HOTEL DISCOVERY INC, SB-2/A, 1997-09-29

HOTEL DISCOVERY INC
SB-2/A, 1997-09-29
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<PAGE> 1

AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON SEPTEMBER 29, 1997

REGISTRATION NO. 333-34235
================================================================================

SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

AMENDMENT NO. 2

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
</TABLE>

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 Underwriter 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.
================================================================================
<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 SEPTEMBER 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
- --------------------------------------------------------------------------------------------------------------------
Total(3)(4).............................. $12,500,000 $1,000,000 $11,500,000
====================================================================================================================
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(1)The Underwriter will receive a sales commission equal to 8% of the Total
Price to Public from the sale of the Units. The Company has also agreed to
pay the Underwriter a nonaccountable expense allowance equal to 2% of the
Total Price to Public. The Company has also agreed to sell to the
Underwriter, for nominal consideration, a 5-year warrant to purchase up to
250,000 shares at 120% of the Price to Public (the "Underwriter's Warrant").
In addition, the Company has agreed to indemnify the Underwriter against
certain liabilities. See "Underwriting."

(2) Before deducting expenses of the offering estimated at $220,000, which does
not include the 2% nonaccountable expense allowance described in Note 1
above and assumes no exercise of the Underwriter's over-allotment option.

(3) The Company has granted the Underwriter a 45-day option to purchase up to
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 by the Underwriter, subject to receipt and acceptance
by it, its right to reject orders in whole or in part and to certain other
conditions. It is expected that delivery of the certificates representing the
Units will be made on or about , 1997 in Minneapolis, Minnesota.

RJ Steichen & Company Logo
The date of this Prospectus is , 1997.
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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."
<PAGE> 4

PROSPECTUS SUMMARY

The following summary is qualified in its entirety by the more detailed
information and financial statements (including the notes thereto) appearing
elsewhere in this Prospectus. Unless otherwise indicated, the information in
this Prospectus assumes no exercise of the Underwriter's over-allotment option.
This Prospectus contains forward-looking statements that involve risks and
uncertainties. The Company's actual results may differ significantly from the
results discussed in the forward-looking statements. Factors that might cause
such differences include, but are not limited to, those discussed under the
heading "Risk Factors", which investors should carefully consider.

THE COMPANY

The business of Hotel Discovery, Inc. (the "Company") is to develop, own
and operate theme restaurants with a retail component designed to appeal to the
upscale casual dining market. The Company opened its first restaurant in the
Kenwood Shopping Center in Cincinnati, Ohio (the "Kenwood Unit") on December 19,
1996, and a second restaurant to be located at the Mall of America in a suburb
of Minneapolis, Minnesota (the "Mall of America Unit") is under development.

In October 1995, a limited partnership raised $2.5 million to build the
Kenwood Unit which, at 17,000 square feet and up to 360 seats, represents the
first embodiment of the Hotel Discovery theme concept. In conjunction with a
reorganization of the Company, the assets of the limited partnership were
directly contributed to the Company in November 1996 in consideration of Common
Stock of the Company. See "Reorganization." The Company subsequently raised
approximately $7 million in private placements which concluded in June and July
1997, the proceeds of which were used to complete and add special features to
the Kenwood Unit, begin development of the Mall of America Unit and for working
capital purposes.

Management has spent more than four years in the development stage of the
Hotel Discovery concept. The Company's officers bring substantial restaurant
experience to the Company, with significant hands-on multi-location operating
experience as well as extensive site selection and development experience.

Hotel Discovery is a concept restaurant that offers 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 Underwriter's
over-allotment option; (ii) 250,000 shares of Common Stock issuable upon
exercise of the Underwriter's 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 502,666 shares are currently outstanding at
exercise prices ranging from $3.00 to $3.34 per share; and (vi) 50,000
shares of Common Stock issuable upon exercise of directors' stock options at
an exercise price of $3.34 per share.
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SUMMARY FINANCIAL INFORMATION

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<CAPTION>
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
========== =========== ========== ===========
</TABLE>

<TABLE>
<CAPTION>
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
</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 $1.4 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 Underwriter's over-allotment option; (ii) 250,000
shares of Common Stock issuable upon exercise of the Underwriter's 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 502,666 shares
are currently outstanding at exercise prices ranging from $3.00 to $3.34 per
share; and (vi) 50,000 shares of Common Stock issuable upon exercise of
directors' stock options at an exercise price of $3.34 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

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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."

