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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-KSB
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED JANUARY 3, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO 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
Incorporation or Organization) Identification No.)
4801 W. 81ST STREET, SUITE 112 55437
BLOOMINGTON, MN 55437 (Zip Code)
(Address of principal executive offices)
612-837-9917
(Issuer's telephone number, including area code)
Securities Registered Under Section 12(b) of the Exchange Act:
NONE
Securities Registered Under Section 12(g) of the Exchange Act:
COMMON STOCK, PAR VALUE $.01
CLASS A WARRANTS TO PURCHASE ONE SHARE OF COMMON
STOCK UNITS, CONSISTING OF ONE SHARE OF COMMON STOCK AND
ONE CLASS A WARRANT
(Title of each class)
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 [ ]
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained in this form, and no disclosure will be contained, to
the best of issuer's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB. [ ]
The Issuer had total revenues of $6,932,891 for its fiscal year ended January 3,
1999.
As of April 2, 1999, the aggregate market value of the voting and non-voting
common equity held by non-affiliates (assuming for these purposes, but not
conceding, that all executive officers and directors are "affiliates" of the
Issuer) of the Issuer was $5,558,588 based upon the last reported sale price in
the Nasdaq SmallCap Market on April 2, 1999 of $0.81 per share.
As of January 3, 1999, the number of shares outstanding of the Issuer's Common
Stock was 8,000,089.
Transitional Small Business Disclosure Format: Yes [ ] No [X]
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DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Issuer's Proxy Statement for the Annual Meeting of Shareholders
scheduled to be held on June 3, 1999 are incorporated by reference in Part III
hereof.
FORWARD-LOOKING STATEMENTS
Certain of the matters discussed in the following pages, particularly regarding
estimates of the number and locations of new restaurants that the Company
intends to open during fiscal 1999 and 2000, 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-KSB, 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.
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CAFE ODYSSEY, INC.
INDEX
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PAGE
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PART I
Item 1. Description of Business 4
Item 2. Description of Property 11
Item 3. Legal Proceedings 13
Item 4. Submission of Matters to a Vote of Security Holders 13
PART II
Item 5. Market for Common Equity and Related Stockholder Matters 14
Item 6. Management's Discussion and Analysis of Financial Condition and Plan of Operations 14
Item 7. Financial Statements 17
Item 8. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 17
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons; Compliance with Section 16(a)
of the Exchange Act 18
Item 10. Executive Compensation 18
Item 11. Security Ownership of Certain Beneficial Owners and Management 18
Item 12. Certain Relationships and Related Transactions 18
Item 13. Exhibits, List, and Reports on Form 8-K 18
Signatures
Financial Statement Schedules
Exhibits
</TABLE>
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PART 1
ITEM 1. DESCRIPTION OF BUSINESS
GENERAL
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 two full service restaurants, one in
Cincinnati, Ohio (the "Kenwood Restaurant"), which operates under the trade name
"Hotel Discovery," and one in the Mall of America, located in Bloomington,
Minnesota, a suburb of Minneapolis (the "Mall of America Restaurant"), which
operates under the trade name "Cafe Odyssey." The Kenwood Restaurant opened
under the name "Hotel Mexico" on December 19, 1996. The Mall of America
Restaurant opened on June 8, 1998. Prior to the opening of the Kenwood
Restaurant, the Company was in the development stage.
On March 15, 1999, the Company opened its third restaurant at the Denver
Pavilions, located in the downtown district of Denver, Colorado (the "Denver
Pavilions Restaurant"). This restaurant, as with all future restaurants, will be
under the trade name Cafe Odyssey.
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. See "Reorganization."
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 approved a change
in its corporate name from Hotel Discovery, Inc. to Cafe Odyssey, Inc., and on
May 21, 1998, at the Annual Shareholders Meeting, approval was recorded. The
Kenwood Restaurant will retain the name "Hotel Discovery" because of its
established name.
CONCEPT
The Company's existing restaurants are positioned in the upscale casual segment
and differentiate themselves from the competition by offering it's guests an
enveloping experience that combines award winning food with sophisticated,
non-intrusive entertainment. While there are restaurants that have a strong food
base and others that focus on entertainment, the Company feels that the
"experiential dining" combination it offers is unique to the industry
Based on the concepts of travel, discovery and adventure, each restaurant
provides guests with a dining experience in multiple themed environments that
capture the romance, passion and nature of exotic locations throughout the world
utilizing state-of-the-art technology in sound, video, lighting, scenery and
decor. In the Kenwood Restaurant, these themes are embodied in the Safari Room,
the Artist Loft, the Observatory and the Mapping Room. The Mall of America
Restaurant and the Denver Pavilions Restaurant both contain three dining rooms
that replicate the environments of the lost City of Atlantis, the ancient Incan
ruins of Machu Picchu in the Andes and the sweeping plains of the Serengeti
desert in Tanzania, Africa.
The menu at each restaurant offers a broad range of cuisine from around the
world, including "cultural fusion" menu items such as Barcelona Spring Rolls and
Asian Tacos. Features include American, Asian, Jamaican, West Indian, Mexican
and European tastes and textures. Menu items are freshly made, using only the
highest quality fresh meats, produce, spices and other ingredients. The menu
mirrors the exploratory journey and adventure society themes of the restaurants.
The Company has created a new tag line for advertising and identification
purposes. It states the ongoing refinement of the Cafe Odyssey philosophy:
"Where in the world will you eat today?" This line was debuted at the Denver
Pavilions Restaurant.
Each restaurant also has a retail area located at the entrance. The retail
component of the Kenwood Restaurant and the Denver Pavilions Restaurant includes
a collection of adult and children's casual clothing, including T-shirts,
sweatshirts, shirts and caps, and a limited amount of other logo merchandise.
The Mall of America Restaurant displays a much larger selection of merchandise
centered around the four themes of imagination, invention, exploration and
adventure as expressed in the three dining rooms. Such
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merchandise is expected to include educational toys and games, stationery,
prints, telescopes, art materials, jewelry, primitive musical instruments and
other gift items.
EXPANSION STRATEGY
Management believes the Cafe Odyssey concept is ideally positioned toward the
large and fast growing "baby boomer" segment. Future expansion opportunities for
Cafe Odyssey will be targeted towards high traffic upscale malls and resort
areas, as well as urban retail and entertainment centers. The present size of a
Cafe Odyssey restaurant is between 15,000 and 18,000 square feet. This
necessitates locations in areas with significant tourist as well as local
traffic. The Company is currently investigating the economics for units in the
12,000 to 14,000 square foot range, to allow the Company more markets for
expansion. The Company is currently in the process of negotiating with landlords
for future sites, but there can be no assurance that the Company will be able to
enter into binding contracts for these or any additional sites.
