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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 17, 1997
REGISTRATION NO. 333-34235
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
AMENDMENT NO. 3
TO
FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
HOTEL DISCOVERY, INC.
(Name of Small Business Issuer in its Charter)
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MINNESOTA 5812 31-1487885
(State or other jurisdiction (Primary standard industrial (I.R.S. Employer
of incorporation) classification code number) Identification Number)
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7701 FRANCE AVENUE SOUTH, SUITE 217
EDINA, MINNESOTA 55435
(612) 841-6363
(Address and Telephone Number of Principal Executive Offices)
STEPHEN D. KING, CHAIRMAN AND CHIEF EXECUTIVE OFFICER
HOTEL DISCOVERY, INC.
7701 FRANCE AVENUE SOUTH, SUITE 217
EDINA, MINNESOTA 55435
(612) 841-6363
(Name, Address, and Telephone Number of Agent For Service)
Copies to:
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WILLIAM M. MOWER, ESQ. GIRARD P. MILLER, ESQ.
GAY L. GREITER, ESQ. DOHERTY RUMBLE & BUTLER, P.A.
MASLON EDELMAN BORMAN & BRAND, LLP 3500 FIFTH STREET TOWERS
3300 NORWEST CENTER 150 SOUTH FIFTH STREET
MINNEAPOLIS, MINNESOTA 55402-4140 MINNEAPOLIS, MINNESOTA 55402-4235
(612) 672-8200 (612) 340-5555
FAX (612) 672-8397 FAX (612) 340-5584
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APPROXIMATE DATE OF PROPOSED SALE TO THE PUBLIC: As soon as practicable
after the effective date of this Registration Statement.
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
CALCULATION OF REGISTRATION FEE
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TITLE OF EACH CLASS ADDITIONAL PROPOSED MAXIMUM PROPOSED MAXIMUM
OF SECURITIES TO AMOUNT TO BE OFFERING PRICE AGGREGATE AMOUNT OF
BE REGISTERED REGISTERED(1) PER UNIT OFFERING PRICE REGISTRATION FEE(2)
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Units, each consisting of one
share of Common Stock, $.01 par
value, and one Class A Warrant
to purchase one share of Common
Stock........................... 2,875,000 Units(3) $5.00 $14,375,000 $4,350.83
- ----------------------------------------------------------------------------------------------------------------------
Common Stock, $.01 par value(4)... 2,875,000 Shares $6.50 $18,687,500 $5,656.08
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(1) Pursuant to Rule 416 under the Securities Act, this registration statement
also covers such additional securities as may become issuable upon exercise
of the Class A Warrants.
(2) The aggregate filing fee of $10,006.91 was previously paid.
(3) Includes 375,000 Units subject to an option granted to the Underwriters to
cover over-allotments, if any.
(4) Issuable upon exercise of the Class A Warrants.
------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT, OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE
ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A), MAY
DETERMINE.
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<PAGE> 2
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor
may offers to buy be accepted prior to the time the registration statement
becomes effective. This prospectus shall not constitute an offer to sell or
the solicitation of an offer to buy, nor shall there be any sale of these
securities in any State in which such offer, solicitation or sale would be
unlawful prior to registration or qualification under the securities laws
of any such State.
SUBJECT TO COMPLETION, DATED OCTOBER 17, 1997
HOTEL DISCOVERY, INC. LOGO
2,500,000 Units
Consisting of 2,500,000 Shares of Common Stock
and 2,500,000 Redeemable Class A Warrants
-------------------------
Hotel Discovery, Inc. (the "Company") is offering 2,500,000 units (the
"Offering"), each unit consisting of one share of Common Stock, $.01 par value
(a "Share") and one redeemable Class A Warrant at an initial public offering
price of $5.00 per unit (a "Unit"). The Class A Warrants are immediately
exercisable and, commencing 10 trading days after the Effective Date (as
hereinafter defined), transferable separate from the Common Stock. Each Class A
Warrant entitles the holder to purchase at any time until four years following
the date that the Registration Statement relating to this Prospectus has been
declared effective by the Securities and Exchange Commission (the "Effective
Date"), one share of Common Stock at an exercise price of $6.50 per Warrant,
subject to adjustment. The Class A Warrants are subject to redemption by the
Company for $.01 per Warrant at any time 90 days after the Effective Date, on 30
days' written notice, provided that the average closing bid price of the Common
Stock exceeds $7.00 (subject to adjustment) for any 14 consecutive trading days
prior to such notice. See "Description of Securities."
Prior to this Offering, there has been no market for the Company's
securities. See "Underwriting" for information relating to the factors
considered in determining the Price to Public. The Company has applied for
listing its Common Stock, Class A Warrants and Units on the Nasdaq SmallCap
Market under the symbols HOTD, HOTDW and HOTDU, respectively.
-------------------------
THESE ARE SPECULATIVE SECURITIES. THIS OFFERING INVOLVES A HIGH DEGREE OF
RISK AND SUBSTANTIAL DILUTION. SEE "RISK FACTORS" COMMENCING ON PAGE 6 AND
"DILUTION" ON PAGE 12.
-------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
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UNDERWRITING PROCEEDS TO
PRICE TO PUBLIC DISCOUNT(1) COMPANY(2)
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Per Unit................................. $5.00 $0.40 $4.60
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Total(3)(4).............................. $12,500,000 $1,000,000 $11,500,000
====================================================================================================================
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(1)The Underwriters will receive a sales commission equal to 8% of the Total
Price to Public from the sale of the Units. The Company has also agreed to
pay the Underwriters a nonaccountable expense allowance equal to 2% of the
Total Price to Public. The Company has also agreed to sell to the
Underwriters, for nominal consideration, a 5-year warrant to purchase up to
250,000 shares at 120% of the Price to Public (the "Underwriter's Warrant").
In addition, the Company has agreed to indemnify the Underwriters against
certain liabilities. See "Underwriting."
(2) Before deducting expenses of the offering estimated at $220,000, which does
not include the 2% nonaccountable expense allowance described in Note 1
above and assumes no exercise of the Underwriters' over-allotment option.
(3) The Company has granted the Underwriters a 45-day option to purchase up to
375,000 additional Units from the Company solely to cover over-allotments,
if any. If such option is exercised in full, the Total Price to Public,
Total Underwriting Discount and Total Proceeds to Company will be
$14,375,000, $1,150,000 and $13,225,000, respectively. See "Underwriting."
(4) At the request of the Company, up to 10% of the Units offered hereby may be
reserved for sale to persons designated by the Company at the Price to
Public.
The Units are offered severally by the Underwriters, subject to receipt and
acceptance by them, their right to reject orders in whole or in part and to
certain other conditions. It is expected that delivery of the certificates
representing the Units will be made on or about , 1997 in Minneapolis,
Minnesota.
RJ Steichen & Company Logo
The date of this Prospectus is , 1997.
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[PICTURES TO COME FROM THE COMPANY]
IN CONNECTION WITH THIS OFFERING, CERTAIN UNDERWRITERS (AND SELLING GROUP
MEMBERS) MAY ENGAGE IN PASSIVE MARKET MAKING TRANSACTIONS IN THE COMMON STOCK,
UNITS AND CLASS A WARRANTS ON NASDAQ IN ACCORDANCE WITH RULE 103 OF REGULATION
M. SEE "PLAN OF DISTRIBUTION."
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PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and financial statements (including the notes thereto) appearing
elsewhere in this Prospectus. Unless otherwise indicated, the information in
this Prospectus assumes no exercise of the Underwriters' over-allotment option.
This Prospectus contains forward-looking statements that involve risks and
uncertainties. The Company's actual results may differ significantly from the
results discussed in the forward-looking statements. Factors that might cause
such differences include, but are not limited to, those discussed under the
heading "Risk Factors", which investors should carefully consider.
THE COMPANY
The business of Hotel Discovery, Inc. (the "Company") is to develop, own
and operate theme restaurants with a retail component designed to appeal to the
upscale casual dining market. The Company opened its first restaurant in the
Kenwood Shopping Center in Cincinnati, Ohio (the "Kenwood Unit") on December 19,
1996, and a second restaurant to be located at the Mall of America in a suburb
of Minneapolis, Minnesota (the "Mall of America Unit") is under development.
In October 1995, a limited partnership raised $2.5 million to build the
Kenwood Unit which, at 17,000 square feet and up to 360 seats, represents the
first embodiment of the Hotel Discovery theme concept. In conjunction with a
reorganization of the Company, the assets of the limited partnership were
directly contributed to the Company in November 1996 in consideration of Common
Stock of the Company. See "Reorganization." The Company subsequently raised
approximately $7 million in private placements which concluded in June and July
1997, the proceeds of which were used to complete and add special features to
the Kenwood Unit, begin development of the Mall of America Unit and for working
capital purposes.
Management has spent more than four years in the development stage of the
Hotel Discovery concept. The Company's officers bring substantial restaurant
experience to the Company, with significant hands-on multi-location operating
experience as well as extensive site selection and development experience.
Hotel Discovery is a concept restaurant that offers the themes of
adventure, imagination, exploration and innovation as entertainment. In the
Kenwood Unit, these themes are embodied in the Safari Room, the Artist Loft, the
Observatory and the Mapping Room. Specially designed furnishings and
decorations, as well as the sights and sounds of state-of-the-art video and
audio systems, transport guests along imaginative dining journeys. Imaginary
places filled with myths and legends provide a unique blend of awareness,
enjoyment, and entertainment to guests of Hotel Discovery.
The Hotel Discovery menu offers a broad range of cuisine from around the
world, including "cultural fusion" menu items such as Barcelona Spring Rolls and
Asian Tacos. Features include American, Asian, Jamaican, West Indian, Mexican
and European tastes and textures. Menu items are freshly made, using only the
highest quality fresh meats, produce, spices and other ingredients. The menu
mirrors the exploratory journey and adventure society themes of the restaurant
itself.
The Company targets the upscale casual segment of the dining-out industry,
for which quality food pleasingly presented is an important consideration.
Management expects that future restaurants will be located in highly visible,
upscale malls or resort areas which feature upper and upper middle class
demographics and a high level of tourist traffic. The Company is considering
potential sites in Las Vegas and Chicago, but no assurances can be given that
attractive sites will be located in those cities or that negotiations to build
or lease such sites will be successfully concluded.
The Company began operations as Hotel Mexico, Inc. ("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 Unit. HMI's operations and the net
assets of the Kenwood Partnership were combined in November 1996, and in August
1997 HMI was reorganized as Hotel Discovery, Inc., a Minnesota corporation. See
"Reorganization." The Company's
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executive offices are located at 7701 France Avenue South, Suite 217, Edina,
Minnesota 55435 and its telephone number is (612) 841-6363.
THE OFFERING
Securities Offered............ 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. Each Class A Warrant is
immediately exercisable and, commencing 10
trading days after the Effective Date,
transferable separately from the Common Stock.
Each Class A Warrant entitles the holder to
purchase, at any time until four years after
the Effective Date, one share of Common Stock
at an exercise price of $6.50 per Warrant,
subject to adjustment. The Class A Warrants are
subject to redemption by the Company for $.01
per Warrant at any time 90 days after the
Effective Date, on 30 days' written notice,
provided that the average closing bid price of
the Common Stock exceeds $7.00 (subject to
adjustment) for any 14 consecutive trading days
prior to such notice.
Common Stock Outstanding
Before this Offering........ 5,399,289 Shares
Common Stock Outstanding
After this Offering......... 7,899,289 Shares(1)
Proposed Nasdaq SmallCap
Market Symbols:
Common Stock................ HOTD
Warrants.................... HOTDW
Units....................... HOTDU
Use of Proceeds............... The Company intends to utilize the proceeds for
further concept development, to complete
development and construction of a second Hotel
Discovery restaurant at the Mall of America in
Bloomington, Minnesota (the "Mall of America
Unit") and a third Hotel Discovery restaurant
at an unidentified site, and for working
capital.
- -------------------------
(1) Does not include (i) 375,000 Units subject to the Underwriters'
over-allotment option; (ii) 250,000 shares of Common Stock issuable upon
exercise of the Underwriters' Warrant at 120% of the Price to Public; (iii)
2,500,000 shares of Common Stock which are issuable upon the exercise of the
Class A Warrants at an exercise price of $6.50 per Warrant; (iv) 214,955
shares of Common Stock issuable upon exercise of warrants at an exercise
price of $3.75 per warrant; (v) 750,000 shares of Common Stock reserved for
issuance under the Company's 1997 Stock Option and Compensation Plan, of
which options relating to 512,666 shares are currently outstanding at
exercise prices ranging from $3.00 to $4.00 per share; and (vi) 75,000
shares of Common Stock issuable upon exercise of directors' stock options at
exercise prices ranging from $3.34 to $3.75 per share.
4
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SUMMARY FINANCIAL INFORMATION
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TWENTY-SIX WEEKS ENDED
YEAR ENDED YEAR ENDED -------------------------
DECEMBER 31, DECEMBER 29, JUNE 30, JUNE 29,
1995 1996 1996 1997
------------ ------------ -------- --------
(UNAUDITED)
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STATEMENT OF OPERATIONS DATA:
Net sales................................... $ 0 $ 104,129 $ 0 $ 1,864,564
Restaurant costs and expenses............... 0 309,563 0 2,525,472
Selling, general and administrative
expenses.................................. 14,775 138,209 44,122 765,573
Pre-opening and development costs........... 923,482 1,970,452 413,889 189,423
Other (income) expense...................... 2,209 13,507 (10,950) 65,787
---------- ----------- ---------- -----------
Net loss.................................. $ (940,466) $(2,327,602) $ (447,061) $(1,681,691)
========== =========== ========== ===========
Net loss per share.......................... $ (.28) $ (.53) $ (.10) $ (.33)
========== =========== ========== ===========
Shares used in per share calculations....... 3,362,611 4,355,187 4,286,100 5,058,240
========== =========== ========== ===========
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JUNE 29, 1997
------------------------------------------
PRO FORMA PRO FORMA AS
ACTUAL (1) ADJUSTED(2)
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BALANCE SHEET DATA:
Working capital (deficiency).......................... $(1,684,117) $ (284,117) $10,745,883
Total assets.......................................... 6,972,765 7,572,765 18,602,765
Total liabilities..................................... 5,065,966 4,265,966 4,265,966
Accumulated deficit................................... (5,123,427) (5,123,427) (5,123,427)
Stockholders' equity.................................. 1,906,799 3,306,799 14,336,799
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(1) Assumes completion on June 29, 1997 of the sale of 499,804 shares of Common
Stock at $3.00 per share for net proceeds of approximately $1.4 million that
actually occurred in July 1997.
(2) As adjusted for the sale of the Units offered hereby and the anticipated
application of the net proceeds therefrom. Does not include: (i) 375,000
Units subject to the Underwriters' over-allotment option; (ii) 250,000
shares of Common Stock issuable upon exercise of the Underwriters' Warrant
at 120% of the Price to Public; (iii) 2,500,000 shares of Common Stock which
are issuable upon the exercise of the Class A Warrants at an exercise price
of $6.50 per Warrant; (iv) 214,955 shares of Common Stock issuable upon
exercise of warrants at an exercise price of $3.75 per warrant; (v) 750,000
shares of Common Stock reserved for issuance under the Company's 1997 Stock
Option and Compensation Plan, of which options relating to 512,666 shares
are currently outstanding at exercise prices ranging from $3.00 to $4.00 per
share; and (vi) 75,000 shares of Common Stock issuable upon exercise of
directors' stock options at exercise prices ranging from $3.34 to $3.75 per
share.
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RISK FACTORS
An investment in the Shares offered hereby is highly speculative and
involves a high degree of risk. Investors could lose their entire investment.
Prospective investors should carefully consider the following factors, along
with the other information set forth in this Prospectus, in evaluating the
Company, its business and prospects before purchasing the Shares.
LACK OF SIGNIFICANT OPERATING HISTORY
The Company's first restaurant, the Kenwood Unit, opened on December 19,
1996 and, accordingly, the Company faces all of the risks, expenses and
difficulties frequently encountered in connection with the operation and
development of a new business enterprise, including the lack of a significant
operating history. Management anticipates net losses to continue for the
foreseeable future. There can be no assurance that the Company will be able to
generate significant revenues or operate profitably. Future revenues and
profits, if any, will depend upon various factors, including market acceptance
of the Hotel Discovery concept, the quality of restaurant operations, the
ability to expand to multi-unit locations and general economic conditions.
Furthermore, to the extent the Company's expansion strategy is successful, there
is no assurance that the Company will successfully manage the transition to
higher volume operations, control its operating expenses, attract necessary
additional personnel, or attract the required capital. Unless otherwise stated,
all historical financial results for the Company are derived solely from the
Kenwood Unit, which may not be indicative of other locations.
LIMITED BASE OF OPERATIONS
The Company currently operates one restaurant, the Kenwood Unit, and plans
to open the Mall of America Unit in the second quarter of 1998. During the
Company's initial development stage, the combination of a relatively small
number of locations and the significant investment associated with each new
restaurant may cause the operating results of the Company to fluctuate
significantly and adversely affect the profitability and cash flow of the
Company. Due to the small number of current and planned locations and the large
expenditure required to open each new unit, poor operating results at any one
unit or a delay in the planned opening of a unit would materially affect the
profitability and cash flow of the entire Company. Future growth in revenues and
profits will depend to a substantial extent on the Company's ability to increase
the number of its restaurants and on its choice of locations. Because of the
substantial financial requirements associated with opening new units, the
investment risk related to any one Hotel Discovery unit is much larger than that
associated with most other restaurant companies' venues.
DEPENDENCE ON KEY PERSONNEL
The Company will be largely dependent upon the personal efforts and
abilities of Stephen D. King, Chairman and Chief Executive Officer, and Ronald
K. Fuller, President and Chief Operating Officer. The loss or unavailability to
the Company of either of these individuals could have a material adverse effect
upon the Company's business. The Company maintains a $1,000,000 key-man life
insurance policy on Mr. Fuller. See "Management."
NEED FOR ADDITIONAL MANAGEMENT
The success of the Company will depend in large part upon the Company's
ability to supplement its existing management team. While both Messrs. King and
Fuller have significant restaurant and multi-location restaurant management
experience, the Company will need to hire other corporate level and management
employees to help implement and operate its expansion plans, including a chief
financial officer. The failure to obtain, or delays in obtaining, key employees
could have a material adverse effect on the Company. See "Management."
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DEPENDENCE ON DISCRETIONARY CONSUMER SPENDING
The success of the Company's operations depends to a significant extent on
a number of factors including discretionary consumer spending, economic
conditions affecting disposable consumer income, the overall success of the
malls, entertainment centers and other venues where Hotel Discovery restaurants
are or will be located, and the continued popularity of theme restaurants
generally and the Company's concept in particular. Theme restaurants are more
susceptible to shifts in consumer preferences and frequently experience a
decline of revenue growth or of actual revenues as consumers tire of the related
theme.
RISKS OF NEW CONSTRUCTION
Construction projects, including the opening of additional restaurant
locations, entail risks, including shortages of materials or skilled labor,
unforeseen environmental, engineering or geological problems, work stoppages,
weather interference, floods, difficulties with regulatory agencies and
unanticipated cost increases, any of which could give rise to delays and cost
overruns.
LIMITED FINANCIAL RESOURCES; ADEQUACY OF PROCEEDS AND NEED FOR ADDITIONAL
FINANCING
The Company's ability to execute its business strategy depends to a
significant degree on its ability to obtain substantial equity capital and other
financing to fund the development of additional restaurants. The proceeds of
this Offering will provide the Company with the financing required to develop
and open the Mall of America Unit and for working capital purposes. The total
cost of developing the Kenwood Unit was approximately $4.7 million, which
included $3.5 million for building design and construction and $1.2 million for
equipment, furniture and fixtures. The Company estimates that the total cost of
developing the planned Mall of America Unit will be approximately $4.5 million,
net of landlord contributions. Although the Company estimates that the proceeds
from this Offering will be sufficient to develop and open both the Mall of
America Unit and a third Hotel Discovery restaurant, there can be no assurance
that both of such restaurants can be developed at such estimated costs. If the
proceeds of this Offering are not sufficient to develop a third unit, the
Company may be required to seek additional funds through an additional offering
of the Company's equity securities or by incurring indebtedness. If additional
funds are required, there can be no assurance that any additional funds will be
available on terms acceptable to the Company or its shareholders. New investors
may seek and obtain substantially better terms than were granted its present
investors and the issuance of such securities would result in dilution to
existing shareholders. Furthermore, as the Company prepares to open additional
restaurants, it will expend a relatively higher amount on administrative
expenses than would a mature company with similar operations.
EXPANSION STRATEGY
The Company's ability to open and successfully operate additional
restaurants will also depend upon the hiring and training of skilled restaurant
management personnel and the ability to successfully manage growth, including
monitoring units and controlling costs, food quality and customer service. The
Company anticipates that the opening of additional restaurants will result in
additional expenses associated with managing operations located in multiple
markets. Furthermore, the Company believes that competition for unit-level
management has become increasingly intense as additional restaurant chains
expand to new markets. Achieving consumer awareness and market acceptance will
require substantial efforts and expenditures by the Company. An extraordinary
amount of management's time may be drawn to such matters and may adversely
affect operating results. The Company is considering potential sites in Las
Vegas and Chicago, but there can be no assurance that the Company will be able
to enter into any other contracts for development of additional restaurants on
terms satisfactory to the Company or at all. Accordingly, there can be no
assurance that the Company will be able to open new restaurants or that, if
opened, those units can be operated profitably.
RESTAURANT AND RETAIL INDUSTRY COMPETITION
The restaurant and specialty retail businesses are highly competitive. The
restaurant industry is highly competitive with respect to price, service,
quality and location and, as a result, has a high failure rate. There
7
<PAGE> 9
are numerous well-established competitors, including national, regional and
local restaurant chains, possessing substantially greater financial, marketing,
personnel and other resources than the Company. There can be no assurance that
the Company will be able to successfully respond to various competitive factors
affecting the restaurant industry. The restaurant industry is also generally
affected by changes in consumer preferences, national, regional and local
economic conditions and demographic trends. The performance of restaurant
facilities may also be affected by factors such as traffic patterns, demographic
considerations, and the type, number and location of competing facilities. In
addition, factors such as inflation, increased labor and employee benefit costs,
and the availability of experienced management and hourly employees may also
adversely affect the restaurant industry in general and the Company in
particular. Restaurant operating costs are further affected by increases in the
minimum hourly wage, unemployment tax rates and similar matters over which the
Company has no control.
The theme retail business is also highly competitive, particularly in
locations experiencing an oversupply of retail businesses. Hotel Discovery would
compete with a number of well-established specialty retailers possessing
significantly greater financial, marketing, personnel and other resources than
the Company.
LONG-TERM, NON-CANCELABLE LEASES
The Company has entered into long-term leases relating to the Kenwood Unit
and the Mall of America Unit. These leases are non-cancelable by the Company
(except in limited circumstances) and range in term from 12 to 15 years.
Additional restaurants developed by the Company are likely to be subject to
similar long-term, non-cancelable leases. If the Kenwood Unit, the Mall of
America Unit or any other future restaurant does not perform at a profitable
level and the decision is made to close that unit, the Company may nonetheless
be committed to perform its obligations under the applicable lease, which would
include, among other things, payment of the applicable base rent for the balance
of the respective lease term. If such a termination were to occur at one or more
of these locations, the Company could lose a restaurant without necessarily
receiving an adequate return on its investment. See "Description of Leases."
CONTROL OF THE COMPANY
Following this offering, Stephen D. King will control approximately 11.4%
of the Company's Common Stock, assuming all of the shares offered hereunder are
sold. See "Principal Shareholders." Thus Mr. King will have the ability to
substantially influence the election of members of the Board of Directors and to
direct the operations and financial affairs of the Company.
GOVERNMENT REGULATION
The restaurant business is subject to various federal, state and local
government regulations, including those relating to the sale of food and
alcoholic beverages. The failure to maintain food and liquor licenses would have
a material adverse effect on the Company's operating results. In addition,
restaurant operating costs are affected by increases in the minimum hourly wage,
unemployment tax rates, sales taxes and similar costs over which the Company has
no control. Many of the Company's restaurant personnel will be paid at rates
based on the federal minimum wage. Increases in the minimum wage would result in
an increase in the Company's labor costs. The Company will be subject to "dram
shop" statutes in certain states, including Minnesota and Ohio, which generally
provide a person injured by an intoxicated person the right to recover damages
from the establishment that served alcoholic beverages to the intoxicated
person. The Company has obtained liability insurance against such potential
liability.
TRADEMARKS
The Company's ability to successfully implement its Hotel Discovery concept
will depend in part upon its ability to protect its trademarks. The Company has
filed a trademark application with the United States Patent and Trademark Office
to register the "Hotel Discovery" mark and design. There can be no assurance
that the Company will be granted trademark registration for any or all of the
proposed uses in the Company's applications. In the event the Company's mark is
granted registration, there can be no assurance that the
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Company can protect such mark and design against prior users in areas where the
Company conducts or will conduct operations. There is no assurance that the
Company will be able to prevent competitors from using the same or similar
marks, concepts or appearance.
SUBSTANTIAL DILUTION
Purchasers of the securities offered hereby will experience immediate
substantial dilution of $3.25 per share in net tangible book value per share of
Common Stock if all of the shares offered hereby are sold. See "Dilution."
DIVIDENDS NOT LIKELY
At the present time, the Company intends to use earnings, if any, to
finance further growth of the Company's business. Accordingly, investors should
not purchase the shares with a view toward receipt of dividends.
LACK OF PUBLIC MARKET; DETERMINATION OF OFFERING PRICE
Prior to this Offering, there has been no public market for the Company's
securities. Although the Company has applied for listing of the Common Stock on
the Nasdaq SmallCap Market, there can be no assurance that an active public
market will develop or be sustained. In addition, the SmallCap Market may be
significantly less liquid than the Nasdaq National Market. If the Company fails
to maintain the standards for quotation, the Company's securities could be
removed from the market and traded in the over-the-counter market. As a result,
an investor would find it more difficult to dispose of, or obtain accurate
quotations as to the price of, the securities.
In addition, if the Company fails to maintain its qualification for the
Units to trade on the Nasdaq SmallCap Market, the Units will be subject to
certain rules of the Securities and Exchange Commission relating to "penny
stocks." Such rules require broker-dealers to make a suitability determination
for purchasers and to receive the purchaser's prior written consent for a
purchase transaction, thus restricting the ability of purchasers and
broker-dealers to sell the stock in the open market.
The offering price of the Units has been arbitrarily determined by
negotiation between the Company and the Underwriter and bears no relationship to
the Company's current operating results, book value, net worth or financial
statement criteria of value. The factors considered in determining the offering
price included an evaluation by management of the history of and prospects for
the industry in which the Company competes and the prospects for earnings of the
Company. Such factors are largely subjective, and the Company makes no
representation as to any objectively determinable value of the Units offered
hereby. See "Underwriting".
CURRENT PROSPECTUS AND STATE REGISTRATION REQUIRED TO EXERCISE WARRANTS;
POSSIBLE REDEMPTION OF WARRANTS
Purchasers of Units will be able to exercise the Class A Warrants only if a
current prospectus relating to the shares of Common Stock underlying the Class A
Warrants is then in effect and only if such securities are qualified for sale or
exempt from qualification under the applicable securities laws of the states in
which the various holders of Class A Warrants reside. Although the Company will
use its best efforts to (i) maintain the effectiveness of a current prospectus
covering the shares of Common Stock underlying the Class A Warrants and (ii)
maintain the registration of such Common Stock under the securities laws of the
states in which the Company initially qualifies the Units for sale in the
Offering, there can be no assurance that the Company will be able to do so. The
Company will be unable to issue shares of Common Stock to those persons desiring
to exercise their Class A Warrants if a current prospectus covering the shares
issuable upon the exercise of the Class A Warrants is not kept effective or if
such shares are not qualified nor exempt from qualification in the states in
which the holders of the Warrants reside.
The Class A Warrants are subject to redemption at any time by the Company
at $.01 per Warrant 90 days after the Effective Date, on 30 days' prior written
notice, if the average closing bid price of the
9
<PAGE> 11
Common Stock shall exceed $7.00 (subject to adjustment), for 14 consecutive
trading days, at any time prior to such notice and provided a current prospectus
covering the shares is then effective under federal securities laws. If the
Class A Warrants are redeemed, Warrant holders will lose their right to exercise
the Warrants except during such 30-day redemption period. Redemption of the
Class A Warrants could force the holders to exercise the Class A Warrants at a
time when it may be disadvantageous for the holders to do so or to sell the
Class A Warrants at the then market price or accept the redemption price, which
is likely to be substantially less than the market value of the Class A Warrants
at the time of redemption. See "Description of Securities -- Class A Warrants."
UNDERWRITERS' WARRANT
The Company has agreed to sell to the Underwriters, for nominal
consideration, a five-year warrant to purchase up to 250,000 shares of Common
Stock at 120% of the Price to Public. As long as the Underwriters' Warrant or
other outstanding warrants remain unexercised, the Company's ability to raise
additional capital may be adversely affected. See "Underwriting."
UNDESIGNATED STOCK
The Company's authorized capital consists of 100,000,000 shares of capital
stock. The Board of Directors, without any action by the Company's stockholders,
is authorized to designate and issue shares in such classes or series (including
classes or series of preferred stock) as it deems appropriate and to establish
the rights, preferences and privileges of such shares, including dividends,
liquidation and voting rights. The Company currently has 5,399,289 shares of
Common Stock outstanding and has authorized the issuance of an additional
2,875,000 shares of Common Stock in contemplation of this Offering. A further
4,164,955 shares of Common Stock have been authorized for the following: (i)
2,500,000 shares issuable upon the exercise of the Class A Warrants being issued
as part of this Offering (2,875,000 if the Underwriters' over-allotment option
is exercised in full), (ii) 250,000 shares issuable upon the exercise of the
Underwriters' Warrant, (iii) 214,955 shares of Common Stock issuable upon
exercise of warrants; (iv) 750,000 shares reserved for issuance under the
Company's 1997 Stock Option and Compensation Plan, of which options relating to
512,666 shares are currently outstanding, and (v) 75,000 shares of Common Stock
issuable upon exercise of directors' stock options. No other class of common
stock or preferred stock is currently designated and there is no current plan to
designate or issue any such securities. The rights of holders of preferred stock
and other classes of common stock that may be issued may be superior to the
rights granted to the holders of the Units. The ability of the Board of
Directors to designate and issue such undesignated shares could impede or deter
an unsolicited tender offer or takeover proposal regarding the Company. Further,
the issuance of additional shares having preferential rights could adversely
affect the voting power and other rights of holders of Common Stock.
SHARES ELIGIBLE FOR FUTURE SALE
The sale, or availability for sale, of substantial amounts of Common Stock
in the public market subsequent to this offering may adversely affect the
prevailing market price of Common Stock and may impair the Company's ability to
raise additional capital by the sale of its equity securities. The Company and
its directors, executive officers and 5% shareholders have agreed that they will
not sell nor grant any option for the sale of or otherwise dispose of any shares
of Common Stock for 180 days after the Effective Date without the prior written
consent of the R.J. Steichen & Company (the "Representative"). It is expected
that 4,438,288 shares of the Company's Common Stock which were sold in reliance
on "private placement" exemptions under the Securities Act of 1933, as amended
(the "1933 Act") will become eligible for sale pursuant to Rule 144 under the
1933 Act as follows: 2,880,401 shares on the Effective Date (except that holders
of 2,857,826 of such shares have agreed not to sell or otherwise dispose of such
shares without the prior written consent of the Representative for a period
ranging from 90 to 180 days after the Effective Date), 1,092,400 shares in the
fourth quarter of 1997 (except that the holders of such 1,092,400 shares have
agreed not to sell or otherwise dispose of such shares without the prior written
consent of the Representative for 90 days after the Effective Date), 13,200
shares in the first quarter of 1998, 570,685 shares in the second quarter of
1998, 692,603 shares in the third quarter of 1998, and the remaining 150,000
shares thereafter. See "Description of
10
<PAGE> 12
Securities -- Shares Eligible for Future Sale." In connection with this
Offering, certain officers and directors of the Company have agreed to escrow a
portion of their shares with the State of Minnesota for three years or until (i)
the Company meets certain earnings requirements established by the State of
Minnesota, or (ii) the State of Minnesota determines that the escrow agreement
is no longer necessary.
