-----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, AsxA1nUCKRxBElw3TgpiOHipfeDb7hT0xKtWZYluQuyWA+8WI7YeheyBRGwdn2II euBGARd0RHXXkHqN2HdtNQ== 0000950124-99-004869.txt : 19990819 0000950124-99-004869.hdr.sgml : 19990819 ACCESSION NUMBER: 0000950124-99-004869 CONFORMED SUBMISSION TYPE: 10QSB PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19990704 FILED AS OF DATE: 19990818 FILER: COMPANY DATA: COMPANY CONFORMED NAME: CAFE ODYSSEY INC CENTRAL INDEX KEY: 0001044738 STANDARD INDUSTRIAL CLASSIFICATION: RETAIL-EATING PLACES [5812] IRS NUMBER: 311487885 STATE OF INCORPORATION: MN FISCAL YEAR END: 0102 FILING VALUES: FORM TYPE: 10QSB SEC ACT: SEC FILE NUMBER: 000-23243 FILM NUMBER: 99695479 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 FORMER COMPANY: FORMER CONFORMED NAME: HOTEL DISCOVERY INC DATE OF NAME CHANGE: 19970821 10QSB 1 FORM 10QSB 1 U. S. SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 FORM 10-QSB [X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JULY 4, 1999 OR [ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM TO ------- ------- COMMISSION FILE NUMBER 0-23243 - -------------------------------------------------------------------------------- CAFE ODYSSEY, INC. (Name of Small Business Issuer in Its Charter) MINNESOTA 31-1487885 (State or Other Jurisdiction of (I.R.S. Employer Identification No.) Incorporation or Organization) 4801 W. 81ST STREET, SUITE 112, BLOOMINGTON, MN 55437 (Address of Principal Executive Offices) 612-837-9917 (Issuer's Telephone Number, Including Area Code) HOTEL DISCOVERY, INC. (Former Name, Former Address and Former Fiscal Year, If Changed Since Last Report) 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 [ ] As of August 5, 1999, there were 9,353,190 shares of common stock, $.01 par value, outstanding. Transitional Small Business Disclosure Format (check One): Yes [ ] No [X] 2 FORWARD-LOOKING STATEMENTS Certain of the matters discussed in the following pages 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-QSB, 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 CAFE ODYSSEY, INC. FORM 10-QSB INDEX JULY 4, 1999 Page ---- PART I FINANCIAL INFORMATION Item 1. FINANCIAL STATEMENTS Balance Sheets - As of July 4, 1999 and January 3, 1999 4 Statements of Operations - For the thirteen and twenty-six week periods ended July 4, 1999 and June 28, 1998 5 Statements of Cash Flows - For the twenty-six week period ended July 4, 1999 and June 28, 1998 6 Condensed Notes to the Financial Statements 7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 11 PART II OTHER INFORMATION Item 1. Legal Proceedings 18 Item 2. Changes in Securities and Use of Proceeds 18 Item 6. Exhibits and Reports on Form 8-K 19 Signatures 20 3 4 PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS CAFE ODYSSEY, INC. BALANCE SHEETS
(Unaudited) * July 4, January 3, 1999 1999 ------------ ------------ ASSETS CURRENT ASSETS: Cash and cash equivalents $ 311,919 $ 106,247 Inventories 203,327 161,463 Other current assets 790,043 452,243 ------------ ------------ Total current assets 1,305,289 719,953 PROPERTY AND EQUIPMENT, net 15,298,944 11,699,548 OTHER ASSETS 1,080,154 520,487 ------------ ------------ $ 17,684,387 $ 12,939,988 ============ ============ LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES: Short-term notes payable $ 1,201,616 $ 0 Accounts payable 1,905,486 1,452,648 Advances payable to principal shareholder 150,000 100,000 Convertible promissory notes payable 150,000 150,000 Current portion of long-term debt 199,007 2,199,007 Accrued expenses 692,689 688,356 ------------ ------------ Total current liabilities 4,298,798 4,590,011 DEFERRED RENT 3,795,685 1,755,852 LONG-TERM DEBT, less current portion 3,681,562 755,878 ------------ ------------ Total liabilities 11,776,045 7,101,741 ------------ ------------ COMMITMENTS AND CONTINGENCIES CLASS A 8% PREFERRED STOCK, $.01 PAR VALUE, $1,000 STATED VALUE, 2,000 SHARES AUTHORIZED; 1,700 SHARES ISSUED AND OUTSTANDING 1,700,000 0 ------------ ------------ SHAREHOLDERS' EQUITY: Common stock, $.01 par value, 100,000,000 shares authorized; 8,549,556 and 8,000,089 shares issued and outstanding 85,496 80,001 Additional paid-in capital 21,213,673 20,281,140 Less: Common stock subscribed (400,000) (400,000) Accumulated deficit (16,690,827) (14,122,894) ------------ ------------ Total shareholders' equity 4,208,342 5,838,247 ------------ ------------ $ 17,684,387 $ 12,939,988 ============ ============
*From Audited Financial Statements The accompanying condensed notes are an integral part of these financial statements. 4 5 CAFE ODYSSEY, INC. STATEMENTS OF OPERATIONS (UNAUDITED)
Thirteen weeks ended Twenty-six weeks ended ------------------------------ ------------------------------ July 4, June 28, July 4, June 28, 1999 1998 1999 1998 ----------- ----------- ----------- ----------- NET SALES $ 3,561,023 $ 1,195,676 $ 5,893,655 $ 1,999,995 ----------- ----------- ----------- ----------- COSTS AND EXPENSES: Food, beverage and retail costs 919,446 343,587 1,526,033 562,003 Restaurant operating expenses 2,498,330 877,904 4,214,633 1,559,506 Depreciation and amortization 352,672 185,299 610,840 311,139 Pre-opening expenses 0 663,875 572,932 791,193 General, administrative & develop 480,530 676,394 960,776 1,418,529 ----------- ----------- ----------- ----------- Total costs and expenses 4,250,978 2,747,059 7,885,214 4,642,370 ----------- ----------- ----------- ----------- LOSS FROM OPERATIONS (689,955) (1,551,383) (1,991,559) (2,642,375) INTEREST INCOME (EXPENSE), net (242,134) 10,669 (384,145) 101,524 ----------- ----------- ----------- ----------- NET LOSS $ (932,089) $(1,540,714) $(2,375,704) $(2,540,851) PREFERRED STOCK DIVIDENDS AND ACCRETION 192,229 0 192,229 0 ----------- ----------- ----------- ----------- LOSS ATTRIBUTABLE TO COMMON SHAREHOLDERS $(1,124,318) $(1,540,714) $(2,567,933) $(2,540,851) =========== =========== =========== =========== BASIC AND DILUTED NET LOSS PER COMMON SHARE $ (0.11) $ (0.19) $ (0.29) $ (0.32) =========== =========== =========== =========== BASIC AND DILUTED NET LOSS ATTRIBUTABLE TO COMMON SHAREHOLDERS PER COMMON SHARE $ (0.13) $ (0.19) $ (0.31) $ (0.32) =========== =========== =========== =========== BASIC AND DILUTED WEIGHTED AVERAGE OUTSTANDING SHARES 8,332,239 8,000,158 8,193,858 8,000,174 =========== =========== =========== ===========
The accompanying condensed notes are an integral part of these financial statements. 5 6 CAFE ODYSSEY, INC. STATEMENTS OF CASH FLOWS (UNAUDITED)
Twenty-six weeks ended ---------------------------- July 4, June 28, 1999 1998 ----------- ----------- OPERATING ACTIVITIES: Net loss $(2,375,704) $(2,540,851) Adjustments to reconcile net loss to cash flows from operating activities: Depreciation 610,840 311,139 Amortization of deferred rent 77,333 15,222 Common stock issued in lieu of compensation 197,708 0 Changes in operating assets and liabilities: Inventories (41,864) (80,615) Other current assets (337,800) (194,158) Other assets (563,667) (318,296) Accounts payable 452,838 1,950,358 Accrued expenses 4,333 (48,352) ----------- ----------- Net cash used in operating activities (1,975,983) (905,553) ----------- ----------- INVESTING ACTIVITIES: Purchases of property and equipment (4,206,236) (6,321,436) ----------- ----------- FINANCING ACTIVITIES: Proceeds from short-term notes payable 1,315,000 0 Proceeds from long-term debt 1,000,000 791,986 Proceeds from preferred stock and warrant sale 2,000,000 0 Proceeds from exercise of stock options 74,249 0 Tenant allowance collected 1,962,500 0 Advances from shareholder 50,000 0 Payments on short-term notes payable (113,384) (200,000) Payments on long-term debt (74,316) (34,710) Repurchases of common stock 0 (300) Amortization of warrant discount 173,842 0 ----------- ----------- Net cash provided by financing activities 6,387,891 556,976 ----------- ----------- INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 205,672 (6,670,013) CASH AND CASH EQUIVALENTS, beginning of period 106,247 9,222,174 ----------- ----------- CASH AND CASH EQUIVALENTS, end of period $ 311,919 $ 2,552,161 =========== =========== SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Cash paid for interest $ 236,145 $ 34,342 Cash paid for income taxes 0 0 Non-cash item - landlord allowance receivable 0 1,600,000
