-----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, USYku3ghAbcMGZx7p6X4Y36/EmnfM2L2cMQfTI07GtWpL+/C7OTXVA56Ihwl/Jlw MzOoPf8FLWNp0Fy7hJ4BLg== 0000950124-98-001771.txt : 19980331 0000950124-98-001771.hdr.sgml : 19980331 ACCESSION NUMBER: 0000950124-98-001771 CONFORMED SUBMISSION TYPE: 10KSB PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19971228 FILED AS OF DATE: 19980330 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: HOTEL DISCOVERY INC CENTRAL INDEX KEY: 0001044738 STANDARD INDUSTRIAL CLASSIFICATION: RETAIL-EATING PLACES [5812] IRS NUMBER: 311487885 STATE OF INCORPORATION: MN FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10KSB SEC ACT: SEC FILE NUMBER: 000-23243 FILM NUMBER: 98579327 BUSINESS ADDRESS: STREET 1: 4801 WEST 81 STREET STREET 2: SUITE 112 CITY: BLOOMINGTON STATE: MN ZIP: 55437 BUSINESS PHONE: 6128379917 MAIL ADDRESS: STREET 1: 4801 WEST 81 STREET STREET 2: SUITE 112 CITY: BLOOMINGTON STATE: MN ZIP: 55437 10KSB 1 FORM 10KSB 1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 FORM 10-KSB (Mark One) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 28, 1997 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to ------- ------- Commission file number 0-23243 - -------------------------------------------------------------------------------- HOTEL DISCOVERY, INC. (Name of Small Business Issuer in its Charter) MINNESOTA 31-1487885 (State or Other Jurisdiction of (I.R.S. Employer Incorporation or Organization) Indentification No.) 4801 W. 81ST STREET, SUITE 112 55437 BLOOMINGTON, MN 55437 (Zip Code) (Address of principal executive offices) 612-837-9917 (Issuer's telephone number, including area code) Securities Registered Under Section 12(b) of the Exchange Act: NONE Securities Registered Under Section 12(g) of the Exchange Act: COMMON STOCK, PAR VALUE $.01 CLASS A WARRANTS TO PURCHASE ONE SHARE OF COMMON STOCK UNITS, CONSISTING OF ONE SHARE OF COMMON STOCK AND ONE CLASS A WARRANT (Title of each class) Check whether the issuer: (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the preceding 12 months (or for such shorter period that the issuer was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Check if there is no disclosure of delinquent filers in response to Item 405 of Regulation S-B contained in this form, and no disclosure will be contained, to the best of issuer's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-KSB or any amendment to this Form 10-KSB. [ ] The Issuer had total revenues of $3,546,695 for its fiscal year ended December 28, 1997. As of March 20, 1998, the aggregate market value of the voting and non-voting common equity held by non-affiliates (assuming for these purposes, but not conceding, that all executive officers and directors are "affiliates" of the Issuer) of the Issuer was $24,734,987 based upon the last reported sale price in the Nasdaq SmallCap Market on March 20, 1998 of $3 1/2 per share. As of December 28, 1997, the number of shares outstanding of the Issuer's Common Stock was 8,000,189. Transitional Small Business Disclosure Format: Yes [ ] No [X] 1 2 DOCUMENTS INCORPORATED BY REFERENCE Portions of the Issuer's Proxy Statement for the Annual Meeting of Shareholders scheduled to be held on May 21, 1998 are incorporated by reference in Part III hereof. FORWARD-LOOKING STATEMENTS Certain of the matters discussed in the following pages, particularly regarding estimates of the number and locations of new restaurants that the Company intends to open during fiscal 1998 and 1999, constitute "forward-looking statements" within the meaning of the Securities Act of 1933, as amended and the Securities Exchange Act of 1934, as amended. Forward-looking statements involve a number of risks and uncertainties, and, in addition to the factors discussed in this Form 10-KSB, among the other factors that could cause actual results to differ materially are the following: the Company's ability to identify and secure suitable locations on acceptable terms, obtain additional capital necessary for expansion on acceptable terms, open new restaurants in a timely manner, hire and train additional restaurant personnel and integrate new restaurants into its operations; the continued implementation of the Company's strict business discipline over a growing restaurant base; the economic conditions in the new markets into which the Company expands and possible uncertainties in the customer base in these areas; changes in customer dining patterns; competitive pressures from other national and regional restaurant chains; business conditions, such as inflation or a recession, and growth in the restaurant industry and the general economy; changes in monetary and fiscal policies, laws and regulations; and other risks identified from time to time in the Company's SEC reports, registration statements and public announcements. - -------------------------------------------------------------------------------- 2 3 HOTEL DISCOVERY, INC. INDEX
Page ---- PART I Item 1. Description of Business 4 Item 2. Description of Property 11 Item 3. Legal Proceedings 13 Item 4. Submission of Matters to a Vote of Security Holders 13 PART II Item 5. Market for Common Equity and Related Stockholder Matters 14 Item 6. Management's Discussion and Analysis of Financial Condition and Plan of Operations 14 Item 7. Financial Statements 16 Item 8. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 16 PART III Item 9. Directors, Executive Officers, Promoters and Control Persons; Compliance with Section 16(a) of the Exchange Act 17 Item 10. Executive Compensation 17 Item 11. Security Ownership of Certain Beneficial Owners and Management 17 Item 12. Certain Relationships and Related Transactions 17 Item 13. Exhibits, List, and Reports on Form 8-K 17
Signatures Financial Statement Schedules Exhibits 3 4 PART 1 ITEM 1. DESCRIPTION OF BUSINESS GENERAL Hotel Discovery, Inc. (the "Company") intends to develop, own and operate restaurants with multiple themed dining rooms and a corresponding retail component designed to appeal to the upscale casual dining market. The Company has one restaurant operating under the name "Hotel Discovery" in the Kenwood Shopping Center in Cincinnati, Ohio (the "Kenwood Restaurant"), which opened on December 19, 1996. In addition, a second restaurant to be operated under the name "Cafe Odyssey" is under development at the Mall of America in Bloomington, Minnesota, a suburb of Minneapolis (the "Mall of America Restaurant"). The Company began operations as Hotel Mexico, Inc. ("HMI"), which was incorporated in Ohio in January 1994. The Kenwood Restaurant Limited Partnership, an Ohio limited partnership (the "Kenwood Partnership") was formed in June 1995 to own and operate the Kenwood Restaurant. HMI's operations and the net assets of the Kenwood Partnership were combined in November 1996, and in August 1997, HMI was reorganized as Hotel Discovery, Inc., a Minnesota corporation. See "Reorganization." On February 25, 1998, the Company changed the name of its restaurant concept from Hotel Discovery to Cafe Odyssey. The Company believes that the new name better reflects the concept's primary focus on award-winning food, served in a unique environment of adventure, imagination, exploration and innovation. In conjunction with this action, the Company's Board of Directors approved a change in its corporate name from Hotel Discovery, Inc. to Cafe Odyssey, Inc., subject to shareholder approval. The Cafe Odyssey name will be used for the planned Mall of America Restaurant and all subsequent restaurants. The Kenwood Restaurant will retain the name "Hotel Discovery" because of its already established and well-received perception in the marketplace. CONCEPT The Company's existing restaurant provides award-winning food and excellent service coupled with soft, sophisticated and subtle entertainment technology. The Company's concept combines two contemporary trends within the restaurant industry by incorporating the upscale casual food-driven attributes of restaurants like Palomino and The Cheesecake Factory with a variation on the entertainment features of restaurants such as Planet Hollywood, Rainforest Cafe and Dave and Buster's. In the 1997 Taste of Cincinnati festival, Hotel Discovery's Ebony Butterfly Medallions won "Best Entree" and its Pacific Rim Lo Mein won "Award of Excellence". In addition, Cincinnati Magazine named Hotel Discovery "Best Extravaganza" and the Portobello Mushroom Fajita "Best Meatless Meal." Based on the concepts of travel, discovery and adventure, each restaurant provides guests with a dining experience in multiple themed environments that capture the romance, passion and nature of exotic locations throughout the world utilizing the state-of-the-art technology in sound, video, lighting, scenery and decor. In the Kenwood Restaurant, these themes are embodied in the Safari Room, the Artist Loft, the Observatory and the Mapping Room. The Mall of America Restaurant will contain three dining rooms that replicate the environments of the lost City of Atlantis, the ancient Incan ruins of Machu Picchu in the Andes and the sweeping plains of the Serengeti desert in Tanzania, Africa. The menu at each restaurant 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. Each restaurant also has a retail area located at the entrance. The retail component of the Kenwood Restaurant includes a collection of adult and children's casual clothing, including T-shirts, sweatshirts, shirts and caps, and a limited amount of other logo merchandise. The Mall of America Restaurant will display a much larger selection of merchandise centered around the four themes of imagination, invention, exploration and adventure as expressed in the three dining rooms. Such merchandise is expected to include educational toys and games, stationery, prints, telescopes, art materials, jewelry, primitive musical instruments and other gift items. 4 5 EXPANSION STRATEGY Management believes the Cafe Odyssey concept is ideally positioned toward the large and fast growing "baby boomer" segment. Future expansion opportunities for Cafe Odyssey will be targeted towards high traffic upscale malls and resorts, as well as urban retail and entertainment centers. In addition, the large size of future Cafe Odyssey restaurants will often necessitate locations in areas with significant tourist as well as local traffic. The Company is currently in the process of negotiating with landlords for future sites, but there can be no assurance that the Company will be able to enter into binding contracts for these or any additional sites. RESTAURANT OPERATIONS The Company strives to maintain quality operations through extensive training of its employees and careful supervision of personnel. The Company has developed, and expects to implement at each of its restaurants, a detailed operations manual containing specifications relating to food and beverage preparation, maintenance of premises and employee conduct. Each restaurant is expected to have a director of operations with a staff of five to seven managers and a controller. Each director of operations reports directly to the Company's vice president of operations. The Company requires all kitchen and front-of-the-house managers to complete an intensive six-week training program which includes two weeks of food preparation training in the kitchen, as well as complete cross-training on all other phases of the restaurant's operations. The Company's restaurant management is then tested on the Company's philosophy, management strategy, policies, procedures and operating standards. In addition, 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 re-educate the service staff on all menu items, to communicate daily specials, to respond to feedback from comment cards and to reinforce service standards. MANAGEMENT AND FINANCIAL CONTROLS The Company has implemented specific management control systems for employee follow-up, customer satisfaction, and financial results. These controls are described below. Employee Follow-up. Shift schedules are posted weekly for each position. A scheduled manager supervises every shift. Managers are responsible for executing job functions and following a thorough and complete checklist for each category of the restaurant's operations, including the appearance of the outside of the restaurant, dining room, kitchen and rest rooms 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 circle luncheon for key employees from each position. The president of the Company also holds a quarterly "town meeting" with selected employees to ensure that strong communication continues between the corporate office and each restaurant. Customer Satisfaction. Management believes that continual guest feedback on the key attributes of food quality, menu variety, service and ambiance is crucial to the Company'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 market research and telephone interviews. This constant feedback helps the Company's management monitor guest response to all areas of operations and react accordingly. Checklists are also used to ensure that guests receive a high level of service and food quality. In addition, front-of-the-house management is required to interact with guests in all peak meal periods. Management's incentives include a bonus based upon a percentage of either restaurant-level or corporate cash flow and/or profitability as compared to an annual budget which is approved by senior management. Through its pay-for-performance incentive systems, the Company believes that it has essentially mirrored its compensation system to that of an entrepreneurially owned and operated business. Financial Controls. Financial controls are monitored through management information systems that track sales, customer counts, food costs, payroll costs and guest lists. All data is reviewed on a daily, weekly and monthly basis, both in the restaurant and in the corporate office. Profit and loss statements are prepared weekly by the restaurant controller and reconciled monthly with the corporate office financial statements. Management believes its systems allow for a prompt reaction to correct deviations and to capitalize on trends. 5 6 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 carryout 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 which is pleasingly presented is an absolute requirement within the upscale casual segment of the industry. GOVERNMENT REGULATIONS The Company is 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 a 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 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 or establishments that served alcoholic beverages to the intoxicated person. The Company has obtained liability insurance against such potential liability. The Company is also subject to the Fair Labor Standards Act, which governs minimum wages, overtime and working conditions. A significant portion of the Company's restaurant employees are paid at rates relating to either the federal or state 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. EMPLOYEES As of December 28, 1997, the Company employed 122 persons, of whom 76 worked in full-time positions and 46 were part-time. The Mall of America Restaurant 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. 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 Restaurant. The Kenwood Partnership was dissolved in October 1997. The general partner of the Kenwood Partnership was Kenwood Restaurant, Inc., an Ohio corporation (the "General Partner"). Mr. King was the sole director and officer of the General Partner and controlled the General Partner until his resignation in September 1997. The Kenwood Partnership had 22 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 totalling $1,567,197 to a newly formed corporation in exchange for shares of such corporation. HMI, with total net assets of $631,966, then merged with and into the newly formed corporation, the name of which remained Hotel Mexico, Inc. (hereafter "Hotel Mexico"). Upon consummation of the merger, outstanding shares of HMI were converted into an aggregate of 1,350,000 shares of Common Stock of Hotel Mexico. 