MINNESOTA ANTI-TAKEOVER LAW
The Company is subject to Minnesota statutes regulating business
combinations and restricting voting rights of certain persons acquiring shares
of the Company, which may hinder or delay a change in control of the Company.
USE OF PROCEEDS
The net proceeds to be received by the Company from this Offering, after
deducting estimated costs and expenses of the Offering, are estimated to be
approximately $11,030,000 ($12,717,500 if the Underwriters' over-allotment
option is exercised in full). The Company intends to utilize the net proceeds as
follows:
<TABLE>
<S> <C>
Further concept development (primarily concept architectural
design)................................................... $ 300,000
Development and construction of the Mall of America Unit.... 4,500,000
Development and construction of a third Hotel Discovery
restaurant at an unidentified site........................ 4,500,000
Repayment of working capital indebtedness................... 600,000
Working capital............................................. 1,130,000
-----------
Total....................................................... $11,030,000
===========
</TABLE>
NEW FACILITIES
The Company intends to apply at least $9,000,000 of the net proceeds to
develop and open two new Hotel Discovery restaurants. The Company currently
estimates that the average cost of developing and opening new Hotel Discovery
restaurants, including equipment, furniture, fixtures and pre-opening expenses,
will range from $4,000,000 to $4,500,000 per facility, net of landlord
contributions, depending upon location, site conditions, construction costs, and
the level of landlord contributions to a facility. There can be no assurance
that the Company will be able to develop and open new Hotel Discovery
restaurants at such costs.
GENERAL
The foregoing represents the Company's best estimate of its allocation of
the net proceeds of this Offering, based upon the current state of its business
operations, its current plans and current economic and industry conditions.
These estimates are subject to change based on unanticipated levels and types of
competition, adverse market trends and new business opportunities. Any material
revisions in the allocation of proceeds will be made at the discretion of the
Board of Directors. The Company believes the net proceeds from this Offering,
together with cash generated from operations, will be sufficient to meet the
Company's capital needs for at least 12 months, in connection with the Company's
plans to develop the Mall of America Unit and the third restaurant Unit. Pending
the use of the proceeds of this Offering, the Company intends to invest the
proceeds in short-term, high quality, interest-bearing instruments. If the
Underwriters exercise the over-allotment option in full, the Company will
realize additional net proceeds of approximately $1,687,500. Such additional net
proceeds will be added to the Company's working capital.
11
<PAGE> 13
DILUTION
As of June 29, 1997, the Company's net tangible book value was $1,886,799
or approximately $0.39 per share of Common Stock. "Net tangible book value"
represents the tangible assets of the Company less all liabilities. Without
giving effect to any other changes in net tangible book value after June 29,
1997, other than to give effect to (i) the sale of the securities offered hereby
(assuming the entire offering price of the Units is allocated to the Common
Stock), and (ii) the application of the net proceeds therefrom, the tangible
book value as of June 29, 1997 would have been $12,916,799, or approximately
$1.75 per share. This represents an immediate increase to existing shareholders
in net tangible book value of approximately $1.36 per share and an immediate
dilution to new shareholders of $3.25 per share. "Dilution" represents the
difference between the amount per share paid by purchasers in this Offering and
pro forma net tangible book value per share of the Common Stock after this
Offering. The following table illustrates the per share dilution to new
investors as of June 29, 1997:
<TABLE>
<S> <C> <C>
Public offering price....................................... $5.00
Net tangible book value before offering..................... $0.39
Increase in net tangible book value attributable to new
investors................................................. 1.36
-----
Pro forma net tangible book value after the offering........ 1.75
-----
Dilution in net tangible book value to new investors(1)..... $3.25
=====
</TABLE>
- -------------------------
(1) The dilution in net tangible book value per share to new investors, assuming
the Underwriter's over-allotment option is fully exercised, would be $3.12.
The following table summarizes the differences between the existing
shareholders and the new investors with respect to the number of shares of
Common Stock purchased from the Company, the total cash consideration paid, and
the average cash consideration per share of Common Stock paid (assuming the
entire offering price of the Units is allocated to the Common Stock).
<TABLE>
<CAPTION>
TOTAL CASH
SHARES PURCHASED(1) CONSIDERATION
------------------- --------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
------ ------- ------ ------- -------------
<S> <C> <C> <C> <C> <C>
Founding Investors....................... 3,000,000 38.0% $ 2,500,000 11.3% $0.83
Private Placement Investors.............. 2,399,289 30.4 7,197,867 32.4 3.00
New Investors............................ 2,500,000 31.6 12,500,000 56.3 5.00
--------- ----- ----------- -----
Total............................... 7,899,289 100.0% $22,197,867 100.0%
========= ===== =========== =====
</TABLE>
- -------------------------
(1) The foregoing table takes into account the July 1997 sale of 499,804 shares
of Common Stock at $3.00 per share but does not take into consideration: (i)
375,000 Units subject to the Underwriters' over-allotment option; (ii)
250,000 shares of Common Stock issuable upon exercise of the Underwriters'
Warrant at 120% of the Price to Public; (iii) 2,500,000 shares of Common
Stock which are issuable upon the exercise of the Class A Warrants at an
exercise price of $6.50 per Warrant; (iv) 214,955 shares of Common Stock
issuable upon exercise of warrants at an exercise price of $3.75 per
warrant; (v) 750,000 shares of Common Stock reserved for issuance under the
Company's 1997 Stock Option and Compensation Plan, of which options relating
to 512,666 shares are currently outstanding at exercise prices ranging from
$3.00 to $4.00 per share; and (vi) 75,000 shares of Common Stock issuable
upon exercise of directors' stock options at exercise prices ranging from
$3.34 to $3.75 per share.
12
<PAGE> 14
DIVIDEND POLICY
The Company has never declared or paid any cash dividends on its Common
Stock, and the Board of Directors presently intends to retain all earnings, if
any, for use in the Company's business for the foreseeable future. Any future
determination as to declaration and payment of dividends will be made at the
discretion of the Board of Directors.
CAPITALIZATION
The following table sets forth the capitalization of the Company as of June
29, 1997, as further adjusted to give effect to the sale of the Units offered
hereby and the anticipated application by the Company of the proceeds therefrom.
<TABLE>
<CAPTION>
PRO FORMA
ACTUAL PRO FORMA(1) AS ADJUSTED(2)
------ ------------ --------------
<S> <C> <C> <C>
Long-term debt:
Long-term debt, net................................. $ 895,870 $ 895,870 $ 895,870
Convertible debt(3)................................. 150,000 150,000 150,000
----------- ----------- -----------
Total long-term debt........................... 1,045,870 1,045,870 1,045,870
----------- ----------- -----------
Stockholders' equity:
Common stock, $.01 par value; 100,000,000 shares
authorized; 4,899,485 shares issued and
outstanding; 5,399,289 pro forma; 7,599,289 as
adjusted......................................... 48,995 53,993 78,993
Additional paid-in capital.......................... 7,581,231 8,976,233 19,981,233
Common stock subscribed............................. (600,000) (600,000) (600,000)
Accumulated deficit................................. (5,123,427) (5,123,427) (5,123,427)
----------- ----------- -----------
Total stockholders' equity..................... 1,906,799 3,306,799 14,336,799
----------- ----------- -----------
Total capitalization........................... $ 2,952,669 $ 4,352,669 $15,382,669
=========== =========== ===========
</TABLE>
- -------------------------
(1) Assumes completion on June 29, 1997 of the sale of 499,804 shares of Common
Stock at $3.00 per share for net proceeds of approximately $1,400,000 which
was completed in July 1997.
(2) As adjusted for the sale of the Units offered hereby and the anticipated
application of the net proceeds therefrom. Does not include: (i) 375,000
Units subject to the Underwriters' over-allotment option; (ii) 250,000
shares of Common Stock issuable upon exercise of the Underwriters' Warrant
at 120% of the Price to Public; (iii) 2,500,000 shares of Common Stock which
are issuable upon the exercise of the Class A Warrants at an exercise price
of $6.50 per Warrant; (iv) 214,955 shares of Common Stock issuable upon
exercise of warrants at an exercise price of $3.75 per warrant; (v) 750,000
shares of Common Stock reserved for issuance under the Company's 1997 Stock
Option and Compensation Plan, of which options relating to 512,666 shares
are currently outstanding at exercise prices ranging from $3.00 to $4.00 per
share; and (vi) 75,000 shares of Common Stock issuable upon exercise of
directors' stock options at exercise prices ranging from $3.34 to $3.75 per
share.
(3) Convertible into 39,600 shares of Common Stock at maturity on July 1, 1999.
13
<PAGE> 15
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in connection with the Company's
financial statements and related notes thereto included elsewhere in this
Prospectus.
OVERVIEW
The Company was formed in January 1994 as an Ohio corporation to develop,
own and operate upscale, casual theme restaurants under the name "Hotel
Discovery." The Company opened its first restaurant in the Kenwood Shopping
Center in Cincinnati, Ohio in December 1996. Prior to opening the Kenwood Unit,
the Company had no revenues and its activities were devoted solely to
development. The Company is presently developing a unit in the Mall of America
in Bloomington, Minnesota.
Future revenue and profits, if any, will depend upon various factors,
including market acceptance of the Hotel Discovery concept, the quality of the
restaurant operations, the ability to expand to multi-unit locations and general
economic conditions. The Company's present sources of revenue are limited to its
existing unit. There can be no assurances the Company will successfully
implement its expansion plans, in which case it will continue to be dependent on
the revenues from the existing unit. The Company also faces all of the risks,
expenses and difficulties frequently encountered in connection with the
expansion and development of a new and expanding business. Furthermore, to the
extent that the Company's expansion strategy is successful, it must manage the
transition to multiple site operations, higher volume operations, the control of
overhead expenses and the addition of necessary personnel.
The Company has adopted a 52/53 week accounting period ending on the Sunday
nearest December 31 of each year.
RESULTS OF OPERATIONS
The Company had no revenues or operations during the period from January
13, 1994 (Inception) to December 19, 1996 (the opening of the Kenwood Unit).
Accordingly, comparisons to periods prior to December 19, 1996 are not
meaningful.
Total Revenues -- The Kenwood Unit opened in December 1996. For the year
ended December 29, 1996, the Company had total sales of $104,129 compared with
$1,864,564 for the 26 weeks ended June 29, 1997. In August 1997, the Company
began retail sales at the Kenwood Unit. Prior to that time, the Company had no
retail operations.
Costs and Expenses -- For the year ended December 31, 1995, the Company had
a net loss of $940,466. For the year ended December 29, 1996, the Company had a
net loss of $2,327,602 compared with a net loss of $1,681,691 for the 26 weeks
ended June 29, 1997. The net losses for 1995 and 1996 are largely attributable
to concept development and pre-opening costs totaling $923,482 and $1,970,452
for each period, respectively. The net loss for the 1997 period is largely
attributable to additional expenses as the Company increases its corporate
overhead structure for the development of additional locations supported by
revenues from a single operating unit. On February 1, 1997, the Company entered
into an employment agreement with an executive officer requiring the payment of
annual compensation totaling $200,000 per year. This agreement, and continued
increases in the Company's corporate overhead, will impact general and
administrative expenses on an ongoing basis.
14
<PAGE> 16
OPERATING RESULTS OF THE KENWOOD UNIT
During the period from the commencement of Kenwood Unit operations
(December 19, 1996) to December 29, 1996, food and beverage costs were $43,324
or 41.6% of sales compared with $612,115 or 32.8% of sales for the June 29, 1997
period. The improvement in food and beverage costs as a percentage of sales is
due primarily to improved operating efficiencies.
Labor, benefits and other direct restaurant operating expenses were
$241,239 or 231.7% of sales during the period from the commencement of Kenwood
operations (December 19, 1996) to December 29, 1996, compared to $1,638,357 or
87.9% of sales during the 26 weeks ended June 29, 1997. This improvement in
restaurant operating expenses as a percentage of sales is due primarily to
improved labor management and other operating efficiencies and increased sales.
Although no assurances can be given, management believes that the Kenwood
Unit's current level of sales, trained workforce and general operation will
continue to improve unit level performance in future periods.
LIQUIDITY AND CAPITAL RESOURCES
The Company has met its capital requirements through the sale of Common
Stock to and borrowings from its principal shareholder, Stephen D. King, the
private placement of common stock and debt, and through revenues from
operations. During the period from January 13, 1994 (Inception) through
September 1995, the Company's predecessor sold 1,750 shares of Common Stock to
Mr. King and another individual for nominal consideration, which shares were
split 825-to-1 in November 1996.
During the years ended December 29, 1996 and December 31, 1995, the maximum
amount of borrowings from Mr. King outstanding at any time was $1,213,469 and
$862,891, respectively. At year end December 29, 1996, and December 31, 1995,
the amount of such outstanding indebtedness was $447,787 and $862,891,
respectively. Included in these amounts were concept development costs
reimbursed to a demonstration restaurant owned and operated by Mr. King in the
amount of $278,101 for the year ended December 29, 1996 and $433,996 for the
year ended December 31, 1995. The Company paid interest of 11.5% on all such
advances.
In October 1995, Kenwood Restaurant Limited Partnership, an Ohio limited
partnership formed in June 1995 (the "Kenwood Partnership"), raised $2.5 million
in a private placement of 250 shares of Common Stock of the Company's
predecessor (which shares were split 825-to-1 in November 1996, and now
represent 206,250 shares of the Company) and limited partnership interests in
the Kenwood Partnership. The Kenwood Partnership was dissolved in October 1997.
The sole general partner of the Kenwood Partnership was Kenwood Restaurant,
Inc., a corporation that was controlled by Stephen D. King until his resignation
as an officer and director in September, 1997. In a reorganization of the
Company which occurred in November 1996, the Kenwood Partnership contributed all
of its assets to the Company's predecessor, including the Kenwood Unit, in
exchange for 1,350,000 shares of Common Stock of the Company.
From November 1996 through July 1997, the Company's predecessor completed
private placements of an aggregate of 2,392,889 shares of Common Stock at $3.00
per share. The net proceeds were approximately $5.9 million. Such proceeds have
been, and will be, used for new and additional features for the Kenwood Unit,
repayment of indebtedness, working capital and development of the planned Mall
of America Unit.
For the year ended December 31, 1995, the year ended December 29, 1996 and
the 26 weeks ended June 29, 1997, the Company used $932,549, $1,024,187 and
$2,387,424, respectively, in cash flow for operating activities.
Since Inception, the Company's principal capital requirements have been the
funding of (i) the development of the Company and the Hotel Discovery concept,
(ii) the construction of the Kenwood Unit and the acquisition of furniture,
fixtures and equipment therein and (iii) the development of the Mall of America
Unit. Total capital expenditures for the Kenwood Unit were approximately $4.7
million.
15
<PAGE> 17
When completed, the Company estimates that capital expenditures for the
Mall of America Unit will be approximately $4.5 million, net of landlord
contributions of $1.6 million. The unit is expected to be complete in the second
quarter of 1998.
The Company borrowed $1.0 million under a leasehold mortgage term loan from
a bank, which is personally guaranteed by Mr. King. This financing was used for
the Kenwood Unit. Principal and interest are due monthly through October 1999,
at which time the remaining balance is due in full. This loan had an outstanding
principal balance of $965,290 on June 29, 1997. In December 1996, the Company
borrowed an additional $2.5 million under a mortgage term loan from a bank.
Payments of interest only were due through January 1998, at which time the
entire principal balance was due. This loan was paid in full on January 31,
1997. In May 1997, the Company borrowed $2.0 million on a 13-month term note,
with interest only payable monthly at the rate of 7.15%. This note was
guaranteed by Mr. King and was fully secured by substantially all of the
Company's assets. This note was repaid in full in July 1997. On June 23, 1997,
the Company borrowed $800,000 from Provident Bank, which is fully secured by
substantially all of the Company's assets. The loan bears interest at 2% over
the bank's reference rate payable monthly. The loan was personally guaranteed by
Mr. King. This loan was repaid in full in July 1997. In the last 60 days, the
Company borrowed an aggregate of $600,000 for working capital needs from three
unaffiliated lenders with interest rates ranging from prime to 2% over prime.
All of these loans will be paid from the net proceeds of the offering.
After development of the two units funded by this offering, future
development and expansion will be financed through cash flow from operations and
other forms of financing such as the sale of additional equity and debt
securities, capital leases and other credit facilities. There are no assurances
that such financing will be available on terms acceptable or favorable to the
Company.
16
<PAGE> 18
BUSINESS
GENERAL
Hotel Discovery, Inc. is a Minnesota corporation which was formed to
develop, own and operate upscale casual theme restaurants. The Company was
formed in January 1994 as an Ohio corporation, prior to reorganizing as a
Minnesota corporation, and operates one Hotel Discovery restaurant in the
Kenwood Shopping Center in Cincinnati, Ohio, which opened in December 1996. A
second restaurant to be located at the Mall of America in a suburb of
Minneapolis, Minnesota, is currently under development. The Company also has a
license agreement with Eastgate Restaurants, Inc., a corporation wholly-owned by
Stephen D. King, for the operation of a demonstration and test restaurant in
Cincinnati which opened in June 1994.
HOTEL DISCOVERY CONCEPT
Hotel Discovery restaurants will serve the upscale casual segment of the
restaurant industry. Each Hotel Discovery restaurant will combine two
contemporary trends within the restaurant industry by incorporating the
entertainment features of restaurants such as Planet Hollywood, Rainforest Cafe
and Dave & Buster's with the upscale casual attributes of restaurants like
Palomino and The Cheesecake Factory. The Hotel Discovery concept is carefully
designed to provide guests with a new and innovative dining concept providing
noteworthy food, superior service and genuinely imaginative surroundings and
special effects. Hotel Discovery restaurants will contain visual and audio
effects providing a unique sight and sound experience. Management believes the
Hotel Discovery restaurant ambiance and entertainment quality differentiate its
concept from traditional casual segment restaurants such as Applebee's,
Bennigan's, Chili's and Friday's and goes beyond the simple food service-only
concept of a typical theme restaurant.
THE CONCEPT AND THE KENWOOD UNIT
Hotel Discovery is designed around the concepts of adventure, imagination,
exploration and invention. It is based on a foundation of superior food and
excellent service coupled with soft, sophisticated, non-intrusive entertainment.
The surroundings and extensive self-entertainment aspects within Hotel Discovery
restaurants, such as videos corresponding to each dining room, provide guests
with soft discovery experiences that allow them to actively and passively
participate in quality dining experiences.
Imaginary places, myths, and legends intended to pique guests' individual
interests provide a unique land of awareness, enjoyment, and entertainment to
guests of Hotel Discovery. Specially designed furnishings and decorations, along
with specially arranged audio-visual presentations, are carefully orchestrated
to transport guests along imaginative dining journeys. The guest's voyage begins
the moment he or she enters the restaurant and sees a hologram of an old-time
sailing ship rocking on ocean waves. The guest is greeted by the concierge and
then introduced to his or her adventure guide, who seats the guest in one of
four distinctly different dining rooms: the Mapping Room, the Safari Room, the
Artist Loft, or the Observatory.
Features of Hotel Discovery include the sights and sounds of
state-of-the-art video and audio systems, as well as more tangible entertainment
items such as aquariums, waterfalls, a 25-foot moving whale's tail, space
shuttle, a star dome with fiber optic lights, an artist's work in progress and
African masks with moving eyes. While guests venture through the many different
aspects of Hotel Discovery at their leisure, they are able to experience
destinations both real and imaginary within any of the four dining rooms.
ADDITIONAL CONCEPT DEVELOPMENT
In July 1997, the Company entered into an agreement with The Cuningham
Group, an architectural and engineering firm based in Minneapolis, Minnesota, to
assist the Company with Hotel Discovery concept development and rollout. The
Cuningham Group offers full design and build services and the Company believes
based upon its client list that it is a leading firm in the growing restaurant
entertainment segment. Clients of The Cuningham Group in the restaurant and
entertainment industries include Rainforest Cafe, Grand Casinos, Hilton Hotels,
Paramount Studios, Steven Spielberg, MCA, IMAX Corporation, Harrah's
Entertainment, Knott's Berry Farm, Walt Disney Company, Universal Studios and
Six Flags.
17
<PAGE> 19
THE CONCEPT AND THE MALL OF AMERICA UNIT
The Company has obtained a lease for a 16,000-square-foot Hotel Discovery
restaurant to be located on the third floor of the Mall of America in
Bloomington, Minnesota, a suburb of Minneapolis (the "Mall of America Unit").
The Mall of America Unit will feature a 200-foot-long, curved front elevation
that is planned to include waterfalls, stone masonry, brick and stucco which
will symbolize the evolution of building materials through the centuries. As
currently under development, the entrance will be very open and inviting, with a
large replica of a sailing ship framing the retail merchandise area on one side
and a half wall of rock with water fountains leading into the Discovery Club Bar
on the other. The bar will be used to entertain guests who are waiting to be
seated in the dining rooms and is expected to feature a stylized, partially open
globe that will be large enough for guests to actually sit inside and enjoy
sound and lighting effects.
FLOOR PLAN OF THE MALL OF AMERICA UNIT*
BLUEPRINT OF MALL OF AMERICA UNIT
* subject to change.
The themes of imagination, invention, adventure and exploration will be
carried forward and expanded to represent a period and place for each of three
dining rooms. As currently planned, the Atlantis Room will transport diners to a
sanctum submerged beneath the ocean. The Serengheti Room will recall the natural
splendor of the famous Serengheti plains from the vantage point of a luxuriously
appointed veranda. The Machu Picchu Room, with massive stone ruins and primitive
wooden structures, will evoke the mysterious Incan city in the clouds.
RETAIL COMPONENT
The retail area of a Hotel Discovery restaurant is located at the entrance
of the facility. All restaurant patrons will have to pass by merchandise on
their way to and from the dining areas. The retail component of the Hotel
Discovery concept at the Kenwood Unit includes a collection of adult and
children's casual clothing, including T-shirts, sweat shirts, shirts and caps,
and a limited amount of other logo merchandise. The Mall of America Unit will
display a much larger selection of merchandise which will be centered around the
four themes of imagination, invention, exploration and adventure as expressed in
the four dining rooms. Such merchandise is expected to include educational toys
and games, stationery, prints, telescopes, art materials, jewelry, primitive
musical instruments, gift items and travel and hotel memorabilia. The Company
believes that its unique theme will generate consumer identification similar to
the retail items sold by other restaurant/retail facilities.
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<PAGE> 20
EXPANSION PLANS; LOCATION SELECTION
Management believes the Hotel Discovery concept is ideally targeted to the
upscale mall and resort area customer segment. Future expansion activities will
be concentrated in locations which exhibit large upper and upper middle class
demographics and malls containing upscale, quality retailers and upscale casual
restaurants. In addition, the large size of planned Hotel Discovery restaurants
will necessitate locations in areas with significant tourist as well as local
traffic. Several leading leasing managers of upscale malls have expressed
interest in having a Hotel Discovery restaurant as a tenant. The Company
currently intends to aim future expansion at upscale malls or resort areas.
AWARD-WINNING MENU
The Hotel Discovery menu features items from around the world. In the 1997
Taste of Cincinnati festival, Hotel Discovery's Ebony Butterfly Medallions won
"Best Entree" and another Hotel Discovery menu entry won honorable mention in
the vegetarian category. Menu offerings include a variety of freshly prepared
steaks, chicken, seafood, entree salads and pastas, all with an eclectic,
international flair. The menu mirrors the exploratory journey and adventure
society concept embodied in the restaurant itself.
Management believes that continual guest feedback on the key attributes of
food quality, menu variety, service and ambiance is crucial to Hotel Discovery's
success. It is currently obtained by weekly tabulation of comment cards that are
distributed with every guest check, an extensive mystery diner program and
periodic marketing research and telephone interviews. This constant feedback
enables Hotel Discovery management to monitor guest response to all areas of the
operation and react accordingly.
Great care is taken to ensure that only the finest and freshest meats,
vegetables, spices and other ingredients are used in Hotel Discovery recipes.
Hotel Discovery's freshly prepared menu items are designed to cater to the most
discerning tastes consistent with the image of an upscale casual dining
experience.
RESTAURANT OPERATIONS
Hotel Discovery strives to maintain quality through extensive training of
its employees and careful supervision of personnel. The Company has developed,
and expects to implement at each Hotel Discovery restaurant, operations in
accordance with a detailed operating manual, which contains specifications
relating to food and beverage preparation, maintenance of premises and employee
conduct. Each restaurant is expected to have a director of operations, five to
seven managers and a controller.
The Company places emphasis on employee training and incentives. Problems
of employee turnover, low morale and inconsistent performance have been
worsening within the restaurant industry in recent years. The Company believes
that many of these problems can be lessened through extensive training, both
initially and on an ongoing basis. Hotel Discovery training begins with
classroom sessions that immerse new employees in Company food, beverage and
service standards and guest communication guidelines. Each prospective guest
service employee actually tastes, and is tested on, every food and beverage item
on the menu. Daily shift meetings are held prior to lunch and dinner to
communicate daily specials and feedback from comment cards and to reinforce
service standards.
MANAGEMENT AND FINANCIAL CONTROLS
Hotel Discovery has implemented specific management control features for
employee follow-up, customer satisfaction, and financial results. These controls
are described below.
Employee Follow-up. Shift schedules are posted weekly for each position in
the restaurant. Each shift is managed by a scheduled manager. Managers are
responsible for executing job functions and following a thorough and complete
checklist for each category of the restaurant. Checklists review the appearance
of the outside of the restaurant, the dining room, kitchen and restrooms as well
as dining room service and food preparation. Regular one-on-one meetings are
held with employees and feedback as to their performance is given on a regular
and consistent basis. This feedback includes positive reinforcement as well as
redirection when a change in focus is needed. In addition, the restaurant's
director of operations holds a weekly quality
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<PAGE> 21
circle luncheon for key employees from each position in the restaurant. The
President of the Company also holds a quarterly "town meeting" with selected
employees to ensure that a strong communications system between the corporate
office and the field is in place.
Customer Satisfaction. Similar checklists are used to ensure that guests
receive a high level of service and food quality. In addition, floor management
is conducted during all peak seating periods by management. Management's
incentives include a bonus based upon a percentage of cash flow and/or
profitability. These incentives enable the manager to act and work as a
"partner." It is this type of pay-for-performance system that will allow the
results of Hotel Discovery restaurants to mirror those of an entrepreneurially
owned and operated business.
Financial Controls. Financial controls are monitored through a computer
software system that is state-of-the-art for tracking sales, food costs, labor,
and guest lists. All of this data is reviewed on a daily, weekly and monthly
basis, enabling management to react promptly to correct deviations and
capitalize on trends.
COMPETITION
The food service industry is intensely competitive with respect to food
quality, concept, location, service and price. In addition, there are many
well-established food service competitors with substantially greater financial
and other resources than the Company and with substantially longer operating
histories. The Company believes that it competes with other full-service dine-in
restaurants, take-out food service companies, fast-food restaurants,
delicatessens, cafeteria-style buffets and prepared food stores, as well as with
supermarkets and convenience stores. Competitors include national, regional and
local restaurants, purveyors of carry-out food and convenience dining
establishments.
Competition in the food service business is often affected by changes in
consumer tastes, national, regional, and local economic and real estate
conditions, demographic trends, traffic patterns, the cost and availability of
labor, purchasing power, availability of product and local competitive factors.
The Company attempts to manage or adapt to these factors, but it should be
recognized that some or all of these factors could cause the Company to be
adversely affected. Management is of the opinion that quality food pleasingly
presented is an absolute requirement within the upscale casual segment of the
market.
THE UPSCALE CASUAL DINING SEGMENT
The Hotel Discovery concept is positioned squarely in the upscale casual
segment of the dining-out industry. Many successful upscale casual chains in the
full service restaurant industry locate in major metropolitan areas and most
typically within or contiguous to a high-traffic, upscale regional mall or
resort area. While mall traffic in general has been sporadic or declining in
recent years as the "big box" concept in retailing drains potential customers
away from malls, the regional mall still remains a viable concept for fulfilling
customer needs. In actuality, the declining customer count within the regional
mall has created an opportunity for the upscale casual segment of the restaurant
industry. Landlords desiring to increase traffic within the upscale mall have
shown a willingness to provide restaurants with generous "add backs" or "give
ups" to locate within a specific mall in order to increase the traffic flow,
thereby creating an advantageous situation for both the mall developer as well
as the restaurant investor.
Although price is not the most important determinant to customer count
within this $15 per average check niche, value is. The Hotel Discovery menu is
extensive, varied, innovative, original and constantly evolving, using only the
freshest ingredients coupled with a pleasing presentation. The surroundings are
high-energy and casual with efficient, attentive and friendly service. Rather
than merely a place to consume food, the concept appeals to all the senses
through video, audio and entertainment features.
GOVERNMENT REGULATIONS
Hotel Discovery restaurants are subject to federal, state and local laws
affecting the operation of its restaurants, including zoning, health, sanitation
and safety regulation and alcoholic beverage licensing requirements. Each
restaurant is operated in accordance with standardized procedures designed to
assure
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<PAGE> 22
compliance with all applicable codes and regulations. The suspension of food
service or liquor license would cause an interruption of operations at the
affected restaurant. The Company believes that it is in compliance with all
licensing and other regulations.
The Company is also subject to the Fair Labor Standards Act, which governs
minimum wages, overtime and working conditions. A significant portion of Hotel
Discovery restaurant employees are paid at rates relating to federal minimum
wage. Accordingly, an increase in the minimum wage would directly increase each
restaurant's labor cost.
Obtaining alcoholic beverage licenses from various jurisdictions will
require disclosure of certain detailed information about directors, officers and
greater than 10% shareholders of the Company's equity securities, and will
necessitate that such persons be approved by the appropriate liquor licensing
authority.
The Kenwood Unit
LOCATION
The Kenwood Unit is located in the recently refurbished Sycamore Plaza at
Kenwood Shopping Center, a premier location in Cincinnati, Ohio, and opened for
business on December 19, 1996. The restaurant contains approximately 17,000
square feet on three levels and is located at the northeast corner of the
Shopping Center Plaza. The Company leases the site upon which the restaurant is
constructed.
The Kenwood Unit was open for dinner on December 19, 1996 and for lunch on
January 4, 1997. For the 26 weeks ended June 29, 1997, the Kenwood Unit had
total sales of $1,864,564.
DESCRIPTION OF LEASE
The initial term of the lease is for 15 years. In addition, the Company has
the right to extend the term of the lease for two additional terms of five years
each, exercisable not earlier than 12 months nor later than six months prior to
the expiration of the initial term or first option period, as applicable.
The lease provides for the payment of both a monthly fixed minimum rent and
a percentage rent based on gross sales in excess of an escalating base amount.
The monthly fixed minimum rent is $12,833 for the first five years of the lease,
$14,117 for the sixth through tenth years, $15,400 for the eleventh through
fifteenth years, $16,683 during the first five-year lease renewal term and
$17,967 during the second five-year lease renewal term.
In addition to the fixed minimum rent, the lease provides for the payment
of a percentage rent equal to 4% of the gross sales from the restaurant in
excess of the following annual gross sales amounts: $3,850,000 for the first
five years of the lease, $4,235,000 for the sixth through tenth years,
$4,620,000 for the eleventh through fifteenth years, $5,004,999 for the first
five-year lease renewal term and $5,390,000 for the second five-year lease
renewal term.
The lease is a "triple net" lease and, in addition to the fixed minimum
rent and percentage rent, the Company is required to pay its proportionate share
of taxes, insurance, and maintenance and operation costs. Initially, the
estimated annual amount payable with respect to taxes, maintenance and operating
costs, and insurance is $4.15 a square foot, or approximately $32,000 per year.
The landlord agreed to reimburse the Company in an amount up to $200,000 as
a construction allowance for the completion of building and leasehold
improvements within 30 days of the opening of the Kenwood Unit. The Company
expects to complete the necessary documentation to obtain such reimbursement in
the near future. In addition, the landlord agreed that it will not construct any
permanent facility within a designated no-build area outlined in the lease. This
"no-build" area allows unimpaired visibility of the restaurant from both Kenwood
Road and Montgomery Road.