The accompanying condensed notes are an integral part of these financial statements. 6 7 CAFE ODYSSEY, INC. CONDENSED NOTES TO THE FINANCIAL STATEMENTS JULY 4, 1999 (UNAUDITED) 1. GENERAL The Company owns and operates three full service restaurants. One is located in Cincinnati, Ohio (the "Kenwood Restaurant"), which operates under the trade name "Hotel Discovery." The other two restaurants operate under the trade name Cafe Odyssey. One is in the Mall of America, located in Bloomington, Minnesota, a suburb of Minneapolis (the "Mall of America Restaurant"), and the other at the Denver Pavilions, located in the downtown district of Denver, Colorado (the "Denver Pavilions Restaurant"). The Kenwood Restaurant opened under the name "Hotel Mexico" on December 19, 1996. The Mall of America Restaurant opened on June 8, 1998. The Denver Pavilions Restaurant opened March 15, 1999. Prior to the opening of the Kenwood Restaurant, the Company was in the development stage. On February 25, 1998, the Company changed the name of its restaurant concept from Hotel Discovery to Cafe Odyssey. In conjunction with this action, the Company's Board of Directors and shareholders approved a change in its corporate name from Hotel Discovery, Inc. to Cafe Odyssey, Inc. This change was approved by shareholders on May 21, 1998. The Company has retained the name "Hotel Discovery" for the Kenwood Restaurant because it does not meet the Cafe Odyssey criteria. See Note 4 for further discussion of the Kenwood Restaurant. 2. BASIS OF FINANCIAL STATEMENT PRESENTATION The accompanying unaudited condensed financial statements have been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations. Although management believes that the disclosures are adequate to make the information presented not misleading, it is suggested that these interim financial statements be read in conjunction with the Company's most recent 10-KSB dated January 3, 1999. In the opinion of management, all adjustments (which include only normal recurring adjustments) necessary for a fair presentation of the financial position, results of operations and cash flows for the interim periods presented have been made. Operating results for the periods ended July 4, 1999, are not necessarily indicative of the results that may be expected for the fiscal year ending January 2, 2000. The Company has adopted a 52/53 week accounting period ending on the Sunday nearest December 31 of each year. Fiscal year 1999 will be a 52 week year. 3. PROPERTY AND EQUIPMENT Property and equipment consisted of the following as of:
July 4, January 3, 1999 1999 ------------ ------------ Leasehold improvements $ 13,043,079 $ 6,435,925 Equipment and fixtures 4,437,097 4,014,095 Construction in progress 0 2,823,920 ------------ ------------ 17,480,176 13,273,940 Less: accumulated depreciation and amortization (2,181,232) (1,574,392) ============ ============ Total property and equipment, net $ 15,298,944 $ 11,699,548 ============ ============
7 8 4. WRITE-DOWN OF PROPERTY AND EQUIPMENT The Company's initial restaurant location in Cincinnati, Ohio has not generated positive operating cash flows to date. This initial format and Hotel Discovery concept have not served as the prototype for the Company's subsequent restaurants. Accordingly, the Company recorded a non-cash write-down of the Kenwood Restaurant of $2,000,000 in 1998. An impairment was determined by the Company's management based on the operating performance of the restaurant combined with the difference between the carrying amount of the assets and the undiscounted cash flows estimated to be generated. The write-down for impairment of long-lived assets was calculated in accordance with the requirements of Statement of Financial Accounting Standards No. 121 based primarily on operating projections, future discounted cash flows and other relevant market factors. The estimation process involved in determining if assets have been impaired and in determining fair value is inherently uncertain since it requires estimates of the current market, as well as future events and conditions. Such future events and conditions include economic and market conditions, as well as the continued acceptance of the Hotel Discovery concept. The realization of the estimates applied to the Company's real estate projects is dependent upon future uncertain events and conditions, and accordingly, the actual timing and amounts realized by the Company may differ from the estimated fair values as described herein. This write-down of the Kenwood Restaurant will allow the Company to divest itself from this restaurant. The Company has a favorable land lease and as such, will attempt to market such. Future positive cash flows from a sub-lease could be generated. There can be no assurances that a sub-lease or sale of the Kenwood Restaurant will be accomplished during 1999, if at all, which would meet the requirements of the Company. 5. DEBT On March 10, 1999, the Company entered into a promissory note for $825,000 with a financial institution. The note is an unsecured revolving line of credit facility which requires interest payments only. The interest rate on the note is equal to the Index Rate (7.75% as of July 4, 1999), with the maximum interest rate not to exceed 21.75% per annum. The note is due March 10, 2000. The note is secured by personal guarantees and the Company has issued five-year warrants for an aggregate of 500,000 shares of common stock at an exercise price of $0.75 per share to the guarantors in consideration of the guarantees. One guarantor, a director of the Company, received 87,500 warrants, the remaining 412,500 warrants going to other third party guarantors. On April 30, 1999, the Company entered into a master equipment lease agreement ("Capital Lease") for $300,000 with a financial institution. The Capital Lease is secured by substantially all of the furniture, accessories, computer/POS and kitchen equipment located at the Denver Pavilions Restaurant and required security deposits of approximately $135,000. The note bears interest at 17.3% and monthly payments of $8,708 are required for 4 years. On May 13, 1999, the Company signed a Letter of Intent to acquire popmail.com, inc. ("Popmail"). Through partnerships with radio stations nationwide, Popmail is a leading email provider to radio stations. The Company entered into a definitive merger agreement with Popmail on June 1, 1999, and the transaction closed into escrow on June 25, 1999. Completion of the transaction is subject to, among other things, the approval of the Company's shareholders and certain conditions of the merger agreement such as repaying a $5 million indebtedness of Popmail. On May 14, 1999, the Company issued 2,000 shares of Series A 8% convertible preferred stock (the "Series A Preferred Stock") with a stated value of $1,000 per share in a private placement for total proceeds of $2,000,000 and net proceeds after expenses of approximately $1,700,000. In addition, the Company issued a warrant (the "Agent's Warrant") to the placement agent to purchase 150,000 shares of the Company's common stock at $3.00 per share in connection with the offering. The Warrant is exercisable for five years. The purchase was an institutional investor who is an "accredited investor" as such term is defined in Rule 501(a) of Regulation D promulgated under the Securities Act of 1933, as amended ("Regulation D"). The Company relied upon Rule 506 of Regulation D as the exception for such private placement. 