6 7 In conjunction with the dissolution of the Kenwood Partnership in October 1997, the shares of Hotel Mexico Common Stock received by the Kenwood Partnership in the reorganization and other partnership assets were distributed to the general and limited partners in accordance with the Partnership Agreement. On June 24, 1997, the Board of Directors of Hotel Mexico approved its reincorporation as a Minnesota corporation named Hotel Discovery, Inc. Following approval of the transaction and of the name change by Hotel Mexico's shareholders at a special meeting held on August 11, 1997, Hotel Mexico 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 Hotel Mexico was converted into one share of Common Stock of Hotel Discovery, Inc. RISK FACTORS The following discussion should be read in connection with the Company's financial statements and related notes thereto included elsewhere in this report. LACK OF SIGNIFICANT OPERATING HISTORY The Company's first restaurant, the Kenwood Restaurant, opened on December 19, 1996. Accordingly, the Company faces all of the risks, expenses and difficulties 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 acceptance of the Hotel Discovery/Cafe Odyssey concept, the quality of restaurant operations, the ability to expand 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 procure the required capital. Unless otherwise stated, all historical financial results for the Company are derived solely from the Kenwood Restaurant, which may not be indicative of other locations. LIMITED BASE OF OPERATIONS The Company currently operates one restaurant, the Kenwood Restaurant, and plans to open the Mall of America Restaurant 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 restaurant, poor operating results at any one restaurant or a delay in the planned opening of a restaurant 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 restaurants, the investment risk related to any one Cafe Odyssey restaurant 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 of the Board, Ronald K. Fuller, President, Chief Executive Officer and Chief Operating Officer and Anne Huemme, Vice President-Finance, Chief Financial Officer and Corporate Secretary. The loss or unavailability to the Company of any of these individuals could have a material adverse effect upon the Company's business. The Company maintains a $1,000,000 key-man life insurance policy on Mr. Fuller. 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. The failure to obtain, or delays in obtaining, key employees could have a material adverse effect on the Company. 7 8 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 success of the malls, entertainment centers and other venues where Hotel Discovery/Cafe Odyssey restaurants are or will be located, and the continued popularity of themed restaurants in general and the Company's concept in particular. Themed restaurants are more susceptible to shifts in consumer preferences and frequently experience a decline in revenue growth or of actual revenues due to most restaurants opening near or at full capacity. RISKS OF NEW CONSTRUCTION Construction projects, including the opening of additional restaurants, 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; 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 total cost of developing the Kenwood Restaurant was approximately $5.1 million, which included approximately $3.2 million for building design and construction, approximately $1.9 million for furniture, fixtures and equipment and net of landlord contributions. The Company estimates that the total cost of developing the planned Mall of America Restaurant will be approximately $4.9 million, net of landlord contributions. There can be no assurance that future restaurants can be developed at similar costs. For continued development of additional restaurants, 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 to its shareholders. New investors may seek and obtain substantially better terms than were granted to 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 restaurants 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 restaurant-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 several major metropolitan areas, 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 restaurants 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, national, regional and local economic conditions and demographic trends. The performance of restaurant operations may also be affected by factors such as traffic patterns, demographic considerations, and the type, number and location of competing operations. 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 8 9 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 themed retail business is also highly competitive, particularly in locations experiencing an oversupply of retail businesses. The Company would then 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 Restaurant and the Mall of America Restaurant. 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 Restaurant, the Mall of America Restaurant, or any other future restaurant does not perform at a profitable level and the decision is made to close that restaurant, 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 BY MANAGEMENT As of December 28, 1997, Stephen D. King controlled approximately 11.2% of the Company's Common Stock. Thus, Mr. King has 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 affect 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-level personnel will be paid at rates based on either the federal or the state minimum wage. Increases in the minimum wage would result in an increase in the Company's labor costs. TRADEMARKS The Company's ability to successfully implement the Hotel Discovery/Cafe Odyssey 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 both the "Hotel Discovery" and the "Cafe Odyssey" marks and designs. 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 marks are granted registration, there can be no assurance that the Company can protect such marks and designs 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. ABSENCE OF DIVIDENDS At the present time, the Company intends to use earnings, if any, to finance further growth of the Company's business. Accordingly, the Company does not anticipate the payment of dividends in the foreseeable future. LIMITED LIQUIDITY Although the Company's Common Stock is currently listed on the Nasdaq SmallCap Market, there can be no assurance that an active public market will be developed or be sustained. In addition, the Nasdaq 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, investors would find it more difficult to dispose of, or obtain accurate quotations as to the price of, the securities. 9 10 In addition, if the Company fails to maintain its qualification for the Units, Common Stock or Class A Warrants to trade on the Nasdaq SmallCap Market, the Units, Common Stock and Class A Warrants 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. CURRENT PROSPECTUS AND STATE REGISTRATION REQUIRED TO EXERCISE WARRANTS; POSSIBLE REDEMPTION OF WARRANTS Holders of Units and Class A Warrants will be able to exercise the Warrants only if a current prospectus relating 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 qualified the Units for sale in the initial public 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, 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 exercise 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. 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 or 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 8,000,189 shares of Common Stock outstanding. As of March 20, 1998, a further 3,639,955 shares of Common Stock have been reserved for the following: (i) 2,600,000 shares issuable upon the exercise of the Class A Warrants issued as part of the Company's initial public offering and the partial exercise of the underwriter's over-allotment; (ii) 214,955 shares issuable upon the exercise of warrants; (iii) 750,000 shares for issuance under the Company's 1997 Stock Option and Compensation Plan, of which options relating to 722,666 shares are currently outstanding, and (iv) 75,000 shares issuable upon exercise of certain directors' stock options. In addition, the Company currently plans, subject to shareholder approval, to designate an additional 500,000 shares of Common Stock for its 1997 Stock Option and Compensation Plan and an additional 250,000 shares of Common Stock for the 1998 Director Stock Option Plan. 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 holders of the Units issued in the Company's initial public offering. 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 future sale, or availability for sale, of substantial amounts of Common Stock in the public market 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 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 November 3, 1997 (the "Effective Date") without the prior written consent of the R.J. Steichen & Company (the "Representative"). In addition, 5,399,289 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") became eligible for sale pursuant to Rule 144 under the 1933 Act as follows: 2,880,401 shares on November 3, 1997 (except that holders of 2,857,826 of such shares agreed not to sell or otherwise dispose of such shares without the prior written consent of the Representative for a period ranging from 90 to 180 days after the Effective Date), 1,092,400 shares in the fourth quarter of 1997 (except that the holders of such 1,092,400 shares agreed not to sell or otherwise dispose of such shares 10 11 without the prior written consent of the Representative for 90 days after the Effective Date), 13,200 shares in the first quarter of 1998, 570,685 shares in the second quarter of 1998, 692,603 shares in the third quarter of 1998, and the remaining 150,000 shares thereafter. In connection with the Company's initial public offering, certain officers and directors of the Company have agreed to escrow a portion of their shares of Common Stock 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. 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. ITEM 2. DESCRIPTION OF PROPERTY THE KENWOOD RESTAURANT LOCATION The Kenwood Restaurant is approximately 17,000 square feet in size on three levels and is located at the northeast corner of the recently refurbished Sycamore Plaza at Kenwood Shopping Center in Cincinnati, Ohio. The Kenwood Restaurant opened on December 19, 1996. The Company leases the land upon which the Kenwood Restaurant is constructed. For the 52 weeks ended December 28, 1997, the Kenwood Restaurant had total sales of $3,546,695. DESCRIPTION OF LEASE The initial term of the lease is 15 years. In addition, the Company has the option to extend the term of the lease for two additional periods 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 initial lease term, $14,117 for the sixth through tenth years of the initial lease term, $15,400 for the eleventh through fifteenth years of the initial lease term, $16,683 during the first five-year option term and $17,967 during the second five-year option term. 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 initial lease term, $4,235,000 for the sixth through tenth years of the initial lease term, $4,620,000 for the eleventh through fifteenth years of the initial lease term, $5,005,000 for the first five-year option term and $5,390,000 for the second five-year option term. 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 operating costs. Initially, the estimated annual amount payable with respect to taxes, insurance, and maintenance and operating costs is $4.15 per square foot, or approximately $32,000 per year. The landlord agreed to reimburse the Company an amount up to $200,000 as a construction allowance for the completion of the building and leasehold improvements within 30 days of the opening of the Kenwood Restaurant. The Company received this reimbursement during 1997. In addition, the landlord agreed that it will not construct any permanent facility within a designated "no-build" area, as defined. This "no-build" area allows for unimpaired visibility of the Kenwood Restaurant from both Kenwood Road and Montgomery Road. FINANCING The total cost of the Kenwood Restaurant, including the cost of the initial construction and additional features, was approximately $5.1 million, net of landlord contributions. Approximately $2,475,000 of this cost was funded by the proceeds of a private placement in October 1995. Another $1,425,000 was financed by a private placement which was concluded in June 1997, $850,000 of which was spent on additional features. An additional $1,000,000 was funded by a leasehold mortgage loan (the "Loan") which was incurred by the Kenwood Restaurant Limited Partnership and subsequently assumed by the Company. 11 12 The Loan is collateralized with a leasehold mortgage and lien on the assets of the restaurant and is personally guaranteed by the Company's Chairman of the Board. The Loan bears interest at a floating rate, which was 9.06% as of December 28, 1997, and provides for monthly payments of principal in the amount of $5,785 plus interest through February 1999, at which time the remaining balance is due in full. THE MALL OF AMERICA RESTAURANT LOCATION The Mall of America Restaurant will consist of approximately 16,215 square feet located on the third floor of the Mall of America in Bloomington, Minnesota, a suburb of Minneapolis and is leased pursuant to a lease agreement dated August 4, 1997. 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 annual mall traffic, but increases up to 50% in the summer months. According to an August 26, 1997 article in the Minneapolis Star Tribune, the industry benchmark for success in prime shopping malls is $325 in annual sales per square foot. 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 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-themed restaurant with related entertainment and merchandise which has undergone three expansions since its 1994 opening and through December 28, 1997 has opened 12 other domestic locations and three international locations; - 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. DESCRIPTION OF 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. 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 operating costs. 12 13 ITEM 3. LEGAL PROCEEDINGS The Company is involved in routine legal actions in the ordinary course of its business. Although outcomes of any such legal actions cannot be predicted, in the opinion of management there is no legal proceeding pending against or involving the Company for which the outcome is likely to have a material adverse effect upon the financial position or results of operations of the Company. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS There were no matters submitted for a vote of security holders during the fourth quarter of 1997. 13 14 PART II ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The Company completed its initial public offering on November 3, 1997 by issuing Units consisting of one share of Common Stock and one Class A Warrant for $5.00 per unit. Since that date, the Company's Units, Common Stock and Class A Warrants have been traded on the Nasdaq SmallCap Market under the symbols "HOTDU", "HOTD" and "HOTDW", respectively. The table below sets forth the high and low sales prices of the Company's Common Stock, as reported on the Nasdaq SmallCap Market, during the periods indicated.