RESTAURANT OPERATIONS
The Company strives to maintain quality operations through extensive training of
its employees and careful supervision of personnel. The Company has developed,
and expects to implement at each of its restaurants, a detailed operations
manual containing specifications relating to food and beverage preparation,
maintenance of premises and employee conduct. Each restaurant is expected to
have a director of operations with a staff of five to seven managers and a staff
accountant. Each director of operations reports directly to the Company's vice
president of operations.
The Company requires all kitchen and front-of-the-house managers to complete an
intensive six-week training program which includes two weeks of food preparation
training in the kitchen, as well as complete cross-training on all other phases
of the restaurant's operations. The Company's restaurant management is then
tested on the Company's philosophy, management strategy, policies, procedures
and operating standards. In addition, each prospective guest service employee
actually tastes, and is tested on, every food and beverage item on the menu.
Daily shift meetings are held prior to lunch and dinner to re-educate the
service staff on all menu items, to communicate daily specials, to respond to
feedback from comment cards and to reinforce service standards.
MANAGEMENT AND FINANCIAL CONTROLS
The Company has implemented specific management control systems for employee
follow-up, customer satisfaction, and financial results. These controls are
described below.
Employee Follow-up: Shift schedules are posted weekly for each position. A
scheduled manager supervises every shift. Managers are responsible for executing
job functions and following a thorough and complete checklist for each category
of the restaurant's operations, including the appearance of the outside of the
restaurant, dining room, kitchen and rest rooms as well as dining room service
and food preparation. Regular one-on-one meetings are held with employees and
feedback as to their performance is given on a regular and consistent basis.
This feedback includes positive reinforcement as well as redirection when a
change in focus is needed. In addition, the restaurant's director of operations
holds a weekly circle luncheon for key employees from each position. The
President of the Company also holds a quarterly "town meeting" with selected
employees to ensure that strong communication continues between the corporate
office and each restaurant.
Customer Satisfaction: Management believes that continual guest feedback on the
key attributes of food quality, menu variety, service and ambiance is crucial to
the Company's success. Guest feedback is currently obtained by weekly tabulation
of comment cards that are distributed with every guest check, an extensive
mystery diner program and periodic market research and telephone interviews.
This constant feedback helps the Company's management monitor guest response to
all areas of operations and react accordingly. Checklists are also used to
ensure that guests receive a high level of service and food quality. In
addition, front-of-the-house management is required to interact with guests in
all peak meal periods.
Management's Incentives: Management's incentives include a bonus based upon a
percentage of either restaurant-level or corporate cash flow and/or
profitability as compared to an annual budget which is approved by senior
management. Through its pay-for-performance incentive systems, the Company
believes that it has essentially mirrored its compensation system to that of an
entrepreneurially owned and operated business.
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Financial Controls: Financial controls are monitored through management
information systems that track sales, customer counts, food costs, payroll costs
and guest lists. All data is reviewed on a daily, weekly and monthly basis, both
in the restaurant and in the corporate office. Profit and loss statements are
prepared weekly by the restaurant controller and reconciled monthly with the
corporate office financial statements. Management believes its systems allow for
a prompt reaction to correct deviations and to capitalize on trends.
COMPETITION
The food service industry is intensely competitive with respect to food quality,
concept, location, service and price. In addition, there are many
well-established food service competitors with substantially greater financial
and other resources than the Company and with substantially longer operating
histories. The Company believes that it competes with other full-service dine-in
restaurants, take-out food service companies, fast-food restaurants,
delicatessens, cafeteria-style buffets and prepared food stores, as well as with
supermarkets and convenience stores. Competitors include national, regional and
local restaurants, purveyors of carryout food and convenience dining
establishments.
Competition in the food service business is often affected by changes in
consumer tastes, national, regional, and local economic and real estate
conditions, demographic trends, traffic patterns, the cost and availability of
labor, purchasing power, availability of product, and local competitive factors.
The Company attempts to manage or adapt to these factors, but it should be
recognized that some or all of these factors could cause the Company to be
adversely affected. Management is of the opinion that quality food which is
pleasingly presented is an absolute requirement within the upscale casual
segment of the industry.
GOVERNMENT REGULATIONS
The Company is subject to federal, state and local laws affecting the operation
of its restaurants, including zoning, health, sanitation and safety regulation
and alcoholic beverage licensing requirements. Each restaurant is operated in
accordance with standardized procedures designed to assure compliance with all
applicable codes and regulations. The suspension of a food service or liquor
license would cause an interruption of operations at the affected restaurant.
The Company believes that it is in compliance with all licensing and other
regulations.
The Company is subject to "dram shop" statutes in certain states, including
Minnesota and Ohio, which generally provide a person injured by an intoxicated
person the right to recover damages from the establishment or establishments
that served alcoholic beverages to the intoxicated person. The Company has
obtained liability insurance against such potential liability.
The Company is also subject to the Fair Labor Standards Act, which governs
minimum wages, overtime and working conditions. A significant portion of the
Company's restaurant employees are paid at rates relating to either the federal
or state minimum wage. Accordingly, an increase in the minimum wage would
directly increase each restaurant's labor cost.
Obtaining alcoholic beverage licenses from various jurisdictions will require
disclosure of certain detailed information about directors, officers and greater
than 10% shareholders of the Company's equity securities, and will necessitate
that such persons be approved by the appropriate liquor licensing authority.
EMPLOYEES
As of January 3, 1999, the Company employed 234 persons, of whom 129 worked in
full-time positions and 105 were part-time. The Denver Pavilions Restaurant will
employ approximately 250 full- and part-time personnel when operating at full
capacity. No current employee is covered by a collective bargaining agreement,
and the Company has never experienced an organized work stoppage, strike or
labor dispute. The Company considers relations with its employees to be
excellent.
REORGANIZATION
The Company's predecessor, Hotel Mexico, Inc. ("HMI"), was originally
incorporated in January 1994 as an Ohio corporation. The Kenwood Restaurant
Limited Partnership, an Ohio limited partnership (the "Kenwood Partnership"),
was formed in June 1995 for the purpose of owning and operating the Kenwood
Restaurant. The Kenwood Partnership was dissolved in October 1997. The general
partner of the Kenwood Partnership was Kenwood Restaurant, Inc., an Ohio
corporation (the "General Partner"). Mr. King was the sole director and officer
of the General Partner and controlled the General Partner until his resignation
in September 1997.