UNDERWRITER'S WARRANT

The Company has agreed to sell to the Underwriter, 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 Underwriter's Warrant or
other outstanding warrants remain unexercised, the Company's ability to raise
additional capital may be adversely affected. See "Underwriting."

UNDESIGNATED STOCK

The Company's authorized capital consists of 100,000,000 shares of capital
stock. The Board of Directors, without any action by the Company's stockholders,
is authorized to designate and issue shares in such classes or series (including
classes or series of preferred stock) as it deems appropriate and to establish
the rights, preferences and privileges of such shares, including dividends,
liquidation and voting rights. The Company currently has 5,399,289 shares of
Common Stock outstanding and has authorized the issuance of an additional
2,875,000 shares of Common Stock in contemplation of this Offering. A further
4,139,955 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 Underwriter's over-allotment option
is exercised in full), (ii) 250,000 shares issuable upon the exercise of the
Underwriter's 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
502,666 shares are currently outstanding, and (v) 50,000 shares of Common Stock
issuable upon exercise of directors' stock options. No other class of common
stock or preferred stock is currently designated and there is no current plan to
designate or issue any such securities. The rights of holders of preferred stock
and other classes of common stock that may be issued may be superior to the
rights granted to the holders of the Units. The ability of the Board of
Directors to designate and issue such undesignated shares could impede or deter
an unsolicited tender offer or takeover proposal regarding the Company. Further,
the issuance of additional shares having preferential rights could adversely
affect the voting power and other rights of holders of Common Stock.

SHARES ELIGIBLE FOR FUTURE SALE

The sale, or availability for sale, of substantial amounts of Common Stock
in the public market subsequent to this offering may adversely affect the
prevailing market price of Common Stock and may impair the Company's ability to
raise additional capital by the sale of its equity securities. The Company and
its directors, executive officers and 5% shareholders have agreed that they will
not sell nor grant any option for the sale of or otherwise dispose of any shares
of Common Stock for 180 days after the Effective Date without the prior written
consent of the Underwriter. It is expected that 4,438,288 shares of the
Company's Common Stock which were sold in reliance on "private placement"
exemptions under the Securities Act of 1933, as amended (the "1933 Act") will
become eligible for sale pursuant to Rule 144 under the 1933 Act as follows:
1,857,001 shares on the Effective Date (except that holders of 1,510,933 of such
shares have agreed not to sell or otherwise dispose of such shares for 90 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 for 90 days after the Effective Date), 800,685
shares in the second quarter of 1998, and 739,203 shares in the third quarter of
1998. See "Description of Securities -- Shares Eligible for Future Sale." In
connection with this Offering, certain officers and directors of the Company
have agreed to escrow a portion of their shares with the State of Minnesota for
three years or until (i) the Company meets certain earnings

10
<PAGE> 12

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 Underwriter's 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
Working capital............................................. 1,730,000
-----------
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
Underwriter exercises 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 Underwriter's over-allotment option; (ii)
250,000 shares of Common Stock issuable upon exercise of the Underwriter's
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 502,666 shares are currently outstanding at exercise prices ranging from
$3.00 to $3.34 per share; and (vi) 50,000 shares of Common Stock issuable
upon exercise of directors' stock options at an exercise price of $3.34 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.

(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 sole general partner of the Kenwood Partnership is
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.

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

19
<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

20
<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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<PAGE> 25

MANAGEMENT

DIRECTORS, EXECUTIVE OFFICERS AND KEY EMPLOYEES

The following table sets forth certain information with respect to each of
the directors and executive officers of the Company.