FISCAL YEAR ENDED DECEMBER 28, 1997 HIGH LOW ----------------------------------- ---- --- FOURTH QUARTER Units $5 5/16 $3 Common Stock $3 13/16 $2 1/8 Class A Warrants $1 1/16 $ 13/16
On March 20, 1998, the last reported sale price for the Units, Common Stock and Class A Warrants was $4 1/4, $3 1/2 and $1, respectively. As of March 20, 1998, there was one holder of record of the Company's Units, 319 holders of record of the Company's Common Stock and 43 holders of record of the Company's Class A Warrants. The Company has never declared or paid any cash dividends or distributions on its capital stock. The Company does not intend to pay any cash dividends on its Common Stock in the foreseeable future, as the current policy of the Company's Board of Directors is to retain all earnings, if any, to support operations and finance expansion. See "Management's Discussion and Analysis or Plan of Operations - Liquidity and Capital Resources." Future declaration and payment of dividends, if any, will be determined in light of then current conditions, including the Company's earnings, operations, capital requirements, financial condition, restrictions in financing arrangements and other factors deemed relevant by the Board of Directors. ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND PLAN OF OPERATIONS The following discussion should be read in connection with the Company's financial statements and related notes thereto included elsewhere in this report. OVERVIEW The Company was formed in January 1994 as an Ohio corporation to develop, own and operate upscale, casual themed restaurants under the name "Hotel Mexico". The Company opened its first restaurant in the Kenwood Shopping Center in Cincinnati, Ohio (the "Kenwood Restaurant") in December 1996. Prior to opening the Kenwood Restaurant, the Company had no revenues and its activities were devoted solely to development. The Company is presently developing a restaurant in the Mall of America (the "Mall of America Restaurant") in Bloomington, Minnesota, a suburb of Minneapolis. Future revenue and profits, if any, will depend upon various factors, including market acceptance of the Hotel Discovery/Cafe Odyssey concept, the quality of the restaurant operations, the ability to expand to multi-unit locations and general economic conditions. The Company's present source of revenue is limited to its existing restaurant. 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 restaurant. 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 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 uses a 52- or 53-week fiscal year ending on the Sunday nearest December 31. All references herein in this Management's Discussion and Analysis to "1997" and "1996" represent the 52-week fiscal years ended December 28, 1997 and December 29, 1996, respectively. 14 15 RESULTS OF OPERATIONS FOR THE FISCAL YEARS ENDED DECEMBER 28, 1997 AND DECEMBER 29, 1996 The Company had no revenues or operations during the period from January 13, 1994 (Inception) to December 19, 1996 (the opening of the Kenwood Restaurant). Accordingly, comparisons to periods prior to December 19, 1996 are not meaningful. For 1997, the Company had net sales of $3,546,695 compared to $104,129 for 1996. In August 1997, the Company began retail sales at the Kenwood Restaurant. For 1997, food, beverage and retail costs were $1,122,313 or 31.6% of sales compared to $43,324 or 41.6% of sales for the period from the commencement of the Kenwood Restaurant's operations (December 19, 1996) to December 29, 1996. The improvement in food, beverage and retail costs as a percentage of sales is due primarily to improved operating efficiencies. For 1997, labor, benefits and other direct restaurant operating expenses were $2,835,157 or 79.9% of sales compared to $241,239 or 231.7% of sales for the period from the commencement of the Kenwood Restaurant's operations (December 19, 1996) to December 29, 1996. This improvement in restaurant operating expenses as a percentage of sales is due primarily to improved labor management and other operating efficiencies. Although no assurances can be given, management believes that the Kenwood Restaurant's current level of sales, trained workforce and general operation will continue to improve restaurant-level performance in future periods. For 1997, the Company had a net loss of $3,974,576 compared to a net loss of $2,327,602 for 1996. The net loss for 1997 is largely attributable to continued concept development and pre-opening costs of approximately $800,000,as well as additional general and administration expenses as the Company increased its corporate overhead structure for the development of additional restaurants. The net loss for 1996 was largely attributable to concept development and pre-opening costs totaling approximately $2.0 million. Continued increases in the Company's corporate overhead will impact general and administrative expenses on an ongoing basis. LIQUIDITY AND CAPITAL RESOURCES Since Inception, the Company's principal capital requirements have been (i) the development of the Company and the Hotel Discovery/Cafe Odyssey concept, (ii) the construction of the Kenwood Restaurant and the acquisition of furniture, fixtures and equipment therein and (iii) the development of the Mall of America Restaurant. Total capital expenditures for the Kenwood Restaurant were approximately $5.1 million, net of landlord contributions. When completed, the Company estimates that capital expenditures for the Mall of America Restaurant will be approximately $4.9 million, net of landlord contributions of $1.6 million. The Mall of America Restaurant is expected to be complete in the second quarter of 1998. The Company's primary sources of working capital have been proceeds from the sale of Common Stock to and borrowings from its principal shareholder, Stephen D. King, the private placement of Common Stock and debt, as well as the proceeds from the Company's initial public offering of Units in November 1997. For 1997 and 1996, the Company used $3,769,796 and $1,024,187, respectively, in cash flow for operating activities. As of December 28, 1997 and December 29, 1996, the Company had working capital of $8,092,735 and a working capital deficit of $1,596,718, respectively. During 1997 and 1996, the maximum amount of borrowings from Mr. King outstanding at any one time was $1,148,430 and $1,213,469, respectively. As of December 28, 1997, there was no outstanding indebtedness. The amount of outstanding indebtedness as of December 29, 1996 was $447,787. 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 1996. The Company paid interest of 11.5% on all such advances. In October 1995, 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. The Kenwood Partnership was dissolved in October 1997. The general partner of the Kenwood Partnership was Kenwood Restaurant, Inc., an Ohio corporation that was controlled by Stephen D. King until his resignation as an officer and director in September 1997. In a reorganization of the Company which occurred in November 1996, the Kenwood 15 16 Partnership contributed all of its net assets to the Company's predecessor, including the Kenwood Restaurant, in exchange for 1,350,000 shares of Common Stock of the Company. 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 Restaurant. Principal and interest are due monthly through February 1999, at which time the remaining balance is due in full. This loan had an outstanding principal balance of $921,585 on December 28, 1997. 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 collateralized 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, also collateralized by substantially all of the Company's assets. The loan was personally guaranteed by Mr. King and was repaid in full in July 1997. 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 $6.1 million. Such proceeds have been, and will be, used for new and additional features for the Kenwood Restaurant, repayment of indebtedness, working capital and development of the planned Mall of America Restaurant. On August 12, 1997, the Company borrowed $200,000 from Provident Bank at an annual rate of interest of 2% over Provident's reference rate. The loan was personally guaranteed by Mr. King and was repaid in full in November 1997. On September 8, 1997, the Company borrowed $200,000 from BankWindsor at an annual rate of 1.125% over BankWindsor's reference rate. The loan is payable on demand and had an outstanding principal balance of $200,000 on December 28, 1997. This loan was repaid in full in January 1998. On October 3, 1997, the Company borrowed $200,000 from Trakehner Holdings, Inc., which loan bore interest at 8.75% and was due on demand or no later than the Effective Date of the Company's initial public offering. This loan was repaid in full in November 1997. In November 1997, the Company completed an initial public offering of 2,500,000 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. In December 1997, the Company issued an additional 100,000 Units to its principal underwriter, R.J. Steichen & Company, pursuant to the underwriter's decision to exercise a portion of its over-allotment. The Company received net proceeds of approximately $11.2 million in conjunction with the initial public offering and the partial exercise of the underwriter's over-allotment. The Class A Warrants are subject to redemption by the Company at any time, on not less than 30 days' written notice, at a price of $0.01 per Warrant at any time following a period of 14 consecutive trading days where the per share average closing bid price of the Company's 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 last reported sale price on the primary exchange on which the Common Stock is traded. The Company intends to open one restaurant in 1998 and 1-3 restaurants in 1999. The Company estimates that its capital expenditures (net of estimated landlord contributions) will be approximately $10-15 million in fiscal 1998 and $10-20 million in fiscal 1999. The Company expects to finance its concept development and expansion through cash flow from operations, the exercise of its Class A Warrants 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. ITEM 7. FINANCIAL STATEMENTS The financial statements of the Company are included herein following the signatures, beginning at page F-1. ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE On February 4, the Company, with the approval of its Board of Directors and Audit Committee, engaged Arthur Andersen LLP as the independent public accountants for Hotel Discovery, Inc. Prior to the engagement of Arthur Andersen LLP, Ernst & Young LLP had served as the independent public accountants for the Company. The report prepared by Ernst & Young LLP as of December 29, 1996 contained no adverse opinion or disclaimer of opinion and was not qualified or modified as to uncertainty of audit scope or accounting principles. In connection with the audit of December 29, 1996, and through February 4, 1998, there were no disagreements with Ernst & Young LLP on any matter of accounting principles or practices, financial statement disclosure or auditing scope or procedure, which disagreements, if not resolved to the satisfaction of Ernst & Young LLP, would have caused Ernst & Young LLP to make reference to the subject matter of the disagreements in its reports. 16 17 PART III ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT Information in response to this Item is incorporated herein by reference to the Company's definitive proxy statement to be filed pursuant to Regulation 14A within 120 days after the end of the fiscal year covered by this form 10-KSB. ITEM 10. EXECUTIVE COMPENSATION Information in response to this Item is incorporated herein by reference to the Company's definitive proxy statement to be filed pursuant to Regulation 14A within 120 days after the end of the fiscal year covered by this form 10-KSB. ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Information in response to this Item is incorporated herein by reference to the Company's definitive proxy statement to be filed pursuant to Regulation 14A within 120 days after the end of the fiscal year covered by this form 10-KSB. ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Information in response to this Item is incorporated herein by reference to the Company's definitive proxy statement to be filed pursuant to Regulation 14A within 120 days after the end of the fiscal year covered by this form 10-KSB. ITEM 13. EXHIBITS, LIST AND REPORTS ON FORM 8-K (A) EXHIBITS 1.1 Form of Underwriting Agreement (with form of Underwriter's Warrant) (incorporated herein by reference to Exhibit 1.1 to the Company's Registration Statement on Form SB-2 as filed on August 22, 1997, as amended (File No. 333-34235)) (the "1997 SB-2") 3.1 Articles of Incorporation (incorporated herein by reference to Exhibit 3.1 to the 1997 SB-2) 3.2 By-laws (incorporated herein by reference to Exhibit 3.2 to the 1997 SB-2) 4 Form of Warrant Agreement (incorporated herein by reference to Exhibit 4 to the 1997 SB-2) 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 Restaurant) (incorporated herein by reference to Exhibit 10.1 to the 1997 SB-2) 10.2 Lease dated August 4, 1997 between Mall of America Company and Hotel Mexico, Inc. (Mall of America Restaurant) (incorporated herein by reference to Exhibit 10.2 to the 1997 SB-2) 10.3 Loan Agreement dated October 9, 1996 by and among Kenwood Restaurant Limited Partnership and PNC Bank, Ohio, National Association (incorporated herein by reference to Exhibit 10.3 to the 1997 SB-2) 17 18 10.4 Company's 1997 Stock Option and Compensation Plan (incorporated herein by reference to Exhibit 10.4 to the 1997 SB-2) 10.5 Employment Agreement between the Company and Ronald K. Fuller dated March 17, 1997 (incorporated herein by reference to Exhibit 10.5 to the 1997 SB-2) 10.6 Amendment to Company's 1997 Stock Option and Compensation Plan (incorporated herein reference to Exhibit 10.6 to the 1997 SB-2) 10.7 Second Amendment to Company's 1997 Stock Option and Compensation Plan (incorporated herein by reference to Exhibit 10.7 to the 1997 SB-2) 10.8 First Loan Assumption Agreement dated December 31, 1996 by and among PNC Bank, Ohio, National Association, Kenwood Restaurant Limited Partnership, Stephen D. King, Kenwood Restaurant, Inc. and Hotel Mexico, Inc. 10.9 Second Loan Assumption Agreement dated October 16, 1997 by and among PNC Bank, Ohio, National Association, Stephen D. King and the Company 10.10 Employment Agreement between the Company and Anne D. Huemme dated December 15, 1997 24 Powers of Attorney (included on signature page) 27 Financial Data Schedules (B) REPORTS ON FORM 8-K None. SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the issuer has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. HOTEL DISCOVERY, INC. By: /s/ ANNE D. HUEMME ------------------------------------------- Anne D. Huemme Vice President - Finance and Chief Financial Officer Date: March 30, 1998 POWER OF ATTORNEY Each person whose signature below constitutes and appoints Anne D. Huemme as 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 to this Annual Report on Form 10-KSB 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 her substitute or substitutes, may lawfully do or cause to do done by virtue hereof. 18 19 In accordance with the Exchange Act, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates stated.