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<PAGE> 23
FINANCING OF THE KENWOOD UNIT
The total cost of the Kenwood Unit, including additional features, was
approximately $4.7 million. Approximately $2,475,000 of the cost of the
restaurant was funded by the proceeds of a private placement in October 1995.
Another $1,025,000 was financed by a private placement which was concluded in
June 1997, $850,000 of which was spent on new additional features. Leasehold
improvements in the amount of $200,000 will be financed by the landlord. An
additional $1,000,000 was funded by a leasehold mortgage term loan (the "Loan")
which was incurred by the Kenwood Restaurant Limited Partnership and assumed by
the Company.
The Loan is secured with a leasehold mortgage and lien on the assets of the
restaurant and is guaranteed by Mr. King individually. The Loan bears interest
at a floating rate which is currently 9.06% and provides for monthly payments of
principal in the amount of $5,785 plus interest through October 1999, at which
time the remaining balance is due in full.
The Mall of America Unit
LOCATION
The Mall of America Unit will consist of a 16,000-square-foot restaurant
located on the third floor of the Mall of America in Bloomington, Minnesota. The
site is leased pursuant to a lease dated August 4, 1997 between Mall of America
Company, a Minnesota general partnership, and the Company.
The Mall of America opened in August 1992 with 266 tenants and now holds
approximately 520 stores, merchandise carts and attractions, including four
large anchor tenants (Macy's, Bloomingdale's, Sears and Nordstrom). The mall
encompasses 4.2 million square feet on four enclosed floors, of which 2.5
million square feet are leasable, and employs 11,000 to 13,000 people, depending
on the season. More than 93% of the leasable space is under contract, up from
71% five years ago. The mall draws an estimated 40 million visitors per year.
Tourists account for 35% to 39% of mall traffic, which percentage increases up
to 50% in the summer months.
According to an August 26, 1997 article in the Minneapolis Star Tribune,
the industry benchmark for success in prime shopping malls is $325 in annual
sales per square foot, while stores in the Mall of America with fewer than
15,000 square feet (which includes most of the mall's tenants) average $450 in
annual sales per square foot. This figure is partially offset by
higher-than-average expenses, including property taxes and charges for common
areas such as the rotunda and broad hallways. Mall development will increasingly
focus on entertainment in order to maintain a strong flow of visitors to the
mall. Since it opened in 1992, the mall has emerged as a laboratory for new
retail and development concepts, including:
- Knott's Camp Snoopy, the country's first indoor amusement park combined
with a shopping center,
- The first Rainforest Cafe, a tropical-theme restaurant with related
entertainment and merchandise which has undergone three expansions since
its 1994 opening and has since opened six other locations in the United
States and in London, England;
- Postmark America, the U.S. Postal Service's only retail store, and
- Chrysler's Great Cars Great Trucks, a prototype showcase where shoppers
can inspect vehicles and use touchscreen computers to price customized
vehicles.
Having pioneered the Hotel Discovery concept at the Kenwood Unit, the
management of the Company is optimistic that the Mall of America, with its
reputation for innovation in retailing and entertainment, will be an ideal
location to showcase the Company's continuing development of its highly-themed,
entertainment-oriented Hotel Discovery restaurant concept.
DESCRIPTION OF MALL OF AMERICA LEASE
The term of the lease is for 12 years, commencing on the earlier of (i) the
day following the last day allowed to the Company for completion of remodeling
of the leased space or (ii) the date on which the restaurant opens for business.
The lease does not provide for renewal terms.
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<PAGE> 24
The lease provides for the payment of either a minimum annual rent or a
percentage rent based on gross sales. The minimum annual rent is $25 per square
foot, or $405,375 per year based on approximately 16,215 square feet of leased
area. The percentage rent is the amount by which 6% of gross sales exceeds
minimum rent. The lease provides for waiver of the minimum annual rent for the
first year of the lease. The landlord will also reimburse the Company for up to
$1.6 million in leasehold improvements.
The lease is a triple net lease and, in addition to the fixed minimum rent
and percentage rent, the Company is required to pay its proportionate share of
taxes, insurance, and maintenance and operation costs.
EMPLOYEES
As of August 22, 1997, the Company employed 133 persons, of whom 82 worked
in full-time positions and 51 were part-time. The Mall of America Unit is
expected to employ approximately 250 full- and part-time personnel when
operating at full capacity. No current employee is covered by a collective
bargaining agreement, and the Company has never experienced an organized work
stoppage, strike or labor dispute. The Company considers relations with its
employees to be excellent.
LEGAL PROCEEDINGS
The Company is not a party to any material litigation and is not aware of
any threatened litigation that would have a material adverse effect on its
business.
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MANAGEMENT
DIRECTORS, EXECUTIVE OFFICERS AND KEY EMPLOYEES
The following table sets forth certain information with respect to each of
the directors and executive officers of the Company.
<TABLE>
<CAPTION>
NAME AGE POSITION(S) HELD
---- --- ----------------
<S> <C> <C>
Stephen D. King.............................. 41 Chairman and Chief Executive Officer
Ronald K. Fuller............................. 51 President, Chief Operating Officer and Director
Steven B. Carey.............................. 36 Vice President -- Menu Development
Samuel J. Talucci, Jr. ...................... 45 Vice President -- Operations
John J. Motschenbacher....................... 34 Controller
Patricia J. Diamond.......................... 38 Director of Retail
Michael L. Krienik........................... 44 Director
Martin J. O'Dowd............................. 48 Director
Thomas W. Orr................................ 52 Director
</TABLE>
Stephen D. King, the Chairman and Chief Executive Officer of the Company,
is a managing partner of BaryCenter Capital Management, a Cincinnati-based
financial advisor and investment firm. Mr. King will devote substantially all of
his management time to the Company. From 1982 to 1990, Mr. King served in
various capacities, including Chief Executive Officer, of Pizza Hut of
Cincinnati, Inc., which operates 36 Pizza Hut restaurants in the Cincinnati,
Ohio area. Mr. King has also served in various capacities with Long John Silver,
Two Pesos and Skyline Chili franchise operations. Mr. King also has extensive
real estate and financing expertise and, from 1991 to 1994, served as managing
partner of River City Capital, LLC, a real estate development entity with
properties valued at approximately $60 million.
Ronald K. Fuller joined the Company as President and Chief Operating
Officer in January 1997. He is also acting as the Company's Chief Financial
Officer until the Company fills that position. Mr. Fuller had served since 1993
as President and Chief Executive Officer for Leeann Chin, Inc., Minneapolis,
Minnesota, a casual dining restaurant company. From 1985 to 1993, Mr. Fuller
held several executive positions with General Mills, Inc. and General Mills
Restaurants, Inc. in Minneapolis and Orlando, Florida, including Vice President
- -- Operations, Executive Vice President -- New Concept Development, and
President/General Manager.
Steven B. Carey became Vice President -- Menu Development of the Company in
January 1997. From 1994 until that time, Mr. Carey was Corporate Executive Chef
for Leeann Chin, Inc. From 1985 to 1994 he acted as Executive Chef or Senior
Executive Chef for a number of units of Restaurants Unlimited, based in Seattle,
Washington, including Palomino (Minneapolis), Ryan's Grill (Honolulu), Cutter's
Grand Cafe (Philadelphia), Kincaid's Bayhouse (Burlingame, California) and
Skates on the Bay (Berkeley).
Samuel J. Talucci, Jr. became Vice President -- Operations in September
1997. From 1985 until that time, Mr. Talucci served as founder, owner and
general manager of Magnolia Cafe, an award-winning Cajun and Creole restaurant
in Philadelphia. From 1983 to 1985 Mr. Talucci worked for Mike Kelly's/Joe
Kelly's, a full-service fresh seafood, steak and prime rib restaurant
enterprise. He was initially Regional Supervisor for Joe Kelly's in Oklahoma
City, where he oversaw profitability, store openings and management training for
four restaurants, and then Director of Operations for Mike Kelly's in Detroit
where he opened two restaurants, set up systems and procedures and supervised
management training. From 1978 to 1983, Mr. Talucci served in various management
capacities for T.W. Lee's Inc. (Lexington, Kentucky), That's Entertainment Inc.
(New Haven and Yalesville, Connecticut), and Clyde's Inc. (Columbia, Maryland
and Sao Paulo, Brazil).
John J. Motschenbacher became Corporate Controller of the Company in June
1997. From 1993 to immediately prior to joining the Company, Mr. Motschenbacher
served in various capacities for Leeann Chin, Inc., including as Director of
Accounting and MIS and as Corporate Controller. He was the Controller of
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<PAGE> 26
Q-Steaks, Inc., a steakhouse chain based in St. Louis Park, Minnesota. From 1991
to 1992 he was a Regional Controller for Bon Appetit Management Company (San
Francisco), a provider of contract and institutional food service. From 1988 to
1991, he served as Senior Regional Accountant and then Manager of Accounting and
Administration for Consul Restaurant Corporation (Bloomington, Minnesota), a
Chi-Chi's Restaurant franchisee and provider of contract food services.
Patricia J. Diamond became Director of Retail of the Company in August
1997. From April 1996 to immediately prior to joining the Company, Ms. Diamond
served as General Manager of UnderWater World at the Mall of America, where she
was responsible for developing and coordinating all aquarium operations,
including financial, personnel, marketing and retail functions. From January
1992 to April 1996, Ms. Diamond acted as General Manager of the LEGO Imagination
Center at the Mall of America, where she was responsible for setup, development,
and management, including budgeting, hiring of personnel, retail, exhibition and
special events promotion.
Michael L. Krienik became a Director of the Company in September 1997 and
is President of Krienik Advertising Inc., Cincinnati, Ohio, a full-service
advertising agency which he founded in 1981. Prior to founding his own
advertising agency, Mr. Krienik served in various merchandising/management roles
with Federated Department Stores from 1973 to 1977 and then served as the
National Advertising Manager for U.S. Shoe Corporation from 1977 to 1981.
Martin J. O'Dowd became a Director of the Company in September 1997 and is
the Chief Operating Officer for United States operations and a Director of
Elephant & Castle Group, Inc. From May 1995 to April 1997, Mr. O'Dowd served as
President and Chief Operating Officer and a Director of Rainforest Cafe, Inc.
From July 1984 to May 1995, Mr. O'Dowd was Corporate Director, Food and Beverage
Services for Holiday Inn Worldwide. Mr. O'Dowd is also a Director of Famous
Dave's of America, Inc.
Thomas W. Orr became a Director of the Company in September 1997 and has
been a Senior Consultant since 1995 for the Delta Consulting Group, Trumbull,
Connecticut, specializing in business strategy, new business development,
marketing and sales. From 1994 to 1995, Mr. Orr was President of the retail
chicken group of ConAgra Broiler Company, with responsibility for strategic
direction, operations of five plants, sales, marketing, international and
commodity businesses. Mr. Orr had previously been associated with ConAgra
Broiler Company from 1991 to 1993 as Vice President of Sales and Vice President
of Marketing. From 1993 to 1994, Mr. Orr served as Senior Vice President for
Jennie-O Foods, Inc., a subsidiary of Hormel Foods, with responsibility for
strategy development, marketing and sales for the retail, food service and
commodity divisions.
The Company is actively searching for a Chief Financial Officer and expects
to hire such officer by the end of 1997.
COMMITTEE OF THE BOARD OF DIRECTORS
The Board of Directors has an Audit Committee comprised of Messrs. Krienik
and Orr. The Audit Committee recommends to the Board of Directors the
appointment of independent auditors, reviews and approves the scope of the
annual audit of the Company's financial statements, reviews and approves any
non-audit services performed by the independent auditors, reviews the findings
and recommendations of the internal and independent auditors and periodically
reviews and approves major accounting policies and significant internal
accounting control procedures.
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<PAGE> 27
EXECUTIVE COMPENSATION
The following table sets forth all cash compensation paid by the Company
for the period from January 13, 1994 (Inception) through December 29, 1996 to
the Company's Chairman and Chief Executive Officer:
<TABLE>
<CAPTION>
LONG-TERM
ANNUAL COMPENSATION COMPENSATION
------------------------ ---------------
OTHER ANNUAL AWARD
NAME OF INDIVIDUAL POSITION SALARY COMPENSATION OPTIONS GRANTED
------------------ -------- ------ ------------ ---------------
<S> <C> <C> <C> <C>
Stephen D. King................... Chairman of the Board and $0(1) 0 --
Chief Executive Officer
</TABLE>
- -------------------------
(1) Effective August 1, 1997, the Company began paying a salary to Mr. King of
$200,000 per year.
EMPLOYMENT AGREEMENTS
Mr. Fuller has a two-year employment agreement with the Company, which
provides for an annual base salary of $200,000 for his first year of employment,
which may be adjusted annually as determined by the Board of Directors, plus a
bonus based upon the Company's performance. Such agreement also provides that if
Mr. Fuller is terminated by the Company for a reason other than "cause," as
defined therein, he will receive up to two years' severance (base salary plus
bonus) if such termination occurs prior to the Effective Date and one year's
severance (base salary) if such termination occurs thereafter. Mr. Fuller
receives medical, dental and other customary benefits. The employment agreement
provides that Mr. Fuller will not compete with the Company for one year
following termination of his employment. Mr. Fuller received options to purchase
300,000 shares of Common Stock at an exercise price of $3.00 per share. Options
to purchase 50,000 shares are currently vested. The remaining options vest over
two years.
The Company intends to retain other executive management employees pursuant
to employment agreements. The Company intends to offer stock options to such
employees.
STOCK OPTION AND COMPENSATION PLAN
The Board of Directors adopted the 1997 Stock Option and Incentive
Compensation Plan (the "Plan") in January 1997 and reserved 500,000 shares of
Common Stock for issuance to employees and key consultants under the Plan. The
Plan was amended in September 1997 to increase to 750,000 the number of shares
available for issuance under the Plan.
The Plan is administered by the Board of Directors, which has the
discretion to determine the number and purchase price of shares subject to stock
options, which may not be below the fair market value of the Common Stock on the
date granted, the term of each option, which may not exceed ten years, and the
time or times during its term when the option becomes exercisable. As of the
date of this Prospectus, options aggregating 512,666 shares of Common Stock, at
exercise prices ranging from $3.00 to $4.00 per share, have been granted to
certain employees of the Company.
BOARD OF DIRECTORS AND DIRECTOR COMPENSATION
Each of the Company's directors has been elected to serve until the next
annual meeting of shareholders. The Company's executive officers are appointed
annually by the Company's directors. Each of the Company's directors continues
to serve until his or her successor has been designated and qualified.
Directors receive no fees for serving as directors and the Company has no
current plans to pay cash compensation to its directors. The Company's three
non-employee directors, Messrs. Krienik, O'Dowd and Orr, each received a
ten-year option to purchase 25,000 shares of Common Stock when they joined the
Board. One-third of the options vest on each of the first, second and third
anniversaries of the date of grant. The options granted to Messrs. Krienik and
Orr have an exercise price of $3.34 a share and the option granted to Mr. O'Dowd
has an exercise price of $3.75 a share. Members of the Board who are also
employees of the Company receive no options for their services as directors.
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<PAGE> 28
REORGANIZATION
The Company's predecessor, Hotel Mexico, Inc. ("HMI"), was originally
incorporated in January 1994 as an Ohio corporation and 98% and 2% of the
original capital stock was issued to Stephen D. King and another unrelated
shareholder, respectively. The Kenwood Restaurant Limited Partnership, an Ohio
limited partnership (the "Kenwood Partnership"), was formed in June 1995 for the
purpose of owning and operating the Kenwood Unit. The Kenwood Partnership was
dissolved in October 1997. The general partner of the Kenwood Partnership was
Kenwood Restaurant, Inc., an Ohio corporation (the "General Partner"). Mr. King
was the sole director and officer of the General Partner and controlled the
General Partner until Mr. King's resignation in September, 1997. The Kenwood
Partnership had 22 limited partners as a result of a private placement in
October 1995.
HMI's operations and the net assets of the Kenwood Partnership were
combined on November 14, 1996. On that date, the Kenwood Partnership contributed
all of its net assets totalling $1,567,197 to a newly formed corporation in
exchange for shares of such corporation. HMI, with total net assets of $631,966,
then merged with and into the newly-formed corporation, the name of which was
changed to Hotel Mexico, Inc. Upon consummation of the merger, outstanding
shares of HMI were converted into an aggregate of 1,350,000 shares of Common
Stock of the newly formed corporation.
In conjunction with the dissolution of the Kenwood Partnership in October
1997, the shares of HMI Common Stock received by the Kenwood Partnership in the
reorganization and other partnership assets were distributed to the general and
limited partners in accordance with the Partnership Agreement.
On June 24, 1997, the Board of Directors of HMI approved its
reincorporation as a Minnesota corporation named Hotel Discovery, Inc. Following
approval of the transaction and of the name change by HMI's shareholders at a
special meeting held on August 11, 1997, HMI was merged with and into Hotel
Discovery, Inc., a newly-formed Minnesota corporation, on August 22, 1997. Hotel
Discovery, Inc. has an authorized capital stock of 100,000,000 undesignated
shares, and each share of Common Stock of HMI was converted into one share of
Common Stock of Hotel Discovery, Inc.
CERTAIN TRANSACTIONS
The Company granted a five-year non-exclusive license to Eastgate
Restaurants, Inc., an Ohio corporation wholly owned by Stephen D. King, to test
the concept at a demonstration restaurant at 792 Eastgate South Drive,
Cincinnati, Ohio, which opened in June 1994. The license granted included the
right to use the Hotel Mexico name, emblems, restaurant design, furnishings,
menu and operating procedures. The license fee included an initial payment of
$2,500 to the Company and a monthly fee of $200 until the demonstration
restaurant ceased operations in August, 1997.
Stephen D. King, a principal shareholder, director and executive officer
provided essentially all of the Company's working capital in the development
stage. This working capital was provided by direct advances to the Company and
reimbursement for various business costs and expenses incurred by the principal
shareholder on behalf of the Company. During the years ended December 29, 1996
and December 31, 1995, the maximum amount of such indebtedness outstanding at
any time was $1,213,469 and $862,891, respectively. At year end December 29,
1996 and December 31, 1995, the amount of such outstanding indebtedness was
$447,787 and $862,891, respectively. Included in these amounts were concept
development costs reimbursed to a demonstration restaurant owned and operated by
the principal shareholder in the amount of $278,101 for the year ended December
29, 1996 and $433,996 for the year ended December 31, 1995. The Company pays
interest of 11.5% on all such advances. Subsequent to December 29, 1996, this
principal shareholder has continued to provide the Company with additional
working capital advances on a revolving basis, with $348,430 and $374,000
outstanding on June 29, 1997 and the date of this Prospectus, respectively.
In December 1996, the Company borrowed $2.5 million under a term loan from
PNC Bank, Ohio, National Association, fully secured by cash collateral. The loan
accrued annual interest of 5.94% and payments of interest only were due through
January 1998, at which time the entire principal was due. The loan was
personally guaranteed by Mr. King. This loan was paid in full on January 31,
1997. In May 1997 the
27
<PAGE> 29
Company borrowed $2.0 million on a 13-month term note, with interest only
payable monthly at the rate of 7.15%. This note was guaranteed by Mr. King and
was fully secured by substantially all of the Company's assets. This note was
repaid in full in July 1997. Mr. King has also personally guaranteed a
$1,000,000 leasehold mortgage term loan from PNC Bank, Ohio to the Company. See
"The Kenwood Unit--Financing of the Kenwood Unit."
On June 23, 1997, the Company borrowed $800,000 from Provident Bank, which
is fully secured by substantially all of the Company's assets. The loan bears
interest at 2% over the bank's reference rate payable monthly. The loan was
personally guaranteed by Mr. King. This loan was repaid in full in July 1997.
Also, on August 12, 1997, the Company borrowed $200,000 from Provident Bank,
which loan bears interest at 2% over Provident's reference rate, is guaranteed
by Mr. King, and is due on November 10, 1997.
It is the Company's belief that each transaction referred to in this
section between the Company and an officer, director or 5% shareholder of the
Company's Common Stock was on terms no less favorable to the Company than could
have been obtained from non-affiliated parties. Any future transactions and
loans between the Company and any of such persons will be on terms no less
favorable to the Company than could be obtained from unaffiliated third parties.
All future material affiliated transactions must be approved by a majority of
the independent outside members of the Company's Board of Directors who do not
have an interest in the transactions.
28
<PAGE> 30
PRINCIPAL SHAREHOLDERS
The following table sets forth certain information regarding beneficial
ownership of the Company's Common Stock as of the date of this Prospectus, as
adjusted to give effect to the issuance of the securities offered hereby, by (i)
each person known by the Company to be the beneficial owner of more than 5% of
the outstanding Common Stock, (ii) each director of the Company, (iii) each
executive officer of the Company, and (iv) all executive officers and directors
of the Company as a group. Unless otherwise indicated, each of the following
persons has sole voting and investment power with respect to the shares of
Common Stock set forth opposite their respective names.
<TABLE>
<CAPTION>
PERCENT
----------------------
SHARES OF PRIOR TO AFTER
NAME COMMON STOCK OFFERING OFFERING(1)
---- ------------ -------- -----------
<S> <C> <C> <C>
Stephen D. King(2)......................................... 900,000(3) 16.7% 11.4%
Ronald K. Fuller........................................... 60,000(4) 1.1 0.8
Michael L. Krienik......................................... 0 -- --
Martin J. O'Dowd........................................... 0 -- --
Thomas W. Orr.............................................. 10,000 * *
Kenwood Restaurant Inc.(2)................................. 427,500 7.9 5.4
All executive officers and directors as a group (5
persons)................................................. 960,000(3) 17.6 12.1
</TABLE>
- -------------------------
* Less than 1%
(1) Figures do not include any shares that may be purchased in the offering by
executive officers, directors and the principal shareholder of the Company.
Assumes that the Underwriters' over-allotment option is not exercised.
(2) Such person's address is 8260 NorthCreek Drive, Suite 140, Cincinnati, Ohio
45236.
(3) Includes 248,884 shares owned by Mr. King that are subject to options to
purchase held by various individuals. Does not include 395,276 shares as to
which Mr. King has voting control pursuant to voting trust agreements. Such
voting trust agreements will terminate on the Effective Date. Mr. King has
an option exercisable through September 20, 2001 to purchase those shares.
Including all such shares prior to the offering (but excluding them
subsequent to the offering), Mr. King's percentage ownership would be 24.0%
and 11.4%, respectively.
(4) Includes 50,000 shares issuable upon exercise of stock options that are
exercisable within 60 days.
29
<PAGE> 31
DESCRIPTION OF SECURITIES
UNITS
Each Unit offered hereby consists of one share of Common Stock and one
redeemable Class A Warrant. Warrants are immediately exercisable and, commencing
10 trading days after the Effective Date, separately transferable from the
Common Stock. Each Class A Warrant entitles the holder to purchase at any time,
until the earlier of redemption by the Company or four years following the
Effective Date, one share of common Stock at an exercise price of $6.50 per
Warrant, subject to adjustment.
CAPITAL STOCK
The Company's authorized capital stock consists of 100,000,000 undesignated
shares of Common Stock, $.01 par value per share in the case of Common Stock,
and a par value as determined by the Board of directors in the case of Preferred
Stock. After the closing of this Offering, there will be issued and outstanding
7,899,289 shares of Common Stock, or 8,274,289 shares if the Underwriters'
over-allotment option is exercised in full.
COMMON STOCK
There are no preemptive, subscription, conversion or redemption rights
pertaining to the Common Stock. The absence of preemptive rights could result in
a dilution of the interest of existing shareholders should additional shares of
Common Stock be issued. Holders of the Common Stock are entitled to receive such
dividends as may be declared by the Board of Directors out of assets legally
available therefor, and to share ratably in the assets of the Company available
upon liquidation.
Each share of Common Stock is entitled to one vote for all purposes and
cumulative voting is not permitted in the election of directors. Significant
corporate transactions, such as amendments to the articles of incorporation,
mergers, sales of assets and dissolution or liquidation, require approval by the
affirmative vote of the majority of the outstanding shares of Common Stock.
Other matters to be voted upon by the holders of Common Stock normally require
the affirmative vote of a majority of the shares present at the particular
stockholders' meeting. The Company's directors and officers as a group
beneficially own approximately 17.6% of the Outstanding Common Stock of the
Company. Upon completion of this Offering, such persons will beneficially own
approximately 12.1% of the outstanding shares (11.5% if the Underwriters'
over-allotment option is exercised in full). See "Principal Shareholders."
Accordingly, such persons will continue to be able to substantially control the
Company's affairs including, without limitation, the sale of equity or debt
securities of the Company, the appointment of officers, the determination of
officers' compensation and the determination whether to cause a registration
statement to be filed. There are approximately 265 beneficial holders of the
Company's Common Stock as of the date of this Prospectus.
The rights of holders of the shares of Common Stock may in the future
become subject to prior and superior rights and preferences in the event that
the Board of Directors establishes one or more additional classes of Common
Stock or one or more series of Preferred Stock. The Board of Directors has no
present plan to establish any such class or series.
The former limited partners of the dissolved Kenwood Partnership, who own
an aggregate of 1,128,750 shares of Common Stock of the Company, have preemptive
rights with respect to certain private placements of equity securities and
certain debt securities of the Company pursuant to a Shareholder Agreement dated
as of September 30, 1995. These preemptive rights will terminate immediately
prior to the Effective Date.
CLASS A WARRANTS
The Class A Warrants included as part of the Units being offered hereby
will be issued under and governed by the provisions of a Warrant Agreement (the
"Warrant Agreement") between the Company and Norwest Bank Minnesota, N.A. as
Warrant Agent (the "Warrant Agent"). The following summary of the Warrant
Agreement is not complete, and is qualified in its entirety by reference to the
Warrant Agreement, a copy of which has been filed as an exhibit to the
Registration Statement of which this Prospectus is a part.
30
<PAGE> 32
Commencing 10 trading days after the Effective Date, the shares of Common
Stock and the Class A Warrants offered as part of the Units will be detachable
and separately transferable. One Class A Warrant entitles the holder
("Warrantholder") thereof to purchase one share of Common Stock during the four
years following the Effective Date, subject to earlier redemption, provided that
at such time a current prospectus relating to the shares of Common Stock
issuable upon exercise of the Class A Warrants is in effect and the issuance of
such shares is qualified for sale or exempt from qualification under applicable
state securities laws. Each Class A Warrant will be exercisable at an exercise
price of $6.50 per Warrant, subject to adjustment in certain events.
The Class A Warrants are subject to redemption by the Company beginning 90
days after the Effective Date, on not less than 30 days' written notice, at a
price of $.01 per Warrant at any time following a period of 14 consecutive
trading days where the per share average closing bid price of the Common Stock
exceeds $7.00 (subject to adjustment), provided that a current prospectus
covering the shares issuable upon the exercise of the Class A Warrants is then
effective under federal securities laws. For these purposes, the closing bid
price of the Common Stock shall be determined by the closing bid price as
reported by Nasdaq so long as the Common Stock is quoted on Nasdaq and, if the
Common Stock is listed on a national securities exchange, shall be determined by
the last reported sale price on the primary exchange on which the Common Stock
is traded. Holders of Class A Warrants will automatically forfeit all rights
thereunder except the right to receive the $.01 redemption price per Warrant
unless the Class A Warrants are exercised before they are redeemed.
The Warrantholders are not entitled to vote, receive dividends or exercise
any of the rights of holders of shares of Common Stock for any purpose. The
Class A Warrants are in registered form and may be presented for transfer,
exchange or exercise at the office of the Warrant Agent. Although the Company
has applied for listing of the Class A Warrants on the Nasdaq SmallCap Market,
there is currently no established market for the Class A Warrants, and there is
no assurance that any such market will develop.
The Warrant Agreement provides for adjustment of the exercise price and the
number of shares of Common Stock purchasable upon exercise of the Class A
Warrants to protect Warrantholders against dilution in certain events, including
stock dividends, stock splits, reclassification, and any combination of Common
Stock, or the merger, consolidation, or disposition of substantially all the
assets of the Company.
The Class A Warrants may be exercised upon surrender of the certificate
therefor on or prior to the expiration date (or earlier redemption date) at the
offices of the Warrant Agent, with the form of "Election to Purchase" on the
reserve side of the certificate properly completed and executed as indicated,
accompanied by payment of the full exercise price (by certified or cashier's
check payable to the order of the Company) for the number of Class A Warrants
being exercised.
RECENT PRIVATE PLACEMENTS OF COMMON STOCK
In July 1997, the Company concluded the private placement of 499,804 shares
of Common Stock at $3.00 per share. The Company realized net proceeds of
approximately $1,400,000. These proceeds were used for working capital purposes.
In June 1997, the Company concluded the private placement of 1,663,085
shares of Common Stock at $3.00 per share. The Company realized net proceeds of
approximately $4,350,000. Of these net proceeds, $1,200,000 was used to repay a
$1.2 million working capital loan from PNC Bank, Ohio, National Association,
which loan had been guaranteed by Mr. King personally. An additional $675,000
was used to complete construction and development of the Kenwood Unit, $850,000
has been or is being used for new features for the Kenwood Unit, approximately
$200,000 has been used for development and execution of the lease at the Mall of
America, and the balance was utilized for working capital, including operating
losses.
The Representative acted as the selling agent (the "Agent") with respect to
these equity offerings. The Agent received sales commissions equal to 8% of the
gross proceeds of the offering plus a non-accountable expense allowance of 2% of
gross proceeds. The Agent also received four-year warrants to purchase 199,205
shares of the Company's Common Stock at an exercise price of $3.75 per share.
31
<PAGE> 33
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this Offering, there will be 7,899,289 shares of Common
Stock issued and outstanding (8,274,289 if the Underwriters' over-allotment
option is exercised in full). The shares purchased in this Offering will be
freely tradeable without registration or other restriction under the 1933 Act,
except for any shares purchased by an "affiliate" of the Company (as defined in
the Act).
All the currently outstanding shares were issued in reliance upon the
"private placement" exemptions provided by the Act and are deemed restricted
securities within the meaning of Rule 144 ("Restricted Shares"). Restricted
Shares may not be sold unless they are registered under the Act or are sold
pursuant to an applicable exemption from registration, including an exemption
under Rule 144. All such Restricted Shares will become eligible for sale,
assuming all of the other requirements of Rule 144 have been satisfied, as
follows: 2,880,401 shares upon the Effective Date (except that holders of
2,857,826 of such shares have agreed not to sell or otherwise dispose of such
shares without the prior written consent of the Representative for a period
ranging from 90 to 180 days after the Effective Date), 1,092,400 shares in the
fourth quarter of 1997 (except that the holders of such 1,092,400 shares have
agreed not to sell or otherwise dispose of such shares without the prior written
consent of the Representative for 90 days after the Effective Date), 13,200
shares in the first quarter of 1998, 570,685 shares in the second quarter of
1998, 692,603 shares in the third quarter of 1998, and the remaining 150,000
shares thereafter.
Rule 144 provides that if at least one year has elapsed since restricted
shares of Common Stock were last acquired from the Company or an affiliate of
the Company, the holder is generally entitled to sell, within any three-month
period, a number of shares that does not exceed the greater of 1% of the shares
of Common Stock then outstanding or the reported average weekly trading volume
of the Common Stock during the four calendar weeks immediately preceding the
date on which notice of the sale is sent to the SEC. Sales under Rule 144 are
subject to certain manner of sale restrictions, notice requirements and
availability of current public information concerning the Company. A person who
is not an affiliate of the Company during the three months preceding the sale
generally may sell shares without regard to the volume limitations, manner of
sale provision, notice requirements or the availability of public information
concerning the Company, provided that at least two years have elapsed since the
shares were last acquired from the Company or an affiliate.
In general, under Rule 701 as currently in effect, any employee, consultant
or advisor of the Company who purchases shares from the Company by exercising a
stock option outstanding on the date of the Offering is eligible to resell such
shares 90 days after the date of the Prospectus in reliance on Rule 144, but
need not comply with certain restrictions contained in Rule 144, including the
holding period requirement. After the Offering, the Company intends to register,
through a Form S-8 registration statement, 750,000 shares of Common Stock that
are reserved for issuance under the Stock Option Plan. See "Management." After
the effective date of such registration statement, shares issued upon exercise
of outstanding options would generally be eligible for immediate resale in the
public market, subject to vesting under the applicable option agreements.