8 9 The annual dividend of 8% is cumulative and is payable quarterly in arrears either in cash or in freely tradable shares of common stock. Each share of Series A Preferred Stock is convertible into shares of the Company's common stock at a conversion price equal to 65% of the average closing bid price for the common stock five days prior to the conversion. The total number of shares of common stock issuable (i) upon conversion of the Series A Preferred Stock, (ii) as a dividend on the Series A Preferred Stock and (iii) upon exercise of the Warrant cannot exceed 1,662,687 shares (20% of the number of outstanding shares of common stock on July 13, 1999), unless the Company obtains shareholder approval as required by Nasdaq. In the event a holder of Series A Preferred Stock is unable to convert shares of Series A Preferred Stock into common stock because 1,662,687 shares have already been issued as described in the preceding sentence, the Company must redeem any unconverted Series A Preferred Stock presented for conversion for cash at a price equal to 125% of the stated value. The Company has the right to redeem the Series A Preferred Stock in cash at 135% of stated value plus accrued and unpaid dividends. All Series A Preferred Stock which is still outstanding on May 14, 2004 is mandatorily converted at the Conversion Price. The Company is not required to convert Series A Preferred Stock, whether upon request for conversion by the holder or upon the May 14, 2004 mandatory conversion date, if and to the extent that such holder would then own in excess of 5% of the Company's common stock. If, notwithstanding the foregoing, such holder is deemed by a court to be the beneficial owner of more than 5% of the Company's common stock, the Company is required to redeem for cash such number of shares of Series A Preferred Stock as will reduce such holder's ownership to not more than 5% at a redemption price equal to the stated value plus accrued and unpaid dividends. In the case of mandatory conversion, the Company may elect to pay a redemption price in cash equal to 135% of the stated value plus accrued and unpaid dividends or may extend the mandatory conversion date for one year. The Company filed a Registration Statement on Form S-3 registering the resale of the shares of common stock issuable upon conversion. The Registration Statement was declared effective on June 25, 1999. The Company will use the proceeds from the private placement to finance certain acquisitions. The Company will use the proceeds from exercise of the warrants for working capital. The Company will receive no proceeds from the sale of common stock by the selling shareholders. On June 30, 1999, the Company entered into a Letter of Intent to acquire Internet Community Concepts ("ICC"). ICC provides Web content, e-commerce and advertising to nearly 350 radio stations. 6. COMMITMENTS AND CONTINGENCIES LITIGATION - The Company is involved in legal actions in the ordinary course of business. While no reasonable estimates of potential liability can be determined, management believes such legal actions will be resolved without material effect on the Company's financial position or results of operations. 7. SUBSEQUENT EVENTS On July 13, 1999, the Company issued 2,000 shares of Series C 8% convertible preferred stock (the "Series C Preferred Stock") with a stated value of $1,000 per share in a private placement for total proceeds of $2,000,000 and net proceeds after expenses of approximately $1,700,000. In addition, the Company issued a warrant (the "Warrant") to the placement agent to purchase 150,000 shares of the Company's common stock at $3.00 per share in connection with the offering. The Warrant is exercisable for five years. The annual dividend of 8% is cumulative and is payable quarterly in arrears either in cash or in freely tradable shares of common stock. Each share of Series C Preferred Stock is convertible into shares of the Company's common stock at a conversion price equal to 65% of the average closing bid price for the common stock five days prior to the conversion. The total number of shares of common stock issuable (i) upon conversion of the Series C Preferred Stock, (ii) as a dividend on the Series C Preferred Stock and (iii) upon exercise of the Warrant cannot exceed 1,762,632 shares (20% of the number of outstanding shares of common stock on July 13, 1999), unless the 9 10 Company obtains shareholder approval as required by Nasdaq. In the event a holder of Series C Preferred Stock is unable to convert shares of Series C Preferred Stock into common stock because 1,762,632 shares have already been issued as described in the preceding sentence, the Company must redeem any unconverted Series C Preferred Stock presented for conversion for cash at a price equal to 125% of the stated value. The Company has the right to redeem the Series C Preferred Stock in cash at 135% of stated value plus accrued and unpaid dividends. All Series C Preferred Stock which is still outstanding on July 13, 2004 is mandatorily converted at the Conversion Price. The Company is not required to convert Series C Preferred Stock, whether upon request for conversion by the holder or upon the July 13, 2004 mandatory conversion date, if and to the extent that such holder would then own in excess of 5% of the Company's common stock. If, notwithstanding the foregoing, such holder is deemed by a court to be the beneficial owner of more than 5% of the Company's common stock, the Company is required to redeem for cash such number of shares of Series C Preferred Stock as will reduce such holder's ownership to not more than 5% at a redemption price equal to the stated value plus accrued and unpaid dividends. In the case of mandatory conversion, the Company may elect to pay a redemption price in cash equal to 135% of the stated value plus accrued and unpaid dividends or may extend the mandatory conversion date for one year. The Company, on August 13, 1999, did file a Registration Statement relating to the resale of common stock issuable (i) upon conversion of the Series C Preferred Stock, (ii) in lieu of cash dividends on the Series C Preferred Stock and (iii) upon exercise of the Warrant. If the Registration Statement has not been declared effective by the SEC by December 10, 1999, the Company must pay liquidated damages thereafter until such conditions are satisfied. On July 15, 1999, the Company announced plans to change its name from Cafe Odyssey, Inc. to "PopMail.com, inc." This name change is subject to the approval of our shareholders and, like the contemplated acquisitions of Internet Community Concepts and ROI Interactive, is contingent upon the completion of the Popmail transaction. On July 19, 1999, the Company entered into a Letter of Intent to purchase substantially all of the assets of ROI Interactive, LLC, a "permission marketing" email communications company which concentrates on the needs of its media, sports and entertainment customers. 