<PAGE> 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 September 28, 1997
[ ] Transition report under Section 13 or 15(d) of the Exchange Act
For the transition period from ____________________ to _________________
Commission file number 000-23243
HOTEL DISCOVERY, INC.
(Exact Name of Small Business Issuer as Specified in Its Charter)
Minnesota 31-1487885
(State or other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
7701 France Avenue South, Suite 217, Edina, MN 55435
(Address of Principal Executive Offices)
(612) 841-6363
(Issuer's Telephone Number, Including Area Code)
(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 past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Yes ___ No X
State the number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practicable date: At December 16, 1997 there
were 7,900,189 shares of common stock, $.01 par value, outstanding.
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HOTEL DISCOVERY, INC.
Form 10-QSB Index
September 28, 1997
<TABLE>
<CAPTION>
Page Number
<S> <C> <C>
Part I: Financial Information
Item 1. Financial Statements
Condensed Balance Sheets - 3
September 28, 1997 and December 29, 1996
Condensed Statements of Operations - 4
For the thirteen weeks ended September 28, 1997 and
September 29, 1996, and the thirty-nine weeks ended
September 28, 1997 and September 29, 1996
Condensed Statements of Cash Flows - 5
For the thirty-nine weeks ended September 28, 1997 and
September 29, 1996
Notes to Condensed Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial 8
Condition and Results of Operations
Part II: Other Information 11
Item 6. Exhibits and Reports on Form 8-K
</TABLE>
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HOTEL DISCOVERY, INC.
CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
September 28, December 29,
ASSETS 1997 1996
-------------- ------------
(Unaudited)
<S> <C> <C>
CURRENT ASSETS:
Cash $267,018 $2,707,561
Inventories 132,364 138,757
Other current assets 179,586 91,575
---------- ------------
Total current assets 578,968 2,937,893
---------- ------------
PROPERTY AND EQUIPMENT
Building and leasehold improvements 3,097,268 3,353,182
Equipment and fixtures 2,265,206 902,334
---------- ------------
5,362,474 4,255,516
Less: accumulated depreciation (464,000) (25,000)
---------- ------------
Total property and equipment, net 4,898,474 4,230,516
---------- ------------
OTHER ASSETS 89,995 51,841
---------- ------------
$5,567,437 $7,220,250
=========== ============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Short-term notes payable $400,000 $2,500,000
Accounts payable 1,089,659 803,885
Accrued expenses 49,634 538,637
Salaries and wages payable 68,162 174,882
Advances payable to principal shareholder 525,110 447,787
Current portion of long-term debt 69,420 69,420
---------- ------------
TOTAL CURRENT LIABILITIES 2,201,985 4,534,611
LONG-TERM DEBT, LESS CURRENT PORTION 878,515 924,795
CONVERTIBLE PROMISSORY NOTES PAYABLE 150,000 150,000
---------- ------------
Total liabilities 3,230,500 5,609,406
---------- ------------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Common stock, $.01 par value, 100,000,000 shares
authorized 5,399,289 and 3,945,400 shares 53,992 39,454
issued and outstanding
Additional paid-in capital 8,948,291 5,013,126
Less: common stock subscribed (600,000) 0
Accumulated deficit (6,065,346) (3,441,736)
---------- ------------
Total shareholders' equity 2,336,937 1,610,844
---------- ------------
Total liabilities and shareholders' equity $5,567,437 $7,220,250
=========== ============
</TABLE>
See accompanying notes to condensed financial statements.
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HOTEL DISCOVERY, INC.
CONDENSED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Thirteen weeks ended Thirty-nine weeks ended
------------------------------------ ------------------------------------
September 28, September 29, September 28, September 29,
1997 1996 1997 1996
------------------------------------ -------------------------------------
<S> <C> <C> <C> <C>
NET SALES $839,171 $0 $2,703,735 $0
------------------------------------ -------------------------------------
Costs and expenses:
Food,beverage and retail costs 252,820 0 864,935 0
Labor and benefits 332,173 0 1,368,475 0
Restaurant operating expenses 235,047 0 837,102 0
Depreciation and amortization 164,000 0 439,000 0
Selling, general and administrative expenses 455,364 44,254 1,220,937 88,376
Pre-opening and development costs 306,755 522,767 496,178 936,656
------------------------------------ -------------------------------------
Total costs and expenses 1,746,159 567,021 5,226,627 1,025,032
------------------------------------ -------------------------------------
LOSS FROM OPERATIONS (906,988) (567,021) (2,522,892) (1,025,032)
------------------------------------ -------------------------------------
OTHER INCOME (EXPENSE)
Interest expenses (50,259) 0 (142,762) 0
Interest income 15,328 4,343 42,044 15,293
------------------------------------ -------------------------------------
Total other income (expense) (34,931) 4,343 (100,718) 15,293
------------------------------------ -------------------------------------
Net loss ($941,919) ($562,678) ($2,623,610) (1,009,739)
==================================== =====================================
Shares used in per share calculation 5,652,969 4,286,100 5,260,942 4,286,100
==================================== =====================================
Net loss per share ($0.17) ($0.13) ($0.50) ($0.24)
==================================== =====================================
</TABLE>
See accompanying notes to condensed financial statements.