Following this Offering, the Company cannot predict the effect, if any,
that sales of the Common Stock or the availability of such Common Stock for sale
will have on the market price prevailing from time to time. Nevertheless, sales
by existing shareholders of substantial amounts of Common Stock could adversely
affect prevailing market prices for the Common Stock if and when a public market
exists. The Company's executive officers, directors and 5% shareholders have
agreed that they will not sell, grant any option for the sale of, or otherwise
dispose of any equity securities of the Company (or any securities convertible
into or exercisable or exchangeable for equity securities of the Company) for a
period of 180 days after the Effective Date without the prior written consent of
the Representative. Holders of an aggregate of 2,162,889 shares of the Company's
Common Stock purchased in two private placements in which the Representative
acted as selling agent agreed not to sell or otherwise dispose of any shares of
Common Stock for a period of 90 days after the Effective Date.
32
<PAGE> 34
MINNESOTA ANTI-TAKEOVER LAW
The Company is governed by the provisions of Sections 302A.671 and 302A.673
of the Minnesota Business Corporation Act. In general, Section 302A.671 provides
that the shares of a corporation acquired in a "control share acquisition" have
no voting rights unless voting rights are approved in a prescribed manner. A
"control share acquisition" is an acquisition, directly or indirectly, of
beneficial ownership of shares that would, when added to all other shares
beneficially owned by the acquiring person, entitle the acquiring person to have
voting power of 20% or more in the election of directors. In general, Section
302A.673 prohibits a publicly-held Minnesota corporation from engaging in a
"business combination" with an "interested shareholder" for a period of four
years after the date of the transaction in which the person became an interested
shareholder, unless the business combination is approved in a prescribed manner.
"Business combination" includes mergers, asset sales and other transactions
resulting in a financial benefit to the interested shareholder. An "interested
shareholder" is a person who is the beneficial owner, directly or indirectly, of
10% or more of the corporation's voting stock or who is an affiliate or
associate of the corporation and at any time within four years prior to the date
in question was the beneficial owner, directly or indirectly, of 10% or more of
the corporation's voting stock.
TRANSFER AGENT AND REGISTRAR
Norwest Bank Minnesota, N.A. is the transfer agent and registrar for the
Common Stock.
UNDERWRITING
The Underwriters named below, acting through their representative, R.J.
Steichen & Company (the "Representative"), have severally agreed, subject to the
terms and conditions of the Underwriting Agreement, to purchase an aggregate of
2,500,000 Units from the Company at the Price to Public set forth on the cover
page of this Prospectus, less the underwriting discounts and commissions, in the
amounts set forth opposite their respective names below.
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITER UNITS
- ----------- ---------
<S> <C>
R.J. Steichen & Company.....................................
D. H. Blair Investment Banking Corp. .......................
The Ohio Company............................................
H.J. Meyers & Co. Inc. .....................................
Smith, Moore & Co. .........................................
Dougherty Summit Securities LLC.............................
Equity Securities Trading Co., Inc. ........................
Frederick & Company, Inc. ..................................
Glaser Capital Corp. .......................................
Miller, Johnson & Kuehn, Incorporated.......................
---------
Total.................................................. 2,500,000
=========
</TABLE>
The Company has been advised by the Representative that the Underwriters
propose to offer the 2,500,000 Units at a Price to Public of $5.00 per Unit and
to certain selected dealers at such price less a concession not in excess of
$.24 per Unit to certain other dealers who are members of the National
Association of Securities Dealers, Inc. After the initial public offering, the
Price to Public and other selling terms may be changed by the Representative.
The Underwriters do not intend to confirm sales to any account over which they
have discretionary authority.
In the Underwriting Agreement, the Company and the Underwriters have agreed
to indemnify each other (including officers, directors and control persons of
each other) against certain liabilities under the 1933 Act, or to contribute to
payments which the Underwriters may be required to make in respect thereof.
Insofar as indemnification for liabilities arising under the 1933 Act may be
permitted to directors, officers and controlling
33
<PAGE> 35
persons of the Company pursuant to the foregoing provisions, or otherwise, the
Company has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the Act
and is, therefore, unenforceable.
The Company has granted to the Underwriters an option, exercisable within
45 days after the date of this Prospectus, to purchase up to an additional
375,000 Units at the Price to Public, less the Underwriting Discount shown on
the cover page of this Prospectus. This option may only be exercised in whole or
in part, but only for the purpose of covering any over-allotments in the sale of
the Units offered hereby.
The Company's executive officers, directors and 5% shareholders have agreed
that they will not sell, grant any option for the sale of, or otherwise dispose
of any equity securities of the Company (or any securities convertible into or
exercisable or exchangeable for equity securities of the Company) for a period
of 180 days after the Effective Date without the prior written consent of the
Representative. Holders of an aggregate of 2,162,889 shares of the Company's
Common Stock purchased in two private placements in which the Representative
acted as selling agent agreed not to sell or otherwise dispose of any shares of
Common Stock for a period of 90 days after the Effective Date.
The Company has agreed to pay the Underwriters a nonaccountable expense
allowance of 2% of the aggregate Total Price to Public of the Units or $250,000
($287,500 if the Underwriters' over-allotment option is exercised in full).
The Company has agreed to sell to the Underwriters, for $50.00, five-year
warrants to purchase 250,000 shares of Common Stock of the Company at a price
per share equal to 120% of the Price to Public (the "Underwriter's Warrant").
The Underwriters' Warrant is exercisable commencing one year from the Effective
Date and for a period of four years thereafter. The Underwriters' Warrant
contains anti-dilution provisions providing for appropriate adjustments to the
exercise price and the number of shares on the occurrence of certain events. The
shares of Common Stock received upon exercise of the Underwriters' Warrant may
participate in any securities registration by the Company, at the Company's
expense, during the term of the Warrant and for two years thereafter unless and
to the extent that, in the judgment of the underwriter of such offering, the
market for the securities to be sold by the Company would be adversely affected
thereby. In addition, the holders of such shares have a one-time right to demand
registration of the shares during the term of the Warrant, at the Company's
expense, if and when registration of the Company's securities on Form S-3
becomes available under the 1933 Act. The Underwriters' Warrant also has a
cashless exercise option. Any profits realized by the Underwriters upon the sale
of the Underwriters' Warrant or the securities issuable upon exercise thereof
may be deemed to constitute additional underwriting compensation.
In November 1996 through July 1997, the Company sold an aggregate of
2,162,889 shares of Common Stock in two private placements in which the
Representative acted as selling agent. The Representative received agent's
commissions of approximately $597,616 and warrants to purchase an aggregate of
199,205 shares of Common Stock exercisable at $3.75 per share.
At the request of the Company, up to 10% of the Units offered hereby may be
reserved for sale to persons designated by the Company. The price of such Units
will be the Price to Public set forth on the cover of this Prospectus. Other
than one director and officer that intends to purchase up to 6,000 Units
directly or through family trusts, no other officers, directors, principal
shareholders, or promoters or their affiliates are expected to purchase any of
such reserved Units.
Prior to this Offering, there has been no public market for the shares.
Consequently, the Price to Public of the Units and the exercise price of the
Class A Warrants were arbitrarily determined through negotiation between the
Company and the Representative and bears no relation to the Company's current
earnings, book value, net worth, financial statement criteria of value, the
history of and prospects for the industry in which the Company principally
competes or the capability of the Company's management. There can be no
assurance that the price at which the Units, the Class A Warrants or the Common
Stock will sell in the public market after this Offering will not be lower than
the price at which they are sold by the Underwriters.
34
<PAGE> 36
The foregoing is a summary of the material provisions of the Underwriting
Agreement and the Underwriters' Warrant. Copies of such documents have been
filed as exhibits to the Registration Statement of which this Prospectus is a
part.
LEGAL MATTERS
The validity of the Units offered hereby will be passed upon for the
Company by Maslon Edelman Borman & Brand, LLP, Minneapolis, Minnesota. William
M. Mower, a partner of Maslon Edelman Borman & Brand, is a partner of Trakehner
Holdings, Inc., which company has provided a $200,000 working capital loan to
the Company. Certain legal matters relating to the sale of the Units of Common
Stock will be passed upon for the Underwriters by Doherty Rumble & Butler, P.A.,
Minneapolis, Minnesota.
EXPERTS
The financial statements of Hotel Discovery, Inc. at December 29, 1996 and
for each of the two years in the period ended December 29, 1996 appearing in
this Prospectus and Registration Statement have been audited by Ernst & Young,
LLP, independent auditors, as set forth in their report appearing elsewhere
herein and are included in reliance upon such report given upon the authority of
such firm as experts in accounting and auditing.
ADDITIONAL INFORMATION
The Company is not a reporting company under the Securities Exchange Act of
1934, as amended. The Company has filed with the Washington, D.C. Office of the
Securities and Exchange Commission (the "Commission") a Registration Statement
on Form SB-2 under the Act with respect to the Common Stock offered hereby. This
Prospectus filed as a part of the Registration Statement does not contain all of
the information contained in the Registration Statement and the exhibits
thereto, certain portions of which have been omitted in accordance with the
rules and regulations of the Commission. For further information with respect to
the Company and the securities offered hereby, reference is made to such
Registration Statement including the exhibits and schedules thereto. Statements
contained in this Prospectus as to the contents of any contract, agreement or
other documents are not necessarily complete, and in each instance, reference is
made to such contract or other document filed as an exhibit to the Registration
Statement, each such statement being qualified in all respects by such
reference. The Registration Statement and exhibits may be inspected without
charge and copied at the Washington office of the Commission, 450 Fifth Street,
N.W., Washington, DC 20549, and copies of such material may be obtained at
prescribed rates from the Commission's Public Reference Section at the same
address.
35
<PAGE> 37
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Auditors.............................. F-1
Audited Financial Statements:
Balance Sheet............................................. F-2
Statements of Operations.................................. F-3
Statements of Shareholders' Equity........................ F-4
Statements of Cash Flows.................................. F-5
Notes to Financial Statements............................... F-6
</TABLE>
36
<PAGE> 38
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors and
Shareholders of Hotel Discovery, Inc.,
We have audited the accompanying balance sheet of Hotel Discovery, Inc. as
of December 29, 1996 and the related statements of operations, shareholders'
equity, and cash flows for the years ended December 31, 1995 and December 29,
1996. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Hotel Discovery, Inc. at
December 29, 1996 and the results of its operations and its cash flows for the
years ended December 31, 1995 and December 29, 1996 in conformity with generally
accepted accounting principles.
ERNST & YOUNG, LLP
Cincinnati, Ohio
August 20, 1997
F-1
<PAGE> 39
HOTEL DISCOVERY, INC.
BALANCE SHEET
<TABLE>
<CAPTION>
DECEMBER 29, JUNE 29,
1996 1997
------------ --------
(UNAUDITED)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................. $2,707,561 $ 1,998,056
Inventory................................................. 138,757 131,987
Other current assets...................................... 91,575 205,936
---------- -----------
Total current assets................................... 2,937,893 2,335,979
---------- -----------
PROPERTY AND EQUIPMENT
Building.................................................. 1,900,547 1,900,547
Leasehold improvements.................................... 1,452,635 1,584,677
Equipment and fixtures.................................... 902,334 1,218,538
---------- -----------
4,255,516 4,703,762
Less: accumulated depreciation............................ (25,000) (300,000)
---------- -----------
Total property and equipment, net...................... 4,230,516 4,403,762
---------- -----------
OTHER ASSETS................................................ 51,841 233,024
---------- -----------
Total assets........................................... $7,220,250 $ 6,972,765
========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Short-term notes payable.................................. $2,500,000 $ 2,800,000
Accounts payable.......................................... 803,885 751,197
Accrued expenses.......................................... 538,637 14,466
Salaries and wages payable................................ 174,882 36,583
Advances payable to principal shareholder................. 447,787 348,430
Current portion of long-term debt......................... 69,420 69,420
---------- -----------
Total current liabilities.............................. 4,534,611 4,020,096
LONG-TERM DEBT, LESS CURRENT PORTION........................ 924,795 895,870
CONVERTIBLE PROMISSORY NOTES PAYABLE........................ 150,000 150,000
---------- -----------
Total liabilities...................................... 5,609,406 5,065,966
---------- -----------
COMMITMENTS AND CONTINGENCIES (NOTE 7)
SHAREHOLDERS' EQUITY:
Common stock (.01 par value, 100,000,000 shares authorized
and 3,945,400 and 4,899,485 shares issued and
outstanding)........................................... 39,454 48,995
Additional paid-in capital................................ 5,013,126 7,581,231
Less: common stock subscribed............................. 0 (600,000)
Accumulated deficit....................................... (3,441,736) (5,123,427)
---------- -----------
Total shareholders' equity............................. 1,610,844 1,906,799
---------- -----------
Total liabilities and shareholders' equity............. $7,220,250 $ 6,972,765
========== ===========
</TABLE>
See accompanying notes
F-2
<PAGE> 40
HOTEL DISCOVERY, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED TWENTY-SIX WEEKS ENDED
--------------------------- ------------------------
DECEMBER 31, DECEMBER 29, JUNE 30, JUNE 29,
1995 1996 1996 1997
------------ ------------ -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C>
NET SALES................................... $ 0 $ 104,129 $ 0 $ 1,864,564
---------- ----------- ---------- -----------
COSTS AND EXPENSES:
Food and beverage costs................... 0 43,324 0 612,115
Labor and benefits........................ 0 85,407 0 1,036,302
Restaurant operating expenses............. 0 155,832 0 602,055
Depreciation and amortization............. 0 25,000 0 275,000
Selling, general and administrative
expenses............................... 14,775 138,209 44,122 765,573
Pre-opening and development costs......... 923,482 1,970,452 413,889 189,423
---------- ----------- ---------- -----------
Total costs and expenses............. 938,257 2,418,224 458,011 3,480,468
---------- ----------- ---------- -----------
LOSS FROM OPERATIONS........................ (938,257) (2,314,095) (458,011) (1,615,904)
OTHER INCOME (EXPENSE):
Interest (expense)........................ (2,209) (13,507) 0 (92,503)
Interest income........................... 0 0 10,950 26,716
---------- ----------- ---------- -----------
Total other income (expense)......... (2,209) (13,507) 10,950 (65,787)
---------- ----------- ---------- -----------
Net loss............................. $ (940,466) $(2,327,602) $ (447,061) $(1,681,691)
========== =========== ========== ===========
Shares used in per share calculations....... 3,362,611 4,355,187 4,286,100 5,058,240
========== =========== ========== ===========
Net loss per share.......................... $ (.28) $ (.53) $ (.10) $ (.33)
========== =========== ========== ===========
</TABLE>
See accompanying notes
F-3
<PAGE> 41
HOTEL DISCOVERY, INC.
STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL
------------------- PAID-IN COMMON STOCK ACCUMULATED
SHARES AMOUNT CAPITAL SUBSCRIBED DEFICIT TOTAL
------ ------ ---------- ------------ ----------- -----
<S> <C> <C> <C> <C> <C> <C>
BALANCE -- JANUARY 1, 1995..... 1,650,000 $16,500 $ 9,000 $ (25,500) $ (173,668) $ (173,668)
Issuance of shares........... 1,350,000 13,500 2,461,000 (1,750,000) -- 724,500
Cash received on stock
subscribed................. -- -- -- 830,000 -- 830,000
Net loss..................... -- -- -- -- (940,466) (940,466)
--------- ------- ---------- ----------- ----------- -----------
BALANCE -- DECEMBER 31, 1995... 3,000,000 30,000 2,470,000 (945,500) (1,114,134) 440,366
Issuance of shares........... 945,400 9,454 2,543,126 -- -- 2,552,580
Cash received on stock
subscribed................. -- -- -- 945,500 -- 945,500
Net loss..................... -- -- -- -- (2,327,602) (2,327,602)
--------- ------- ---------- ----------- ----------- -----------
BALANCE -- DECEMBER 29, 1996... 3,945,400 39,454 5,013,126 -- (3,441,736) 1,610,844
Issuance of shares
(unaudited)................ 947,685 9,477 2,548,969 (690,000) -- 1,868,446
Shares issued for services
(unaudited)................ 6,400 64 19,136 -- -- 19,200
Cash received on stock
subscribed (unaudited)..... -- -- -- 90,000 -- 90,000
Net loss (unaudited)......... -- -- -- -- (1,681,691) (1,681,691)
--------- ------- ---------- ----------- ----------- -----------
BALANCE -- JUNE 29, 1997
(UNAUDITED)........ 4,899,485 $48,995 $7,581,231 $ (600,000) $(5,123,427) $ 1,906,799
========= ======= ========== =========== =========== ===========
</TABLE>
See accompanying notes
F-4
<PAGE> 42
HOTEL DISCOVERY, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED TWENTY-SIX WEEKS ENDED
--------------------------- -----------------------
DECEMBER 31, DECEMBER 29, JUNE 30, JUNE 29,
1995 1996 1996 1997
------------ ------------ -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C>
OPERATING ACTIVITIES:
Net loss.................................. $ (940,466) $(2,327,602) $(447,061) $(1,681,691)
Depreciation and amortization.......... 0 25,000 0 275,000
Shares issued for services............. 0 0 0 19,200
Changes in operating assets and
liabilities --
Inventory............................ 0 (138,757) 0 6,770
Other current assets................. 20,000 (71,575) 20,000 (114,361)
Other assets......................... 0 0 34,527 (177,183)
Accounts payable..................... (12,083) 775,228 148,731 (52,689)
Accrued expenses and salaries and
wages payable..................... 0 713,519 0 (662,470)
---------- ----------- --------- -----------
Net cash used for operating
activities...................... (932,549) (1,024,187) (243,803) (2,387,424)
---------- ----------- --------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment....... (811,969) (3,443,544) (996,684) (448,245)
Payment of organization costs............. 0 0 (165) (4,000)
---------- ----------- --------- -----------
Net cash used for investing
activities...................... (811,969) (3,443,544) (996,849) (452,245)
---------- ----------- --------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Advances (payments) from shareholder...... 637,221 (415,103) (67,185) (99,357)
Net increase in short-term notes
payable................................ 0 2,500,000 0 300,000
Proceeds from issuance of bank note....... 0 1,000,000 0 0
Issuance of convertible notes payable..... 0 150,000 100,000 0
Proceeds from issuance of equity.......... 724,980 2,552,580 0 1,868,446
Principal repayments on bank note......... 0 (5,785) 0 (28,925)
Payments received on stock
subscriptions.......................... 830,000 945,500 915,000 90,000
---------- ----------- --------- -----------
Net cash provided by financing
activities...................... 2,192,201 6,727,192 947,815 2,130,164
---------- ----------- --------- -----------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS............................... 447,683 2,259,461 (292,837) (709,505)
CASH AND CASH EQUIVALENTS, BEGINNING........ 417 448,100 448,100 2,707,561
---------- ----------- --------- -----------
CASH AND CASH EQUIVALENTS, ENDING........... $ 448,100 $ 2,707,561 $ 155,263 $ 1,998,056
========== =========== ========= ===========
SUPPLEMENTAL CASH FLOWS INFORMATION:
Cash paid for interest.................... $ 60,000 $ 45,000 $ 0 $ 65,787
Cash paid for income taxes................ $ 0 $ 0 $ 0 $ 0
</TABLE>
See accompanying notes
F-5
<PAGE> 43
HOTEL DISCOVERY, INC.
NOTES TO THE FINANCIAL STATEMENTS
DECEMBER 29, 1996 AND DECEMBER 31, 1995
1. DESCRIPTION OF THE BUSINESS AND FORMATION OF THE COMPANY
Hotel Discovery, Inc. (the "Company") owns and operates one restaurant in
Cincinnati Ohio (the "Kenwood Unit"). Prior to the opening of this restaurant on
December 19, 1996, the Company was in the development stage. In August 1997, the
Company reincorporated in the State of Minnesota and changed its name from Hotel
Mexico, Inc. to Hotel Discovery, Inc. and increased the number of authorized
shares to 100,000,000.
On November 13, 1996, the Company was reorganized after Hotel Mexico, Inc.
was incorporated in the state of Ohio and became the owner of Hotel Mexico,
Inc.-predecessor and all the net assets of Kenwood Restaurant Limited
Partnership. The result of the reorganization is that the owners of Hotel
Mexico, Inc.-predecessor and the Partnership became the owners of all the
outstanding stock of Hotel Mexico, Inc.-successor. The reincorporation and
reorganization have been reflected retroactively and all share and per share
amounts have been adjusted.
A demonstration and test restaurant, owned by the principal shareholder of
the Company, which opened in June 1994, was used in the development of the Hotel
Discovery concept. This restaurant operates using the Hotel Mexico name under a
license agreement with the Company.
2. SIGNIFICANT ACCOUNTING POLICIES
INTERIM FINANCIAL DATA
The unaudited balance sheet as of June 29, 1997 and the related statements
of operations, cash flows and shareholders' equity for the twenty-six week
period ended June 29, 1997 have been prepared in accordance with the accounting
policies in effect as of December 29, 1996 and for the two years ended December
29, 1996. In the opinion of management such interim financial statements contain
all adjustments (all of which are normal and recurring in nature) necessary to
present fairly the Company's financial position and results of operations and
cash flows. The results of operations for the twenty-six week period ended June
29, 1997 is not necessarily indicative of the results to be expected for the
full year.
FISCAL YEAR
The Company has adopted a 52/53 week accounting period ending on the Sunday
nearest December 31 of each year.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents includes cash on hand, bank deposits and liquid
money market investments with maturities of 90 days or less.
INVENTORY
Restaurant food and supplies inventories are stated at the lower of cost
(determined using the first-in first-out method) or market.
ADVERTISING COSTS
The Company expenses advertising costs as incurred. Advertising expense was
$0 and $98,673 for 1995 and 1996.
F-6
<PAGE> 44
HOTEL DISCOVERY, INC.
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
PRE-OPENING AND DEVELOPMENT COSTS
Pre-opening costs such as staff training, advertising, rent, and concept
development, menu design, consultant and similar costs of a development nature
are expensed as incurred.
PROPERTY AND EQUIPMENT
Property and equipment acquired are recorded at cost and includes interest
on funds borrowed to finance construction. Capitalized interest in 1996 was
$45,000. Improvements are capitalized, while repair and maintenance expenses are
charged to operations as incurred. Leasehold improvements are being amortized
using the straight line method over the shorter of the estimated useful life or
the lease term. Furniture and equipment are being depreciated on a straight-line
method over 5 to 15 years.
INCOME TAXES
The Company accounts for income taxes using the liability method to
recognize deferred income tax assets and liabilities. Deferred income taxes are
determined based upon the temporary differences between the financial statement
carrying amounts and the tax basis of assets and liabilities.
STOCK OPTIONS
As permitted by Statement of Financial Accounting Standards No. 123,
Accounting for Stock Based Compensation, the Company has chosen to account for
stock option grants using the intrinsic value method prescribed in APB opinion
No. 25, Accounting for Stock Issued to Employees. No options were granted during
the two years ended December 29, 1996.
RECENTLY ISSUED ACCOUNTING STANDARDS
During 1996 the Company adopted Financial Accounting Standards Board
Statement No. 121 "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of" (Statement 121). Statement 121 establishes
accounting standards for the recognition and measurement of impairment of
long-lived assets, certain identifiable intangibles, and goodwill either to be
held or disposed of. The adoption of Statement 121 did not have an impact on the
Company's financial position or results of operations.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and the
accompanying notes. Actual results could differ from the estimates.
NET LOSS PER COMMON SHARE
Net loss per common share is computed by dividing net loss by the weighted
average number of common shares outstanding and dilutive common equivalent
shares assumed to be outstanding during each period. Common equivalent shares
consist of dilutive options to purchase common stock. However, pursuant to
certain rules of the Securities and Exchange Commission, the calculation also
includes equity securities, including options and warrants, issued within one
year of an initial public offering with an issue price less than the initial
public offering price, even if the effect is anti-dilutive. The treasury stock
method was used in determining the dilutive effect of such issuances.
F-7
<PAGE> 45
HOTEL DISCOVERY, INC.
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
The Company will adopt in the fiscal year ending December 28, 1997,
Statement of Financial Accounting Standards No. 128 "Earnings per Share" (SFAS
No. 128), which was issued in February 1997. SFAS No. 128 requires disclosures
of basic earnings per share (EPS) and diluted EPS, which replaces the existing
primary EPS and fully diluted EPS, as defined by APB No. 15. Basic EPS is
computed by dividing net income by the weighted average number of shares of
Common Stock, outstanding during the year. Dilutive EPS is computed similar to
EPS as previously reported provided that, when applying the treasury stock
method to common equivalent shares, the Company must use its average share price
for the period rather than the more dilutive greater of the average share price
or end-of-period share price required by APB No. 15.
3. DEBT
The Company borrowed $1,000,000 in August 1996 under a leasehold mortgage
term loan from a bank. The loan bears interest at 9.06%, payments of principal
and interest are due monthly in the amount of $5,785 through October 1999 at
which time the remaining balance is due in full.
In December 1996, the Company borrowed an additional $2,500,000 under a
mortgage term loan from a bank. The loan bears interest at 5.94%, payments of
interest only are due through January 1998 at which time the entire principal is
due. The loan has been classified as short-term as it was repaid in full in
January 1997.
The loans are secured by the leasehold mortgage and substantially all
assets of the Kenwood Unit. Additionally the principal shareholder has
personally guaranteed the loans. Related loan agreements require minimum working
capital, tangible net worth and debt coverage ratios and restrict additional
indebtedness or asset sales. The fair value of the Company's debt approximates
market.
Aggregate maturities of long-term debt are as follows:
<TABLE>
<S> <C>
1997........................................................ $ 69,420
1998........................................................ 69,420
1999........................................................ 855,375
--------
$994,215
========
</TABLE>
In May and June 1997, the Company borrowed $2,800,000 under loan agreements
with banks. The loans have been classified as short-term as they were repaid in
full in July 1997.
4. CONVERTIBLE PROMISSORY NOTES PAYABLE
In June and July 1996, the Company executed three convertible promissory
notes in the total amount of $150,000. The notes mature on July 1, 1999, bearing
interest at 8.01% per annum. The notes are convertible into 39,600 shares of the
Company's common stock at maturity, at the payee's option.
5. INCOME TAXES
Deferred tax assets and liabilities are recognized based on the difference
between financial statement amounts and tax carrying values of assets and
liabilities. Due to the limited history of the Company's operations, a valuation
allowance was established for the net deferred tax assets. For the two years
ending
F-8
<PAGE> 46
HOTEL DISCOVERY, INC.
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
5. INCOME TAXES (CONTINUED)
December 29, 1996, the Company did not record a benefit from income taxes.
Significant components of the Company's deferred tax assets and liabilities are
as follows at December 29, 1996:
<TABLE>
<S> <C>
Deferred tax assets:
Net operating loss carryforward........................... $ 685,700
Deferral of pre-opening expenses.......................... 336,200
Other tax deferred items.................................. 67,200
----------
Total deferred tax assets................................... 1,089,100
Less: valuation allowance................................... 1,089,100
----------
Net deferred tax assets..................................... -0-
Deferred tax liabilities.................................... -0-
----------
Net deferred tax assets..................................... $ -0-
==========
</TABLE>
The Company's net operating loss carryforward expires in 2011.
The following is a reconciliation of the tax expense recorded in these
financial statements to the expected tax rate based on statutory rates.
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
---------------------------------
DECEMBER 29, DECEMBER 31,
1996 1995
------------ ------------
<S> <C> <C>
Net loss.......................................... $(2,327,602) $(940,466)
Expected rate..................................... 40% 40%
----------- ---------
Expected tax benefit.............................. (931,000) (376,200)
Tax loss attributable to predecessor entities..... -- 218,100
Valuation allowance............................... 931,000 158,100
----------- ---------
Tax benefit recognized............................ $ -0- $ -0-
=========== =========
</TABLE>
6. SHAREHOLDERS' EQUITY
STOCK OPTION PLAN
In January 1997, the Board of Directors adopted the 1997 Stock Option and
Incentive Compensation Plan (the "Plan") and reserved 500,000 common shares for
issuance under the Plan. The Plan is administered by a stock option committee of
the Board of Directors which has the discretion to determine the number of
shares granted, the price of the option, the term of the option and the time
period over which the option may be exercised.
As of August 20, 1997 the Company had granted 452,666 options to purchase
the Company's stock for $3.00 per share under the Plan. Additionally, 25,000
options have been granted to a Director outside of the Plan at $3.34 per share.
As of August 20, 1997, 50,000 options are exercisable, the remaining options
become exercisable over the next three years. The total options that will be
exercisable at each year end are: 1997--50,000, 1998--315,999, 1999--459,332 and
2000--477,666.
WARRANTS
In 1997, the Company granted 214,995 warrants. The warrants are immediately
exercisable at a price of $3.75 per share and expire in five years.
F-9
<PAGE> 47
HOTEL DISCOVERY, INC.
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
6. SHAREHOLDERS' EQUITY (CONTINUED)
CAPITAL STOCK
In June 1997, in connection with the Company's reincorporation in
Minnesota, the authorized capital of the Company increased to 100,000,000
shares. As allowed under Minnesota law the Board of Directors is authorized to
designate and issue shares in such classes or series (including classes or
series of preferred stock) as it deems appropriate and to establish the rights,
preferences, and privileges of such shares.
7. COMMITMENTS AND CONTINGENCIES
The Company has entered into a long-term operating ground lease, which
expires in 2012, for the Kenwood Unit. The agreement requires the Company to pay
all maintenance, taxes, operating expenses and a percentage (4%) of sales over
stated thresholds.
The future minimum base rent payments are:
<TABLE>
<S> <C>
1997........................................................ $ 153,996
1998........................................................ 153,996
1999........................................................ 153,996
2000........................................................ 153,996
2001........................................................ 153,996
Thereafter.................................................. 1,770,960
----------
$2,540,940
==========
</TABLE>
On August 14, 1997, the Company entered into a twelve year lease with Mall
of America Company for a 16,000 square-foot restaurant space in Mall of America.
The minimum annual rent is $405,375 plus a percentage rent for a total annual
rent of up to 6% of gross sales. The minimum rent has been waived for the first
year.
8. RELATED PARTY TRANSACTIONS
The principal shareholder, director and executive officer provided
essentially all of the Company's working capital in the development stage. The
working capital was provided by direct advances to the Company and reimbursement
for various business costs and expenses incurred by the shareholder on behalf of
the Company. During the years ended December 29,1996 and December 31, 1995 the
maximum amount of such indebtedness outstanding at any time was $1,213,469, and
$862,891, respectively. At December 29,1996 and December 31, 1995, the amount
outstanding of such indebtedness was $447,787 and $862,891. Included in these
amounts were concept development costs reimbursed to a demonstration restaurant
owned and operated by the principal shareholder in the amount of $278,101 for
the year ended December 29, 1996 and $433,996 for the year ended December 31,
1995. The Company pays interest at 11.5% on these advances. There are no fixed
repayment terms on the advances.
9. SALE OF SHARES AND PROPOSED TRANSACTION
In July 1997, the Company sold an additional 499,804 common shares at $3.00
per share.
The Board of Directors has initiated the completion of a public offering.
F-10
<PAGE> 48
[PHOTOGRAPHS]
<PAGE> 49
======================================================
NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS IN CONNECTION WITH THE OFFER MADE BY THIS PROSPECTUS, AND, IF GIVEN
OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING
BEEN AUTHORIZED BY THE COMPANY OR THE UNDERWRITER. NEITHER THE DELIVERY OF THIS
PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL UNDER ANY CIRCUMSTANCES CREATE ANY
IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE
THE DATE HEREOF. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER OR SOLICITATION BY
ANYONE IN ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION IS NOT AUTHORIZED
OR IN WHICH THE PERSON MAKING SUCH OFFER OR SOLICITATION IS NOT QUALIFIED TO DO
SO OR TO ANYONE TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION.