Signature Title Date --------- ----- ---- /s/ Stephen D. King Chairman of the Board March 30, 1998 -------------------------------- Stephen D. King /s/ Ronald K. Fuller President, Chief Executive Officer, March 30, 1998 -------------------------------- Chief Operating Officer and Director Ronald K. Fuller (Principal Executive Officer) /s/ Anne D. Huemme Vice President - Finance and March 30, 1998 -------------------------------- Chief Financial Officer Anne D. Huemme (Principal Financial and Accounting Officer) /s/ Michael H. Krienik Director March 30, 1998 -------------------------------- Michael H. Krienik /s/ Martin J. O'Dowd Director March 30, 1998 -------------------------------- Martin J. O'Dowd /s/ Thomas W. Orr Director March 30, 1998 -------------------------------- Thomas W. Orr
19 20 HOTEL DISCOVERY, INC. INDEX TO FINANCIAL STATEMENTS
Page ---- Report of Independent Public Accountants F-2 Report of Independent Auditors F-3 Balance Sheets as of December 28, 1997 and December 29, 1996 F-4 Statements of Operations for Years Ended December 28, 1997 and December 29, 1996 F-5 Statements of Shareholders' Equity for Years Ended December 28,1997 and December 29, 1996 F-6 Statements of Cash Flows for Years Ended December 28,1997 and December 29, 1996 F-7 Notes to Financial Statements for Years Ended December 28, 1997 and December 29, 1996 F-8
F-1 21 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To Hotel Discovery, Inc., We have audited the accompanying balance sheet of Hotel Discovery, Inc. as of December 28, 1997 and the related statements of operations, shareholders' equity, and cash flows for the year then ended. 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 audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the 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 audit provides 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 28, 1997 and the results of its operations and its cash flows for the year then ended in conformity with generally accepted accounting principles. ARTHUR ANDERSEN LLP Minneapolis, Minnesota, February 13, 1998 F-2 22 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 year then ended. 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 audit. 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 year then ended in conformity with generally accepted accounting principles. ERNST & YOUNG, LLP Cincinnati, Ohio August 20, 1997 F-3 23 HOTEL DISCOVERY, INC. Balance Sheets
December 28, December 29, 1997 1996 ---- ---- ASSETS CURRENT ASSETS Cash and cash equivalents $ 9,222,174 $ 2,707,561 Inventories 41,766 138,757 Other current assets 250,043 91,575 ------------ ------------ Total current assets 9,513,983 2,937,893 PROPERTY AND EQUIPMENT, net 5,270,160 4,230,516 OTHER ASSETS, net 55,908 51,841 ------------ ------------ $ 14,840,051 $ 7,220,250 ============ ============ LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES: Short-term notes payable $ 200,000 $ 2,500,000 Accounts payable 669,380 803,885 Salaries and wages payable 366,674 174,882 Other accrued expenses 115,773 538,637 Advances payable to principal shareholder -- 447,787 Current portion of long-term debt 69,420 69,420 ------------ ------------ Total current liabilities 1,421,247 4,534,611 LONG-TERM DEBT, less current portion 852,165 924,795 CONVERTIBLE PROMISSORY NOTES PAYABLE 150,000 150,000 ------------ ------------ Total liabilities 2,423,412 5,609,406 ------------ ------------ COMMITMENTS & CONTINGENCIES (Note 7) SHAREHOLDERS' EQUITY: Common stock, $.01 par value, 100,000,000 shares authorized; 8,000,189 and 3,945,400 shares issued and outstanding 80,002 39,454 Additional paid-in capital 20,152,949 5,013,126 Less: Common stock subscribed (400,000) -- Accumulated deficit (7,416,312) (3,441,736) ------------ ------------ Total shareholders' equity 12,416,639 1,610,844 ------------ ------------ $ 14,840,051 $ 7,220,250 ============ ============
The accompanying notes are an integral part of these balance sheets F-4 24 HOTEL DISCOVERY, INC. Statements of Operations
Year ended Year ended December 28, December 29, 1997 1996 ---- ---- NET SALES $ 3,546,695 $ 104,129 ----------- ----------- COSTS AND EXPENSES: Food, beverage and retail costs 1,122,313 43,324 Labor and benefits 1,687,803 85,407 Restaurant operating expenses 1,147,354 155,832 Selling, general and administrative expenses 2,073,028 138,209 Depreciation and amortization 614,000 25,000 Pre-opening and development costs 792,397 1,970,452 ----------- ----------- Total costs and expenses 7,436,895 2,418,224 ----------- ----------- LOSS FROM OPERATIONS (3,890,200) (2,314,095) ----------- ----------- OTHER INCOME (EXPENSE): Interest expense (173,332) (13,507) Interest income 88,956 -- ----------- ----------- Total other expense (84,376) (13,507) ----------- ----------- NET LOSS $(3,974,576) $(2,327,602) ----------- ----------- BASIC AND DILUTED WEIGHTED AVERAGE OUTSTANDING SHARES 5,204,835 3,119,474 =========== =========== BASIC AND DILUTED NET LOSS PER SHARE $ (0.76) $ (0.75) =========== ===========
The accompanying notes are an integral part of these financial statements F-5 25 HOTEL DISCOVERY, INC. Statements of Shareholders' Equity
Common Stock Additional Common ------------- paid-in stock Accumulated Shares Amount capital subscribed Deficit Total ------ ------ ------- ---------- ------- ----- BALANCE, December 31, 1995 3,000,000 $30,000 $ 2,470,000 $ (945,500) $ (1,114,134) $ 440,366 Issuance of shares pursuant to 945,400 9,454 2,543,126 -- -- 2,552,580 private placements 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 Initial public offering, net of offering 2,600,000 26,000 11,201,967 -- -- 11,227,967 costs Sale of common stock pursuant to 1,447,489 14,475 3,916,029 (690,000) -- 3,240,504 private placements Issuance of shares in lieu of 7,300 73 21,827 -- -- 21,900 compensation Cash received on stock subscribed -- -- -- 290,000 -- 290,000 Net loss -- -- -- -- (3,974,576) (3,974,576) --------- ------- ----------- ---------- ------------ ----------- BALANCE, December 28, 1997 8,000,189 $80,002 $20,152,949 $ (400,000) $ (7,416,312) $12,416,639 ========= ======= =========== ========== ============ ===========
The accompanying notes are an integral part of these financial statements F-6 26 HOTEL DISCOVERY, INC. Statements of Cash Flow
Year Ended ------------------------------ December 28, December 29, 1997 1996 ---- ---- OPERATING ACTIVITIES: Net loss ($ 3,974,576) ($ 2,327,602) Adjustments to reconcile net loss to net cash flows used in operating activities - Depreciation and amortization 614,000 25,000 Common stock issued in lieu of compensation 21,900 -- Change in operating assets and liabilities - Inventories 96,991 (138,757) Other current assets (158,468) (71,575) Other assets (4,067) -- Accounts payable (134,505) 775,228 Accrued expenses (231,072) 713,519 ------------ ------------ Net cash used in operating activities (3,769,797) (1,024,187) ------------ ------------ INVESTING ACTIVITIES: Purchases of property and equipment (1,653,644) (3,443,544) ------------ ------------ FINANCING ACTIVITIES: Net borrowings/(payments) on short-term notes payable (2,300,000) 2,500,000 Net payments to shareholder (447,787) (415,103) Proceeds from issuance of long-term debt -- 1,000,000 Issuance of convertible notes payable -- 150,000 Proceeds from issuance of stock 14,468,471 2,552,580 Principal repayments on long-term debt (72,630) (5,785) Payments received on stock subscriptions 290,000 945,500 ------------ ------------ Net cash provided by financing activities 11,938,054 6,727,192 ------------ ------------ INCREASE IN CASH AND CASH EQUIVALENTS 6,514,613 2,259,461 CASH AND CASH EQUIVALENTS, beginning of year 2,707,561 448,100 ------------ ------------ CASH AND CASH EQUIVALENTS, end of year $ 9,222,174 $ 2,707,561 ============ ============ SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Cash paid for interest $ 173,332 $ 45,000 Cash paid for income taxes -- --
The accompanying notes are an integral part of these financial statements F-7 27 HOTEL DISCOVERY, INC. NOTES TO THE FINANCIAL STATEMENTS DECEMBER 28, 1997 AND DECEMBER 29, 1996 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 Restaurant), which opened under the name "Hotel Mexico" on December 19, 1996. Prior to the opening of this restaurant, the Company was in the development stage. The Company's predecessor, Hotel Mexico (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 Restaurant. 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 totalling $1,567,197 to a newly formed corporation, in exchange for shares of such corporation. HMI, with total net assets of $631,966 then merged with and into the newly formed corporation, the name of which remained Hotel Mexico, Inc. (hereafter, Hotel Mexico). Upon consummation of the merger, all outstanding shares of Hotel Mexico were converted into an aggregate of 1,350,000 shares of Common Stock of the newly formed corporation. The shares of Hotel Mexico Common Stock received by the Kenwood Partnership in the reorganization were retained by the Kenwood Partnership until the effective date of the Company's initial public offering, at which time the shares of Common Stock and all other partnership assets were distributed to the general and limited partners in accordance with the partnership agreement and the Kenwood Partnership was dissolved. On August 22, 1997, Hotel Mexico merged with and into Hotel Discovery, Inc., a newly formed Minnesota corporation. The Company has an authorized capital stock of 100,000,000 undesignated shares, and each share of Common Stock of Hotel Mexico was converted into one share of the Company's Common Stock. The Company incurred a net loss of $3,974,576 in 1997 and $2,327,602 in 1996. The losses for these periods are primarily attributable to costs and expenses incurred in the development and start-up of operations at the Kenwood Restaurant and at the Company's second restaurant to be located at the Mall of America in Bloomington, Minnesota. The 1997 losses are also attributable to the costs associated with the hiring of senior corporate management to position the Company for its future expansion plans. The Company has a limited operating history, and future revenues and results from operations will depend upon various factors including market acceptance of its concept and general economic conditions. The Company's ability to meet its expansion plans and achieve profitability depends on its ability to obtain financing for the development of additional restaurants. There are no assurances that such financing will be available on terms acceptable or favorable to the Company. 2. SIGNIFICANT ACCOUNTING POLICIES FISCAL YEAR The Company has adopted a 52-53-week year ending on the Sunday nearest December 31 of each year. All references herein to "1997" and "1996" represent 52-week fiscal years ended December 28, 1997 and December 29, 1996, respectively. CASH AND CASH EQUIVALENTS The Company includes as cash and cash equivalents cash on hand, bank deposits and all liquid money market investments with original maturities of three months or less when purchased, which are recorded at the lower of cost or market. INVENTORIES Inventories consist primarily of restaurant food and beverages and are stated at the lower of cost or market as determined by the first-in first-out method. PRE-OPENING AND DEVELOPMENT COSTS The direct and incremental costs associated with opening a new restaurant, which consist of hiring and training the initial workforce, mock service and other direct costs are charged to operations when incurred. F-8 28 PROPERTY AND EQUIPMENT Property and equipment acquired are recorded at cost. The Company capitalized interest on funds borrowed to finance construction of $0 in 1997 and $45,000 in 1996. Improvements are capitalized, while repair and maintenance expenses are charged to operations as incurred. Leasehold improvements are amortized using the straight line method over the shorter of the estimated useful life or the lease term. Furniture and equipment are depreciated on a straight-line method over their estimated useful lives of 5 to 15 years. Property and equipment consisted of the following as of:
December 28, December 29, 1997 1996 ------------ ----------- Building and leasehold improvements $ 3,182,160 $ 3,353,182 Equipment and fixtures 2,294,503 902,334 Construction in progress 432,497 -- ----------- ----------- 5,909,160 4,255,516 Less: accumulated depreciation and amortization (639,000) (25,000) ----------- ----------- Total property and equipment, net $ 5,270,160 $ 4,230,516 =========== ===========
INCOME TAXES The Company accounts for income taxes using the liability method to recognize deferred income tax assets and liabilities. Deferred income taxes are provided for differences between the financial reporting and tax bases of the Company's assets and liabilities at currently enacted tax rates. NET LOSS PER COMMON SHARE The Company adopted in fiscal 1997, Statement of Financial Accounting Standard (SFAS) No. 128 "Earnings per Share", which requires disclosure of basic earnings per share (EPS) and diluted EPS, which replace the existing primary EPS and fully diluted EPS, as defined by Accounting Principles Board (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. Diluted EPS is computed similarly to primary 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. As a result of the adoption of SFAS No. 128, the Company's reported loss per share for 1996 was restated. The effect of this accounting change on previously reported EPS data was as follows: Primary EPS as reported $(0.53) Effect of SFAS No. 128 (0.22) ------- Basic EPS as restated $(0.75) ======= Fully diluted EPS --- Effect of SFAS No. 128 (0.75) ------- Diluted EPS as restated $(0.75) ======= USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Ultimate results could differ from the estimates. F-9 29 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 a variable rate (9.06% at December 28, 1997) and requires monthly payments of principal and interest of $5,785 through February 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 bore interest at 5.94% and had payments of interest only due through January 1998, at which time the entire principal was due. The loan was classified as short-term as of December 29, 1996 as it was repaid in full in January 1997. In May and June 1997, the Company borrowed an aggregate of $2,800,000 under loan agreements with banks. The loans were both repaid in full in July 1997. The outstanding loan is collateralized by the leasehold mortgage and substantially all of the assets of the Kenwood Restaurant. Additionally, the principal shareholder has personally guaranteed the loan. The related loan agreement contains certain covenants, as defined, which require, among others, minimum working capital, tangible net worth and debt coverage ratios and restrict additional indebtedness or asset sales. As of December 28, 1997, the Company was in compliance with all such covenants. The fair value of the Company's debt approximates market. Aggregate maturities of long-term debt as of December 28, 1997 are as follows: 1998 $ 69,420 1999 852,165 -------- $921,585 ======== CONVERTIBLE PROMISSORY NOTES PAYABLE In June and July 1996, the Company executed three convertible promissory notes totalling $150,000. The notes mature on July 1, 1999, and bear interest at 8.01%. The notes are convertible into 39,600 shares of the Company's Common Stock at maturity, at the payee's option. 4. SHAREHOLDERS' EQUITY 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. PRIVATE PLACEMENTS From November 1996 through July 1997, the Company completed private placement offerings of an aggregate of 2,392,889 shares of Common Stock at $3.00 per share. The Company received net proceeds of approximately $6.1 million after the payment of approximately $700,000 in related offering costs. The proceeds were used to pay off certain debt and will be used for additional development costs and working capital pruposes. INITIAL PUBLIC OFFERING During the fourth quarter of 1997, the Company consummated an intial public offering of 2,600,000 units at an offering price of $5.00 per unit, including 100,000 units from the exercise of the underwriters' over-allotment option, which occurred in December 1997. Each unit consisted on one share of Common Stock and one Redeemable Class A Warrant. The Company received net proceeds of approximately $11.2 million after payment of approximately $1.8 million in related underwriting discount and offering costs. WARRANTS In 1997, the Company granted 214,955 warrants. The warrants are immediately exercisable at a price of $3.75 per share and expire in five years. F-10 30 5. STOCK OPTIONS STOCK OPTION PLAN The Board of Directors has adopted the 1997 Stock Option and Incentive Compensation Plan (the "Plan") and reserved 750,000 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. Also during 1997, the Company granted 75,000 options to its outside directors outside of the Plan. A summary of the status of the Company's Plan as of and for the year ended December 28, 1997 is presented in the table and narrative below:
Year ended December 28, 1997 ----------------- Weighted Average Shares Exercise Price ------ -------------- Outstanding, beginning of Period ---- $ ---- Granted 707,666 $ 3.11 ------- ------- Outstanding, end of Period 707,666 $ 3.11 ======= ======= Exercisable, end of Period 50,000 Weighted average fair value of options ======= granted $ 2.38 =======
The Company accounts for these plans under APB Opinion No. 25, under which no compensation cost has been recognized. Had compensation cost for these plans been determined consistent with SFAS No. 123, "Accounting for Stock-Based Compensation," the Company's net loss and loss per share would have been increased to the following pro forma amounts for 1997: Net Loss As Reported $(3,974,576) Pro Forma (4,093,576) Diluted EPS As Reported (0.76) Pro Forma (0.79) The fair value of each option is estimated on the date of grant using the Black-Scholes option pricing model with the following weighted average assumptions used for grants in 1997: risk-free interest rate of 6.01%; no expected dividend yield; expected lives of 7 years; and expected volatility of 80%. 6. INCOME TAXES As of December 28, 1997 and December 29, 1996, the Company's deferred taxes consisted primarily of net operating loss carryforwards, preopening costs not currently deductible and accelerated methods of depreciation. The Company has recorded a full valuation allowance against the net deferred tax asset due to the uncertainty of realizing the related benefits. As of December 28, 1997, the Company had net operating loss carryforwards of approximately $2.3 million, which, if not used, will expire through 2012. F-11 31 The following is a reconciliation of the tax expense recorded in these financial statements to the federal and state tax rate based on statutory rates.