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HOTEL DISCOVERY, INC.
CONDENSED STATEMENTS OF CASH FLOWS
FOR THE THIRTY-NINE WEEKS ENDED SEPTEMBER 28, 1997 AND SEPTEMBER 29, 1996
(UNAUDITED)
<TABLE>
<CAPTION>
1997 1996
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<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ($2,623,610) ($1,009,739)
Adjustments to reconcile net loss to
cash flows from operating activities:
Depreciation 439,000 0
Changes in operating assets and liabilities:
Inventories 6,393 0
Prepaid expenses and other current assets (88,011) 19,316
Other assets (38,154) (1,321)
Accounts payable 285,774 326,633
Other current liabilities (595,723) 65,000
------------------ -------------
Cash flows from operating activities (2,614,331) (600,111)
------------------ -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (1,106,958) (1,900,785)
Payment for organization costs 0 (165)
------------------ -------------
Cash flows from investing activities (1,106,958) (1,900,950)
------------------ -------------
CASH FLOWS FROM FINANCING ACTIVITIES
Advances (payments to) from shareholder 77,323 (484,267)
Net increase (decrease) in short-term notes payable (2,100,000) 1,500,000
Issuance of convertible notes payable 0 150,000
Proceeds from issuance of equity 3,259,703 0
Principal repayments on bank note (46,280) 0
Payments received on stock subscriptions 90,000 944,500
------------------ -------------
Cash flows from financing activities 1,280,746 2,110,233
------------------ -------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (2,440,543) (390,828)
CASH AND CASH EQUIVALENTS, BEGINNING 2,707,561 448,100
------------------ -------------
CASH AND CASH EQUIVALENTS, ENDING $267,018 $57,272
================== =============
SUPPLEMENTAL CASH FLOWS INFORMATION:
Cash paid for interest $50,259 $0
Cash paid for income taxes $0 $0
</TABLE>
See accompanying notes to condensed financial statements.
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HOTEL DISCOVERY, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
SEPTEMBER 28, 1997
(UNAUDITED)
(1) GENERAL
The business of Hotel Discovery, Inc. (the "Company") is to develop,
own and operate theme restaurants with a retail component designed to appeal to
the upscale casual dining market. The Company opened its first restaurant in
the Kenwood Shopping Center in Cincinnati, Ohio on December 19, 1996, and a
second restaurant to be located at the Mall of America in Bloomington,
Minnesota is under development.
On November 13, 1996, the Company was reorganized after Hotel Mexico, Inc. was
incorporated in the state of Ohio and became the owner of Hotel Mexico,
Inc.-predecessor and all the net assets of Kenwood Restaurant Limited
Partnership. The result of the reorganization is that the owners of Hotel
Mexico, Inc.-predecessor and the Partnership became the owners of all the
outstanding stock of Hotel Mexico, Inc.-successor. In August 1997, the Company
reincorporated in the State of Minnesota, and changed its name from Hotel
Mexico, Inc. to Hotel Discovery, Inc. The reincorporation and reorganization
have been reflected retroactively and all share and per share amounts have been
adjusted.
(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 condensed financial statements be read in conjunction with the
Company's most recent registration statement dated November 3, 1997. 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 thirteen and thirty-nine weeks ended
September 28, 1997 are not necessarily indicative of the results that may be
expected for the fiscal year ending December 28, 1997.
The Company has adopted a 52/53 week accounting period ending on the
Sunday nearest December 31 of each year.
(3) INITIAL PUBLIC STOCK OFFERING
During November 1997, the Company sold, in an initial public offering,
2,500,000 units at an offering price of $5.00 per Unit. Each Unit consists of
one share of Common Stock and one Redeemable Class A Warrant. The Company
received net proceeds of approximately $11.2 million after the payment of
approximately $1.3 million in related underwriting discount and offering costs.
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HOTEL DISCOVERY, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 28, 1997
(UNAUDITED)
(4) INCOME (LOSS) PER COMMON SHARE
Income (loss) per common share is usually based on the weighted average
number of common shares outstanding during each period. However, pursuant to
certain rules of the Securities and Exchange Commission, the calculation also
includes equity securities, including options and warrants, issued within one
year of an initial public offering with an issue price less than the initial
public offering price, even if the effect is anti-dilutive. The treasury stock
approach was used in determining the dilutive effect of such issuances. Common
stock equivalents (other than those issued within one year of an initial public
offering with an issue price less than the initial public offering price)
including options and warrants are assumed to be exercised or converted into
common shares at the beginning of each period unless the aggregate effect of
such inclusion is anti-dilative. Primary and fully diluted income (loss) per
share are the same.