---------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary...................... 3
Risk Factors............................ 6
Use of Proceeds......................... 11
Dilution................................ 12
Dividend Policy......................... 13
Capitalization.......................... 13
Management's Discussion and Analysis of
Financial Condition and Results of
Operations............................ 14
Business................................ 17
Management.............................. 24
Reorganization.......................... 26
Certain Transactions.................... 27
Principal Shareholders.................. 29
Description of Securities............... 30
Underwriting............................ 33
Legal Matters........................... 34
Experts................................. 35
Additional Information.................. 35
Index to Financial Statements........... 36
</TABLE>
----------------------------
UNTIL , 1997 (25 DAYS AFTER THE DATE OF THE PROSPECTUS), ALL
DEALERS EFFECTING TRANSACTIONS IN THE REGISTERED SECURITIES, WHETHER OR NOT
PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN
ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.
======================================================
======================================================
HOTEL DISCOVERY, INC. LOGO
2,500,000 UNITS
CONSISTING OF 2,500,000 SHARES
OF COMMON STOCK AND 2,500,000
REDEEMABLE CLASS A WARRANTS
------------------------------
PROSPECTUS
------------------------------
RJ STEICHEN & COMPANY LOGO
, 1997
======================================================
<PAGE> 50
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The Company is governed by Minnesota Statutes Chapter 302A. Minnesota
Statutes Section 302A.521 provides that a corporation shall indemnify any person
made or threatened to be made a party to any proceeding by reason of the former
or present official capacity of such person against judgments, penalties, fines,
including, without limitation, excise taxes assessed against such person with
respect to an employee benefit plan, settlements, and reasonable expenses,
including attorney's fees and disbursements, incurred by such person in
connection with the proceeding, if, with respect to the acts or omissions of
such person complained of in the proceeding, such person has not been
indemnified by another organization or employee benefit plan for the same
expenses with respect to the same acts or omissions; acted in good faith;
received no improper personal benefit and Section 302A.255, if applicable, has
been satisfied; in the case of a criminal proceeding, had no reasonable cause to
believe the conduct was unlawful; and in the case of acts or omissions by
persons in their official capacity for the corporation, reasonably believed that
the conduct was in the best interests of the corporation, or in the case of acts
or omissions by persons in their capacity for other organizations, reasonably
believed that the conduct was not opposed to the best interests of the
corporation.
As permitted by Section 302A.251 of the Minnesota Statutes, the Articles of
Incorporation of the Company provide that a director shall have no personal
liability to the Company and its shareholders for breach of his fiduciary duty
as a director, to the fullest extent permitted by law.
The Underwriting Agreement contains provisions under which the small
business issuer on the one hand, and the Underwriter, on the other hand, have
agreed to indemnify each other (including officers and directors of the small
business issuer and the Underwriter and any person who may be deemed to control
the small business issuer or the Underwriter) against certain liabilities,
including liabilities under the Securities Act of 1933, as amended.
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The estimated expenses in connection with the issuance and distribution of
the securities registered hereby, other than underwriting discounts and fees,
are set forth in the following table:
<TABLE>
<S> <C>
SEC registration fee........................................ $ 10,007
NASD filing fee............................................. 3,875
Nasdaq listing fee.......................................... 10,000
Legal fees and expenses..................................... 70,000
Accounting fees and expenses................................ 40,000
Blue Sky fees and expenses.................................. 20,000
Transfer agent fees and expenses............................ 1,000
Printing and engraving expenses............................. 60,000
Miscellaneous............................................... 5,118
--------
Total..................................................... $220,000
========
</TABLE>
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES.
In connection with the initial capitalization of the Company in January
1994, the Company sold an aggregate of 1,750 shares of Common Stock to Stephen
D. King and Andrew Green, both "accredited investors" as defined in Regulation D
of the Securities Act of 1933, as amended (the "Securities Act") for an
aggregate purchase price of $500. Such shares were split 825-to-1 in November
1996, and now represent 1,443,750 shares of the Company. The Company believes
that such sale of such Common Stock was exempt from registration pursuant to
Section 4(2) of the Securities Act and Rules 505 and/or 506 under Regulation D
of the Securities Act.
II-1
<PAGE> 51
In October 1995, the Company and Kenwood Restaurant Limited Partnership, an
Ohio limited partnership formed in June 1995, raised gross proceeds of $2.5
million in a private placement of 25 units each unit consisting of 10 shares of
Common Stock of the Company (which shares were split 825-to-1 in November 1996,
and now represent 8,250 shares per unit, or an aggregate of 206,250 shares of
the Company) and two (2) limited partnership interests in the Kenwood Restaurant
Limited Partnership to 19 "accredited investors" for a purchase price of
$100,000 per unit. The Company believes that such sale of such securities was
exempt from registration pursuant to Section 4(2) of the Securities Act and
Rules 505 and/or 506 under Regulation D of the Securities Act. The Company
believes that each investor was sophisticated and had access to information
concerning the issuer.
In a reorganization of the Company which occurred in November 1996, the
Kenwood Restaurant Limited Partnership contributed all of its assets to the
Company, including the Kenwood Unit, in exchange for 1,350,000 shares of Common
Stock of the Company. The Company believes that such sale of such securities was
exempt from registration pursuant to Section 4(2) of the Securities Act and
Rules 505 and/or 506 under Regulation D of the Securities Act. The Company
believes that each investor was sophisticated and had access to information
concerning the Issuer.
From November 1996 through July 1997, the Company completed private
placements to 161 "accredited investors" of an aggregate of 2,392,889 shares of
Common Stock at $3.00 per share. The net proceeds to the Company were
approximately $5.9 million. The Company believes that such sales of Common Stock
were exempt from registration pursuant to Section 4(2) of the Securities Act and
Rule 506 under Regulation D of the Securities Act.
II-2
<PAGE> 52
ITEM 27. EXHIBITS.
EXHIBIT INDEX
<TABLE>
<C> <S>
1.1 Form of Underwriting Agreement (with form of Underwriters'
Warrant)
1.2 Form of Agreement Among Underwriters
3.1 Articles of Incorporation*
3.2 By-laws*
4 Form of Warrant Agreement*
5 Opinion of Maslon Edelman Borman & Brand, LLP*
10.1 Indenture of Lease dated November 9, 1994 between Phillip E.
Stephens, Trustee and Kenwood Restaurant, Inc.; First
Amendment to Lease dated May 3, 1995 by and between Phillip
E. Stephens, Trustee and Kenwood Restaurant, Inc.; by Second
Amendment to Lease dated 1996 between Phillip E.
Stephens, Trustee and Kenwood Restaurant Limited
Partnership; Second Amendment to Agreement dated October 18,
1996 between Phillip E. Stephens, Trustee and Kenwood
Restaurant Limited Partnership; and Addendum to Second
Amendment to Lease dated October 18, 1996 between Phillip E.
Stephens, Trustee and Kenwood Restaurant Limited Partnership
(Kenwood Unit)*
10.2 Lease dated August 4, 1997 between Mall of America Company
and Hotel Mexico, Inc. (Mall of America Unit)*
10.3 Loan Agreement by and among Kenwood Restaurant Limited
Partnership and PNC Bank, Ohio, National Association*
10.4 Company's 1997 Stock Option and Compensation Plan*
10.5 Employment Agreement between the Company and Ronald K.
Fuller dated March 17, 1997*
10.6 Amendment to Company's 1997 Stock Option and Compensation
Plan*
10.7 Second Amendment to Company's 1997 Stock Option and
Compensation Plan
24.1 Consent of Maslon Edelman Borman & Brand, LLP (included in
Exhibit 5)*
24.2 Consent of Ernst & Young LLP*
25 Powers of Attorney*
27.1 Financial Data Schedule*
</TABLE>
- ---------------
* Previously filed.
II-3
<PAGE> 53
ITEM 28. UNDERTAKINGS.
Insofar as indemnification for liabilities arising under the Act may be
permitted to directors, officers and controlling persons of the small business
issuer pursuant to the foregoing provisions or otherwise, the small business
issuer has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the small business issuer of
expenses incurred or paid by a director, officer or controlling person of the
small business issuer in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the small business issuer will,
unless in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the Act and
will be governed by the final adjudication of such issue.
The undersigned small business issuer hereby undertakes that it will:
(1) File, during any period in which it offers or sells securities, a
post-effective amendment to this registration statement to (i) include any
prospectus required by Section 10(a)(3) of the Securities Act; (ii) reflect
in the prospectus any facts or events which, individually or together,
represent a fundamental change in the information in the registration
statement; and (iii) include any additional or changed material information
on the plan of distribution.
(2) For determining any liability under the Securities Act, treat the
information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in a form
of prospectus filed by the small business issuer under Rule 424(b)(1) or
(4) or Rule 497(h) under the Securities Act as part of this registration
statement as of the time the Commission declared it effective.
(3) For determining any liability under the Securities Act, treat each
post-effective amendment that contains a form of prospectus as a new
registration statement for the securities offered in the registration
statement, and that offering of the securities at that time as the initial
bona fide offering of those securities.
The small business issuer hereby undertakes to provide to the Underwriters
at the closing specified in the Underwriting Agreement certificates in such
denominations and registered in such names as required by the Underwriters to
permit prompt delivery to each purchaser.
II-4
<PAGE> 54
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing on Form SB-2 and has authorized this Amendment
No. 3 to the Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized in the City of Minneapolis, State of
Minnesota, on October 17, 1997.
HOTEL DISCOVERY, INC.
By /s/ STEPHEN D. KING
---------------------------------
Stephen D. King
Chairman of the Board and
Chief Executive Officer
In accordance with the requirements of the Securities Act of 1933, this
Amendment No. 3 to the Registration Statement has been signed by the following
persons in the capacities and on the dates stated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ STEPHEN D. KING Chairman of the Board and Chief October 17, 1997
- ----------------------------------- Executive Officer
Stephen D. King
/s/ RONALD K. FULLER President, Chief Operating Officer October 17, 1997
- ----------------------------------- and Director (Chief Financial and
Ronald K. Fuller Chief Accounting Officer)
/s/ THOMAS W. ORR Director October 17, 1997
- -----------------------------------
Thomas W. Orr
/s/ MICHAEL L. KRIENIK Director October 17, 1997
- -----------------------------------
Michael L. Krienik
/s/ MARTIN J. O'DOWD Director October 17, 1997
- -----------------------------------
Martin J. O'Dowd
</TABLE>
II-5
<PAGE> 1
2,500,000 UNITS CONSISTING OF 2,500,000 SHARES OF COMMON STOCK
AND
2,500,000 REDEEMABLE CLASS A COMMON STOCK PURCHASE WARRANTS
HOTEL DISCOVERY, INC.
UNDERWRITING AGREEMENT
____________, 1997
R. J. Steichen & Company
As Representative of the
Several Underwriters
One Financial Plaza
120 South Sixth Street
Minneapolis, MN 55402
Ladies and Gentlemen:
Hotel Discovery, Inc., an Minnesota corporation (the "COMPANY"), proposes
to issue and sell to you (the "REPRESENTATIVE") and the other Underwriters
named in Schedule I hereto, an aggregate of 2,500,000 Units ("UNITS"), each
Unit consisting of one share of Common Stock ("COMMON STOCK") and one
Redeemable Class A Common Stock Purchase Warrant (the "WARRANT") exercisable
for a period of four (4) years commencing on the effective date of the
Registration Statement to purchase one share of Common Stock of the Company at
a price of $6.50 per share. The Warrants shall be immediately exercisable and
are detachable and transferable commencing ten (10) trading days after the
effective date of the Registration Statement under the Act or at any earlier
time agreed to by the Underwriters and the Company. The Warrants shall be
redeemable at the option of the Company at $.01 per Warrant at any time ninety
(90) days after the effective date and upon thirty (30) days' prior notice in
writing of the Company's intention to redeem, provided that the average closing
bid price for the Common Stock exceeds $7.00 per share (subject to adjustment)
for any 14 consecutive trading days prior to such notice, on such other terms
set forth in the Preliminary Prospectus (defined herein).
The 2,500,000 Units to be purchased from the Company are referred to
herein as the "FIRM UNITS." In addition, solely for the purpose of covering
overallotments with respect to the Firm Units, the Company proposes to grant to
the Underwriters, for their account, the option to purchase up to an additional
375,000 Units (the "OPTION UNITS"). The Firm Units and any Option Units
purchased pursuant to this Underwriting Agreement are herein referred to as the
"UNITS."
<PAGE> 2
The Company hereby confirms its agreement with respect to the purchase of
the Units by the Underwriters.
1. REPRESENTATIONS AND WARRANTIES OF THE COMPANY. The Company
represents and warrants to, and agrees with, the several Underwriters as
follows:
(a) The Company has prepared in conformity in all material
respects with the requirements of the Securities Act of 1933, as
amended (the "ACT"), and the applicable rules and regulations of the
Securities and Exchange Commission (the "COMMISSION") thereunder, and has
filed with the National Office of the Commission in Washington, D.C., a
registration statement on Form SB-2, File No. 333-34235, including a
Prospectus relating to the Units, and will file with the Commission before
the effective date of the registration statement one or more amendments
thereto. Copies of such registration statement and amendments (including
all forms of the preliminary prospectus) have been delivered to you. Any
such preliminary prospectus (as described in Rule 430 under the Act)
included at any time as part of such registration statement is herein
called a "PRELIMINARY PROSPECTUS." As used herein, the term "REGISTRATION
STATEMENT" shall, except where the context otherwise requires, mean said
registration statement (and all exhibits thereto) as amended by all
amendments filed prior to its effective date; and the term "PROSPECTUS"
shall, except where the context otherwise requires, mean said final
prospectus on file with the Commission when the Registration Statement
becomes effective (except that, if the prospectus filed by the Company
pursuant to Rule 424(b) under Act shall differ from the prospectus
included in the Registration Statement, the term "PROSPECTUS" shall,
except where the context otherwise requires, mean the prospectus so filed
pursuant to Rule 424(b) from and after the date on which it shall have
been first used.) Reference herein to the Registration Statement, to any
Preliminary Prospectus, to the Prospectus or to any amendment of or
supplement to the Prospectus includes all documents and information
incorporated therein by reference.
(b) The Commission has not issued any order preventing or
suspending the use of any Preliminary Prospectus, and each Preliminary
Prospectus, at the time of filing thereof with the Commission, did not
contain any untrue statement of a material fact or omit to state a
material fact required to be stated therein or necessary in order to make
the statements therein, in the light of the circumstances under which they
were made, not misleading; PROVIDED, HOWEVER, that none of the
representations and warranties in this subparagraph shall apply to
statements in, or omissions from, any Preliminary Prospectus which are
based upon and conform to written information furnished to the Company by
or on behalf of you specifically for use in the preparation thereof.
(c) When the Registration Statement becomes effective and at all
times subsequent thereto up to each Closing Date (defined hereinafter)
and upon the effective date of any post-effective amendment to the
Registration Statement, the Registration Statement and the Prospectus, and
any amendments thereof or supplements thereto, will in all material
respects conform to the requirements of the Act and of the applicable
rules
2
<PAGE> 3
and regulations of the Commission thereunder (the "RULES AND
REGULATIONS"). When the Registration Statement becomes effective and at
all times subsequent thereto, up to each Closing Date and the effective
date of any post-effective amendment to the Registration Statement,
neither the Registration Statement (as amended, if the Company shall have
filed with the Commission any post-effective amendment thereto), nor the
Prospectus, will include an untrue statement of a material fact or omit to
state any material fact required to be stated therein or necessary to make
the statements therein, in the light of the circumstances under which they
were made, not misleading; PROVIDED, HOWEVER, that the Company makes no
representations or warranties as to information contained in or omitted
from the Registration Statement or the Prospectus, or any such amendment
or supplement, in reliance upon and in conformity with written information
furnished to the Company by you specifically for use in the preparation
thereof. There is no contract or document required to be described in the
Registration Statement or Prospectus, or to be filed as an exhibit to the
Registration Statement, which was not described or filed as required.
(d) [Deleted]
(e) Ernst & Young, LLP, the accountants who have examined certain
financial statements and schedules of the Company, filed and to be
filed with the Commission as part of the Registration Statement and the
Prospectus, are independent public accountants within the meaning of the
Act and the Rules and Regulations. The financial statements of the
Company, together with related notes and summaries thereof, set forth in
the Registration Statement and Prospectus, in all material respects
present fairly the financial position and results of operations and
changes in financial position of the Company as of the dates and for the
periods indicated. All such financial statements (including the related
notes) have been prepared in accordance with generally accepted accounting
principles consistently applied throughout the periods concerned except as
may be otherwise stated therein.
(f) Subsequent to the respective dates as of which information is
given in the Registration Statement and Prospectus, and other
than as described in the Registration Statement and Prospectus, (i) the
Company has not incurred any material liabilities or obligations,
contingent or otherwise, or entered into any material transaction, except
obligations incurred in the ordinary course of business that in the
aggregate are not material; (ii) the Company has not paid or declared any
dividend or other distribution on its Common Stock; (iii) there has not
been any change in the Common Stock or increase in the long-term debt of
the Company (including any capitalized lease obligation), or any issuance
of options, warrants, or rights to purchase Common Stock of the Company,
or any material adverse change in the business, financial position,
results of operations, key personnel, capitalization, properties, or net
worth of the Company, considered as a whole; and (iv) no material loss or
damage (whether or not insured) to the property of the Company has been
sustained.
3
<PAGE> 4
(g) The Company has been duly incorporated and is validly existing
as a corporation in good standing under the laws of its jurisdiction of
incorporation, with full power and authority to own its properties and
conduct its business as it is currently being carried on and as described
in the Prospectus and is duly qualified to do business as a foreign
corporation and is in good standing in all states or jurisdictions in
which the ownership or lease of property or the conduct of its business
requires such qualification and in which the failure to so qualify would
have a material adverse effect on its business condition (financial or
other), or properties. The Company has all necessary and material
authorizations, approvals and orders of and from all governmental
regulatory officials and bodies to own its properties and conduct its
business as described in the Prospectus and is conducting its business in
substantial compliance with all applicable laws, rules and regulations of
the jurisdictions in which it is conducting business.
(h) The Company is not in violation of its articles of
incorporation, bylaws, or other governing documents and is not in
default in the performance of any obligation, agreement or condition
contained in any lease agreement or in any bond, debenture, note or any
other evidence of indebtedness or in any material contract, indenture, loan
agreement or license where such default would have a material adverse
effect on the business condition (financial or other) or properties of the
Company, considered as a whole which violation or default has not been
waived. The consummation of the transactions herein contemplated and the
fulfillment of the terms hereof will not conflict with or result in a
material breach of any of the terms or provisions of, or constitute a
material default under, the articles of incorporation or bylaws, or other
governing documents of the Company, or any indenture, mortgage, agreement
or other instrument to which the Company is a party or by which it is
bound, or to which any property of the Company is subject, or conflict with
or violate any law or any order, rule or regulation, applicable to the
Company of any court, or of any federal or state regulatory body or
administrative agency, having jurisdiction over the Company or any of its
properties which conflict, breach or default has not been waived.
(i) The Company will, as of each Closing Date, have the duly
authorized and outstanding capitalization set forth in the Prospectus.
The outstanding Common Stock of the Company is duly authorized and validly
issued, fully paid and nonassessable. The Common Stock of the Company
conform in all material respects in substance to all statements in relation
thereto contained in the Registration Statement and the Prospectus. The
Company has all requisite power and authority (corporate and other) to
issue, sell, and deliver the Units, including the Common Stock issuable
upon exercise of the Warrants in accordance with and upon the terms and
conditions set forth in this Agreement and in the Registration Statement
and Prospectus; and all corporate action required to be taken by the
Company for the due and proper authorization, issuance, sale, and delivery
of the Units, including the Common Stock issuable upon exercise of the
Warrants, has been validly and sufficiently taken.
4
<PAGE> 5
(j) The Company has full legal power, right and authority
(corporate and other) to enter into this Underwriting Agreement and to
perform and discharge its obligations hereunder, and this Underwriting
Agreement has been duly authorized, executed and delivered on behalf of the
Company and is the valid and binding obligation of the Company, subject, as
to the enforcement of remedies, to applicable bankruptcy, insolvency,
moratorium and other laws affecting the rights of creditors generally, and
except as enforceability of the indemnification or contribution provisions
may be limited by federal or state securities laws or principles of public
policy.
(k) The Company will apply the proceeds of the sale of the Units
by it substantially to the purposes set forth in the Prospectus.
(l) To the best of the Company's knowledge, no approval,
authorization, consent or order of any public board or body (other than
in connection with or in compliance with the provisions of the Act and the
securities or Blue Sky laws of various jurisdictions) is legally required
for the sale of the Units by the Company.
(m) The Company has no subsidiaries.
(n) The Company has good and marketable title, free and clear of all
liens, encumbrances, equities, charges or claims, to all of the
property, real and personal, described in the Registration Statement and
Prospectus as being owned by it, except as otherwise set forth in the
Registration Statement and Prospectus and except for such as are not in the
aggregate material in relation to the property of the Company considered as
a whole and do not materially affect the value of such property, and,
except as otherwise stated in the Registration Statement and Prospectus,
has valid and binding leases to the real and/or personal property described
in the Registration Statement and Prospectus as under lease to it with such
exceptions as could not materially interfere with the conduct of the
business.
(o) There are no actions, suits or proceedings or investigations
pending before any court or governmental agency, authority or body to
which the Company is a party or of which the business or property of the
Company is the subject which, if decided adversely, would have a material
adverse effect on the general affairs, condition (financial or other),
business, properties, net worth, or results of operations of the Company,
and, to the best of the Company's knowledge, no such actions, suits or
proceedings are threatened.
(p) The Company has not taken or will not take, directly or
indirectly, any action designed to or which has constituted or which
might reasonably be expected to cause or result in stabilization or
manipulation as defined in the Securities Exchange Act of 1934, as amended,
of the price of the Company's securities to facilitate the sale or resale
of the Units.
5
<PAGE> 6
(q) The Company has not, directly or indirectly, at any time during
the past five years (i) made any contributions to any candidate for
political office, or failed to disclose fully any contribution in violation
of law, or (ii) made any payment to any state, Federal or foreign
governmental officer or official, or other person charged with similar
public or quasi-public duties, other than payments required or permitted by
applicable law.
(r) Except as described in the Prospectus and to the best knowledge
of the Company, the Company owns or possesses the right to utilize all
the patents, patent applications, trademarks, service marks, trade names,
trademark registrations, service mark registrations, copyrights, licenses,
inventions, trade secrets, and similar rights necessary for the present
conduct of its business as described in the Prospectus, without any known
conflict with the asserted rights of others in respect of such matters.
Except as may be stated in the Prospectus, the Company has not received any
notice of any infringement of, or license or similar fees for, any patents,
patent applications, trademarks, service marks, trade names, trademark
registrations, service mark registrations, copyrights, licenses,
inventions, trade secrets, or other similar rights of others, or any claim
with respect thereto, which would have a material adverse effect on the
business of the Company.
(s) The Company has filed all necessary federal, state and foreign
income and franchise tax returns or if not filed, has obtained all
necessary extensions and has paid all taxes as shown as due on any such
returns; and the Company has no knowledge of any material tax deficiency
which has been asserted against the Company, and, to the best of the
Company's knowledge, the Company has no material obligation to pay any
taxes except as may be stated in the Prospectus.
(t) All prior offers or sales of the securities of the Company were
exempt from registration under the Act and all applicable state blue sky
laws.
(u) No securities of the Company have been sold within three years
prior to the date hereof, except as set out in Item 26 of Part II of the
Registration Statement.
(v) The Company knows of no outstanding claims for services in the
nature of a finder's fee or origination fee with respect to the sale of
the Units or Underwriter's Warrants (defined hereinafter) hereunder
resulting from its acts for which the Underwriters may be responsible.
The Company will indemnify the Underwriters for and hold the Underwriters
harmless against any claim for such finder's fees or origination fees.
(w) All material contracts or agreements are properly filed as an
exhibit to the Registration Statement. Each contract to which the
Company is a party and which is filed as a part of or incorporated by
reference into the Registration Statement has been duly and validly
executed, is in full force and effect in all material respects in
accordance with its terms, and none of such contracts have been assigned
by the Company, and the Company knows of no present situation or
condition or fact which would prevent compliance by the
6
<PAGE> 7
Company with the terms of such contracts, as amended to date. Except
for amendments or modifications of such contracts in the ordinary course of
business, the Company has no intention of exercising any right which it may
have to cancel any of its obligations under any of such contracts, and has
no knowledge that any other party to any of such contracts has any
intention not to render full performance under such contracts.
(x) The Company maintains insurance which is in full force and
effect, of the types and in an amount, in the judgment of the Company and
except as otherwise disclosed in the Prospectus, which is reasonable for
its present business taking into account its operations and assets,
including, but not limited to, insurance covering all personal property
owned or leased by the Company against theft, damage, destruction, acts
of vandalism and all other risks customarily insured against.
(y) The Company maintains a system of internal accounting controls
sufficient to provide reasonable assurances that (i) transactions are
executed in accordance with management's general or specific
authorizations, (ii) transactions are recorded as necessary to permit
preparation of financial statements in conformity with generally accepted
accounting principles and to maintain accountability for assets, (iii)
access to assets is permitted only in accordance with management's
general or specific authorization, and (iv) the recorded accountability
for assets is compared with existing assets at reasonable intervals and
appropriate action is taken with respect to any differences.
(z) All material transactions between the Company and its officers,
directors, promoters, and its shareholders who beneficially own 5% or
more of any class of the Company's voting securities required to be
disclosed in the Prospectus have been accurately disclosed in the
Prospectus, and the terms of each such transaction are fair to the Company
and no less favorable to the Company than the terms that could have been
obtained from unrelated parties.
2. PURCHASE OF THE UNITS BY THE UNDERWRITERS.
(a) On the basis of the representations and warranties herein
contained, but subject to the terms and conditions herein set forth,
the Company agrees to sell to the several Underwriters, and the
Underwriters, severally and not jointly, agree to purchase from the
Company, the Firm Units. The purchase price for each Firm Unit shall be
$4.60 per Unit.
(b) The Company hereby grants to the Underwriters, for their
account, an option to purchase from the Company, solely for the purpose
of covering overallotments in the sale of Firm Units, all or any portion
of an aggregate of 375,000 Option Units for a period of 45 days from the
date hereof at the same purchase price per Option Unit as the purchase
price per Firm Unit set forth in Section 2(a) above.
7
<PAGE> 8
3. DELIVERY OF AND PAYMENT FOR UNITS. Delivery of certificates for the
Firm Units and payment therefor shall be made at the offices of Maslon
Edelman Borman & Brand, PLLP (or such other place as mutually may be agreed
upon), at 10:00 a.m., Minneapolis, Minnesota time, on or before the third full
business day following the effective date of the Registration Statement (the
"FIRST CLOSING DATE").
The option to purchase Option Units granted in Section 2(b) hereof may be
exercised at any time (but not more than once) during the 45-day term thereof
by written notice to the Company from you. Such notice shall set forth the
aggregate number of Option Units as to which the option is being exercised, and
the time and date, not earlier than either the First Closing Date or the second
business day after the day on which the option shall have been exercised but
not later than the third full business day after the date of such exercise, as
determined by you, when the Option Units are to be delivered (the "SECOND
CLOSING DATE"). Delivery and payment for such Option Units to be purchased by
you are to be at the offices set forth above for delivery and payment of the
Firm Units. The First Closing Date and the Second Closing Date are sometimes
herein individually called the "CLOSING DATE" and collectively called the
"CLOSING DATES."
Delivery of facsimile certificates for the Units shall be made by or on
behalf of the Company to you against payment by you of the purchase price
therefor by wire transfer or certified or official bank check in clearing house
funds to the order of the Company. The certificates for such Units shall be
registered in such names and denominations as you shall have requested at least
two full business days prior to the applicable Closing Date. Time shall be of
the essence and delivery at the time and place specified in this Agreement is a
further condition to your obligations hereunder.
4. COVENANTS OF THE COMPANY. The Company covenants and agrees with each
Underwriter that:
(a) The Company will use its best efforts to cause the Registration
Statement to become and remain effective, up to each Closing Date. The
Company will notify you promptly of any request by the Commission for any
amendment of or supplement to the Registration Statement or the Prospectus
or for additional information, will prepare and file with the Commission,
promptly upon your request, any amendments of or supplements to the
Registration Statement or Prospectus which, in your reasonable opinion,
may be necessary or advisable in connection with the distribution of the
Units; and will not file any amendments and supplements to the
Registration Statement as originally filed with the Commission unless it
shall first have delivered copies of such amendments or supplements to
you, or file any such amendment or supplement to which you shall have
reasonably objected in writing to the Company. The Company will
immediately advise you by telephone, confirming such advice in writing (i)
when notice is received from the Commission that the Registration
Statement has become effective, (ii) of any order suspending the
effectiveness of the Registration Statement or of any proceedings or
examination under the Act, as soon as the Company is advised thereof, and
(iii) of any order or communication of any public authority addressed to
the Company suspending or
8
<PAGE> 9
threatening to suspend qualification of the Units for sale in any
state. The Company will use its best efforts to prevent the issuance of
any stop order or other such order, and, should a stop order or other such
order be issued, to obtain as soon as possible the lifting thereof.
(b) If, at any time when a prospectus relating to the Units is
required to be delivered under the Act, any event shall have occurred
as a result of which, in the opinion of counsel for the Company or in the
reasonable opinion of counsel for you, the Prospectus, as then amended or
supplemented, includes an untrue statement of a material fact or omits to
state a material fact required to be stated therein or necessary to make
the statements therein not misleading, or if it is necessary at any time
to amend or supplement the Prospectus to comply with the Act, the Company
will notify you promptly and prepare and file with the Commission an
appropriate amendment or supplement.
(c) The Company will use its best efforts to take or cause to be
taken all necessary action and furnish to whomever you may reasonably
direct such information as may be required in qualifying the Units for
offering and sale under the Blue Sky or securities laws of such states as
you and the Company shall designate. The Company shall not, however, be
required to register or qualify as a foreign corporation or as a dealer in
securities or, except as to matters and transactions related to the
offering or sale of the Units, consent to service of process in any state.
(d) The Company will furnish to each of the several Underwriters,
from time to time and without charge, copies of the Registration
Statement, each Preliminary Prospectus, the Prospectus (including all
documents from which information is incorporated by reference), and all
amendments of and supplements to any of such documents, in each case as
soon as available and in such quantities as you may from time to time
reasonably request for the purposes contemplated by the Act. The Company
authorizes the several Underwriters and all dealers to whom any of the
Units may be sold by the Underwriters to use the Preliminary Prospectuses
and Prospectuses supplied, as from time to time amended or supplemented,
in connection with the sale of the Units as and to the extent permitted by
federal and applicable state and local securities laws.
(e) The Company will furnish to each of you two copies of the
Registration Statement and all amendments thereof which are signed and
include all exhibits and schedules.
(f) The Company will, for a period of two (2) years after the
Effective Date, furnish directly to you, and to each Underwriter who
may so request in writing, as soon as the same shall be sent to
shareholders generally, copies of all annual or interim shareholder
reports of the Company, and will, for the same period, also furnish each
of you, and to each Underwriter who may so request in writing, with the
following:
9
<PAGE> 10
(i) two copies of any report, application, or document
(other than exhibits, which, however, will be furnished on request)
which the Company shall file with the Commission or any securities
exchange;
(ii) as soon as the same shall be sent to shareholders
generally, copies of each communication which shall be sent to
shareholders; and
(iii) from time to time such other information concerning the
Company as you may reasonably request, provided that the Company
shall not be required to furnish any information pursuant hereto
that is not furnished to its shareholders or not otherwise made
publicly available.
(g) The Company will, for a period of two (2) years after the
Effective Date, furnish directly to you, quarterly profit and loss
statements, reports of the Company's cash flow filed by the Company with
the Commission.
(h) The Company will make generally available to its security
holders as soon as practicable, but in any event not later than
eighteen months after the effective date of the Registration Statement, a
statement of earnings of the Company (which need not be audited) complying
with Section 11(a) of the Act and the rules and regulations of the
Commission thereunder (including, at the option of the Company, Rule 158).
