction. In the event of any recapitalization, stock dividend, stock split, combination of shares or other change in the Common Stock, the number of shares of Common Stock then subject to the Plan, including shares subject to restrictions, options or achievements of performance shares, shall be adjusted in proportion to the change in outstanding shares of Common Stock. In the event of any such adjustments, the purchase price of any option, the performance objectives of any Incentive, and the shares of Common Stock issuable pursuant to any Incentive shall be adjusted as and to the extent appropriate, in the discretion of the Committee, to provide participants with the same relative rights before and after such adjustment. 11.7 Incentive Plans and Agreements. Except in the case of stock awards or cash awards, the terms of each Incentive shall be stated in a plan or agreement approved by the Committee. The Committee may also determine to enter into agreements with holders of options to reclassify or convert certain outstanding options, within the terms of the Plan, as Incentive Stock Options or as non-statutory stock options and in order to eliminate SARs with respect to all or part of such options and any other previously issued options. 11.8 Withholding. (a) The Company shall have the right to withhold from any payments made under the Plan or to collect as a condition of payment, any taxes required by law to be withheld. At any time when a participant is required to pay to the Company an amount required to be withheld under applicable income tax laws in connection with a distribution of Common Stock or upon exercise of an option or SAR, the participant may satisfy this obligation in whole or in part by electing (the "Election") to have the Company withhold from the distribution shares of Common Stock having a value up to the amount required to be withheld. The value of the shares to be withheld shall be based on the Fair Market Value of the Common Stock on the date that the amount of tax to be withheld shall be determined ("Tax Date"). (b) Each Election must be made prior to the Tax Date. The Committee may disapprove of any Election, may suspend or terminate the right to make Elections, or may provide with respect to any Incentive that the right to make Elections shall not apply to such Incentive. An Election is irrevocable. (c) If a participant is an officer or director of the Company within the meaning of Section 16 of the 1934 Act, then an Election must comply with all of the requirements of the 1934 Act. 11.9 No Continued Employment. Engagement or Right to Corporate Assets. No participant under the Plan shall have any right, because of his or her participation, to -9- 10 continue in the employ of, or to continue his or her consulting engagement for, the Company for any period of time or to any right to continue his or her present or any other rate of compensation. Nothing contained in the Plan shall be construed as giving an employee, a consultant, such persons' beneficiaries, or any other person, any equity or interests of any kind in the assets of the Company or creating a trust of any kind or a fiduciary relationship of any kind between the Company and any such person. 11.10 Deferral Permitted. Payment of cash or distribution of any shares of Common Stock to which a participant is entitled under any Incentive shall be made as provided in the Incentive. Payment may be deferred at the option of the participant if provided in the Incentive. 11.11 Amendment of the Plan. The Board may amend or discontinue the Plan at any time. However, no such amendment or discontinuance shall, subject to adjustment under Section 11.6, (a) change or impair, without the consent of the recipient, an Incentive previously granted, (b) materially increase the maximum number of shares of Common Stock which may be issued to all participants under the Plan, (c) materially increase the benefits that may be granted under the Plan, (d) materially modify the requirements as to eligibility for participation in the Plan, or (e) materially increase the benefits accruing to participants under the Plan. 11.12 Immediate Acceleration of Incentives. Notwithstanding any provision in this Plan or in any Incentive to the contrary, (a) the restrictions on all shares of restricted stock award shall lapse immediately, (b) all outstanding options and SARs will become exercisable immediately, and (c) all performance shares shall be deemed to be met and payment made immediately, if subsequent to the date that the Plan is approved by the Board of Directors of the Company, any of the following events occur unless otherwise determined by the Board and a majority of the Continuing Directors (as defined below). (1) any person or group of persons becomes the beneficial owner of thirty percent (30%) or more of any equity security of the Company entitled to vote for the election of directors; (2) a majority of the members of the Board is replaced within the period of less than two (2) years by directors not nominated and approved by the Board; or (3) the stockholders of the Company approve an agreement to merge or consolidate with or into another corporation or an agreement to sell or otherwise dispose of all or substantially all of the Company's assets (including a plan of liquidation). For purposes of this Section 11.12, beneficial ownership by a person or group of persons shall be determined in accordance with Regulation 13D (or any similar successor regulation) promulgated by the Securities and Exchange Commission pursuant to the 1934 Act. Beneficial -10- 11 ownership of more than thirty percent (30%) of an equity security may be established by any reasonable method, but shall be presumed conclusively as to any person who files a Schedule 13D report with the Securities and Exchange Commission reporting such ownership. If the restrictions and forfeitability periods are eliminated by reason of provision (1), the limitations of this Plan shall not become applicable again should the person cease to own thirty percent (30%) or more of any equity security of the Company. For purposes of this Section 11.12, "Continuing Directors" are directors (a) who were in office prior to the time any of provisions (1), (2) or (3) occurred or any person publicly announced an intention to acquire twenty percent (20%) or more of any equity security of the Company, (b) directors in office for a period of more than two years, and (c) directors nominated and approved by the Continuing Directors. 11.13 Definition of Fair Market Value. Whenever "Fair Market Value" of Common Stock shall be determined for purposes of this Plan, it shall be determined by reference to the last sale price of a share of Common Stock on the principal United States Securities Exchange registered under the 1934 Act on which the Common Stock is listed (the "Exchange"), or, on the National Association of Securities Dealers, Inc. Automatic Quotation System (including the National Market System) ("NASDAQ") on the applicable date. If the Exchange or NASDAQ is closed for trading on such date, or if the Common Stock does not trade on such date, then the last sale price used shall be the one on the date the Common Stock last traded on the Exchange or NASDAQ. If the Common Stock is not listed on an Exchange or on NASDAQ, "Fair Market Value" shall be determined by the Board of Directors of the Company, which such valuation determination shall be conclusive. -11- EX-10.5 11 EMPLOYMENT AGREEMENT 1 EXHIBIT 10.5 EMPLOYMENT AGREEMENT This Agreement is made as of March 17, 1997 by and between HOTEL MEXICO, INC., an Ohio corporation (the "COMPANY"), and RONALD K. FULLER (the "EXECUTIVE"). WITNESSETH WHEREAS, the Company desires to employ Executive in accordance with the terms and conditions stated in this Agreement; and WHEREAS, Executive desires to accept that employment pursuant to the terms and conditions of this Agreement; NOW, THEREFORE, in consideration of the covenants and agreements contained herein, the parties hereto agree as follows: I. EMPLOYMENT 1.1 Employment as President and Chief Operating Officer. (a) The Company hereby employs Executive as President and Chief Operating Officer and Executive accepts such employment pursuant to the terms of this Agreement. Executive shall report to and take direction from the Chief Executive Officer and the Board of Directors of the Company (the "BOARD"). The Executive will perform those duties which are usual and customary for a President and Chief Operating Officer of a restaurant enterprise. Executive shall be employed at the Company's corporate offices. He shall perform his duties in a manner reasonably expected of a President and Chief Operating Officer of a restaurant company. (b) The Company shall use its best efforts to cause the Executive to be a member of the Board throughout the term of this Agreement and shall include him in the management slate for election as a director at every shareholders' meeting at which his term as a director would otherwise expire. In every case under this Agreement where action of the Board is required, such vote shall not include Executive's vote at any time that Executive is a member of the Board. (c) Executive shall be provided adequate human and financial resources to allow him to perform his duties hereunder. He shall participate with the Board and the Chief Executive Officer in establishing goals and plans for the Company, and he shall be in charge of the implementation of such goals and plans. (d) In the event that Stephen D. King ceases to be Chief Executive Officer of the Company, the Company shall appoint Executive as Chief Executive Officer. 