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The Kenwood Partnership had 22 limited partners as a result of a private
placement in October 1995.
HMI's operations and the net assets of the Kenwood Partnership were combined on
November 14, 1996. On that date, the Kenwood Partnership contributed all of its
net assets totaling $1,567,197 to a newly formed corporation in exchange for
shares of such corporation. HMI, with total net assets of $631,966, then merged
with and into the newly formed corporation, the name of which remained Hotel
Mexico, Inc. (hereafter "Hotel Mexico"). Upon consummation of the merger,
outstanding shares of HMI were converted into an aggregate of 1,350,000 shares
of Common Stock of Hotel Mexico. In conjunction with the dissolution of the
Kenwood Partnership in October 1997, the shares of Hotel Mexico Common Stock
received by the Kenwood Partnership in the reorganization and other partnership
assets were distributed to the general and limited partners in accordance with
the Partnership Agreement.
On June 24, 1997, the Board of Directors of Hotel Mexico approved its
re-incorporation as a Minnesota corporation named Hotel Discovery, Inc.
Following approval of the transaction and of the name change by Hotel Mexico's
shareholders at a special meeting held on August 11, 1997, Hotel Mexico was
merged with and into Hotel Discovery, Inc., a newly formed Minnesota
corporation, on August 22, 1997. Hotel Discovery, Inc. has an authorized capital
stock of 100,000,000 undesignated shares, and each share of Common Stock of
Hotel Mexico was converted into one share of Common Stock of Hotel Discovery,
Inc.
RISK FACTORS
The following discussion should be read in connection with the Company's
financial statements and related notes thereto included elsewhere in this
report.
LIMITED BASE OF OPERATIONS
As of January 3, 1999, the Company operated only two full service restaurants.
Accordingly, the Company faces all of the risks, expenses and difficulties
encountered in connection with a concept development company. Management
anticipates net losses to continue for the foreseeable future. Due to the
limited base of operations, poor operating results at any restaurant or a delay
in the planned opening of a restaurant would materially affect the profitability
and cash flow of the entire Company, therefore, there can be no assurance that
the Company will be able to generate significant revenues or operate profitably.
Future revenues and profits, if any, will depend upon various factors, including
acceptance of the Cafe Odyssey concept, the quality of restaurant operations,
the ability to expand and general economic conditions. Furthermore, to the
extent the Company's expansion strategy is successful, there is no assurance
that the Company will successfully manage the transition to higher volume
operations, control its operating expenses, attract necessary additional
personnel or procure the required capital. Because of the substantial financial
requirements associated with opening new restaurants, the investment risk
related to any one Cafe Odyssey restaurant is much larger than that associated
with most other restaurant companies' venues.
DEPENDENCE ON KEY PERSONNEL
The Company will be largely dependent upon the personal efforts and abilities of
Stephen D. King, Chairman of the Board, Chief Executive Officer and Chief
Financial Officer; and Ronald K. Fuller, President and Chief Operating Officer.
The loss or unavailability to the Company of either of these individuals could
have a material adverse effect upon the Company's business. The Company
maintains a $1,000,000 key-man life insurance policy on Mr.
Fuller.
NEED FOR ADDITIONAL MANAGEMENT
The success of the Company will depend in large part upon the Company's ability
to supplement its existing management team. While both Messrs. King and Fuller
have significant restaurant and multi-location restaurant management experience,
the Company will need to hire other corporate level and management employees to
help implement and operate its expansion plans. The failure to obtain, or delays
in obtaining, key employees could have a material adverse effect on the Company.
DEPENDENCE ON DISCRETIONARY CONSUMER SPENDING
The success of the Company's operations depends to a significant extent on a
number of factors, including discretionary consumer spending, economic
conditions affecting disposable consumer income, the overall success of the
malls, entertainment centers and other venues where Hotel Discovery/Cafe Odyssey
restaurants are or will be located, and the continued popularity of themed
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restaurants in general and the Company's concept in particular. Themed
restaurants are more susceptible to shifts in consumer preferences and
frequently experience a decline in revenue growth or of actual revenues due to
most restaurants opening near or at full capacity.
RISKS OF NEW CONSTRUCTION
Construction projects, including the opening of additional restaurants, entail
risks, including shortages of materials or skilled labor, unforeseen
environmental, engineering or geological problems, work stoppages, weather
interference, floods, difficulties with regulatory agencies and unanticipated
cost increases, any of which could give rise to delays and cost overruns.
LIMITED FINANCIAL RESOURCES; NEED FOR ADDITIONAL FINANCING
The Company's ability to execute its business strategy depends to a significant
degree on its ability to obtain substantial equity capital and other financing
to fund the development of additional restaurants. The total cost of developing
the Kenwood Restaurant was approximately $5.1 million, which included
approximately $3.2 million for building design and construction, approximately
$1.9 million for furniture, fixtures and equipment and net of landlord
contributions. The total cost of developing the Mall of America Restaurant was
approximately $4.6 million, net of landlord contributions. The estimated total
cost of developing the Denver Pavilions Restaurant is approximately $4.3
million, net of landlord contributions. There can be no assurance that future
restaurants can be developed at similar costs. For continued development of
additional restaurants, the Company may be required to seek additional funds
through an additional offering of the Company's equity securities or by
incurring indebtedness. If additional funds are required, there can be no
assurance that any additional funds will be available on terms acceptable to the
Company or to its shareholders. New investors may seek and obtain substantially
better terms than were granted to present investors and the issuance of such
securities would result in dilution to existing shareholders. Furthermore, as
the Company prepares to open additional restaurants, it will expend a relatively
higher amount on administrative expenses than would a mature company with
similar operations.
EXPANSION STRATEGY
The Company's ability to open and successfully operate additional restaurants
will also depend upon the hiring and training of skilled restaurant management
personnel and the ability to successfully manage growth, including monitoring
restaurants and controlling costs, food quality and customer service. The
Company anticipates that the opening of additional restaurants will result in
additional expenses associated with managing operations located in multiple
markets. Furthermore, the Company believes that competition for restaurant-level
management has become increasingly intense as additional restaurant chains
expand to new markets. Achieving consumer awareness and market acceptance will
require substantial efforts and expenditures by the Company. An extraordinary
amount of management's time may be drawn to such matters and may adversely
affect operating results. The Company is considering potential sites in several
major metropolitan areas, but there can be no assurance that the Company will be
able to enter into any other contracts for development of additional restaurants
on terms satisfactory to the Company or at all. Accordingly, there can be no
assurance that the Company will be able to open new restaurants or that, if
opened, those restaurants can be operated profitably.