10 11 ITEM 2. CAFE ODYSSEY, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following management's discussion and analysis of financial condition and results of operations should be read in connection with the accompanying unaudited condensed financial statements and related notes thereto included elsewhere in this report, and the audited financial statements and notes thereto included in the Company's Form 10-KSB for the fiscal year ended January 3, 1999. OVERVIEW Cafe Odyssey, Inc. (the "Company") develops, owns and operates restaurants with multiple themed dining rooms designed to appeal to the upscale casual dining market. The Company owns and operates three full service restaurants. One is located in Cincinnati, Ohio (the "Kenwood Restaurant"), which operates under the trade name "Hotel Discovery." The other two restaurants operate under the trade name Cafe Odyssey, as will any future restaurants. One is in the Mall of America, located in Bloomington, Minnesota, a suburb of Minneapolis (the "Mall of America Restaurant"), and the other at the Denver Pavilions, located in the downtown district of Denver, Colorado (the "Denver Pavilions Restaurant") (together the "Restaurants"). The Kenwood Restaurant opened under the name "Hotel Mexico" on December 19, 1996. The Mall of America Restaurant opened on June 8, 1998. The Denver Pavilions Restaurant opened March 15, 1999. Prior to the opening of the Kenwood Restaurant, the Company was in the development stage. 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. 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 and shareholders approved a change in its corporate name from Hotel Discovery, Inc. to Cafe Odyssey, Inc. This change was approved by shareholders on May 21, 1998. Future revenue and profits, if any, will depend upon various factors, including market acceptance of the Cafe Odyssey concept, the quality of 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 restaurants. 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 restaurants. 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 signed its first letter of intent to acquire a company that provides branded email services to radio stations. Cafe Odyssey's objective is to become a leading provider of email services, permission-based marketing email and branded Web-based email in the fields of radio, television, newspaper and sports/entertainment. The Company has signed two other letters of intent for e-comerce companies. Should the shareholders approve the acquisition of popmail.com, inc., the Company will be comprised of two divisions: an Internet division and a hospitality division. The Company expects to rapidly expand the Internet division, therefore, 11 12 a corporate name change to PopMail.com, inc., will also be voted upon at the Company's annual meeting held August 19, 1999. Through these acquisitions, the Company would hire senior management to operate the Internet division. The Company's present management team will continue to focus its attention on the day to day activities of the Restaurants. No assurance can be given that any acquisitions will be completed or desired results achieved, should the shareholders approve the acquisition or name change. The Company has adopted a 52/53 week accounting period ending on the Sunday nearest December 31 of each year. RESULTS OF OPERATIONS FOR THE THIRTEEN WEEKS AND TWENTY-SIX WEEKS ENDED JULY 4, 1999 AND JUNE 28, 1998 NET SALES The Company had net sales for the thirteen weeks ended July 4, 1999 and June 28,1998 of $3,561,023 and $1,195,676, respectively, or a 197.8% increase of $2,365,347. The increase in sales is attributable to the opening of the Denver Restaurant on March 15, 1999, offset by a continued decline in sales at the Kenwood Restaurant for the second quarter of 1999. The Company had net sales for the twenty-six weeks ended July 4, 1999 and June 28,1998 of $5,893,655 and $1,999,995, respectively, or a 194.7% increase of $3,893,660. The increase in sales is attributable to the opening of the Mall of America Restaurant on June 8, 1998, and the opening of the Denver Restaurant on March 15, 1999, offset by a continued decline in sales at the Kenwood Restaurant for the second quarter of 1999. COSTS AND EXPENSES The food, beverage, retail costs and other unit operating expenses related to the operation of the Restaurants for the thirteen weeks ended July 4, 1999 were $3,417,776 or a 179.8% increase of $2,196,285 from $1,221,491 for the thirteen weeks ended June 28,1998. The food, beverage, retail costs and other unit operating expenses related to the operation of the Restaurants for the twenty-six weeks ended July 4, 1999 were $5,740,666 or a 170.6% increase of $3,619,157 from $2,121,509 for the twenty-six weeks ended June 28,1998. The correlation that exists between the increase in costs and expenses as compared to the increase in revenues reflects the economies of scale of the larger revenue restaurants. Management continues to address cost and expense issues at the Restaurants. Further refinements are anticipated for both the Mall of America Restaurant and the Denver Pavilions Restaurant in the area of labor expenses. However, no assurance can be given that these efforts will achieve desired results by the year end, if at all. Depreciation and amortization expenses for the thirteen weeks ended July 4, 1999 were $352,672 or a 90.3% increase of $167,373 from $185,299 for the thirteen weeks ended June 28,1998. Depreciation and amortization expenses for the twenty-six weeks ended July 4, 1999 were $610,840 or a 96.3% increase of $299,701 from $311,139 for the twenty-six weeks ended June 28,1998. This increase is due primarily to the addition of the Mall of America Restaurant and the Denver Pavilions Restaurant, offset by the write-down on the Kenwood Restaurant. The Company incurred no additional pre-opening expenses for the thirteen weeks ended July 4, 1999. Pre-opening and start-up expenses were $572,932 for the twenty-six weeks ended July 4, 1999, as compared to $791,193 for the twenty-six weeks ended June 28, 1998, a decrease of $218,261 or 27.6%. The Company revised its pre-opening policy with the opening of the Denver Pavilions Restaurant. The Company anticipates that future new restaurant openings will be in line with Denver. However, no assurance can be given that pre-opening and start-up costs will be within the same amounts, due to the size of the next unit, its geographic location or the time needed to open. Of the $572,932 pre-opening expenses, $504,973 were for the Denver Pavilions Restaurant and $67,959 related to the start-up site located in Irvine, California. The Company has decided not to open a restaurant at this specific site. 12 13 The Company's executive and administrative office located in Bloomington, Minnesota, had general, administrative and development expenses for the thirteen weeks ended July 4, 1999, of $480,530 compared to $676,394 for the thirteen weeks ended June 28, 1998, a decrease of $195,864 or 29.0%. The Company's executive and administrative office had general, administrative and development expenses for the twenty-six weeks ended July 4, 1999, of $960,776 compared to $1,418,529 for the twenty-six weeks ended June 28, 1998, an decrease of $457,753 or 32.3%. This decrease reflects the results of the Company's efforts to reduce its general, administrative and development expense line items for the 1999 fiscal year. Interest expense for the thirteen weeks and twenty-six weeks ended July 4, 1999 of $245,283 and $384,183, respectively. Interest income for the thirteen weeks and twenty-six weeks ended July 4, 1999 was $3,149 and $38, respectively. The Company has to address the numerous executive and administrative staffing requirements, the requirements needed to manage remote sites, shareowner relationships, etc. and development costs associated with site location. The Company will be seeking additional senior management personnel as well as support staff, which will also have an associated impact on future earnings. The Company expects to continue to incur operating losses during 1999. LIQUIDITY AND CAPITAL RESOURCES The Company had a working capital deficit of $2,993,509 at July 4, 1999, compared to working capital deficit of $3,870,058 on January 3, 1999. Cash and cash equivalents were $311,919 at July 4, 1999, representing an increase of $205,672 from the cash and cash equivalents of $106,247 at January 3, 1999. 