FOR THE YEARS ENDED ------------------- DECEMBER 28, DECEMBER 29, 1997 1996 --------------- ------------ Net loss............................. $(3,974,576) $(2,327,602) Expected rate........................ 40% 40% ----------- --------- Expected tax benefit................. (1,589,831) (931,000) Valuation allowance.................. 1,589,381 931,000 ----------- --------- Tax benefit recognized............... $ --- $ --- =========== ===========
7. COMMITMENTS AND CONTINGENCIES OPERATING LEASES The Company has entered into various operating leases for its existing and future restaurant which have an initial lease term of ten to fifteen years with an option for renewal. All of these leases contain provisions for contingent rentals based on a percentage of gross revenues, as defined, and contain provisions for payments of real estate taxes, insurance and common area costs. In addition, certain of these leases provide for tenant inducements and rent abatement. Total rent expense, including common area costs, real estate taxes and percentage rent, was $236,642 and $2,683, for the years 1997 and 1996, respectively. Future minimum rental payments (including one restaurant which is not yet open and excluding percentage rent) are as follows as of December 28, 1997: 1998 $ 284,162 1999 524,640 2000 688,256 2001 559,371 2002 574,779 Thereafter 5,418,897 ---------- $8,050,105 ========== LITIGATION The Company is involved in various legal actions rising in the ordinary course of business. In the opinion of management, the ultimate disposition of these matters will not have a material adverse effect on the Company's financial position or the results of its operations. 8. RELATED PARTY TRANSACTIONS The principal shareholder, director and executive officer provided essentially all of the Company's working capital in the development stage. During the year ended December 29, 1996 the maximum amount of such indebtedness outstanding was $1,213,469. At December 29, 1996, the amount outstanding of such indebtedness was $447,787. Included in these amounts were concept development costs to be reimbursed for a demonstration restaurant owned and operated by the principal shareholder in the amount of $278,101. The Company paid interest at 11.5% on these advances. There were no fixed repayment terms on the advances. All amounts were repaid in November 1997 from the proceeds of the Company's initial public offering. During 1997, Krienik Advertising Inc., an Ohio corporation whose President, Chief Executive Officer and 100% shareholder is a director of the Company, provided marketing and advertising services to the Company. Fees paid for these services (including payments for subcontracted media, printing, production and research services) amounted to $565,287 for the year ended December 28, 1997. F-12 32 9. SUBSEQUENT EVENT On February 25, 1998, the Company changed the name of its restaurant concept from Hotel Discovery to Cafe Odyssey. The Company believes that the new name better reflects the concept's primary focus on award-winning food, served in a unique environment of adventure, imagination, exploration and innovation. In conjunction with this action, the Company's Board of Directors approved a change in its corporate name from Hotel Discovery, Inc. to Cafe Odyssey, Inc., subject to shareholder approval. The Cafe Odyssey name will be used for the planned Mall of America Restaurant and all subsequent restaurants. The Kenwood Restaurant will retain the name "Hotel Discovery". F-13 EX-10.8 2 EXHIBIT 10.8 1 EXHIBIT 10.8 Return to: Multi-State Title Agency 201 East Fifth St., PNC Center Cincinnati, Ohio 45202-4182 (513) 651-6170 RECORDING INFORMATION: REGISTERED LAND CERTIFICATE NO. 160105 This instrument was prepared by: Frederick W. Kindel, Esq. Frost & Jacobs 2500 PNC Center 201 East Fifth Street Cincinnati, Ohio 45202 (513) 651-6800 - ------------------------------------------------------------------------------ LOAN ASSUMPTION AGREEMENT This Agreement made effective as of December 31, 1996, by and among PNC BANK, OHIO, NATIONAL ASSOCIATION ("Lender"), KENWOOD RESTAURANT LIMITED PARTNERSHIP, an Ohio limited partnership ("Original Borrower"), STEPHEN D. KING, an individual and resident of the State of Ohio, and KENWOOD RESTAURANT, INC., an Ohio corporation (singularly, the "Original Guarantor" and collectively, the "Original Guarantors"), and HOTEL MEXICO, INC., an Ohio corporation formerly known as "KRLP ACQUISITION CORP." (the "New Borrower"). RECITALS: A. Lender extended a secured loan in the amount of $1,000,000.00 to the Original Borrower with respect to certain premises, more particularly described in Schedule "A" hereto and made a part hereof (the "Property"), the obligations of which were guaranteed by the Original Guarantors and which loan is described herein as the "Loan." 2 B. The Loan is evidenced and/or secured by the documents listed in Schedule B hereto (collectively, the "Loan Documents"). All terms used herein, but not defined, shall have the same definitions as used in the Loan Agreement identified in Schedule "A" hereto. C. The Original Borrower desires to transfer all of its right, title and interest in the Property to New Borrower. D. The Original Borrower and the New Borrower desire to obtain the prior consent of Lender to the aforesaid transactions, and Lender has required that the parties hereto enter into this Agreement as a condition precedent to such approval. E. New Borrower further has requested, and Lender has approved, certain changes to the Loan Documents as hereinafter provided. NOW, THEREFORE, in consideration of the premises and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows: 1. Assumption The New Borrower, with the consent of Lender, hereby assumes, all of the duties and obligations of the Original Borrower under the Loan Documents, and the New Borrower agrees to make all payments in accordance with, and to keep and perform all of the covenants, obligations and conditions of, the Loan Documents, and now is principally liable for such duties and obligations. Notwithstanding the foregoing assumption of liability under the Loan Documents, the Original Borrower also remains principally liable, jointly and severally with the New Borrower, for all of its duties and obligations under the Loan Documents and each Original Guarantor continues to remain liable for all of its duties and obligations under their respective Guarantees of Performance and Payment dated October 9, 1996, executed by Original Guarantors for the benefit of the Lender with respect to the Loan (the "Guarantees"). Except as otherwise expressly provided in this Agreement, nothing contained herein shall amend, waive, extend or release any of the respective duties and obligations of Original Borrower, Original Guarantors or the New Borrower contained in the Loan Documents or the Guarantees. Nothing contained herein shall constitute a novation of liability of the Original Borrower under the Loan Documents. 2. Waivers The obligations of the New Borrower under the Loan Documents will extend to and cover any number of renewals or extensions of the time for payment of the Loan Documents and will not be affected by any surrender, exchange, acceptance, or release by Lender of any other guarantee or any security held by it for the payment of the Loan Documents. The New Borrower hereby waive notice of default, presentment, protest, demand for payment, notice of demand or protest. Lender in its sole discretion may determine the reasonableness of the period which may elapse prior to the making of demand upon the New Borrowers for payments under the Loan Documents and need not -2- 3 pursue any of its remedies against any collateral, Original Borrower or Original Guarantors before having recourse against the New Borrower. If any demand is made at any time upon Lender for the repayment or recovery of any amount received by it in payment or on account of the Loan Documents and if Lender repays all or any part of such amount by reason of any judgment, decree or order of any court or administrative body or by reason of any settlement or compromise of any such demand, the New Borrowers will be and remain liable hereunder for the amount so paid or recovered to the same extent as if such amount had never been received originally by Lender. 3. Acknowledgment of Loan Terms Original Borrower and New Borrower acknowledge the following: (a) Original Borrower and New Borrowers are currently indebted to Lender in the outstanding principal amount of $1,000,000.00 under the Loan. (b) The current annual rate of interest payable under the Loan is acknowledged to be 9.06% per annum and shall remain at such rate until October 1, 1999. (c) The monthly installment payment of principal currently in effect under the Loan is acknowledged to be $5,785.00, plus accrued interest. (d) The maturity date of the Loan is October 1, 1999. 4. Modification of Loan Agreement All of the parties hereto acknowledge and agree that the Loan Agreement is hereby amended as follows: (a) Section 6 of the Loan Agreement is hereby modified by the addition of the following new Section 6.25: 6.25 CONTROL AND OWNERSHIP OF BORROWER. 51% or more of the underlying control of the Borrower shall be vested in, and held by, Stephen D. King, a Guarantor, it being understood that Stephen D. King must continue to control, directly or indirectly, at least a 51% interest in the Borrower, and 25% of the underlying ownership of the Borrower shall be vested in, and held by, Stephen D. King, a Guarantor, it being understood that Stephen D. King must continue to own, directly or indirectly, at least 25% interest in the Borrower. (b) Section 6 of the Loan Agreement is hereby modified by the addition of the following Section 6.26: 6.26 TANGIBLE NET WORTH. Shall maintain a Tangible Net Worth, as hereinafter defined, of at least $3,500,000.00 verified by compiled and reviewed financial statements of Borrower as, -3- 4 from time to time, furnished to Lender. For the purpose of this Agreement, the term "Tangible Net Worth" shall mean stockholders' equity in the Borrower less any advances to third parties and all items properly classified as intangibles, in accordance with generally accepted accounting principles, consistently applied ("GAAP"). (c) Section 6 of the Loan Agreement is hereby modified by the addition of a new Section 6.27: 6.27 TOTAL LIABILITIES - TANGIBLE NET WORTH. Shall maintain a ratio of Total Liabilities, as hereinafter defined, to Tangible Net Worth of 1:1 or less. For the purpose of this Agreement, the term "Total Liabilities" shall mean the sum of all current liabilities, plus long term debt with maturity of longer than twelve (12) months, as determined by GAAP. (d) Clause 7. l(iii) contained in the Loan Agreement which reads "except for the rental payable under the Restaurant Lease, rental and lease payments for real or personal property whose aggregate rental payments would exceed $25,000.00 when added to Borrower's rental or lease agreements existing on the date hereof" is modified to read "except for the rental payable under the Restaurant Lease, rental and lease payments for real or personal property whose aggregate rental payments would exceed $50,000.00 when added to Borrower's rental or lease agreements existing on the date hereof." (e) The last sentence contained in Section 7.11 which reads "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." is hereby amended to read as follows: "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 stock, warrant or other securities in Borrower, except in connection with the current private placement offering of 1,500,000 shares in Borrower so long as Borrower remains in compliance with the negative covenant contained in Section 6.25 hereof; or (ii) the dissolution or merger of Borrower or any Guarantor." 