<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
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. 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
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

24
<PAGE> 26

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.

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.

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.

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<PAGE> 27

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 85% of the fair market value of the Common Stock
on the date granted, the term of each option, and the time or times during its
term when the option becomes exercisable. As of the date of this Prospectus,
options aggregating 502,666 shares of Common Stock 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 two
non-employee directors, Messrs. Krienik 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. Members of the Board who are also employees of the
Company receive no options for their services as directors.

REORGANIZATION

The Company's predecessor, Hotel Mexico, Inc. ("HMI"), was originally
incorporated in January 1994 as an Ohio corporation 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 general partner of the
Kenwood Partnership is 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 has 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 a newly formed corporation in
exchange for shares of such corporation. HMI, with total net assets of $631,966,
then merged

26
<PAGE> 28

with and into the newly-formed corporation, the name of which was changed to
Hotel Mexico, Inc. Upon consummation of the merger, outstanding shares of HMI
were converted into an aggregate of 1,350,000 shares of Common Stock of the
newly formed corporation.

The shares of HMI Common Stock received by the Kenwood Partnership in the
reorganization will be retained by the Kenwood Partnership until immediately
prior to the Effective Date. At that time, the shares of Common Stock and any
other partnership assets will be distributed to the general and limited partners
in accordance with the Partnership Agreement and the Kenwood Partnership will be
dissolved.

On June 24, 1997, the Board of Directors of HMI approved its
reincorporation as a Minnesota corporation named Hotel Discovery, Inc. Following
approval of the transaction and of the name change by HMI's shareholders at a
special meeting held on August 11, 1997, HMI was merged with and into Hotel
Discovery, Inc., a newly-formed Minnesota corporation, on August 22, 1997. Hotel
Discovery, Inc. has an authorized capital stock of 100,000,000 undesignated
shares, and each share of Common Stock of HMI was converted into one share of
Common Stock of Hotel Discovery, Inc.

CERTAIN TRANSACTIONS

The Company granted a five-year non-exclusive license to Eastgate
Restaurants, Inc., an Ohio corporation wholly owned by Stephen D. King, to test
the concept at a demonstration restaurant at 792 Eastgate South Drive,
Cincinnati, Ohio, which opened in June 1994. The license granted 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 $524,000
outstanding on June 29, 1997 and the date of this Prospectus, respectively.

Under the Kenwood Unit lease, the landlord is required to reimburse the
Company for leasehold improvements in the amount of $200,000 upon presentation
of appropriate documentation, which money the Company intends to use to retire a
portion of its debt to Mr. King.

In December 1996, the Company borrowed $2.5 million under a term loan from
PNC Bank, Ohio, National Association, fully secured by cash collateral. The loan
accrued annual interest of 5.94% and payments of interest only were due through
January 1998, at which time the entire principal was due. The loan was
personally guaranteed by Mr. King. This loan was paid in full on January 31,
1997. In May 1997 the Company borrowed $2.0 million on a 13-month term note,
with interest only payable monthly at the rate of 7.15%. This note was
guaranteed by Mr. King and was fully secured by substantially all of the
Company's assets. This note was repaid in full in July 1997. Mr. King has also
personally guaranteed a $1,000,000 leasehold mortgage term loan from PNC Bank,
Ohio to the Company. See "The Kenwood Unit--Financing of the Kenwood Unit."

On June 23, 1997, the Company borrowed $800,000 from Provident Bank, which
is fully secured by substantially all of the Company's assets. The loan bears
interest at 2% over the bank's reference rate payable monthly. The loan was
personally guaranteed by Mr. King. This loan was repaid in full in July 1997.

27
<PAGE> 29

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 -- --
Thomas W. Orr.............................................. 10,000 * *
Kenwood Restaurant Limited Partnership(2)(5)............... 1,350,000 25.0 --
All executive officers and directors as a group (4
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 Underwriter's 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.
Also does not include shares held by the Kenwood Restaurant Limited
Partnership, as to which shares Mr. King has voting control. See
"Reorganization." Including all such shares (but excluding, subsequent to
the offering, the shares subject to the voting trust agreements), Mr. King's
percentage ownership would be 49.0% and 11.4%, respectively.

