<PAGE> 1
U. S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-QSB
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED APRIL 4, 1999
OR
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
------- -------
COMMISSION FILE NUMBER 0-23243
- --------------------------------------------------------------------------------
CAFE ODYSSEY, INC.
(Name of Small Business Issuer in Its Charter)
MINNESOTA 31-1487885
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
4801 W. 81ST STREET, SUITE 112, BLOOMINGTON, MN 55437
(Address of Principal Executive Offices)
612-837-9917
(Issuer's Telephone Number, Including Area Code)
HOTEL DISCOVERY, INC.
(Former Name, Former Address and Former Fiscal Year, If Changed Since Last
Report)
Check whether the issuer: (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the preceding 12 months (or for such
shorter period that the issuer was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days. Yes [X] No [ ]
As of May 7, 1999, there were 8,280,102 shares of common stock, $.01 par value,
outstanding.
Transitional Small Business Disclosure Format (check One): Yes [ ] No [X]
1
<PAGE> 2
FORWARD-LOOKING STATEMENTS
Certain of the matters discussed in the following pages constitute
"forward-looking statements" within the meaning of the Securities Act of 1933,
as amended and the Securities Exchange Act of 1934, as amended. Forward-looking
statements involve a number of risks and uncertainties, and, in addition to the
factors discussed in this Form 10-QSB, among the other factors that could cause
actual results to differ materially are the following: the Company's ability to
identify and secure suitable locations on acceptable terms; obtain additional
capital necessary for expansion on acceptable terms; open new restaurants in a
timely manner; hire and train additional restaurant personnel and integrate new
restaurants into its operations; the continued implementation of the Company's
strict business discipline over a growing restaurant base; the economic
conditions in the new markets into which the Company expands and possible
uncertainties in the customer base in these areas; changes in customer dining
patterns; competitive pressures from other national and regional restaurant
chains; business conditions, such as inflation or a recession, and growth in the
restaurant industry and the general economy; changes in monetary and fiscal
policies, laws and regulations; and other risks identified from time to time in
the Company's SEC reports, registration statements and public announcements.
- --------------------------------------------------------------------------------
2
<PAGE> 3
CAFE ODYSSEY, INC.
FORM 10-QSB INDEX
APRIL 4, 1999
<TABLE>
<CAPTION>
Page
----
<S> <C>
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Balance Sheets -
As of April 4, 1999 and January 3, 1999 4
Statements of Operations -
For the thirteen weeks ended April 4, 1999 and March 29, 1998 5
Statements of Cash Flows -
For the thirteen weeks ended April 4, 1999 and March 29, 1998 6
Condensed Notes to the Financial Statements 7
ITEM 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 10
PART II OTHER INFORMATION
ITEM 1. Legal Proceedings 17
ITEM 4. Submission of Matters to a Vote of Security Holders 17
ITEM 6. Exhibits and Reports on Form 8-K 17
Signatures 18
</TABLE>
3
<PAGE> 4
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CAFE ODYSSEY, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
(Unaudited) *
April 4, January 3,
1999 1999
------------ ------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 657,750 $ 106,247
Landlord allowance receivable 962,500 0
Inventories 202,981 161,463
Other current assets 830,901 452,243
------------ ------------
Total current assets 2,654,132 719,953
PROPERTY AND EQUIPMENT, net 15,354,847 11,699,548
OTHER ASSETS 524,050 520,487
------------ ------------
$ 18,533,029 $ 12,939,988
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Short-term notes payable $ 1,324,007 $ 0
Accounts payable 3,916,270 1,452,648
Advances payable to principal shareholder 150,000 100,000
Convertible promissory notes payable 150,000 150,000
Current portion of long-term debt 3,000,000 2,199,007
Accrued expenses 785,507 688,356
------------ ------------
Total current liabilities 9,325,784 4,590,011
DEFERRED RENT 3,786,318 1,755,852
LONG-TERM DEBT, less current portion 729,743 755,878
------------ ------------
Total liabilities 13,841,848 7,101,741
------------ ------------
COMMITMENTS AND CONTINGENCIES (Note 6)
SHAREHOLDERS' EQUITY:
Common stock, $.01 par value, 100,000,000 shares
authorized; 8,280,102 and 8,000,089 shares
issued and outstanding 82,801 80,001
Additional paid-in capital 20,574,890 20,281,140
Less: Common stock subscribed (400,000) (400,000)
Accumulated deficit (15,566,510) (14,122,894)
------------ ------------
Total shareholders' equity 4,691,181 5,838,247
------------ ------------
$ 18,533,029 $ 12,939,988
============ ============
</TABLE>
*From Audited Financial Statements
The accompanying condensed notes are an integral part of these financial
statements.
4
<PAGE> 5
CAFE ODYSSEY, INC.
STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Thirteen weeks ended
------------------------------------
April 4, March 29,
1999 1998
----------- -----------
<S> <C> <C>
NET SALES $ 2,332,632 $ 804,319
----------- -----------
COSTS AND EXPENSES:
Food, beverage and retail costs 606,587 218,416
Restaurant operating expenses 1,716,303 681,602
Depreciation and amortization 258,168 125,840
Pre-opening expenses 572,932 127,318
General, administrative and development expenses 480,247 742,135
----------- -----------
Total costs and expenses 3,634,237 1,895,311
----------- -----------
LOSS FROM OPERATIONS (1,301,605) (1,090,992)
----------- -----------
INTEREST INCOME (EXPENSE), net (142,011) 90,855
----------- -----------
NET LOSS $(1,443,616) $(1,000,137)
=========== ===========
BASIC AND DILUTED NET LOSS PER SHARE $ (0.18) $ (0.13)
=========== ===========
BASIC AND DILUTED WEIGHTED AVERAGE
OUTSTANDING SHARES 8,055,476 8,000,189
=========== ===========
</TABLE>
The accompanying condensed notes are an integral part of these financial
statements.
5
<PAGE> 6
CAFE ODYSSEY, INC.
STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Thirteen weeks ended
----------------------------------
April 4, March 29,
1999 1998
----------- -----------
<S> <C> <C>
OPERATING ACTIVITIES:
Net loss $(1,443,616) (1,000,137)
Adjustments to reconcile net loss to cash flows from operating
activities:
Depreciation 258,168 149,641
Amortization of deferred rent 67,966 0
Common stock issued in lieu of compensation 197,708 0
Changes in operating assets and liabilities:
Inventories (41,518) 1,754
Other current assets (378,658) (168,379)
Other assets (3,563) 3,198
Accounts payable 2,463,622 (250,685)
Accrued expenses 97,151 (181,257)
----------- -----------
Net cash provided by (used in) operating activities 1,217,260 (1,445,865)
----------- -----------
INVESTING ACTIVITIES:
Purchases of property and equipment (3,913,467) (2,685,688)
----------- -----------
FINANCING ACTIVITIES:
Proceeds from short-term notes payable 1,125,000 0
Proceeds from long-term debt 1,000,000 0
Tenant allowance collected 1,000,000 0
Advances/(payments) from/(to) shareholder 50,000 0
Amortization of warrant discount 98,842 0
Payments on short-term notes payable 0 (200,000)
Payments on long-term debt (26,132) (17,355)
----------- -----------
Net cash provided by (used in) financing activities 3,247,710 (217,355)
----------- -----------
INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS 551,503 (4,348,908)
CASH AND CASH EQUIVALENTS,
beginning of period 106,247 9,222,174
----------- -----------
CASH AND CASH EQUIVALENTS, end of period $ 657,750 $ 4,873,266
=========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH
FLOW INFORMATION:
Cash paid for interest $ 95,447 $ 44,990
Cash paid for income taxes 0 0
Non-cash item - landlord allowance receivable 962,500 1,600,000
</TABLE>
The accompanying condensed notes are an integral part of these financial
statements.
6
<PAGE> 7
CAFE ODYSSEY, INC.
CONDENSED NOTES TO THE FINANCIAL STATEMENTS
APRIL 4, 1999
(UNAUDITED)
1. GENERAL
The Company owns and operates three full service restaurants. One is located in
Cincinnati, Ohio (the "Kenwood Restaurant"), which operates under the trade name
"Hotel Discovery." The other two restaurants operate under the trade name Cafe
Odyssey, as will any future restaurants. One is in the Mall of America, located
in Bloomington, Minnesota, a suburb of Minneapolis (the "Mall of America
Restaurant"), and the other at the Denver Pavilions, located in the downtown
district of Denver, Colorado (the "Denver Pavilions Restaurant"). The Kenwood
Restaurant opened under the name "Hotel Mexico" on December 19, 1996. The Mall
of America Restaurant opened on June 8, 1998. The Denver Pavilions Restaurant
opened March 15, 1999. Prior to the opening of the Kenwood Restaurant, the
Company was in the development stage.
On February 25, 1998, the Company changed the name of its restaurant concept
from Hotel Discovery to Cafe Odyssey. In conjunction with this action, the
Company's Board of Directors and shareholders approved a change in its corporate
name from Hotel Discovery, Inc. to Cafe Odyssey, Inc. This change was approved
by shareholders on May 21, 1998. At the present time, the Company intends to
retain the name "Hotel Discovery" for the Kenwood Restaurant because of its
already established name. See Note 7 for further discussion of the Kenwood
Restaurant.
2. BASIS OF FINANCIAL STATEMENT PRESENTATION
The accompanying unaudited condensed financial statements have been prepared by
the Company pursuant to the rules and regulations of the Securities and Exchange
Commission. Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to such rules and
regulations. Although management believes that the disclosures are adequate to
make the information presented not misleading, it is suggested that these
interim financial statements be read in conjunction with the Company's most
recent 10-KSB dated January 3, 1999. In the opinion of management, all
adjustments (which include only normal recurring adjustments) necessary for a
fair presentation of the financial position, results of operations and cash
flows for the interim periods presented have been made. Operating results for
the thirteen weeks ended April 4, 1999, are not necessarily indicative of the
results that may be expected for the fiscal year ending January 2, 2000.
The Company has adopted a 52/53 week accounting period ending on the Sunday
nearest December 31 of each year. Fiscal year 1999 will be a 52 week year.
3. PROPERTY AND EQUIPMENT
Property and equipment consisted of the following as of:
<TABLE>
<CAPTION>
April 4, January 3,
1999 1999
------------ ------------
<S> <C> <C>
Leasehold improvements $ 12,795,485 $ 6,435,925
Equipment and fixtures 4,391,922 4,014,095
Construction in progress 0 2,832,920
------------ ------------
17,187,407 13,273,940
Less: accumulated depreciation and amortization (1,832,560) (1,574,392)
------------ ------------
Total property and equipment, net $ 15,354,847 $ 11,699,548
============ ============
</TABLE>
7
<PAGE> 8
CAFE ODYSSEY, INC.
CONDENSED NOTES TO THE FINANCIAL STATEMENTS (CONT.)
APRIL 4, 1999
(UNAUDITED)
4. WRITE-DOWN OF PROPERTY AND EQUIPMENT
The Company's initial restaurant location in Cincinnati, Ohio has not generated
positive operating cash flows to date. This initial format and Hotel Discovery
concept have not served as the prototype for the Company's subsequent
restaurants. Accordingly, the Company recorded a non-cash write-down of the
Kenwood Restaurant of $2,000,000 in 1998. An impairment was determined by the
Company's management based on the operating performance of the restaurant
combined with the difference between the carrying amount of the assets and the
undiscounted cash flows estimated to be generated. The write-down for impairment
of long-lived assets was calculated in accordance with the requirements of
Statement of Financial Accounting Standards No. 121 based primarily on operating
projections, future discounted cash flows and other relevant market factors.
The estimation process involved in determining if assets have been impaired and
in determining fair value is inherently uncertain since it requires estimates of
the current market, as well as future events and conditions. Such future events
and conditions include economic and market conditions, as well as the continued
acceptance of the Hotel Discovery concept. The realization of the estimates
applied to the Company's real estate projects is dependent upon future uncertain
events and conditions, and accordingly, the actual timing and amounts realized
by the Company may differ from the estimated fair values as described herein.
This write-down of the Kenwood Restaurant will allow the Company to divest
itself from this restaurant. The Company has a favorable land lease and as such,
will attempt to market such. Future positive cash flows from a sub-lease could
be generated. There can be no assurances that a sub-lease or sale of the Kenwood
Restaurant will be accomplished during 1999, if at all, which would meet the
requirements of the Company.
5. DEBT
On March 10, 1999, the Company entered into a promissory note for $825,000 with
a financial institution. The note is an unsecured revolving line of credit
facility which requires interest payments only. The interest rate on the note is
equal to the Index Rate (7.75% as of April 15, 1999), with the maximum interest
rate not to exceed 21.75% per annum. The note is due March 10, 2000. The note is
secured by personal guarantees and the Company has issued five-year warrants for
an aggregate of 500,000 shares of common stock at an exercise price of $0.75 per
share to the guarantors in consideration of the guarantees. One guarantor, a
director of the Company, received 87,500 warrants, the remaining 412,500
warrants going to other third party guarantors.
6. COMMITMENTS AND CONTINGENCIES
In conjunction with our expansion activity, the Company enters into fixed price
construction contracts from time to time. At April 4, 1999, there is an
outstanding contract commitment for the construction of the Denver Pavilions
Restaurant. As of April 4, 1999, the balance remaining to be paid under this
contract was approximately $2,300,000.
7. SUBSEQUENT EVENTS
On April 30, 1999, the Company entered into a master equipment lease agreement
("Capital Lease") for $300,000 with a financial institution. The Capital Lease
is secured by substantially all of the furniture, accessories, computer/POS and
kitchen equipment located at the Denver Pavilions Restaurant and required
security deposits of approximately $135,000. Monthly payments of $8,708 are
required through April 2003.
8
<PAGE> 9
CAFE ODYSSEY, INC.
CONDENSED NOTES TO THE FINANCIAL STATEMENTS (CONT.)
APRIL 4, 1999
(UNAUDITED)
On May 13, 1999, the Company signed a letter of intent to acquire Popmail.com.
Through partnerships with radio stations nationwide, Popmail.com is a leading
email provider to radio stations. Completion of the transaction is subject to
the approval of the Company's shareholders.
On May 14, 1999, the Company issued 2,000 shares of Series A 8% convertible
preferred stock (the "Preferred Stock") with a stated value of $1,000 per share
in a private placement for total proceeds of $2,000,000 and net proceeds after
expenses of approximately $1,700,000. In addition, the Company issued a warrant
(the "Warrant") to the holder of Preferred Stock to purchase 300,000 shares of
the Company's common stock at $3.00 per share in connection with the offering.
The Warrant is exercisable for five years. In addition to a 10% placement fee
and a 3% unallocable expense allowance, the placement agent received a warrant
to acquire 150,000 shares of Common Stock at $3.00 per share.
The annual dividend of 8% is cumulative and is payable quarterly in arrears
either in cash or in registered shares of the Company's common stock. Each share
of Preferred Stock is convertible into shares of the Company's common stock at a
conversion price equal to 65% of the average closing bid price for the common
stock five days prior to the conversion. The total number of shares of common
stock issuable (i) upon conversion of the Preferred Stock, (ii) as a dividend on
the Preferred Stock and (iii) upon exercise of the Warrant cannot exceed
1,662,687 shares (20% of the number of outstanding shares of common stock on May
14, 1999), unless the Company obtains shareholder approval as required by
Nasdaq. In the event a holder of Preferred Stock is unable to convert shares of
Preferred Stock into common stock because 1,662,687 shares have already been
issued as described in the preceding sentence, the Company must redeem any
unconverted Preferred Stock presented for conversion for cash at a price equal
to 125% of the stated value. The Company has the right to redeem the Preferred
Stock in cash at 135% of stated value plus accrued and unpaid dividends. All
Preferred Stock which is still outstanding on May 14, 2004 is mandatorily
converted at the Conversion Price.
The Company is not required to convert Preferred Stock, whether upon request for
conversion by the holder or upon the May 14, 2004 mandatory conversion date, if
and to the extent that such holder would then own in excess of 5% of the
Company's common stock. If, notwithstanding the foregoing, such holder is deemed
by a court to be the beneficial owner of more than 5% of the Company's common
stock, the Company is required to redeem for cash such number of shares of
Preferred Stock as will reduce such holder's ownership to not more than 5% at a
redemption price equal to the stated value plus accrued and unpaid dividends. In
the case of mandatory conversion, the Company may elect to pay a redemption
price in cash equal to 135% of the stated value plus accrued and unpaid
dividends or may extend the mandatory conversion date for one year.
The Company is required to file by June 13, 1999 a Registration Statement
relating to the resale of common stock issuable (i) upon conversion of the
Preferred Stock, (ii) in lieu of cash dividends on the Preferred Stock and (iii)
upon exercise of the Warrant. If the Registration Statement is not filed by such
date, or has not been declared effective by the SEC by October 11, 1999, the
Company must pay liquidated damages thereafter until such conditions are
satisfied.
9
<PAGE> 10
ITEM 2.
CAFE ODYSSEY, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following management's discussion and analysis of financial condition and
results of operations should be read in connection with the accompanying
unaudited condensed financial statements and related notes thereto included
elsewhere in this report, and the audited financial statements and notes thereto
included in the Company's Form 10-KSB for the fiscal year ended January 3, 1999.
OVERVIEW
Cafe Odyssey, Inc. (the "Company") develops, owns and operates restaurants with
multiple themed dining rooms designed to appeal to the upscale casual dining
market. The Company owns and operates three full service restaurants. One is
located in Cincinnati, Ohio (the "Kenwood Restaurant"), which operates under the
trade name "Hotel Discovery." The other two restaurants operate under the trade
name Cafe Odyssey, as will any future restaurants. One is in the Mall of
America, located in Bloomington, Minnesota, a suburb of Minneapolis (the "Mall
of America Restaurant"), and the other at the Denver Pavilions, located in the
downtown district of Denver, Colorado (the "Denver Pavilions Restaurant")
(together the "Restaurants"). The Kenwood Restaurant opened under the name
"Hotel Mexico" on December 19, 1996. The Mall of America Restaurant opened on
June 8, 1998. The Denver Pavilions Restaurant opened March 15, 1999. Prior to
the opening of the Kenwood Restaurant, the Company was in the development stage.
The Company began operations as Hotel Mexico, Inc. ("HMI"), which was
incorporated in Ohio in January 1994. The Kenwood Restaurant Limited
Partnership, an Ohio limited partnership (the "Kenwood Partnership") was formed
in June 1995 to own and operate the Kenwood Restaurant. HMI's operations and the
net assets of the Kenwood Partnership were combined in November 1996 and in
August 1997. HMI was reorganized as Hotel Discovery, Inc., a Minnesota
corporation.
On February 25, 1998, the Company changed the name of its restaurant concept
from Hotel Discovery to Cafe Odyssey. The Company believes that the new name
better reflects the concept's primary focus on award-winning food, served in a
unique environment of adventure, imagination, exploration and innovation. In
conjunction with this action, the Company's Board of Directors and shareholders
approved a change in its corporate name from Hotel Discovery, Inc. to Cafe
Odyssey, Inc. This change was approved by shareholders on May 21, 1998. At the
present time, the Company intends to retain the name "Hotel Discovery" for the
Kenwood Restaurant because of its already established name.
On May 13, 1999, the Company signed a letter of intent to acquire Popmail.com.
Through partnerships with radio stations nationwide, Popmail.com is a leading
email provider to radio stations. Completion of the transaction is subject to
the approval of the Company's shareholders.
Future revenue and profits, if any, will depend upon various factors, including
market acceptance of the Cafe Odyssey concept, the quality of restaurant
operations, the ability to expand to multi-unit locations and general economic
conditions. The Company's present source of revenue is limited to its existing
restaurants. There can be no assurances the Company will successfully implement
its expansion plans, in which case it will continue to be dependent on the
revenues from the existing restaurants. The Company also faces all of the risks,
expenses and difficulties frequently encountered in connection with the
expansion and development of a new and expanding business. Furthermore, to the
extent the Company's expansion strategy is successful, it must manage the
transition to multiple-site operations, higher volume operations, the control of
overhead expenses and the addition of necessary personnel.
The Company has adopted a 52/53 week accounting period ending on the Sunday
nearest December 31 of each year.
10
<PAGE> 11
CAFE ODYSSEY, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONT.)
RESULTS OF OPERATIONS FOR THE THIRTEEN WEEKS ENDED APRIL 4, 1999 AND MARCH 29,
1998
NET SALES
The Company's only revenue source for the period ended March 29, 1998, was the
Kenwood Restaurant. Accordingly, comparisons for this thirteen week period may
not be meaningful.
The net sales for the thirteen weeks ended April 4, 1999, was $2,332,632
compared to net sales of $804,319 for the thirteen weeks ended March 29, 1998,
an increase of $1,528,313 or 190.0%. The increase in sales is attributable to
the Mall of America Restaurant and the opening of the Denver Pavilions
Restaurant on March 15, 1999.
The Kenwood Restaurant had net sales for the thirteen weeks ended April 4, 1999,
of $501,132 compared to net sales of $804,319 for the thirteen weeks ended March
29, 1998, a decrease of $303,187 or 37.7%. This beta site has not generated
positive operating cash flows to date. This initial format and Hotel Discovery
concept have not served as the prototype for the Company's subsequent
restaurants. Accordingly, the Company recorded a non-cash write-down of the
Kenwood Restaurant of $2,000,000 in 1998. This write-down of the Kenwood
Restaurant will allow the Company to divest itself from this restaurant. The
Company has a favorable land lease and intends to market the property for either
a sub-lease or outright sale. Future positive cash flows from a sub-lease could
be generated. There can be no assurances that a sub-lease or sale of the Kenwood
Restaurant will be accomplished during 1999, if at all, which would meet the
requirements of the Company.
The Mall of America Restaurant, which opened June 8, 1998, had net sales for the
thirteen weeks ended April 4, 1999, of $1,443,709.
The Denver Pavilions Restaurant, which opened March 15, 1999, had net sales for
the three weeks ended April 4, 1999, of $387,791.
COSTS AND EXPENSES
The food, beverage and retail costs for the thirteen weeks ended April 4, 1999,
were $606,587 compared to $218,416 for the thirteen weeks ended March 29, 1998,
an increase of $388,171 or 177.7%. The percentage increase in food, beverage and
retail costs as compared to the percentage increase of sales reflects the
economies of scale of the larger revenue restaurants.
The Kenwood Restaurant had food, beverage and retail costs for the thirteen
weeks ended April 4, 1999, of $133,308 compared to $218,416 for the thirteen
weeks ended March 29, 1998, a decrease of $85,108 or 39.0%. The correlation that
exists between the decrease in costs and expenses is in line with the decrease
in revenues.
The Mall of America Restaurant, which opened June 8, 1998, had food, beverage
and retail costs for the thirteen weeks ended April 4, 1999, of $368,057.
The Denver Pavilions Restaurant, which opened March 15, 1999, had food, beverage
and retail costs for the three weeks ended April 4, 1999, of $105,222.
Restaurant operating expenses, which include labor, direct and indirect
expenses, and occupancy expenses for the thirteen weeks ended April 4, 1999,
were $1,716,303 compared to $681,602 for the thirteen weeks ended March 29,
1998, an increase of $1,034,701 or 151.8%. The percentage increase in restaurant
operating expenses as compared to the percentage increase of sales reflects the
economies of scale of the larger revenue restaurants.
11
<PAGE> 12
CAFE ODYSSEY, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONT.)
Depreciation and amortization expenses for the thirteen weeks ended April 4,
1999, were $258,168 compared to $125,840 for the thirteen weeks ended March 29,
1998, an increase of $132,328 or 105.2%. This increase is due primarily to the
addition of the Mall of America Restaurant.
Pre-opening and start-up expenses were $572,932 for thirteen weeks ended April
4, 1999, as compared to $127,318 for the thirteen weeks ended March 29, 1998, an
increase of $445,614 or 350.0%. This increase includes pre-opening expenses of
$504,973 for the Denver Pavilions Restaurant and $67,959 related to the Irvine,
California site. The Company has decided not to open a restaurant at this
specific site.
The Company's executive and administrative office located in Bloomington,
Minnesota, had general, administrative and development expenses for the thirteen
weeks ended April 4, 1999, of $480,247 compared to $742,135 for the thirteen
weeks ended March 29, 1998, a decrease of $261,888 or 35.3%. This decrease
reflects the results of the Company's efforts to reduce its general,
administrative and development expense line items for the 1999 fiscal year.
Interest expense was $142,049 for thirteen weeks ended April 4, 1999, as
compared to interest income of $118,690. The Company has to address the numerous
executive and administrative staffing requirements, the requirements needed to
manage remote sites, shareowner relationships, etc. and development costs
associated with site location. The Company will be seeking additional senior
management personnel as well as support staff, which will also have an
associated impact on future earnings. The Company expects to continue to incur
operating losses during 1999.
LIQUIDITY AND CAPITAL RESOURCES
The Company had a working capital deficit of $6,671,652 at April 4, 1999,
compared to working capital deficit of $3,870,058 on January 3, 1999. Cash and
cash equivalents were $657,750 at April 4, 1999, representing an increase of
$551,503 from the cash and cash equivalents of $106,247 at January 3, 1999.
Since inception, the Company's principal capital requirements have been (i) the
development of the Company and the Hotel Discovery/Cafe Odyssey concept, (ii)
the construction of the Kenwood Restaurant and the acquisition of furniture,
fixtures and equipment of approximately $5.1 million, net of landlord
contributions, (iii) the construction of the Mall of America Restaurant and the
acquisition of furniture, fixtures and equipment of approximately $4.8 million,
net of landlord contributions, and (iv) the development of the Denver Pavilions
Restaurant.
The Company's primary sources of working capital have been proceeds from the
sale of common stock to and borrowings from its principal shareholder, Stephen
D. King, the private placement of common stock and debt, as well as the proceeds
from the Company's initial public offering of Units in November 1997. During
1998 and 1997, the maximum amount of borrowings from Mr. King outstanding at any
one time was $100,000 and $1,148,430, respectively. The amount of outstanding
indebtedness as of April 4, 1999 was $150,000.
In October 1995, Kenwood Restaurant Limited Partnership, an Ohio limited
partnership formed in June 1995 (the "Kenwood Partnership"), raised $2.5 million
in a private placement of 250 shares of common stock of the Company's
predecessor (which shares were split 825-to-1 in November 1996, and now
represent 206,250 shares of the Company) and limited partnership interests in
the Kenwood Partnership. In a reorganization of the Company which occurred in
November 1996, the Kenwood Partnership contributed all of its net assets to the
Company's predecessor, including the Kenwood Restaurant, in exchange for
1,350,000 shares of common stock of the Company. The general partner of the
Kenwood Partnership was Kenwood Restaurant, Inc., an Ohio corporation that was
controlled by Stephen D. King until his resignation as an officer and director
in September 1997. The Kenwood Partnership was dissolved in October 1997.
The Company borrowed $1.0 million under a leasehold mortgage term loan from a
bank, which was personally guaranteed by Mr. King. This financing was used for
the Kenwood Restaurant. Principal and interest were due
12
<PAGE> 13
CAFE ODYSSEY, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONT.)
monthly through February 1999. This loan was repaid in September 1998. In
December 1996 the Company borrowed an additional $2.5 million under a mortgage
term loan from a bank. Payments of interest only were due through January 1998
at which time the entire principal balance was due. This loan was paid in full
on January 31, 1997. In May 1997 the Company borrowed $2.0 million on a 13-month
term note, with interest only payable monthly at the rate of 7.15%. This note
was guaranteed by Mr. King and was collateralized by substantially all of the
Company's assets. This note was repaid in July 1997. On June 23, 1997, the
Company borrowed $800,000, also collateralized by substantially all of the
Company's assets. The loan was personally guaranteed by Mr. King and was repaid
in full in July 1997.
From November 1996 through July 1997 the Company's predecessor completed private
placements of an aggregate of 2,392,889 shares of Common stock at $3.00 per
share. The net proceeds were approximately $6.1 million. Such proceeds were
fully utilized for the Kenwood Restaurant, repayment of indebtedness, working
capital and construction of the Mall of America Restaurant and the Denver
Pavilions Restaurant.
On August 12, 1997, the Company borrowed $200,000 from Provident Bank at an
annual rate of interest of 2% over Provident's reference rate. The loan was
personally guaranteed by Mr. King and was repaid in full in November 1997. On
September 8, 1997, the Company borrowed $200,000 from Bank Windsor at an annual
rate of 1.125% over Bank Windsor's reference rate. The loan was payable on
demand and had an outstanding principal balance of $200,000 on December 28,
1997. This loan was repaid in full in January 1998. On October 3, 1997, the
Company borrowed $200,000 from Trakehner Holdings, Inc., which bore interest at
8.75% and was due on demand or no later than the effective date of the Company's
initial public offering. This loan was repaid in full in November 1997.
In November 1997 the Company completed an initial public offering of 2,500,000
Units, each Unit consisting of one share of Common Stock and one redeemable
Class A Warrant at an initial public offering price of $5.00 per Unit. In
December 1997 the Company issued an additional 100,000 Units to its principal
underwriter, R.J. Steichen & Company, pursuant to the underwriter's decision to
exercise a portion of its over-allotment option. The Company received net
proceeds of approximately $11.2 million in conjunction with the initial public
offering and the partial exercise of the underwriter's over-allotment.
The Company entered into a senior promissory note in June 1998, which had an
outstanding balance of $882,390 at April 4, 1999. The note requires monthly
installments of $25,044 including interest of 15.94%. The note is secured by
equipment and is due July 2002.