2 1.2 Term. Employment shall be for an initial term of up to two years commencing on January 6, 1997 and continuing until the earlier of (i) January 6, 1999 or (ii) the date Executive's employment terminates pursuant to Article III hereof. This Agreement shall be automatically renewed for three additional one (1) year terms unless the Board gives written notice of termination for "Cause" (as defined in Section 3.2(a) below) to Executive not less than ninety (90) days prior to expiration of the initial term or the renewal term then in progress, as applicable. II. COMPENSATION, BENEFITS AND PERQUISITES 2.1 Base Salary. The Company shall pay Executive an annualized base salary ("BASE SALARY") of $200,000 for the first year of this Agreement. The Base Salary shall be payable in equal installments in the time and manner that other employees of the Company are compensated. The Board will review the Base Salary at least annually and may, in its sole discretion, increase it to reflect performance, appropriate industry guideline data or other factors. 2.2 Bonuses. Executive shall receive an annualized base bonus ("BASE BONUS") of up to $50,000 for the first year of this Agreement, payable quarterly on the first quarterly anniversary of the first day of the term of this Agreement and each quarter thereafter, dependent upon Executive's satisfaction of certain criteria mutually agreed upon by Executive and the Board. The Board and Executive will review and, if mutually agreed, revise the criteria for the Base Bonus at least annually. In addition, Executive shall receive, within forty-five (45) days following the end of each fiscal quarter of the Company, 0.75% of the Company's EBITDA for the four quarters then ended, or such fewer number of quarters as the Company shall have then been conducting operations (the "INCENTIVE BONUS"), provided that no quarterly payment of Incentive Bonus shall exceed one-fourth of 150% of Executive's then-current Base Salary. The start-up costs associated with the Company's Kenwood restaurant and any future restaurants shall be excluded from all EBITDA calculations for purposes of this subsection. 2.3 Moving Expenses. Executive shall receive a one-time payment of $15,000 for relocation expenses and shall also be reimbursed any reasonable sales commission paid by Executive relating to the sale of his home in Edina, Minnesota. 2.4 Automobile Allowance. Executive shall receive an automobile allowance of $700 per month. 2.5 Vacations. Executive shall be entitled to three weeks' paid vacation, or such greater amount of time as determined by the Board. 2.6 Cafeteria Plan Benefits. In lieu of participating in any Company-sponsored welfare plans, Executive shall receive $20,000 per year in cafeteria plan benefits which Executive will utilize in his sole discretion for health, life, disability, and dental insurance or expenses, educational 2 3 expenses, other personal expenses, and other benefits which the Company may from time to time make available. 2.7 Attorney's Fees. The Company will pay Executive's reasonable cost of having this Agreement reviewed by counsel, up to a maximum of $1,000. III. TERMINATION OF EXECUTIVE'S EMPLOYMENT 3.1 Termination of Employment. Executive's employment under this Agreement may be terminated by the Company or Executive at any time for any reason; provided, however, that if Executive's employment is terminated by the Company during the term of this Agreement for a reason other than for Cause, or if Executive terminates his employment for "Good Reason" (as defined in Section 3.2(b) below), he shall continue to receive his Base Salary, Base Bonus, Incentive Bonus (the annual amount of which shall equal the sum of the Incentive Bonus payments made to Executive for the four quarters preceding termination) and the benefits listed in Sections 2.2 and 2.4 above for a period of two (2) years from the date of termination, if such termination occurs prior to consummation of an initial public offering of common stock by the Company; provided, that if Executive obtains other employment during such two (2) year period, the Company shall receive a dollar-for-dollar credit against its severance obligation hereunder with respect to compensation and benefits received by Executive in his new employment (except that in no event shall Executive receive less than one year's Base Salary, Base Bonus, Incentive Bonus and benefits). After such initial public offering, if Executive's employment is terminated by the Company for a reason other than for Cause or if Executive terminates his employment for Good Reason, he shall continue to receive his Base Salary for a period of one (1) year from the date of termination. The termination shall be effective as of the date specified by the party initiating the termination in a written notice delivered to the other party, which date shall not be earlier than the date such notice is delivered to the other party. This Agreement shall terminate in its entirety immediately upon the death of Executive. Except as expressly provided to the contrary in this section or applicable law, Executive's rights to pay and benefits shall cease on the date his employment under this Agreement terminates. 