(4) Includes 50,000 shares issuable upon exercise of stock options that are
exercisable within 60 days.

(5) The sole general partner of Kenwood Restaurant Limited Partnership is
Kenwood Restaurant, Inc., an Ohio corporation. Mr. King has voting control
for these shares until immediately prior to the Effective Date, at which
time the shares will be distributed to the partners and his voting rights
will cease. See "Reorganization."

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 Underwriter's
over-allotment option is exercised in full.

COMMON STOCK

There are no preemptive, subscription, conversion or redemption rights
pertaining to the Common Stock. The absence of preemptive rights could result in
a dilution of the interest of existing shareholders should additional shares of
Common Stock be issued. Holders of the Common Stock are entitled to receive such
dividends as may be declared by the Board of Directors out of assets legally
available therefor, and to share ratably in the assets of the Company available
upon liquidation.

Each share of Common Stock is entitled to one vote for all purposes and
cumulative voting is not permitted in the election of directors. Significant
corporate transactions, such as amendments to the articles of incorporation,
mergers, sales of assets and dissolution or liquidation, require approval by the
affirmative vote of the majority of the outstanding shares of Common Stock.
Other matters to be voted upon by the holders of Common Stock normally require
the affirmative vote of a majority of the shares present at the particular
stockholders' meeting. The Company's directors and officers as a group
beneficially own approximately 17.6% of the Outstanding Common Stock of the
Company. Upon completion of this Offering, such persons will beneficially own
approximately 12.1% of the outstanding shares (11.5% if the Underwriter's
over-allotment option is exercised in full). See "Principal Shareholders."
Accordingly, such persons will continue to be able to substantially control the
Company's affairs including, without limitation, the sale of equity or debt
securities of the Company, the appointment of officers, the determination of
officers' compensation and the determination whether to cause a registration
statement to be filed. There are approximately 265 beneficial holders of the
Company's Common Stock as of the date of this Prospectus.

The rights of holders of the shares of Common Stock may in the future
become subject to prior and superior rights and preferences in the event that
the Board of Directors establishes one or more additional classes of Common
Stock or one or more series of Preferred Stock. The Board of Directors has no
present plan to establish any such class or series.

The limited partners of the Kenwood Partnership, who currently own an
aggregate of 206,250 shares of Common Stock of the Company and will receive an
aggregate of 922,500 additional shares of the Company's Common Stock upon
dissolution of the Kenwood Partnership, have preemptive rights with respect to
certain private placements of equity securities and certain debt securities of
the Company pursuant to a Shareholder Agreement dated as of September 30, 1995.
These preemptive rights will terminate immediately prior to the Effective Date.

CLASS A WARRANTS

The Class A Warrants included as part of the Units being offered hereby
will be issued under and governed by the provisions of a Warrant Agreement (the
"Warrant Agreement") between the Company and Norwest Bank Minnesota, N.A. as
Warrant Agent (the "Warrant Agent"). The following summary of the

30
<PAGE> 32

Warrant Agreement is not complete, and is qualified in its entirety by reference
to the Warrant Agreement, a copy of which has been filed as an exhibit to the
Registration Statement of which this Prospectus is a part.

Commencing 10 trading days after the Effective Date, the shares of Common
Stock and the Class A Warrants offered as part of the Units will be detachable
and separately transferable. One Class A Warrant entitles the holder
("Warrantholder") thereof to purchase one share of Common Stock during the four
years following the Effective Date, subject to earlier redemption, provided that
at such time a current prospectus relating to the shares of Common Stock
issuable upon exercise of the Class A Warrants is in effect and the issuance of
such shares is qualified for sale or exempt from qualification under applicable
state securities laws. Each Class A Warrant will be exercisable at an exercise
price of $6.50 per Warrant, subject to adjustment in certain events.