In September 1998 the Company entered into a $3,000,000 revolving line of credit
facility with a financial institution. This credit facility is secured by an
open-ended leasehold mortgage, security agreement and assignment of rents,
income and proceeds ("Mortgage"), which Mortgage encumbers the leasehold
improvements of the Kenwood Restaurant. In addition, two directors and an
ex-director of the Company entered into a joint and several limited guaranty of
the first $1,000,000 of the Company's borrowings under this credit facility. In
consideration of these guarantees, the Company issued 40,000 five-year warrants
to each of these individuals at an exercise price of $0.75 per share in November
1998. Guarantees for the other $2,000,000 were obtained later in November 1998
from two of the aforementioned directors and an additional third party whereby
two of the directors each severally guaranteed $500,000, and the other third
party guaranteed $1,000,000, of such borrowings. All three guarantors pledged
certain collateral to the financial institution in connection with the latter
guarantees. In exchange for such guarantees and pledges of collateral, the
Company issued 200,000 five-year warrants each to two of the directors in
November 1998, and 400,000 five-year warrants to the other third party in
January 1999 all at an exercise price of $0.75 per share. The Board of Directors
of the Company also authorized the issuance of additional warrants and the
payment of cash penalties to the three guarantors if the borrowings are not
repaid in full by September 30, 1999. This credit facility provides for monthly
payments of interest accrued on the outstanding unpaid principal balance at
13
<PAGE> 14
CAFE ODYSSEY, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONT.)
a rate equal to the Prime Rate, or 7.75% as of April 4, 1999. As of April 2,
1999, the Company has borrowed $3,000,000 under this credit facility. The line
of credit facility and senior promissory note contain certain restrictive
covenants, as defined. As of April 4, 1999, the Company was in compliance with
all such covenants.
On February 23, 1999, the Company entered into a promissory note for $300,000
with a private investor. The note is unsecured and requires a balloon payment of
principal and interest 90 days from the loan date. The interest rate is 18% per
year, with a 2% loan origination fee. The Company issued a five year warrant to
such investor to purchase 50,000 shares of the Company's common stock at an
exercise price of $0.50 per share.
On March 10, 1999, the Company entered into a promissory note for $825,000 with
a financial institution. The note is an unsecured revolving line of credit
facility which requires interest payments only. The interest rate on the note is
equal to the Index Rate (7.75% as of April 15, 1999), with the maximum interest
rate not to exceed 21.75% per annum. The note is due March 10, 2000. The note is
secured by personal guarantees and the Company has issued five-year warrants for
an aggregate of 500,000 shares of common stock at an exercise price of $0.75 per
share to the guarantors in consideration of the guarantees. One guarantor, a
director of the Company, received 87,500 warrants, the remaining 412,500
warrants going to other third party guarantors.
On April 30, 1999, the Company entered into a master equipment lease agreement
("Capital Lease") for $300,000 with a financial institution. The Capital Lease
is secured by substantially all of the furniture, accessories, computer/POS and
kitchen equipment located at the Denver Pavilions Restaurant and required
security deposits of approximately $135,000. The note bears interest at 17.3%
and monthly payments of $8,708 are required for 4 years.
On May 13, 1999, the Company signed a letter of intent to acquire Popmail.com.
Through partnerships with radio stations nationwide, Popmail.com is a leading
email provider to radio stations. Completion of the transaction is subject to
the approval of the Company's shareholders.
On May 14, 1999, the Company issued 2,000 shares of Series A 8% convertible
preferred stock (the "Preferred Stock") with a stated value of $1,000 per share
in a private placement for total proceeds of $2,000,000 and net proceeds after
expenses of approximately $1,700,000. In addition, the Company issued a warrant
(the "Warrant") to the holder of Preferred Stock to purchase 300,000 shares of
the Company's common stock at $3.00 per share in connection with the offering.
The Warrant is exercisable for five years. In addition to a 10% placement fee
and a 3% unallocable expense allowance, the placement agent received a warrent
to acquire 150,000 shares of Common Stock at $3.00 per share.
The annual dividend of 8% is cumulative and is payable quarterly in arrears
either in cash or in registered shares of the Company's common stock. Each share
of Preferred Stock is convertible into shares of the Company's common stock at a
conversion price equal to 65% of the average closing bid price for the common
stock five days prior to the conversion. The total number of shares of common
stock issuable (i) upon conversion of the Preferred Stock, (ii) as a dividend on
the Preferred Stock and (iii) upon exercise of the Warrant cannot exceed
1,662,687 shares (20% of the number of outstanding shares of common stock on May
14, 1999), unless the Company obtains shareholder approval as required by
Nasdaq. In the event a holder of Preferred Stock is unable to convert shares of
Preferred Stock into common stock because 1,662,687 shares have already been
issued as described in the preceding sentence, the Company must redeem any
unconverted Preferred Stock presented for conversion for cash at a price equal
to 125% of the stated value. The Company has the right to redeem the Preferred
Stock in cash at 135% of stated value plus accrued and unpaid dividends. All
Preferred Stock which is still outstanding on May 14, 2004 is mandatorily
converted at the Conversion Price.
The Company is not required to convert Preferred Stock, whether upon request for
conversion by the holder or upon the May 14, 2004 mandatory conversion date, if
and to the extent that such holder would then own in excess of 5% of the
Company's common stock. If, notwithstanding the foregoing, such holder is deemed
by a court to be the beneficial owner of more than 5% of the Company's common
stock, the Company is required to redeem for cash
14
<PAGE> 15
CAFE ODYSSEY, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONT.)
such number of shares of Preferred Stock as will reduce such holder's ownership
to not more than 5% at a redemption price equal to the stated value plus accrued
and unpaid dividends. In the case of mandatory conversion, the Company may elect
to pay a redemption price in cash equal to 135% of the stated value plus accrued
and unpaid dividends or may extend the mandatory conversion date for one year.
The Company is required to file by June 13, 1999 a Registration Statement
relating to the resale of common stock issuable (i) upon conversion of the
Preferred Stock, (ii) in lieu of cash dividends on the Preferred Stock and (iii)
upon exercise of the Warrant. If the Registration Statement is not filed by such
date, or has not been declared effective by the SEC by October 11, 1999, the
Company must pay liquidated damages thereafter until such conditions are
satisfied.
The Class A Warrants are subject to redemption by the Company at any time, on
not less than 30 days' written notice, at a price of $0.01 per Warrant at any
time following a period of 14 consecutive trading days where the per share
average closing bid price of the Company's common stock exceeds $7.00 (subject
to adjustment), provided that a current prospectus covering the shares issuable
upon the exercise of the Class A Warrants is then effective under federal
securities laws. For these purposes, the closing bid price of the common stock
shall be determined by the last reported sale price on the primary exchange on
which the common stock is traded.
The Company will not open any new restaurants in fiscal year 1999 unless
sufficient capital is raised. Management is committed to its original,
fundamental strategy of slow, controlled growth. This approach to expansion
although conservative, will strengthen the concept and avoid the pitfalls of
some of the competition by insuring that the management team is not outdistanced
and can execute the Company standards. It also insures that the real estate
strategy is not compromised due to forced timing of restaurant openings. With
the successful execution of the Denver Pavilions Restaurant, being opened on
time and on budget, the Company has terminated the lease agreement with the
Irvine, California developer primarily due to the physical placement that the
restaurant would occupy within the Irvine complex. The Company is investigating
other real estate site locations.
The Company estimates that its capital expenditures required for its next
restaurant (excluding any landlord contributions) will be approximately $3 to
$10 million. The Company expects to finance its concept development and
expansion through cash flow from operations, the exercise of its Class A
Warrants and other forms of financing such as the sale of additional equity and
debt securities, capital leases and other credit facilities. There are no
assurances that such financing will be available on terms acceptable or
favorable to the Company.
IMPACT OF THE YEAR 2000 ISSUE
INTRODUCTION. The term "Year 2000" is used to describe general problems that may
result from improper processing of dates and date-sensitive calculations by
computers or other machinery as the year 2000 is approached and reached. This
problem stems from the fact that many of the world's computer hardware and
software applications have historically used only the last two digits to refer
to a year. As a result, many of these computer programs do not or will not
properly recognize a year that begins with "20" instead of the familiar "19." If
not corrected, many computer applications could fail or create erroneous
results. The following information was prepared to comply with the guidelines
for Year 2000 disclosure that the Securities and Exchange Commission issued in
an Interpretative Release, effective August 4, 1998. These guidelines require
significantly more detailed information than was previously required by the
Commission.
THE COMPANY'S STATE OF READINESS. To operate its business, the Company relies on
many third party information technology systems ("IT"), including its point of
sale, table seating and reservation management, inventory management, credit
card processing, payroll, accounts payable, fixed assets, banking and general
ledger systems. The Company does not maintain any proprietary IT systems and has
not made any modifications to any of the IT systems provided to it by its IT
vendors. The Company has requested that each of the vendors providing
15
<PAGE> 16
CAFE ODYSSEY, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONT.)
hardware and software to run these systems ("IT vendors") complete a Year 2000
compliance questionnaire. The Company has not yet received completed
questionnaires from all of its IT vendors. Of those questionnaires that have
been completed, the Company has been provided software upgrades and enhancements
that, when installed, will ensure that the information technology systems
associated with that particular vendor will be Year 2000 compliant. The Company
expects that all assurances and/or IT upgrades and enhancements from its IT
vendors will be completed and installed by September 1, 1999.
The Company also relies upon government agencies, utility companies, providers
of telecommunications services, food, beverage and retail product suppliers and
other third party product and service providers ("Material Relationships"), over
which it can assert little control. The Company's ability to conduct its core
business is dependent upon the ability of these Material Relationships to ensure
Year 2000 compliance, to the extent they affect the Company. If the
telecommunications carriers, public utilities, key food, beverage and retail
product suppliers and other Material Relationships do not appropriately rectify
their Year 2000 issues, the Company's ability to conduct its core business may
be materially impacted, which could result in a material adverse effect on the
Company's financial condition.
The Company has begun an assessment of all Material Relationships to determine
risk and assist in the development of contingency plans. This effort is expected
to be completed by September 1, 1999.
COSTS TO ADDRESS THE COMPANY'S YEAR 2000 ISSUES. The Company expenses costs
associated with its Year 2000 compliance efforts as the costs are incurred. The
Company has not yet incurred any expenses in connection with its Year 2000
compliance efforts to date, and estimates it will spend no more than $5,000 to
complete its Year 2000 compliance efforts. The Company estimates that the only
costs that it will incur in connection with its Year 2000 compliance efforts
will be in the testing phase, which will not occur until it has received
assurances from each of its IT vendors that their IT systems upon which the
Company relies are Year 2000 compliant. All costs associated with bringing these
IT systems into Year 2000 compliance are expected to be borne by the Company's
IT vendors. It is expected that the Company will have received these assurances
and will begin its testing phase by September 1, 1999. It should be noted,
however, that the Company is unable to estimate the costs that it may incur as a
result of Year 2000 problems suffered by its IT vendors and Material
Relationships, and that there can be no assurance that the Company will
successfully identify and rectify all its Year 2000 problems.
RISKS PRESENTED BY YEAR 2000 PROBLEMS. The Company has not yet begun the testing
phase of its Year 2000 compliance efforts. As a result, the Company cannot fully
assess the risks from any potential Year 2000 issues. Once the testing phase is
underway, which is expected to occur no later than September 1, 1999, the
Company may identify areas of its core business that are at risk of Year 2000
disruption. In addition, many of the Company's critical Material Relationships
may not appropriately address their Year 2000 issues, the result of which could
have a material adverse effect on the Company's financial condition and results
of operations.
THE COMPANY'S CONTINGENCY PLANS. Because the Company has not yet begun the
testing phase of its Year 2000 compliance efforts, and accordingly has not yet
fully assessed its risks from any potential Year 2000 issues, the Company has
not yet developed detailed contingency plans specific to Year 2000 issues for
any specific areas of business. The Company expects, however, to develop
detailed contingency plans specific to Year 2000 issues once the testing phase
of its Year 2000 compliance efforts is complete and its key risks have been
assessed.
16
<PAGE> 17
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is involved in routine legal actions in the ordinary course of its
business. Although outcomes of any such legal actions cannot be predicted, in
the opinion of management there is no legal proceeding pending against or
involving the Company for which the outcome is likely to have a material adverse
effect upon the financial position or results of operations of the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
3.1 Articles of Incorporation, as amended
10.1 Common Stock Purchase Warrant to purchase 300,000
shares of Cafe Odyssey, Inc. dated as of May 14,
1999, issued to The Shaar Fund Ltd.
10.2 Securities Purchase Agreement, dated as of
May 14, 1999, between Cafe Odyssey, Inc.,
and The Shaar Fund Ltd.
10.3 Registration Rights Agreement, dated May 14, 1999,
between Cafe Odyssey, Inc., and The Shaar Fund Ltd.
27 Financial Data Schedule
(b) REPORTS ON FORM 8-K
None
17
<PAGE> 18
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
CAFE ODYSSEY, INC.
By: /s/ Stephen D. King
-------------------
Stephen D. King
Chief Executive Officer and
Chief Financial Officer
Date: May 18, 1999
18
<PAGE> 1
EXHIBIT 3.1
ARTICLES OF INCORPORATION
OF
HOTEL DISCOVERY, INC.
The undersigned hereby creates a corporation under Chapter 302A of the
Minnesota Statutes and adopts the following Articles of Incorporation.
ARTICLE 1
NAME
The name of the Corporation is HOTEL DISCOVERY, INC.
ARTICLE 2
REGISTERED OFFICE
The address of the registered office of the Corporation is 3300 Norwest
Center, 90 South Seventh Street, Minneapolis, Minnesota 55402.
ARTICLE 3
CAPITAL
A. The Corporation is authorized to issue one hundred million
(100,000,000) shares of capital stock, having a par value of
one cent ($.01) per share in the case of common stock, and
having a par value as determined by the Board of Directors in
the case of preferred stock, to be held, sold and paid for at
such times and in such manner as the Board of Directors may
from time to time determine in accordance with the laws of the
State of Minnesota.
B. In addition to any and all powers conferred upon the Board of
Directors by the laws of the State of Minnesota, the Board of
Directors shall have the authority to establish by resolution
more than one class or series of shares, either preferred or
common, and to fix the relative rights, restrictions and
preferences of any such different classes or series, and the
authority to issue shares of a class or series to another
class or series to effectuate share dividends, splits or
conversion of the Corporation's outstanding shares.
C. The Board of Directors shall also have the authority to issue
rights to convert any of the Corporation's securities into
shares of stock of any class or classes, the authority to
issue options to purchase or subscribe for shares of stock of
any class or classes, and the authority to issue share
purchase or subscription warrants or any other evidence of
such option rights which set forth the terms, provisions and
conditions thereof, including the price or prices at which
such shares may be
<PAGE> 2
subscribed for or purchased. Such options, warrants and
rights, may be transferable or nontransferable and separable
or inseparable from other securities of the Corporation. The
Board of Directors is authorized to fix the terms, provisions
and conditions of such options, warrants and rights, including
the conversion basis or bases and the option price or prices
at which shares may be subscribed for or purchased.
ARTICLE 4
SHAREHOLDER RIGHTS
A. No shareholder of the Corporation shall have any preemptive
rights.
B. No shareholder of the Corporation shall have any cumulative
voting rights.
ARTICLE 5
INCORPORATOR
The name and address of the incorporator, who is a natural person of
full age, is:
William M. Mower
3300 Norwest Center
90 South Seventh Street
Minneapolis, Minnesota 55402-4140
ARTICLE 6
WRITTEN ACTION BY LESS THAN ALL OF THE DIRECTORS
Any action required or permitted to be taken at a Board meeting, other
than an action requiring shareholder approval, may be taken by written action of
the Board of Directors if signed by the number of directors that would be
required to take the same action at a meeting at which all directors were
present.
ARTICLE 7
LIMITED LIABILITY OF DIRECTORS
To the fullest extent permitted by law, a director shall have no
personal liability to the Corporation or its shareholders for breach of
fiduciary duty as a director. Any amendment to or repeal of this Article 7 shall
not adversely affect any right or protection of a director of the Corporation
for or with respect to any acts or omissions of such director occurring prior to
such amendment or repeal.
<PAGE> 3
IN WITNESS WHEREOF, I have signed my name this 31st day of July, 1997.
/s/ William M. Mower
--------------------------------------
William M. Mower, Incorporator
<PAGE> 4
ARTICLES OF AMENDMENT
OF
ARTICLES OF INCORPORATION
OF
HOTEL DISCOVERY, INC.
The undersigned President of Hotel Discovery, Inc., a Minnesota
corporation (the "Corporation"), hereby certifies that at a meeting of the
shareholders on May 21, 1998, the following resolution to amend its Articles of
Incorporation were adopted by the shareholders of the Corporation in accordance
with the applicable provisions of the Minnesota Business Corporation Act:
1. Article 1 of its Articles of Incorporation is amended to read
in its entirety as follows:
The name of the Corporation is Cafe Odyssey, Inc.
IN WITNESS WHEREOF the undersigned has hereunto set his hand this 22nd
day of May, 1998.
/s/ Ronald K. Fuller
-----------------------------
Ronald K. Fuller
President
<PAGE> 5
CERTIFICATE OF DESIGNATION
OF
SERIES A 8% CONVERTIBLE PREFERRED STOCK
OF
CAFE ODYSSEY, INC.
--------------------------------------------------
Pursuant to Section 302A.401 of the
Business Corporation Act of the State of Minnesota
--------------------------------------------------
Cafe Odyssey, Inc., a corporation organized and existing under
the Business Corporation Act of the State of Minnesota (the "CORPORATION"),
hereby certifies that the following resolutions were adopted by the Board of
Directors of the Corporation on May 12, 1999 pursuant to authority of the Board
of Directors as required by Section 302A.401, Subdivision 3 of the Business
Corporation Act of the State of Minnesota:
RESOLVED, that pursuant to the authority granted to and vested
in the Board of Directors of this Corporation (the "BOARD OF DIRECTORS" or the
"BOARD") in accordance with the provisions of its Article of Incorporation, the
Board of Directors hereby authorizes a series of the Corporation's preferred
stock (the "PREFERRED STOCK"), and hereby states the designation and number of
shares, and fixes the relative rights, preferences, privileges, powers and
restrictions thereof as follows:
Series A 8% Convertible Preferred Stock:
ARTICLE 1
DEFINITIONS
The terms defined in this Article whenever used in this
Certificate of Designation have the following respective meanings:
(a) "ADDITIONAL CAPITAL SHARES" has the meaning set forth in
Section 6.1(c).
(b) "AFFILIATE" has the meaning ascribed to such term in Rule
12b-2 under the Securities Exchange Act of 1934, as amended.
(c) "BUSINESS DAY" means a day other than Saturday, Sunday or
any day on which banks located in the State of New York are authorized or
obligated to close.
(d) "CAPITAL SHARES" means the Common Shares and any other
shares of any other class or series of common stock, whether now or hereafter
authorized and however designated, which have the right to participate in the
distribution of earnings and assets (upon dissolution, liquidation or
winding-up) of the Corporation.
(e) "CLOSING DATE" means May 14, 1999.
<PAGE> 6
(f) "COMMON SHARES" or "COMMON STOCK" means shares of common
stock, par value $0.01 per share, of the Corporation.
(g) "COMMON STOCK ISSUED AT CONVERSION" when used with
reference to the securities issuable upon conversion of the Series A Preferred
Stock, means all Common Shares now or hereafter Outstanding and securities of
any other class or series into which the Series A Preferred Stock hereafter
shall have been changed or substituted, whether now or hereafter created and
however designated.
(h) "CONVERSION DATE" means any day on which all or any
portion of shares of the Series A Preferred Stock is converted in accordance
with the provisions hereof.
(i) "CONVERSION NOTICE" has the meaning set forth in Section
6.2.
(j) "CONVERSION PRICE" means on any date of determination the
applicable price for the conversion of shares of Series A Preferred Stock into
Common Shares on such day as set forth in Section 6.1.
(k) "CONVERSION RATIO" means on any date of determination the
applicable percentage of the Market Price for conversion of shares of Series A
Preferred Stock into Common Shares on such day as set forth in Section 6.1.
(l) "CORPORATION" means Cafe Odyssey, Inc., a Minnesota
corporation, and any successor or resulting corporation by way of merger,
consolidation, sale or exchange of all or substantially all of the Corporation's
assets, or otherwise.
(m) "CURRENT MARKET PRICE" means on any date of determination
the closing bid price of a Common Share on such day as reported on the Nasdaq
SmallCap Market ("NASDAQ"); provided, if such security bid is not listed or
admitted to trading on the Nasdaq, as reported on the principal national
security exchange or quotation system on which such security is quoted or listed
or admitted to trading, or, if not quoted or listed or admitted to trading on
any national securities exchange or quotation system, the closing bid price of
such security on the over-the-counter market on the day in question as reported
by Bloomberg LP, or a similar generally accepted reporting service, as the case
may be.
(n) "HOLDER" means The Shaar Fund Ltd., any successor thereto,
or any Person or Persons to whom the Series A Preferred Stock is subsequently
transferred in accordance with the provisions hereof.
(o) "MARKET DISRUPTION EVENT" means any event that results in
a material suspension or limitation of trading of the Common Shares on Nasdaq.
(p) "MARKET PRICE" per Common Share means the arithmetic mean
of the closing bid prices of the Common Shares as reported on Nasdaq for five
Trading Days during any Valuation Period; provided, if such security bid is not
listed or admitted to trading on the Nasdaq, as reported on the principal
national security exchange or quotation system on which such security is quoted
or listed or admitted to trading, or, if not quoted or listed or admitted to
trading on any national securities exchange or quotation system, the closing bid
price of such
2
<PAGE> 7
security on the over-the-counter market on the day in question as reported by
Bloomberg LP, or a similar generally accepted reporting service, as the case may
be, for five Trading Days during any Valuation Period.
(q) "OUTSTANDING" when used with reference to Common Shares or
Capital Shares (collectively, "SHARES"), means, on any date of determination,
all issued and outstanding Shares, and includes all such Shares issuable in
respect of outstanding scrip or any certificates representing fractional
interests in such Shares; provided, however, that any such Shares directly or
indirectly owned or held by or for the account of the Corporation or any
Subsidiary of the Corporation shall not be deemed "OUTSTANDING" for purposes
hereof.
(r) "PERSON" means an individual, a corporation, a
partnership, an association, a limited liability company, an unincorporated
business organization, a trust or other entity or organization, and any
government or political subdivision or any agency or instrumentality thereof.
(s) "PROPOSED TRANSACTION" means the Corporation's proposed
acquisition of Popmail.com, Inc. and transactions directly related thereto.
(t) "REGISTRATION RIGHTS AGREEMENT" means that certain
Registration Rights Agreement dated a date even herewith between the Corporation
and The Shaar Fund Ltd.
(u) "RESTAURANT DIVESTITURE" means any divestiture, sale,
transfer, conveyance or spinoff of all or substantially all of the Corporation's
assets constituting its restaurants.
(v) "SEC" means the United States Securities and Exchange
Commission.
(w) "SECURITIES ACT" means the Securities Act of 1933, as
amended, and the rules and regulations of the SEC thereunder, all as in effect
at the time.
(x) "SECURITIES PURCHASE AGREEMENT" means that certain
Securities Purchase Agreement dated a date even herewith between the Corporation
and The Shaar Fund Ltd.
(y) "SERIES A PREFERRED SHARES" or "SERIES A PREFERRED STOCK"
means the shares of Series A 8% Convertible Preferred Stock of the Corporation
or such other convertible Preferred Stock exchanged therefor.
(z) "STATED VALUE" has the meaning set forth in Article 2.
(aa) "SUBSIDIARY" means any entity of which securities or
other ownership interests having ordinary voting power to elect a majority of
the board of directors or other persons performing similar functions are owned
directly or indirectly by the Corporation.
(bb) "TRADING DAY" means any day on which purchases and sales
of securities authorized for quotation on Nasdaq are reported thereon and on
which no Market Disruption Event has occurred.
3
<PAGE> 8
(cc) "VALUATION EVENT" has the meaning set forth in Section
6.1.
(dd) "VALUATION PERIOD" means the five Trading Day period
immediately preceding the Conversion Date.
All references to "CASH" or "$" herein means currency of the
United States of America.
ARTICLE 2
DESIGNATION AND AMOUNT
The designation of this series, which consists of 2,000 shares
of Preferred Stock, is Series A 8% Convertible Preferred Stock (the "SERIES A
PREFERRED STOCK"), with a par value of $0.01 per share, and the stated value
shall be $1,000 per share (the "STATED VALUE").
ARTICLE 3
RANK
The Series A Preferred Stock shall rank (i) prior to the
Common Stock; (ii) prior to any class or series of capital stock of the
Corporation hereafter created other than "PARI PASSU SECURITIES" (collectively,
with the Common Stock, "JUNIOR SECURITIES"); and (iii) pari passu with any class
or series of capital stock of the Corporation hereafter created specifically
ranking on parity with the Series A Preferred Stock ("PARI PASSU SECURITIES").
ARTICLE 4
DIVIDENDS
(a) (i) The Holder shall be entitled to receive, when, as and
if declared by the Board of Directors, out of funds legally available
for the payment of dividends, dividends (subject to Article 4(a)(ii)
hereof) at the rate of 8% per annum (computed on the basis of a 360-day
year) (the "DIVIDEND RATE") on the Liquidation Value (as defined below)
of each share of Series A Preferred Stock on and as of the most recent
Dividend Payment Due Date (as defined below) with respect to each
Dividend Period (as defined below). Dividends on the Series A Preferred
Stock shall be cumulative from the date of issue, whether or not
declared for any reason, including if such declaration is prohibited
under any outstanding indebtedness or borrowings of the Corporation or
any of its Subsidiaries, or any other contractual provision binding on
the Corporation or any of its Subsidiaries, and whether or not there
shall be funds legally available for the payment thereof.
(ii) Each dividend shall be payable in equal quarterly
amounts on each March 31, June 30, September 30 and December 31 of each
year (each, a "DIVIDEND PAYMENT DUE DATE"), commencing June 30, 1999,
to the holders of record of shares of the Series A Preferred Stock, as
they appear on the stock records of the Corporation at the close of
business on any record date, not more than 60 days or less than 10 days
preceding the payment dates thereof, as shall be fixed by the Board of
Directors. For the
4
<PAGE> 9
purposes hereof, "DIVIDEND PERIOD" means the quarterly period
commencing on and including the Issue Date (as defined below) or, if a
dividend has previously been paid, the day after the immediately
preceding Dividend Payment Due Date and ending on and including the
immediately subsequent Dividend Payment Due Date. Accrued and unpaid
dividends for any past Dividend Period may be declared and paid at any
time, without reference to any Dividend Payment Due Date, to holders of
record on such date, not more than 15 days preceding the payment date
thereof, as may be fixed by the Board of Directors.
(iii) At the option of the Corporation, the dividend
shall be paid in cash or through the issuance of duly and validly
authorized and issued, fully paid and nonassessable, freely tradeable
shares of the Common Stock valued at the Market Price. The Common Stock
to be issued in lieu of cash payments shall be registered for resale in
the Registration Statement (as defined in the Registration Rights
Agreement) to be filed by the Corporation to register the Common Stock
issuable upon conversion of the shares of Series A Preferred Stock and
exercise of the Warrants as set forth in the Registration Rights
Agreement. Notwithstanding the foregoing, until such Registration
Statement (as defined in the Registration Rights Agreement) has been
declared effective under the Securities Act by the SEC, payment of
dividends on the Series A Preferred Stock shall be in cash.
(b) Except as provided in Section 4(e) hereof, the Holder
shall not be entitled to any dividends in excess of the cumulative dividends, as
herein provided, on the Series A Preferred Stock. Except as provided in this
Article 4, no interest, or sum of money in lieu of interest, shall be payable in
respect of any dividend payment or payments on the Series A Preferred Stock that
may be in arrears.
(c) So long as any shares of the Series A Preferred Stock are
outstanding, no dividends, except as described in the next succeeding sentence,
shall be declared or paid or set apart for payment on Pari Passu Securities for
any period unless full cumulative dividends required to be paid in cash have
been or contemporaneously are declared and paid or declared and a sum sufficient
for the payment thereof set apart for such payment on the Series A Preferred
Stock for all Dividend Periods terminating on or prior to the date of payment of
the dividend on such class or series of Pari Passu Securities. When dividends
are not paid in full or a sum sufficient for such payment is not set apart, as
aforesaid, all dividends declared upon shares of the Series A Preferred Stock
and all dividends declared upon any other class or series of Pari Passu
Securities shall be declared ratably in proportion to the respective amounts of
dividends accumulated and unpaid on the Series A Preferred Stock and accumulated
and unpaid on such Pari Passu Securities.
(d) So long as any shares of the Series A Preferred Stock are
outstanding, no dividends shall be declared or paid or set apart for payment or
other distribution declared or made upon Junior Securities, nor shall any Junior
Securities be redeemed, purchased or otherwise acquired (other than a
redemption, purchase or other acquisition of shares of Common Stock made for
purposes of an employee incentive or benefit plan (including a stock option
plan) of the Corporation or any subsidiary), (all such dividends, distributions,
redemptions or purchases being hereinafter referred to as a "JUNIOR SECURITIES
DISTRIBUTION") for any
5
<PAGE> 10
consideration (or any moneys be paid to or made available for a sinking fund for
the redemption of any shares of any such stock) by the Corporation, directly or
indirectly, unless in each case (i) the full cumulative dividends required to be
paid in cash on all outstanding shares of the Series A Preferred Stock and any
other Pari Passu Securities shall have been paid or set apart for payment for
all past Dividend Periods with respect to the Series A Preferred Stock and all
past dividend periods with respect to such Pari Passu Securities, and (ii)
sufficient funds shall have been paid or set apart for the payment of the
dividend for the current Dividend Period with respect to the Series A Preferred
Stock and the current dividend period with respect to such Pari Passu
Securities.
(e) If at any time the Corporation shall declare or pay a
dividend on, or other distribution on, the Common Shares payable in Common
Shares (a "STOCK DIVIDEND"), the Board of Directors shall declare a dividend
(the "SERIES A STOCK DIVIDEND") on the aggregate Series A Preferred Shares then
outstanding of that number of Common Shares equal to the number of Common Shares
the Holder would have received had it converted all its then outstanding Series
A Preferred Shares, and exercised the Warrant in full for all the Common Shares
then underlying the Warrant, immediately prior to the Stock Dividend. The Series
A Stock Dividend shall be payable to the Holder concurrently with the payment of
the Stock Dividend to the holders of Common Shares, and the Common Shares issued
pursuant to the Series A Stock Dividend shall be duly and validly authorized and
issued, fully paid and nonassessable.