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 of approximately $5.1 million, net of landlord contributions, (iii) the construction of the Mall of America Restaurant and the acquisition of furniture, fixtures and equipment of approximately $4.8 million, net of landlord contributions, and (iv) the construction of the Denver Pavilions Restaurant and the acquisition of furniture, fixtures and equipment of approximately $4.2 million, net of landlord contributions. 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. During 1998 and 1997, the maximum amount of borrowings from Mr. King outstanding at any one time was $100,000 and $1,148,430, respectively. The amount of outstanding indebtedness as of July 4, 1999 was $150,000. 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. In a reorganization of the Company which occurred in November 1996, the Kenwood 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 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. The Kenwood Partnership was dissolved in October 1997. The Company borrowed $1.0 million under a leasehold mortgage term loan from a bank, which was personally guaranteed by Mr. King. This financing was used for the Kenwood Restaurant. Principal and interest were due monthly through February 1999. This loan was repaid in September 1998. 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 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. 13 14 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 were fully utilized for the Kenwood Restaurant, repayment of indebtedness, working capital and construction of the Mall of America Restaurant and the Denver Pavilions 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 Bank Windsor at an annual rate of 1.125% over Bank Windsor's reference rate. The loan was 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 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 option. 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 entered into a senior promissory note in June 1998, which had an outstanding balance of $841,203 at July 4, 1999. The note requires monthly installments of $25,044 including interest of 15.94%. The note is secured by equipment and is due July 2002. In September 1998 the Company entered into a $3,000,000 revolving line of credit facility with a financial institution. This credit facility is secured by an open-ended leasehold mortgage, security agreement and assignment of rents, income and proceeds ("Mortgage"), which Mortgage encumbers the leasehold improvements of the Kenwood Restaurant. In addition, two directors and an ex-director of the Company entered into a joint and several limited guaranty of the first $1,000,000 of the Company's borrowings under this credit facility. In consideration of these guarantees, the Company issued 40,000 five-year warrants to each of these individuals at an exercise price of $0.75 per share in November 1998. Guarantees for the other $2,000,000 were obtained later in November 1998 from two of the aforementioned directors and an additional third party whereby two of the directors each severally guaranteed $500,000, and the other third party guaranteed $1,000,000, of such borrowings. All three guarantors pledged certain collateral to the financial institution in connection with the latter guarantees. In exchange for such guarantees and pledges of collateral, the Company issued 200,000 five-year warrants each to two of the directors in November 1998, and 400,000 five-year warrants to the other third party in January 1999 all at an exercise price of $0.75 per share. The Board of Directors of the Company also authorized the issuance of additional warrants and the payment of cash penalties to the three guarantors if the borrowings are not repaid in full by September 30, 1999. This credit facility provides for monthly payments of interest accrued on the outstanding unpaid principal balance at a rate equal to the Prime Rate, or 7.75% as of July 4, 1999. As of April 2, 1999, the Company has borrowed $3,000,000 under this credit facility. The line of credit facility and senior promissory note contain certain restrictive covenants, as defined. As of July 4, 1999, the Company was in compliance with all such covenants. On February 23, 1999, the Company entered into a promissory note for $300,000 with a private investor. The note is unsecured and requires a balloon payment of principal and interest 90 days from the loan date. The interest rate is 18% per year, with a 2% loan origination fee. The Company issued a five year warrant to such investor to purchase 50,000 shares of the Company's common stock at an exercise price of $0.50 per share. A principal payment, accrued interest and an origination fee was paid in May 1999, and a new note was issued for $200,000 with the same investor. The new note, dated May 23, 1999, is also unsecured and requires a balloon payment of principal and interest 90 days from the loan date at a rate of 12.5% per year. The investor has the option to receive payment of principal and interest in cash or in shares of the Company's common stock, with a conversion price of $3.00 per share. 14 15 On March 10, 1999, the Company entered into a promissory note for $825,000 with a financial institution. The note is an unsecured revolving line of credit facility which requires interest payments only. The interest rate on the note is equal to the Index Rate (7.75% as of July 4, 1999), with the maximum interest rate not to exceed 21.75% per annum. The note is due March 10, 2000. The note is secured by personal guarantees and the Company has issued five-year warrants for an aggregate of 500,000 shares of common stock at an exercise price of $0.75 per share to the guarantors in consideration of the guarantees. One guarantor, a director of the Company, received 87,500 warrants, the remaining 412,500 warrants going to other third party guarantors. On April 30, 1999, the Company entered into a master equipment lease agreement ("Capital Lease") for $300,000 with a financial institution. The Capital Lease is secured by substantially all of the furniture, accessories, computer/POS and kitchen equipment located at the Denver Pavilions Restaurant and required security deposits of approximately $135,000. The note bears interest at 17.3% and monthly payments of $8,708 are required for 4 years. On May 13, 1999, the Company signed a Letter of Intent to acquire popmail.com, inc. ("Popmail"). Through partnerships with radio stations nationwide, Popmail