RESTAURANT AND RETAIL INDUSTRY COMPETITION
The restaurant and specialty retail businesses are highly competitive. The
restaurant industry is highly competitive with respect to price, service,
quality and location and, as a result, has a high failure rate. There are
numerous well-established competitors, including national, regional and local
restaurant chains, possessing substantially greater financial, marketing,
personnel and other resources than the Company. There can be no assurance that
the Company will be able to successfully respond to various competitive factors
affecting the restaurant industry. The restaurant industry is also generally
affected by changes in consumer preferences, national, regional and local
economic conditions and demographic trends. The performance of restaurant
operations may also be affected by factors such as traffic patterns, demographic
considerations, and the type, number and location of competing operations. In
addition, factors such as inflation, increased labor and employee benefit costs,
and the availability of experienced management and hourly employees may also
adversely affect the restaurant industry in general and the Company in
particular. Restaurant operating costs are further affected by increases in the
minimum hourly wage, unemployment tax rates and similar matters over which the
Company has no control.
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The themed retail business is also highly competitive, particularly in locations
experiencing an oversupply of retail businesses. The Company competes with a
number of well-established specialty retailers possessing significantly greater
financial, marketing, personnel and other resources than the Company.
LONG-TERM, NON-CANCELABLE LEASES
The Company has entered into long-term leases relating to its three restaurant
operations. These leases are non-cancelable by the Company (except in limited
circumstances) and range in term from 10 to 15 years. Additional restaurants
developed by the Company are likely to be subject to similar long-term,
non-cancelable leases. If any of the Company's three restaurants or other future
restaurants do not perform at profitable levels, and a decision is made to close
the unprofitable unit, the Company may nonetheless be committed to perform its
obligations under the applicable lease, which would include, among other things,
payment of the applicable base rent for the balance of the respective lease
term. See "Description of Leases."
CONTROL BY MANAGEMENT
As of January 3, 1999, Stephen D. King controlled approximately 15.5% of the
Company's Common Stock. Thus, Mr. King has he ability to substantially influence
the election of members of the Board of Directors and to direct the operations
and financial affairs of the Company.
GOVERNMENT REGULATION
The restaurant business is subject to various federal, state and local
government regulations, including those relating to the sale of food and
alcoholic beverages. The failure to maintain food and liquor licenses would have
a material adverse affect on the Company's operating results. In addition,
restaurant operating costs are affected by increases in the minimum hourly wage,
unemployment tax rates, sales taxes and similar costs over which the Company has
no control. Many of the Company's restaurant-level personnel will be paid at
rates based on either the federal or the state minimum wage. Increases in the
minimum wage would result in an increase in the Company's labor costs.
TRADEMARKS
The Company's ability to successfully implement the Cafe Odyssey concept will
depend in part upon its ability to protect its trademarks. The Company has filed
a trademark application with the United States Patent and Trademark Office to
register both the "Hotel Discovery" and the "Cafe Odyssey" marks and designs.
There can be no assurance that the Company will be granted trademark
registration for any or all of the proposed uses in the Company's applications.
In the event the Company's marks are granted registration, there can be no
assurance that the Company can protect such marks and designs against prior
users in areas where the Company conducts or will conduct operations. There is
no assurance that the Company will be able to prevent competitors from using the
same or similar marks, concepts or appearance.
ABSENCE OF DIVIDENDS
At the present time, the Company intends to use earnings, if any, to finance
further growth of the Company's business. Accordingly, the Company does not
anticipate the payment of dividends in the foreseeable future.
LIMITED LIQUIDITY
Although the Company's Common Stock is currently listed on the Nasdaq SmallCap
Market, there can be no assurance that an active public market will be developed
or be sustained. In addition, the Nasdaq SmallCap Market may be significantly
less liquid than the Nasdaq National Market. If the Company fails to maintain
the standards for quotation, the Company's securities could be removed from the
market and traded in the over-the-counter market. As a result, investors would
find it more difficult to dispose of, or obtain accurate quotations as to the
price of, the securities.
In addition, if the Company fails to maintain its qualification for the Common
Stock or Class A Warrants to trade on the Nasdaq SmallCap Market, the Common
Stock and Class A Warrants will be subject to certain rules of the Securities
and Exchange Commission relating to "penny stocks." Such rules require
broker-dealers to make a suitability determination for purchasers and to
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receive the purchaser's prior written consent for a purchase transaction, thus
restricting the ability of purchasers and broker-dealers to sell the stock in
the open market.
EFFECTS OF DELISTING FROM NASDAQ SMALLCAP MARKET; LACK OF LIQUIDITY OF
LOW PRICED STOCKS
The Company has failed to maintain the minimum bid price criteria of $1.00 per
share during most of 1999 to date, which is required for its common stock to
trade on the Nasdaq SmallCap market. Additional factors which could give rise
to the delisting include, but are not necessarily limited to, a reduction of the
Company's net tangible assets to below $2,000,000, a reduction to one active
market maker or a reduction in the market value of the public float in the
Company's securities to less than $1,000,000.
Nasdaq has given the Company notice that the Company must achieve a minimum bid
price for the common stock of at least $1.00 for 10 consecutive trading days
ending on or before June 23, 1999 or the Company's securities will be
delisted. In such event, trading, if any, in the common stock would thereafter
be conducted in the over-the-counter markets in the so-called "pink sheets" or
the National Association of Securities Dealers' "Electronic Bulletin Board."
Consequently, the liquidity of the Company's common stock would likely be
impaired, not only in the number of shares which could be bought and sold, but
also through delays in the timing of the transactions, reduction in security
analysts' and the news media's coverage, if any, of the Company and lower
prices for the Company's securities than might otherwise prevail. If the
Company's common stock were to be delisted from the Nasdaq SmallCap Market, it
would become subject to Rule 15g-9 under the Exchange Act (the "Penny Stock
Rules"), which imposes additional sales practice requirements on broker-dealers
which sell such common stock to persons other than established customers and
certain institutional investors. For transactions covered by the Penny Stock
Rules, a broker-dealer must make a special suitability determination for the
purchaser and have received the purchaser's written consent to the transaction
prior to sale. Consequently, the Penny Stock Rules may adversely affect the
ability of broker-dealers to sell the Company's common stock and may adversely
affect the ability of the Company's shareholders to sell any of their shares of
common stock in the secondary market.