ARTICLE 5
LIQUIDATION PREFERENCE
(a) If the Corporation shall commence a voluntary case under
the Federal bankruptcy laws or any other applicable Federal or state bankruptcy,
insolvency or similar law, or consent to the entry of an order for relief in an
involuntary case under any law or to the appointment of a receiver, liquidator,
assignee, custodian, trustee, sequestrator (or other similar official) of the
Corporation or of any substantial part of its property, or make an assignment
for the benefit of its creditors, or admit in writing its inability to pay its
debts generally as they become due, or if a decree or order for relief in
respect of the Corporation shall be entered by a court having jurisdiction in
the premises in an involuntary case under the Federal bankruptcy laws or any
other applicable Federal or state bankruptcy, insolvency or similar law
resulting in the appointment of a receiver, liquidator, assignee, custodian,
trustee, sequestrator (or other similar official) of the Corporation or of any
substantial part of its property, or ordering the winding up or liquidation of
its affairs, and any such decree or order shall be unstayed and in effect for a
period of 30 consecutive days and, on account of any such event, the Corporation
shall liquidate, dissolve or wind up, or if the Corporation shall otherwise
liquidate, dissolve or wind up (each such event being considered a "LIQUIDATION
EVENT"), no distribution shall be made to the holders of any shares of capital
stock of the Corporation upon liquidation, dissolution or winding-up unless
prior thereto, the holders of shares of Series A Preferred Stock, subject to
this Article 5, shall have received the Liquidation Preference (as defined in
Article 5(c)) with respect to each share. If upon the occurrence of a
Liquidation Event, the assets and funds available for distribution among the
holders of the Series A Preferred Stock and holders of Pari Passu Securities
shall be insufficient to permit the payment to such holders of the
6
<PAGE> 11
preferential amounts payable thereon, then the entire assets and funds of the
Corporation legally available for distribution to the Series A Preferred Stock
and the Pari Passu Securities shall be distributed ratably among such shares in
proportion to the ratio that the Liquidation Preference payable on each such
share bears to the aggregate Liquidation Preference payable on all such shares.
(b) At the option of each Holder, the sale, conveyance of
disposition of all or substantially all of the assets of the Corporation, the
effectuation by the Corporation of a transaction or series of related
transactions in which more than 50% of the voting power of the Corporation is
disposed of, or the consolidation, merger or other business combination of the
Corporation with or into any other Person or Persons when the Corporation is not
the survivor shall either: (i) be deemed to be a liquidation, dissolution or
winding up of the Corporation pursuant to which the Corporation shall be
required to distribute, upon consummation of and as a condition to, such
transaction an amount equal to 120% (100% if the provisions of this Article 5(b)
are triggered by a Restaurant Divestiture) of the Liquidation Preference with
respect to each outstanding share of Series A Preferred Stock in accordance with
and subject to the terms of this Article 5 or (ii) be treated pursuant to
Article 5(c)(iii) hereof; provided, that all holders of Series A Preferred Stock
shall be deemed to elect the option set forth in clause (i) hereof if at least a
majority in interest of such holders elect such option; provided, further, that
the provisions of this Article 5(b) shall not apply to the Proposed Transaction.
(c) For purposes hereof, the "LIQUIDATION PREFERENCE" with
respect to a share of the Series A Preferred Stock shall mean an amount equal to
the sum of (i) the Stated Value thereof, plus (ii) an amount equal to 30% of
such Stated Value, plus (iii) the aggregate of all accrued and unpaid dividends
on such share of Series A Preferred Stock until the most recent Dividend Payment
Due Date; provided that, in the event of an actual liquidation, dissolution or
winding up of the Corporation, the amount referred to in clause (iii) above
shall be calculated by including accrued and unpaid dividends to the actual date
of such liquidation, dissolution or winding up, rather than the Dividend Payment
Due Date referred to above.
ARTICLE 6
CONVERSION OF PREFERRED STOCK SECTION
6.1 CONVERSION; CONVERSION PRICE
At the option of the Holder, the shares of Preferred Stock may
be converted, either in whole or in part, into Common Shares (calculated as to
each such conversion to the nearest 1/100th of a share), at any time, and from
time to time following the date of issuance of the Series A Preferred Stock (the
"ISSUE DATE") at a Conversion Price per share of Common Stock equal to 65% of
the Market Price. At the Corporation's option, the amount of accrued and unpaid
dividends as of the Conversion Date shall not be subject to conversion but
instead may be paid in cash as of the Conversion Date; if the Corporation elects
to convert the amount of accrued and unpaid dividends at the Conversion Date
into Common Stock, the Common Stock issued to the Holder shall be valued at the
applicable Conversion Price.
7
<PAGE> 12
The number of shares of Common Stock due upon conversion of
Series A Preferred Stock shall be (i) the number of shares of Series A Preferred
Stock to be converted, multiplied by (ii) the Stated Value and divided by (iii)
the applicable Conversion Price.
Within two Business Days of the occurrence of a Valuation
Event, the Corporation shall send notice (the "VALUATION EVENT NOTICE") of such
occurrence to the Holder. Notwithstanding anything to the contrary contained
herein, if a Valuation Event occurs during any Valuation Period, a new Valuation
Period shall begin on the Trading Day immediately following the occurrence of
such Valuation Event and end on the Conversion Date; provided that, if a
Valuation Event occurs on the fifth day of any Valuation Period, then the
Conversion Price shall be the Current Market Price of the Common Shares on such
day; and provided, further, that the Holder may, in its discretion, postpone
such Conversion Date to a Trading Day which is no more than five Trading Days
after the occurrence of the latest Valuation Event by delivering a notification
to the Corporation within two Business Days of the receipt of the Valuation
Event Notice. In the event that the Holder deems the Valuation Period to be
other than the five Trading Days immediately prior to the Conversion Date, the
Holder shall give written notice of such fact to the Corporation in the related
Conversion Notice at the time of conversion.
For purposes of this Section 6.1, a "VALUATION EVENT" shall
mean an event in which the Corporation at any time during a Valuation Period
takes any of the following actions:
(a) subdivides or combines its Capital Shares;
(b) makes any distribution on its Capital Shares;
(c) issues any additional Capital Shares (the "ADDITIONAL
CAPITAL SHARES"), otherwise than as provided in the foregoing Sections 6.1(a)
and 6.1(b) above, at a price per share less, or for other consideration lower,
than the Current Market Price in effect immediately prior to such issuances, or
without consideration, except for issuances under employee benefit plans
consistent with those presently in effect and issuances under presently
outstanding warrants, options or convertible securities;
(d) issues any warrants, options or other rights to subscribe
for or purchase any Additional Capital Shares and the price per share for which
Additional Capital Shares may at any time thereafter be issuable pursuant to
such warrants, options or other rights shall be less than the Current Market
Price in effect immediately prior to such issuance;
(e) issues any securities convertible into or exchangeable or
exercisable for Additional Capital Shares and the consideration per share for
which Additional Capital Shares may at any time thereafter be issuable pursuant
to the terms of such convertible, exchangeable or exercisable securities shall
be less than the Current Market Price in effect immediately prior to such
issuance;
(f) makes a distribution of its assets or evidences of
indebtedness to the holders of its Capital Shares as a dividend in liquidation
or by way of return of capital or other than as a dividend payable out of
earnings or surplus legally available for the payment of dividends under
applicable law or any distribution to such holders made in respect of the sale
of
8
<PAGE> 13
all or substantially all of the Corporation's assets (other than under the
circumstances provided for in the foregoing Sections 6.1(a) through 6.1(e)); or
(g) takes any action affecting the number of Outstanding
Capital Shares, other than an action described in any of the foregoing Sections
6.1(a) through 6.1(f) hereof, inclusive, which in the opinion of the
Corporation's Board of Directors, determined in good faith, would have a
material adverse effect upon the rights of the Holder at the time of a
conversion of the Preferred Stock.
SECTION 6.2 EXERCISE OF CONVERSION PRIVILEGE
(a) Conversion of the Series A Preferred Stock may be
exercised, in whole or in part, by the Holder by telecopying an executed and
completed notice of conversion in the form annexed hereto as Annex I (the
"CONVERSION NOTICE") to the Corporation. Each date on which a Conversion Notice
is telecopied to the Corporation in accordance with the provisions of this
Section 6.2 shall constitute a Conversion Date. The Corporation shall convert
the Preferred Stock and issue the Common Stock Issued at Conversion, and all
voting and other rights associated with the beneficial ownership of the Common
Stock Issued at Conversion shall vest with the Holder, effective as of the
Conversion Date at the time specified in the Conversion Notice. The Conversion
Notice also shall state the name or names (with addresses) of the persons who
are to become the holders of the Common Stock Issued at Conversion in connection
with such conversion. The Holder shall deliver the shares of Series A Preferred
Stock to the Corporation by express courier within 15 days following the date on
which the telecopied Conversion Notice has been transmitted to the Corporation.
Upon surrender for conversion, the Preferred Stock shall be accompanied by a
proper assignment thereof to the Corporation or be endorsed in blank. As
promptly as practicable after the receipt of the Conversion Notice as aforesaid,
but in any event not more than five Business Days after the Corporation's
receipt of such Conversion Notice, the Corporation shall (i) issue the Common
Stock issued at Conversion in accordance with the provisions of this Article 6,
and (ii) cause to be mailed for delivery by overnight courier to the Holder (x)
a certificate or certificate(s) representing the number of Common Shares to
which the Holder is entitled by virtue of such conversion, (y) cash, as provided
in Section 6.3, in respect of any fraction of a Common Share issuable upon such
conversion and (z) cash in the amount of accrued and unpaid dividends as of the
Conversion Date. Such conversion shall be deemed to have been effected at the
time at which the Conversion Notice indicates so long as the Series A Preferred
Stock shall have been surrendered as aforesaid at such time, and at such time
the rights of the Holder of the Series A Preferred Stock, as such, shall cease
and the Person or Persons in whose name or names the Common Stock Issued at
Conversion shall be issuable shall be deemed to have become the holder or
holders of record of the Common Shares represented thereby and all voting and
other rights associated with the beneficial ownership of such Common Shares
shall at such time vest with such Person or Persons. The Conversion Notice shall
constitute a contract between the Holder and the Corporation, whereby the Holder
shall be deemed to subscribe for the number of Common Shares which it will be
entitled to receive upon such conversion and, in payment and satisfaction of
such subscription (and for any cash adjustment to which it is entitled pursuant
to Section 6.4), to surrender the Series A Preferred Stock and to release the
Corporation from all liability thereon. No cash payment aggregating less than
$1.00 shall be required to be given unless specifically requested by the Holder.
9
<PAGE> 14
(b) If, at any time (i) the Corporation challenges, disputes
or denies the right of the Holder hereof to effect the conversion of the Series
A Preferred Stock into Common Shares or otherwise dishonors or rejects any
Conversion Notice delivered in accordance with this Section 6.2 or (ii) any
third party who is not and has never been an Affiliate of the Holder commences
any lawsuit or proceeding or otherwise asserts any claim before any court or
public or governmental authority which seeks to challenge, deny, enjoin, limit,
modify, delay or dispute the right of the Holder hereof to effect the conversion
of the Series A Preferred Stock into Common Shares, then the Holder shall have
the right, by written notice to the Corporation, to require the Corporation to
promptly redeem the Series A Preferred Stock for cash at a redemption price
equal to 135% of the Stated Value thereof together with all accrued and unpaid
dividends thereon (the "MANDATORY PURCHASE AMOUNT"). Under any of the
circumstances set forth above, the Corporation shall be responsible for the
payment of all costs and expenses of the Holder, including reasonable legal fees
and expenses, as and when incurred in disputing any such action or pursuing its
rights hereunder (in addition to any other rights of the Holder).
SECTION 6.3 FRACTIONAL SHARES
No fractional Common Shares or scrip representing fractional
Common Shares shall be issued upon conversion of the Series A Preferred Stock.
Instead of any fractional Common Shares which otherwise would be issuable upon
conversion of the Series A Preferred Stock, the Corporation shall pay a cash
adjustment in respect of such fraction in an amount equal to the same fraction.
No cash payment of less than $1.00 shall be required to be given unless
specifically requested by the Holder.
SECTION 6.4 RECLASSIFICATION, CONSOLIDATION, MERGER OR
MANDATORY SHARE EXCHANGE
At any time while the Series A Preferred Stock remains
outstanding and any shares thereof have not been converted, in case of any
reclassification or change of Outstanding Common Shares issuable upon conversion
of the Series A Preferred Stock (other than a change in par value, or from par
value to no par value per share, or from no par value per share to par value or
as a result of a subdivision or combination of outstanding securities issuable
upon conversion of the Series A Preferred Stock) or in case of any
consolidation, merger or mandatory share exchange of the Corporation with or
into another corporation (other than a merger or mandatory share exchange with
another corporation in which the Corporation is a continuing corporation and
which does not result in any reclassification or change, other than a change in
par value, or from par value to no par value per share, or from no par value per
share to par value, or as a result of a subdivision or combination of
Outstanding Common Shares upon conversion of the Series A Preferred Stock), or
in the case of any sale or transfer to another corporation of the property of
the Corporation as an entirety or substantially as an entirety, the Corporation,
or such successor, resulting or purchasing corporation, as the case may be,
shall, without benefit of any additional consideration therefor, execute a new
Preferred Stock providing that the Holder shall have the right to convert such
new Preferred Stock (upon terms and conditions not less favorable to the Holder
than those in effect pursuant to the Series A Preferred Stock) and to receive
upon such exercise, in lieu of each Common Share theretofore issuable upon
conversion of the Series A Preferred Stock, the kind and amount of shares of
stock, other securities, money or property receivable upon such
reclassification, change, consolidation,
10
<PAGE> 15
merger, mandatory share exchange, sale or transfer by the holder of one Common
Share issuable upon conversion of the Series A Preferred Stock had the Series A
Preferred Stock been converted immediately prior to such reclassification,
change, consolidation, merger, mandatory share exchange or sale or transfer. The
provisions of this Section 6.4 shall similarly apply to successive
reclassifications, changes, consolidations, mergers, mandatory share exchanges
and sales and transfers.
SECTION 6.5 ADJUSTMENTS TO CONVERSION RATIO
For so long as any shares of the Series A Preferred Stock are
outstanding, if the Corporation: (i) issues and sells pursuant to an exemption
from registration under the Securities Act (A) Common Shares at a purchase price
on the date of issuance thereof that is lower than the Conversion Price, (B)
warrants or options with an exercise price representing a percentage of the
Current Market Price with an exercise price on the date of issuance of the
warrants or options that is lower than the agreed upon exercise price for the
Holder, except for employee stock option agreements or stock incentive
agreements of the Corporation, or (C) convertible, exchangeable or exercisable
securities with a right to exchange at lower than the Current Market Price on
the date of issuance or conversion, as applicable, of such convertible,
exchangeable or exercisable securities, except for stock option agreements or
stock incentive agreements; and (ii) grants the right to the purchaser(s)
thereof to demand that the Corporation register under the Securities Act such
Common Shares issued or the Common Shares for which such warrants or options may
be exercised or such convertible, exchangeable or exercisable securities may be
converted, exchanged or exercised, then the Conversion Ratio shall be reduced to
equal the lowest of any such lower rates.
SECTION 6.6 OPTIONAL REDEMPTION UNDER CERTAIN
CIRCUMSTANCES
At anytime after the date of issuance of the Series A
Preferred Stock until the Mandatory Conversion Date (as defined below), the
Corporation, upon notice delivered to the Holder as provided in Section 6.7, may
redeem, in cash, the Series A Preferred Stock (but only with respect to such
shares as to which the Holder has not theretofore furnished a Conversion Notice
in compliance with Section 6.2), at 135% of the Stated Value thereof (the
"OPTIONAL REDEMPTION PRICE"), together with all accrued and unpaid dividends
thereon to the date of redemption (the "REDEMPTION DATE"). Except as set forth
in this Section 6.6, the Corporation shall not have the right to prepay or
redeem the Series A Preferred Stock.
SECTION 6.7 NOTICE OF REDEMPTION
Notice of redemption pursuant to Section 6.6 shall be provided
by the Corporation to the Holder in writing (by registered mail or overnight
courier at the Holder's last address appearing in the Corporation's security
registry) not less than 10 nor more than 15 days prior to the Redemption Date,
which notice shall specify the Redemption Date and refer to Section 6.6
(including a statement of the Market Price per Common Share) and this Section
6.7.
SECTION 6.8 SURRENDER OF PREFERRED STOCK
Upon any redemption of the Series A Preferred Stock pursuant
to Sections 6.6 or 6.7, the Holder shall either deliver the Series A Preferred
Stock by hand to the Corporation at its
11
<PAGE> 16
principal executive offices or surrender the same to the Corporation at such
address by express courier. Payment of the optional Redemption Price specified
in Section 6.6 shall be made by the Corporation to the Holder against receipt of
the Series A Preferred Stock (as provided in this Section 6.8) by wire transfer
of immediately available funds to such account(s) as the Holder shall specify to
the Corporation. If payment of such redemption price is not made in full by the
Mandatory Redemption Date or the Redemption Date, as the case may be, the Holder
shall again have the right to convert the Series A Preferred Stock as provided
in Article 6 hereof.
SECTION 6.9 MANDATORY CONVERSION
On the fifth anniversary of the date of this Agreement (the
"MANDATORY CONVERSION DATE"), the Corporation shall convert all Series A
Preferred Stock outstanding at the Conversion Price.
SECTION 6.10 CERTAIN CONVERSION LIMITATIONS
(a) Notwithstanding anything herein to the contrary, the
Holder shall not have the right, and the Corporation shall not have the
obligation, to convert all or any portion of the Series A Preferred Stock (and
the Corporation shall not have the right to pay dividends on the Series A
Preferred Stock in shares of Common Stock) if and to the extent that the
issuance to the Holder of shares of Common Stock upon such conversion (or
payment of dividends) would result in the Holder being deemed the "beneficial
owner" of more than 5% of the then outstanding shares of Common Stock within the
meaning of Section 13(d) of the Securities Exchange Act of 1934, as amended, and
the rules promulgated thereunder. If any court of competent jurisdiction shall
determine that the foregoing limitation is ineffective to prevent a Holder from
being deemed the beneficial owner of more than 5% of the then outstanding shares
of Common Stock, then the Corporation shall redeem so many of such Holder's
shares (the "REDEMPTION SHARES") of Series A Preferred Stock as are necessary to
cause such Holder to be deemed the beneficial owner of not more than 5% of the
then outstanding shares of Common Stock. Upon such determination by a court of
competent jurisdiction, the Redemption Shares shall immediately and without
further action be deemed returned to the status of authorized but unissued
shares of Series A Preferred Stock, and the Holder shall have no interest in or
rights under such Redemption Shares. Any and all dividends paid on or prior to
the date of such determination shall be deemed dividends paid on the remaining
shares of Series A Preferred Stock held by the Holder. Such redemption shall be
for cash at a redemption price equal to the sum of (i) the Stated Value of the
Redemption Shares and (ii) any accrued and unpaid dividends to the date of such
redemption; provided, however, if the redemption is a result of the mandatory
conversion pursuant to Section 6.9, the Corporation may either (i) make such
redemption in cash at a redemption price equal to the sum of (x) 135% of the
Stated Value of such shares and (y) any accrued and unpaid dividends to the date
of such redemption or (ii) extend the Mandatory Conversion Date for a period of
one year.
(b) Unless the Corporation shall have obtained the approval of
its voting stockholders to such issuance in accordance with the rules of the
Nasdaq or such other stock market with which the Corporation shall be required
to comply, but only to the extent required thereby, the Corporation shall not
issue shares of Common Stock (i) upon conversion of any shares of Series A
Preferred Stock or (ii) as a dividend on the Series A Preferred Stock, if such
12
<PAGE> 17
issuance of Common Stock, when added to the number of shares of Common Stock
previously issued by the Corporation (i) upon conversion of shares of the Series
A Preferred Stock, (ii) upon exercise of the Warrants issued pursuant to the
terms of the Securities Purchase Agreement and (iii) in payment of dividends on
the Series A Preferred Stock, would equal or exceed 20% of the number of shares
of the Corporation's Common Stock which were issued and outstanding on the
Closing Date (the "MAXIMUM ISSUANCE AMOUNT"). In the event that a properly
executed Conversion Notice is received by the Corporation which would require
the Corporation to issue shares of Common Stock equal to or in excess of the
Maximum Issuance Amount, the Corporation shall honor such conversion request by
(i) converting the number of shares of Series A Preferred Stock stated in the
Conversion Notice not in excess of the Maximum Issuance Amount and (ii)
redeeming the number of shares of Series A Preferred Stock stated in the
Conversion Notice equal to or in excess of the Maximum Issuance Amount in cash
at a price equal to 125% of the Stated Value of the shares of Series A Preferred
Stock to be so redeemed, together with all accrued and unpaid dividends thereon.
In the event that the Corporation shall elect to pay a dividend in shares of
Common Stock which would require the Corporation to issue shares of Common Stock
equal to or in excess of the Maximum Issuance Amount, the Corporation shall pay
(i) a dividend in shares of Common Stock equal to one less than an amount which
would result in the Corporation issuing shares equal to the Maximum Issuance
Amount and (ii) the balance of the dividend in cash.
ARTICLE 7
VOTING RIGHTS
The holders of the Series A Preferred Stock have no voting
power, except as otherwise provided by the Business Corporation Act of the State
of Minnesota ("MBCA"), in this Article 7, and in Article 8 below.
Notwithstanding the above, the Corporation shall provide each
Holder of Series A Preferred Stock with prior notification of any meeting of the
shareholders (and copies of proxy materials and other information sent to
shareholders). In the event of any taking by the Corporation of a record of its
shareholders for the purpose of determining shareholders who are entitled to
receive payment of any dividend or other distribution, any right to subscribe
for, purchase or otherwise acquire (including by way of merger, consolidation or
recapitalization) any share of any class or any other securities or property, or
to receive any other right, or for the purpose of determining shareholders who
are entitled to vote in connection with any proposed liquidation, dissolution or
winding up of the Corporation, the Corporation shall mail a notice to each
Holder, at least 30 days prior to the consummation of the transaction or event,
whichever is earlier), of the date on which any such action is to be taken for
the purpose of such dividend, distribution, right or other event, and a brief
statement regarding, the amount and character of such dividend, distribution,
right or other event to the extent known at such time.
To the extent that under the MBCA the vote of the Holders of
the Series A Preferred Stock, voting separately as a class or series as
applicable, is required to authorize a given action of the Corporation, the
affirmative vote or consent of the Holders of at least a majority of the
outstanding shares of Series A Preferred Stock represented at a duly held
meeting at which a quorum is present or by written consent of a majority of the
outstanding shares of Series A Preferred Stock (except as otherwise may be
required under the MBCA) shall constitute
13
<PAGE> 18
the approval of such action by the class. To the extent that under the MBCA
holders of the Series A Preferred Stock are entitled to vote on a matter with
holders of Common Stock, voting together as one class, each share of Series A
Preferred Stock shall be entitled to a number of votes equal to the number of
shares of Common Stock into which it is then convertible using the record date
for the taking of such vote of shareholders as the date as of which the
Conversion Price is calculated. Holders of the Series A Preferred Stock shall be
entitled to notice of all shareholder meetings or written consents (and copies
of proxy materials and other information sent to shareholders) with respect to
which they would be entitled to vote, which notice would be provided pursuant to
the Corporation's bylaws and the MBCA.
ARTICLE 8
PROTECTIVE PROVISIONS
So long as shares of Series A Preferred Stock are outstanding,
the Corporation shall not, without first obtaining the approval (by vote or
written consent, as provided by the MBCA) of the Holders of at least a majority
of the then outstanding shares of Series A Preferred Stock:
(a) alter or change the rights, preferences or privileges of
the Series A Preferred Stock;
(b) create any new class or series of capital stock having a
preference over the Series A Preferred Stock as to distribution of assets upon
liquidation, dissolution or winding up of the Corporation ("SENIOR SECURITIES")
or alter or change the rights, preferences or privileges of any Senior
Securities so as to affect adversely the Series A Preferred Stock, except in
connection with the Proposed Transaction;
(c) increase the authorized number of shares of Series A
Preferred Stock; or
(d) do any act or thing not authorized or contemplated by this
Certificate of Designation which would result in taxation of the holders of
shares of the Series A Preferred Stock under Section 305 of the Internal Revenue
Code of 1986, as amended (or any comparable provision of the Internal Revenue
Code as hereafter from time to time amended).
In the event Holders of least a majority of the then
outstanding shares of Series A Preferred Stock agree to allow the Corporation to
alter or change the rights, preferences or privileges of the shares of Series
Preferred Stock, pursuant to subsection (a) above, so as to affect the Series A
Preferred Stock, then the Corporation will deliver notice of such approved
change to the Holders of the Series Preferred Stock that did not agree to such
alteration or change (the "DISSENTING HOLDERS") and Dissenting Holders shall
have the right for a period of 30 days to convert pursuant to the terms of this
Certificate of Designation as they exist prior to such alteration or change or
continue to hold their shares of Series A Preferred Stock.
If at any time the Corporation shall "spin-off" certain of its
assets or businesses by transferring, directly or indirectly, such assets or
businesses to a subsidiary of the Corporation ("SPINCO") and making a dividend
(the "SPIN-OFF DIVIDEND") to the Corporation's stockholders of the shares of
capital stock of Spinco, the Corporation shall make a dividend to each Holder
of,
14
<PAGE> 19
or cause Spinco to issue to each Holder, that number of shares of capital stock
of Spinco as such Holder would have received had it converted, immediately prior
to the Spin-off Dividend, each Preferred Share then held by such Holder into
Common Stock.
ARTICLE 9
MISCELLANEOUS
SECTION 9.1 LOSS, THEFT, DESTRUCTION OF PREFERRED STOCK
Upon receipt of evidence satisfactory to the Corporation of
the loss, theft, destruction or mutilation of shares of Series A Preferred Stock
and, in the case of any such loss, theft or destruction, upon receipt of
indemnity or security reasonably satisfactory to the Corporation, or, in the
case of any such mutilation, upon surrender and cancellation of the Series A
Preferred Stock, the Corporation shall make, issue and deliver, in lieu of such
lost, stolen, destroyed or mutilated shares of Series A Preferred Stock, new
shares of Series A Preferred Stock of like tenor. The Series A Preferred Stock
shall be held and owned upon the express condition that the provisions of this
Section 9.1 are exclusive with respect to the replacement of mutilated,
destroyed, lost or stolen shares of Series A Preferred Stock and shall preclude
any and all other rights and remedies notwithstanding any law or statute
existing or hereafter enacted to the contrary with respect to the replacement of
negotiable instruments or other securities without the surrender thereof.
SECTION 9.2 WHO DEEMED ABSOLUTE OWNER
The Corporation may deem the Person in whose name the Series A
Preferred Stock shall be registered upon the registry books of the Corporation
to be, and may treat it as, the absolute owner of the Series A Preferred Stock
for the purpose of receiving payment of dividends on the Series A Preferred
Stock, for the conversion of the Series A Preferred Stock and for all other
purposes, and the Corporation shall not be affected by any notice to the
contrary. All such payments and such conversion shall be valid and effectual to
satisfy and discharge the liability upon the Series A Preferred Stock to the
extent of the sum or sums so paid or the conversion so made.
SECTION 9.3 NOTICE OF CERTAIN EVENTS
In the case of the occurrence of any event described in
Sections 6.1, 6.6 or 6.7 of this Certificate of Designation, the Corporation
shall cause to be mailed to the Holder of the Series A Preferred Stock at its
last address as it appears in the Corporation's security registry, at least 20
days prior to the applicable record, effective or expiration date hereinafter
specified (or, if such 20 days notice is not possible, at the earliest possible
date prior to any such record, effective or expiration date), a notice stating
(x) the date on which a record is to be taken for the purpose of such dividend,
distribution, issuance or granting of rights, options or warrants, or if a
record is not to be taken, the date as of which the Holders of record of Series
A Preferred Stock to be entitled to such dividend, distribution, issuance or
granting of rights, options or warrants are to be determination or the date on
which such reclassification, consolidation, merger, sale, transfer, dissolution,
liquidation or winding-up is expected to become effective, and (y) the date as
of which it is expected that Holders of record of Series A Preferred Stock will
be entitled to
15
<PAGE> 20
exchange their shares for securities, cash or other property deliverable upon
such reclassification, consolidation, merger, sale transfer, dissolution,
liquidation or winding-up.
SECTION 9.4 REGISTER
The Corporation shall keep at its principal office a register
in which the Corporation shall provide for the registration of the Series A
Preferred Stock. Upon any transfer of the Series A Preferred Stock in accordance
with the provisions hereof, the Corporation shall register such transfer on the
Series A Preferred Stock register.
The Corporation may deem the person in whose name the Series A
Preferred Stock shall be registered upon the registry books of the Corporation
to be, and may treat it as, the absolute owner of the Series A Preferred Stock
for the purpose of receiving payment of dividends on the Series A Preferred
Stock, for the conversion of the Series A Preferred Stock and for all other
purposes, and the Corporation shall not be affected by any notice to the
contrary. All such payments and such conversions shall be valid and effective to
satisfy and discharge the liability upon the Series A Preferred Stock to the
extent of the sum or sums so paid or the conversion or conversions so made.
SECTION 9.5 WITHHOLDING
To the extent required by applicable law, the Corporation may
withhold amounts for or on account of any taxes imposed or levied by or on
behalf of any taxing authority in the United States having jurisdiction over the
Corporation from any payments made pursuant to the Series A Preferred Stock.
SECTION 9.6 HEADINGS
The headings of the Articles and Sections of this Certificate
of Designation are inserted for convenience only and do not constitute a part of
this Certificate of Designation.