(i) Whether or not this Agreement becomes effective or is
terminated or cancelled or the sale of the Units to you is consummated,
and regardless of the reason for or cause of any such termination,
cancellation, or failure to consummate, the Company will pay or cause to
be paid (A) all expenses (including any transfer taxes) incurred in
connection with the delivery to you of the Units, (B) all expenses and
fees (including, without limitation, fees and expenses of the Company's
accountants and counsel, excluding, however, fees of the Underwriters'
counsel) in connection with the preparation, printing, filing, delivery,
and shipping of the Registration Statement (including the financial
statements therein and all amendments, schedules, and exhibits thereto),
each Preliminary Prospectus, the Prospectus, and any amendment thereof or
supplement thereto, (C) all fees and expenses, including all Company
counsel fees, (D) fees and expenses of the Underwriters' counsel, incurred
in connection with the qualification of the Units for offering and sale by
the Underwriters or by dealers under the securities or Blue Sky laws of
the states and other jurisdictions which you and the Company mutually
shall designate in accordance with Section 4(c) hereof, (E) subject to the
further provisions of this Section 4(i), all fees and expenses, including
all counsel fees, excluding, however, fees of the Underwriters' counsel,
incurred in connection with the review of the offering by the National
Association of Securities Dealers, Inc. and listing fees, if any, (F) all
costs and expenses incident to qualification with The Nasdaq SmallCap
Market, (G) postage and express charges and other expenses in connection
with delivery of the Preliminary and Final Prospectus to the Underwriters,
and (H) all other costs and expenses incident to the performance of the
Company's obligations hereunder that are not otherwise specifically
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<PAGE> 11
provided for herein. In addition to and not in lieu of the foregoing,
the Company shall pay to the Representative on each Closing Date, for
out-of-pocket expenses (including fees of Underwriters' counsel), a
nonaccountable expense allowance equal to two percent (2%) of the
aggregate purchase price for the Units sold to all the Underwriters on
each Closing Date. If the Underwriters withdraw from the sale of the
Units as herein proposed for any reason other than their inability to sell
the Units and through no other fault of their own, or if the sale of the
Units as herein proposed is abandoned by the Company, the Company will
reimburse the Representative in the amount of all accountable expenses
(including fees and disbursements of counsel) incurred by the
Representative in connection with the contemplated purchase, offer, and
sale of the Units, including without limitation, expenses incurred in
their investigation, preparation to market, and marketing of the Units,
and in contemplation of performing and in performance of its obligations
hereunder, up to an aggregate of $30,000, such expenses and fees to be
evidenced by appropriate receipts, invoices, or other documentation.
(j) The Company will cause each officer and director of the Company
to furnish to the Representative, on or prior to the date of this
Agreement, a letter or letters, in form and substance satisfactory to
counsel for the Representative, pursuant to which each such person shall
agree not to offer for sale, sell, distribute or otherwise dispose of any
securities of the Company for a period of 180 days from the date hereof.
The Company will use its best efforts to cause each significant
shareholder of the Company (as reasonably determined by the
Representative) to furnish to the Representative, on or prior to the date
of this Agreement, a letter or letters, in form and substance satisfactory
to counsel for the Representative, pursuant to which each such shareholder
shall agree not to offer for sale, sell, distribute or otherwise dispose
of any securities of the Company for a period of 90 days from the date
hereof.
(k) The Company will not, during the 180 days following the
effective date of the Registration Statement, except with your prior
written consent, offer for sale, sell, distribute, or otherwise dispose of
any Common Stock or sell or grant options, rights, or warrants with
respect to any Common Stock (except for the grants, options, rights,
warrants or convertible securities pursuant to the Company's 1997 Stock
Option and Incentive Compensation Plan), otherwise than in accordance with
this Agreement or as contemplated by the Prospectus.
(l) The Company authorizes the Underwriters and all dealers to whom
any of the Units may be sold by the Underwriters in connection with the
distribution of the Units, to use the Prospectus as from time to time
amended or supplemented in connection with the offering and sale of the
Units and in accordance with the applicable provisions of the Act and the
applicable Rules and Regulations and applicable state Blue Sky or
securities laws.
(m) The Company shall not request an effective date nor allow the
Registration Statement to be declared effective without the prior
approval of the Underwriters.
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<PAGE> 12
(n) Within the time during which the Prospectus is required to be
delivered under the Act, the Company will comply, at its own expense,
with all requirements imposed upon it by the Act, by the Rules and
Regulations, by the Exchange Act, and by any order of the Commission, so
far as necessary to permit the continuance of sales or dealings in the
Units.
(o) The Company shall file an application and take all other steps
necessary to have the Units actually listed on The Nasdaq SmallCap Market
on or prior to the effective date of the Registration Statement under the
Act.
(p) The Company will reserve and keep available that maximum number
of its authorized but unissued shares of Common Stock which are issuable
upon exercise of Warrants and the Underwriter's Warrants during the term
of the Warrants and the Underwriter's Warrants.
(q) Prior to the Closing Date, no discussions will be held by
officers, directors or any other affiliate or associate of the Company
with any member of the news media and no news release or other publicity
about the Company will be permitted without prior approval of the
Company's and the Underwriters' respective legal counsel.
(r) The Company shall have obtained a CUSIP number for the Units
(and its components) prior to the effective date of the Registration
Statement under the Act.
(s) The Company shall supply to the Representative, and its legal
counsel, at the Company's cost, one complete bound volume of all of the
documents relating to the public offering, within a reasonable time after
the Closing Date, not to exceed four (4) months. The volume shall be
hard cover bound in book format.
(t) The Company will apply the proceeds from the sale of the Units
by it to the purposes and in the manner set forth in the Registration
Statement and, pending such application, shall invest such net proceeds
only in one or more of the following, except as otherwise provided by
prior written consent of the Underwriters: (i) interest-bearing
obligations issued by the United States Government or issued by an agency
or instrumentality of the United States Government and guaranteed by the
United States Government and having a maturity not in excess of one year,
(ii) interest-bearing domestic commercial paper having a maturity of not
more than 365 days and, at the time of purchase by the Company, rated
investment grade by Moody's Investors Service, Inc. or Standard & Poor's
Corporation, (iii) interest-bearing certificates of deposit issued by a
commercial bank chartered by the United States Government or by any state
of the United States having shareholders' equity of at least $500,000,000
except that the foregoing notwithstanding, the Company may invest no more
than $100,000 of such net proceeds in certificates of deposit issued by
any such commercial bank regardless of shareholders' equity, and (iv)
shares or other units of interest in a registered open-ended investment
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<PAGE> 13
company the assets of which aggregate at least $200,000,000 and are
invested solely in so-called "money market" obligations.
5. CONDITIONS OF UNDERWRITERS' OBLIGATIONS. The obligations of the
several Underwriters herein shall be subject to the accuracy of the
representations and warranties on the part of the Company herein as of the date
hereof, and as of each Closing Date, to the accuracy of the written statements
of Company officers made pursuant to the provisions hereof, to the performance
by the Company of its obligations hereunder and to the following additional
conditions:
(a) The Registration Statement shall have become effective not later
than 5:00 P.M., Minneapolis, Minnesota time, on the date of this
Agreement or on such later time and date as shall be satisfactory to you,
as Representative of the several Underwriters, no stop order suspending
the effectiveness of the Registration Statement or any amendment thereof
or supplement or the qualification of the Units for offering or sale shall
have been issued and no proceedings for that purpose shall have been
instituted or shall be pending or shall be threatened by the Commission or
by any state securities authority, and any request of the Commission for
additional information (to be included in the Registration Statement or
the Prospectus or otherwise) shall have been complied with to the your
satisfaction.
(b) You shall not have advised the Company that the Registration
Statement or Prospectus, or any amendment thereof or supplement
thereto, contains an untrue statement of fact that, in your reasonable
opinion, is material, or omits to state a fact that, in your reasonable
opinion, is material and is required to be stated therein or is necessary
to make the statements therein not misleading provided that this Section
5(b) shall not apply to statements in, or omissions from, the Registration
Statement or Prospectus, or any amendment thereof or supplement thereto
that are based upon and conform to written information provided by you
specifically for use in the Registration Statement or Prospectus.
(c) On or prior to each Closing Date, the form and validity of the
Units, the legality and sufficiency of the corporate proceedings and
matters relating to the incorporation of the Company and other matters
incident to the issuance of the Units, the form of the Registration
Statement and the Prospectus and of any amendments thereof or supplements
thereto filed prior to such Closing Date (other than financial statements
and schedules and other financial or statistical data included therein),
the authorization, execution, and delivery of this Agreement and the
description of the Units contained in the Prospectus shall have been
reasonably approved by you. In connection with such determination, the
Company shall have furnished to you such documents as you may have
requested for the purpose of enabling you to pass upon such matters.
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<PAGE> 14
(d) On each Closing Date there shall have been furnished to you, as
Representative of the several Underwriters, the favorable opinion
(addressed to the Underwriters) of Maslon Edelman Borman & Brand, a
Professional Limited Liability Partnership, counsel for the Company, dated
such Closing Date, and in form reasonably satisfactory to counsel for the
Underwriters, to the effect that:
(i) The Company is a corporation duly incorporated, validly
existing and in good standing under the laws of the State of
Minnesota, with corporate power and authority to own or lease its
properties and conduct its business as described in the Prospectus.
The Company has no subsidiaries other than as described in the
Prospectus.
(ii) The authorized capital stock of the Company as of the
date of this Agreement is as set forth in the Prospectus. The
outstanding shares of the Common Stock of the Company have been duly
authorized and validly issued and are fully paid and nonassessable.
The Units (and their components) have been duly authorized and, upon
issuance, delivery and payment therefor as described in this
Agreement, will be validly issued, fully paid and nonassessable. The
shares of Common Stock underlying the Warrants have been duly
authorized and reserved for issuance and when issued, sold and
delivered in accordance with the terms of the Warrant, will be
validly issued, fully paid and nonassessable. The issuance, sale and
delivery of the Underwriter's Warrant has been duly authorized and
the shares (the "WARRANT SHARES") of Common Stock issuable upon the
exercise thereof have been reserved for issuance upon such exercise.
The Warrant Shares, when issued, sold and delivered in accordance
with the terms of the Underwriter's Warrant, will be validly issued,
fully paid and nonassessable. No preemptive rights of, or rights of
refusal in favor of, stockholders of the Company exist with respect
to the Units (or any component thereof), the Underwriter's Warrant or
the Warrant Shares, or the issue and sale thereof, pursuant to the
Company's Articles of Incorporation or Bylaws.
(iii) The authorized securities of the Company conform as to
legal matters in all material respects to the description
thereof set forth in the Prospectus under the caption "Description of
Securities." The certificates representing the Warrants and the
Common Stock are in proper form under the Minnesota Business
Corporation Act.
(iv) The Registration Statement has become effective under
the Securities Act and, to such counsel's knowledge, no stop
order suspending the effectiveness of the Registration Statement or
suspending or preventing the use of the Prospectus is in effect and,
to our knowledge, no proceedings for that purpose have been
instituted or are pending by the Commission.
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<PAGE> 15
(v) The Registration Statement and the Prospectus comply as to
form in all material respects with the requirements of the
Securities Act and with the Rules and Regulations, except the
financial statements, the notes thereto and the related schedules and
other financial and statistical data contained therein, as to which
we express no opinion.
(vi) Counsel knows of no contracts, leases, documents or
pending legal proceedings that are required to be described in
the Prospectus or to be filed as exhibits to the Registration
Statement that are not so described or filed.
(vii) The Underwriting Agreement, the Warrant Agreement and
the Underwriter's Warrant have been duly authorized by all
requisite corporate action, executed and delivered by the Company and
constitute the valid and binding obligations of the Company
enforceable in accordance with their respective terms.
(viii) The execution and delivery of the Underwriting
Agreement and the issue and sale of the Underwriter's Warrant,
the Units (and their components) and the shares underlying the
Warrant will not violate or conflict with the Articles of
Incorporation or the Bylaws of the Company or any material provision
of any material contract or instrument filed as an exhibit to the
Registration Statement to which the Company is a party or by which
the Company is bound (other than any violation of or conflict with
any financial tests or covenants contained therein, as to which
counsel need express no opinion) or any law of the United States or
the State of Minnesota, any rule or regulation of any governmental
authority or regulatory body of the United States or the State of
Minnesota, or any judgment, order or decree known to us and
applicable to the Company of any court or governmental authority.
(ix) No holders of capital stock of the Company, or securities
convertible into capital stock of the Company, have the right
to cause the Company to include such holder's capital stock in the
Registration Statement pursuant to the Company's Articles of
Incorporation or Bylaws or any contract or agreement.
(x) No consent, approval, authorization or order of, and no
notice to or filing with, any governmental agency or body or
any court is required to be obtained or made by the Company for the
issue and sale of the Units pursuant to the Underwriting Agreement,
except such as have been obtained or made and such as may be required
under applicable state securities or blue sky laws or by the National
Association of Securities Dealers, Inc., as to which we
express no opinion.
Although counsel to the Company cannot guarantee the accuracy
and completeness of the statements contained in the Registration
Statement or in the Prospectus, on the basis of discussions and meetings
with officers of the Company,
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<PAGE> 16
representatives of the Company's independent auditors, the Underwriters
and counsel to the Underwriters, our participation in the preparation of
the Registration Statement and the Prospectus, our examination of the
documents referred to in the Registration Statement and in the Prospectus,
and our procedures forming the basis of the opinions expressed above,
nothing came to our attention that led us to believe that the Registration
Statement, as of the date it was declared effective, contained an untrue
statement of a material fact or omitted to state a material fact required
to be stated therein or necessary to make the statements therein not
misleading, or that the Prospectus, as of its date or on the date hereof,
contained or contains an untrue statement of a material fact or omitted or
omits to state a material fact required to be stated therein or necessary
to make the statements therein, in light of the circumstances under which
they were made, not misleading (provided that we express no view with
respect to the content of financial statements, the notes thereto and the
related schedules and other financial or statistical data included in the
Registration Statement or the Prospectus or as to statements in the
Registration Statement or Prospectus which are based on and conform to
written information furnished to the Company by or on your behalf
specifically for use in the preparation thereof).
In rendering such opinion, such counsel may rely (A) as to questions
of the law of jurisdictions other than the State of Minnesota or the
United States upon an opinion or opinions (dated the Closing Date,
addressed to you and in form satisfactory to you) of counsel acceptable to
you and (B) as to matters of fact, to the extent they deem proper, on
certificates of appropriate officers of the Company, of the transfer agent
and registrar for the Units and of public officials; PROVIDED, such
opinions and certificates must be attached to the opinion of counsel.
(e) At the time of execution of this Agreement, the Underwriters
shall have received from Ernst & Young, LLP, a letter dated the date of
such execution, in form and substance satisfactory to the Representative,
to the effect that they are independent accountants with respect to the
Company within the meaning of the Act and the applicable published
instructions, and Regulations thereunder, and further stating in effect
that:
(i) In their opinion, the audited financial statements
included in the Registration Statement and Prospectus covered
by their report included therein, comply as to form in all material
respects with the applicable requirements of the Act and the
published instructions, and Regulations, thereunder.
(ii) On the basis of (A) a reading of the minutes of the
shareholders' and directors' meetings of the Company since
inception, (B) inquiries of certain officials of the Company
responsible for financial and accounting matters, (C) a reading of
the Company's monthly operating statements subsequent to December 31,
1996, and (D) other specified procedures and inquiries (but not an
audit in accordance with generally accepted auditing standards),
nothing came to their attention causing them to believe that:
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<PAGE> 17
(1) that the unaudited financial statements of the
Company, contained in the Prospectus and any amendment thereof
or supplement thereto, do not comply as to form, in all material
respects, with the applicable accounting requirements of the Act
and the published Rules and Regulations or were not prepared in
conformity with generally-accepted accounting principles and
practices applied on a basis consistent in all material respects
with those followed in the preparation of, the audited financial
statements of the Company included therein; or
(2) that the unaudited amounts of revenues, income
before provision for income taxes, net income and ratio of
earnings to fixed charges of the Company contained in the
Prospectus, or any amendment thereof or supplement thereto, were
not derived from financial statements prepared in conformity
with generally-accepted accounting principles and practices
applied on a basis consistent in all material respects with
those followed in the preparation of the audited financial
statements of the Company included therein; or
(3) that the unaudited pro forma financial statements of
the Company and recently-acquired companies, if any, contained
in the Prospectus or any amendment thereof or supplement
thereto, were not properly compiled in accordance with
generally-accepted accounting principles or did not provide for
all adjustments necessary for a fair presentation of the
information purported to be shown thereby; or
(4) with respect to the period subsequent to December
31, 1996, there were, at a specified date, not more than five
(5) business days prior to the date of the letter, any changes
or any material increases or decreases in capital stock,
long-term or short-term debt or shareholders' equity, decreases
in net assets, net current assets, or net worth or any material
decrease, as compared with the corresponding period of the prior
year, in revenues or net income of the Company as compared with
the amounts shown in the December 31, 1996 balance sheet
included in the Registration Statement, except as disclosed or
referred to in the Prospectus and Registration Statement.
(iii) Certain information set forth on the cover of the
Prospectus, and in the Prospectus under the headings
"Prospectus Summary," "Summary Financial Information," "Risk
Factors," "Use of Proceeds," "Dilution," "Capitalization,"
"Management's Discussion and Analysis of Financial Condition and
Results of Operations," "Business," "Management," "Reorganization,"
"Certain Transactions," "Principal Shareholders" and "Description of
Securities" and that are expressed in dollars (or percentages derived
from dollar amounts) or numbers have been compared to accounting
records of the Company which were subject to
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<PAGE> 18
the internal accounting controls of the Company and are in
agreement with such records or computations made therefrom, excluding
any questions of legal interpretation.
(f) The Underwriters shall have received from Ernst & Young, LLP, a
letter dated as of each Closing Date, to the effect that such
accountants reaffirm, as of such Closing Date, and as though made on such
Closing Date, the statements made in the letter furnished by such
accountants pursuant to subparagraph (e) of this Section 5, except that
the specified date referred to in such letter will be a date not more than
five (5) business days prior to such Closing Date.
(g) At each Closing Date, the Company shall have performed all
material obligations and satisfied all material conditions on its part
to be performed or satisfied on or prior thereto (except any condition
satisfaction of which shall have been waived as herein provided) and
compliance with the provisions of this subparagraph (g) shall be evidenced
by a certificate of an executive officer of the Company.
(h) On each Closing Date there shall have been furnished to you a
certificate, dated as of such Closing Date and addressed to you, as
Representative of the several Underwriters, signed by the principal
executive officer and principal financial officer of the Company to the
effect that:
(i) the representations and warranties and covenants of the
Company in this Agreement are true and correct in all material
respects as if made at and as of such Closing Date and the Company
has complied in all material respects with all the agreements and
satisfied all the material conditions on its part to be performed or
satisfied hereunder at or prior to such Closing Date;
(ii) no stop order or other order suspending the
effectiveness of the Registration Statement or any amendment or
supplement thereto or the qualification of the Units for offering or
sale has been issued and, to the Company's knowledge, no proceedings
for that purpose have been instituted or are pending or, to the
knowledge of the respective signers thereof, are threatened by the
Commission or any state or regulatory body;
(iii) neither the Registration Statement, as of the date it
was declared effective, nor the Prospectus, as of its date and
the Closing Date, included any untrue statement of a material fact or
omitted to state a material fact required to be stated therein or
necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading; (B) since
the effective date of the Registration Statement, no event has
occurred which should have been set forth in an amendment or
supplement to the Prospectus which has not been set forth in such an
amendment or supplement; (C) subsequent to the respective dates as of
which information is given in the Registration Statement and
Prospectus and
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<PAGE> 19
except as set forth in or contemplated by the Prospectus, the
Company has not incurred any material liability or obligation, direct
or contingent, whether or not in the ordinary course of business, or
entered into any material transaction, outside of the ordinary course
of business, and there has not been any material change in the Common
Stock, or any increase in the short-term or long-term debt, including
any capitalized lease obligation (other than in the ordinary course
of its business and in an amount which is not material) or any
issuance of options, warrants, convertible securities or other rights
to purchase the Common Stock of the Company or any material adverse
change in the general affairs, business, key personnel,
capitalization or financial position of the Company considered as a
whole (other than the issuance of Common Stock pursuant to existing
options); and subsequent to the date of the Underwriting Agreement,
the Company has not sustained any material loss or damage to its
property or interference with its business by strike, fire, flood,
accident or other calamity, whether or not any of the foregoing is
insured, that would have a material adverse effect upon the Company
considered as a whole, (D) the projection of the Company previously
presented to the Representative showing that the Company will be able
to meet the maintenance requirements for listing on The Nasdaq
SmallCap Market for a period of 24 months from the date hereof, were
prepared in good faith and continue to represent the signers' best
present estimate of the Company's financial condition following the
Closing of the sale of the Units.
(i) The Underwriters shall receive a Blue Sky Memorandum reasonably
satisfactory to the Representative from Doherty, Rumble & Butler, P.A.,
confirming that all requisite action for the offer and sale of the Units
in all jurisdictions requested has been taken.
(j) The Underwriters shall have received "lock up" agreements, in
form and substance acceptable to the Representative, from (i) all
directors, officers and five percent or greater shareholders of the
Company restricting the sale, assignment or other conveyance of any
securities of the Company without the prior written consent of the
Representative for a period of 180 days from the effective date of the
Registration Statement under the Act, and (ii) from all significant
shareholders of the Company (as reasonably determined by the
Representative) restricting the sale, assignment or other conveyance of
any securities of the Company without the prior written consent of the
Representative for a period of 90 days from the effective date of the
Registration Statement under the Act.
(k) The Company's Units (and the securities comprising the Units)
shall be listed on The Nasdaq SmallCap Market on or prior to the
effective date of the Registration Statement under the Act.
(l) Prior to the First Closing, the number of issued and outstanding
shares of common stock of the Company shall not exceed 5,399,289 shares,
and there shall be no
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<PAGE> 20
change in the capitalization of the Company without the prior written
consent of the Representative.
(m) The Company's Units (and the securities comprising the Units)
shall be registered under the Securities Exchange Act of 1934, as
amended, pursuant to Form 8-A, on or prior to the effective date of the
Registration Statement under the Act.
(n) The Company shall have furnished to the Representative and
Doherty, Rumble & Butler, P.A., counsel for the Representative, such
further certificates and documents as your Underwriters' counsel may
reasonably request, relating to the fulfillment of the conditions set
forth in this Section 5.
All such opinions, certificates, letters and documents will be in
compliance with the provisions hereof only if they are reasonably satisfactory
to you and to counsel for the Underwriters. The Company will furnish you with
such conformed copies of such opinions, certificates, letters, and other
documents as you shall reasonably request. The Representative, on behalf of
the several Underwriters, may waive in writing the performance of any one or
more of the conditions specified in this Section 5 or extend the time for their
performance.
If any of the conditions specified in this Section 5 shall not have been
fulfilled when and as required by this Agreement to be fulfilled, this
Agreement and all obligations of the several Underwriters hereunder may be
cancelled by you, as Representative of the several Underwriters, at, or at any
time prior to, each Closing Date. Any such cancellation shall be without
liability of the Underwriters to the Company or any liability of the Company to
the Underwriters, except pursuant to Section 4(i) hereof. Notice of such
cancellation shall be given to the Company in writing, or by telefax or
telephone confirmed in writing.
The Representative may waive in writing the performance of any one or more
of the foregoing conditions or extend the time for their performance.
6. EFFECTIVE DATE AND TERMINATION.
(a) This Agreement shall become effective at immediately after the
time at which the Registration Statement shall have become effective
under the Act.
(b) Until the First Closing Date, this Agreement may be terminated
by you by giving notice to the Company, if (i) the Company shall have
sustained a loss or damage by fire, flood, accident, or other calamity
which is material to the property, business, or condition (financial or
other) of the Company considered as a whole, any properties of the Company
shall have become a party or subject to litigation material to the Company
considered as a whole, or there shall have been, since the respective
dates as of which information is given in the Registration Statement or
the Prospectus, any material adverse change or development in the general
affairs, condition (financial or other), business, key personnel,
capitalization, properties, results of operations or net worth, of the
Company
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<PAGE> 21
considered as a whole, whether or not arising in the ordinary course of
business, which loss, damage, or change, in your judgment, shall render it
inadvisable to proceed with the delivery of the Units, whether or not such
loss shall have been insured, (ii) trading in securities generally on the
New York Stock Exchange, the American Stock Exchange, The Nasdaq National
Market, The Nasdaq SmallCap Market or the over-the-counter market shall
have been suspended or minimum prices shall have been established on such
exchange or market by the Commission or by such exchange, (iii) a general
banking moratorium shall have been declared by federal or state
authorities, or (iv) there shall have been such a serious, unusual and
material adverse change in general economic, political, or financial
conditions or the effect of international conditions on the financial
markets in the United States shall be such as, in your reasonable
judgment, makes it inadvisable to proceed with the delivery of the Units.
Any termination of this Agreement pursuant to this Section 6 shall be
without liability of the Company to the Underwriters, except as otherwise
provided in Sections 4(i), 7 and 8 hereof, and without liability of the
Underwriters to the Company, except as provided in Sections 7 and 8
hereof.
(c) Any notice referred to in this Section 6 may be given at the
address specified in Section 11 hereof in writing or by telegraph or
telephone, and if by telegraph or telephone, shall be immediately
confirmed in writing.
7. INDEMNIFICATION.
(a) The Company agrees to indemnify and hold harmless each
Underwriter and each person, if any, who controls any Underwriter
within the meaning of the Act against any losses, claims, damages or
liabilities, joint or several, to which such Underwriter or such
controlling person may become subject, under the Act or otherwise, insofar
as such losses, claims, damages or liabilities (or actions in respect
thereof) arise out of or are based upon (i) any untrue statement or
alleged untrue statement of a material fact made by the Company in Section
l hereof or contained (A) in the Registration Statement, any Preliminary
Prospectus, or the Prospectus, or any amendment thereof or supplement
thereto, or (B) in any Blue Sky application or other document executed by
the Company specifically for that purpose or based upon and conforming to
written information furnished by the Company filed in any state or other
jurisdiction in order to qualify any or all of the Units under the
securities laws thereof (any such application, document or information
being hereinafter called a "BLUE SKY APPLICATION"), or (ii) the omission
or alleged omission to state in the Registration Statement, any
Preliminary Prospectus, or the Prospectus, or any amendment thereof or
supplement thereto, or in any Blue Sky Application a material fact
required to be stated therein or necessary to make the statements therein,
in the light of the circumstances under which they were made, not
misleading; and will reimburse the Underwriters, their officers and
directors and each such controlling person for any legal or other expenses
reasonably incurred by the Underwriters, their officers and directors or
such controlling person in connection with investigating or defending any
such loss, claim, damage, liability or action; provided,
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however, that the Company will not be liable in any such case to the
extent, but only to the extent, that any such loss, claim, damage or
liability arises out of or is based upon an untrue statement or alleged
untrue statement or omission or alleged omission made in reliance upon and
in conformity with written information furnished to the Company through
you or on your behalf specifically for use in the preparation of the
Registration Statement or any amendment thereof or supplement thereto, or
any such Blue Sky Application or any such Preliminary Prospectus or the
Prospectus or any such amendment thereof or supplement thereto; and
provided, further, that the foregoing indemnity agreement is subject to
the condition that, insofar as it relates to any untrue statement, alleged
untrue statement, omission or alleged omission made in any Preliminary
Prospectus but eliminated or remedied in the Prospectus (as amended or
supplemented), such indemnity agreement shall not inure to the benefit of
any Underwriter (or to the benefit of any person who controls any
Underwriter), if the person asserting any loss, liability, claim or damage
purchased the Units which are the subject thereof and a copy of the
Prospectus (as then supplemented or amended) was not sent or given to such
person with or prior to the written confirmation of the sale of such Units
to such person.
(b) Each Underwriter, severally, but not jointly, will indemnify and
hold harmless the Company, each of its directors, each of its officers
who has signed the Registration Statement, and each person, if any, who
controls the Company within the meaning of the Act, against any losses,
claims, damages or liabilities, joint or several, to which the Company or
any such director or officer, or controlling person, may become subject,
under the Act or otherwise, insofar as such losses, claims, damages or
liabilities (or actions in respect thereof) arise out of or are based upon
(i) any untrue statement or alleged untrue statement of a material fact
contained (A) in the Registration Statement, any Preliminary Prospectus,
or the Prospectus, or any amendment thereof or supplement thereto, or (B)
in any Blue Sky Application, or (ii) the omission or alleged omission to
state in the Registration Statement, any Preliminary Prospectus, the
Prospectus or any amendment thereof or supplement thereto or in any Blue
Sky Application a material fact required to be stated therein or necessary
to make the statements therein, in the light of the circumstances under
which they were made, not misleading, in each case to the extent, but only
to the extent, that such untrue statement or alleged untrue statement or
omission or alleged omission was made in reliance upon and in conformity
with written information furnished to the Company through you, as
Representative of the Underwriters by or on behalf of such Underwriter,
specifically for use with reference to the Underwriter in the preparation
of the Registration Statement or any amendment thereof or supplement
thereto or any such Blue Sky Application or any such Preliminary
Prospectus or the Prospectus or any such amendment thereof or supplement
thereto; and will reimburse the Company, any such director or officer, or
controlling person, for any legal or other expenses reasonably incurred by
the Company or any such director or officer, or controlling person, in
connection with investigating or defending any such loss, claim, damage,
liability or action. This indemnity agreement will be in addition to any
liability which such Underwriter may otherwise have.
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<PAGE> 23
(c) Promptly after receipt by an indemnified party under this
Section 7 of notice of the commencement of any action, such
indemnified party will, if a claim in respect thereof is to be made
against any indemnifying party under this Section 7, notify in writing the
indemnifying party of the commencement thereof; no indemnification shall
be available to any party who shall fail to give notice as provided in
this Section 7(c) if the party to whom notice was not given was unaware of
the proceeding to which such notice would have related and was prejudiced
by the failure to give such notice, but the omission so to notify such
indemnifying party of any such action, suit or proceeding shall not
relieve it from any liability that it may have to any indemnified party
for contribution or otherwise than under this section. In case any such
action is brought against any indemnified party, and the indemnified party
notifies an indemnifying party of the commencement thereof, the
indemnifying party will be entitled to participate therein, and, to the
extent that it may wish, jointly with any other indemnifying party
similarly notified, to assume the defense thereof, with counsel who shall
be to the reasonable satisfaction of such indemnified party, and
(notwithstanding subparagraphs (a) and (b) of this Section 7) after notice
from the indemnifying party to such indemnified party of its election so
to assume the defense thereof, the indemnifying party will not be liable
to such indemnified party under this Section 7 for any legal or other
expenses subsequently incurred by such indemnified party in connection
with the defense thereof other than reasonable costs of investigation
except as provided below. The indemnified party shall have the right to
employ its counsel in any such action, but the fees and expenses of such
counsel shall be at the expense of such indemnified party unless (i) the
employment of counsel by such indemnified party has been authorized in
writing by the indemnifying parties, (ii) the indemnified party shall have
reasonably concluded that there may be a conflict of interest between the
indemnifying parties, or any of them, and the indemnified party in the
conduct of the defense of such action (in which case the indemnifying
parties shall not have the right to direct the defense of such action on
behalf of the indemnified party) or (iii) the indemnifying parties shall
not have employed counsel to assume the defense of such action within a
reasonable time after notice of the commencement thereof, in each of which
cases the fees and expenses of counsel shall be at the expense of the
indemnifying parties; provided, however, that the indemnifying parties
shall not be liable for the fees and expenses of more than one counsel for
the indemnified parties. Any such indemnifying party shall not be liable
to any such indemnified party on account of any settlement of any claim or
action effected by the indemnified party without the consent of such
indemnifying party.