CURRENT PROSPECTUS AND STATE REGISTRATION REQUIRED TO EXERCISE CLASS A WARRANTS
Holders of Class A Warrants (the "Warrants") will be able to exercise the
Warrants only if a current prospectus relating the shares of Common Stock
underlying the Warrants is then in effect and only if such securities are
qualified for sale or exempt from qualification under the applicable securities
laws of the states in which the various holders of Warrants reside. Although the
Company will use its best efforts to (i) maintain the effectiveness of a current
prospectus covering the shares of Common Stock underlying the Warrants and (ii)
maintain the registration of such Common Stock under the securities laws of the
states in which the Company initially qualified the Units for sale in the
initial public offering, there can be no assurance that the Company will be able
to do so. The Company will be unable to issue shares of Common Stock to those
persons desiring to exercise their Warrants if a current prospectus covering the
shares issuable upon the exercise of the Warrants is not kept effective or if
such shares are not qualified nor exempt from qualification in the states in
which the holders of the Warrants reside.
Each Warrant is exercisable at an exercise price of $6.50 per Warrant, subject
to adjustment in certain events. The Warrants are subject to redemption at any
time by the Company at $.01 per Warrant, on 30 days' prior written notice, if
the average closing bid price of the Common Stock exceeds $7.00 (subject to
adjustment), for 14 consecutive trading days, at any time prior to such notice
and provided a current prospectus covering the shares is then effective under
federal securities laws. If the Warrants are redeemed, Warrant holders will lose
their right to exercise the Warrants except during such 30-day redemption
period. Redemption of the Warrants could force the holders to exercise the
Warrants at the then market price or accept the redemption price, which is
likely to be substantially less than the market value of the Warrants at the
time of redemption. The Warrants have an expiration date of November 3, 2001.
UNDESIGNATED STOCK
The Company's authorized capital consists of 100,000,000 shares of capital
stock. The Board of Directors, without any action by the Company's shareholders,
is authorized to designate and issue shares in such classes or series (including
classes or series or preferred stock) as it deems appropriate and to establish
the rights, preferences and privileges of such shares, including dividends,
liquidation and voting rights. The Company currently has 8,000,089 shares of
Common Stock outstanding. As of April 2, 1999, 4,159,955 additional shares of
Common Stock have been reserved for the following: (i) 2,600,000 shares issuable
upon the exercise of the Class A Warrants issued as part of the Company's
initial public offering and the partial exercise of the underwriter's
over-allotment; (ii) 214,955 shares issuable upon the exercise of warrants;
(iii) 1,250,000 shares for issuance under the Company's 1997 Stock Option and
Compensation Plan, of which options relating to 751,166 shares are currently
outstanding, and (iv) 95,000 shares issuable upon exercise of certain directors'
stock options. The rights of holders of preferred stock and other classes of
common stock that may be issued may be superior to the rights granted to holders
of the Units issued in the Company's initial public offering. The ability of the
Board of Directors to designate and issue such undesignated shares could impede
or deter an unsolicited tender offer or takeover proposal regarding the Company.
Further, the issuance of additional shares having preferential rights could
adversely affect the voting power and other rights of holders of Common Stock.
SHARES ELIGIBLE FOR FUTURE SALE
The future sale, or availability for sale, of substantial amounts of Common
Stock in the public market may adversely affect the prevailing market price of
Common Stock and may impair the Company's ability to raise additional capital by
the sale of equity securities. 5,399,289 shares of the Company's Common Stock
which were sold in reliance on "private placement" exemptions under the
Securities Act of 1933, as amended (the "1933 Act") have become eligible for
sale pursuant to Rule 144 under the 1933 Act. In connection with the Company's
initial public offering, certain officers and directors of the Company have
agreed to escrow a portion of their shares of Common Stock with the State of
Minnesota for three years or until (i) the Company meets certain earnings
requirements established by the State of Minnesota, or (ii) the State of
Minnesota determines that the escrow agreement is no longer necessary.
MINNESOTA ANTI-TAKEOVER LAW
The Company is subject to Minnesota statutes regulating business combinations
and restricting voting rights of certain persons acquiring shares of the
Company, which may hinder or delay a change in control of the Company.
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ITEM 2. DESCRIPTION OF PROPERTY
THE KENWOOD RESTAURANT
LOCATION
The Kenwood Restaurant is approximately 17,000 square feet in size on three
levels and is located at the northeast corner of the recently refurbished
Sycamore Plaza at Kenwood Shopping Center in Cincinnati, Ohio. The Kenwood
Restaurant opened on December 19, 1996. The Company leases the land upon which
the Kenwood Restaurant is constructed.
DESCRIPTION OF LEASE
The initial term of the lease is 15 years. In addition, the Company has the
option to extend the term of the lease for two additional periods of five years
each, exercisable not earlier than 12 months nor later than six months prior to
the expiration of the initial term or first option period, as applicable.
The lease provides for the payment of both a monthly fixed minimum rent and a
percentage rent based on gross sales in excess of an escalating base amount. The
monthly fixed minimum rent is $12,833 for the first five years of the initial
lease term, $14,117 for the sixth through tenth years of the initial lease term,
$15,400 for the eleventh through fifteenth years of the initial lease term,
$16,683 during the first five-year option term and $17,967 during the second
five-year option term.
In addition to the fixed minimum rent, the lease provides for the payment of a
percentage rent equal to 4% of the gross sales from the restaurant in excess of
the following annual gross sales amounts: $3,850,000 for the first five years of
the initial lease term, $4,235,000 for the sixth through tenth years of the
initial lease term, $4,620,000 for the eleventh through fifteenth years of the
initial lease term, $5,005,000 for the first five-year option term and
$5,390,000 for the second five-year option term. No percentage rent was paid in
1998. In addition to the fixed minimum rent and percentage rent, the Company is
required to pay its proportionate share of common area maintenance costs: taxes,
insurance, maintenance and operating costs.
The landlord agreed to reimburse the Company an amount up to $200,000 as a
construction allowance for the completion of the building and leasehold
improvements within 30 days of the opening of the Kenwood Restaurant. The
Company received this reimbursement during 1997. In addition, the landlord
agreed that it will not construct any permanent facility within a designated
"no-build" area, as defined. This "no-build" area allows for unimpaired
visibility of the Kenwood Restaurant from both Kenwood Road and Montgomery Road.