16
<PAGE> 21
IN WITNESS WHEREOF, the Corporation has caused this
Certificate of Designation to be signed by its duly authorized officers on May
14, 1999.
CAFE ODYSSEY, INC.
By: /s/ Ronald K. Fuller
----------------------------------
Name: Ronald K. Fuller
Title: President
17
<PAGE> 22
ANNEX I
FORM OF CONVERSION NOTICE
TO: Cafe Odyssey, Inc.
4801 West 81st Street, Suite 112
Bloomington, MN 55437
The undersigned owner of this Series A 8% Convertible
Preferred Stock (the "SERIES A PREFERRED STOCK") issued by Cafe Odyssey, Inc.
(the "CORPORATION") hereby irrevocably exercises its option to convert
__________ shares of the Series A Preferred Stock into shares of the common
stock, par value $0.01 per share ("COMMON STOCK"), of the Corporation in
accordance with the terms of the Certificate of Designation. The undersigned
hereby instructs the Corporation to convert the number of shares of the Series A
Preferred Stock specified above into Shares of Common Stock Issued at Conversion
in accordance with the provisions of Article 6 of the Certificate of
Designation. The undersigned directs that the Common Stock issuable and
certificates therefor deliverable upon conversion, the Series A Preferred Stock
recertificated, if any, not being surrendered for conversion hereby, together
with any check in payment for fractional Common Stock, be issued in the name of
and delivered to the undersigned unless a different name has been indicated
below. All capitalized terms used and not defined herein have the respective
meanings assigned to them in the Certificate of Designation. So long as the
Series A Preferred Stock shall have been surrendered for conversion hereby, the
conversion pursuant hereto shall be deemed to have been effected at the date and
time specified below, and at such time the rights of the undersigned as a Holder
of the Series A Preferred Stock shall cease and the Person or Persons in whose
name or names the Common Stock Issued at Conversion shall be issuable shall be
deemed to have become the holder or holders of record of the Common Shares
represented thereby and all voting and other rights associated with the
beneficial ownership of such Common Shares shall at such time vest with such
Person or Persons.
Date and time:
----------------------------
--------------------------------------
Signature
Fill in for registration of Series A Preferred Stock:
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Please print name and address (including zip code number)
<PAGE> 1
EXHIBIT 10.1
THIS COMMON STOCK PURCHASE WARRANT AND THE SECURITIES REPRESENTED HEREBY HAVE
NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND MAY NOT BE
TRANSFERRED IN VIOLATION OF SUCH ACT, THE RULES AND REGULATIONS THEREUNDER OR
THE PROVISIONS OF THIS COMMON STOCK PURCHASE WARRANT.
Number of Shares of Common Stock: 300,000
Warrant No. A-1
COMMON STOCK PURCHASE WARRANT
To Purchase Common Stock of
Cafe Odyssey, Inc.
THIS IS TO CERTIFY THAT The Shaar Fund Ltd., or registered
assigns, is entitled, at any time from the Closing Date (as hereinafter defined)
to the Expiration Date (as hereinafter defined), to purchase from Cafe Odyssey,
Inc., a Minnesota corporation (the "COMPANY"), 300,000 shares of Common Stock
(as hereinafter defined and subject to adjustment as provided herein), in whole
or in part, including fractional parts, at a purchase price equal to $3.00 per
share, all on the terms and conditions and pursuant to the provisions
hereinafter set forth.
1. DEFINITIONS
As used in this Common Stock Purchase Warrant (this
"WARRANT"), the following terms have the respective meanings set forth below:
"ADDITIONAL SHARES OF COMMON STOCK" shall mean all shares of
Common Stock issued by the Company after the Closing Date, other than Warrant
Stock.
"BOOK VALUE" shall mean, in respect of any share of Common
Stock on any date herein specified, the consolidated book value of the Company
as of the last day of any month immediately preceding such date, divided by the
number of Fully Diluted Outstanding shares of Common Stock as determined in
accordance with GAAP (assuming the payment of the exercise prices for such
shares) by Arthur Andersen LLP or any other firm of independent certified public
accountants of recognized national standing selected by the Company and
reasonably acceptable to the Holder.
"BUSINESS DAY" shall mean any day that is not a Saturday or
Sunday or a day on which banks are required or permitted to be closed in the
State of New York.
<PAGE> 2
"CLOSING DATE" shall have the meaning set forth in the
Securities Purchase Agreement.
"COMMISSION" shall mean the Securities and Exchange Commission
or any other federal agency then administering the Securities Act and other
federal securities laws.
"COMMON STOCK" shall mean (except where the context otherwise
indicates) the Common Stock, par value $0.01 per share, of the Company as
constituted on the Closing Date, and any capital stock into which such Common
Stock may thereafter be changed, and shall also include (i) capital stock of the
Company of any other class (regardless of how denominated) issued to the holders
of shares of Common Stock upon any reclassification thereof which is also not
preferred as to dividends or assets over any other class of stock of the Company
and which is not subject to redemption and (ii) shares of common stock of any
successor or acquiring corporation received by or distributed to the holders of
Common Stock of the Company in the circumstances contemplated by Section 4.4.
"CONVERTIBLE SECURITIES" shall mean evidences of indebtedness,
shares of stock or other securities which are convertible into or exchangeable,
with or without payment of additional consideration in cash or property, for
shares of Common Stock, either immediately or upon the occurrence of a specified
date or a specified event.
"CURRENT WARRANT PRICE" shall mean, in respect of a share of
Common Stock at any date herein specified, the price at which a share of Common
Stock may be purchased pursuant to this Warrant on such date.
"EXCHANGE ACT" shall mean the Securities Exchange Act of 1934,
as amended, or any successor federal statute, and the rules and regulations of
the Commission thereunder, all as the same shall be in effect from time to time.
"EXERCISE PERIOD" shall mean the period during which this
Warrant is exercisable pursuant to Section 2.1.
"EXPIRATION DATE" shall mean May 14, 2004.
"FULLY DILUTED OUTSTANDING" shall mean, when used with
reference to Common Stock, at any date as of which the number of shares thereof
is to be determined, all shares of Common Stock Outstanding at such date and all
shares of Common Stock issuable in respect of this Warrant, outstanding on such
date, and other options or warrants to purchase, or securities convertible into,
shares of Common Stock outstanding on such date which would be deemed
outstanding in accordance with GAAP for purposes of determining Book Value or
net income per share.
"GAAP" shall mean generally accepted accounting principles in
the United States of America as from time to time in effect.
"HOLDER" shall mean the Person in whose name the Warrant or
Warrant Stock set forth herein is registered on the books of the Company
maintained for such purpose.
2
<PAGE> 3
"MARKET PRICE" per Common Share means the average of the
closing bid prices of the Common Shares as reported on the Nasdaq SmallCap
Market ("NASDAQ") for the five trading days immediately preceding the Closing
Date.
"OTHER PROPERTY" shall have the meaning set forth in Section
4.4.
"OUTSTANDING" shall mean, when used with reference to Common
Stock, at any date as of which the number of shares thereof is to be determined,
all issued shares of Common Stock, except shares then owned or held by or for
the account of the Company or any subsidiary thereof, and shall include all
shares issuable in respect of outstanding scrip or any certificates representing
fractional interests in shares of Common Stock.
"PERSON" shall mean any individual, sole proprietorship,
partnership, joint venture, trust, incorporated organization, association,
corporation, institution, public benefit corporation, entity or government
(whether federal, state, county, city, municipal or otherwise, including,
without limitation, any instrumentality, division, agency, body or department
thereof).
"REGISTRATION RIGHTS AGREEMENT" shall mean the Registration
Rights Agreement dated a date even herewith between the Company and The Shaar
Fund Ltd., as it may be amended from time to time.
"RESTRICTED COMMON STOCK" shall mean shares of Common Stock
which are, or which upon their issuance on their exercise of this Warrant would
be, evidenced by a certificate bearing the restrictive legend set forth in
Section 9.1(a).
"SECURITIES ACT" shall mean the Securities Act of 1933, as
amended, or any successor federal statute, and the rules and regulations of the
Commission thereunder, all as the same shall be in effect at the time.
"SECURITIES PURCHASE AGREEMENT" shall mean the Securities
Purchase Agreement dated as of a date even herewith between the Company and The
Shaar Fund Ltd. as it may be amended from time to time.
"TRANSFER" shall mean any disposition of any Warrant or
Warrant Stock or of any interest in either thereof, which would constitute a
sale thereof within the meaning of the Securities Act.
"TRANSFER NOTICE" shall have the meaning set forth in Section
9.2.
"WARRANT PRICE" shall mean an amount equal to (i) the number
of shares of Common Stock being purchased upon exercise of this Warrant pursuant
to Section 2.1, multiplied by (ii) the Current Warrant Price as of the date of
such exercise.
"WARRANT STOCK" shall mean the shares of Common Stock
purchased by the holders of the Warrants upon the exercise thereof.
"WARRANTS" shall mean this Warrant and all warrants issued
upon transfer, division or combination of, or in substitution for, any thereof.
All Warrants shall at all times be
3
<PAGE> 4
identical as to terms and conditions and date, except as to the number of shares
of Common Stock for which they may be exercised.
2. EXERCISE OF WARRANT
2.1 MANNER OF EXERCISE
From and after the Closing Date and until 5:00 p.m., New York
time, on the Expiration Date, Holder may exercise this Warrant, on any Business
Day, for all or any part of the number of shares of Common Stock purchasable
hereunder.
In order to exercise this Warrant, in whole or in part, Holder
shall deliver to the Company at its principal office at 4801 West 81st Street,
Suite 112, Bloomington, Minnesota 55437, or at the office or agency designated
by the Company pursuant to Section 12, (i) a written notice of Holder's election
to exercise this Warrant, which notice shall specify the number of shares of
Common Stock to be purchased, (ii) payment of the Warrant Price in cash or wire
transfer or cashier's check drawn on a United States bank and (iii) this
Warrant. Such notice shall be substantially in the form of the subscription form
appearing at the end of this Warrant as Exhibit A, duly executed by Holder or
its agent or attorney. Upon receipt of the items referred to in clauses (i),
(ii) and (iii) above, the Company shall, as promptly as practicable, and in any
event within five Business Days thereafter, execute or cause to be executed and
deliver or cause to be delivered to Holder a certificate or certificates
representing the aggregate number of full shares of Common Stock issuable upon
such exercise, together with cash in lieu of any fraction of a share, as
hereinafter provided. The stock certificate or certificates so delivered shall
be, to the extent possible, in such denomination or denominations as Holder
shall request in the notice and shall be registered in the name of Holder or,
subject to Section 9, such other name as shall be designated in the notice. This
Warrant shall be deemed to have been exercised and such certificate or
certificates shall be deemed to have been issued, and Holder or any other Person
so designated to be named therein shall be deemed to have become a holder of
record of such shares for all purposes, as of the date the notice, together with
the cash or check or checks and this Warrant, is received by the Company as
described above and all taxes required to be paid by Holder, if any, pursuant to
Section 2.2 prior to the issuance of such shares have been paid. If this Warrant
shall have been exercised in part, the Company shall, at the time of delivery of
the certificate or certificates representing Warrant Stock, deliver to Holder a
new Warrant evidencing the rights of Holder to purchase the unpurchased shares
of Common Stock called for by this Warrant, which new Warrant shall in all other
respects be identical with this Warrant, or, at the request of Holder,
appropriate notation may be made on this Warrant and the same returned to
Holder. Notwithstanding any provision herein to the contrary, the Company shall
not be required to register shares in the name of any Person who acquired this
Warrant (or part hereof) or any Warrant Stock otherwise than in accordance with
this Warrant.
2.2 PAYMENT OF TAXES AND CHARGES
All shares of Common Stock issuable upon the exercise of this
Warrant pursuant to the terms hereof shall be validly issued, fully paid and
nonassessable, freely tradable and without any preemptive rights. The Company
shall pay all expenses in connection with, and all taxes and other governmental
charges that may be imposed with respect to, the issue or delivery
4
<PAGE> 5
thereof, unless such tax or charge is imposed by law upon Holder, in which case
such taxes or charges shall be paid by Holder. The Company shall not be
required, however, to pay any tax or other charge imposed in connection with any
transfer involved in the issue of any certificate for shares of Common Stock
issuable upon exercise of this Warrant in any name other than that of Holder,
and in such case the Company shall not be required to issue or deliver any stock
certificate until such tax or other charge has been paid or it has been
established to the satisfaction of the Company that no such tax or other charge
is due.
2.3 FRACTIONAL SHARES
The Company shall not be required to issue a fractional share
of Common Stock upon exercise of any Warrant. As to any fraction of a share
which Holder would otherwise be entitled to purchase upon such exercise, the
Company shall pay a cash adjustment in respect of such final fraction in an
amount equal to the same fraction of the Market Price per share of Common Stock
as of the Closing Date.
2.4 CONTINUED VALIDITY
A holder of shares of Common Stock issued upon the exercise of
this Warrant, in whole or in part (other than a holder who acquires such shares
after the same have been publicly sold pursuant to a Registration Statement
under the Securities Act or sold pursuant to Rule 144 thereunder), shall
continue to be entitled with respect to such shares to all rights to which it
would have been entitled as Holder under Sections 9, 10 and 14 of this Warrant.
The Company will, at the time of exercise of this Warrant, in whole or in part,
upon the request of Holder, acknowledge in writing, in form reasonably
satisfactory to Holder, its continuing obligation to afford Holder all such
rights; provided, however, that if Holder shall fail to make any such request,
such failure shall not affect the continuing obligation of the Company to afford
to Holder all such rights.
3. TRANSFER, DIVISION AND COMBINATION
3.1 TRANSFER
Subject to compliance with Section 9, transfer of this Warrant
and all rights hereunder, in whole or in part, shall be registered on the books
of the Company to be maintained for such purpose, upon surrender of this Warrant
at the principal office of the Company referred to in Section 2.1 or the office
or agency designated by the Company pursuant to Section 12, together with a
written assignment of this Warrant substantially in the form of Exhibit B hereto
duly executed by Holder or its agent or attorney and funds sufficient to pay any
transfer taxes payable upon the making of such transfer. Upon such surrender
and, if required, such payment, the Company shall, subject to Section 9, execute
and deliver a new Warrant or Warrants in the name of the assignee or assignees
and in the denomination specified in such instrument of assignment, and shall
issue to the assignor a new Warrant evidencing the portion of this Warrant not
so assigned, and this Warrant shall promptly be canceled. A Warrant, if properly
assigned in compliance with Section 9, may be exercised by a new Holder for the
purchase of shares of Common Stock without having a new warrant issued.
5
<PAGE> 6
3.2 DIVISION AND COMBINATION
Subject to Section 9, this Warrant may be divided or combined
with other Warrants upon presentation hereof at the aforesaid office or agency
of the Company, together with a written notice specifying the names and
denominations in which new Warrants are to be issued, signed by Holder or its
agent or attorney. Subject to compliance with Section 3.1 and with Section 9, as
to any transfer which may be involved in such division or combination, the
Company shall execute and deliver a new Warrant or Warrants in exchange for the
Warrant or Warrants to be divided or combined in accordance with such notice.
3.3 EXPENSES
The Company shall prepare, issue and deliver at its own
expense (other than transfer taxes) the new Warrants or Warrants under this
Section 3.
3.4 MAINTENANCE OF BOOKS
The Company agrees to maintain, at its aforesaid office or
agency, books for the registration and the registration of transfer of the
Warrants.
4. ADJUSTMENTS
The number of shares of Common Stock for which this Warrant is
exercisable, or the price at which such shares may be purchased upon exercise of
this Warrant, shall be subject to adjustment from time to time as set forth in
this Section 4. The Company shall give Holder notice of any event described
below which requires an adjustment pursuant to this Section 4 at the time of
such event.
4.1 STOCK DIVIDENDS, SUBDIVISIONS AND COMBINATIONS
If at any time the Company shall:
(a) take a record of the holders of its Common Stock for the
purpose of entitling them to receive a dividend payable in, or other
distribution of, Additional Shares of Common Stock;
(b) subdivide its outstanding shares of Common Stock into a
larger number of shares of Common Stock; or
(c) combine its outstanding shares of Common Stock into a
smaller number of shares of Common Stock;
then (i) the number of shares of Common Stock for which this Warrant is
exercisable immediately after the occurrence of any such event shall be adjusted
to equal the number of shares of Common Stock which a record holder of the same
number of shares of Common Stock for which this Warrant is exercisable
immediately prior to the occurrence of such event would own or be entitled to
receive after the happening of such event, and (ii) the Current Warrant Price
shall be adjusted to equal (A) the Current Warrant Price multiplied by the
number of shares of
6
<PAGE> 7
Common Stock for which this Warrant is exercisable immediately prior to the
adjustment divided by (B) the number of shares for which this Warrant is
exercisable immediately after such adjustment.
4.2 CERTAIN OTHER DISTRIBUTIONS
If at any time the Company shall take a record of the holders
of its Common Stock for the purpose of entitling them to receive any dividend or
other distribution of:
(a) cash;
(b) any evidences of its indebtedness, any shares of its stock
or any other securities or property of any nature whatsoever (other than cash,
Convertible Securities or Additional Shares of Common Stock); or
(c) any warrants or other rights to subscribe for or purchase
any evidences of its indebtedness, any shares of its stock or any other
securities or property of any nature whatsoever (other than cash, Convertible
Securities or Additional Shares of Common Stock);
then Holder shall be entitled to receive such dividend or distribution as if
Holder had exercised the Warrant. A reclassification of the Common Stock (other
than a change in par value, or from par value to no par value or from no par
value to par value) into shares of Common Stock and shares of any other class of
stock shall be deemed a distribution by the Company to the holders of its Common
Stock of such shares of such other class of stock within the meaning of this
Section 4.2 and, if the outstanding shares of Common Stock shall be changed into
a larger or smaller number of shares of Common Stock as a part of such
reclassification, such change shall be deemed a subdivision or combination, as
the case may be, of the outstanding shares of Common Stock within the meaning of
Section 4.1.
4.3 OTHER PROVISIONS APPLICABLE TO ADJUSTMENTS UNDER THIS
SECTION
The following provisions shall be applicable to the making of
adjustments of the number of shares of Common Stock for which this Warrant is
exercisable and the Current Warrant Price provided for in this Section 4:
(a) WHEN ADJUSTMENTS TO BE MADE. The adjustments required by
this Section 4 shall be made whenever and as often as any specified event
requiring an adjustment shall occur. For the purpose of any adjustment, any
specified event shall be deemed to have occurred at the close of business on the
date of its occurrence.
(b) FRACTIONAL INTERESTS. In computing adjustments under this
Section 4, fractional interests in Common Stock shall be taken into account to
the nearest 1/10th of a share.
(c) WHEN ADJUSTMENT NOT REQUIRED. If the Company shall take a
record of the holders of its Common Stock for the purpose of entitling them to
receive a dividend or distribution or subscription or purchase rights and shall,
thereafter and before the distribution to stockholders thereof, legally abandon
its plan to pay or deliver such dividend, distribution, subscription or purchase
rights, then thereafter no adjustment shall be required by reason of the
7
<PAGE> 8
taking of such record and any such adjustment previously made in respect thereof
shall be rescinded and annulled.
(d) CHALLENGE TO GOOD FAITH DETERMINATION. Whenever the Board
of Directors of the Company shall be required to make a determination in good
faith of the fair value of any item under this Section 4, such determination may
be challenged in good faith by the Holder, and any dispute shall be resolved by
an investment banking firm of recognized national standing selected by the
Company and acceptable to Holder.
4.4 REORGANIZATION, RECLASSIFICATION, MERGER, CONSOLIDATION
OR DISPOSITION OF ASSETS
In case the Company shall reorganize its capital, reclassify
its capital stock, consolidate or merge with or into another corporation (where
the Company is not the surviving corporation or where there is a change in or
distribution with respect to the Common Stock of the Company), or sell, transfer
or otherwise dispose of all or substantially all its property, assets or
business to another corporation and, pursuant to the terms of such
reorganization, reclassification, merger, consolidation or disposition of
assets, shares of common stock of the successor or acquiring corporation, or any
cash, shares of stock or other securities or property of any nature whatsoever
(including warrants or other subscription or purchase rights) in addition to or
in lieu of common stock of the successor or acquiring corporation ("OTHER
PROPERTY"), are to be received by or distributed to the holders of Common Stock
of the Company, then Holder shall have the right thereafter to receive, upon
exercise of the Warrant, the number of shares of common stock of the successor
or acquiring corporation or of the Company, if it is the surviving corporation,
and Other Property receivable upon or as a result of such reorganization,
reclassification, consolidation or disposition of assets by a holder of the
number of shares of Common Stock for which this Warrant is exercisable
immediately prior to such event. In case of any such reorganization,
reclassification, merger, consolidation or disposition of assets, the successor
or acquiring corporation (if other than the Company) shall expressly assume the
due and punctual observance and performance of each and every covenant and
condition of this Warrant to be performed and observed by the Company and all
the obligations and liabilities hereunder, subject to such modifications as may
be deemed appropriate (as determined by resolution of the Board of Directors of
the Company) in order to provide for adjustments of shares of Common Stock for
which this Warrant is exercisable which shall be as nearly equivalent as
practicable to the adjustments provided for in this Section 4. For purposes of
this Section 4.4, "COMMON STOCK OF THE SUCCESSOR OR ACQUIRING CORPORATION" shall
include stock of such corporation of any class which is not preferred as to
dividends or assets over any other class of stock of such corporation and which
is not subject to redemption and shall also include any evidences of
indebtedness, shares of stock or other securities which are convertible into or
exchangeable for any such stock, either immediately or upon the arrival of a
specified date or the happening of a specified event and any warrants or other
rights to subscribe for or purchase any such stock. The foregoing provisions of
this Section 4.4 still similarly apply to successive reorganizations,
reclassifications, mergers, consolidations or disposition of assets.
8
<PAGE> 9
4.5 OTHER ACTION AFFECTING COMMON STOCK
In case at any time or from time to time the Company shall
take any action in respect of its Common Stock, other than any action described
in this Section 4, which would have a materially adverse effect upon the rights
of Holder, the number of shares of Common Stock and/or the purchase price
thereof shall be adjusted in such manner as may be equitable in the
circumstances, as determined in good faith by the Board of Directors of the
Company.
4.6 CERTAIN LIMITATIONS
Notwithstanding anything herein to the contrary, the Company
agrees not to enter into any transaction which, by reason of any adjustment
hereunder, would cause the Current Warrant Price to be less than the par value
per share of Common Stock.
5. NOTICES TO HOLDER
5.1 NOTICE OF ADJUSTMENTS
Whenever the number of shares of Common Stock for which this
Warrant is exercisable, or whenever the price at which a share of such Common
Stock may be purchased upon exercise of the Warrants, shall be adjusted pursuant
to Section 4, the Company shall forthwith prepare a certificate to be executed
by the chief financial officer of the Company setting forth, in reasonable
detail, the event requiring the adjustment and the method by which such
adjustment was calculated (including a description of the basis on which the
Board of Directors of the Company determined the fair value of any evidences of
indebtedness, shares of stock, other securities or property or warrants or other
subscription or purchase rights referred to in Section 4.2), specifying the
number of shares of Common Stock for which this Warrant is exercisable and (if
such adjustment was made pursuant to Section 4.4 or 4.5) describing the number
and kind of any other shares of stock or Other Property for which this Warrant
is exercisable, and any change in the purchase price or prices thereof, after
giving effect to such adjustment or change. The Company shall promptly cause a
signed copy of such certificate to be delivered to the Holder in accordance with
Section 14.2. The Company shall keep at its office or agency designated pursuant
to Section 12 copies of all such certificates and cause the same to be available
for inspection at said office during normal business hours by the Holder or any
prospective purchaser of a Warrant designated by Holder.
5.2 NOTICE OF CORPORATE ACTION
If at any time:
(a) the Company shall take a record of the holders of its
Common Stock for the purpose of entitling them to receive a dividend or other
distribution, or any right to subscribe for or purchase any evidences of its
indebtedness, any shares of stock of any class or any other securities or
property, or to receive any other right; or
(b) there shall be any capital reorganization of the Company,
any reclassification or recapitalization of the capital stock of the Company or
any consolidation or
9
<PAGE> 10
merger of the Company with, or any sale, transfer or other disposition of all or
substantially all the property, assets or business of the Company to, another
corporation; or
(c) there shall be a voluntary or involuntary dissolution,
liquidation or winding up of the Company;
then, in any one or more of such cases, the Company shall give to Holder (i) at
least 30 days' prior written notice of the date on which a record date shall be
selected for such dividend, distribution or right or for determining rights to
vote in respect of any such reorganization, reclassification, merger,
consolidation, sale, transfer, disposition, dissolution, liquidation or winding
up, and (ii) in the case of any such reorganization, reclassification, merger,
consolidation, sale, transfer, disposition, dissolution, liquidation or winding
up, at least 30 days' prior written notice of the date when the same shall take
place. Such notice in accordance with the foregoing clause also shall specify
(i) the date on which any such record is to be taken for the purpose of such
dividend, distribution or right, the date on which the holders of Common Stock
shall be entitled to any such dividend, distribution or right, and the amount
and character thereof, and (ii) the date on which any such reorganization,
reclassification, merger, consolidation, sale, transfer, disposition,
dissolution, liquidation or winding up is to take place and the time, if any
such time is to be fixed, as of which the holders of Common Stock shall be
entitled to exchange their shares of Common Stock for securities or other
property deliverable upon such reorganization, reclassification, merger,
consolidation, sale, transfer, disposition, dissolution, liquidation or winding
up. Each such written notice shall be sufficiently given if addressed to Holder
at the last address of Holder appearing on the books of the Company and
delivered in accordance with Section 14.2.
6. NO IMPAIRMENT
The Company shall not by any action, including, without
limitation, amending its certificate of incorporation or through any
reorganization, transfer of assets, consolidation, merger, dissolution, issue or
sale of securities or other voluntary action, avoid or seek to avoid the
observance or performance of any of the terms of this Warrant, but will at all
times in good faith assist in the carrying out of all such terms and in the
taking of all such actions as may be necessary or appropriate to protect the
rights of Holder against impairment. Without limiting the generality of the
foregoing, the Company will (a) not increase the par value of any shares of
Common Stock receivable upon the exercise of this Warrant above the amount
payable therefor upon such exercise immediately prior to such increase in par
value, (b) take all such action as may be necessary or appropriate in order that
the Company may validly and legally issue fully paid and nonassessable shares of
Common Stock upon the exercise of this Warrant, and (c) use its best efforts to
obtain all such authorizations, exemptions or consents from any public
regulatory body having jurisdiction thereof as may be necessary to enable the
Company to perform its obligations under this Warrant.
Upon the request of Holder, the Company will at any time
during the period this Warrant is outstanding acknowledge in writing, in form
satisfactory to Holder, the continuing validity of this Warrant and the
obligations of the Company hereunder.
10
<PAGE> 11
7. RESERVATION AND AUTHORIZATION OF COMMON STOCK
From and after the Closing Date, the Company shall at all
times reserve and keep available for issue upon the exercise of Warrants such
number of its authorized but unissued shares of Common Stock as will be
sufficient to permit the exercise in full of all outstanding Warrants. All
shares of Common Stock which shall be so issuable, when issued upon exercise of
any Warrant and payment therefor in accordance with the terms of such Warrant,
shall be duly and validly issued and fully paid and nonassessable and not
subject to preemptive rights.
Before taking any action which would cause an adjustment
reducing the Current Warrant Price below the then par value, if any, of the
shares of Common Stock issuable upon exercise of the Warrants, the Company shall
take any corporate action which may be necessary in order that the Company may
validly and legally issue fully paid and nonassessable shares of such Common
Stock at such adjusted Current Warrant Price.
Before taking any action which would result in an adjustment
in the number of shares of Common Stock for which this Warrant is exercisable or
in the Current Warrant Price, the Company shall obtain all such authorizations
or exemptions thereof, or consents thereto, as may be necessary from any public
regulatory body or bodies having jurisdiction thereof.
8. TAKING OF RECORD; STOCK AND WARRANT TRANSFER BOOKS
In the case of all dividends or other distributions by the
Company to the holders of its Common Stock with respect to which any provision
of Section 4 refers to the taking of record of such holders, the Company will in
each case take such a record and will take such record as of the close of
business on a Business Day. The Company will not at any time, except upon
dissolution, liquidation or winding up of the Company, close its stock transfer
books or Warrant transfer books so as to result in preventing or delaying the
exercise or transfer of any Warrant.
9. RESTRICTIONS ON TRANSFERABILITY
The Warrants and the Warrant Stock shall not be transferred,
hypothecated or assigned before satisfaction of the conditions specified in this
Section 9, which conditions are intended to ensure compliance with the
provisions of the Securities Act with respect to the Transfer of any Warrant or
any Warrant Stock. Holder, by acceptance of this Warrant, agrees to be bound by
the provisions of this Section 9.
9.1 RESTRICTIVE LEGEND
(a) Holder, by accepting this Warrant and any Warrant Stock
agrees that this Warrant and the Warrant Stock issuable upon exercise hereof may
not be assigned or otherwise transferred unless and until (i) the Company has
received an opinion of counsel for Holder that such securities may be sold
pursuant to an exemption from registration under the Securities Act or (ii) a
registration statement relating to such securities has been filed by the Company
and declared effective by the Commission.
11
<PAGE> 12
Each certificate for Warrant Stock issuable hereunder shall
bear a legend as follows until such securities have been sold pursuant to an
effective registration statement under the Securities Act:
"THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), OR
THE SECURITIES LAWS OF ANY STATE, AND ARE BEING OFFERED AND
SOLD PURSUANT TO AN EXEMPTION FROM THE REGISTRATION
REQUIREMENTS OF THE SECURITIES ACT AND SUCH LAWS. THESE
SECURITIES MAY NOT BE SOLD OR TRANSFERRED EXCEPT PURSUANT TO
AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT
OR PURSUANT TO AN AVAILABLE EXEMPTION FROM THE REGISTRATION
REQUIREMENTS OF THE SECURITIES ACT OR SUCH OTHER LAWS."