The Class A Warrants are subject to redemption by the Company beginning 90
days after the Effective Date, on not less than 30 days' written notice, at a
price of $.01 per Warrant at any time following a period of 14 consecutive
trading days where the per share average closing bid price of the Common Stock
exceeds $7.00 (subject to adjustment), provided that a current prospectus
covering the shares issuable upon the exercise of the Class A Warrants is then
effective under federal securities laws. For these purposes, the closing bid
price of the Common Stock shall be determined by the closing bid price as
reported by Nasdaq so long as the Common Stock is quoted on Nasdaq and, if the
Common Stock is listed on a national securities exchange, shall be determined by
the last reported sale price on the primary exchange on which the Common Stock
is traded. Holders of Class A Warrants will automatically forfeit all rights
thereunder except the right to receive the $.01 redemption price per Warrant
unless the Class A Warrants are exercised before they are redeemed.

The Warrantholders are not entitled to vote, receive dividends or exercise
any of the rights of holders of shares of Common Stock for any purpose. The
Class A Warrants are in registered form and may be presented for transfer,
exchange or exercise at the office of the Warrant Agent. Although the Company
has applied for listing of the Class A Warrants on the Nasdaq SmallCap Market,
there is currently no established market for the Class A Warrants, and there is
no assurance that any such market will develop.

The Warrant Agreement provides for adjustment of the exercise price and the
number of shares of Common Stock purchasable upon exercise of the Class A
Warrants to protect Warrantholders against dilution in certain events, including
stock dividends, stock splits, reclassification, and any combination of Common
Stock, or the merger, consolidation, or disposition of substantially all the
assets of the Company.

The Class A Warrants may be exercised upon surrender of the certificate
therefor on or prior to the expiration date (or earlier redemption date) at the
offices of the Warrant Agent, with the form of "Election to Purchase" on the
reserve side of the certificate properly completed and executed as indicated,
accompanied by payment of the full exercise price (by certified or cashier's
check payable to the order of the Company) for the number of Class A Warrants
being exercised.

RECENT PRIVATE PLACEMENTS OF COMMON STOCK

In July 1997, the Company concluded the private placement of 499,804 shares
of Common Stock at $3.00 per share. The Company realized net proceeds of
approximately $1,400,000. These proceeds were used for working capital purposes.

In June 1997, the Company concluded the private placement of 1,663,085
shares of Common Stock at $3.00 per share. The Company realized net proceeds of
approximately $4,350,000. Of these net proceeds, $1,200,000 was used to repay a
$1.2 million working capital loan from PNC Bank, Ohio, National Association,
which loan had been guaranteed by Mr. King personally. An additional $675,000
was used to complete construction and development of the Kenwood Unit, $850,000
has been or is being used for new features for the Kenwood Unit, approximately
$200,000 has been used for development and execution of the lease at the Mall of
America, and the balance was utilized for working capital, including operating
losses.

The Underwriter acted as the selling agent (the "Agent") with respect to
these equity offerings. The Agent received sales commissions equal to 8% of the
gross proceeds of the offering plus a non-accountable

31
<PAGE> 33

expense allowance of 2% of gross proceeds. The Agent also received four-year
warrants to purchase 199,205 shares of the Company's Common Stock at an exercise
price of $3.75 per share.

SHARES ELIGIBLE FOR FUTURE SALE

Upon completion of this Offering, there will be 7,899,289 shares of Common
Stock issued and outstanding (8,274,289 if the Underwriter's over-allotment
option is exercised in full). The shares purchased in this Offering will be
freely tradeable without registration or other restriction under the 1933 Act,
except for any shares purchased by an "affiliate" of the Company (as defined in
the Act).