FINANCING
The total cost of the Kenwood Restaurant, including the cost of the initial
construction and additional features, was approximately $5.1 million, net of
landlord contributions. Approximately $2,475,000 of this cost was funded by the
proceeds of a private placement in October 1995. Another $1,425,000 was financed
by a private placement which was concluded in June 1997, $850,000 of which was
spent on additional features. An additional $1,000,000 was funded by a leasehold
mortgage loan (the "Loan") which was incurred by the Kenwood Restaurant Limited
Partnership and subsequently assumed by the Company.
The Loan was collateralized with a leasehold mortgage and lien on the assets of
the restaurant and was personally guaranteed by the Company's Chairman of the
Board. The Loan was repaid in full in September 1998.
THE MALL OF AMERICA RESTAURANT
LOCATION
The Mall of America Restaurant consists of approximately 17,800 square feet
located on the third floor of the Mall of America in Bloomington, Minnesota, a
suburb of Minneapolis. This site is leased pursuant to a lease agreement dated
August 4, 1997.
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The Mall of America opened in August 1992 with 266 tenants and now holds
approximately 520 stores, merchandise carts and attractions, including four
large anchor tenants (Macy's, Bloomingdale's, Sears and Nordstrom). The mall
encompasses 4.2 million square feet on four enclosed floors, of which 2.5
million square feet are leasable, and employs 11,000 to 13,000 people, depending
on the season. More than 93% of the leasable space is under contract, up from
71% five years ago. The mall draws an estimated 40 million visitors per year.
Tourists account for 35% to 37% of annual mall traffic, but increases up to 50%
in the summer months.
DESCRIPTION OF LEASE
The term of the lease is for 12 years, commencing on June 1, 1998. The lease
does not provide for renewal terms.
The lease provides for the payment of either a minimum annual rent or a
percentage rent based on gross sales. The minimum annual rent is $25 per square
foot, or $405,375 per year based on approximately 16,215 square feet of leased
area. The percentage rent is the amount by which 6% of gross sales exceeds
minimum rent. The terms of payment do not change over the course of the lease
term. The lease also provided for a waiver of the minimum annual rent only, for
the first year of the lease. An amount of $9,033 was recorded for percentage
rent expense in 1998. In addition to the fixed minimum rent and percentage rent,
the Company is required to pay its proportionate share of CAM costs: taxes,
insurance, maintenance and operating costs.
FINANCING
The total cost of the Mall of America Restaurant was approximately $6.4 million.
The landlord reimbursed the Company $1,621,500 in tenant improvements bringing
net cost to approximately $4.8 million.
THE DENVER PAVILIONS RESTAURANT
LOCATION
The Denver Pavilions Restaurant consists of approximately 18,000 square feet
located on the third floor of the Denver Pavilions in Denver, Colorado. This
site is leased pursuant to a lease agreement dated May 12, 1998.
DESCRIPTION OF LEASE
The term of the lease is for 15 years, commencing on February 27, 1999. The
lease also provides for three renewal terms.
The lease provides for the payment of either a minimum annual rent or a
percentage rent based on gross sales. The minimum annual rent increases
throughout the term of the lease from $450,000 per year in years one through
five to $568,800 in years 11 through 15. The percentage rent is the amount by
which 5% of gross sales exceeds minimum rent. The lease also provides for a
tenant allowance. In addition to the fixed minimum rent and percentage rent, the
Company is required to pay its proportionate share of common area maintenance
costs: taxes, insurance, maintenance and operating costs.
ITEM 3. 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
There were no matters submitted for a vote of security holders during the fourth
quarter of 1998.
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PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Since November 3, 1997, the Common Stock of the Company has been traded in the
over-the-counter market and quoted on the Nasdaq SmallCap Market under the
symbol "HOTD". On May 21, 1998, the Company changed its corporate name from
Hotel Discovery, Inc. to Cafe Odyssey, Inc. In conjunction with this change,
effective May 24, 1998, the Company's symbol for its Common Stock was changed
from "HOTD" to " CODY". The following table sets forth the high and low bid
prices of the Company's Common Stock for the periods indicated. The Nasdaq bid
quotations represent inter-dealer prices, without retail mark-ups, mark-downs or
commissions, and may not necessarily represent actual transactions:
<TABLE>
<CAPTION>
High Low
---- ---
<S> <C> <C>
1997
----
Fourth Quarter............................................................... $ 4.00 $ 2.00
1998
----
First Quarter................................................................ $ 3.75 $ 1.88
Second Quarter............................................................... $ 5.38 $ 2.25
Third Quarter................................................................ $ 3.63 $ 1.00
Fourth Quarter............................................................... $ 1.13 $ 0.50
1999
----
First Quarter................................................................ $ 1.03 $ 0.63
</TABLE>
As of March 29, 1999, there were approximately 318 shareholders of record of the
Company's Common Stock, and approximately 1,350 other beneficial owners whose
shares are held in street name.
The Company has never declared or paid any cash dividends or distributions on
its capital stock. The Company does not intend to pay any cash dividends on its
Common Stock in the foreseeable future, as the current policy of the Company's
Board of Directors is to retain all earnings, if any, to support operations and
finance expansion. Future declaration and payment of dividends, if any, will be
determined in light of then current conditions, including the Company's
earnings, operations, capital requirements, financial condition, restrictions in
financing arrangements and other factors deemed relevant by the Board of
Directors.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion should be read in connection with the Company's
financial statements and related notes thereto included elsewhere in this
report.
OVERVIEW
The Company's predecessor, Hotel Mexico, Inc., ("HMI") was formed in January
1994 as an Ohio corporation to develop, own and operate upscale, casual themed
restaurants. On August 22, 1997, HMI merged with and into Hotel Discovery, Inc.
("HDI"), a newly formed Minnesota corporation. On February 25, 1998, the Board
of Directors approved a change in its restaurant concept name from Hotel
Discovery to Cafe Odyssey. In conjunction with this action, on May 21, 1998, the
shareholders approved a change in its corporate name from HDI to Cafe Odyssey,
Inc. (the "Company").
The Company owns and operates two full service restaurants, one in Cincinnati,
Ohio (the "Kenwood Restaurant"), which operates under the trade name "Hotel
Discovery", and one in the Mall of America, in a suburb of Minneapolis,
Minnesota (the "Mall of America Restaurant"), which operates under the trade
name "Cafe Odyssey." The Kenwood Restaurant opened under the name "Hotel Mexico"
on December 19, 1996. The Mall of America Restaurant opened on June 8, 1998.