(b) Except as otherwise provided in this Section 9, the
Warrant shall be stamped or otherwise imprinted with a legend in substantially
the following form:
"THIS WARRANT AND THE SECURITIES REPRESENTED HEREBY HAVE NOT
BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED,
AND MAY NOT BE TRANSFERRED IN VIOLATION OF SUCH ACT, THE RULES
AND REGULATIONS THEREUNDER OR THE PROVISIONS OF THIS WARRANT."
9.2 NOTICE OF PROPOSED TRANSFERS
Prior to any Transfer or attempted Transfer of any Warrants or
any shares of Restricted Common Stock, the Holder shall give ten days' prior
written notice (a "TRANSFER NOTICE") to the Company of Holder's intention to
effect such Transfer, describing the manner and circumstances of the proposed
Transfer, and obtain from counsel to Holder who shall be reasonably satisfactory
to the Company, an opinion that the proposed Transfer of such Warrants or such
Restricted Common Stock may be effected without registration under the
Securities Act. After receipt of the Transfer Notice and opinion, the Company
shall, within five days thereof, notify the Holder as to whether such opinion is
reasonably satisfactory and, if so, such holder shall thereupon be entitled to
Transfer such Warrants or such Restricted Common Stock, in accordance with the
terms of the Transfer Notice. Each certificate, if any, evidencing such shares
of Restricted Common Stock issued upon such Transfer shall bear the restrictive
legend set forth in Section 9.1(a), and the Warrant issued upon such Transfer
shall bear the restrictive legend set forth in Section 9.1(b), unless in the
opinion of such counsel such legend is not required in order to ensure
compliance with the Securities Act. Holder shall not be entitled to Transfer
such Warrants or such Restricted Common Stock until receipt of notice from the
Company under this Section 9.2(a) that such opinion is reasonably satisfactory.
12
<PAGE> 13
9.3 REQUIRED REGISTRATION
Pursuant to the terms and conditions set forth in Registration
Rights Agreement, the Company shall prepare and file with the Commission not
later than the 30th day after the Closing Date, a Registration Statement
relating to the offer and sale of the Common Stock issuable upon exercise of the
Warrants and shall use its best efforts to cause the Commission to declare such
Registration Statement effective under the Securities Act as promptly as
practicable but no later than 150 days after the Closing Date.
9.4 TERMINATION OF RESTRICTIONS
Notwithstanding the foregoing provisions of Section 9, the
restrictions imposed by this Section upon the transferability of the Warrants,
the Warrant Stock and the Restricted Common Stock (or Common Stock issuable upon
the exercise of the Warrants) and the legend requirements of Section 9.1 shall
terminate as to any particular Warrant or share of Warrant Stock or Restricted
Common Stock (or Common Stock issuable upon the exercise of the Warrants) (i)
when and so long as such security shall have been effectively registered under
the Securities Act and disposed of pursuant thereto or (ii) when the Company
shall have received an opinion of counsel reasonably satisfactory to it that
such shares may be transferred without registration thereof under the Securities
Act. Whenever the restrictions imposed by Section 9 shall terminate as to this
Warrant, as hereinabove provided, the Holder hereof shall be entitled to receive
from the Company upon written request of the Holder, at the expense of the
Company, a new Warrant bearing the following legend in place of the restrictive
legend set forth hereon:
"THE RESTRICTIONS ON TRANSFERABILITY OF
THE WITHIN WARRANT CONTAINED IN SECTION 9
HEREOF TERMINATED ON __________, _____,
AND ARE OF NO FURTHER FORCE AND EFFECT."
All Warrants issued upon registration of transfer, division or combination of,
or in substitution for, any Warrant or Warrants entitled to bear such legend
shall have a similar legend endorsed thereon. Whenever the restrictions imposed
by this Section shall terminate as to any share of Restricted Common Stock, as
hereinabove provided, the holder thereof shall be entitled to receive from the
Company, at the Company's expense, a new certificate representing such Common
Stock not bearing the restrictive legend set forth in Section 9.1(a).
9.5 LISTING ON SECURITIES EXCHANGE
If the Company shall list any shares of Common Stock on any
securities exchange or quotation system, it will, at its expense, list thereon,
maintain and, when necessary, increase such listing of, all shares of Common
Stock issued or, to the extent permissible under the applicable securities
exchange rules, issuable upon the exercise of this Warrant so long as any shares
of Common Stock shall be so listed during any such Exercise Period.
13
<PAGE> 14
10. SUPPLYING INFORMATION
The Company shall cooperate with Holder in supplying such
information as may be reasonably necessary for Holder to complete and file any
information reporting forms presently or hereafter required by the Commission as
a condition to the availability of an exemption from the Securities Act for the
sale of any Warrant or Restricted Common Stock.
11. LOSS OR MUTILATION
Upon receipt by the Company from Holder of evidence reasonably
satisfactory to it of the ownership of and the loss, theft, destruction or
mutilation of this Warrant and indemnity reasonably satisfactory to it (it being
understood that the written agreement of the Holder shall be sufficient
indemnity), and in case of mutilation upon surrender and cancellation hereof,
the Company will execute and deliver in lieu hereof a new Warrant of like tenor
to Holder; provided, in the case of mutilation no indemnity shall be required if
this Warrant in identifiable form is surrendered to the Company for
cancellation.
12. OFFICE OF THE COMPANY
As long as any of the Warrants remain outstanding, the Company
shall maintain an office or agency (which may be the principal executive offices
of the Company) where the Warrants may be presented for exercise, registration
of transfer, division or combination as provided in this Warrant.
13. LIMITATION OF LIABILITY
No provision hereof, in the absence of affirmative action by
Holder to purchase shares of Common Stock, and no enumeration herein of the
rights or privileges of Holder hereof, shall give rise to any liability of
Holder for the purchase price of any Common Stock or as a stockholder of the
Company, whether such liability is asserted by the Company or by creditors of
the Company.
14. MISCELLANEOUS
14.1 NONWAIVER AND EXPENSES
No course of dealing or any delay or failure to exercise any
right hereunder on the part of Holder shall operate as a waiver of such right or
otherwise prejudice Holder's rights, powers or remedies. If the Company fails to
make, when due, any payments provided for hereunder, or fails to comply with any
other provision of this Warrant, the Company shall pay to Holder such amounts as
shall be sufficient to cover any costs and expenses including, without
limitation, reasonable attorneys' fees, including those of appellate
proceedings, incurred by Holder in collecting any amounts due pursuant hereto or
in otherwise enforcing any of its rights, powers or remedies hereunder.
14
<PAGE> 15
14.2 NOTICE GENERALLY
Except as may be otherwise provided herein, any notice or
other communication or delivery required or permitted hereunder shall be in
writing and shall be delivered personally or sent by certified mail, postage
prepaid, or by a nationally recognized overnight courier service, and shall be
deemed given when so delivered personally or by overnight courier service, or,
if mailed, three (3) days after the date of deposit in the United States mails,
as follows:
(a) if to the Company, to:
Cafe Odyssey, Inc.
4801 West 81st Street, Suite 112
Bloomington, MN 55437
Attention: Stephen D. King
(612) 837-9917
(612) 837-9916 (Fax)
with a copy to:
Maslon Edelman Borman & Brand, LLP
3300 Norwest Center
90 South Seventh Street
Minneapolis, MN 55402
Attention: William M. Mower, Esq.
(612) 672-8358
(612) 672-8397 (Fax)
(b) if to the Holder, to:
The Shaar Fund Ltd.
c/o Levinson Capital Management
2 World Trade Center, Suite 1820
New York, NY 10048
Attention: Samuel Levinson
(212) 432-7771
(212) 432-7771 (Fax)
with a copy to:
Cadwalader, Wickersham & Taft
100 Maiden Lane
New York, NY 10038
Attention: Dennis J. Block, Esq.
(212) 504-5555
(212) 504-5557 (Fax)
The Company or the Holder may change the foregoing address by notice given
pursuant to this Section 14.2.
15
<PAGE> 16
14.3 INDEMNIFICATION
The Company agrees to indemnify and hold harmless Holder from
and against any liabilities, obligations, losses, damages, penalties, actions,
judgments, suits, claims, costs, attorneys' fees, expenses and disbursements of
any kind which may be imposed upon, incurred by or asserted against Holder in
any manner relating to or arising out of any failure by the Company to perform
or observe in any material respect any of its covenants, agreements,
undertakings or obligations set forth in this Warrant; provided, however, that
the Company will not be liable hereunder to the extent that any liabilities,
obligations, losses, damages, penalties, actions, judgments, suits, claims,
costs, attorneys' fees, expenses or disbursements are found in a final
nonappealable judgment by a court to have resulted from Holder's gross
negligence, bad faith or willful misconduct in its capacity as a stockholder or
warrantholder of the Company.
14.4 REMEDIES
Holder in addition to being entitled to exercise all rights
granted by law, including recovery of damages, will be entitled to specific
performance of its rights under Section 9 of this Warrant. The Company agrees
that monetary damages would not be adequate compensation for any loss incurred
by reason of a breach by it of the provisions of Section 9 of this Warrant and
hereby agrees to waive the defense in any action for specific performance that a
remedy at law would be adequate.
14.5 SUCCESSORS AND ASSIGNS
Subject to the provisions of Sections 3.1 and 9, this Warrant
and the rights evidenced hereby shall inure to the benefit of and be binding
upon the successors of the Company and the successors and assigns of Holder. The
provisions of this Warrant are intended to be for the benefit of all Holders
from time to time of this Warrant and, with respect to Section 9 hereof, holders
of Warrant Stock, and shall be enforceable by any such Holder or holder of
Warrant Stock.
14.6 AMENDMENT
This Warrant and all other Warrants may be modified or amended
or the provisions hereof waived with the written consent of the Company and
Holder.
14.7 SEVERABILITY
Wherever possible, each provision of this Warrant shall be
interpreted in such manner as to be effective and valid under applicable law,
but if any provision of this Warrant shall be prohibited by or invalid under
applicable law, such provision shall only be ineffective to the extent of such
prohibition or invalidity, without invalidating the remainder of such provision
or the remaining provisions of this Warrant.
14.8 HEADINGS
The headings used in this Warrant are for the convenience of
reference only and shall not, for any purpose, be deemed a part of this Warrant.
16
<PAGE> 17
14.9 GOVERNING LAW
This Warrant shall be governed by the laws of the State of New
York, without regard to the provisions thereof relating to conflicts of law.
17
<PAGE> 18
IN WITNESS WHEREOF, the Company has caused this Warrant to be
duly executed and its corporate seal to be impressed hereon and attested by its
Secretary or an Assistant Secretary.
Dated: May __, 1999
CAFE ODYSSEY, INC.
By: /s/ Stephen D. King
-----------------------------------------
Name:
Title:
Attest:
By: /s/ Mark D. Dacko
-----------------------------------------
Name:
Title:
18
<PAGE> 19
EXHIBIT A
SUBSCRIPTION FORM
[To be executed only upon exercise of Warrant]
The undersigned registered owner of this Warrant irrevocably
exercises this Warrant for the purchase of __________ shares of Common Stock of
Cafe Odyssey, Inc. and herewith makes payment therefor, all at the price and on
the terms and conditions specified in this Warrant and requests that
certificates for the shares of Common Stock hereby purchased (and any securities
or other property issuable upon such exercise) be issued in the name of and
delivered to
- --------------------------------------------------------------------------------
whose address is
- --------------------------------------------------------------------------------
and, if such shares of Common Stock shall not include all of the shares of
Common Stock issuable as provided in this Warrant, that a new Warrant of like
tenor and date for the balance of the shares of Common Stock issuable hereunder
be delivered to the undersigned.
----------------------------------------------
(Name of Registered Owner)
----------------------------------------------
(Signature of Registered Owner)
----------------------------------------------
(Street Address)
----------------------------------------------
(City) (State) (Zip Code)
NOTICE: The signature on this subscription
must correspond with the name as written upon
the face of the within Warrant in every
particular, without alteration or enlargement
or any change whatsoever.
A-1
<PAGE> 20
EXHIBIT B
ASSIGNMENT FORM
FOR VALUE RECEIVED the undersigned registered owner of this
Warrant hereby sells, assigns and transfers unto the Assignee named below all of
the rights of the undersigned under this Warrant, with respect to the number of
shares of Common Stock set forth below:
No. of Shares of
Name and Address of Assignee Common Stock
---------------------------- ------------
and does hereby irrevocably constitute and appoint
- --------------------------------------------------------------------------------
attorney-in-fact to register such transfer on the books of Cafe Odyssey, Inc.
maintained for the purpose, with full power of substitution in the premises.
Dated:
----------------------------
----------------------------------------------
(Print Name)
----------------------------------------------
(Signature)
----------------------------------------------
(Print Name of Witness)
----------------------------------------------
(Witness's Signature)
NOTICE: The signature on this assignment must
correspond with the name as written upon the
face of the within Warrant in every
particular, without alteration or enlargement
or any change whatsoever.
B-1
<PAGE> 1
EXHIBIT 10.2
SECURITIES PURCHASE AGREEMENT
THIS SECURITIES PURCHASE AGREEMENT, dated as of May 14, 1999,
between Cafe Odyssey, Inc., a Minnesota corporation with principal executive
offices located at 4801 West 81st Street, Suite 112, Bloomington, Minnesota
55437 (the "COMPANY"), and The Shaar Fund Ltd. ("BUYER").
WHEREAS, Buyer desires to purchase from the Company, and the
Company desires to issue and sell to the Buyer, upon the terms and subject to
the conditions of this Agreement, (i) 2,000 shares of the Company's Series A 8%
Convertible Preferred Stock, par value $0.01 per share (collectively, the
"PREFERRED SHARES"), and (ii) Common Stock Purchase Warrants in the form
attached hereto as Exhibit A (collectively, the "WARRANTS");
WHEREAS, upon the terms and subject to the designations,
preferences and rights set forth in the Company's Certificate of Designation of
Series A 8% Convertible Preferred Stock in the form attached hereto as Exhibit B
(the "CERTIFICATE OF DESIGNATION"), the Preferred Shares are convertible into
shares of the Company's common stock, par value $0.01 per share (the "COMMON
STOCK");
WHEREAS, the Warrants, upon the terms and subject to the
conditions in the Warrants, will for a period of five years be exercisable to
purchase 300,000 shares of Common Stock;
NOW, THEREFORE, in consideration of the premises and the
mutual covenants contained herein, the parties hereto, intending to be legally
bound, hereby agree as follows:
I. PURCHASE AND SALE OF PREFERRED SHARES AND WARRANTS
A. TRANSACTION. Buyer hereby agrees to purchase from the
Company, and the Company has offered and hereby agrees to issue and sell to the
Buyer in a transaction exempt from the registration and prospectus delivery
requirements of the Securities Act of 1933, as amended (the "SECURITIES ACT"),
the Preferred Shares and the Warrants to purchase 300,000 shares of Common
Stock.
B. PURCHASE PRICE; FORM OF PAYMENT. The purchase price for
the Preferred Shares and the Warrants to be purchased by Buyer hereunder shall
be $2,000,000 (the "PURCHASE PRICE"). Buyer shall pay the Purchase Price by wire
transfer of immediately available funds to the escrow agent (the "ESCROW AGENT")
identified in those certain Escrow Instructions of even date herewith, a copy of
which is attached hereto as Exhibit C (the "ESCROW INSTRUCTIONS").
Simultaneously with the execution of this Agreement and against receipt by the
Escrow Agent of the Purchase Price, the Company shall deliver one or more duly
authorized, issued and executed certificates (I/N/O Buyer or, if the Company
otherwise has been notified, I/N/O Buyer's nominee) evidencing the Preferred
Shares and the Warrants which the Buyer is purchasing, to the Escrow Agent or
its designated depository. By executing and delivering this Agreement,
<PAGE> 2
Buyer and the Company each hereby agrees to observe the terms and conditions of
the Escrow Instructions, all of which are incorporated herein by reference as if
fully set forth herein.
C. METHOD OF PAYMENT. Payment into escrow of the Purchase
Price shall be made by wire transfer of immediately available funds to:
The Bank of New York
48 Wall Street
New York, NY 10038
ABA No.: 021000018
For the Account of: Cadwalader, Wickersham & Taft
Trust Account IOLA Fund
Account No.: 0902061070
Simultaneously with the execution of this Agreement, the Buyer shall deposit
with the Escrow Agent the Purchase Price and the Company shall deposit with the
Escrow Agent the Preferred Shares and the Warrants.
II. BUYER'S REPRESENTATIONS, WARRANTIES; ACCESS TO
INFORMATION; INDEPENDENT INVESTIGATION
Buyer represents and warrants to and covenants and agrees with
the Company as follows:
A. Buyer is purchasing the Preferred Shares, the Warrants,
the Common Stock issuable upon exercise of the Warrants (the "WARRANT SHARES")
and the shares of Common Stock issuable upon conversion of the Preferred Shares
(the "CONVERSION SHARES" and, collectively with the Preferred Shares, the
Warrants and the Warrant Shares, the "SECURITIES") for its own account, for
investment purposes only and not with a view towards or in connection with the
public sale or distribution thereof in violation of the Securities Act.
B. Buyer is (i) an "ACCREDITED INVESTOR" within the meaning
of Rule 501 of Regulation D under the Securities Act, (ii) experienced in making
investments of the kind contemplated by this Agreement, (iii) capable, by reason
of its business and financial experience, of evaluating the relative merits and
risks of an investment in the Securities, and (iv) able to afford the loss of
its investment in the Securities.
C. Buyer understands that the Securities are being offered
and sold by the Company in reliance on an exemption from the registration
requirements of the Securities Act and equivalent state securities and "blue
sky" laws, and that the Company is relying upon the accuracy of, and Buyer's
compliance with, Buyer's representations, warranties and covenants set forth in
this Agreement to determine the availability of such exemption and the
eligibility of Buyer to purchase the Securities;
E. Buyer acknowledges that in making its decision to
purchase the Securities it has been given an opportunity to review the
Commission Filings (as defined in Section III.H. hereof) and to ask questions of
and to receive answers from the Company's executive officers,
2
<PAGE> 3
directors and management personnel concerning the terms and conditions of the
private placement of the Securities by the Company.
F. Buyer understands that the Securities have not been
approved or disapproved by the Securities and Exchange Commission (the
"COMMISSION") or any state securities commission and that the foregoing
authorities have not reviewed any documents or instruments in connection with
the offer and sale to it of the Securities and have not confirmed or determined
the adequacy or accuracy of any such documents or instruments.
G. This Agreement has been duly and validly authorized,
executed and delivered by Buyer and is a valid and binding agreement of Buyer
enforceable against it in accordance with its terms, subject to applicable
bankruptcy, insolvency, fraudulent conveyance, reorganization, moratorium and
similar laws affecting creditors' rights and remedies generally and except as
rights to indemnity and contribution may be limited by federal or state
securities laws or the public policy underlying such laws.
H. Neither Buyer nor its affiliates nor any person acting
on its or their behalf has the intention of entering, or will enter into, prior
to the closing, any put option, short position or other similar instrument or
position with respect to the Common Stock and neither Buyer nor any of its
affiliates nor any person acting on its or their behalf will use at any time
shares of Common Stock acquired pursuant to this Agreement to settle any put
option, short position or other similar instrument or position that may have
been entered into prior to the execution of this Agreement.
III. THE COMPANY'S REPRESENTATIONS
The Company represents and warrants to Buyer that:
A. CAPITALIZATION.
1. The authorized capital stock of the Company
consists of 100,000,000 shares of which 8,313,435 shares of Common
Stock are issued and outstanding on the date hereof and no shares of
preferred stock are issued and outstanding on the date hereof. All of
the issued and outstanding shares of Common Stock and preferred stock,
if any, have been duly authorized and validly issued and are fully paid
and nonassessable. As of the date hereof, the Company has outstanding
stock options and warrants to purchase 4,339,750 shares of Common
Stock. The Conversion Shares and Warrant Shares have been duly and
validly authorized and reserved for issuance by the Company, and when
issued by the Company upon conversion of, or in lieu of accrued
dividends on, the Preferred Shares and on exercise of the Warrants will
be duly and validly issued, fully paid and nonassessable and will not
subject the holder thereof to personal liability by reason of being
such holder. There are no preemptive, subscription, "call" or other
similar rights to acquire the Common Stock (including the Conversion
Shares and Warrant Shares) that have been issued or granted to any
person.
2. Except as disclosed on Schedule III.A.2. hereto,
the Company does not own or control, directly or indirectly, any
interest in any other corporation,
3
<PAGE> 4
partnership, limited liability company, unincorporated business
organization, association, trust or other business entity.
B. ORGANIZATION; REPORTING COMPANY STATUS.
1. The Company is a corporation duly organized,
validly existing and in good standing under the laws of the State of
Minnesota and is duly qualified as a foreign corporation in all
jurisdictions in which the failure to so qualify would have a material
adverse effect on the business, properties, prospects, condition
(financial or otherwise) or results of operations of the Company or on
the consummation of any of the transactions contemplated by this
Agreement (a "MATERIAL ADVERSE EFFECT").
2. The Company has registered the Common Stock
pursuant to Section 12 of the Securities Exchange Act of 1934, as
amended (the "EXCHANGE ACT"), and has timely filed with the Commission
all reports and information required to be filed by it pursuant to all
reporting obligations under Section 13(a) or 15(d), as applicable, of
the Exchange Act for the 12-month period immediately preceding the date
hereof. The Common Stock is listed and traded on the Nasdaq SmallCap
Market ("Nasdaq") and the Company has not received any notice
regarding, and to its knowledge there is no threat of, the termination
or discontinuance of the eligibility of the Common Stock for such
listing, except for the receipt of notice from Nasdaq regarding the
Company's failure to maintain a minimum bid price for its Common Stock,
which notice is no longer effective.
C. AUTHORIZED SHARES. The Company has duly and validly
authorized and reserved for issuance shares of Common Stock sufficient in number
for the conversion of the Preferred Shares and the exercise of the Warrants,
such number of authorized and reserved shares to be at least 19.9% of the total
outstanding shares of Common Stock on the Closing Date. The Company understands
and acknowledges the potentially dilutive effect to the Common Stock of the
issuance of the Preferred Shares and Warrant Shares upon conversion of the
Preferred Shares and exercise of the Warrants, respectively. The Company further
acknowledges that its obligation to issue Conversion Shares upon conversion of
the Preferred Shares and Warrant Shares upon exercise of the Warrants in
accordance with this Agreement, the Preferred Shares and the Warrants is
absolute and unconditional regardless of the dilutive effect that such issuance
may have on the ownership interests of other stockholders of the Company and
notwithstanding the commencement of any case under 11 U.S.C. ss. 101 et seq.
(the "BANKRUPTCY CODE"). In the event the Company is a debtor under the
Bankruptcy Code, the Company hereby waives to the fullest extent permitted any
rights to relief it may have under 11 U.S.C. ss. 362 in respect of the
conversion of the Preferred Shares and the exercise of the Warrants. The Company
agrees, without cost or expense to Buyer, to take or consent to any and all
action necessary to effectuate relief under 11 U.S.C. ss. 362. Schedule III.C.
hereto sets forth (i) all issuances and sales by the Company since the closing
of its initial public offering of its capital stock, and other securities
convertible, exercisable or exchangeable for capital stock of the Company, (ii)
the amount of such securities sold, including any underlying shares of capital
stock, (iii) the purchaser thereof, and (iv) the amount paid therefor.
D. AUTHORITY; VALIDITY AND ENFORCEABILITY. The Company has
the requisite corporate power and authority to file and perform its obligations
under the Certificate of
4
<PAGE> 5
Designation and to enter into the Documents (as hereinafter defined), and to
perform all of its obligations hereunder and thereunder (including the issuance,
sale and delivery to Buyer of the Securities). The execution, delivery and
performance by the Company of the Documents, and the consummation by the Company
of the transactions contemplated hereby and thereby (including, without
limitation, the filing of the Certificate of Designation with the Minnesota
Secretary of State's office, the issuance of the Preferred Shares, the Warrants
and the issuance and reservation for issuance of the Conversion Shares and
Warrant Shares), has been duly authorized by all necessary corporate action on
the part of the Company. Each of the Documents has been duly and validly
executed and delivered by the Company and the Certificate of Designation has
been duly filed with the Minnesota Secretary of State's office by the Company
and each instrument constitutes a valid and binding obligation of the Company
enforceable against it in accordance with its terms, subject to applicable
bankruptcy, insolvency, fraudulent conveyance, reorganization, moratorium and
similar laws affecting creditors' rights and remedies generally and except as
rights to indemnity and contribution may be limited by federal or state
securities laws or the public policy underlying such laws. The Securities have
been duly and validly authorized for issuance by the Company and, when executed
and delivered by the Company, will be valid and binding obligations of the
Company enforceable against it in accordance with their terms, subject to
applicable bankruptcy, insolvency, fraudulent conveyance, reorganization,
moratorium and similar laws affecting creditors' rights and remedies generally.
For purposes of this Agreement, the term "DOCUMENTS" means (i) this Agreement;
(ii) the Registration Rights Agreement of even date herewith between the Company
and Buyer, a copy of which is annexed hereto as Exhibit D (the "REGISTRATION
RIGHTS AGREEMENT"); (iii) the Certificate of Designation; (iv) the Warrants; and
(v) the Escrow Instructions.
E. AUTHORIZATION OF THE SECURITIES. The authorization,
issuance, sale and delivery of the Preferred Shares and Warrants has been duly
authorized by all requisite corporate action on the part of the Company. As of
the Closing Date, the Preferred Shares and the Warrants, and the Conversion
Shares and the Warrant Shares upon their issuance in accordance with the
Certificate of Designation and the Warrants, respectively, will be validly
issued and outstanding, fully paid and nonassessable, and not subject to any
preemptive rights, rights of first refusal or other similar rights.
F. NON-CONTRAVENTION. The execution and delivery by the
Company of the Documents, the issuance of the Securities, and the consummation
by the Company of the other transactions contemplated hereby and thereby,
including, without limitation, the filing of the Certificate of Designation with
the Minnesota Secretary of State's office, do not and will not conflict with or
result in a breach by the Company of any of the terms or provisions of, or
constitute a default (or an event which, with notice, lapse of time or both,
would constitute a default) under (i) the articles of incorporation or by-laws
of the Company or (ii) any indenture, mortgage, deed of trust or other material
agreement or instrument to which the Company is a party or by which its
properties or assets are bound, or any law, rule, regulation, decree, judgment
or order of any court or public or governmental authority having jurisdiction
over the Company or any of the Company's properties or assets, except as to
clause (ii) above such conflict, breach or default which would not have a
Material Adverse Effect.
G. APPROVALS. No authorization, approval or consent of any
court or public or governmental authority is required to be obtained by the
Company for the issuance and sale of
5
<PAGE> 6
the Preferred Shares or the Warrants (and the Conversion Shares and Warrant
Shares) to Buyer as contemplated by this Agreement, except such authorizations,
approvals and consents that have been obtained by the Company prior to the date
hereof.
H. COMMISSION FILINGS. None of the Company's reports and
documents heretofore filed with the Commission pursuant to the Securities Act or
the Exchange Act (collectively, the "COMMISSION FILINGS") contained at the time
they were filed any untrue statement of a material fact or omitted to state any
material fact required to be stated therein or necessary to make the statements
made therein, in light of the circumstances under which they were made, not
misleading.
I. ABSENCE OF CERTAIN CHANGES. Since the Balance Sheet Date
(as defined in Section III.M.), there has not occurred any change, event or
development in the business, financial condition, prospects or results of
operations of the Company, and there has not existed any condition having or
reasonably likely to have, a Material Adverse Effect.
J. FULL DISCLOSURE. There is no fact known to the Company
(other than general economic or industry conditions known to the public
generally) that has not been fully disclosed in writing to the Buyer that (i)
reasonably could be expected to have a Material Adverse Effect or (ii)
reasonably could be expected to materially and adversely affect the ability of
the Company to perform its obligations pursuant to the Documents.
K. ABSENCE OF LITIGATION. There is no action, suit, claim,
proceeding, inquiry or investigation pending or, to the Company's knowledge,
threatened, by or before any court or public or governmental authority which, if
determined adversely to the Company, would have a Material Adverse Effect.
L. ABSENCE OF EVENTS OF DEFAULT. No "EVENT OF DEFAULT" (as
defined in any agreement or instrument to which the Company is a party) and no
event which, with notice, lapse of time or both, would constitute an Event of
Default (as so defined), has occurred and is continuing, which could have a
Material Adverse Effect.
M. FINANCIAL STATEMENTS; NO UNDISCLOSED LIABILITIES. The
Company has made available to Buyer true and complete copies of its audited
balance sheet as at January 3, 1999 and the related audited statements of
operations and cash flows for the fiscal years ended December 28, 1997 and
January 3, 1999 including the related notes and schedules thereto (collectively,
the "FINANCIAL STATEMENTS"). Each of the Financial Statements is complete and
correct in all material respects, has been prepared in accordance with United
States General Accepted Accounting Principles ("GAAP") (subject, in the case of
the interim Financial Statements, to normal year end adjustments and the absence
of footnotes) and in conformity with the practices consistently applied by the
Company without modification of the accounting principles used in the
preparation thereof, and fairly presents the financial position, results of
operations and cash flows of the Company as at the dates and for the periods
indicated. For purposes hereof, the audited balance sheet of the Company as at
January 3, 1999 is hereinafter referred to as the "BALANCE SHEET" and January 3,
1999 is hereinafter referred to as the "BALANCE SHEET DATE". The Company has no
indebtedness, obligations or liabilities of any kind (whether accrued, absolute,
contingent or otherwise, and whether due or to become due) that would have
6
<PAGE> 7
been required to be reflected in, reserved against or otherwise described in the
Balance Sheet or in the notes thereto in accordance with GAAP, which was not
fully reflected in, reserved against or otherwise described in the Balance Sheet
or the notes thereto or was not incurred in the ordinary course of business
consistent with the Company's past practices since the Balance Sheet Date.