5. Inducements As an inducement for the Lender to enter into this Agreement, Original Borrower, Original Guarantors and New Borrower represent and warrant to Lender the following: (a) The Loan Documents constitute valid, legal and binding obligations of the Original Borrower and are now the valid, legal and binding obligations of the New Borrower, enforceable in accordance with their terms; the liens and security interests of the security documents comprising the Loan Documents are valid and substituting liens and interests against the collateral described -4- 5 therein, first in priority of title, except for matters disclosed in that certain Loan Policy of Title Insurance No. 36 0138 010 00004177 issued by Chicago Title Insurance Company to Lender. (b) The New Borrower acknowledge that they have received and reviewed a copy of the Loan Documents. (c) The New Borrower, the Original Borrower and Original Guarantors hereby acknowledge that as of the date hereof there are no claims, causes of action, defenses or rights of set-off against Lender with respect to the Loan Documents or Guarantees. (d) The Original Borrower and Original Guarantors are currently not in default under the Loan Documents or the Guarantees, respectively, and have fully performed all of their respective duties and obligations thereunder through and including the effective date of this Agreement. (e) The Guarantees are in full force and effect and constitute a valid and binding obligations of the Original Guarantors thereunder, which is enforceable in accordance with their terms. (f) The consummation of this Agreement by Original Borrower, Original Guarantors and New Borrower are their voluntary and free deed and act, without any misapprehension as the effect hereof, and without any coercion, duress, or overreaching or other misconduct by the Lender or any of its employees, representatives or agents. (g) This Agreement and the consummation of the transaction contemplated hereby constitute the valid, enforceable and binding obligation of the Original Borrower, Original Guarantors and New Borrower, respectively. (h) Neither the execution of this Agreement nor the consummation of any of the transactions contemplated hereby will constitute a violation of, be in conflict with or constitute a default under (or with the passage of time or delivery of notice, or both), or will constitute a default under any term or provision of any agreement which the Original Borrower, Original Guarantors or the New Borrower, individually or collectively, are a party to or bound by. (i) Concurrent with the signature and delivery of this Agreement by the parties hereto, the New Borrower own full, absolute and complete title to the Property, subject to the lien of the security documents comprising the Loan Documents and the fee simple or reversionary interest of Phillip E. Stephens, Trustee. (j) Lender has acted at all times in a fair, reasonable, good faith manner in connection with its administration and enforcement of the Loan Documents, its dealings with the parties hereto with respect to the Loan, and all other transactions related to this Agreement or the Loan. -5- 6 (k) All of the representations and warranties of the Original Borrower contained in the Loan Agreement are incorporated and restated herein by the New Borrower as of the effective date of this Agreement, without condition or exception, as though fully stated in this Agreement, and such representations and warranties are true and accurate. 6. General (a) The New Borrower shall be responsible for the out-of-pocket expenses incurred by the Lender in connection with this Agreement. (b) This Agreement will be governed by and construed in accordance with the laws of the State of Ohio. This Agreement will be recorded at the New Borrower's expense. (c) This Agreement will be binding upon each of the parties hereto and each of their respective personal representatives, heirs, successors and assigns and will inure to the benefit of Lender and its successors and assigns, but all duties and obligations of the Original Borrower, Original Guarantors, and New Borrower shall not be delegated unto any other party, except as provided herein. (d) Notwithstanding anything to the contrary, the duties and obligations of the Original Borrower are not deemed restated or preempted by this Agreement, except to the extent modified herein, and the lien and security interests of the security documents comprising the Loan Documents shall retain their original priority of title. 7. Consent to Jurisdiction; Waiver of Jury Trial. This Agreement has been executed, delivered and accepted at and will be deemed to have been made at Cincinnati, Ohio and will be interpreted and the rights and liabilities of the parties hereto determined in accordance with the laws of the State of Ohio, and the Original Borrower, New Borrower and Original Guarantors hereby agree to the exclusive jurisdiction of any state or federal court located within Hamilton County, Ohio and consents that all service of process to Original Borrower, New Borrower and Original Guarantors shall be sent in the manner, and at the address, set forth in the Loan Documents; provided that nothing herein contained will prevent the Lender from bringing any action or exercising any rights against any property of the Borrower within any other state or nation to enforce any award or judgment obtained in the federal or state court located within Hamilton County, Ohio. The Original Borrower, New Borrower and Original Guarantors waive any objection based on forum non-conveniens and any objection to venue or any action instituted hereunder. The Original Borrower, New Borrower and Original Guarantors and the Lender each waive any right to trial by jury in any action or proceeding related to this Agreement, the Loan Documents or any transaction contemplated in any of such documents. 8. Miscellaneous. -6- 7 This Agreement may be executed in counterparts. This Agreement, together with the Loan Documents, contain the entire agreement among the parties hereto. 9. CONFESSION OF JUDGMENT. ANY ATTORNEY-AT-LAW MAY APPEAR IN ANY COURT OF RECORD SITUATED IN THE COUNTY WHERE THE ORIGINAL BORROWER, EITHER NEW BORROWER OR EITHER GUARANTOR THEN RESIDES OR CONDUCTS BUSINESS, OR IN THE COUNTY WHERE BORROWER SIGNED THIS WARRANT, OR IN ANY OTHER COURT IN THE STATE OF OHIO OR IN ANY OTHER STATE OR TERRITORY OF THE UNITED STATES, AT ANY TIME AFTER THE DEBT HEREBY EVIDENCED SHALL BECOME DUE, EITHER AT ITS STATED MATURITY OR BY ACCELERATION OR OTHERWISE, AND MAY WAIVE THE ISSUING AND SERVICE OF PROCESS AND CONFESS JUDGMENT AGAINST BORROWER, JOINTLY AND SEVERALLY, IN FAVOR OF LENDER, FOR THE AMOUNT THEN OWING HEREIN, TOGETHER WITH THE COSTS OF SUIT, AND THEREUPON RELEASE ALL ERRORS AND WAIVE ALL RIGHTS OF APPEAL AND STAYS OF EXECUTION. NO SUCH JUDGMENT OR JUDGMENTS AGAINST LESS THAN ALL OF THE UNDERSIGNED SHALL BE A BAR TO A SUBSEQUENT JUDGMENT OR JUDGMENTS AGAINST ANY ONE OR MORE OR THE UNDERSIGNED AGAINST WHOM JUDGMENT HAS NOT BEEN OBTAINED HEREON, THIS BEING A JOINT AND SEVERAL WARRANT OF ATTORNEY TO CONFESS JUDGMENT. Executed as of December 20, 1996. ORIGINAL BORROWER: WARNING: BY SIGNING THIS PAPER YOU GIVE UP YOUR RIGHT TO NOTICE AND COURT TRIAL. IF YOU DO NOT PAY ON TIME A COURT JUDGMENT MAY BE TAKEN AGAINST YOU WITHOUT YOUR PRIOR KNOWLEDGE AND THE POWERS OF A COURT CAN BE USED TO COLLECT FROM YOU REGARDLESS OF ANY CLAIMS YOU MAY HAVE AGAINST THE CREDITOR WHETHER FOR RETURNED GOODS, FAULTY GOODS, FAILURE ON HIS PART TO COMPLY WITH THE AGREEMENT, OR ANY OTHER CAUSE. KENWOOD RESTAURANT LIMITED PARTNERSHIP WITNESSES: By: Kenwood Restaurant, Inc., its General Partner /s/ Gregory E. Land Print Name: Gregory E. Land By: /s/ Stephen D. King Print Name: Stephen D. King /s/ Suzanne P. Land Title: President Print Name: Suzanne P. Land WARNING: BY SIGNING THIS PAPER YOU GIVE UP YOUR RIGHT TO NOTICE AND COURT TRIAL. IF YOU DO NOT PAY ON TIME A COURT JUDGMENT MAY BE TAKEN AGAINST YOU WITHOUT YOUR PRIOR KNOWLEDGE AND THE POWERS OF A COURT CAN BE USED TO COLLECT FROM YOU REGARDLESS OF ANY CLAIMS YOU MAY HAVE AGAINST THE CREDITOR WHETHER FOR RETURNED GOODS, FAULTY GOODS, FAILURE ON HIS PART TO COMPLY WITH THE AGREEMENT, OR ANY OTHER CAUSE. -7- 8 WITNESSES: ORIGINAL GUARANTOR: /s/ Gregory E. Land Print Name: Gregory E. Land By: /s/ Stephen D. King STEPHEN D. KING /s/ Suzanne P. Land Print Name: Suzanne P. Land WARNING: BY SIGNING THIS PAPER YOU GIVE UP YOUR RIGHT TO NOTICE AND COURT TRIAL. IF YOU DO NOT PAY ON TIME A COURT JUDGMENT MAY BE TAKEN AGAINST YOU WITHOUT YOUR PRIOR KNOWLEDGE AND THE POWERS OF A COURT CAN BE USED TO COLLECT FROM YOU REGARDLESS OF ANY CLAIMS YOU MAY HAVE AGAINST THE CREDITOR WHETHER FOR RETURNED GOODS, FAULTY GOODS, FAILURE ON HIS PART TO COMPLY WITH THE AGREEMENT, OR ANY OTHER CAUSE. /s/ Gregory E. Land KENWOOD RESTAURANT LIMITED PARTNERSHIP, Print Name: Gregory E. Land an Ohio limited partnership By: /s/ Stephen D. King /s/ Suzanne P. Land Print Name: Stephen D. King Print Name: Suzanne P. Land WARNING: BY SIGNING THIS PAPER YOU GIVE UP YOUR RIGHT TO NOTICE AND COURT TRIAL. IF YOU DO NOT PAY ON TIME A COURT JUDGMENT MAY BE TAKEN AGAINST YOU WITHOUT YOUR PRIOR KNOWLEDGE AND THE POWERS OF A COURT CAN BE USED TO COLLECT FROM YOU REGARDLESS OF ANY CLAIMS YOU MAY HAVE AGAINST THE CREDITOR WHETHER FOR RETURNED GOODS, FAULTY GOODS, FAILURE ON HIS PART TO COMPLY WITH THE AGREEMENT, OR ANY OTHER CAUSE. HOTEL MEXICO, INC., F.K.A. KRLP ACQUISITION, CORP. /s/ Gregory E. Land Print Name: Gregory E. Land By: /s/ Stephen D. King Print Name: Stephen D. King /s/ Suzanne P. Land Title: President Print Name: Suzanne P. Land APPROVED AND AGREED: WITNESSES: LENDER: /s/ Tammy Johnson PNC BANK, OHIO, NATIONAL ASSOCIATION Print Name: Tammy Johnson -8- 9 /s/ Frederick W. Kindel By: /s/ Wendy Gaskin Print Name: Frederick W. Kindel Title: Loan Officer STATE OF OHIO ) ) ss. COUNTY OF HAMILTON ) The foregoing instrument was acknowledged before me, a notary public, this 20th day of December, 1996 by STEPHEN D. KING. /s/ Suzanne P. Land Notary Public STATE OF OHIO ) ) ss. COUNTY OF HAMILTON ) The foregoing instrument was acknowledged before me, a notary public, this 20th day of December, 1996 by Stephen D. King, the President of KENWOOD RESTAURANT, INC., an Ohio corporation, on behalf of such corporation. /s/ Suzanne P. Land Notary Public STATE OF OHIO ) ) ss. COUNTY OF HAMILTON ) The foregoing instrument was acknowledged before me, a notary public, this 20th day of December, 1996 by Stephen D. King, the President of KRLP ACQUISITION CORP., an Ohio corporation, known formerly as HOTEL MEXICO, INC., an Ohio corporation. /s/ Suzanne P. Land Notary Public STATE OF OHIO ) ) ss. COUNTY OF HAMILTON ) -9- 10 The foregoing instrument was acknowledged before me, a notary public, this 20th day of December, 1996 by Wendy Gaskin, a Loan Officer of PNC BANK, OHIO, NATIONAL ASSOCIATION, a national banking association, on behalf of such association. /s/ Frederick W. Kindel Notary Public STATE OF OHIO ) ) ss. COUNTY OF HAMILTON ) The foregoing instrument was acknowledged before me, a notary public, this 20th day of December, 1996 by Stephen D. King, the President of T&R Butler, Inc., the general partner of KENWOOD RESTAURANT LIMITED PARTNERSHIP, an Ohio limited partnership, on behalf of such corporation. /s/ Suzanne P. Land Notary Public -10- 11 SCHEDULE A The real estate underlying, and improvements constructed on the Premises covered by that certain Lease Agreement executed November 9, 1994, a memorandum of which was recorded on August 26, 1996, in Official Record 7133, Page 1322 of the Hamilton County, Ohio Registered Land Records in favor of Kenwood Restaurant, Inc., which assigned its interest therein by instrument dated August 23, 1996 and recorded on August 26, 1996, in Official Record 7133, Page 1331, of the aforesaid records in favor of the Borrower, which has further assigned its interest therein by instrument dated November 15, 1996 and recorded on ____________, in Official Record ____, Page ____, Hamilton County, Ohio Registered Land Records (collectively the "Lease"). The Property shall include, without limitation, New Borrower=s leasehold estate and contract rights contained in the Lease. -11- 12 SCHEDULE B 1. Promissory Note, dated October 1, 1996, made by Original Borrower in favor of Lender in the original principal amount of $1,000,000.00; 2. Loan Agreement, dated October 9, 1996, by and between Original Borrower and Lender; 3. Security Agreement dated October 9, 1996, by and between Original Borrower and Lender; 4. Assignment of License Agreement as collateral security dated October 9, 1996, by and between Original Borrower and Lender; 5. Conditional Assignment dated October 9, 1996, by and among Original Borrower, Cintech Construction, Inc., and Lender; 6. UCC-1 Financing Statements; 7. Open-End Mortgage, Assignment of Rents and Leases and Security Agreement, dated August 23, 1996, and recorded August 26, 1996 in Official Record Book 7133, Page 1338, Hamilton County, Ohio Registered Land Records by and between Original Borrower and Lender; 8. First Amendment To Open-End Mortgage, Assignment of Rents and Leases and Security Agreement, dated October 9, 1996 and recorded October 29, 1996 in Official Record Book 7188, Page 792, of the Hamilton County, Ohio Registered Land Records by and between Original Borrower and Lender; 9. All other documents executed or furnished by Original Borrower in connection with the aforesaid documents. -12- EX-10.9 3 EXHIBIT 10.9 1 EXHIBIT 10.9 Return to: Multi-State Title Agency 201 East Fifth St., PNC Center Cincinnati, Ohio 45202-4182 (513) 651-6170 RECORDING INFORMATION: REGISTERED LAND CERTIFICATE NO. _____________ This instrument was prepared by: Frederick W. Kindel, Esq. Frost & Jacobs 2500 PNC Center 201 East Fifth Street Cincinnati, Ohio 45202 (513) 651-6800 - ------------------------------------------------------------------------------ SECOND LOAN ASSUMPTION AGREEMENT This Agreement made effective as of October 16, 1997, by and among PNC BANK, OHIO, NATIONAL ASSOCIATION ("Lender"), STEPHEN D. KING, an individual and resident of the State of Ohio, (the "Guarantor"), and HOTEL DISCOVERY, INC., a Minnesota corporation, as successor by merger to HOTEL MEXICO, INC., an Ohio corporation formerly known as "KRLP ACQUISITION CORP." (the "New Borrower"). RECITALS: A. Lender extended a secured loan in the amount of $1,000,000.00 to the Kenwood Restaurant Limited Partnership, an Ohio corporation (the "Original Borrower") with respect to certain premises, more particularly described in Schedule "A" hereto and made a part hereof (the "Property"), the obligations of which were guaranteed by the Guarantor and which loan is described herein as the "Loan." 2 B. The Loan is now evidenced and/or secured by the documents listed in Schedule B hereto (collectively, the "Loan Documents"). All terms used herein, but not defined, shall have the same definitions as used in the Loan Agreement identified in Schedule "B" hereto. C. The Original Borrower transferred all of its right, title and interest in the Property to Hotel Mexico, Inc. ("HMI"). D. Pursuant to certain Assignment and Assumption of Lease dated December 15, 1996 by and between Original Borrower and HMI, and filed of record in Official Record Volume 7268, Page 1034, in the Hamilton County, Ohio Recorder's Office, HMI assumed all of the obligations of the Original Borrower under the Loan. E. On or about August 1, 1997, HMI merged into the New Borrower, with New Borrower being the surviving corporation under such merger. F. New Borrower has requested Lender to approve said merger and New Borrower's assumption of HMI's obligations under the Loan Documents, and Lender has agreed to provide such consent in accordance with, but subject to, the terms and conditions of this Agreement. NOW, THEREFORE, in consideration of the premises and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows: 1. Assumption The New Borrower, with the consent of Lender, hereby assumes, all of the duties and obligations of HMI under the Loan Documents, and the New Borrower agrees to make all payments in accordance with, and to keep and perform all of the covenants, obligations and conditions of, the Loan Documents, and now is principally liable for such duties and obligations. Guarantor continues to remain liable for all of its duties and obligations under its Guarantee of Performance and Payment dated October 9, 1996, executed by Guarantor for the benefit of the Lender with respect to the Loan Documents (the "Guarantee"). Except as otherwise expressly provided in this Agreement, nothing contained herein shall amend, waive, extend or release any of the respective duties and obligations of New Borrower or Guarantor contained in the Loan Documents or the Guarantee. 