8. CONTRIBUTION. In order to provide for just and equitable contribution
in circumstances in which indemnification provided for in Section 7 is
unavailable, each indemnifying party shall contribute to the aggregate losses,
claims, damages, expenses and liabilities to which the indemnified parties may
be subject in such proportion so that the several Underwriters are responsible
for that portion (the "UNDERWRITING PORTION") represented by the percentage
that the underwriting commissions appearing on the cover page of the Prospectus
bear to the public offering price (net of Underwriting Commissions) appearing
thereon and the Company is responsible for the remaining portion (the "RESIDUAL
PORTION"); provided, however, (i) that no person guilty of fraudulent
misrepresentation (within the meaning of Section 11(f) of
23
<PAGE> 24
the Act) will be entitled to contribution from any person who was not guilty of
such fraudulent misrepresentation; and (ii) if such allocation is not permitted
by applicable law, then the relative fault of the Company, its directors,
officers and controlling persons, on the one hand, and the several
Underwriters, and their respective officers, directors and its controlling
persons, on the other, in connection with the statements or omissions which
resulted in such damages and other relevant equitable considerations shall also
be considered. The relative fault shall be determined by reference to, among
other things, whether in the case of an untrue statement of a material fact or
the omission to state a material fact, such statement or omission relates to
information supplied by the Company or by the Underwriters and the parties'
relative intent, knowledge, access to information, and opportunity to correct
or prevent such untrue statement or omission. The Company and the several
Underwriters agree that it would not be just and equitable if the respective
obligations of the Company on the one hand, and the Underwriters, on the other,
to contribute pursuant to this Section 8 were to be determined by pro rata or
per capita allocation of the aggregate damages (even if the Underwriters, and
their respective officers, directors and their respective controlling persons
in the aggregate were treated as one entity for such purpose) or by any other
method of allocation that does not take account of the equitable considerations
referred to in this Section 8. For purposes of this Section 8, the term
"DAMAGES" shall include any legal or other expense reasonably incurred by the
indemnified party in connection with investigating or defending any action or
claim that is the subject of the contribution provisions of this Section 8.
Notwithstanding the provisions of this Section 8, the several Underwriters,
their respective officers, directors and its controlling persons in the
aggregate shall not be required to contribute any amount in excess of the
amount by which the total purchase price of the Units purchased by it, directly
or indirectly, from the Company pursuant to this Agreement exceeds the amount
of any damages that the several Underwriters, their respective officers,
directors and their respective controlling persons in the aggregate have
otherwise been required to pay by reason of such untrue statement or omission.
For purposes of this Section 8, each person, if any, who controls any
Underwriter within the meaning of the Act shall have the same rights to
contribution as such Underwriter, and each person, if any, who controls the
Company within the meaning of the Act, each officer who shall have signed the
Registration Statement and each director of the Company shall have the same
rights to contribution as the Company. Each party entitled to contribution
agrees that, upon the service of a summons or other initial legal process upon
it in any action instituted against it in respect of which contribution may be
sought, it will promptly give written notice of such service to the party or
parties from whom contribution may be sought, but the omission so to notify
such party or parties of any such service shall not relieve the party from whom
contribution may be sought from any obligation it may have hereunder or
otherwise. In case any such action, suit, or proceeding is brought against any
party, and such person so notifies a contributing party of the commencement
thereof, the contributing party will be entitled to participate therein with
the notifying party and any other contributing party similarly notified.
9. SUBSTITUTION OF UNDERWRITERS. If one or more of the Underwriters shall
fail or refuse (otherwise than for a reason sufficient to justify the
cancellation or termination of this Agreement under the provisions of Sections
5 or 6 hereof) to purchase and pay for the number of Units agreed to be
purchased by such Underwriter or Underwriters upon tender to you of such Units
in accordance with the terms hereof, and the number of such Units shall not
exceed 10%
24
<PAGE> 25
of the total number of units to be purchased by the Underwriters hereunder,
then, each of the nondefaulting Underwriters shall purchase and pay for (in
addition to the number of Units which it has severally agreed to purchase
hereunder) that proportion of the number of Units which the defaulting
Underwriter or Underwriters shall have so failed or refused to purchase which
the number of Units agreed to be purchased by the nondefaulting Underwriter
bears to the aggregate number of Units so agreed to be purchased by all such
nondefaulting Underwriters. In such case, you or the Company shall have the
right to postpone each Closing Date specified in Section 3 hereof to a date not
later than the seventh full business day after the date originally fixed as
such Closing Date pursuant to said Section 3 in order that any necessary
changes in the Registration Statement, the Prospectus, or any other documents
or arrangements may be made.
If one or more of the Underwriters shall fail or refuse (otherwise than
for a reason sufficient to justify the cancellation or termination of this
Agreement under the provisions of Sections 5 or 6 hereof) to purchase and pay
for the number of Units agreed to be purchased by such Underwriter or
Underwriters upon tender to you of such Units in accordance with the terms
hereof and the number of such Units shall exceed 10% of the total number of
Units to be purchased by the Underwriters, hereunder, then (unless within
forty-eight hours after such default arrangements to your satisfaction shall
have been made for the purchase of the defaulted Units by an Underwriter or
Underwriters) this Agreement shall terminate without liability on the part of
any nondefaulting Underwriter or on the part of the Company except as otherwise
provided in Sections 4(i), 7 and 8 hereof. As used in this Agreement, the term
"UNDERWRITER" includes any person substituted for an Underwriter under this
paragraph. Nothing in this Section 9, and no action taken hereunder, shall
relieve an defaulting Underwriter from liability in respect of any default of
such Underwriter under this Agreement.
10. SURVIVAL OF INDEMNITIES, CONTRIBUTION, WARRANTIES AND REPRESENTATIONS.
The respective indemnity and contribution agreements of the Company and the
Underwriters contained in Sections 7 and 8 hereof, the representations,
warranties, and covenants of the Company contained in Sections 1 and 4 hereof
and the representations and warranties of the Underwriters contained in Section
14 hereof shall remain operative and in full force and effect, regardless of
any termination or cancellation of this Agreement or any investigation made by
or on behalf of any of the Underwriters or the Company or any of their
respective directors or officers, or any controlling person referred to in said
Sections 7 and 8, and shall survive the delivery of, and payment for, the
Units.
11. NOTICES. Except as otherwise expressly provided in this Agreement,
all notices and other communications hereunder shall be in writing and, if
given to the Underwriters, shall be mailed, delivered or telefaxed to R. J.
Steichen & Company, One Financial Plaza, 120 South Sixth Street, Minneapolis,
MN 55402, Attention: President, with a copy to Girard P. Miller, Doherty,
Rumble & Butler, P.A., 150 South Fifth Street, Suite 3500, Minneapolis, MN
55402, or if given to the Company, shall be mailed, delivered or telefaxed to
it at Hotel Discovery, Inc., 7701 France Avenue South, Suite 217, Edina, MN
55435, Attention: President, with a copy to William M. Mower, Maslon Edelman
Borman & Brand, a Professional Limited Liability Partnership, 90 South Seventh
Street, Suite 3300, Minneapolis, MN 55402.
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<PAGE> 26
12. UNDERWRITER'S WARRANT. Upon payment of a purchase price of $50 by the
Representative, the Company will issue and deliver to R. J. Steichen & Company,
for its account, Warrants to purchase Common Stock in an amount equal to
250,000 shares of Common Stock. Such Warrants shall be issued on the Closing
Date and shall be dated as of the Closing Date. Such Warrants shall be
exercisable commencing one (1) year after the Effective Date for a period of
four years thereafter at a price per share of $6.00. Such Warrant shall
contain such terms and conditions as contained in the form of Underwriter's
Warrant attached hereto and labeled Appendix A.
13. INFORMATION FURNISHED BY UNDERWRITERS. The statements relating to
stabilization activities of the Underwriters on the inside front cover of the
Preliminary Prospectus and the Prospectus, and under the caption "UNDERWRITING"
in any Preliminary Prospectus and in the Prospectus, and, to the extent the
same relate to you, in any Blue Sky application, constitute the written
information furnished by or on behalf of you referred to in Section 1 hereof
and in paragraphs (a) and (b) of Section 7 hereof.
14. PARTIES. This Agreement is made solely for the benefit of the several
Underwriters, the Company, any director, officer, or controlling person
referred to in Sections 7 and 8 hereof, and their respective personal
representatives, successors and assigns, and no other person shall acquire or
have any right by virtue of this Agreement. The term "personal
representatives, successors and assigns," as used in this Agreement, shall not
include any purchaser of Units (as such purchaser) from the Underwriters.
15. REPRESENTATIONS, WARRANTIES AND COVENANTS OF THE REPRESENTATIVE. The
Representative, on behalf of the several Underwriters, represents, warrants to
and agrees with the Company that:
(a) The Underwriters are corporations or partnerships duly formed
and validly existing in good standing under the laws of the jurisdiction
in which they are incorporated or formed.
(b) Each Underwriter is duly registered as a broker-dealer under the
Securities Exchange Act of 1934, as amended, and under the securities
laws of Minnesota and of such other states in which it intends to offer
or sell the Units, if such registration is required in any such other
state, and is a member in good standing of the National Association of
Securities Dealers, Inc., and no proceedings have been initiated or
threatened to suspend any such registration or membership.
(c) The execution, delivery and performance of this Agreement by the
Representative on behalf of the several Underwriters, and the
consummation of the transactions contemplated hereby, have been duly
authorized by the Underwriters, and at the time of its execution,
performance, or consummation, will not constitute or result in any breach
or violation of any of the terms, provisions or conditions of, or
constitute a default under, any federal statute or regulation (including,
without limitation, the net
26
<PAGE> 27
capital requirements under Rule 15c-1 of the Securities Exchange Act of
1934) or any statute or regulation of any state in which it intends to
offer or sell the Units, or any order, judgment, decree, rule or
regulation of any court or governmental agency or body having
jurisdiction over the Underwriter or any of its activities or property;
and other than registration of the Units under the Act and applicable
states securities laws and subject to the favorable review by the
National Association of Securities Dealers, Inc., no consent, approval,
authorization or order of any court or governmental agency or body is
required for the consummation of the transactions contemplated hereby.
(d) There is not now pending or threatened against any of the
Underwriters or any control person of an Underwriter any action or
proceeding either in any court of competent jurisdiction or before the
Commission, National Association of Securities Dealers, Inc. or the
securities authorities of any state, based upon any action or failure to
act on the part of the Underwriter or any controlling person of an
Underwriter that would restrict your ability to perform your obligations
hereunder.
(e) The Units will be offered by the Underwriters only to persons
resident in Minnesota and such other states as are mutually designated by
the Representative and the Company pursuant to Section 4(c) hereof. All
of such persons shall be persons and entities for whom the purchase of
the Units is a suitable investment and you shall employ or engage no
Selected Dealer, sales person, agent or representative in the offer or
sale of the Units, which Selected Dealer, sales person, agent or
representative is not properly registered and licensed for the purpose of
such offer or sale. All such registrations and licenses shall remain in
full force and effect until after the Closing Dates.
(f) The Representative, on behalf of the several Underwriters,
agrees that neither any Underwriter nor any officer or other person
employed by any Underwriter or any Selected Dealer will provide any
information or make any representations to offerees of the Units, other
than such information and representations as are either contained in the
Prospectus or the Registration Statement or are not inconsistent with
information set forth in the Prospectus or the Registration Statement.
(g) The Representative, on behalf of the several Underwriters,
agrees that in any event the Representative learns of any circumstances
or fact which it believes would make any Preliminary Prospectus, the
Prospectus, or the Registration Statement inaccurate or misleading in any
material respect, it will immediately bring such circumstances or facts
to the attention of the Company.
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<PAGE> 28
16. GOVERNING LAW. This Agreement shall be governed by and construed and
enforced in accordance with the laws of the State of Minnesota.
HOTEL DISCOVERY, INC.
By _________________________________________
Its ________________________________
"COMPANY"
The foregoing Agreement is hereby
confirmed and accepted as of the
date first above written:
R. J. STEICHEN & COMPANY
By _________________________________
Authorized Officer
____________________________________
Print Name
"REPRESENTATIVE OF THE SEVERAL UNDERWRITERS"
28
<PAGE> 29
SCHEDULE I
NUMBER OF FIRM UNITS
UNDERWRITERS TO BE PURCHASED
------------ --------------------
TOTAL
<PAGE> 30
APPENDIX A
COMMON STOCK PURCHASE WARRANT
(FORM OF)
<PAGE> 31
HOTEL DISCOVERY, INC.
COMMON STOCK PURCHASE WARRANT
Hotel Discovery, Inc., an Minnesota corporation (the "COMPANY"), hereby
agrees that, for value received, ________________________________, or its
assigns, is entitled, subject to the terms set forth below, to purchase from
the Company at any time or from time to time after ____________, 1998, and
before 4:30 p.m., Minneapolis, Minnesota time, on __________, 2002 Two Hundred
Fifty Thousand (250,000) shares of the $.01 par value Common Stock of the
Company, at an exercise price of $6.00 per Share, subject to adjustment as
provided herein.
1. EXERCISE OF WARRANT. The purchase rights granted by this Warrant shall
be exercised (in minimum quantities of 100 shares) by the holder surrendering
this Warrant with the form of exercise attached hereto duly executed by such
holder, to the Company at its principal office, accompanied by payment, in cash
or by cashier's check payable to the order of the Company, of the purchase
price payable in respect of the Shares being purchased. If less than all of
the Shares purchasable hereunder is purchased, the Company will, upon such
exercise, execute and deliver to the holder hereof a new Warrant (dated the
date hereof) evidencing the number of Shares not so purchased. As soon as
practicable after the exercise of this Warrant and payment of the purchase
price, the Company will cause to be issued in the name of and delivered to the
holder hereof, or as such holder may direct, a certificate or certificates
representing the Shares purchased upon such exercise. The Company may require
that such certificate or certificates contain on the face thereof a legend
substantially as follows:
"The transfer of the shares represented by this certificate is
restricted pursuant to the terms of a Common Stock Purchase
Warrant dated , 1997, issued by Hotel Discovery,
Inc., a copy of which is available for inspection at the offices
of Hotel Discovery, Inc. Transfer may not be made except in
accordance with the terms of the Common Stock Purchase Warrant.
In addition, no sale, offer to sell or transfer of the shares
represented by this certificate shall be made unless a
Registration Statement under the Securities Act of 1933, as
amended (the "ACT"), with respect to such shares is then in effect
or an exemption from the registration requirements of the Act is
then in fact applicable to such shares."
___________________________
THIS WARRANT IS SUBJECT TO THE RESTRICTIONS ON TRANSFER SET FORTH
AT THE BOTTOM OF PAGE 8 HEREOF.
<PAGE> 32
2. NEGOTIABILITY AND TRANSFER. This Warrant is issued upon the following
terms, to which each holder hereof consents and agrees:
(a) Except where directed by a court of competent
jurisdiction pursuant to the dissolution or liquidation of a
corporate holder hereof, for the period ending one year from
, 1997, title to this Warrant may not be sold,
transferred, assigned or hypothecated, except that within such
one-year period title to this Warrant may be transferred only
to ________________ (the "UNDERWRITER"), or to a person who is
both an officer and shareholder, or both an officer and
employee, of the Underwriter, or to a successor (or both an
officer and shareholder, or both an officer and employee) in
interest to the business of the Underwriter, by endorsement
(by the holder hereof executing the form of assignment
attached hereto) and delivery in the same manner as in the
case of a negotiable instrument transferable by endorsement
and delivery subject to the requirements of Section 4 hereof.
(b) Until this Warrant is duly transferred on the
books of the Company, the Company may treat the registered
holder of this Warrant as absolute owner hereof for all
purposes without being affected by any notice to the contrary.
(c) Each successive holder of this Warrant, or of any
portion of the rights represented thereby, shall be bound by
the terms and conditions set forth herein.
3. ANTIDILUTION ADJUSTMENTS. If the Company shall at any time hereafter
subdivide or combine its outstanding shares of Common Stock, or declare
a dividend payable in Common Stock, the exercise price in effect immediately
prior to the subdivision, combination or record date for such dividend payable
in Common Stock shall forthwith be proportionately increased, in the case of
combination, or proportionately decreased, in the case of subdivision or
declaration of a dividend payable in Common Stock, and the number of Shares
purchasable upon exercise of this Warrant, immediately preceding such event,
shall be changed to the number determined by dividing the then current exercise
price by the exercise price as adjusted after such subdivision, combination or
dividend payable in Common Stock and against the number of Shares purchasable
upon the exercise of this Warrant immediately preceding such event, so as to
achieve an exercise price and number of Shares purchasable after such event
proportional to such exercise price and number of Shares purchasable
immediately preceding such event. No adjustment in exercise price shall be
required unless such adjustment would require an increase or decrease of at
least five cents ($0.05) in such price; PROVIDED, HOWEVER, that any adjustments
which are not require to be so made shall be carried forward and taken into
account in any subsequent adjustment. All calculations hereunder shall be made
to the nearest cent or to the nearest one-hundredth of a share, as the case may
be.
No fractional Shares are to be issued upon the exercise of the Warrant,
but the Company shall pay a cash adjustment in respect of any fraction of a
Share which would otherwise be
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<PAGE> 33
issuable in an amount equal to the same fraction of the market price per share
of Common Stock on the day of exercise as determined in good faith by the
Company.
In case of any capital reorganization or any reclassification of the
Common Stock of the Company, or in the case of any consolidation with or merger
of the Company into or with another corporation, or the sale of all or
substantially all of its assets to another corporation, which is effected in
such a manner that the holders of Common Stock shall be entitled to receive
stock, securities or assets with respect to or in exchange for Common Stock,
then, as a part of such reorganization, reclassification, consolidation, merger
or sale, as the case may be, lawful provision shall be made so that the holder
of the Warrant shall have the right thereafter to receive, upon the exercise
hereof, the kind and amount of shares of stock or other securities or property
which the holder would have been entitled to receive if, immediately prior to
such reorganization, reclassification, consolidation, merger or sale, the
holder had held the number of Shares which were then purchasable upon the
exercise of the Warrant. In any such case, appropriate adjustment (as
determined in good faith by the Board of Directors of the Company) shall be
made in the application of the provisions set forth herein with respect to the
rights and interest thereafter of the holder of the Warrant, to the end that
the provisions set forth herein (including provisions with respect to
adjustments of the exercise price) shall thereafter be applicable, as nearly as
reasonably may be, in relation to any shares of stock or other property
thereafter deliverable upon the exercise of the Warrant.
When any adjustment is required to be made in the exercise price, initial
or adjusted, the Company shall forthwith determine the new exercise price, and
(a) prepare and retain on file a statement describing in
reasonable detail the method used in arriving at the new exercise
price; and
(b) cause a copy of such statement to be mailed to the holder of
the Warrant as of a date within ten (10) days after the date when
the circumstances giving rise to the adjustment occurred.
4. REGISTRATION RIGHTS. Prior to making any disposition of the Warrant or
of any Shares purchased upon exercise of the Warrant, the holder will give
written notice to the Company describing briefly the manner of any such
proposed disposition. The holder will not make any such disposition until (i)
the Company has notified him that, in the opinion of its counsel, registration
under the Act is not required with respect to such disposition, or (ii) a
Registration Statement covering the proposed distribution has been filed by the
Company and has become effective. The Company agrees that, upon receipt of
written notice from the holder hereof with respect to such proposed
distribution, it will use its best efforts, in the consultation with the
holder's counsel, to ascertain as promptly as possible whether or not
registration is required, and will advise the holder promptly with respect
thereto, and the holder will cooperate in providing the Company with
information necessary to make such determination.
3
<PAGE> 34
If, at any time prior to the expiration of seven (7) years from the date
hereof, the Company shall propose to file any Registration Statement (other
than any registration on Forms S-4, S-8 or any other similarly inappropriate
form or Registration Statement with respect to an initial public offering in
which there are no selling shareholders) under the Securities Act of 1933, as
amended, covering a public offering of the Company's Units or shares, it will
notify the holder hereof at least thirty (30) days prior to each such filing
and will include in the Registration Statement (to the extent permitted by
applicable regulation), the shares purchased by the holder or purchasable by
the holder upon the exercise of the Warrant to the extent requested by the
holder hereof. Notwithstanding the foregoing, the number of shares of the
holders of the Warrants proposed to be registered thereby shall be reduced pro
rata with any other selling shareholder (other than the Company) upon the
reasonable request of the managing underwriter of such offering. If the
Registration Statement or Offering Statement filed pursuant to such thirty (30)
day notice has not become effective within six months following the date such
notice is given to the holder hereof, the Company must again notify such holder
in the manner provided above.
At any time prior to the expiration of five (5) years from the date
hereof, and provided that a registration statement on Form S-3 (or its
equivalent) is then available to the Company, and on a one-time basis only, if
the holders of 50% or more of the Warrants and/or the Shares acquired upon
exercise of the Warrants request the registration of the Shares on Form S-3 (or
its equivalent), the Company shall promptly thereafter use its best efforts to
effect the registration under the Securities Act of 1933, as amended, of all
such shares which such holders request in writing to be so registered, and in a
manner corresponding to the methods of distribution described in such holders'
request.
All expenses of any such registrations referred to in this Section 4,
except the fees of counsel to such holders and underwriting commissions or
discounts, filing fees, and any transfer or other taxes applicable to such
shares, shall be borne by the Company.
Upon effectiveness of a Registration Statement which includes Common Stock
purchased or purchasable upon the exercise of this Warrant in accordance with a
valid demand under this Section 4, the rights under this Warrant of all holders
to make another such demand shall terminate. Each purchaser or transferee of a
portion of this Warrant is responsible to determine whether his or her demand
rights under this paragraph have been terminated by such an exercise. Any
Warrants issued upon transfers subsequent to such an exercise shall have all of
the demand registration provisions under this Section 4 deleted.
The Company will mail to each record holder, at the last known post office
address, written notice of any exercise of the rights granted under this
paragraph 4, by certified or registered mail, return receipt requested, and
each holder shall have twenty (20) days from the date of deposit of such notice
in the U.S. Mail to notify the Company in writing whether such holder wishes to
join in such exercise.
The Company will furnish the holder hereof with a reasonable number of
copies of any prospectus included in such filings and will amend or supplement
the same as required during the
4
<PAGE> 35
period of required use thereof. The Company will maintain, at its expense, the
effectiveness of any Registration Statement or the Offering Statement filed by
the Company, whether or not at the request of the holder hereof, for at least
six (6) months following the effective date thereof.
In the case of the filing of any Registration Statement, and to the extent
permissible under the Securities Act of 1933, as amended, and controlling
precedent thereunder, the Company and the holder hereof shall provide cross
indemnification agreements to each other in customary scope covering the
accuracy and completeness of the information furnished by each.
The holder of the Warrant agrees to cooperate with the Company in the
preparation and filing of any such Registration Statement or Offering
Statement, and in the furnishing of information concerning the holder for
inclusion therein, or in any efforts by the Company to establish that the
proposed sale is exempt under the Act as to any proposed distribution.
5. RIGHT TO CONVERT.
(a) The holder of this Warrant shall have the right
to require the Company to convert this Warrant (the
"CONVERSION RIGHT"), at any time after ________________, 1998
and prior to its expiration, into Common Stock as provided for
in this Section 5. Upon exercise of the Conversion Right, the
Company shall deliver to the holder (without payment by the
holder of any exercise price) that number of shares of Common
Stock equal to the quotient obtained by dividing (x) the value
of the Warrant at the time the Conversion Right is exercised
(determined by subtracting the exercise price for one Warrant
Share in effect immediately prior to the exercise of the
Conversion Right from the Fair Market Value (as determined
below) for one Warrant Share immediately prior to the exercise
of the Conversion Right) by (y) the Fair Market Value of one
share of Common Stock immediately prior to the exercise of the
Conversion Right.
(b) The Conversion Right may be exercised by the
holder, at any time or from time to time, prior to its
expiration, on any business day, by delivering a written
notice (the "CONVERSION NOTICE") to the Company at the offices
of the Company exercising the Conversion Right and specifying
(i) the total number of shares of Common Stock the
Warrantholder will purchase pursuant to such conversion, and
(ii) a place, and a date not less than five (5) nor more than
twenty (20) business days from the date of the Conversion
Notice, for the closing of such purchase.
(c) At any closing under Section 5(b) hereof, (i) the
holder will surrender the Warrant, (ii) the Company will
deliver to the holder a certificate or certificates for the
number of shares of Common Stock issuable upon such
conversion, together with cash, in lieu of any fraction of a
share, and (iii) the Company will deliver to the holder a new
Warrant representing the
5
<PAGE> 36
number of shares, if any, with respect to which the Warrant
shall not have been converted.
(d) "FAIR MARKET VALUE" of a share of Common Stock as
of a particular date (the "DETERMINATION DATE") shall mean:
(i) If the Company's Common Stock is
traded on an exchange or is quoted on The Nasdaq
National Market or The Nasdaq SmallCap Market, then the
average closing or last sale prices, respectively,
reported for the ten (10) business days immediately
preceding the Determination Date.
(ii) If the Company's Common Stock is not
traded on an exchange or on The Nasdaq National Market
or The Nasdaq SmallCap Market, but is traded in the
over-the-counter market, then the average of the closing
bid and asked prices reported for the ten (10) business
days immediately preceding the Determination Date.
(iii) If the Company's Common Stock is not publicly
traded and there has been a bona fide sale for cash on
an arm's-length basis within 45 days prior to the
Determination Date of such Common Stock by the Company
privately to one or more investors unaffiliated with
the Company (a "Qualifying Sale"), then the most recent
such sales price; and
(iv) If the Company's Common Stock is not publicly
traded and there has been no Qualifying Sale, then the
appraised fair market value of such stock, as
determined by mutual agreement of the Company and the
holder of the Warrant; or if the parties cannot agree
to such valuation, then each of the Company and the
holder shall select an arbitrator and such arbitrators
shall select a third, and such three arbitrators shall
determine (in accordance with the Commercial
Arbitration Rules of the American Arbitration
Association, such expenses to be borne equally by the
parties) the fair market value (without any discount
for lack of marketability or minority interest) of a
share of Common Stock of the Company.
6. NOTICES. The Company shall mail to the registered holder of the
Warrant, at his or her last known post office address appearing on the books of
the Company, not less than fifteen (15) days prior to the date on which (a) a
record will be taken for the purpose of determining the holders of Common Stock
entitled to dividends (other than cash dividends) or subscription rights, or
(b) a record will be taken (or in lieu thereof, the transfer books will be
closed) for the purpose of determining the holders of common stock entitled to
notice of and to vote at a meeting of shareholders at which any capital
reorganization, reclassification of common stock, consolidation,
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<PAGE> 37
merger, dissolution, liquidation, winding up or sale of substantially
all of the Company's assets shall be considered and acted upon.
7. RESERVATION OF COMMON STOCK. A number of shares of Common Stock
sufficient to provide for the exercise of the Warrant and the shares of Common
Stock included therein upon the basis herein set forth shall at all times be
reserved for the exercise thereof.
8. MISCELLANEOUS. Whenever reference is made herein to the issue or sale
of shares of Common Stock, the terms "COMMON STOCK" or "SHARES" shall include
any stock of any class of the Company other than preferred stock that has a
fixed limit on dividends and a fixed amount payable in the event of any
voluntary or involuntary liquidation, dissolution or winding up of the Company.
The Company will not, by amendment of its Articles of Incorporation or
through reorganization, consolidation, merger, dissolution or sale of assets,
or by any other voluntary act or deed, avoid or seek to avoid the observance or
performance of any of the covenants, stipulations or conditions to be observed
or performed hereunder by the Company, but will, at all times in good faith,
assist, insofar as it is able, in the carrying out of all provisions hereof and
in the taking of all other action which may be necessary in order to protect
the rights of the holder hereof against dilution.
Upon written request of the holder of this Warrant, the Company will
promptly provide such holder with a then current written list of the names and
addresses of all holders of warrants originally issued under the terms of, and
concurrent with, this Warrant.
The representations, warranties and agreements herein contained shall
survive the exercise of this Warrant. References to the "holder of" include
the immediate holder of shares purchased on the exercise of this Warrant, and
the word "holder" shall include the plural thereof. This Common Stock Purchase
Warrant shall be interpreted under the laws of the State of Minnesota.
All Shares or other securities issued upon the exercise of the Warrant
shall be validly issued, fully paid and non-assessable, and the Company will
pay all taxes in respect of the issuer thereof.
Notwithstanding anything contained herein to the contrary, the holder of
this Warrant shall not be deemed a stockholder of the Company for any purpose
whatsoever until and unless this Warrant is duly exercised.
7
<PAGE> 38
IN WITNESS WHEREOF, this Warrant has been duly executed by Hotel
Discovery, Inc., this day of , 1997.
HOTEL DISCOVERY, INC.
By __________________________________________
Its _________________________________
THE SECURITIES EVIDENCED HEREBY HAVE NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933, OR APPLICABLE STATE SECURITIES LAW. THESE
SECURITIES HAVE BEEN ACQUIRED FOR INVESTMENT AND MAY NOT BE
OFFERED FOR SALE, SOLD, ASSIGNED, TRANSFERRED, PLEDGED, ASSIGNED
OR OTHERWISE DISPOSED OF, AND NO TRANSFER OF THE SECURITIES WILL
BE MADE BY THE COMPANY OR ITS TRANSFER AGENT, IN THE ABSENCE OF
SUCH REGISTRATION OR AN OPINION OF COUNSEL ACCEPTABLE TO THE
COMPANY THAT SUCH REGISTRATION IS NOT REQUIRED.
8
<PAGE> 39
WARRANT EXERCISE FORM
To be signed only upon exercise of Warrant.
The undersigned, the holder of the within Warrant, hereby irrevocably
elects to exercise the purchase right represented by such Warrant for, and to
purchase thereunder, shares of Common Stock of Hotel
Discovery, Inc. to which such Warrant relates and herewith makes payment of
therefor in cash or by certified check, and requests that such
$ shares be issued and be delivered to, ,
the address for which is set forth below the signature of the undersigned.
Dated:______________
______________________________ _____________________________________
(Taxpayer's I.D. Number) Signature)
_____________________________________
(Address)
_____________________________________
ASSIGNMENT FORM
To be signed only upon authorized transfer of Warrant.
FOR VALUE RECEIVED, the undersigned hereby sells, assigns, and transfers
unto the right to purchase shares of Common
Stock of Hotel Discovery, Inc. to which the within Warrant relates and appoints
, attorney, to transfer said right on the books of Hotel
Discovery, Inc. with full power of substitution in the premises.
Dated: ________________________
_____________________________________
(Signature)
_____________________________________
(Address)
_____________________________________
<PAGE> 40
CASHLESS EXERCISE FORM
(To be executed upon exercise of Warrant pursuant to Section 5)
The undersigned hereby irrevocably elects a cashless exercise of the right
of purchase represented by the within Common Stock Purchase Warrant for, and to
purchase thereunder, ______________________ shares of Common Stock, as provided
for in Section 5 therein.
If said number of shares shall not be all the shares purchasable under the
within Common Stock Purchase Warrant, a new Warrant is to be issued in the name
of said undersigned for the balance remaining of the shares purchasable
thereunder rounded up to the next higher number of shares.
Please issue a certificate or certificates for such Common Stock in the
name of, and pay any cash for any fractional shares to:
NAME ____________________________________________________________
(Please Print Name)
ADDRESS ____________________________________________________________
____________________________________________________________
SOCIAL SECURITY NO. ______________________________________________________
SIGNATURE ____________________________________________________________
NOTE: The above signature should correspond exactly with the
name on the first page of this Common Stock Purchase Warrant
or with the name of the assignee appearing in the assignment
form on the preceding page.
<PAGE> 1
HOTEL DISCOVERY, INC.
2,500,000 UNITS CONSISTING OF 2,500,000 SHARES OF COMMON STOCK
AND
2,500,000 REDEEMABLE CLASS A COMMON STOCK PURCHASE WARRANTS
AGREEMENT AMONG UNDERWRITERS
OCTOBER __, 1997
R. J. Steichen & Company, As Representative
of the several Underwriters named in
Schedule I to Exhibit A annexed hereto
One Financial Plaza
120 South Sixth Street
Minneapolis, Minnesota 55402
Ladies and Gentlemen:
We understand that Hotel Discovery, Inc., a Minnesota corporation (the
"COMPANY"), desires to enter into an agreement, substantially in the form of
Exhibit A hereto (the "UNDERWRITING AGREEMENT"). The Underwriting Agreement
provides for the sale by the Company to you and the other prospective
Underwriters named in Schedule I to the Underwriting Agreement, severally and
not jointly, of an aggregate of 2,500,000 Units ("FIRM UNITS"), each Unit
consisting of one share of Common Stock ("COMMON STOCK") and one Redeemable
Class A Common Stock Purchase Warrant (the "WARRANT") exercisable for a period
of four (4) years commencing on the effective date of the Registration
Statement to purchase one share of Common Stock of the Company at a price of
$6.50. In addition, solely for the purpose of covering overallotments with
respect to the Firm Units, the Company proposes to grant to the Underwriter,
for its account, the option to purchase up to an additional 375,000 Units (the
"OPTION UNITS"). The Firm Units and any Option Units purchased pursuant to
this Underwriting Agreement are herein referred to as the "UNITS."