is a leading email provider to radio stations. The Company entered into a definitive merger agreement with Popmail on June 1, 1999, and the transaction closed into escrow on June 25, 1999. Completion of the transaction is subject to, among other things, the approval of the Company's shareholders and certain conditions of the merger agreement such as repaying a $5 million indebtedness of Popmail. On May 14, 1999, the Company issued 2,000 shares of Series A 8% convertible preferred stock (the "Series A Preferred Stock") with a stated value of $1,000 per share in a private placement for total proceeds of $2,000,000 and net proceeds after expenses of approximately $1,700,000. In addition, the Company issued a warrant (the "Agent's Warrant") to the placement agent to purchase 150,000 shares of the Company's common stock at $3.00 per share in connection with the offering. The Warrant is exercisable for five years. The purchase was an institutional investor who is an "accredited investor" as such term is defined in Rule 501(a) of Regulation D promulgated under the Securities Act of 1933, as amended ("Regulation D"). The Company relied upon Rule 506 of Regulation D as the exception for such private placement. The annual dividend of 8% is cumulative and is payable quarterly in arrears either in cash or in freely tradable shares of common stock. Each share of Series A Preferred Stock is convertible into shares of the Company's common stock at a conversion price equal to 65% of the average closing bid price for the common stock five days prior to the conversion. The total number of shares of common stock issuable (i) upon conversion of the Series A Preferred Stock, (ii) as a dividend on the Series A Preferred Stock and (iii) upon exercise of the Warrant cannot exceed 1,662,687 shares (20% of the number of outstanding shares of common stock on May 14, 1999), unless the Company obtains shareholder approval as required by Nasdaq. In the event a holder of Series A Preferred Stock is unable to convert shares of Series A Preferred Stock into common stock because 1,662,687 shares have already been issued as described in the preceding sentence, the Company must redeem any unconverted Series A Preferred Stock presented for conversion for cash at a price equal to 125% of the stated value. The Company has the right to redeem the Series A Preferred Stock in cash at 135% of stated value plus accrued and unpaid dividends. All Series A Preferred Stock which is still outstanding on May 14, 2004 is mandatorily converted at the Conversion Price. The Company is not required to convert Series A Preferred Stock, whether upon request for conversion by the holder or upon the May 14, 2004 mandatory conversion date, if and to the extent that such holder would then own in excess of 5% of the Company's common stock. If, notwithstanding the foregoing, such holder is deemed by a court to be the beneficial owner of more than 5% of the Company's common stock, the Company is required to redeem for cash such number of shares of Series A Preferred Stock as will reduce such holder's ownership to not more than 5% at a redemption price equal to the stated value plus accrued and unpaid dividends. In the case of mandatory conversion, the Company may elect to pay a redemption price in cash equal to 135% of the stated value plus accrued and unpaid dividends or may extend the mandatory conversion date for one year. The Company filed a Registration Statement on Form S-3 registering the resale of the shares of common stock issuable upon conversion. The Registration Statement was declared effective on June 25, 1999. The Company will use the proceeds from the private placement to finance certain acquisitions. The Company will use the proceeds from exercise of the warrants for working capital. The Company will receive no proceeds from the sale of common 15 16 stock by the selling shareholders. On June 30, 1999, the Company entered into a Letter of Intent to acquire Internet Community Concepts ("ICC"). ICC provides Web content, e-commerce and advertising to nearly 350 radio stations. The Company will not open any new restaurants in fiscal year 1999 unless sufficient capital is raised. Management is committed to its original, fundamental strategy of slow, controlled growth. This approach to expansion although conservative, will strengthen the concept and avoid the pitfalls of some of the competition by insuring that the management team is not outdistanced and can execute the Company standards. It also insures that the real estate strategy is not compromised due to forced timing of restaurant openings. With the successful execution of the Denver Pavilions Restaurant being opened on time and on budget, the Company has terminated the lease agreement with the Irvine, California developer primarily due to the physical placement that the restaurant would occupy within the Irvine complex. The Company is investigating other real estate site locations. The Company estimates that its capital expenditures required for its next restaurant (excluding any landlord contributions) will be approximately $3 to $7 million. 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. The Company estimates the costs for its acquisition and merger with popmail.com, inc. to be approximately $5,500,00. Completion of the transaction is subject to, among other things, the approval of the Company's shareholders and certain conditions of the merger agreement. The Company has entered into a definitive purchase agreement to acquire all of the capital stock of ROI Interactive, Inc. This transaction is an exchange of assets for stock and cash. It is estimated that approximately $2,600,000 may be needed to complete the transaction. The Company expects to finance its Internet acquisitions through either the exercise of its Class A Warrants, or through other forms of financing such as the sale of additional equity and debt securities and other credit facilities. There are no assurances that such financing, if any, will be available on terms acceptable or favorable to the Company. IMPACT OF THE YEAR 2000 ISSUE INTRODUCTION. The term "Year 2000" is used to describe general problems that may result from improper processing of dates and date-sensitive calculations by computers or other machinery as the year 2000 is approached and reached. This problem stems from the fact that many of the world's computer hardware and software applications have historically used only the last two digits to refer to a year. As a result, many of these computer programs do not or will not properly recognize a year that begins with "20" instead of the familiar "19." If not corrected, many computer applications could fail or create erroneous results. The following information was prepared to comply with the guidelines for Year 2000 disclosure that the Securities and Exchange Commission issued in an Interpretative Release, effective August 4, 1998. These guidelines require significantly more detailed information than was previously required by the Commission. THE COMPANY'S STATE OF READINESS. To operate its business, the Company relies on many third party information technology systems ("IT"), including its point of sale, table seating and reservation management, inventory management, credit card processing, payroll, accounts payable, fixed assets, banking and general ledger systems. The Company does not maintain any proprietary IT systems and has not made any modifications to any of 16 17 the IT systems provided to it by its IT vendors. The Company has requested