2. Waivers The obligations of the New Borrower under the Loan Documents will extend to and cover any number of renewals or extensions of the time for payment of the Loan Documents and will not be affected by any surrender, exchange, acceptance, or release by Lender of any other guarantee or any security held by it for the payment of the Loan Documents. The New Borrower hereby waive notice of default, presentment, protest, demand for payment, notice of demand or protest. Lender in its sole discretion may determine the reasonableness of the period which may elapse prior to the making of demand upon the New Borrower for payments under the Loan Documents and need not pursue any 2 3 of its remedies against any collateral, or Guarantor before having recourse against the New Borrower. If any demand is made at any time upon Lender for the repayment or recovery of any amount received by it in payment or on account of the Loan Documents and if Lender repays all or any part of such amount by reason of any judgment, decree or order of any court or administrative body or by reason of any settlement or compromise of any such demand, the New Borrower will be and remain liable hereunder for the amount so paid or recovered to the same extent as if such amount had never been received originally by Lender. 3. Acknowledgment of Loan Terms New Borrower acknowledges the following: (a) As of the effective date of this Agreement and New Borrower is currently indebted to Lender in the outstanding principal amount of $941,261.58 under the Loan. (b) The current annual rate of interest payable under the Loan is acknowledged to be 9.06% per annum and shall remain at such rate until maturity. (c) The monthly installment payment of principal currently in effect under the Loan is acknowledged to be $5,785.00, plus accrued interest. (d) The Loan Documents are valid and binding obligations of the New Borrower and are enforceable in accordance with their terms. 4. Waiver of Certain Loan Defaults New Borrower acknowledges that it is currently in default of' one or more of the following provisions of the Loan Agreement: (a) Its failure to operate a Hotel Mexico Restaurant in accordance with Section 6.2.3. (b) Its failure to timely furnish certain financial statements of Guarantor to Lender pursuant to Section 6.8. (c) Its failure to maintain a Total Liabilities to Tangible Net Worth of 1:1 or less pursuant to Section 6.27. (d) Its incurrence of indebtedness to Guarantor pursuant to Section 7.1. (e) The merger of HMI into New Borrower in contravention of Section 7.7. (f) Its removal of its books and records to another location in accordance with Section 7.10. 3 4 (g) The assignment of the Restaurant Lease from HMI to New Borrower as a result of the merger of such entities in contravention of Section 7.16. In the event that the current offering of stock of New Borrower as filed by New Borrower pursuant to SB-2 Registration Statement under The Securities Act of 1993 with the Securities and Exchange Commission on September 17, 1997 becomes effective and closes with net proceeds therefrom equal to or greater than $10,000,000.00 by December 1, 1997 (collectively, the "Public Offering") and there are no other defaults by New Borrower or Guarantor (other than specified in this Section 4) under the Loan Documents or Guarantee, respectively, then Lender hereby waives each and every such default by New Borrower, provided, however, that (i) Lender reserves the right to enforce all of its rights and remedies against New Borrower and Guarantor as a result of such default if the Public Offering does not occur by December 1, 1997, and (ii) such waiver by Lender shall not constitute a further waiver of such default as hereafter may occur or any other default by New Borrower under the Loan Documents. 5. Amendments to Loan Documents In the event that the Public Offering closes by December 1, 1997, and there are no other defaults by either New Borrower or Guarantor under the Loan Documents or the Guarantee, respectively (other than specified in Section 4) then: (a) Section 6.2.3 of the Loan Agreement shall be revised to read "Use of the Property solely as a Hotel Discovery Restaurant in accordance with the Restaurant Lease." and all references to "Hotel Mexico Restaurant" used in the Loan Documents shall be revised to "Hotel Discovery Restaurant." All references to the "Franchise Agreement" shall be deleted. (b) The provisions of that certain letter dated June 26, 1997 executed by Lender addressed to HMI, which reduces the Tangible New Worth contained in Section 6.26 of the Loan Agreement from $3,500,000.00 to $1,500,000.00 shall be null and void, without further force and effect, it being understood that the Tangible New Worth referenced in said Section 6.26 shall be $3,500,000.00. (c) The following section shall be incorporated as Section 6.28 into the Loan Agreement: Maintenance of Cash. Shall maintain at all times cash under its exclusive control, not subject to any pledge, security or similar arrangement, of $2,500,000.00 or more. (d) The last sentence of Section 7.11 of the Loan Agreement shall be deleted. (e) The maturity date of the Note shall be changed from "October 1, 1999" to "February 1, 1999". 4 5 6. Release New Borrower and Guarantor hereby release Lender and its employees, agents and counsel, from all claims, losses, damages and expenses, including without limitation, reasonable attorneys' fees, arising out of or relating to the Loan, any amendments, modifications or other agreements between HMI, New Borrower, Guarantor and/or Lender, and Lender's administration of the Loan and negotiation of this Agreement. 7. Inducements As an inducement for the Lender to enter into this Agreement, New Borrower and Guarantor represent, warrant and state to Lender the following: (a) The Loan Documents constitute the valid, legal and binding obligations of the New Borrower, which are enforceable in accordance with their terms; and the liens and security interests of the security documents comprising the Loan Documents are valid and substituting liens and interests against the collateral described therein, first in priority of title, except for matters disclosed in that certain Loan Policy of Title Insurance No. 36 0138 010 00004177 issued by Chicago Title Insurance Company to Lender. (b) The New Borrower has received and reviewed a copy of the Loan Documents. (c) There are no claims, causes of action, defenses or rights of set-off against Lender with respect to the Loan Documents or Guarantee, respectively. (d) Except for the defaults by New Borrower under the Loan as provided in Section 4 hereof, the New Borrower and Guarantor are currently not in default under the Loan Documents or the Guarantee, respectively, and have fully performed all of their respective duties and obligations thereunder through and including the effective date of this Agreement. Furthermore, Lender currently is entitled to enforce all of its rights and remedies against New Borrower and Guarantor under the Loan Documents or Guarantee, respectively, or otherwise as a result of the defaults by New Borrower under the Loan as provided in Section 4. (e) The Guarantee is in full force and effect and constitute a valid and binding obligations of the Guarantor thereunder, which is enforceable in accordance with its terms. (f) The consummation of this Agreement by New Borrower and Guarantor are their voluntary and free deed and act, without any misapprehension as the effect hereof, and without any coercion, duress, or overreaching or other misconduct by the Lender or any of its employees, representatives or agents. 5 6 (g) This Agreement and the consummation of the transaction contemplated hereby constitute the valid, enforceable and binding obligation of the New Borrower and Guarantor, respectively. (h) Neither the execution of this Agreement nor the consummation of any of the transactions contemplated hereby will constitute a violation of, be in conflict with or constitute a default under (or with the passage of time or delivery of notice, or both), or will constitute a default under any term or provision of any agreement which the New Borrower or Guarantor is a party to or bound by. (i) Concurrent with the signature and delivery of this Agreement by the parties hereto, the New Borrower owns full, absolute and complete title to the Property, subject to the lien of the security documents comprising the Loan Documents and the fee simple or reversionary interest of Phillip E. Stephens, Trustee, under the Restaurant Lease. Furthermore, the transfer of HMI's interest in the Property is permitted by the terms of the Restaurant Lease and does not require the prior consent or approval of the Lessor thereunder. (j) Lender has acted at all times in a fair, reasonable, good faith manner in connection with its administration and enforcement of the Loan Documents, its dealings with the parties hereto with respect to the Loan, and all other transactions related to this Agreement or the Loan. (k) Except to the extent expressly amended under the Loan Documents or this Agreement, all of the representations and warranties of HMI contained in the Loan Agreement are incorporated and restated herein by the New Borrower as of the effective date of this Agreement, without condition or exception, as though fully stated in this Agreement, and such representations and warranties are true and accurate. (l) New Borrower has adopted the necessary resolution to enter into this Agreement and its signatory to this Agreement is authorized to execute the same and is in good standing with New Borrower. 8. General (a) The New Borrower shall be responsible for the out-of-pocket expenses incurred by the Lender in connection with this Agreement. (b) This Agreement will be governed by and construed in accordance with the laws of the State of Ohio. This Agreement will be recorded at the New Borrower's expense. (c) This Agreement will be binding upon each of the parties hereto and each of their respective personal representatives, heirs, successors and assigns and will inure to the benefit of Lender and its successors and assigns, but all duties and obligations of the New Borrower and Guarantor shall not be delegated unto any other party, except as provided herein. 6 7 (d) Notwithstanding anything to the contrary, the lien and security interests of the security documents comprising the Loan Documents shall retain their original priority of title. 9. Consent to Jurisdiction; Waiver of Jury Trial. This Agreement has been executed, delivered and accepted at and will be deemed to have been made at Cincinnati, Ohio and will be interpreted and the rights and liabilities of the parties hereto determined in accordance with the laws of the State of Ohio, and the New Borrower and Guarantor hereby agree to the exclusive jurisdiction of any state or federal court located within Hamilton County, Ohio and consents that all service of process to New Borrower and Guarantor shall be sent in the manner, set forth in the Loan Documents, except that the address to which notices are to be sent to New Borrower is as follows: PNC Bank, Ohio, National Association P.O. Box 1198 Cincinnati, Ohio 45201-1198 Attn: Wendy Gaskin with a copy to: Frost & Jacobs LLP 2500 PNC Center 201 East Fifth Street Cincinnati, Ohio 45201 Attn: Frederick W. Kindel with a copy to: Hotel Discovery, Inc. 7701 France Avenue South, Suite 219 Edina, MN 55435 Attn: Ronald K. Fuller and with a copy to: Maslon Edelman Borman & Brand 3300 Norwest Center 90 South Seventh Street Minneapolis, MN 55402-4140 William M. Mower, P.A. Nothing herein contained will prevent the Lender from bringing any action or exercising any rights against any property of the New Borrower within any other state or nation to enforce any award or judgment obtained in the federal or state court located within Hamilton County, Ohio. The New Borrower and Guarantor waive any objection based on forum non-conveniens and any objection to venue or any action instituted hereunder. The New Borrower and Guarantor and the Lender each waive any right to trial by jury in any action or proceeding related to this Agreement, the Loan Documents or any transaction contemplated in any of such documents. 