All the currently outstanding shares were issued in reliance upon the
"private placement" exemptions provided by the Act and are deemed restricted
securities within the meaning of Rule 144 ("Restricted Shares"). Restricted
Shares may not be sold unless they are registered under the Act or are sold
pursuant to an applicable exemption from registration, including an exemption
under Rule 144. A total of 4,438,288 Restricted Shares will become eligible for
sale, assuming all of the other requirements of Rule 144 have been satisfied, as
follows: 1,857,001 shares upon the Effective Date (except that holders of
1,510,933 of such shares have agreed not to sell or otherwise dispose of such
shares for 90 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 for 90 days after the Effective
Date), 800,685 shares in the second quarter of 1998, and 739,203 shares in the
third quarter of 1998.

Rule 144 provides that if at least one year has elapsed since restricted
shares of Common Stock were last acquired from the Company or an affiliate of
the Company, the holder is generally entitled to sell, within any three-month
period, a number of shares that does not exceed the greater of 1% of the shares
of Common Stock then outstanding or the reported average weekly trading volume
of the Common Stock during the four calendar weeks immediately preceding the
date on which notice of the sale is sent to the SEC. Sales under Rule 144 are
subject to certain manner of sale restrictions, notice requirements and
availability of current public information concerning the Company. A person who
is not an affiliate of the Company during the three months preceding the sale
generally may sell shares without regard to the volume limitations, manner of
sale provision, notice requirements or the availability of public information
concerning the Company, provided that at least two years have elapsed since the
shares were last acquired from the Company or an affiliate.

In general, under Rule 701 as currently in effect, any employee, consultant
or advisor of the Company who purchases shares from the Company by exercising a
stock option outstanding on the date of the Offering is eligible to resell such
shares 90 days after the date of the Prospectus in reliance on Rule 144, but
need not comply with certain restrictions contained in Rule 144, including the
holding period requirement. 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 Underwriter. Holders of an aggregate of 2,162,889 shares of the Company's
Common Stock purchased in two private placements in which the Underwriter 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

Under the terms and subject to the conditions contained in the Underwriting
Agreement, dated the effective date of this offering, R.J. Steichen & Company
(the "Underwriter") has agreed to purchase from the Company, and the Company has
agreed to sell to the Underwriter, an aggregate of 2,500,000 Units.

The Underwriting Agreement provides that the Underwriter will be obligated
to purchase, subject to the terms and conditions set forth therein, all of the
Units being sold pursuant to the Underwriting Agreement (other than the Units
covered by the over-allotment option) if any of the Units being sold pursuant to
the Underwriting Agreement are purchased.

The Company has been advised by the Underwriter that the Underwriter
proposes to offer the 2,500,000 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 Underwriter. The
Underwriter does not intend to confirm sales to any account over which it has
discretionary authority.

In the Underwriting Agreement, the Company and the Underwriter have agreed
to indemnify each other (including officers, directors and control persons of
each other) against certain liabilities under the 1933 Act, or to contribute to
payments which the Underwriter may be required to make in respect thereof.
Insofar as indemnification for liabilities arising under the 1933 Act may be
permitted to directors, officers and controlling persons of the 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 Underwriter 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
Underwriter. Holders of an aggregate of

33
<PAGE> 35

2,162,889 shares of the Company's Common Stock purchased in two private
placements in which the Underwriter 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 Underwriter a nonaccountable expense
allowance of 2% of the aggregate Total Price to Public of the Units or $250,000
($287,500 if the Underwriter's over-allotment option is exercised in full).

The Company has agreed to sell to the Underwriter, for $50.00, five-year
warrants to purchase 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 Underwriter's Warrant is exercisable commencing one year from the Effective
Date and for a period of four years thereafter. The Underwriter's Warrant
contains anti-dilution provisions providing for appropriate adjustments to the
exercise price and the number of shares on the occurrence of certain events. The
shares of Common Stock received upon exercise of the Underwriter's Warrant may
participate in any securities registration by the Company, at the Company's
expense, during the term of the Warrant and for two years thereafter unless and
to the extent that, in the judgment of the underwriter of such offering, the
market for the securities to be sold by the Company would be adversely affected
thereby. In addition, the holders of such shares have a one-time right to demand
registration of the shares during the term of the Warrant, at the Company's
expense, if and when registration of the Company's securities on Form S-3
becomes available under the 1933 Act. The Underwriter's Warrant also has a
cashless exercise option. Any profits realized by the Underwriter upon the sale
of the Underwriter's Warrant or the securities issuable upon exercise thereof
may be deemed to constitute additional underwriting compensation.