3.2 Definitions. For purposes of this Agreement, (a) "Cause" shall mean only the following: (i) commission of a felony; (ii) theft or embezzlement of Company property or commission of similar acts involving moral turpitude; (iii) alcohol or drug abuse which, in the judgment of the Board, has rendered Executive incapable of carrying out his duties hereunder; or (iv) any other willful failure by Executive to substantially perform his material duties under this Agreement (excluding nonperformance resulting from disability), which willful failure is not cured within 30 days after written notice from the Chairman of the Board specifying the act of willful nonperformance or within such longer period (but no longer than 90 days in any event) as is reasonably required to cure such willful nonperformance. Notwithstanding the foregoing, Executive shall not be deemed to have been terminated for Cause 3 4 unless and until there shall have been delivered to Executive a copy of a resolution duly adopted by the affirmative vote of the Board at a meeting of the Board called and held for this specific purpose. (b) "Good Reason" shall mean only the following: (i) Executive has been demoted; (ii) Executive has incurred a substantial reduction in his authority or responsibility; (iii) the Company fails to appoint Executive as Chief Executive Officer pursuant to the terms of Section 1.1(c); (iv) the Board elects to terminate Executive in lieu of permitting this Agreement to automatically renew pursuant to Section 1.2 for a reason other than Cause; or (v) Executive is not continued as a member of the Board of Directors. 3.3 Disability. If Executive has become disabled such that he cannot perform the essential functions of his job with or without reasonable accommodation, and the disability has continued for a period of more than 90 days, the Board may, in its discretion, terminate his employment under this Agreement. 3.4 Notice. Executive must provide the Company with at least 30 days' written notice if Executive desires to terminate his employment under this Agreement. IV. CONFIDENTIALITY 4.1 Prohibitions Against Use. Executive acknowledges and agrees that during the term of this Agreement he may have access to various trade secrets and confidential business information ("CONFIDENTIAL INFORMATION") of the Company. Executive agrees that he shall use such Confidential Information solely in connection with his obligations under this Agreement and shall maintain in strictest confidence and shall not disclose any such Confidential Information, directly or indirectly, or use such information in any other way during the term of this Agreement or for a period of two (2) years after the termination of this Agreement. Executive further agrees to take all reasonable steps necessary to preserve and protect the Confidential Information. The provisions of this Section 4.1 shall not apply to information known by Executive which (i) was in possession of Executive prior to receipt thereof from the Company, (ii) is or becomes generally available to the public other than as a result of a disclosure by Executive, or (iii) becomes available to Executive from a third party having the right to make such disclosure. 4.2 Remedies. Executive acknowledges that the Company's remedy at law for any breach or threatened breach by Executive of Section 4.1 will be inadequate. Therefore, the Company shall be entitled to injunctive and other equitable relief restraining Executive from violating those provisions, in addition to any other remedies that may be available to the Company under this Agreement or applicable law. V. NON-COMPETITION 4 5 5.1 Agreement Not to Compete. Executive agrees that, on or before the date which is one (1) year after the date Executive's employment under this Agreement terminates, he will not, unless he receives the prior approval of the Board, directly or indirectly engage in any of the following actions: (a) Own an interest in (except as provided below), manage, operate, join, control, lend money or render financial or other assistance to, or participate in or be connected with, as an officer, employee, partner, stockholder, consultant or otherwise, any entity whose primary business is entertainment-themed restaurants in the United States, such as, but not limited to, Rainforest Cafe, Plant Hollywood, Cheesecake Factory, Hard Rock Cafe, Dive!, and Dave & Busters. However, nothing in this subsection (a) shall preclude Executive from holding less than 1% of the outstanding capital stock of any corporation required to file periodic reports with the Securities and Exchange Commission under Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the securities of which are listed on any securities exchange, quoted on the National Association of Securities Dealers Automated Quotation System or traded in the over-the-counter market. (b) Intentionally solicit, endeavor to entice away from the Company, or otherwise interfere with the Company's relationship with any person who is employed by or otherwise engaged to perform services for the Company (including, but not limited to, any independent sales representatives or organizations), whether for Executive's own account or for the account of any other individual, partnership, firm, corporation or other business organization. If the scope of the restrictions in this Section 5.1 are determined by a court of competent jurisdiction to be too broad to permit enforcement of such restrictions to their full extent, then such restrictions shall be construed or rewritten (blue-lined) so as to be enforceable to the maximum extent permitted by law, and Executive hereby consents, to the extent he may lawfully do so, to the judicial modification of the scope of such restrictions in any proceeding brought to enforce them. VI. MISCELLANEOUS 6.1 Amendment. This Agreement may be amended only in writing, signed by both parties. 