7 8 10. Miscellaneous This Agreement may be executed in counterparts. This Agreement, together with the Loan Documents, contain the entire agreement among the parties hereto. The Agreement shall be included in the definition of "Loan Documents" as used herein. 11. CONFESSION OF JUDGMENT. ANY ATTORNEY-AT-LAW MAY APPEAR IN ANY COURT OF RECORD SITUATED IN THE COUNTY WHERE EITHER NEW BORROWER OR GUARANTOR THEN RESIDES OR CONDUCTS BUSINESS, OR IN THE COUNTY WHERE NEW BORROWER SIGNED THIS WARRANT, OR IN ANY OTHER COURT IN THE STATE OF OHIO OR IN ANY OTHER STATE OR TERRITORY OF THE UNITED STATES, AT ANY TIME AFTER THE DEBT HEREBY EVIDENCED SHALL BECOME DUE, EITHER AT ITS STATED MATURITY OR BY ACCELERATION OR OTHERWISE, AND MAY WAIVE THE ISSUING AND SERVICE OF PROCESS AND CONFESS JUDGMENT AGAINST BORROWER, JOINTLY AND SEVERALLY, IN FAVOR OF LENDER, FOR THE AMOUNT THEN OWING HEREIN, TOGETHER WITH THE COSTS OF SUIT, AND THEREUPON RELEASE ALL ERRORS AND WAIVE ALL RIGHTS OF APPEAL AND STAYS OF EXECUTION. NO SUCH JUDGMENT OR JUDGMENTS AGAINST LESS THAN ALL OF THE UNDERSIGNED SHALL BE A BAR TO A SUBSEQUENT JUDGMENT OR JUDGMENTS AGAINST ANY ONE OR MORE OR THE UNDERSIGNED AGAINST WHOM JUDGMENT HAS NOT BEEN OBTAINED HEREON, THIS BEING A JOINT AND SEVERAL WARRANT OF ATTORNEY TO CONFESS JUDGMENT. Executed as of October 16, 1997. WARNING: BY SIGNING THIS PAPER YOU GIVE UP YOUR RIGHT TO NOTICE AND COURT TRIAL. IF YOU DO NOT PAY ON TIME A COURT JUDGMENT MAY BE TAKEN AGAINST YOU WITHOUT YOUR PRIOR KNOWLEDGE AND THE POWERS OF A COURT CAN BE USED TO COLLECT FROM YOU REGARDLESS OF ANY CLAIMS YOU MAY HAVE AGAINST THE CREDITOR WHETHER FOR RETURNED GOODS, FAULTY GOODS, ON HIS PART TO COMPLY WITH THE AGREEMENT, OR ANY OTHER CAUSE. NEW BORROWER: HOTEL DISCOVERY, INC. WITNESSES: /s/ Thomas L. Goila Print Name: Thomas L. Goila By: /s/ Stephen D. King Print Name: Stephen D. King /s/ Wendy Gaskin Title: President Print Name: Wendy Gaskin WARNING: BY SIGNING THIS PAPER YOU GIVE UP YOUR RIGHT TO NOTICE AND COURT TRIAL. IF YOU DO NOT PAY ON TIME A COURT JUDGMENT MAY BE TAKEN AGAINST YOU WITHOUT YOUR PRIOR KNOWLEDGE AND THE POWERS OF A COURT CAN BE USED TO COLLECT FROM YOU REGARDLESS OF ANY CLAIMS YOU MAY 8 9 HAVE AGAINST THE CREDITOR WHETHER FOR RETURNED GOODS, FAULTY GOODS, ON HIS PART TO COMPLY WITH THE AGREEMENT, OR ANY OTHER CAUSE. WITNESSES: GUARANTOR: /s/ Thomas L. Goila Print Name: Thomas L. Goila By: /s/ Stephen D. King Print Name: Stephen D. King /s/ Wendy Gaskin Title: President Print Name: Wendy Gaskin APPROVED AND AGREED: WITNESSES: LENDER: /s/ Thomas L. Goila PNC BANK, OHIO, NATIONAL ASSOCIATION Print Name: Thomas L. Goila /s/ Wendy Gaskin By: /s/ Wendy Gaskin Print Name: Wendy Gaskin Title: Wendy Gaskin STATE OF OHIO ) ) SS. COUNTY OF HAMILTON ) The foregoing instrument was acknowledged before me, a notary public, this 16th day of October, 1997 by Stephen D. King, the President of HOTEL DISCOVERY, INC. /s/ Tammy Johnson Notary Public STATE OF OHIO ) ) SS. COUNTY OF HAMILTON ) The foregoing instrument was acknowledged before me, a notary public, this 16th day of October, 1997 by STEPHEN D. KING. /s/ Tammy Johnson Notary Public 9 10 STATE OF OHIO ) ) SS. COUNTY OF HAMILTON ) The foregoing instrument was acknowledged before me, a notary public, this 16th day of October, 1997 by Wendy Gaskin, the Loan Officer of PNC BANK, OHIO, NATIONAL ASSOCIATION, a national banking association on behalf of such association. /s/ Tammy Johnson Notary Public 10 11 SCHEDULE A The real estate underlying, and improvements constructed on the Premises covered by that certain Lease Agreement executed December 9, 1994, a memorandum of which was recorded on August 26, 1996, in Official Record 7133, Page 1322 of the Hamilton County, Ohio Registered Land Records in favor of Kenwood Restaurant, Inc. 11 12 SCHEDULE B 1. Promissory Note, dated October 1, 1996, made by Original Borrower in favor of Lender in the original principal amount of $1,000,000.00; 2. Loan Agreement, dated October 9, 1996, by and between Original Borrower and Lender; 3. Security Agreement dated October 9, 1996, by and between Original Borrower and Lender; 4. Assignment of License Agreement as collateral security dated October 9, 1996, by and between Original Borrower and Lender; 5. Conditional Assignment dated October 9, 1996, by and among Original Borrower, Cintech Construction, Inc., and Lender; 6. UCC-1 Financing Statements; 7. Open-End Mortgage, Assignment of Rents and Leases and Security Agreement, dated August 23, 1996, and recorded August 26, 1996 in Official Record Book 7133, Page 1338, Hamilton County, Ohio Registered Land Records by and between Original Borrower and Lender; 8. First Amendment To Open-End Mortgage, Assignment of Rents and Leases and Security Agreement, dated October 9, 1996 and recorded October 29, 1996 in Official Record Book 7188, Page 792, of the Hamilton County, Ohio Registered Land Records by and between Original Borrower and Lender; 9. Guarantee of Payment and Performance of Stephen D. King. 10. Loan Assumption Agreement by and among Original Borrower, Stephen D. King, Kenwood Restaurant, Inc., ("Guarantor") and HMI. 11. All other documents executed or furnished by Original Borrower in connection with the aforesaid documents. 12 EX-10.10 4 EXHIBIT 10.10 1 EXHIBIT 10.10 EMPLOYMENT AGREEMENT This Agreement is made as of December 15, 1997 by and between HOTEL DISCOVERY, INC., a Minnesota corporation (the "COMPANY"), and ANNE D. HUEMME (the "EXECUTIVE"). W I T N E S S E T H 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 Chief Financial Officer and Vice President - Finance. The Company hereby employs Executive as Chief Financial Officer and Vice President - Finance and Executive accepts such employment pursuant to the terms of this Agreement. Executive shall report to and take direction from the Chief Operating Officer. The Executive will perform those duties which are usual and customary for a Chief Financial Officer and Vice President - Finance of a restaurant enterprise. Executive shall be employed at the Company's corporate offices. She shall perform her duties in a manner reasonably expected of a Chief Financial Officer and Vice President Finance of a restaurant company. 1.2 Term. Employment shall be for an initial term of up to three years commencing on January 5, 1998 and continuing until the earlier of (i) January 5, 2001 or (ii) the date Executive's employment terminates pursuant to Article III hereof. This Agreement shall be automatically renewed for three (3) additional one (1) year terms unless the Board gives written notice of termination 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 $130,000 during 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 Chief Operating Officer will review the Base Salary at least annually and may, in his or her sole discretion, increase it to reflect performance, appropriate industry guideline data or other factors. 2.2 Bonus. Executive shall receive an annualized bonus ("BONUS") of up to 25% of her Base Salary payable quarterly on the first quarterly anniversary of the effective date of this 2 Agreement and each quarter thereafter, the amount of such Bonus to be dependent upon Executive's satisfaction of certain quarterly objectives mutually agreed upon by Executive and the Chief Operating Officer. The Chief Operating Officer and Executive will review and, if mutually agreed, revise the criteria for the Bonus at least annually. 2.3 Moving Expenses. Executive shall receive a one-time payment of $15,000 toward the expenses of selling her home in Georgia and shall also be reimbursed for the expense of moving her personal property to Minnesota. Pending the sale of Executive's home in Georgia, the Company will reimburse Executive, for up to six months, for the lesser of the mortgage payments for her home in Georgia and her new home in Minnesota. 2.4 Airfare Reimbursement. Pending Executive's relocation to Minnesota, Executive will be reimbursed for the cost of up to six round-trip plane tickets from Atlanta to Minneapolis. 2.5 Automobile Allowance. Executive shall receive an automobile allowance of $500 per month. 2.6 Vacations. Executive shall be entitled to three weeks' paid vacation, or such greater amount of time as determined by the Board of Directors of the Company (the "BOARD"). 2.7 Employee Benefits. The Company agrees to pay 100% of the COBRA continuation premiums for health and dental insurance currently maintained by Executive and her family until the expiration of any waiting periods required for full participation by Executive and her family under the Company's plans and policies. Thereafter, Executive shall be entitled to the usual and customary benefits and perquisites which the Company generally provides to its other executives under its applicable plans and policies (including, without limitation, group health, group dental and group life coverage). Executive shall pay any contributions which are generally required of executives to receive any such benefits. 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. 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 her employment under this Agreement terminates. If Executive's employment is terminated by the Company (i) for a reason other than for "cause" as defined in Section 3.2 below, or (ii) following a change of control of the Company (defined as the sale in one or more private transactions of fifty percent (50%) or more of the Company), she shall continue to receive her Base Salary for a period of six (6) months from the date of termination. 3.2 Cause. For purposes of this Article III, "CAUSE" shall mean only the following: (i) commission of a felony; (ii) theft or embezzlement of Company property or commission of 2 3 similar acts involving moral turpitude; (iii) alcohol or drug abuse which, in the judgment of the Board, has rendered Executive incapable of carrying out her duties hereunder; or (iv) any other failure by Executive to substantially perform her material duties under this Agreement (excluding nonperformance resulting from disability), which failure is not cured within 30 days after written notice from the Chairman of the Board specifying the act of nonperformance. 3.3 Notice. Each party must provide the other with at least 30 days' written notice of termination of Executive's employment under this Agreement. IV. Confidentiality 4.1 Prohibitions Against Use. Executive acknowledges and agrees that during the term of this Agreement she may have access to various trade secrets and confidential business information ("CONFIDENTIAL INFORMATION") of the Company. Executive agrees that she shall use such Confidential Information solely in connection with her 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 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, she will not, unless she 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 3 4 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 she 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. This Agreement contains the entire understanding of the parties with regard to all matters contained herein. There are no other agreements, conditions or representations, oral or written, expressed or implied, with regard thereto. This Agreement supersedes all prior agreements relating to the employment of Executive by the Company. 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 Discovery, Inc. 7701 France Avenue South, Suite 217 Edina, MN 55435 Attention: President If to Executive, to: Anne D. Huemme 3140 Maple Lane Alpharetta, GA 30004 4 5 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 Minnesota, 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 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 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 Articles IV and V. IN WITNESS WHEREOF, the parties have executed this Agreement effective as of the date set forth above. HOTEL DISCOVERY, INC. /s/ Ronald K. Fuller --------------------------- By: Ronald K. Fuller Its: President /s/ Anne D. Huemme --------------------------- ANNE D. HUEMME 5 EX-27 5 FINANCIAL DATA SCHEDULE
5 YEAR DEC-27-1998 DEC-30-1996 DEC-28-1997 9,222,174 0 0 0 41,766 9,513,983 5,909,160 (639,000) 14,840,051 1,421,247 1,002,165 0 0 80,002 12,336,637 14,840,051 3,546,695 3,546,695 1,112,313 7,436,895 0 0 84,376 (3,974,576) 0 (3,974,576) 0 0 0 (3,974,576) (0.76) (0.76)
EX-27.2 6 FINANCIAL DATA SCHEDULE
5 YEAR DEC-28-1997 JAN-01-1996 DEC-29-1996 2,707,561 0 0 0 138,757 2,937,893 4,255,516 (25,000) 7,220,250 4,534,611 1,074,795 0 0 39,454 1,571,390 7,220,250 104,129 104,129 43,324 2,418,224 0 0 13,507 (2,327,602) 0 (2,327,602) 0 0 0 (2,327,602) (0.75) (0.75)
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