Prior to the opening of the
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Kenwood Restaurant, the Company was in the development stage. On March 15, 1999,
the Company opened its third restaurant at the Denver Pavilions, located in the
downtown district of Denver, Colorado. This restaurant, as with all future
restaurants, will be under the trade name Cafe Odyssey.
Future revenue and profits, if any, will depend upon various factors, including
market acceptance of the Hotel Discovery/Cafe Odyssey concept, the quality of
the 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 year ending on the Sunday nearest December
31 of each year. All references herein to "1998" represent a 53-week fiscal year
ended January 3, 1999 and "1997" represents a 52-week fiscal year ended December
28, 1997.
RESULTS OF OPERATIONS FOR THE FISCAL YEARS ENDED JANUARY 3, 1999 AND
DECEMBER 28, 1997
Net sales increased by $3,386,196 or 95.5% to $6,932,891 for fiscal year 1998
from $3,546,695 for fiscal year 1997. Sales at the Kenwood Restaurant decreased
by approximately 25.3% or $896,488. Restaurant level management at the Kenwood
Restaurant has been the major factor in the decrease of sales and will continue
to be a focus of the Company. Sales are not anticipated to increase much, if at
all, over its current level for 1999. Sales at the Mall of America Restaurant
were $4,282,684 for the 30 weeks of operations.
Food, beverage and retail costs were $1,897,492 (27.4% of net sales) for the
fiscal year 1998 as compared to $1,122,313 (31.6% of net sales) for fiscal year
1997, which remain within the normal operating percentage of net sales. This
reduction in the percentage change from the prior year indicates a stabilization
in overall cost of goods sold.
Restaurants operating expenses were $5,038,104 (72.7% of net sales) for the
fiscal year 1998 as compared to $2,835,157 (79.9% of net sales) for fiscal year
1997. This improvement in restaurant operating expenses is due primarily to
improved efficiencies of the front of house and back of house staff being better
prepared and more seasoned, allowing them to execute their functions correctly
and more efficiently.
The 53.1% increase in depreciation and amortization expense is primarily
attributable to the new Mall of America Restaurant.
Pre-opening expenses were $732,851 for fiscal year 1998 as compared to $792,397
for the fiscal year 1997. Included in the 1998 amount was approximately $12,000
for the preliminary investigation of the Irvine, California site. It is the
Company's policy to expense as incurred all start-up and pre-opening costs that
are not otherwise capitalizable as long-lived assets.
The Kenwood Restaurant 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
noncash write-down of this restaurant of $2,000,000 in 1998. The 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 general, administrative and development expenses relate to the Company's
executive and administrative office located in Bloomington, Minnesota. Total
general, administrative and development expenses were $3,081,213 (44.4% of net
sales) for the fiscal year 1998 as compared to $2,073,028 (58.4% of net sales)
for fiscal year 1997. This is a increase of $1,008,185. As with any "start-up
company", the Company has to address numerous executive and administrative
staffing requirements, the requirements needed to manage remote sites, and the
development costs associated with site location. The Company has re-evaluated
its general, administrative and development expense line items to reduce
corporate overhead expenses for the 1999 fiscal year. However, no assurance can
be given that any or all of the reductions will produce an acceptable expense
percentage of net sales. Until more Cafe
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Odyssey restaurants are in operation, general, administrative and development
expenses will continue to provide the greatest impact on the net operating
profit or loss of the Company for the foreseeable future.
The Company's other income and expense consist of interest income and interest
expense. The excess of income over expenses for 1998 was $50,374 (0.1% of net
sales) due to the cash received from the November 1997 Initial Public Offering.
The excess of expenses over income for 1997 was $84,376 (0.2% of net sales) due
to loans and other debt financing secured during the year.
LIQUIDITY AND CAPITAL RESOURCES
The Company had a working capital deficit of $3,870,058 at January 3, 1999,
compared to working capital of $8,092,736 on December 28, 1997. Cash and cash
equivalents were $106,247 at January 3, 1999 representing a decrease of
$9,115,927 from the cash and cash equivalents of $9,222,174 at December 28,
1997.
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 (iiii) 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 January 3, 1999 was $100,000.
In October 1995, Kenwood Restaurant Limited Partnership, an Ohio limited
partnership formed in June 1995 (the "Kenwood Partnership"), raised $2.5 million
in a private placement of 250 shares of Common Stock of the Company's
predecessor (which shares were split 825-to-1 in November 1996, and now
represent 206,250 shares of the Company) and limited partnership interests in
the Kenwood Partnership. In a reorganization of the Company which occurred in
November 1996, the Kenwood Partnership contributed all of its net assets to the
Company's predecessor, including the Kenwood Restaurant, in exchange for
1,350,000 shares of Common Stock of the Company. The general partner of the
Kenwood Partnership was Kenwood Restaurant, Inc., an Ohio corporation that was
controlled by Stephen D. King until his resignation as an officer and director
in September 1997. The Kenwood Partnership was dissolved in October 1997.
The Company borrowed $1.0 million under a leasehold mortgage term loan from a
bank, which was personally guaranteed by Mr. King. This financing was used for
the Kenwood Restaurant. Principal and interest were due monthly through February
1999. This loan was repaid in September 1998. In December 1996, the Company
borrowed an additional $2.5 million under a mortgage term loan from a bank.
Payments of interest only were due through January 1998, at which time the
entire principal balance was due. This loan was paid in full on January 31,
1997. In May 1997, the Company borrowed $2.0 million on a 13-month term note,
with interest only payable monthly at the rate of 7.15%. This note was
guaranteed by Mr. King and was collateralized by substantially all of the
Company's assets. This note was repaid in July 1997. On June 23, 1997, the
Company borrowed $800,000, also collateralized by substantially all of the
Company's assets. The loan was personally guaranteed by Mr. King and was repaid
in full in July 1997.
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 have
been fully utilized for the Kenwood Restaurant, repayment of indebtedness,
working capital and construction of the Mall of America Restaurant and
development of 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 is 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 loan 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.
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<PAGE> 16
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. 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 $921,323 at January 3, 1999. The note requires monthly
installments of $25,044 including interest of 15.94%. The note is secured by
equipment and is due July 2002.