that each of the vendors providing hardware and software to provided upgrades and enhancements0 that, when installed, will ensure that the information technology systems associated with that particular vendor will be Year 2000 compliant. The Company expects that all assurances and/or IT upgrades and enhancements from its IT vendors will be completed and installed by October 31, 1999. The Company also relies upon government agencies, utility companies, providers of telecommunications services, food, beverage and retail product suppliers and other third party product and service providers ("Material Relationships"), over which it can assert little control. The Company's ability to conduct its core business is dependent upon the ability of these Material Relationships to ensure Year 2000 compliance, to the extent they affect the Company. If the telecommunications carriers, public utilities, key food, beverage and retail product suppliers and other Material Relationships do not appropriately rectify their Year 2000 issues, the Company's ability to conduct its core business may be materially impacted, which could result in a material adverse effect on the Company's financial condition. The Company has begun an assessment of all Material Relationships to determine risk and assist in the development of contingency plans. This effort is expected to be completed by October 31, 1999. COSTS TO ADDRESS THE COMPANY'S YEAR 2000 ISSUES. The Company expenses costs associated with its Year 2000 compliance efforts as the costs are incurred. The Company has not yet incurred any expenses in connection with its Year 2000 compliance efforts to date, and estimates it will spend no more than $5,000 to complete its Year 2000 compliance efforts. The Company estimates that the only costs that it will incur in connection with its Year 2000 compliance efforts will be in the testing phase, which will not occur until it has received assurances from each of its IT vendors that their IT systems upon which the Company relies are Year 2000 compliant. All costs associated with bringing these IT systems into Year 2000 compliance are expected to be borne by the Company's IT vendors. It is expected that the Company will have received these assurances and will begin its testing phase by October 31, 1999. It should be noted, however, that the Company is unable to estimate the costs that it may incur as a result of Year 2000 problems suffered by its IT vendors and Material Relationships, and that there can be no assurance that the Company will successfully identify and rectify all its Year 2000 problems. RISKS PRESENTED BY YEAR 2000 PROBLEMS. The Company has not yet begun the testing phase of its Year 2000 compliance efforts. As a result, the Company cannot fully assess the risks from any potential Year 2000 issues. Once the testing phase is underway, which is expected to occur no later than October 31, 1999, the Company may identify areas of its core business that are at risk of Year 2000 disruption. In addition, many of the Company's critical Material Relationships may not appropriately address their Year 2000 issues, the result of which could have a material adverse effect on the Company's financial condition and results of operations. THE COMPANY'S CONTINGENCY PLANS. Because the Company has not yet begun the testing phase of its Year 2000 compliance efforts, and accordingly has not yet fully assessed its risks from any potential Year 2000 issues, the Company has not yet developed detailed contingency plans specific to Year 2000 issues for any specific areas of business. The Company expects, however, to develop detailed contingency plans specific to Year 2000 issues once the testing phase of its Year 2000 compliance efforts is complete and its key risks have been assessed. 17 18 PART II. OTHER INFORMATION ITEM 1. 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 2. CHANGES IN SECURITIES AND USE OF PROCEEDS On May 14, 1999, the Company issued 2,000 shares of Series A 8% convertible preferred stock (the "Series A Preferred Stock") with a stated value of $1,000 per share in a private placement for total proceeds of $2,000,000 and net proceeds after expenses of approximately $1,700,000. In addition, the Company issued a warrant (the "Agent's Warrant") to the placement agent to purchase 150,000 shares of the Company's common stock at $3.00 per share in connection with the offering. The Warrant is exercisable for five years. The purchase was an institutional investor who is an "accredited investor" as such term is defined in Rule 501(a) of Regulation D promulgated under the Securities Act of 1933, as amended ("Regulation D"). The Company relied upon Rule 506 of Regulation D as the exception for such private placement. The annual dividend of 8% is cumulative and is payable quarterly in arrears either in cash or in freely tradable shares of common stock. Each share of Series A Preferred Stock is convertible into shares of the Company's common stock at a conversion price equal to 65% of the average closing bid price for the common stock five days prior to the conversion. The total number of shares of common stock issuable (i) upon conversion of the Series A Preferred Stock, (ii) as a dividend on the Series A Preferred Stock and (iii) upon exercise of the Warrant cannot exceed 1,662,687 shares (20% of the number of outstanding shares of common stock on May 14, 1999), unless the Company obtains shareholder approval as required by Nasdaq. In the event a holder of Series A Preferred Stock is unable to convert shares of Series A Preferred Stock into common stock because 1,662,687 shares have already been issued as described in the preceding sentence, the Company must redeem any unconverted Series A Preferred Stock presented for conversion for cash at a price equal to 125% of the stated value. The Company has the right to redeem the Series A Preferred Stock in cash at 135% of stated value plus accrued and unpaid dividends. All Series A Preferred Stock which is still outstanding on May 14, 2004 is mandatorily converted at the Conversion Price. The Company is not required to convert Series A Preferred Stock, whether upon request for conversion by the holder or upon the May 14, 2004 mandatory conversion date, if and to the extent that such holder would then own in excess of 5% of the Company's common stock. If, notwithstanding the foregoing, such holder is deemed by a court to be the beneficial owner of more than 5% of the Company's common stock, the Company is required to redeem for cash such number of shares of Series A Preferred Stock as will reduce such holder's ownership to not more than 5% at a redemption price equal to the stated value plus accrued and unpaid dividends. In the case of mandatory conversion, the Company may elect to pay a redemption price in cash equal to 135% of the stated value plus accrued and unpaid dividends or may extend the mandatory conversion date for one year. The Company filed a Registration Statement on Form S-3 registering the resale of the shares of common stock issuable upon conversion. The Registration Statement was declared effective on June 25, 1999. The Company will use the proceeds from the private placement to finance certain acquisitions. The Company will use the proceeds from exercise of the warrants for working capital. The Company will receive no proceeds from the sale of common stock by the selling shareholders. 