The Company will adopt in the fiscal year ending December 28, 1997,
Statement of Financial Accounting Standards No. 128 "Earnings per Share" (SFAS
No. 128), which was issued in February 1997. SFAS No. 128 requires disclosures
of basic earnings per share (EPS) and diluted EPS, which replaces the existing
primary EPS and fully diluted EPS, as defined by APB No. 15. Basic EPS is
computed by dividing net income (loss) by the weighted average number of shares
of Common Stock outstanding during the year. Dilative EPS is computed similar
to EPS as previously reported provided that, when applying the treasury stock
method to common equivalent shares, the Company must use its average share
price for the period rather than the more dilative greater of the average share
price or end-of-period share price required by APB No. 15.
(5) INCOME TAXES
The Company has adopted Statement of Financial Accounting Standards No.
109, "Accounting for Income Taxes", under which deferred income tax assets and
liabilities are recognized for the differences between financial and income tax
reporting basis of assets and liabilities based on currently enacted rates and
laws. The Company has incurred cumulative net operating losses for both
financial reporting and income tax purposes. The Company has recorded a full
valuation allowance against the net deferred tax asset due to the uncertainty
of realizing the related benefits given the Company's limited operating
history.
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HOTEL DISCOVERY, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(UNAUDITED)
The following discussion should be read in connection with the
Company's condensed financial statements and related notes thereto included
in this quarterly report for the period ended September 28, 1997 and
the Company's registration statement dated November 3, 1997.
OVERVIEW
The Company was formed in January 1994 as an Ohio corporation to
develop, own and operate upscale, casual theme restaurants under the name
"Hotel Discovery." The Company opened its first restaurant in the Kenwood
Shopping Center in Cincinnati, Ohio in December 1996. The Company is
presently developing and constructing a unit in the Mall of America in
Bloomington, Minnesota.
Future revenue and profits, if any, will depend upon various factors,
including market acceptance of the Hotel Discovery concept, the quality of the
restaurant operations, the ability to expand to multi-unit locations and
general economic conditions. The Company's present sources of revenues are
limited to its existing unit. There can be no assurances the Company will
successfully implement its expansion plans, in which case it will continue to
be dependent on the revenues from the existing unit. The Company also faces
all of the risks, expenses and difficulties frequently encountered in
connection with the expansion and development of a new and expanding business.
Furthermore, to the extent that the Company's expansion strategy is successful,
it must manage the transition to multiple site operations, higher volume
operations, the control of overhead expenses and the addition of necessary
personnel. The successful implementation of the Company's growth strategy is
contingent upon the satisfaction of various conditions and the occurrence of
certain events, including increased competition, many of which are beyond the
control of the Company. Based on the Company's limited history, a comparison
of results from period to period is not meaningful.
The Company has a adopted a 52/53 week accounting period ending on the
Sunday nearest December 31 of each year.
RESULTS OF OPERATIONS
The Company had no revenues or operations during the period from
January 13, 1994 (Inception) to December 19, 1996 (the opening of the Kenwood
Unit). Accordingly, comparisons to periods prior to December 19, 1996 are not
meaningful.
REVENUES
The Kenwood Unit opened in December 1996. The Company had revenues of
$839,171 and $2,703,735 for the 13 weeks and 39 weeks ended September 28, 1997,
respectively. In August 1997, the Company began retail sales at the Kenwood
Unit. Prior to that time the Company had no retail operations.
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HOTEL DISCOVERY, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(UNAUDITED)
COSTS AND EXPENSES
For the 39 weeks ended September 28, 1997 and September 29, 1996, the Company
had a net loss of $2,623,610 and $1,009,739, respectively, compared with a net
loss of $941,919 and $562,678 for the 13 weeks ended September 28, 1997 and
September 29, 1996, respectively. The net losses are largely attributable to
concept development and pre-opening costs totaling $936,656 and $522,767 for
the 39 weeks and 13 weeks ended September 28, 1996 respectively and to
additional expenses incurred as the Company increased its corporate overhead
structure for the development of additional locations supported by revenues
from a single operating unit. In addition, the Company incurred pre-opening
and development costs of $496,178 and $306,755 for the 39 weeks and 13 weeks
ended September 28, 1997, respectively. On February 1, 1997 and August 1,
1997, the Company entered into employment agreements with two executive
officers requiring the payment of annual compensation of $200,000 per year for
each executive officer. These employment agreements, and the continued
increases in the Company's corporate overhead, will impact general and
administrative expenses on an ongoing basis.