In November 1996 through July 1997, the Company sold an aggregate of
2,162,889 shares of Common Stock in two private placements in which the
Underwriter acted as selling agent. The Underwriter received agent's commissions
of approximately $597,616 and warrants to purchase an aggregate of 199,205
shares of Common Stock exercisable at $3.75 per share.

At the request of the Company, up to 10% of the Units offered hereby may be
reserved for sale to persons designated by the Company. The price of such Units
will be the Price to Public set forth on the cover of this Prospectus. 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 Underwriter and bears no relation to the Company's current
earnings, book value, net worth, financial statement criteria of value, the
history of and prospects for the industry in which the Company principally
competes or the capability of the Company's management. There can be no
assurance that the price at which the Units, the Class A Warrants or the Common
Stock will sell in the public market after this Offering will not be lower than
the price at which they are sold by the Underwriter.

The foregoing is a summary of the material provisions of the Underwriting
Agreement and the Underwriter's Warrant. Copies of such documents have been
filed as exhibits to the Registration Statement of which this Prospectus is a
part.

LEGAL MATTERS

The validity of the Units offered hereby will be passed upon for the
Company by Maslon Edelman Borman & Brand, LLP, Minneapolis, Minnesota. Certain
legal matters relating to the sale of the Units of Common Stock will be passed
upon for the Underwriter by Doherty Rumble & Butler, P.A., Minneapolis,
Minnesota.

34
<PAGE> 36

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:

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 Underwriter's
Warrant)*
3.1 Articles of Incorporation*
3.2 By-laws*
4 Form of Warrant Agreement*
5 Opinion of Maslon Edelman Borman & Brand, LLP*
10.1 Indenture of Lease dated November 9, 1994 between Phillip E.
Stephens, Trustee and Kenwood Restaurant, Inc.; First
Amendment to Lease dated May 3, 1995 by and between Phillip
E. Stephens, Trustee and Kenwood Restaurant, Inc.; by Second
Amendment to Lease dated 1996 between Phillip E.
Stephens, Trustee and Kenwood Restaurant Limited
Partnership; Second Amendment to Agreement dated October 18,
1996 between Phillip E. Stephens, Trustee and Kenwood
Restaurant Limited Partnership; and Addendum to Second
Amendment to Lease dated October 18, 1996 between Phillip E.
Stephens, Trustee and Kenwood Restaurant Limited Partnership
(Kenwood Unit)*
10.2 Lease dated August 4, 1997 between Mall of America Company
and Hotel Mexico, Inc. (Mall of America Unit)*
10.3 Loan Agreement by and among Kenwood Restaurant Limited
Partnership and PNC Bank, Ohio, National Association*
10.4 Company's 1997 Stock Option and Compensation Plan*
10.5 Employment Agreement between the Company and Ronald K.
Fuller dated March 17, 1997*
10.6 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 Underwriter
at the closing specified in the Underwriting Agreement certificates in such
denominations and registered in such names as required by the Underwriter to
permit prompt delivery to each purchaser.

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<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. 2 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 September 29, 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. 2 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 September 29, 1997
- ----------------------------------- Executive Officer
Stephen D. King

/s/ RONALD K. FULLER President, Chief Operating Officer September 29, 1997
- ----------------------------------- and Director (Chief Financial and
Ronald K. Fuller Chief Accounting Officer)

/s/ THOMAS W. ORR Director September 29, 1997
- -----------------------------------
Thomas W. Orr

/s/ MICHAEL L. KRIENIK Director September 29, 1997
- -----------------------------------
Michael L. Krienik
</TABLE>

II-5