6.2 Entire Agreement. Other than an Option Agreement dated [January 15, 1997] between the Company and Executive, this Agreement contains the entire understanding of the parties with regard to all matters contained herein. Other than such Option Agreement and this Agreement, there are no other agreements, conditions or representations, oral or written, expressed or implied, with regard thereto. This Agreement and such Option Agreement supersede all prior agreements relating to the employment of Executive by the Company. 5 6 6.3 Assignment. This Agreement shall be binding upon, and shall inure to the benefit of parties and their respective successors, assigns, heirs and personal representatives and any entity with which the Company may merge or consolidate or to which the Company may sell substantially all of its assets. 6.4 Notices. Any notice required to be given under this Agreement shall be in writing and shall be delivered either in person or by certified or registered mail, return receipt requested. Any notice by mail shall be addressed as follows: If to the Company, to: Hotel Mexico, Inc. 8260 NorthCreek Drive, Suite 140 Cincinnati, OH 45236 Attention: President If to Executive, to: Ronald K. Fuller 6440 Indian Hills Pass Edina, MN 55439 or to such other addresses as either party may designate in writing to the other party from time to time. 6.5 Waiver of Breach. Any waiver by either party of compliance with any provision of this Agreement by the other party shall not operate or be construed as a waiver of any other provision of this Agreement, or of any subsequent breach by such party of a provision of this Agreement. 6.6 Severability. If any one or more of the provisions (or portions thereof) of this Agreement shall for any reason be held by a final determination of a court of competent jurisdiction to be invalid, illegal, or unenforceable in any respect, such invalidity, illegality or unenforceability shall not affect any other provisions (or portions of the provisions) of this Agreement, and the invalid, illegal or unenforceable provisions shall be deemed replaced by a provision that is valid, legal and enforceable and that comes closest to expressing the intention of the parties hereto. 6.7 Governing Law. This Agreement shall be interpreted and enforced in accordance with the laws of the State of Ohio, without giving effect to conflict of law principles. 6.8 Arbitration. Any controversy or claim arising out of or relating to this Agreement or the breach of this Agreement or the breach of any exhibits attached to this Agreement shall be settled by arbitration in accordance with the Commercial Arbitration Rules of the American 6 7 Arbitration Association, and a judgment upon the award rendered by the arbitrator(s) may be entered in any court having jurisdiction. The arbitrator(s) shall have the authority to award the prevailing party its costs and reasonable attorney's fees which shall be paid by the non-prevailing party. In the event the parties hereto agree that it is necessary to litigate any dispute hereunder in a court, the non-prevailing party shall pay the prevailing party its costs and reasonable attorney's fees. Notwithstanding anything in this Section 6.9 to the contrary, during the pendency of any dispute or controversy arising under or in connection with this Agreement or exhibits attached to this Agreement, the Company shall be entitled to seek an injunction or restraining order in a court of competent jurisdiction to enforce the provisions of Article IV and Article V. IN WITNESS WHEREOF, the parties have executed this Agreement effective as of the date set forth above. HOTEL MEXICO, INC. /s/ Stephen D. King -------------------------- Stephen D. King President /s/ Ronald K. Fuller -------------------------- RONALD K. FULLER 7 EX-24.2 12 CONSENT - ERNST & YOUNG 1 EXHIBIT 24.2 Consent of Independent Auditors We consent to the reference to our firm under the caption "Experts" and to the use of our report dated August 20, 1997, in the Registration Statement (Form SB-2) and related Prospectus of Hotel Discovery, Inc. for the registration of 2,530,000 units of its Common Stock and Class A Warrants. ERNST & YOUNG, LLP Cincinnati, Ohio August 22, 1997 EX-27.1 13 FDS
5 6-MOS DEC-29-1996 DEC-30-1996 JUN-29-1997 1,998,056 0 0 0 131,987 2,335,979 4,703,762 300,000 6,972,765 4,020,096 0 0 0 48,995 1,857,804 6,972,765 1,864,564 1,864,564 0 3,480,468 65,787 0 92,903 (1,681,691) 0 (1,681,691) 0 0 0 (1,681,691) (.33) (.33)
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