18 19 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (A) EXHIBITS 10.1 Employment agreement between the Company and Thomas W. Orr dated April 30, 1999. * 27 Financial Data Schedule * This exhibit pertains to compensation. (B) REPORTS ON FORM 8-K On May 4, 1999, the Company filed a Current Report on Form 8-K, under Item 5 announcing that it had signed a Letter of Intent to acquire popmail.com, inc. On June 7, 1999, the Company filed a Current Report on Form 8-K, under Item 5 announcing that it had signed a definitive merger agreement with popmail.com, inc. On June 25, 1999, the Company filed a Current Report on Form 8-K, under Item 5 announcing that it had closed escrow with respect to the popmail.com, inc. merger. 19 20 SIGNATURES In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. CAFE ODYSSEY, INC. By: /s/ Thomas W. Orr ----------------- THOMAS W. ORR VICE PRESIDENT-FINANCE AND CHIEF FINANCIAL OFFICER (PRINCIPAL FINANCIAL OFFICER) Date: August 17, 1999 20 EX-10.1 2 EMPLOYMENT AGREEMENT 1 EXHIBIT 10.1 EMPLOYMENT AGREEMENT This Agreement is made as of April 30, 1999 by and between CAFE ODYSSEY, INC., a Minnesota corporation (the "COMPANY"), and THOMAS W. ORR (the "EXECUTIVE"). 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 Executive Vice President. The Company hereby employs Executive as Chief Financial Officer and Executive Vice President and Executive accepts such employment pursuant to the terms of this Agreement. Executive shall report to and take direction from the President. The Executive will perform those duties which are usual and customary for a Chief Financial Officer and Executive Vice President of a restaurant enterprise and Internet company. He shall perform his duties in a manner reasonably expected of a Chief Financial Officer and Executive Vice President of a restaurant company. 1.2 Term. Employment shall be for an initial term of up to three years commencing on June 1, 2000 and continuing until the earlier of (i) June 1, 200__ or (ii) the date Executive's employment terminates pursuant to Article III hereof. Unless Executive's employment has been terminated pursuant to Article III, the term of this Agreement shall be renewed for successive one-year terms if mutually agreed upon by the Executive and the Board of Directors of the Company (the "BOARD"). II. COMPENSATION, BENEFITS AND PERQUISITES 2.1 Base Salary. The Company shall pay Executive an annualized base salary ("BASE SALARY") of $75,000 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 President 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 Automobile Allowance. Executive shall receive an automobile allowance of $680 per month. 1 2 2.3 Vacations. Executive shall be entitled to three weeks' paid vacation, or such greater amount of time as determined by the Board. 2.4 Employee Benefits. The Company agrees to pay 100% of the COBRA continuation premiums for health and dental insurance currently maintained by Executive and his family until the expiration of any waiting periods required for full participation by Executive and his 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. 2.5 Travel Expenses and Cost of Living Allowance. Executive shall be reimbursed his reasonable travel expenses from his home to Minneapolis upon submission of receipts to the Company. Executive shall also be reimbursed for the cost of a temporary apartment, meals and other expenses for his stays in Minneapolis up to a total of $1,200 per month upon submission of receipts to the Company. 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 his employment under this Agreement terminates. 3.2 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 he may have access to various trade secrets and confidential business information ("CONFIDENTIAL INFORMATION") of the Company. Executive agrees that he shall use such Confidential Information solely in connection with his obligations under this Agreement and shall maintain in strictest confidence and shall not disclose any such Confidential Information, directly or indirectly, or use such information in any other way during the term of this Agreement or for a period of two (2) years after the termination of this Agreement. Executive further agrees to take all reasonable steps necessary to preserve and protect the Confidential Information. The provisions of this Section 4.1 shall not apply to information known by Executive which (i) was in possession of Executive prior to receipt thereof from the Company, (ii) is or becomes generally available to the public other than as a result of a disclosure by Executive, or (iii) becomes available to Executive from a third party having the right to make such disclosure. 2 3 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. Executive agrees that, on or before the date which is one (1) year after the date Executive's employment under this Agreement terminates, he will not, unless he receives the prior approval of the Board, directly or indirectly engage in any of the following actions: (a) Own an interest in (except as provided below), manage, operate, join, control, lend money or render financial or other assistance to, or participate in or be connected with, as an officer, employee, partner, stockholder, consultant or otherwise, any entity whose primary business is entertainment-themed restaurants or any entity whose primary business is the provision of internet-based e-mail services to radio stations, in each case, within the United States. However, nothing in this subsection (a) shall preclude Executive from holding less than 1% of the outstanding capital stock of any corporation required to file periodic reports with the Securities and Exchange Commission under Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the securities of which are listed on any securities exchange, quoted on the National Association of Securities Dealers Automated Quotation System or traded in the over-the-counter market. (b) Intentionally solicit, endeavor to entice away from the Company, or otherwise interfere with the Company's relationship with any person who is employed by or otherwise engaged to perform services for the Company (including, but not limited to, any independent sales representatives or organizations), whether for Executive's own account or for the account of any other individual, partnership, firm, corporation or other business organization. If the scope of the restrictions in this Article V 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 so as to be enforceable to the maximum extent permitted by law, and Executive hereby consents, to the extent he may lawfully do so, to the judicial modification of the scope of such restrictions in any proceeding brought to enforce them. VI. MISCELLANEOUS 6.1 Amendment. This Agreement may be amended only in writing, signed by both parties. 6.2 Entire Agreement. 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. 3 4 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: Cafe Odyssey, Inc. 4801 West 81st Street, Suite 112 Bloomington, MN 55437 Attention: President If to Executive, to: Thomas W. Orr 4801 West 81st Street, Suite 112 Bloomington, MN 55437 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. 4 5 CAFE ODYSSEY, INC. /s/ Ronald K. Fuller By: Ronald K. Fuller Its: President /s/ Thomas W. Orr THOMAS W. ORR 5 EX-27 3 FINANCIAL DATA SCHEDULE
5 6-MOS JAN-02-2000 JAN-04-1999 JUL-04-1999 311,919 0 0 0 203,327 1,305,289 17,480,176 2,181,232 17,684,387 4,298,798 3,681,562 0 1,700,000 85,496 4,122,846 17,684,387 5,893,655 5,893,655 1,526,033 7,885,214 0 0 387,332 (2,567,933) 0 (2,567,933) 0 0 0 (2,567,933) (0.31) (0.31)
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