OPERATING RESULTS OF THE KENWOOD UNIT
During the 39 weeks ended September 28, 1997, food and beverage costs
were $864,935 or 32.0% of sales compared with $252,820 or 30.1% of sales for
the 13 weeks ended September 28, 1997. The improvement in food and beverage
costs as a percentage of sales is due primarily to improved operating
efficiencies.
Labor, benefits and other direct restaurant operating expenses were $2,205,577
or 81.6% of sales during the 39 weeks ended September 28, 1997 compared to
$567,220 or 67.6% of sales during the 13 weeks ended September 28, 1997. This
improvement in restaurant operating expenses as a percentage of sales is due
primarily to increased sales.
Although no assurances can be given, management believes that the
Kenwood Unit's current level of sales, trained workforce and general operation
will continue to improve unit level performance in future periods.
LIQUIDITY AND CAPITAL RESOURCES
The Company has met its capital and operating requirements through revenues
from operations, the sale of Common Stock to and borrowings from its founder,
bank borrowings, the private placement of Common Stock and the sale of Common
Stock and Warrants to the public in November 1997. The Company's initial
public offering, which closed in November 1997, raised net proceeds of
approximately $11.2 million
From November 1996 to July 1997, the Company completed private
placements of an aggregate of 2,392,889 shares of Common Stock at $3.00 per
share. The net proceeds were approximately $5.9 million. Such proceeds have
been used for new and additional features for the Kenwood Unit, repayment of
indebtedness, working capital and preliminary development costs of the planned
Mall of America Unit.
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HOTEL DISCOVERY, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(UNAUDITED)
Since inception, the Company's principal capital requirements have been the
funding of (i) the development of the Company and the Hotel Discovery concept,
(ii) the construction of the Kenwood Unit and the acquisition of furniture,
fixtures and equipment therein and (iii) the preliminary development costs of
the Mall of America Unit. When completed, the Company estimates that capital
expenditures for the Mall of America Unit will approximate $4.5 million, net of
landlord contributions of $1.6 million. The Mall of America Unit is expected
to be completed and opened in the second quarter of 1998. As of September
28, 1997, the costs incurred to date for the Mall of America Unit were $69,000.
Based on projected cash generated from operations and net proceeds from
the initial public offering, the Company believes it will have sufficient
resources to fund operations and proposed capital expenditures during the next
twelve months.
FORWARD-LOOKING STATEMENTS
The Private Securities Litigation Reform Act of 1995 provides a "safe harbor"
for forward-looking statements. Certain information included in this Form
10-QSB and other materials filed or to be filed by the Company with the
Securities and Exchange Commission (as well as information included in oral
statements or other written statements made or to be made by the Company)
contains statements that are "forward-looking" under the Federal Private
Securities Litigation Reform Act of 1995. A number of important factors could
individually or in aggregate, cause actual results to differ materially from
those expressed or implied in any forward-looking statements. Such factors
included, but are not limited to, the following: competition in the upscale
casual dining market; additional market acceptance of the Company's concept;
consumer spending trends and habits; weather conditions in the regions in which
the Company develops and operates restaurants; costs and risks of construction
including work stoppage, and availability of new suitable locations; and laws
and regulations affecting labor and employee benefit costs. For further
information regarding these and other factors, see the Company's registration
statement dated November 3, 1997 related to the offering of Common Stock and
Warrants.
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PART II: OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibit 27- Financial Data Schedule
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the quarterly
period ended September 28, 1997.
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant has
duly caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
Hotel Discovery, Inc.
Registrant
/s/ Stephen D. King
-------------------------------------
Stephen D. King
Chairman of the Board and Chief Executive Officer
/s/ Ronald K. Fuller
-------------------------------------
Ronald K. Fuller, Chief Operating Officer and
Director (Chief Financial and Chief Accounting
Officer)
Date: December 18, 1997
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<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-28-1997
<PERIOD-END> SEP-28-1997
<CASH> 267,018
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 132,364
<CURRENT-ASSETS> 578,968
<PP&E> 5,362,474
<DEPRECIATION> 464,000
<TOTAL-ASSETS> 5,567,437
<CURRENT-LIABILITIES> 2,201,985
<BONDS> 1,028,515
0
0
<COMMON> 53,992
<OTHER-SE> 2,282,945
<TOTAL-LIABILITY-AND-EQUITY> 5,567,437
<SALES> 2,703,735
<TOTAL-REVENUES> 2,703,735
<CGS> 864,935
<TOTAL-COSTS> 5,226,627
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 142,762
<INCOME-PRETAX> (2,623,610)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,623,610)
<EPS-PRIMARY> (.50)
<EPS-DILUTED> (.50)
</TABLE>