N. COMPLIANCE WITH LAWS; PERMITS. The Company is in
compliance with all laws, rules, regulations, codes, ordinances and statutes
(collectively, "LAWS") applicable to it or to the conduct of its business,
except for such noncompliance which would not have a Material Adverse Effect.
The Company possesses all permits, approvals, authorizations, licenses,
certificates and consents from all public and governmental authorities which are
necessary to conduct its business, except for those the absence of which would
not have a Material Adverse Effect.
O. RELATED PARTY TRANSACTIONS. Except as set forth on
Schedule III.O. hereto, neither the Company nor any of its officers, directors
or "AFFILIATES" (as such term is defined in Rule 12b-2 under the Exchange Act)
has borrowed any moneys from or has outstanding any indebtedness or other
similar obligations to the Company. Except as set forth on Schedule III.O.
hereto, neither the Company nor any of its officers, directors or Affiliates (i)
owns any direct or indirect interest constituting more than a 1% equity (or
similar profit participation) interest in, or controls or is a director,
officer, partner, member or employee of, or consultant to or lender to or
borrower from, or has the right to participate in the profits of, any person or
entity which is (x) a competitor, supplier, customer, landlord, tenant, creditor
or debtor of the Company, (y) engaged in a business related to the business of
the Company, or (z) a participant in any transaction to which the Company is a
party (other than in the ordinary course of the Company's business) or (ii) is a
party to any contract, agreement, commitment or other arrangement with the
Company.
P. INSURANCE. The Company maintains property and casualty,
general liability, workers' compensation, environmental hazard, personal injury
and other similar types of insurance with financially sound and reputable
insurers that is adequate, consistent with industry standards and the Company's
historical claims experience. The Company has not received notice from, and has
no knowledge of any threat by, any insurer (that has issued any insurance policy
to the Company) that such insurer intends to deny coverage under or cancel,
discontinue or not renew any insurance policy presently in force.
Q. SECURITIES LAW MATTERS. Based, in part, upon the
representations and warranties of Buyer set forth in Section II hereof, the
offer and sale by the Company of the Securities is exempt from (i) the
registration and prospectus delivery requirements of the Securities Act and the
rules and regulations of the Commission thereunder and (ii) the registration
and/or qualification provisions of all applicable state securities and "blue
sky" laws. Other than pursuant to an effective registration statement under the
Securities Act, the Company has not issued, offered or sold the Preferred Shares
or any shares of Common Stock (including for this purpose any securities of the
same or a similar class as the Preferred Shares or Common Stock, or any
securities convertible into or exchangeable or exercisable for the Preferred
Shares or Common Stock or any such other securities), and the Company shall not
directly or indirectly take, and shall not permit any of its directors, officers
or Affiliates directly or indirectly to take,
7
<PAGE> 8
any action (including, without limitation, any offering or sale to any person or
entity of the Preferred Shares or shares of Common Stock), so as to make
unavailable the exemption from Securities Act registration being relied upon by
the Company for the offer and sale to Buyer of the Preferred Shares (and the
Conversion Shares) as contemplated by this Agreement. No form of general
solicitation or advertising has been used or authorized by the Company or any of
its officers, directors or Affiliates in connection with the offer or sale of
the Preferred Shares (and the Conversion Shares) as contemplated by this
Agreement or any other agreement to which the Company is a party.
R. ENVIRONMENTAL MATTERS.
1. The operations of the Company are in compliance
with all applicable Environmental Laws and all permits issued pursuant
to Environmental Laws or otherwise;
2. The Company has obtained or applied for all
permits required under all applicable Environmental Laws necessary to
operate its business;
3. The Company is not the subject of any outstanding
written order of or agreement with any governmental authority or person
respecting (i) Environmental Laws, (ii) Remedial Action or (iii) any
Release or threatened Release of Hazardous Materials;
4. The Company has not received, since January 3,
1999, any written communication alleging that it may be in violation of
any Environmental Law or any permit issued pursuant to any
Environmental Law, or may have any liability under any Environmental
Law;
5. The Company does not have any current contingent
liability in connection with any Release of any Hazardous Materials
into the indoor or outdoor environment (whether on-site or off-site);
6. Except as set forth on Schedule III.R.6 hereto, to
the Company's knowledge, there are no investigations of the business,
operations, or currently or previously owned, operated or leased
property of the Company pending or threatened which could lead to the
imposition of any liability pursuant to any Environmental Law;
7. There is not located at any of the properties of
the Company any (A) underground storage tanks, (B) asbestos-containing
material or (C) equipment containing polychlorinated biphenyls; and,
8. The Company has provided to Buyer all
environmentally related audits, studies, reports, analyses, and results
of investigations that have been performed with respect to the
currently or previously owned, leased or operated properties of the
Company.
For purposes of this Section III.R.:
8
<PAGE> 9
"ENVIRONMENTAL LAW" means any foreign, federal, state or local
statute, regulation, ordinance, or rule of common law as now or hereafter in
effect in any way relating to the protection of human health and safety or the
environment including, without limitation, the Comprehensive Environmental
Response, Compensation and Liability Act, the Hazardous Materials Transportation
Act, the Resource Conservation and Recovery Act, the Clean Water Act, the Clean
Air Act, the Toxic Substances Control Act, the Federal Insecticide, Fungicide,
and Rodenticide Act, and the Occupational Safety and Health Act, and the
regulations promulgated pursuant thereto.
"HAZARDOUS MATERIAL" means any substance, material or waste
which is regulated by the United States, Canada or any of its provinces, or any
state or local governmental authority including, without limitation, petroleum
and its by-products, asbestos, and any material or substance which is defined as
a "HAZARDOUS WASTE," "HAZARDOUS SUBSTANCE," "HAZARDOUS MATERIAL," "RESTRICTED
HAZARDOUS WASTE," "INDUSTRIAL WASTE," "SOLID WASTE," "CONTAMINANT," "POLLUTANT,"
"TOXIC WASTE" or "TOXIC SUBSTANCE" under any provision of any Environmental Law;
"RELEASE" means any release, spill, filtration, emission,
leaking, pumping, injection, deposit, disposal, discharge, dispersal, or
leaching into the indoor or outdoor environment, or into or out of any property;
"REMEDIAL ACTION" means all actions to (x) clean up, remove,
treat or in any other way address any Hazardous Material; (y) prevent the
Release of any Hazardous Material so it does not endanger or threaten to
endanger public health or welfare or the indoor or outdoor environment; or (z)
perform pre-remedial studies and investigations or post-remedial monitoring and
care.
S. LABOR MATTERS. The Company is not party to any labor or
collective bargaining agreement and there are no labor or collective bargaining
agreements which pertain to employees of the Company. No employees of the
Company are represented by any labor organization and none of such employees has
made a pending demand for recognition, and there are no representation
proceedings or petitions seeking a representation proceeding presently pending
or, to the Company's knowledge, threatened to be brought or filed, with the
National Labor Relations Board or other labor relations tribunal. There is no
organizing activity involving the Company pending or to the Company's knowledge,
threatened by any labor organization or group of employees of the Company. There
are no (i) strikes, work stoppages, slowdowns, lockouts or arbitrations or (ii)
material grievances or other labor disputes pending or, to the knowledge of the
Company, threatened against or involving the Company. There are no unfair labor
practice charges, grievances or complaints pending or, to the knowledge of the
Company, threatened by or on behalf of any employee or group of employees of the
Company.
T. ERISA MATTERS. The Company and its ERISA Affiliates are
in compliance in all material respects with all provisions of ERISA applicable
to it. No Reportable Event has occurred, been waived or exists as to which the
Company or any ERISA Affiliate was required to file a report with the Pension
Benefits Guaranty Corporation, and the present value of all liabilities under
all Plans (based on those assumptions used to fund such Plans) did not, as of
the most recent annual valuation date applicable thereto, exceed the value of
the assets of all
9
<PAGE> 10
such Plans in the aggregate. None of the Company or ERISA Affiliates has
incurred any Withdrawal Liability that could result in a Material Adverse
Effect. None of the Company or ERISA Affiliates has received any notification
that any Multiemployer Plan is in reorganization or has been terminated within
the meaning of Title IV of ERISA, and no Multiemployer Plan is reasonably
expected to be in reorganization or termination where such reorganization or
termination has resulted or could reasonably be expected to result in increases
to the contributions required to be made to such Plan or otherwise.
For purposes of this Section III.T.:
"ERISA" means the Employee Retirement Income Security Act of
1974, or any successor statute, together with the regulations thereunder, as the
same may be amended from time to time.
"ERISA AFFILIATE" means any trade or business (whether or not
incorporated) that was, is or hereafter may become, a member of a group of which
the Company is a member and which is treated as a single employer under Section
414 of the Internal Revenue Code of 1986, as amended (the "INTERNAL REVENUE
CODE").
"MULTIEMPLOYER PLAN" means a multiemployer plan as defined in
Section 4001(a)(3) of ERISA to which the Company or any ERISA Affiliate (other
than one considered an ERISA Affiliate only pursuant to subsection (m) or (o) of
Section 414 of the Internal Revenue Code) is making or accruing an obligation to
make contributions, or has within any of the preceding five plan years made or
accrued an obligation to make contributions.
"PBGC" means the Pension Benefit Guaranty Corporation referred
to and defined in ERISA or any successor thereto.
"PLAN" means any pension plan (other than a Multiemployer
Plan) subject to the provision of Title IV of ERISA or Section 412 of the
Internal Revenue Code that is maintained for employees of the Company or any
ERISA Affiliate.
"REPORTABLE EVENT" means any reportable event as defined in
Section 4043(b) of ERISA or the regulations issued thereunder with respect to a
Plan (other than a Plan maintained by an ERISA Affiliate that is considered an
ERISA Affiliate only pursuant to subsection (m) or (o) of Section 414 of the
Internal Revenue Code).
"WITHDRAWAL LIABILITY" means liability to a Multiemployer Plan
as a result of a complete or partial withdrawal from such Multiemployer Plan, as
such terms are defined in Part I of Subtitle E of Title IV of ERISA.
U. TAX MATTERS.
1. The Company has filed all Tax Returns which it is
required to file under applicable Laws, except for such Tax Returns in
respect of which the failure to so file does not and could not have a
Material Adverse Effect; all such Tax Returns are true and accurate in
all material respects and have been prepared in compliance with all
applicable Laws; the Company has paid all Taxes due and owing by it
(whether or not
10
<PAGE> 11
such Taxes are required to be shown on a Tax Return) and have withheld
and paid over to the appropriate taxing authorities all Taxes which it
is required to withhold from amounts paid or owing to any employee,
stockholder, creditor or other third parties; and since the Balance
Sheet Date, the charges, accruals and reserves for Taxes with respect
to the Company (including any provisions for deferred income taxes)
reflected on the books of the Company are adequate to cover any Tax
liabilities of the Company if its current tax year were treated as
ending on the date hereof.
2. No claim has been made by a taxing authority in a
jurisdiction where the Company does not file tax returns that such
corporation is or may be subject to taxation by that jurisdiction.
There are no foreign, federal, state or local tax audits or
administrative or judicial proceedings pending or being conducted with
respect to the Company; no information related to Tax matters has been
requested by any foreign, federal, state or local taxing authority;
and, except as disclosed above, no written notice indicating an intent
to open an audit or other review has been received by the Company from
any foreign, federal, state or local taxing authority. There are no
material unresolved questions or claims concerning the Company's Tax
liability. The Company (A) has not executed or entered into a closing
agreement pursuant to Section 7121 of the Internal Revenue Code or any
predecessor provision thereof or any similar provision of state, local
or foreign law; or (B) has not agreed to or is required to make any
adjustments pursuant to Section 481(a) of the Internal Revenue Code or
any similar provision of state, local or foreign law by reason of a
change in accounting method initiated by the Company or any of its
subsidiaries or has any knowledge that the IRS has proposed any such
adjustment or change in accounting method, or has any application
pending with any taxing authority requesting permission for any changes
in accounting methods that relate to the business or operations of the
Company. The Company has not been a United States real property holding
corporation within the meaning of Section 897(c)(2) of the Internal
Revenue Code during the applicable period specified in Section
897(c)(1)(A)(ii) of the Internal Revenue Code.
3. The Company has not made an election under Section
341(f) of the Internal Revenue Code. The Company is not liable for the
Taxes of another person that is not a subsidiary of the Company under
(A) Treas. Reg. Section 1.1502-6 (or comparable provisions of state,
local or foreign law), (B) as a transferee or successor, (C) by
contract or indemnity or (D) otherwise. The Company is not a party to
any tax sharing agreement. The Company has not made any payments, is
obligated to make payments or is a party to an agreement that could
obligate it to make any payments that would not be deductible under
Section 280G of the Internal Revenue Code.
For purposes of this Section III.U.:
"IRS" means the United States Internal Revenue Service.
"TAX" or "TAXES" means federal, state, county, local, foreign,
or other income, gross receipts, ad valorem, franchise, profits, sales or use,
transfer, registration, excise, utility, environmental, communications, real or
personal property, capital stock, license, payroll, wage or other withholding,
employment, social security, severance, stamp, occupation, alternative or
11
<PAGE> 12
add-on minimum, estimated and other taxes of any kind whatsoever (including,
without limitation, deficiencies, penalties, additions to tax, and interest
attributable thereto) whether disputed or not.
"TAX RETURN" means any return, information report or filing
with respect to Taxes, including any schedules attached thereto and including
any amendment thereof.
V. PROPERTY. The Company has good and marketable title to
all real and personal property owned by it, free and clear of all liens,
encumbrances and defects except such as are described on Schedule III.V. hereto
or such as do not materially affect the value of such property and do not
interfere with the use made and proposed to be made of such property by the
Company; and any real property and buildings held under lease by the Company are
held by it under valid, subsisting and enforceable leases with such exceptions
as are not material and do not interfere with the use made and proposed to be
made of such property and buildings by the Company.
W. INTELLECTUAL PROPERTY. The Company owns or possesses
adequate and enforceable rights to use all patents, patent applications,
trademarks, trademark applications, trade names, service marks, copyrights,
copyright applications, licenses, know-how (including trade secrets and other
unpatented and/or unpatentable proprietary or confidential information, systems
or procedures) and other similar rights and proprietary knowledge (collectively,
"INTANGIBLES") necessary for the conduct of its business as now being conducted
including, but not limited to, those described on Schedule III.W. hereto. The
Company is not infringing upon or in conflict with any right of any other person
with respect to any Intangibles. Except as disclosed on Schedule III.W. hereto,
no claims have been asserted by any person to the ownership or use of any
Intangibles and the Company has no knowledge of any basis for such claim.
X. INTERNAL CONTROLS AND PROCEDURES. The Company maintains
accurate books and records and internal accounting controls which provide
reasonable assurance that (i) all transactions to which the Company is a party
or by which its properties are bound are executed with management's
authorization; (ii) the reported accountability of the Company's assets is
compared with existing assets at regular intervals; (iii) access to the
Company's assets is permitted only in accordance with management's
authorization; and (iv) all transactions to which the Company is a party or by
which its properties are bound are recorded as necessary to permit preparation
of the financial statements of the Company in accordance with GAAP.
Y. PAYMENTS AND CONTRIBUTIONS. Neither the Company nor any
of its directors, officers or, to its knowledge, other employees has (i) used
any Company funds for any unlawful contribution, endorsement, gift,
entertainment or other unlawful expense relating to political activity; (ii)
made any direct or indirect unlawful payment of Company funds to any foreign or
domestic government official or employee, (iii) violated or is in violation of
any provision of the Foreign Corrupt Practices Act of 1977, as amended; or (iv)
made any bribe, rebate, payoff, influence payment, kickback or other similar
payment to any person with respect to Company matters.
12
<PAGE> 13
Z. NO MISREPRESENTATION. No representation or warranty of
the Company contained in this Agreement, any schedule, annex or exhibit hereto
or any agreement, instrument or certificate furnished by the Company to Buyer
pursuant to this Agreement, contains any untrue statement of a material fact or
omits to state a material fact required to be stated therein or necessary to
make the statements therein, not misleading.
IV. CERTAIN COVENANTS AND ACKNOWLEDGMENTS
A. RESTRICTIVE LEGEND. Buyer acknowledges and agrees that,
upon issuance pursuant to this Agreement, the Securities (and any shares of
Common Stock issued in conversion of the Preferred Shares or exercise of the
Warrants) shall have endorsed thereon a legend in substantially the following
form (and a stop-transfer order may be placed against transfer of the Preferred
Shares, the Warrant Shares and the Conversion Shares until such legend has been
removed):
"THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF
1933, AS AMENDED (THE "SECURITIES ACT"), OR THE SECURITIES LAWS OF ANY
STATE, AND ARE BEING OFFERED AND SOLD PURSUANT TO AN EXEMPTION FROM THE
REGISTRATION REQUIREMENTS OF THE SECURITIES ACT AND SUCH LAWS. THESE
SECURITIES MAY NOT BE SOLD OR TRANSFERRED EXCEPT PURSUANT TO AN
EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OR PURSUANT
TO AN AVAILABLE EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE
SECURITIES ACT OR SUCH OTHER LAWS."
B. FILINGS. The Company shall make all necessary Commission
Filings and "blue sky" filings required to be made by the Company in connection
with the sale of the Securities to the Buyer as required by all applicable Laws,
and shall provide a copy thereof to the Buyer promptly after such filing.
C. REPORTING STATUS. So long as the Buyer beneficially owns
any of the Securities, the Company shall timely file all reports required to be
filed by it with the Commission pursuant to Section 13 or 15(d) of the Exchange
Act.
D. USE OF PROCEEDS. The Company shall use the net proceeds
from the sale of the Securities (excluding amounts paid by the Company for
Buyer's out-of-pocket costs and expenses incurred in connection with the
transactions contemplated by this Agreement and finder's fees in connection with
such sale) solely for general corporate and working capital purposes.
E. LISTING. Except to the extent the Company lists its
Common Stock on The New York Stock Exchange or the Nasdaq National Market, the
Company shall use its best efforts to maintain its listing of the Common Stock
on Nasdaq.
F. RESERVED CONVERSION SHARES. The Company at all times
from and after the date hereof shall have a sufficient number of shares of
Common Stock duly and validly authorized and reserved for issuance to satisfy
the conversion, in full, of the 2,000 Preferred
13
<PAGE> 14
Shares and upon the exercise of the Warrants, such number of authorized and
reserved shares to be at least 19.9% of the total outstanding shares of Common
Stock on the Closing Date.
G. FINDER'S FEES. The Company shall pay all finder's fees,
brokerage commissions or like payments in connection with the issuance, purchase
and sale of the Securities, including, without limitation, fees payable by the
Company to Progressive Group, consisting of a 10% placement fee, 3% of
unallocated expenses and warrants to purchase 87,500 shares of Common Stock, and
the Company agrees that Buyer shall have no liability therefor.
V. TRANSFER AGENT INSTRUCTIONS
A. The Company undertakes and agrees that no instruction
other than the instructions referred to in this Section V and customary stop
transfer instructions prior to the registration and sale of the Common Stock
pursuant to an effective Securities Act registration statement will be given to
its transfer agent for the Common Stock and that the Common Stock issuable upon
conversion of the Preferred Shares and exercise of the Warrants otherwise shall
be freely transferable on the books and records of the Company as and to the
extent provided in this Agreement, the Registration Rights Agreement and
applicable law. Nothing contained in this Section V.A. shall affect in any way
Buyer's obligations and agreement to comply with all applicable securities laws
upon resale of such Common Stock. If, at any time, Buyer provides the Company
with an opinion of counsel reasonably satisfactory to the Company that
registration of the resale by Buyer of such Common Stock is not required under
the Securities Act and that the removal of restrictive legends is permitted
under applicable law, the Company shall permit the transfer of such Common Stock
and, promptly instruct the Company's transfer agent to issue one or more
certificates for Common Stock without any restrictive legends endorsed thereon.
B. The Company shall permit Buyer to exercise its right to
convert the Preferred Shares by telecopying an executed and completed Notice of
Conversion (as defined in the Certificate of Designation) to the Company. Each
date on which a Notice of Conversion is telecopied to and received by the
Company in accordance with the provisions hereof shall be deemed a Conversion
Date (as defined in the Certificate of Designation). The Company shall transmit
the certificates evidencing the shares of Common Stock issuable upon conversion
of any Preferred Shares (together with certificates evidencing any Preferred
Shares not being so converted) to Buyer via express courier, by electronic
transfer or otherwise, within five business days after receipt by the Company of
the Notice of Conversion (the "DELIVERY DATE"). Within 15 days after Buyer
delivers the Notice of Conversion to the Company, Buyer shall deliver to the
Company the Preferred Shares being converted.
C. The Company shall permit Buyer to exercise its right to
purchase shares of Common Stock pursuant to exercise of the Warrants in
accordance with its applicable terms of the Warrants. The last date that the
Company may deliver shares of Common Stock issuable upon any exercise of
Warrants is referred to herein as the "WARRANT DELIVERY DATE."
D. The Company understands that a delay in the issuance of
the shares of Common Stock issuable in lieu of cash dividends on the Preferred
Shares, upon the conversion of the Preferred Shares or exercise of the Warrants
beyond the applicable Dividend Payment Due Date (as defined in the Certificate
of Designation), Delivery Date or Warrant Delivery Date
14
<PAGE> 15
could result in economic loss to Buyer. As compensation to Buyer for such loss
(and not as a penalty), the Company agrees to pay to Buyer for late issuance of
Common Stock issuable in lieu of cash dividends on the Preferred Shares, upon
conversion of the Preferred Shares or exercise of the Warrants in accordance
with the following schedule (where "NO. BUSINESS DAYS" is defined as the number
of business days beyond five business days from the Dividend Payment Due Date,
the Delivery Date or the Warrant Delivery Date, as applicable):
<TABLE>
<CAPTION>
COMPENSATION FOR EACH 10 SHARES
OF PREFERRED SHARES NOT CONVERTED
TIMELY OR 500 SHARES OF COMMON
STOCK ISSUABLE IN PAYMENT OF
DIVIDENDS OR UPON EXERCISE OF
NO. BUSINESS DAYS WARRANTS NOT ISSUED TIMELY
- ---------------------------- -----------------------------------
<S> <C>
1 $ 25
2 50
3 75
4 100
5 125
6 150
7 175
8 200
9 225
10 250
more than 10 $250 + $100 for each Business
Day Late beyond 10 days
</TABLE>
The Company shall pay to Buyer the compensation described above by the transfer
of immediately available funds upon Buyer's demand. Nothing herein shall limit
Buyer's right to pursue actual damages for the Company's failure to issue and
deliver Common Stock to Buyer, and in addition to any other remedies which may
be available to Buyer, in the event the Company fails for any reason to effect
delivery of such shares of Common Stock within five business days after the
relevant Dividend Payment Due Date, the Delivery Date or the Warrant Delivery
Date, as applicable, Buyer shall be entitled to rescind the relevant Notice of
Conversion or exercise of Warrants by delivering a notice to such effect to the
Company whereupon the Company and Buyer shall each be restored to their
respective original positions immediately prior to delivery of such Notice of
Conversion on delivery.
VI. DELIVERY INSTRUCTIONS
The Securities shall be delivered by the Company to the Escrow
Agent pursuant to Section I.B. hereof on a "delivery-against-payment basis" at
the Closing.
VII. CLOSING DATE
The date and time of the issuance and sale of the Preferred
Shares (the "CLOSING DATE") shall be the date hereof or such other as shall be
mutually agreed upon in writing. The issuance and sale of the Securities shall
occur on the Closing Date at the offices of the Escrow
15
<PAGE> 16
Agent. Notwithstanding anything to the contrary contained herein, the Escrow
Agent shall not be authorized to release to the Company the Purchase Price and
to Buyer the certificate(s) (I/N/O Buyer or I/N/O Buyer's nominee) evidencing
the Securities being purchased by Buyer unless the conditions set forth in
Section VIII.C. and IX.G. hereof have been satisfied.
VIII. CONDITIONS TO THE COMPANY'S OBLIGATIONS
The Buyer understands that the Company's obligation to sell
the Securities on the Closing Date to Buyer pursuant to this Agreement is
conditioned upon:
A. Delivery by Buyer to the Escrow Agent of the Purchase
Price;
B. The accuracy in all material respects on the Closing
Date of the representations and warranties of Buyer contained in this Agreement
as if made on the Closing Date (except for representations and warranties which,
by their express terms, speak as of and relate to a specified date, in which
case such accuracy shall be measured as of such specified date) and the
performance by Buyer in all material respects on or before the Closing Date of
all covenants and agreements of Buyer required to be performed by it pursuant to
this Agreement on or before the Closing Date;
C. There shall not be in effect any Law or order, ruling,
judgment or writ of any court or public or governmental authority restraining,
enjoining or otherwise prohibiting any of the transactions contemplated by this
Agreement.
IX. CONDITIONS TO BUYER'S OBLIGATIONS
The Company understands that Buyer's obligation to purchase
the Securities on the Closing Date pursuant to this Agreement is conditioned
upon:
A. Delivery by the Company to Buyer of evidence that the
Certificate of Designation has been filed and is effective.
B. Delivery by the Company to the Escrow Agent of one or
more certificates (I/N/O Buyer or I/N/O Buyer's nominee) evidencing the
Securities to be purchased by Buyer pursuant to this Agreement;
C. The accuracy in all respects on the Closing Date of the
representations and warranties of the Company contained in this Agreement as if
made on the Closing Date (except for representations and warranties which, by
their express terms, speak as of and relate to a specified date, in which case
such accuracy shall be measured as of such specified date) and the performance
by the Company in all respects on or before the Closing Date of all covenants
and agreements of the Company required to be performed by it pursuant to this
Agreement on or before the Closing Date;
D. Buyer having received an opinion of counsel for the
Company, dated the Closing Date, in form, scope and substance reasonably
satisfactory to the Buyer as to the matters set forth in Annex A;
16
<PAGE> 17
E. There not having occurred (i) any general suspension of
trading in, or limitation on prices listed for, the Common Stock on Nasdaq, (ii)
the declaration of a banking moratorium or any suspension of payments in respect
of banks in the United States, (iii) the commencement of a war, armed
hostilities or other international or national calamity directly or indirectly
involving the United States or any of its territories, protectorates or
possessions, or (iv) in the case of the foregoing existing at the date of this
Agreement, a material acceleration or worsening thereof;
F. There not having occurred any event or development, and
there being in existence no condition, having or which reasonably and
foreseeably could have a Material Adverse Effect;
G. The Company shall have delivered to Buyer (as provided
in the Escrow Instructions) reimbursement of Buyer's out-of-pocket costs and
expenses whether or not accounted for or incurred in connection with the
transactions contemplated by this Agreement (including the fees and
disbursements of Buyer's legal counsel) of $30,000;
H. There shall not be in effect any Law or order, ruling,
judgment or writ of any court or public or governmental authority restraining,
enjoining or otherwise prohibiting any of the transactions contemplated by this
Agreement; and
I. Delivery of irrevocable instructions to the Company's
transfer agent to reserve such number of shares of Common Stock equal to at
least 19.9% of the total outstanding shares of Common Stock on the Closing Date
for issuance of the Conversion Shares and the Warrant Shares.
X. TERMINATION
A. TERMINATION BY MUTUAL WRITTEN CONSENT. This Agreement
may be terminated and the transactions contemplated hereby may be abandoned, for
any reason and at any time prior to the Closing Date, by the mutual written
consent of the Company and Buyer.
B. TERMINATION BY THE COMPANY OR BUYER. This Agreement may
be terminated and the transactions contemplated hereby may be abandoned by
action of the Company or Buyer if (i) the Closing shall not have occurred at or
prior to 5:00 p.m., New York City time, on May 21, 1999 (the "LATEST CLOSING
DATE"); provided, however, that the right to terminate this Agreement pursuant
to this Section X.B.(i) shall not be available to any party whose failure to
fulfill any of its obligations under this Agreement has been the cause of or
resulted in the failure of the Closing to occur at or before such time and date
or (ii) any court or public or governmental authority shall have issued an
order, ruling, judgment or writ, or there shall be in effect any Law,
restraining, enjoining or otherwise prohibiting the consummation of any of the
transactions contemplated by this Agreement; provided, further, however, that if
the Closing shall not have occurred on or prior to the Latest Closing Date, the
Closing may only occur after the Latest Closing Date with the written acceptance
of Buyer.
C. TERMINATION BY BUYER. This Agreement may be terminated
and the transactions contemplated hereby may be abandoned by Buyer at any time
prior to the Closing Date, if (i) the Company shall have failed to comply with
any of its covenants or agreements
17
<PAGE> 18
contained in this Agreement, (ii) there shall have been a breach by the Company
with respect to any representation or warranty made by it in this Agreement,
(iii) there shall have occurred any event or development, or there shall be in
existence any condition, having or reasonably and forseeably likely to have a
Material Adverse Effect or (iv) the Company shall have failed to satisfy the
conditions provided in Section IX hereof.
D. TERMINATION BY THE COMPANY. This Agreement may be
terminated and the transactions contemplated hereby may be abandoned by the
Company at any time prior to the Closing Date, if (i) Buyer shall have failed to
comply with any of its covenants or agreements contained in this Agreement or
(ii) there shall have been a breach by Buyer with respect to any representation
or warranty made by it in this Agreement.
E. FEES AND EXPENSES OF TERMINATION. If this Agreement is
terminated for any reason, the Company shall reimburse Buyer for all of Buyer's
out-of-pocket costs and expenses incurred in connection with the transactions
contemplated by this Agreement and the other Documents (including, without
limitation, the fees and disbursements of Buyer's legal counsel).