We understand that changes may be made in those who are to be Underwriters
and in the respective number of Units to be purchased by them, but that the
number of Units to be purchased by us as set forth in said Schedule I will not
be changed without our consent except as provided herein or in the Underwriting
Agreement. The parties on whose behalf you execute the Underwriting Agreement
are herein called the "UNDERWRITERS."
We desire to confirm the agreement among you, the undersigned and the
other Underwriters with respect to the purchase of the Units by the
Underwriters, severally and not jointly, from the Company. The aggregate
number of Units which any Underwriter will be obligated to purchase from
<PAGE> 2
the Company pursuant to the terms of the Underwriting Agreement is herein
called the "UNDERWRITING OBLIGATION" of that Underwriter.
1. Authority and Compensation of Representative. We hereby authorize
you, as our representative (the "REPRESENTATIVE") and on our behalf, (a) to
negotiate the terms of and to enter into an agreement with the Company, in
substantially the form attached hereto as Exhibit A, but with such changes
therein as in your judgment will not be materially adverse to the Underwriters,
providing for the purchase by us, severally and not jointly, from the Company,
at the purchase price per share determined as set forth in such Exhibit A, of
the number of Firm Units set forth opposite our name in Schedule I to such
Exhibit A, and our proportionate share of the Option Units which you determine
to be purchased, (b) to exercise all the authority and discretion vested in the
Underwriters and in you by the provisions of the Underwriting Agreement, (c) to
take all such action as you in your discretion may deem necessary or advisable
in order to carry out the provisions of the Underwriting Agreement and of this
Agreement, and the sale and distribution of the Units, and (d) to determine all
matters relating to the public advertisement of the Units.
As our share of the compensation for your services hereunder, we will pay
to you, and we authorize you to charge to our account on the First Closing Date
and on the Option Closing Date referred to in the Underwriting Agreement,
$_________ per Unit in respect of the aggregate number of Firm Units and Option
Units, respectively, which we shall agree to purchase pursuant to the
Underwriting Agreement.
2. Public Offering of Units. The sale of the Units to the public is
to be made, as herein provided, as soon after the registration statement
relating to the Units becomes effective as in your judgment is advisable. The
purchase price to be paid by the Underwriters for the Units and the initial
public offering price are to be determined by agreement between you and the
Company. The Units shall be first offered to the public at the initial public
offering price as so determined (the "INITIAL PUBLIC OFFERING PRICE"). You
will advise us by telefax or telephone when the Units shall be released for
offering, when the registration statement relating to the Units shall become
effective and the price at which the Units are initially to be offered. We
agree not to sell any of the Units until you have released it for that purpose.
We authorize you, after the initial public offering, to change the public
offering price, the concession and the reallowance if, in your sole discretion,
such action becomes desirable by reason of changes in general market conditions
or otherwise. As used herein, the terms "Registration Statement",
"Pre-Effective Prospectus" and "Final Prospectus" shall have the meanings
ascribed to such terms in the Underwriting Agreement. The public offering
price at the time in effect is herein called the "Offering Price". After
notice from you that the Units are released for public sale, we will offer to
the public in conformity with the provisions hereof and with the terms of
offering set forth in the Final Prospectus such Units as you advise us are not
reserved. We agree not to offer or sell any of the Units to persons over whose
accounts we exercise investment discretion without their specific advance
consent.
3. Offering to Dealers and Retail Sales. We authorize you to reserve
for offering and sale, and on our behalf to sell, to retail purchasers (such
sales being herein called "RETAIL SALES") and to dealers selected by you (such
dealers, among whom any Underwriter may be included, being herein called
"SELECTED DEALERS") all or any part of our Units as you, in your sole
discretion, shall determine. Such sales, if any, shall be made (a) in the case
of Retail Sales, at the offering Price, and (b) in the
2
<PAGE> 3
case of sales to Selected Dealers, at the Offering Price less such
concession or concessions as you, in your sole discretion, shall determine.
Except for such sales as are designated by a purchaser to be for the account of
a particular Underwriter or Selected Dealer, any sales to Selected Dealers made
for our account shall be as nearly as practicable in the ratio that the Units
reserved for our account for offering to Selected Dealers bears to the
aggregate of all Units of all Underwriters so reserved.
You agree to notify us promptly on the date of the public offering as to
the number of Units, if any, which we may retain for direct sale by us. Prior
to the termination of the provisions referred to in Section 13 hereof, you may
reserve for offering and sale as hereinbefore provided any Units theretofore
retained by us remaining unsold and we may, with your consent, retain any Units
theretofore reserved by you remaining unsold.
We agree that, from time to time prior to the termination of the
provisions referred to in Section 13 hereof, we shall furnish to you such
information as you may request in order to determine the number of Units
purchased by us under the Underwriting Agreement which then remain unsold, and
we shall upon your request sell to you for the account of any Underwriter as
many of such unsold Units as you may designate at the Offering Price, less all
or any part of the concession to Selected Dealers as you, in your sole
discretion, shall determine. The provisions of Section 4 hereof shall not be
applicable in respect of any such sale.
We authorize you to determine the form and manner of any communications or
agreements with Selected Dealers. In the event that there shall be any
agreements with Selected Dealers, you are authorized to act as manager
thereunder and we agree, in such event, to be governed by the terms and
conditions of such agreements. The form of Selected Dealer Agreement attached
hereto as Exhibit B is satisfactory to us.
It is understood that any Selected Dealer to whom an offer may be made as
hereinbefore provided shall be actually engaged in the investment banking or
securities business and shall be either (i) a member in good standing of the
National Association of Securities Dealers, Inc. (the "NASD") or (ii) a dealer
with its principal place of business located outside the United States, its
territories and its possessions and not registered as a broker or dealer under
the Securities Exchange Act of 1934 (the "1934 ACT"), who agrees not to make
any sales of the Units within the United States, its territories or its
possessions or to persons who are nationals thereof or residents therein. Each
Selected Dealer shall agree to comply with all applicable rules of the NASD,
including the provisions of Section 24 of Article III of the Rules of Fair
Practice of the NASD, and each foreign Selected Dealer who is not a member of
the NASD also shall agree to comply with the NASD's Interpretation with Respect
to Free-Riding and Withholding, to comply, as though it were a member of the
NASD, with the provisions of Sections 8 and 36 of Article III of such Rules of
Fair Practice, and to comply with Section 25 of Article III thereof as that
Section applies to a non-member foreign dealer. The several Underwriters may
allow, and the Selected Dealers, if any, re-allow, such concession or
concessions as you may determine from time to time on sales of the Units to any
qualified dealer, all subject to the Rules of Fair Practice of the NASD.
You, and any of the several Underwriters with your prior consent, may make
purchases or sales of the Units from or to any of the other Underwriters, at
the Offering Price less all or any part
3
<PAGE> 4
of the gross spread, and from or to any of the Selected Dealers at the Offering
Price less all or any part of the concession to Selected Dealers.
Upon your request, we will advise you of the identity of any dealer to
whom we allow such a discount and any Underwriter or Selected Dealer from whom
we receive such a discount.
4. Repurchases in the Open Market. Any Units sold by us (otherwise
than through you) which shall be contracted for or purchased in the open market
by you on behalf of any Underwriter or Underwriters shall be repurchased by us
on demand at a price equal to the cost of such purchase plus any broker's
commissions and transfer taxes on redelivery. Any Units delivered on such
repurchase need not be the identical shares originally sold by us. In lieu of
delivery of such shares to us, you may sell such shares in any manner for our
account and charge us with the amount of any loss or expense or credit us with
the amount of any profit, less any expense, resulting from such sale, or charge
our account with an amount not in excess of the concession to Selected Dealers.
5. Payment and Delivery. On the First Closing Date, we shall deliver
to you payment for the Firm Units to be purchased by us under the Underwriting
Agreement in an amount equal to either (a) the Initial Public Offering Price
for such Firm Units less the concession to Selected Dealers or (b) the Initial
Public Offering Price for such Firm Units as shall have been retained by or
released to us for direct sale, less the concession to Selected Dealers, as you
shall direct. On the Second Closing Date, we shall make a similar payment as
you may direct for any Option Units to be purchased by us. Such payments shall
be made in such form and at such time and place as may be specified in such
request, and we authorize you to make payment for such Units against delivery
thereof for our account hereunder. Unless we promptly give you instructions
otherwise, if we are a member of or clear through a member of The Depository
Trust Company ("DTC"), you may, in your discretion, deliver our Units through
facilities of DTC.
You shall remit to us, as promptly as practicable, the amounts received by
you from Selected Dealers and retail purchasers as payment in respect of Units
sold by you for our account pursuant to Section 3 hereof for which payment has
been received. Units purchased by us under the Underwriting Agreement and not
reserved or sold by you for our account pursuant to Section 3 hereof shall be
delivered to us as promptly as practicable after receipt by you. Any Units
purchased by us and so reserved which remain unsold at any time prior to the
settlement of accounts hereunder may, in your discretion, and shall, upon your
request, be delivered to us, but, until termination of the first three
paragraphs of Section 7 of the Selected Dealer Agreements pursuant to Section 8
thereof and of other selling arrangements, such delivery shall be for carrying
purposes only. In case any Units reserved for sale in Retail Sales or to
Selected Dealers shall not be purchased and paid for in due course as
contemplated hereby, we agree (a) to accept delivery when tendered by you of
any Units so reserved for our account and not so purchased and paid for, and
(b) in case we shall have received payment from you in respect of any such
Units, to reimburse you on demand for the full amount which you shall have paid
us in respect of such Units.
In the event of our failure to tender payment for the Units as provided in
the Underwriting Agreement, you shall have the right under the provisions
thereof to arrange for other persons, who may include you and any other
Underwriter, to purchase such Units which we had agreed to purchase, but
without relieving us from liability for our default, provided that if the
aggregate amount
4
<PAGE> 5
of reserved but unsold Units upon termination of the provisions referred to in
Section 13 does not exceed 10% of the total amount of the Units, you may in
your discretion sell such reserved but unsold Units for the accounts of the
several Underwriters as soon as practicable after such termination, at such
prices and in such manner as you determine.
6. Authority to Borrow. We authorize you to advance your funds for our
account (charging current interest rates) and to arrange loans for our account
or the account of the Underwriters for the purpose of carrying out this
Agreement, and in connection therewith to execute and deliver any notes or
other instruments and to hold or pledge as security therefor all or any part of
the Units purchased hereunder for our account. Any lender is hereby authorized
to accept your instructions in all matters relating to such loans. Any part of
the Units so held by you may be delivered to us for carrying purposes and, if
so delivered, will be redelivered to you upon demand.
7. Allocation of Expenses and Liability. We authorize you to charge
our account with and we agree to pay (a) all transfer taxes on sales made by
you for our account, except as herein otherwise provided, and (b) our
proportionate share (based on our Underwriting Obligation) of all expenses
incurred by you in connection with the purchase, carrying, sale and
distribution of the Units and all other expenses arising under the terms of the
Underwriting Agreement or this Agreement. Your determination of all such
expenses and your allocation thereof shall be final and conclusive. You may at
any time make partial distributions of credit balances or call for payment of
debit balances. Funds for our account at any time in your hands may be held in
your general funds without accountability for interest. As soon as practicable
after the termination of this Agreement, the net credit or debit balance in our
account, after proper charge and credit for all interim payments and receipts,
shall be paid to or paid by us, provided that you may establish such reserves
as you, in your sole discretion, shall deem advisable to cover possible
additional expenses chargeable to the several Underwriters. Notwithstanding
any settlement, we will remain liable for any taxes on transfers for our
account and for our proportionate share (based on our Underwriting Obligation)
of all expenses and liabilities that may be incurred for the accounts of the
Underwriters.
8. Liability for Future Claims. Neither any statement by you of any
credit or debit balance in our account nor any reservation from distribution to
cover possible additional expenses relating to the Units shall constitute any
representation by you as to the existence or non-existence of possible
unforeseen expenses or liabilities of or charges against the several
Underwriters. Notwithstanding the distribution of any net credit balance to us
or the termination of this Agreement or both, we shall be and remain liable
for, and will pay on demand, (a) our proportionate share (based on our
Underwriting Obligation) of all expenses and liabilities which may be incurred
by or for the accounts of the Underwriters, or any of them, including any
liability which may be incurred by or for the accounts of the Underwriters, or
any of them, based on the claim that the Underwriters constitute an
association, unincorporated business, partnership or any separate entity, and
(b) any transfer taxes paid after such settlement on account of any sale or
transfer for our account.
9. Stabilization and Over-Allotment. We authorize you in your
discretion (a) to make purchases and sales of the Units and any other
securities of the Company which you may designate in the open market or
otherwise, for long or short account, and on such terms and at such prices as
you, in your sole discretion, shall deem advisable, (b) in arranging for sales
of the Units, to overallot, and (c) either before or after the termination of
this Agreement, to cover any short position or
5
<PAGE> 6
liquidate any long position incurred pursuant to this Section 9, subject,
however, to the applicable rules and regulations of the Securities and Exchange
Commission (the "COMMISSION") under the 1934 Act. All such purchases and sales
and overallotments shall be made for the respective accounts of the several
Underwriters as nearly as practicable in proportion to their respective
Underwriting Obligations; PROVIDED, HOWEVER, that our net position resulting
from such purchases and sales and overallotments shall not at the time of each
such purchase or sale or overallotment exceed, for either long or short
account, 15% of the aggregate amount which we shall become obligated to pay in
respect of the total number of Firm Units and Option Units purchased for our
account. We agree to take up at cost on demand any Units purchased for our
account pursuant to this Section 9 and to deliver on demand any of such Units
overallotted for our account pursuant to this Section 9.
We understand that the existence of this provision is no assurance that
the price of the Units will be stabilized or that stabilizing, if commenced,
may not be discontinued at any time. If you effect any stabilizing purchase
pursuant to this Section 9, you will promptly notify us of the date and time
when the first stabilizing purchase was effected and the date and time when
stabilizing was terminated. You will retain such information as is required to
be retained by you "as manager" pursuant to Rule 17a-2 under the 1934 Act. We
will furnish to you not later than three business days following the date on
which stabilizing was commenced such information as is required by Rule
17a-2(d) and notify you of the date and time when stabilizing was terminated.
10. Open Market Transactions. We agree that we will not make bids or
offers, or make or induce purchases or sales for our own account or the
accounts of customers, in the open market or otherwise, either before or after
the purchase of the Units and for either long or short account, of any Units or
any security of the same class and series, or any right to purchase any such
security except (i) as provided in this Agreement, the Underwriting Agreement
and the Selected Dealer Agreements or otherwise approved by you, (ii) in
brokerage transactions not involving solicitation of the customer's order and
(iii) in connection with option and option-related transactions that are
consistent with the "no-action" position set forth in Release No. 17609, as
amended in Release No. 19565, of the Commission under the 1934 Act. We further
agree that we will not lend, either before or after the purchase of the Units,
to any customer, Underwriter, Selected Dealer or to any other securities broker
or dealer, any of the Units. We represent that we have at all times complied
with and will at all times comply with the provisions of Regulation M under the
1934 Act applicable to this offering.
11. Blue Sky. Prior to the initial offering by the Underwriters, you
will inform us as to the states and other jurisdictions under the respective
securities or blue sky laws of which it is believed that the Units have been
qualified for sale or are exempt from such qualification, but you do not assume
any responsibility or obligation as to the accuracy of such information or as
to the right of any Underwriter or dealer to offer or sell the Units in any
state or other jurisdiction. You agree to file or cause to be filed, on behalf
of the Underwriters, a Further State Notice in respect of the Units pursuant to
Article 23-A of the General Business Law of the State of New York, if
necessary.
12. Default by Underwriters. Default by one or more Underwriters in
respect of their obligations under the Underwriting Agreement shall not release
us from any of our obligations or in any way affect the liability of any
defaulting Underwriter to the other Underwriters for damages resulting from
such default. In the event of such default by one or more Underwriters, you are
6
<PAGE> 7
authorized to increase, pro rata with the other non-defaulting Underwriters,
the amount of Units which we shall be obligated to purchase from the Company;
provided, however, that the aggregate amount of all such increases for all
non-defaulting Underwriters shall not exceed 10% of the Units and, if the
aggregate amount of the Units not taken up by such defaulting Underwriters
exceeds such 10%, you are further authorized, but shall not be obligated, to
arrange for the purchase by other persons, who may include you and other
non-defaulting Underwriters, of all or a portion of the Units not taken up by
such Underwriters. In the event of such increases or arrangements are made,
the respective amounts of the Units to be purchased by the non-defaulting
Underwriters and by any such other person or persons shall be taken as the
basis for the Underwriters' obligations under this Agreement, but this shall
not in any way affect the liability of any defaulting Underwriter to the other
Underwriters for damages resulting from such default.
In the event of default by one or more Underwriters in respect of their
obligations under this Agreement to take up and pay for any of the Units
purchased by you for their respective accounts pursuant to Section 9 hereof, or
to deliver any such Units sold or overallotted by you for their respective
accounts pursuant to any provision of this Agreement, and to the extent that
arrangements shall not have been made by you for other persons to assume the
obligations of such defaulting Underwriter of Underwriters, each non-defaulting
Underwriter shall assume its proportionate share of the aforesaid obligations
of each such defaulting Underwriter without relieving any such defaulting
Underwriter of its liability therefor.
13. Termination. Section 2, the second paragraph and the first
sentence of the third paragraph of Section 3, Section 4, the first sentence of
Section 9 (other than clause (c) thereof) and Section 10 hereof will terminate
at the close of business on the 30th calendar day after the effective date of
the Registration Statement, unless extended or sooner terminated as hereinafter
provided. You may extend such provisions, or any of them, for a period not to
exceed 30 additional calendar days by notice to us to such effect. You may
terminate any of such provisions at any time by notice to us, and you may
terminate all such provisions at any time by notice to us to the effect that
the offering provisions of this Agreement are terminated.
14. General Position of the Representative. In taking action under this
Agreement, you shall act only as agent of the several Underwriters. Your
authority shall include the taking of such action as you may deem advisable in
respect of all matters pertaining to any and all offers and sales of the Units,
including the right to make any modifications which you consider necessary or
desirable in the arrangements with Selected Dealers or others. You shall be
under no liability for or in respect of the value of the Units or the validity
or the form thereof, the Registration Statement, the Final Prospectus, or any
amendment or supplement to any of them, or agreements or other instruments
executed by or on behalf of the Company or others; or for the validity or the
form of the Underwriting Agreement or this Agreement; or for or in respect of
the delivery of the Units; or for the performance by the Company or others of
any agreement on its or their part; nor shall you as Representative or
otherwise be liable under any of the provisions hereof or for any matters
connected herewith, except for lack of good faith, except for any liability
arising under the Securities Act of 1933, as amended (the "1933 ACT"), and
except for obligations expressly assumed by you in this Agreement; and no
obligations on your part will be implied or inferred from confirmation or
acceptance of this Agreement. In representing the Underwriters hereunder, you
shall act as the Representative of each of them respectively. Nothing herein
contained shall constitute the several
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Underwriters partners with you or with each other, or render any Underwriter
liable for the commitments of any other Underwriter, except as otherwise
provided in Section 12 hereof and Section 7 of the Underwriting Agreement. If
the Underwriters shall be deemed to constitute a partnership for Federal income
tax purposes, it is the intent of each Underwriter to be excluded from the
application of Subchapter K, Chapter 1, Subtitle A, of the Internal Revenue
Code of 1986, as amended. Each Underwriter elects to be so excluded and agrees
not to take any position inconsistent with such election. Each Underwriter
authorizes you, in your discretion, to execute and file on behalf of the
Underwriters such evidence of election as may be required by the Internal
Revenue Service. The commitments and liabilities of each of the several
Underwriters are several in accordance with their respective Underwriting
obligations and are not joint.
15. Acknowledgment of Receipt of Registration Statement, etc. We hereby
confirm that we have examined the Registration Statement relating to the Units
as heretofore filed by the Company with the Commission and each amendment
thereto, if any, filed through the date hereof, including any documents filed
under the 1934 Act through the date hereof and incorporated by reference into
the Final Prospectus, that we are familiar with the terms of the securities to
be offered and the other terms of the offering, that we are willing to be named
as an underwriter in any Pre-Effective Prospectus and the Final Prospectus and
to accept the responsibilities under the 1933 Act of an underwriter thereunder,
and that we are willing to proceed with the underwriting of the Units in the
manner contemplated in the Underwriting Agreement and described in the Final
Prospectus. We further confirm that we have authorized you to advise the
Company on our behalf (a) as to the statements to be included in any
Pre-Effective Prospectus, in the Effective Prospectus and in the Final
Prospectus under the heading "Underwriting" insofar as they relate to us, and
(b) that such statements do not contain any untrue statement of a material fact
or omit to state any material fact required to be stated therein or necessary
to make the statements therein, in the light of the circumstances under which
they were made, not misleading. We understand that the aforementioned
documents are subject to further change and that we will be supplied with
copies of any further amendments or supplements to the Registration Statement,
of any document filed under the 1934 Act after the effective date of the
Registration Statement and before termination of the offering of the Units by
the Underwriters if such document is deemed to be incorporated by reference
into the Final Prospectus and of any amended or supplemented Prospectus
promptly, if and when received by you, but the making of such changes,
amendments and supplements shall not release us or affect our obligations
hereunder or under the Underwriting Agreement.
16. (a) Indemnification. We agree to indemnify and hold harmless each
other Underwriter, their respective officers and directors and any person who
controls any such Underwriter within the meaning of Section 15 of the 1933 Act
or Section 20 of the 1934 Act, to the extent that, and upon the terms on which,
we agree to indemnify and hold harmless the Company and other specified persons
as set forth in the Underwriting Agreement.
(b) Contribution. Each Underwriter (including you) will pay, upon
your request, as contribution, its proportionate share, based upon its
Underwriting Obligation, of any loss, claim, damage or liability, joint or
several, paid or incurred by any Underwriter (including you) to any person
other than an Underwriter, arising out of or based upon any untrue statement or
alleged untrue statement of a material fact contained in the Registration
Statement, the Effective Prospectus, the Final Prospectus, any amendment or
supplement thereto or any Pre-Effective Prospectus or any other
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selling or advertising material approved by you for use by the Underwriters in
connection with the sale of the Units, or the omission or alleged omission to
state in the Registration Statement or any amendment thereto a material fact
required to be stated therein or necessary to make the statements therein not
misleading, or the omission or alleged omission to state in any of the other
foregoing a material fact required to be stated therein or necessary to make
the statements therein, in the light of the circumstances under which they were
made, not misleading (other than an untrue statement or alleged untrue
statement or omission or alleged omission made in reliance upon and in
conformity with written information furnished to the Company through you by or
on behalf of an Underwriter expressly for use therein) or relating to any
transaction contemplated by this Agreement; and will pay such proportionate
share of any legal or other expense reasonably incurred by you or with your
consent in connection with investigating or defending against any such loss,
claim, damage or liability, or any action or proceeding in respect thereof. In
determining the amount of our obligation under this paragraph, appropriate
adjustment may be made by you to reflect any amounts received by any one or
more Underwriters in respect of such claim from the Company pursuant to Section
6 of the Underwriting Agreement or otherwise. There shall be credited against
any amount paid or payable by us pursuant to this paragraph any loss, claim,
damage, liability or expense which is incurred by us as a result of any such
claim asserted against us, and if such loss, claim, damage, liability or
expense is incurred by us subsequent to any payment by us pursuant to this
paragraph, appropriate provision shall be made to effect such credit, by refund
or otherwise. If any such claim is asserted, you may take such action in
connection therewith as you deem necessary or desirable, including retention of
counsel for the Underwriters, and in your discretion separate counsel for any
particular Underwriter or group of Underwriters, and the fees and disbursements
of any counsel so retained by you shall be included in the amounts payable
pursuant to this paragraph. In determining amounts payable pursuant to this
paragraph, any loss, claim, damage, liability or expense incurred by any person
who controls any Underwriter within the meaning of Section 15 of the 1933 Act
or Section 20 of the 1934 Act which has been incurred by reason of such control
relationship shall be deemed to have been incurred by such Underwriter. Any
Underwriter may elect to retain, as its own expense, its own counsel. You may
settle or consent to the settlement of any such claim on advice of counsel
retained by you. Whenever you receive notice of the assertion of any claim to
which the provisions of this paragraph would be applicable, you will give
prompt notice thereof to each Underwriter. You will also furnish each
Underwriter with periodic reports, at such times as you deem appropriate, as to
the status of such claim and the action taken by you in connection therewith.
If any Underwriter or Underwriters defaults in its or their obligation to make
any payments under this paragraph, each nondefaulting Underwriter shall be
obligated to pay its proportionate share of all defaulted payments, based upon
the proportion such non-defaulting Underwriter's Underwriting Obligation bears
to the Underwriting Obligations of all non-defaulting Underwriters. Nothing
herein shall relieve a defaulting Underwriter from liability for its default.
No person guilty of fraudulent misrepresentation (within the meaning of Section
11(f) of the 1933 Act) shall be entitled to contribution from any person who
was not guilty of such fraudulent misrepresentation.
(c) Survival of Indemnity and Contribution. The indemnification and
contribution agreements of each Underwriter contained in this Section 16 shall
remain in full force and effect regardless of any investigation made by or on
behalf of such other Underwriter, officer, director or controlling person and
shall survive the delivery of any payment for the Units and the termination of
this Agreement and the similar agreements entered into with the other
Underwriters. Any successor of any Underwriter, any underwriter acting as such
by substitution in accordance with Section 7 of
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the Underwriting Agreement, or its officers, directors or controlling persons,
if any, shall be entitled to the benefits contained in subsections (a) and (b)
of this Section.
17. Capital Requirements. We confirm that the incurrence by us of our
obligations under this Agreement and under the Underwriting Agreement will not
place us in violation of the net capital requirements of Rule 15c3-1 under the
1934 Act or of any applicable rules relating to capital requirements of any
securities of any securities exchange to which we are subject.
18. Undertaking to Mail Prospectuses. We represent to you that we
have taken all action on our part required to have been taken to satisfy the
policy set forth in Release No. 4968 of the Commission under the 1933 Act,
including the distribution in the manner and at or prior to the time set forth
in such Release, of copies of the Pre-Effective Prospectus relating to the
Stock (or, if you have so requested, copies of any revised Pre-Effective
Prospectus) to all persons to whom we expect to mail confirmation of sale.
As contemplated by Rule 15c2-8 under the 1934 Act, you agree to mail a
copy of the Final Prospectus mentioned in the Underwriting Agreement to any
person making a written request therefor during the period referred to in said
Rule, the mailing to be made to the address given in the request. We confirm
that we have delivered all Pre-Effective Prospectuses and revised Pre-Effective
Prospectuses, if any, required to be delivered under the provisions of Rule
l5c2-8 and agree to deliver all Final Prospectuses required to be delivered
thereunder. We acknowledge that the copies of the Pre-Effective Prospectus
furnished to us have been distributed to dealers who have been notified of the
foregoing requirements pertaining to the delivery of Pre-Effective Prospectuses
and Final Prospectuses. You have heretofore delivered to us such number of
copies of Pre-Effective Prospectuses as have been reasonably requested by us,
receipt of which is hereby acknowledged, and will deliver such number of copies
of Final Prospectuses as will be reasonably requested by us.
We will keep an accurate record of the distribution (including dates,
number of copies and persons to whom sent) by us of the Registration Statement,
and amendments thereto, and any related Prospectus, and amendments and
supplements thereto, and also agree upon your request, to furnish promptly to
the persons who received copies of the above, copies of any subsequent
amendment to the Registration Statement or any revised prospectus or any
revised prospectus supplement or any memorandum furnished to us outlining
changes in any such document.
19. Miscellaneous. Any notice hereunder from you to us or from us to
you shall be deemed to have been duly given if sent by registered mail, telefax
or hand delivered, to us at our address as set forth in our Underwriters'
Questionnaire previously delivered to you, or to you at
___________________________________________________________________________.
We understand that you are a member in good standing of the NASD. We
hereby confirm that we are actually engaged in the investment banking or
securities business and are either (i) a member in good standing of the NASD or
(ii) a dealer with its principal place of business located outside the United
States, its territories and its possessions and not registered as a broker or
dealer under the 1934 Act who agrees not to make any sales within the United
States, its territories or its possessions or to persons who are nationals
thereof or residents therein (except that we may
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participate in sales to Selected Dealers and others under Section 3 of this
Agreement). We hereby agree to comply with all applicable rules of the NASD,
including, without limitation, Section 24 of Article III of the Rules of Fair
Practice of the NASD, or, if we are a foreign dealer and not a member of the
NASD, we hereby agree to comply with the NASD's Interpretation with Respect to
Free-Riding and Withholding, to comply, as though we were a member of the NASD,
with the provisions of Sections 8, 24 and 36 of Article III of such Rules of
Fair Practice, and to comply with Section 25 of Article III thereof as that
Section applies to a non-member foreign dealer. In connection with sales and
offers to sell Units made by us outside the United States, its territories and
possessions (i) we will either furnish to each person to whom any such sale or
offer is made a copy of the then current Pre-Effective Prospectus or the Final
Prospectus, as the case may be, or inform such person that such Pre-Effective
Prospectus or Final Prospectus will be available upon request, and (ii) we will
furnish to each person to whom any such sale or offer is made such prospectus,
advertisement or other offering document containing information relating to the
Units or the Company as may be required under the law of the jurisdiction in
which such sale or offer is made. Any prospectus, advertisement or other
offering document furnished by us to any person in accordance with the
preceding sentence and any such additional offering material as we may furnish
to any person (x) shall comply in all respects with the law of the jurisdiction
in which it is so furnished, (y) shall be prepared and so furnished at our sole
risk and expense and (z) shall not contain information relating to the Units or
the Company which is inconsistent in any respect with the information contained
in the then current Pre-Effective Prospectus or in the Final Prospectus, as the
case may be.
This instrument may be signed by or on behalf of the Underwriters in one
or more counterparts each of which shall constitute an original and all of
which together shall constitute one and the same agreement among all the
Underwriters and shall become effective at such time as all the Underwriters
shall have signed or have had signed on their behalf such counterparts and you
shall have confirmed all such counterparts. You may confirm such counterparts
by facsimile signature.
This Agreement shall be governed by and construed in accordance with the
laws of the State of Minnesota without giving effect to the choice of law or
conflicts of laws principles thereof.
This Agreement shall inure to the benefit of and be binding upon the
successors, assigns, executors and administrators of the parties thereto.
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Please confirm that the foregoing correctly states the understanding
between us by signing and returning to us a counterpart hereof.
Very truly yours,
__________________________________________
As Attorney-in-Fact for each of the
several Underwriters named in Schedule I
to the Underwriting Agreement.
Confirmed as of the date first above written:
R. J. STEICHEN & COMPANY
As Representative
By _______________________________
Its _________________________
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EXHIBIT A
UNDERWRITING AGREEMENT
(FORM OF)
<PAGE> 14
EXHIBIT B
SELECTED DEALER AGREEMENT
(FORM OF)
<PAGE> 1
AMENDMENT TO
1997 STOCK OPTION AND
COMPENSATION PLAN
OF
HOTEL DISCOVERY, INC.
1. OPTION PRICE. Section 6.1 of the Plan should be amended to read as
follows:
6.1 Price. The Option Price per share shall not be less
than the Fair Market Value of the Common Stock subject to the Option
on the date of Grant, subject to adjustment under Section 11.6.
2. PRICE. Section 8.2 of the Plan shall be amended to read as follows:
8.2 Sale Price. The Committee shall determine the price at
which shares of Restricted Stock shall be sold to a Participant, which
may vary from time to time and among Participants, and which shall
not be below the Fair Market Value of such shares of Common Stock at
the date of sale.
3. EFFECTIVE DATE. This Amendment became effective as of October 13, 1997.