XI. SURVIVAL; INDEMNIFICATION
A. The representations, warranties and covenants made by
each of the Company and Buyer in this Agreement, the annexes, schedules and
exhibits hereto and in each instrument, agreement and certificate entered into
and delivered by them pursuant to this Agreement, shall survive the Closing and
the consummation of the transactions contemplated hereby. In the event of a
breach or violation of any of such representations, warranties or covenants, the
party to whom such representations, warranties or covenants have been made shall
have all rights and remedies for such breach or violation available to it under
the provisions of this Agreement or otherwise, whether at law or in equity,
irrespective of any investigation made by or on behalf of such party on or prior
to the Closing Date.
B. The Company hereby agrees to indemnify and hold harmless
the Buyer, its Affiliates and their respective officers, directors, partners and
members (collectively, the "BUYER INDEMNITEES"), from and against any and all
losses, claims, damages, judgments, penalties, liabilities and deficiencies
(collectively, "LOSSES"), and agrees to reimburse the Buyer Indemnitees for all
reasonable out-of-pocket expenses (including the fees and expenses of legal
counsel), in each case promptly as incurred by the Buyer Indemnitees and to the
extent arising out of or in connection with:
1. any misrepresentation, omission of fact or breach
of any of the Company's representations or warranties contained in this
Agreement or the other Documents, or the annexes, schedules or exhibits
hereto or thereto or any instrument, agreement or certificate entered
into or delivered by the Company pursuant to this Agreement or the
other Documents; or
2. any failure by the Company to perform any of its
covenants, agreements. undertakings or obligations set forth in this
Agreement or the other Documents, or the annexes, schedules or exhibits
hereto or thereto or any instrument,
18
<PAGE> 19
agreement or certificate entered into or delivered by the Company pursuant to
this Agreement or the other Documents; or
3. resales of the Common Shares by Buyer in the
manner and as contemplated by this Agreement and the Registration
Rights Agreement.
C. Buyer hereby agrees to indemnify and hold harmless the
Company, its Affiliates and their respective officers, directors, partners and
members (collectively, the "COMPANY INDEMNITEES"), from and against any and all
Losses, and agrees to reimburse the Company Indemnitees for all out-of-pocket
expenses (including the fees and expenses of legal counsel), in each case
promptly as incurred by the Company Indemnitees and to the extent arising out of
or in connection with:
1. any misrepresentation, omission of fact, or breach
of any of Buyer's representations or warranties contained in this
Agreement or the other Documents, or the annexes, schedules or exhibits
hereto or thereto or any instrument, agreement or certificate entered
into or delivered by Buyer pursuant to this Agreement or the other
Documents; or
2. any failure by Buyer to perform in any material
respect any of its covenants, agreements, undertakings or obligations
set forth in this Agreement or the other Documents or any instrument,
certificate or agreement entered into or delivered by Buyer pursuant to
this Agreement or the other Documents.
D. Promptly after receipt by either party hereto seeking
indemnification pursuant to this Section XI (an "INDEMNIFIED PARTY") of written
notice of any investigation, claim, proceeding or other action in respect of
which indemnification is being sought (each, a "CLAIM"), the Indemnified Party
promptly shall notify the party against whom indemnification pursuant to this
Section XI is being sought (the "INDEMNIFYING PARTY") of the commencement
thereof; but the omission to so notify the Indemnifying Party shall not relieve
it from any liability that it otherwise may have to the Indemnified Party except
to the extent that the Indemnifying Party is materially prejudiced and forfeits
substantive rights and defenses by reason of such failure. In connection with
any Claim as to which both the Indemnifying Party and the Indemnified Party are
parties, the Indemnifying Party shall be entitled to assume the defense thereof.
Notwithstanding the assumption of the defense of any Claim by the Indemnifying
Party, the Indemnified Party shall have the right to employ separate legal
counsel and to participate in the defense of such Claim, and the Indemnifying
Party shall bear the reasonable fees, out-of-pocket costs and expenses of such
separate legal counsel to the Indemnified Party if (and only if): (x) the
Indemnifying Party shall have agreed to pay such fees, out-of-pocket costs and
expenses, (y) the Indemnified Party and the Indemnifying Party reasonably shall
have concluded that representation of the Indemnified Party and the Indemnifying
Party by the same legal counsel would not be appropriate due to actual or, as
reasonably determined by legal counsel to the Indemnified Party, potentially
differing interests between such parties in the conduct of the defense of such
Claim, or if there may be legal defenses available to the Indemnified Party that
are in addition to or disparate from those available to the Indemnifying Party,
or (z) the Indemnifying Party shall have failed to employ legal counsel
reasonably satisfactory to the Indemnified Party within a reasonable period of
time after notice of the commencement of such
19
<PAGE> 20
Claim. If the Indemnified Party employs separate legal counsel in circumstances
other than as described in clauses (x), (y) or (z) above, the fees, costs and
expenses of such legal counsel shall be borne exclusively by the Indemnified
Party. Except as provided above, the Indemnifying Party shall not, in connection
with any Claim in the same jurisdiction, be liable for the fees and expenses of
more than one firm of legal counsel for the Indemnified Party (together with
appropriate local counsel). The Indemnifying Party shall not, without the prior
written consent of the Indemnified Party (which consent shall not unreasonably
be withheld), settle or compromise any Claim or consent to the entry of any
judgment that does not include an unconditional release of the Indemnified Party
from all liabilities with respect to such Claim or judgment.
E. In the event one party hereunder should have a claim for
indemnification that does not involve a claim or demand being asserted by a
third party, the Indemnified Party promptly shall deliver notice of such claim
to the Indemnifying Party. If the Indemnified Party disputes the claim, such
dispute shall be resolved by mutual agreement of the Indemnified Party and the
Indemnifying Party or by binding arbitration conducted in accordance with the
procedures and rules of the American Arbitration Association. Judgment upon any
award rendered by any arbitrators may be entered in any court having competent
jurisdiction thereof.
XII. GOVERNING LAW; MISCELLANEOUS
This Agreement shall be governed by and interpreted in
accordance with the laws of the State of New York, without regard to the
conflicts of law principles of such state. Each of the parties consents to the
jurisdiction of the federal courts whose districts encompass any part of the
City of New York or the state courts of the State of New York sitting in the
City of New York in connection with any dispute arising under this Agreement and
hereby waives, to the maximum extent permitted by law, any objection, including
any objection based on forum non conveniens, to the bringing of any such
proceeding in such jurisdictions. A facsimile transmission of this signed
Agreement shall be legal and binding on all parties hereto. This Agreement may
be signed in one or more counterparts, each of which shall be deemed an
original. The headings of this Agreement are for convenience of reference and
shall not form part of, or affect the interpretation of, this Agreement. If any
provision of this Agreement shall be invalid or unenforceable in any
jurisdiction, such invalidity or unenforceability shall not affect the validity
or enforceability of the remainder of this Agreement or the validity or
enforceability of this Agreement in any other jurisdiction. This Agreement may
be amended only by an instrument in writing signed by the party to be charged
with enforcement. This Agreement supersedes all prior agreements and
understandings among the parties hereto with respect to the subject matter
hereof.
XIII. NOTICES
Except as may be otherwise provided herein, any notice or
other communication or delivery required or permitted hereunder shall be in
writing and shall be delivered personally or sent by certified mail, postage
prepaid, or by a nationally recognized overnight courier service, and shall be
deemed given when so delivered personally or by overnight courier service, or,
if mailed, three (3) days after the date of deposit in the United States mails,
as follows:
20
<PAGE> 21
A. if to the Company, to:
Cafe Odyssey, Inc.
4801 West 81st Street, Suite 112
Bloomington, MN 55437
Attention: Stephen D. King
(612) 837-9917
(612) 837-9916 (Fax)
with a copy to:
Maslon Edelman Borman & Brand, LLP
3300 Norwest Center
90 South Seventh Street
Minneapolis, MN 55402
Attention: William M. Mower, Esq.
(612) 672-8358
(612) 672-8397 (Fax)
B. if to the Buyer, to:
The Shaar Fund Ltd.,
c/o Levinson Capital Management
2 World Trade Center, Suite 1820
New York, NY 10048
Attention: Samuel Levinson
(212) 432-7711
(212) 432-7771 (Fax)
with a copy to:
Cadwalader, Wickersham & Taft
100 Maiden Lane
New York, NY 10038
Attention: Dennis J. Block, Esq.
(212) 504-5555
(212) 504-5557 (Fax)
C. if to the Escrow Agent, to:
Cadwalader, Wickersham & Taft
100 Maiden Lane
New York, NY 10038
Attention: Dennis J. Block, Esq.
(212) 504-5555
(212) 504-5557 (Fax)
21
<PAGE> 22
The Company, the Buyer or the Escrow Agent may change the foregoing address by
notice given pursuant to this Section XIII.
XIV. CONFIDENTIALITY
Each of the Company and Buyer agrees to keep confidential and
not to disclose to or use for the benefit of any third party the terms of this
Agreement or any other information which at any time is communicated by the
other party as being confidential without the prior written approval of the
other party; provided, however, that this provision shall not apply to
information which, at the time of disclosure, is already part of the public
domain (except by breach of this Agreement) and information which is required to
be disclosed by law (including, without limitation, pursuant to Item 601(b)(10)
of Regulation S-K under the Securities Act and the Exchange Act).
XV. ASSIGNMENT
This Agreement shall not be assignable by either of the
parties hereto prior to the Closing without the prior written consent of the
other party, and any attempted assignment contrary to the provisions hereby
shall be null and void; provided, however, that Buyer may assign its rights and
obligations hereunder, in whole or in part, to any affiliate of Buyer who
furnishes to the Company the representations and warranties set forth in Section
II hereof and otherwise agrees to be bound by the terms of this Agreement.
22
<PAGE> 23
IN WITNESS WHEREOF, the parties hereto have duly executed and
delivered this Agreement on the date first above written.
CAFE ODYSSEY, INC.
By: /s/ Stephen D. King
------------------------------------
Name:
Title:
THE SHAAR FUND LTD.
By: /s/ Signature illegible
------------------------------------
Name:
Title:
23
<PAGE> 24
EXHIBIT A
COMMON STOCK PURCHASE WARRANTS
<PAGE> 25
EXHIBIT B
CERTIFICATE OF DESIGNATION
<PAGE> 26
EXHIBIT C
ESCROW INSTRUCTIONS
<PAGE> 27
EXHIBIT D
REGISTRATION RIGHTS AGREEMENT
<PAGE> 28
SCHEDULE III.A.2.
SUBSIDIARIES
HD Spirits, Inc., a Minnesota corporation (wholly-owned subsidiary)
<PAGE> 29
SCHEDULE III.C.
ISSUANCES AND SALES OF SECURITIES
Pursuant to Item 601 of Regulation S-K, this Schedule has been omitted from this
filing. The Registrant will furnish a copy of any omitted Schedule or Exhibit to
the Commission upon request.
<PAGE> 30
SCHEDULE III.O.
RELATED PARTY TRANSACTIONS
Pursuant to Item 601 of Regulation S-K, this Schedule has been omitted from this
filing. The Registrant will furnish a copy of any omitted Schedule or Exhibit to
the Commission upon request.
<PAGE> 31
SCHEDULE III.R.6.
ENVIRONMENTAL MATTERS
None.
<PAGE> 32
SCHEDULE III.V.
LIENS AND ENCUMBRANCES ON PROPERTY
1. The Company has a $3,000,000 revolving line of credit facility dated
September 23, 1998 with The Provident Bank which is secured by an
Open-ended Leasehold Mortgage, Security Agreement and Assignment of
Rents, Income and Proceeds which encumbers the leasehold improvements at
the Kenwood Restaurant.
2. On April 30, 1999, the Company entered into a $300,000 master equipment
lease agreement with Carlton Financial Corporation which is secured by
substantially all of the furniture, accessories, and computer/point of
sale and kitchen equipment located at the Denver Pavilions Restaurant.
3. The Company is a party to Senior Loan and Security Agreement No. 9154
dated June 18, 1998 with Phoenix Leasing Corp. which secured by
furniture, fixtures, equipment, kitchen appliances, video/sound systems
and special lighting at the Mall of America Restaurant.
<PAGE> 33
SCHEDULE III.W.
INTELLECTUAL PROPERTY
Tradenames: Cafe' Odyssey, Hotel Discovery
<PAGE> 34
ANNEX A
FORM OF OPINION
1. The Company has been duly incorporated and is validly
existing as a corporation in good standing under the laws of the State of
Minnesota, is duly qualified to do business as a foreign corporation and is in
good standing in all jurisdictions where the Company owns or leases properties
or conducts business, except for jurisdictions in which the failure to so
qualify would not have a Material Adverse Effect, and has all requisite
corporate power and authority to own its properties and conduct its business as
described in the Commission Filings.
2. The authorized capital stock of the Company consists of
100,000,000 shares, having a par value $0.01 per share in the case of Common
Stock (the "COMMON STOCK"), and having a par value as determined by the
Company's Board of Directors in the case of preferred stock.
3. When delivered to you or upon your order against payment
of the agreed consideration therefor in accordance with the provisions of the
Documents, the Securities will be duly authorized and validly issued, fully paid
and nonassessable.
4. The Company has the requisite corporate power and
authority to enter into the Documents and to sell and deliver the Securities as
described in the Documents; each of the Documents has been duly and validly
authorized by all necessary corporate action by the Company; each of the
Documents has been duly and validly executed and delivered by and on behalf of
the Company, and is valid and binding agreement of the Company, enforceable in
accordance with its terms, except as enforceability may be limited by general
equitable principles, bankruptcy, insolvency, fraudulent conveyance,
reorganization, moratorium or other laws affecting creditors rights generally.
5. The executive, delivery and performance of the Documents
by the Company and the performance of its obligations thereunder do not and will
not constitute a breach or violation of any of the terms and provisions of, or
constitute a default (or with notice, lapse of time or both would constitute a
default) under or conflict with or violate any provision of (i) the Company's
certificate of incorporation or bylaws, (ii) any indenture, mortgage, deed of
trust, agreement or other instrument known to us to which the Company is a party
or by which it or any of its property is bound, (iii) or, to the best of our
knowledge, any judgment, decree or order of any court or governmental body
having jurisdiction over the Company or any of its property. To the best of our
knowledge, no consent, approval, authorization, order, registration, filing,
qualification, license or permit of or with any court or any public,
governmental or regulatory agency or body having jurisdiction over the Company
or any of its properties or assets is required for the execution, delivery and
performance by the Company of the Documents or the consummation by the Company
of the transactions contemplated thereby.
6. When issued, the Preferred Shares and the Warrants shall
be duly authorized, validly issued, fully paid and nonassessable, and free and
clear of all encumbrances and restrictions, except for restrictions on transfer
imposed by applicable securities laws. The Conversion Shares and Warrant Shares
issuable upon conversion or exercise, respectively, of the
A-1
<PAGE> 35
Preferred Shares and the Warrants, respectively, will be duly authorized,
validly issued, fully paid and nonassessable, and free and clear of all
encumbrances and restrictions, except for restrictions on transfer imposed by
applicable securities laws.
7. Based on Buyer's representations contained in this
Agreement, the offer and sale of the Preferred Shares and the Warrants are
exempt from the registration requirements of the Securities Act.
8. To the best of our knowledge, other than as described in
the Commission Filings, there are no outstanding options, warrants or other
securities exercisable or convertible into Common Stock of the Company.
9. There is no action, suit, claim, inquiry or
investigation pending or, to the best of our knowledge, threatened by or before
any court or public or governmental authority which, if determined adversely to
the Company, would have a Material Adverse Effect.
10. Neither the Company nor any of its subsidiaries is, or
will be after the consummation of the transactions contemplated by this
Agreement and the other Documents and the use of the proceeds from the sale of
the Securities, an "investment company" or an entity "controlled" by an
"investment company," as such terms are defined in the Investment Company Act of
1940, as amended.
A-2
<PAGE> 1
EXHIBIT 10.3
REGISTRATION RIGHTS AGREEMENT
THIS REGISTRATION RIGHTS AGREEMENT, dated as of May 14, 1999
(this "AGREEMENT"), between Cafe Odyssey, Inc., a Minnesota corporation, with
principal executive offices located at 4801 West 81st Street, Suite 112,
Bloomington, Minnesota 55437 (the "COMPANY"), and The Shaar Fund Ltd. (the
"INITIAL INVESTOR").
WHEREAS, upon the terms and subject to the conditions of the
Securities Purchase Agreement dated as of May 14, 1999, between the Initial
Investor and the Company (the "SECURITIES PURCHASE AGREEMENT"), the Company has
agreed to issue and sell to the Initial Investor (i) 2,000 shares of Series A 8%
Convertible Preferred Stock, par value $0.01 per share (the "PREFERRED SHARES")
which, upon the terms of and subject to the conditions of the Company's
Certificate of Designation of Series A 8% Convertible Preferred Stock (the
"CERTIFICATE OF DESIGNATION"), are convertible into shares of the Company's
common stock, par value $0.01 per share (the "COMMON STOCK") and (ii) Common
Stock Purchase Warrants (the "WARRANTS") to purchase shares of Common Stock; and
WHEREAS, to induce the Initial Investor to execute and deliver
the Securities Purchase Agreement, the Company has agreed to provide with
respect to the Common Stock issued or issuable in lieu of cash dividend payments
on the Preferred Shares, upon conversion of the Preferred Shares and exercise of
the Warrants certain registration rights under the Securities Act;
NOW, THEREFORE, in consideration of the premises and the
mutual covenants contained herein, the parties hereto, intending to be legally
bound, hereby agree as follows:
1. DEFINITIONS
(a) As used in this Agreement, the following terms shall have
the meanings:
(i) "AFFILIATE," of any specified Person means any
other Person who directly, or indirectly through one or more
intermediaries, is in control of, is controlled by, or is under common
control with, such specified Person. For purposes of this definition,
control of a Person means the power, directly or indirectly, to direct
or cause the direction of the management and policies of such Person
whether by contract, securities, ownership or otherwise; and the terms
"CONTROLLING" and "CONTROLLED" have the respective meanings correlative
to the foregoing.
(ii) "CLOSING DATE" means the date and time of the
issuance and sale of the Preferred Shares.
(iii) "COMMISSION" means the Securities and Exchange
Commission.
(iv) "CURRENT MARKET PRICE" on any date of
determination means the closing bid price of a share of the Common
Stock on such day as reported on the Nasdaq
<PAGE> 2
SmallCap Market ("NASDAQ") ; provided, if such security bid is not
listed or admitted to trading on the Nasdaq, as reported on the
principal national security exchange or quotation system on which such
security is quoted or listed or admitted to trading, or, if not quoted
or listed or admitted to trading on any national securities exchange or
quotation system, the closing bid price of such security on the
over-the-counter market on the day in question as reported by Bloomberg
LP, or a similar generally accepted reporting service, as the case may
be.
(v) "EXCHANGE ACT" means the Securities Exchange Act
of 1934, as amended, and the rules and regulations of the Commission
thereunder, or any similar successor statute.
(vi) "INVESTORS" means the Initial Investor and any
transferee or assignee of Registrable Securities who agrees to become
bound by all of the terms and provisions of this Agreement in
accordance with Section 8 hereof.
(vii) "PERSON" means any individual, partnership,
corporation, limited liability company, joint stock company,
association, trust, unincorporated organization, or a government or
agency or political subdivision thereof.
(viii) "PROSPECTUS" means the prospectus (including,
without limitation, any preliminary prospectus and any final prospectus
filed pursuant to Rule 424(b) under the Securities Act, including any
prospectus that discloses information previously omitted from a
prospectus filed as part of an effective registration statement in
reliance on Rule 430A under the Securities Act) included in the
Registration Statement, as amended or supplemented by any prospectus
supplement with respect to the terms of the offering of any portion of
the Registrable Securities covered by the Registration Statement and by
all other amendments and supplements to such prospectus, including all
material incorporated by reference in such prospectus and all documents
filed after the date of such prospectus by the Company under the
Exchange Act and incorporated by reference therein.
(ix) "PUBLIC OFFERING" means an offer registered with
the Commission and the appropriate state securities commissions by the
Company of its Common Stock and made pursuant to the Securities Act.
(x) "REGISTRABLE SECURITIES" means the Common Stock
issued or issuable (i) in lieu of cash dividend payments on the
Preferred Shares, (ii) upon conversion of the Preferred Shares or (iii)
upon exercise of the Warrants; provided, however, a share of Common
Stock shall cease to be a Registrable Security for purposes of this
Agreement when it no longer is a Restricted Security.
(xi) "REGISTRATION STATEMENT" means a registration
statement of the Company filed on an appropriate form under the
Securities Act providing for the registration of, and the sale on a
continuous or delayed basis by the holders of, all of the Registrable
Securities pursuant to Rule 415 under the Securities Act, including the
Prospectus contained therein and forming a part thereof, any amendments
to such
2
<PAGE> 3
registration statement and supplements to such Prospectus, and all
exhibits and other material incorporated by reference in such
registration statement and Prospectus.
(xii) "RESTRICTED SECURITY" means any share of Common
Stock issued or issuable in lieu of cash dividend payments on the
Preferred Shares, upon conversion of the Preferred Shares or exercise
of the Warrants except any such share that (i) has been registered
pursuant to an effective registration statement under the Securities
Act and sold in a manner contemplated by the prospectus included in
such registration statement, (ii) has been transferred in compliance
with the resale provisions of Rule 144 under the Securities Act (or any
successor provision thereto) or is transferable pursuant to paragraph
(k) of Rule 144 under the Securities Act (or any successor provision
thereto), or (iii) otherwise has been transferred and a new share of
Common Stock not subject to transfer restrictions under the Securities
Act has been delivered by or on behalf of the Company.
(xiii) "SECURITIES ACT" means the Securities Act of
1933, as amended, and the rules and regulations of the Commission
thereunder, or any similar successor statute.
(b) All capitalized terms used and not defined herein have the
respective meaning assigned to them in the Securities Purchase Agreement.
2. REGISTRATION
(a) FILING AND EFFECTIVENESS OF REGISTRATION STATEMENT. The
Company shall prepare and file with the Commission not later than 30 days after
the Closing Date, a Registration Statement relating to the offer and resale of
the Registrable Securities by the holders thereof and shall use its best efforts
to cause the Commission to declare such Registration Statement effective under
the Securities Act as promptly as practicable but not later than 150 days after
the Closing Date, assuming for purposes hereof a number of shares of Registrable
Securities equal to at least 19.9% of the total outstanding shares of Common
Stock on the Closing Date. The Company shall notify the Initial Investor by
written notice that such Registration Statement has been declared effective by
the Commission within 24 hours of such declaration by the Commission.
(b) REGISTRATION DEFAULT. If the Registration Statement
covering the Registrable Securities or the Additional Registrable Securities (as
defined in Section 2(d) hereof) required to be filed by the Company pursuant to
Section 2(a) or 2(d) hereof, as the case may be, is not (i) filed with the
Commission within 30 days after the Closing Date or (ii) declared effective by
the Commission within 150 days after the Closing Date (either of which, without
duplication, an "INITIAL DATE"), then the Company shall make the payments to the
Initial Investor as provided in the next sentence as liquidated damages and not
as a penalty. The amount to be paid by the Company to the Initial Investor shall
be determined as of each Computation Date (as defined below), and such amount
shall be equal to 2% (the "LIQUIDATED DAMAGE RATE") of the Purchase Price (as
defined in the Securities Purchase Agreement) from the Initial Date to the first
Computation Date and for each Computation Date thereafter, calculated on a pro
rata basis to the date on which the Registration Statement is filed with (in the
event of an Initial Date pursuant to
3
<PAGE> 4
clause (i) above) or declared effective by (in the event of an Initial Date
pursuant to clause (ii) above) the Commission (the "PERIODIC AMOUNT") provided,
however, that in no event shall the liquidated damages be less than $25,000. The
full Periodic Amount shall be paid by the Company to the Initial Investor by
wire transfer of immediately available funds within three days after each
Computation Date.
As used in this Section 2(b), "COMPUTATION DATE" means the
date which is 30 days after the Initial Date and, if the Registration Statement
required to be filed by the Company pursuant to Section 2(a) has not theretofore
been declared effective by the Commission, each date which is 30 days after the
previous Computation Date until such Registration Statement is so declared
effective.
Notwithstanding the above, if the Registration Statement
covering the Registrable Securities or the Additional Registrable Securities
required to be filed by the Company pursuant to Section 2(a) or 2(d) hereof, as
the case may be, is not filed with the Commission by the 30th day after the
Closing Date, the Company shall be in default of this Registration Rights
Agreement.
(c) ELIGIBILITY FOR USE OF FORM S-3. The Company agrees that
at such time as it meets all the requirements for the use of Securities Act
Registration Statement on Form S-3 it shall file all reports and information
required to be filed by it with the Commission in a timely manner and take all
such other action so as to maintain such eligibility for the use of such form.
(d) [Reserved]
(e) (i) If the Company proposes to register any of its
warrants, Common Stock or any other shares of common stock of the
Company under the Securities Act (other than a registration (A) on Form
S-8 or S-4 or any successor or similar forms, (B) relating to Common
Stock or any other shares of common stock of the Company issuable upon
exercise of employee share options or in connection with any employee
benefit or similar plan of the Company or (C) in connection with a
direct or indirect acquisition by the Company of another Person or any
transaction with respect to which Rule 145 (or any successor provision)
under the Securities Act applies), whether or not for sale for its own
account, it will each such time, give prompt written notice at least 20
days prior to the anticipated filing date of the registration statement
relating to such registration to the Initial Investor, which notice
shall set forth such Initial Investor's rights under this Section 3(e)
and shall offer the Initial Investor the opportunity to include in such
registration statement such number of Registrable Securities as the
Initial Investor may request. Upon the written request of an Initial
Investor made within 10 days after the receipt of notice from the
Company (which request shall specify the number of Registrable
Securities intended to be disposed of by such Initial Investor), the
Company will use its best efforts to effect the registration under the
Securities Act of all Registrable Securities that the Company has been
so requested to register by the Initial Investor, to the extent
requisite to permit the disposition of the Registrable Securities so to
be registered; provided, however, that (A) if such registration
involves a Public Offering, the Initial Investor must sell their
Registrable Securities to the underwriters selected as provided in
Section 3(b) hereof on the same terms and conditions as apply to the
4
<PAGE> 5
Company and (B) if, at any time after giving written notice of its
intention to register any Registrable Securities pursuant to this
Section 3 and prior to the effective date of the registration statement
filed in connection with such registration, the Company shall determine
for any reason not to register such Registrable Securities, the Company
shall give written notice to the Initial Investor and, thereupon, shall
be relieved of its obligation to register any Registrable Securities in
connection with such registration. The Company's obligations under this
Section 2(e) shall terminate on the date that the registration
statement to be filed in accordance with Section 2(a) is declared
effective by the Commission.
(ii) If a registration pursuant to this Section 2(e)
involves a Public Offering and the managing underwriter thereof advises
the Company that, in its view, the number of shares of Common Stock,
Warrants or other shares of Common Stock that the Company and the
Initial Investor intend to include in such registration exceeds the
largest number of shares of Common Stock or Warrants (including any
other shares of Common Stock or Warrants of the Company) that can be
sold without having an adverse effect on such Public Offering (the
"MAXIMUM OFFERING SIZE"), the Company will include in such
registration, only that number of shares of Common Stock or Warrants,
as applicable, such that the number of shares of Registrable Securities
registered does not exceed the Maximum Offering Size, with the
difference between the number of shares in the Maximum Offering Size
and the number of shares to be issued by the Company to be allocated
(after including all shares to be issued and sold by the Company) among
the Company and the Initial Investor pro rata on the basis of the
relative number of shares of Common Stock or Warrants offered for sale
under such registration by each of the Company and the Initial
Investor.
If as a result of the proration provisions of this Section
2(e)(ii), any Initial Investor is not entitled to include all such Registrable
Securities in such registration, such Initial Investor may elect to withdraw its
request to include any Registrable Securities in such registration. With respect
to registrations pursuant to this Section 2(e), the number of securities
required to satisfy any underwriters' over-allotment option shall be allocated
pro rata among the Company and the Initial Investor on the basis of the relative
number of shares of Common Stock or Warrants otherwise to be included by each of
them in the registration with respect to which such over-allotment option
relates.
3. OBLIGATIONS OF THE COMPANY
In connection with the registration of the Registrable
Securities, the Company shall:
(a) Promptly (i) prepare and file with the Commission such
amendments (including post-effective amendments) to the Registration Statement
and supplements to the Prospectus as may be necessary to keep the Registration
Statement continuously effective and in compliance with the provisions of the
Securities Act applicable thereto so as to permit the Prospectus forming part
thereof to be current and useable by Investors for resales of the Registrable
Securities for a period of two years from the date on which the Registration
Statement is first declared effective by the Commission (the "EFFECTIVE TIME")
or such shorter
5
<PAGE> 6
period that will terminate when all the Registrable Securities covered by the
Registration Statement have been sold pursuant thereto in accordance with the
plan of distribution provided in the Prospectus, transferred pursuant to Rule
144 under the Securities Act or otherwise transferred in a manner that results
in the delivery of new securities not subject to transfer restrictions under the
Securities Act (the "REGISTRATION PERIOD") and (ii) take all lawful action such
that each of (A) the Registration Statement and any amendment thereto does not,
when it becomes effective, contain an untrue statement of a material fact or
omit to state a material fact required to be stated therein or necessary to make
the statements therein, not misleading and (B) the Prospectus forming part of
the Registration Statement, and any amendment or supplement thereto, does not at
any time during the Registration Period include an untrue statement of a
material fact or omit to state a material fact required to be stated therein or
necessary to make the statements therein, in light of the circumstances under
which they were made, not misleading. Notwithstanding the foregoing provisions
of this Section 3(a), the Company may, during the Registration Period, suspend
the use of the Prospectus for a period not to exceed 60 days (whether or not
consecutive) in any 12-month period if the Board of Directors of the Company
determines in good faith that because of valid business reasons, including
pending mergers or other business combination transactions, the planned
acquisition or divestiture of assets, pending material corporate developments
and similar events, it is in the best interests of the Company to suspend such
use, and prior to or contemporaneously with suspending such use the Company
provides the Investors with written notice of such suspension, which notice need
not specify the nature of the event giving rise to such suspension. At the end
of any such suspension period, the Company shall provide the Investors with
written notice of the termination of such suspension;
(b) During the Registration Period, comply with the provisions
of the Securities Act with respect to the Registrable Securities of the Company
covered by the Registration Statement until such time as all of such Registrable
Securities have been disposed of in accordance with the intended methods of
disposition by the Investors as set forth in the Prospectus forming part of the
Registration Statement;
(c) (i) Prior to the filing with the Commission of any
Registration Statement (including any amendments thereto) and the distribution
or delivery of any Prospectus (including any supplements thereto), provide (A)
draft copies thereof to the Investors and reflect in such documents all such
comments as the Investors (and their counsel) reasonably may propose and (B) to
the Investors a copy of the accountant's consent letter to be included in the
filing and (ii) furnish to each Investor whose Registrable Securities are
included in the Registration Statement and its legal counsel identified to the
Company, (A) promptly after the same is prepared and publicly distributed, filed
with the Commission, or received by the Company, one copy of the Registration
Statement, each Prospectus, and each amendment or supplement thereto, and (B)
such number of copies of the Prospectus and all amendments and supplements
thereto and such other documents, as such Investor may reasonably request in
order to facilitate the disposition of the Registrable Securities owned by such
Investor;
(d) (i) Register or qualify the Registrable Securities covered
by the Registration Statement under such securities or "blue sky" laws of such
jurisdictions as the Investors who hold a majority-in-interest of the
Registrable Securities being offered reasonably request, (ii) prepare and file
in such jurisdictions such amendments (including post-effective amendments) and
supplements to such registrations and qualifications as may be necessary to
6
<PAGE> 7
maintain the effectiveness thereof at all times during the Registration Period,
(iii) take all such other lawful actions as may be necessary to maintain such
registrations and qualifications in effect at all times during the Registration
Period, and (iv) take all such other lawful actions reasonably necessary or
advisable to qualify the Registrable Securities for sale in such jurisdictions;
provided, however, that the Company shall not be required in connection
therewith or as a condition thereto to (A) qualify to do business in any
jurisdiction where it would not otherwise be required to qualify but for this
Section 3(d), (B) subject itself to general taxation in any such jurisdiction or
(C) file a general consent to service of process in any such jurisdiction;
(e) As promptly as practicable after becoming aware of such
event, notify each Investor of the occurrence of any event, as a result of which
the Prospectus included in the Registration Statement, as then in effect,
includes an untrue statement of a material fact or omits to state a material
fact required to be stated therein or necessary to make the statements therein,
in light of the circumstances under which they were made, not misleading, and
promptly prepare an amendment to the Registration Statement and supplement to
the Prospectus to correct such untrue statement or omission, and deliver a
number of copies of such supplement and amendment to each Investor as such
Investor may reasonably request;
(f) As promptly as practicable after becoming aware of such
event, notify each Investor who holds Registrable Securities being sold (or, in
the event of an underwritten offering, the managing underwriters) of the
issuance by the Commission of any stop order or other suspension of the
effectiveness of the Registration Statement at the earliest possible time and
take all lawful action to effect the withdrawal, recession or removal of such
stop order or other suspension;
(g) Cause all the Registrable Securities covered by the
Registration Statement to be listed on the principal national securities
exchange, and included in an inter-dealer quotation system of a registered
national securities association, on or in which securities of the same class or
series issued by the Company are then listed or included;
(h) Maintain a transfer agent and registrar, which may be a
single entity, for the Registrable Securities not later than the effective date
of the Registration Statement;
(i) Cooperate with the Investors who hold Registrable
Securities being offered to facilitate the timely preparation and delivery of
certificates for the Registrable Securities to be offered pursuant to the
registration statement and enable such certificates for the Registrable
Securities to be in such denominations or amounts, as the case may be, as the
Investors reasonably may request and registered in such names as the Investor
may request; and, within three business days after a registration statement
which includes Registrable Securities is declared effective by the Commission,
deliver and cause legal counsel selected by the Company to deliver to the
transfer agent for the Registrable Securities (with copies to the Investors
whose Registrable Securities are included in such registration statement) an
appropriate instruction and, to the extent necessary, an opinion of such
counsel;
(j) Take all such other lawful actions reasonably necessary to
expedite and facilitate the disposition by the Investors of their Registrable
Securities in accordance with the
7
<PAGE> 8
intended methods therefor provided in the Prospectus which are customary under
the circumstances;
(k) Make generally available to its security holders as soon
as practicable, but in any event not later than three (3) months after (i) the
effective date (as defined in Rule 158(c) under the Securities Act) of the
Registration Statement, and (ii) the effective date of each post-effective
amendment to the Registration Statement, as the case may be, an earnings
statement of the Company and its subsidiaries complying with Section 11(a) of
the Securities Act and the rules and regulations of the Commission thereunder
(including, at the option of the Company, Rule 158);
(1) In the event of an underwritten offering, promptly include
or incorporate in a Prospectus supplement or post-effective amendment to the
Registration Statement such information as the managers reasonably agree should
be included therein and to which the Company does not reasonably object and make
all required filings of such Prospectus supplement or post-effective amendment
as soon as practicable after it is notified of the matters to be included or
incorporated in such Prospectus supplement or post-effective amendment;
(m) (i) Make reasonably available for inspection by Investors,
any underwriter participating in any disposition pursuant to the Registration
Statement, and any attorney, accountant or other agent retained by such
Investors or any such underwriter all relevant financial and other records,
pertinent corporate documents and properties of the Company and its
subsidiaries, and (ii) cause the Company's officers, directors and employees to
supply all information reasonably requested by such Investors or any such
underwriter, attorney, accountant or agent in connection with the Registration
Statement, in each case, as is customary for similar due diligence examinations;
provided, however, that all records, information and documents that are
designated in writing by the Company, in good faith, as confidential,
proprietary or containing any material nonpublic information shall be kept
confidential by such Investors and any such underwriter, attorney, accountant or
agent (pursuant to an appropriate confidentiality agreement in the case of any
such holder or agent), unless such disclosure is made pursuant to judicial
process in a court proceeding (after first giving the Company an opportunity
promptly to seek a protective order or otherwise limit the scope of the
information sought to be disclosed) or is required by law, or such records,
information or documents become available to the public generally or through a
third party not in violation of an accompanying obligation of confidentiality;
and provided, further, that, if the foregoing inspection and information
gathering would otherwise disrupt the Company's conduct of its business, such
inspection and information gathering shall, to the maximum extent possible, be
coordinated on behalf of the Investors and the other parties entitled thereto by
one firm of counsel designed by and on behalf of the majority in interest of
Investors and other parties;
(n) In connection with any underwritten offering, make such
representations and warranties to the Investors participating in such
underwritten offering and to the managers, in form, substance and scope as are
customarily made by the Company to underwriters in secondary underwritten
offerings;
(o) In connection with any underwritten offering, obtain
opinions of counsel to the Company (which counsel and opinions (in form, scope
and substance) shall be reasonably
8
<PAGE> 9
satisfactory to the managers) addressed to the underwriters, covering such
matters as are customarily covered in opinions requested in secondary
underwritten offerings (it being agreed that the matters to be covered by such
opinions shall include, without limitation, as of the date of the opinion and as
of the Effective Time of the Registration Statement or most recent
post-effective amendment thereto, as the case may be, the absence from the
Registration Statement and the Prospectus, including any documents incorporated
by reference therein, of an untrue statement of a material fact or the omission
of a material fact required to be stated therein or necessary to make the
statements therein (in the case of the Prospectus, in light of the circumstances
under which they were made) not misleading, subject to customary limitations);
(p) In connection with any underwritten offering, obtain "cold
comfort" letters and updates thereof from the independent public accountants of
the Company (and, if necessary, from the independent public accountants of any
subsidiary of the Company or of any business acquired by the Company, in each
case for which financial statements and financial data are, or are required to
be, included in the Registration Statement), addressed to each underwriter
participating in such underwritten offering (if such underwriter has provided
such letter, representations or documentation, if any, required for such cold
comfort letter to be so addressed), in customary form and covering matters of
the type customarily covered in "cold comfort" letters in connection with
secondary underwritten offerings;
(q) In connection with any underwritten offering, deliver such
documents and certificates as may be reasonably required by the managers, if
any; and
(r) In the event that any broker-dealer registered under the
Exchange Act shall be an "AFFILIATE" (as defined in Rule 2729(b)(1) of the rules
and regulations of the National Association of Securities Dealers, Inc. (the
"NASD RULES") (or any successor provision thereto)) of the Company or has a
"CONFLICT OF INTEREST" (as defined in Rule 2720(b)(7) of the NASD Rules (or any
successor provision thereto)) and such broker-dealer shall underwrite,
participate as a member of an underwriting syndicate or selling group or assist
in the distribution of any Registrable Securities covered by the Registration
Statement, whether as a holder of such Registrable Securities or as an
underwriter, a placement or sales agent or a broker or dealer in respect
thereof, or otherwise, the Company shall assist such broker-dealer in complying
with the requirements of the NASD Rules, including, without limitation, by (A)
engaging a "QUALIFIED INDEPENDENT UNDERWRITER" (as defined in Rule 2720(b)(15)
of the NASD Rules (or any successor provision thereto)) to participate in the
preparation of the Registration Statement relating to such Registrable
Securities, to exercise usual standards of due diligence in respect thereof and
to recommend the public offering price of such Registrable Securities, (B)
indemnifying such qualified independent underwriter to the extent of the
indemnification of underwriters provided in Section 5 hereof, and (C) providing
such information to such broker-dealer as may be required in order for such
broker-dealer to comply with the requirements of the NASD Rules.
4. OBLIGATIONS OF THE INVESTORS
In connection with the registration of the Registrable
Securities, the Investors shall have the following obligations:
9
<PAGE> 10
(a) It shall be a condition precedent to the obligations of
the Company to complete the registration pursuant to this Agreement with respect
to the Registrable Securities of a particular Investor that such Investor shall
furnish to the Company such information regarding itself, the Registrable
Securities held by it and the intended method of disposition of the Registrable
Securities held by it as shall be reasonably required to effect the registration
of such Registrable Securities and shall execute such documents in connection
with such registration as the Company may reasonably request. As least seven
days prior to the first anticipated filing date of the Registration Statement,
the Company shall notify each Investor of the information the Company requires
from each such Investor (the "REQUESTED INFORMATION") if such Investor elects to
have any of its Registrable Securities included in the Registration Statement.
If at least two business days prior to the anticipated filing date the Company
has not received the Requested Information from in Investor (a "NON-RESPONSIVE
Investor"), then the Company may file the Registration Statement without
including Registrable Securities of such Non-Responsive Investor and have no
further obligations to the Non-Responsive Investor;
(b) Each Investor by its acceptance of the Registrable
Securities agrees to cooperate with the Company in connection with the
preparation and filing of the Registration Statement hereunder, unless such
Investor has notified the Company in writing of its election to exclude all of
its Registrable Securities from the Registration Statement; and
(c) Each Investor agrees that, upon receipt of any notice from
the Company of the occurrence of any event of the kind described in Section 3(e)
or 3(f), it shall immediately discontinue its disposition of Registrable
Securities pursuant to the Registration Statement covering such Registrable
Securities until such Investor's receipt of the copies of the supplemented or
amended Prospectus contemplated by Section 3(e) and, if so directed by the
Company, such Investor shall deliver to the Company (at the expense of the
Company) or destroy (and deliver to the Company a certificate of destruction)
all copies in such Investor's possession, of the Prospectus covering such
Registrable Securities current at the time of receipt of such notice.
5. EXPENSES OF REGISTRATION
All expenses, other than underwriting discounts and
commissions, incurred in connection with registrations, filings or
qualifications pursuant to Section 3, but including, without limitation, all
registration, listing, and qualifications fees, printing and engraving fees,
accounting fees, and the fees and disbursements of counsel for the Company.
6. INDEMNIFICATION AND CONTRIBUTION
(a) The Company shall indemnify and hold harmless each
Investor and each underwriter, if any, which facilitates the disposition of
Registrable Securities, and each of their respective officers and directors and
each person who controls such Investor or underwriter within the meaning of
Section 15 of the Securities Act or Section 20 of the Exchange Act (each such
person being sometimes hereinafter referred to as an "INDEMNIFIED PERSON") from
and against any losses, claims, damages or liabilities, joint or several, to
which such Indemnified Person may become subject under the Securities Act or
otherwise, insofar as such losses, claims, damages or liabilities (or actions in
respect thereof) arise out of or are based upon an untrue
10
<PAGE> 11
statement or alleged untrue statement of a material fact contained in any
Registration Statement or an omission or alleged omission to state therein a
material fact required to be stated therein or necessary to make the statements
therein, not misleading, or arise out of or are based upon an untrue statement
or alleged untrue statement of a material fact contained in any Prospectus or an
omission or alleged omission to state therein a material fact required to be
stated therein or necessary to make the statements therein, in the light of the
circumstances under which they were made, not misleading; and the Company hereby
agrees to reimburse such Indemnified Person for all reasonable legal and other
expenses incurred by them in connection with investigating or defending any such
action or claim as and when such expenses are incurred; provided, however, that
the Company shall not be liable to any such Indemnified Person in any such case
to the extent that any such loss, claim, damage or liability arises out of or is
based upon (i) an untrue statement or alleged untrue statement made in, or an
omission or alleged omission from, such Registration Statement or Prospectus in
reliance upon and in conformity with written information furnished to the
Company by such Indemnified Person expressly for use therein or (ii) in the case
of the occurrence of an event of the type specified in Section 3(e), the use by
the Indemnified Person of an outdated or defective Prospectus after the Company
has provided to such Indemnified Person an updated Prospectus correcting the
untrue statement or alleged untrue statement or omission or alleged omission
giving rise to such loss, claim, damage or liability.
(b) INDEMNIFICATION BY THE INVESTORS AND UNDERWRITERS. Each
Investor agrees, as a consequence of the inclusion of any of its Registrable
Securities in a Registration Statement, and each underwriter, if any, which
facilitates the disposition of Registrable Securities shall agree, as a
consequence of facilitating such disposition of Registrable Securities,
severally and not jointly, to (i) indemnify and hold harmless the Company, its
directors (including any person who, with his or her consent, is named in the
Registration Statement as a director nominee of the Company), its officers who
sign any Registration Statement and each person, if any, who controls the
Company within the meaning of either Section 15 of the Securities Act or Section
20 of the Exchange Act, against any losses, claims, damages or liabilities to
which the Company or such other persons may become subject, under the Securities
Act or otherwise, insofar as such losses, claims, damages or liabilities (or
actions in respect thereof) arise out of or are based upon an untrue statement
or alleged untrue statement of a material fact contained in such Registration
Statement or Prospectus or arise out of or are based upon the omission or
alleged omission to state therein a material fact required to be stated therein
or necessary to make the statements therein (in light of the circumstances under
which they were made, in the case of the Prospectus), not misleading, in each
case to the extent, but only to the extent, that such untrue statement or
alleged untrue statement or omission or alleged omission was made in reliance
upon and in conformity with written information furnished to the Company by such
holder or underwriter expressly for use therein; provided, however, that no
Investor or underwriter shall be liable under this Section 6(b) for any amount
in excess of the net proceeds paid to such Investor or underwriter in respect of
shares sold by it, and (ii) reimburse the Company for any legal or other
expenses incurred by the Company in connection with investigating or defending
any such action or claim as such expenses are incurred.
(c) NOTICE OF CLAIMS, ETC. Promptly after receipt by a party
seeking indemnification pursuant to this Section 6 (an "INDEMNIFIED PARTY") of
written notice of any investigation, claim, proceeding or other action in
respect of which indemnification is being sought (each, a "CLAIM"), the
Indemnified Party promptly shall notify the party against whom
11
<PAGE> 12
indemnification pursuant to this Section 6 is being sought (the "INDEMNIFYING
PARTY") of the commencement thereof; but the omission to so notify the
Indemnifying Party shall not relieve it from any liability that it otherwise may
have to the Indemnified Party, except to the extent that the Indemnifying Party
is materially prejudiced and forfeits substantive rights and defenses by reason
of such failure. In connection with any Claim as to which both the Indemnifying
Party and the Indemnified Party are parties, the Indemnifying Party shall be
entitled to assume the defense thereof. Notwithstanding the assumption of the
defense of any Claim by the Indemnifying Party, the Indemnified Party shall have
the right to employ separate legal counsel and to participate in the defense of
such Claim, and the Indemnifying Party shall bear the reasonable fees,
out-of-pocket costs and expenses of such separate legal counsel to the
Indemnified Party if (and only if): (x) the Indemnifying Party shall have agreed
to pay such fees, costs and expenses, (y) the Indemnified Party and the
Indemnifying Party shall reasonably have concluded that representation of the
Indemnified Party by the Indemnifying Party by the same legal counsel would not
be appropriate due to actual or, as reasonably determined by legal counsel to
the Indemnified Party, potentially differing interests between such parties in
the conduct of the defense of such Claim, or if there may be legal defenses
available to the Indemnified Party that are in addition to or disparate from
those available to the Indemnifying Party, or (z) the Indemnifying Party shall
have failed to employ legal counsel reasonably satisfactory to the Indemnified
Party within a reasonable period of time after notice of the commencement of
such Claim. If the Indemnified Party employs separate legal counsel in
circumstances other than as described in clauses (x), (y) or (z) above, the
fees, costs and expenses of such legal counsel shall be borne exclusively by the
Indemnified Party. Except as provided above, the Indemnifying Party shall not,
in connection with any Claim in the same jurisdiction, be liable for the fees
and expenses of more than one firm of counsel for the Indemnified Party
(together with appropriate local counsel). The Indemnified Party shall not,
without the prior written consent of the Indemnifying Party (which consent shall
not unreasonably be withheld), settle or compromise any Claim or consent to the
entry of any judgment that does not include an unconditional release of the
Indemnifying Party from all liabilities with respect to such Claim or judgment.
(d) CONTRIBUTION. If the indemnification provided for in this
Section 6 is unavailable to or insufficient to hold harmless an Indemnified
Person under subsection (a) or (b) above in respect of any losses, claims,
damages or liabilities (or actions in respect thereof) referred to therein, then
each Indemnifying Party shall contribute to the amount paid or payable by such
Indemnified Party as a result of such losses, claims, damages or liabilities (or
actions in respect thereof) in such proportion as is appropriate to reflect the
relative fault of the Indemnifying Party and the Indemnified Party in connection
with the statements or omissions which resulted in such losses, claims, damages
or liabilities (or actions in respect thereof), as well as any other relevant
equitable considerations. The relative fault of such Indemnifying Party and
Indemnified Party shall be determined by reference to, among other things,
whether the untrue or alleged untrue statement of a material fact or omission or
alleged omission to state a material fact relates to information supplied by
such Indemnifying Party or by such Indemnified Party, and the parties' relative
intent, knowledge, access to information and opportunity to correct or prevent
such statement or omission. The parties hereto agree that it would not be just
and equitable if contribution pursuant to this Section 6(d) were determined by
pro rata allocation (even if the Investors or any underwriters were treated as
one entity for such purpose) or by any other method of allocation which does not
take account of the equitable
12
<PAGE> 13
considerations referred to in this Section 6(d). The amount paid or payable by
an Indemnified Party as a result of the losses, claims, damages or liabilities
(or actions in respect thereof) referred to above shall be deemed to include any
legal or other fees or expenses reasonably incurred by such Indemnified Party in
connection with investigating or defending any such action or claim. No person
guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of
the Securities Act) shall be entitled to contribution from any person who was
not guilty of such fraudulent misrepresentation. The obligations of the
Investors and any underwriters in this Section 6(d) to contribute shall be
several in proportion to the percentage of Registrable Securities registered or
underwritten, as the case may be, by them and not joint.
(e) Notwithstanding any other provision of this Section 6, in
no event shall any (i) Investor be required to undertake liability to any person
under this Section 6 for any amounts in excess of the dollar amount of the
proceeds to be received by such Investor from the sale of such Investor's
Registrable Securities (after deducting any fees, discounts and commissions
applicable thereto) pursuant to any Registration Statement under which such
Registrable Securities are to be registered under the Securities Act and (ii)
underwriter be required to undertake liability to any Person hereunder for any
amounts in excess of the aggregate discount, commission or other compensation
payable to such underwriter with respect to the Registrable Securities
underwritten by it and distributed pursuant to the Registration Statement.
(f) The obligations of the Company under this Section 6 shall
be in addition to any liability which the Company may otherwise have to any
Indemnified Person and the obligations of any Indemnified Person under this
Section 6 shall be in addition to any liability which such Indemnified Person
may otherwise have to the Company. The remedies provided in this Section 6 are
not exclusive and shall not limit any rights or remedies which may otherwise be
available to an indemnified party at law or in equity.
7. RULE 144
With a view to making available to the Investors the benefits
of Rule 144 under the Securities Act or any other similar rule or regulation of
the Commission that may at any time permit the Investors to sell securities of
the Company to the public without registration ("RULE 144"), the Company agrees
to use its best efforts to:
(a) comply with the provisions of paragraph (c) (1) of Rule
144; and
(b) file with the Commission in a timely manner all reports
and other documents required to be filed by the Company pursuant to Section 13
or 15(d) under the Exchange Act; and, if at any time it is not required to file
such reports but in the past had been required to or did file such reports, it
will, upon the request of any Investor, make available other information as
required by, and so long as necessary to permit sales of, its Registrable
Securities pursuant to Rule 144.
8. ASSIGNMENT
The rights to have the Company register Registrable Securities
pursuant to this Agreement shall be automatically assigned by the Investors to
any permitted transferee of all or
13
<PAGE> 14
any portion of such securities (or all or any portion of any Preferred Shares or
Warrant of the Company which is convertible into such securities) of Registrable
Securities only if: (a) the Investor agrees in writing with the transferee or
assignee to assign such rights, and a copy of such agreement is furnished to the
Company within a reasonable time after such assignment, (b) the Company is,
within a reasonable time after such transfer or assignment, furnished with
written notice of (i) the name and address of such transferee or assignee and
(ii) the securities with respect to which such registration rights are being
transferred or assigned, (c) immediately following such transfer or assignment,
the securities so transferred or assigned to the transferee or assignee
constitute Restricted Securities, and (d) at or before the time the Company
received the written notice contemplated by clause (b) of this sentence the
transferee or assignee agrees in writing with the Company to be bound by all of
the provisions contained herein.
9. AMENDMENT AND WAIVER
Any provision of this Agreement may be amended and the
observance thereof may be waived (either generally or in a particular instance
and either retroactively or prospectively), only with the written consent of the
Company and Investors who hold a majority-in-interest of the Registrable
Securities. Any amendment or waiver effected in accordance with this Section 9
shall be binding upon each Investor and the Company.
10. MISCELLANEOUS
(a) A person or entity shall be deemed to be a holder of
Registrable Securities whenever such person or entity owns of record such
Registrable Securities. If the Company receives conflicting instructions,
notices or elections from two or more persons or entities with respect to the
same Registrable Securities, the Company shall act upon the basis of
instructions, notice or election received from the registered owner of such
Registrable Securities.
(b) If, after the date hereof and prior to the Commission
declaring the Registration Statement to be filed pursuant to Section 2(a)
effective under the Securities Act, the Company grants to any Person any
registration rights with respect to any Company securities which are more
favorable to such other Person than those provided in this Agreement, then the
Company forthwith shall grant (by means of an amendment to this Agreement or
otherwise) identical registration rights to all Investors hereunder.
(c) Except as may be otherwise provided herein, any notice or
other communication or delivery required or permitted hereunder shall be in
writing and shall be delivered personally or sent by certified mail, postage
prepaid, or by a nationally recognized overnight courier service, and shall be
deemed given when so delivered personally or by overnight courier service, or,
if mailed, three days after the date of deposit in the United States mails, as
follows:
(i) if to the Company, to:
14
<PAGE> 15
Cafe Odyssey, Inc.
4801 West 81st Street, Suite 112
Bloomington, MN 55437
Attention: Stephen D. King
(612) 837-9917
(612) 837-9916 (Fax)
with a copy to:
Maslon Edelman Borman & Brand, LLP
3300 Norwest Center
90 South Seventh Street
Minneapolis, MN 55402
Attention: William M. Mower, Esq.
(612) 672-8358
(612) 672-8397 (Fax)
(ii) if to the Initial Investor, to:
The Shaar Fund Ltd.,
c/o Levinson Capital Management
2 World Trade Center, Suite 1820
New York, NY 10048
Attention: Samuel Levinson
(212) 432-7711
(212) 432-7771 (Fax)
with a copy to:
Cadwalader, Wickersham & Taft
100 Maiden Lane
New York, NY 10038
Attention: Dennis J. Block, Esq.
(212) 504-5555
(212) 504-5557 (Fax)
(iii) if to any other Investor, at such address as such
Investor shall have provided in writing to the Company.
The Company, the Initial Investor or any Investor may change the foregoing
address by notice given pursuant to this Section 10(c).
(d) Failure of any party to exercise any right or remedy under
this Agreement or otherwise, or delay by a party in exercising such right or
remedy, shall not operate as a waiver thereof.
(e) This Agreement shall be governed by and interpreted in
accordance with the laws of the State of New York. Each of the parties consents
to the jurisdiction of the federal
15
<PAGE> 16
courts whose districts encompass any part of the City of New York or the state
courts of the State of New York sitting in the City of New York in connection
with any dispute arising under this Agreement and hereby waives, to the maximum
extent permitted by law, any objection including any objection based on forum
non conveniens, to the bringing of any such proceeding in such jurisdictions.
(f) The remedies provided in this Agreement are cumulative and
not exclusive of any remedies provided by law. If any term, provision, covenant
or restriction of this Agreement is held by a court of competent jurisdiction to
be invalid, illegal, void or unenforceable, the remainder of the terms,
provisions, covenants and restrictions set forth herein shall remain in full
force and effect and shall in no way be affected, impaired or invalidated, and
the parties hereto shall use their best efforts to find and employ an
alternative means to achieve the same or substantially the same result as that
contemplated by such term, provision, covenant or restriction. It is hereby
stipulated and declared to be the intention of the parties that they would have
executed the remaining terms, provisions, covenants and restrictions without
including any of such that may be hereafter declared invalid, illegal, void or
unenforceable.
(g) The Company shall not enter into any agreement with
respect to its securities that is inconsistent with the rights granted to the
holders of Registrable Securities in this Agreement or otherwise conflicts with
the provisions hereof. The Company is not currently a party to any agreement
granting any registration rights with respect to any of its securities to any
person which conflicts with the Company's obligations hereunder or gives any
other party the right to include any securities in any Registration Statement
filed pursuant hereto, except for such rights and conflicts as have been
irrevocably waived. Without limiting the generality of the foregoing, without
the written consent of the holders of a majority in interest of the Registrable
Securities, the Company shall not grant to any person the right to request it to
register any of its securities under the Securities Act unless the rights so
granted are subject in all respect to the prior rights of the holders of
Registrable Securities set forth herein, and are not otherwise in conflict or
inconsistent with the provisions of this Agreement. The restrictions on the
Company's rights to grant registration rights under this paragraph shall
terminate on the date the Registration Statement to be filed pursuant to Section
2(a) is declared effective by the Commission.
(h) This Agreement, the Securities Purchase Agreement, the
Escrow Instructions, dated as of a date even herewith (the "ESCROW
INSTRUCTIONS"), between the Company, the Initial Investor and Cadwalader,
Wickersham & Taft, the Preferred Shares and the Warrants constitute the entire
agreement among the parties hereto with respect to the subject matter hereof.
There are no restrictions, promises, warranties or undertakings, other than
those set forth or referred to herein. This Agreement, the Securities Purchase
Agreement, the Escrow Instructions, the Certificate of Designation and the
Warrants supersede all prior agreements and undertakings among the parties
hereto with respect to the subject matter hereof.
(i) Subject to the requirements of Section 8 hereof, this
Agreement shall inure to the benefit of and be binding upon the successors and
assigns of each of the parties hereto.
(j) All pronouns and any variations thereof refer to the
masculine, feminine or neuter, singular or plural, as the context may require.
16
<PAGE> 17
(k) The headings in this Agreement are for convenience of
reference only and shall not limit or otherwise affect the meaning thereof.
(1) The Company acknowledges that any failure by the Company
to perform its obligations under Section 3, or any delay in such performance
could result in direct damages to the Investors and the Company agrees that, in
addition to any other liability the Company may have by reason of any such
failure or delay, the Company shall be liable for all direct damages caused by
such failure or delay.
(m) This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original but all of which shall
constitute one and the same agreement. A facsimile transmission of this signed
Agreement shall be legal and binding on all parties hereto.
17
<PAGE> 18
IN WITNESS WHEREOF, the parties have caused this Agreement to
be duly executed and delivered as of the date first above written.
CAFE ODYSSEY, INC.
By: /s/ Stephen D. King
-----------------------------------------
Name:
Title:
THE SHAAR FUND LTD.
By: /s/ Signature illegible
-----------------------------------------
Name:
Title:
18
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JAN-2-2000
<PERIOD-START> JAN-4-1999
<PERIOD-END> APR-4-1999
<CASH> 657,750
<SECURITIES> 0
<RECEIVABLES> 962,500
<ALLOWANCES> 0
<INVENTORY> 202,981
<CURRENT-ASSETS> 2,654,132
<PP&E> 17,187,407
<DEPRECIATION> 1,832,560
<TOTAL-ASSETS> 18,533,029
<CURRENT-LIABILITIES> 9,325,784
<BONDS> 729,746
0
0
<COMMON> 82,801
<OTHER-SE> 4,608,380
<TOTAL-LIABILITY-AND-EQUITY> 18,533,029
<SALES> 2,332,632
<TOTAL-REVENUES> 2,332,632
<CGS> 606,587
<TOTAL-COSTS> 3,634,237
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 142,049
<INCOME-PRETAX> (1,443,616)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,443,616)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,443,616)
<EPS-PRIMARY> (0.18)
<EPS-DILUTED> (0.18)
</TABLE>