In September 1998, the Company entered into a $3,000,000 revolving line of
credit facility with a financial institution. This credit facility is secured by
an open-ended leasehold mortgage, security agreement and assignment of rents,
income and proceeds ("Mortgage"), which Mortgage encumbers the leasehold
improvements of the Kenwood Restaurant. In addition, two directors and an
ex-director of the Company entered into a joint and several limited guaranty of
the first $1,000,000 of the Company's borrowings under this credit facility. In
consideration of these guarantees, the Company issued 40,000 five-year warrants
to each of these individuals at an exercise price of $0.75 per share in November
1998. Guarantees for the other $2,000,000 were obtained later in November 1998
from two of the aforementioned directors and an additional third party whereby
two of the directors each severally guaranteed $500,000, and the other third
party guaranteed $1,000,000, of such borrowings. All three guarantors pledged
certain collateral to the financial institution in connection with the latter
guarantees. In exchange for such guarantees and pledges of collateral, the
Company issued 200,000 five-year warrants each to two of the directors in
November 1998, and 400,000 five-year warrants to the other third party in
January 1999, all at an exercise price of $0.75 per share. The Board of
Directors of the Company also authorized the issuance of additional warrants and
the payment of cash penalties to the three guarantors if the borrowings are not
repaid in full by September 30, 1999. This credit facility provides for monthly
payments of interest accrued on the outstanding unpaid principal balance at a
rate equal to the Prime Rate, or 7.75% as of January 3, 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 January 3, 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
principle and interest 90 days from the loan date. The interest rate is 18% per
year, with a 2% loan origination fee. The Company has issued a five year warrant
to purchase 500,000 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. 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 March 10, 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 will issue warrants to the guarantors in
consideration of the guarantees.
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 intends to open one more restaurant in 1999. The Company estimates
that its capital expenditures (excluding any landlord contributions) will be
approximately $3 to $10 million in fiscal 1999. 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
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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 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 July 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 July 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 July 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 July 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.
ITEM 7. FINANCIAL STATEMENTS
17
<PAGE> 18
The financial statements of the Company are included herein following the
signatures, beginning at page F-1.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
18
<PAGE> 19
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
Information in response to this Item is incorporated herein by reference to the
Company's definitive proxy statement to be filed pursuant to Regulation 14A
within 120 days after the end of the fiscal year covered by this form 10-KSB.
ITEM 10. EXECUTIVE COMPENSATION
Information in response to this Item is incorporated herein by reference to the
Company's definitive proxy statement to be filed pursuant to Regulation 14A
within 120 days after the end of the fiscal year covered by this form 10-KSB.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information in response to this Item is incorporated herein by reference to the
Company's definitive proxy statement to be filed pursuant to Regulation 14A
within 120 days after the end of the fiscal year covered by this form 10-KSB.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information in response to this Item is incorporated herein by reference to the
Company's definitive proxy statement to be filed pursuant to Regulation 14A
within 120 days after the end of the fiscal year covered by this form 10-KSB.
ITEM 13. EXHIBITS, LIST AND REPORTS ON FORM 8-K
(A) EXHIBITS
1.1 Form of Underwriting Agreement (with form of Underwriter's
Warrant) (incorporated herein by reference to Exhibit 1.1 to
the Company's Registration Statement on Form SB-2 as filed on
August 22, 1997, as amended (File No. 333-34235)) (the "1997
SB-2")
3.1 Articles of Incorporation, as amended (incorporated herein by
reference to Exhibit 3 to the Company's Quarterly Report on
Form 10-QSB for the quarter ended June 28, 1998 (the "2Q98
10-QSB")).
3.2 By-laws (incorporated herein by reference to Exhibit 3.2 to
the 1997 SB-2)
4 Form of Warrant Agreement (incorporated herein by reference to
Exhibit 4 to the 1997 SB-2)
10.1 Indenture of Lease dated November 9, 1994 between Phillip E.
Stephens, Trustee and Kenwood Restaurant, Inc.; First
Amendment to Lease dated May 3, 1995 by and between Phillip E.
Stephens, Trustee and Kenwood Restaurant, Inc.; by Second
Amendment to Lease dated , 1996 between Phillip E.
Stephens, Trustee and Kenwood Restaurant Limited Partnership;
Second Amendment to Agreement dated October 18, 1996 between
Phillip E. Stephens, Trustee and Kenwood Restaurant Limited
Partnership; and Addendum to Second Amendment to Lease dated
October 18, 1996 between Phillip E. Stephens, Trustee and
Kenwood Restaurant Limited Partnership (Kenwood Restaurant)
(incorporated herein by reference to Exhibit 10.1 to the 1997
SB-2)
10.2 Lease dated August 4, 1997 between Mall of America Company and
Hotel Mexico, Inc. (Mall of America Restaurant) (incorporated
herein by reference to Exhibit 10.2 to the 1997 SB-2)
10.3 Loan Agreement dated October 9, 1996 by and among Kenwood
Restaurant Limited Partnership and PNC Bank, Ohio, National
Association (incorporated herein by reference to Exhibit 10.3
to the 1997 SB-2)
10.4 1997 Stock Option and Compensation Plan (incorporated herein
by reference to Exhibit 10.4 to the 1997 SB-2)
10.5 Employment Agreement between the Company and Ronald K. Fuller
dated March 17, 1997 (incorporated herein by reference to
Exhibit 10.5 to the 1997 SB-2)
10.6 Amendment to 1997 Stock Option and Compensation Plan
(incorporated herein by reference to Exhibit 10.6 to the 1997
SB-2)
10.7 Second Amendment to 1997 Stock Option and Compensation Plan
(incorporated herein by reference to Exhibit 10.7 to the 1997
SB-2)
10.8 Third Amendment dated February 25, 1998 to the Company's 1997
Stock Option and Compensation Plan (incorporated herein by
reference to Exhibit 10.1 to the 2Q98 10-QSB)
10.9 First Loan Assumption Agreement dated December 31, 1996 by and
among PNC Bank, Ohio, National Association, Kenwood Restaurant
Limited Partnership, Stephen D. King, Kenwood Restaurant, Inc.
and Hotel Mexico, Inc. (incorporated herein by reference to
Exhibit 10.8 to the Company's Annual Report on Form 10-KSB for
the fiscal year ended December 28, 1997 (the "1997 10-KSB"))
10.10 Second Loan Assumption Agreement dated October 16, 1997 by and
among PNC Bank, Ohio, National Association, Stephen D. King
and the Company (incorporated herein by reference to Exhibit
10.9 to the 1997 10-KSB)
10.11 Amendment to Loan Documents dated as of June 28, 1998 by and
among PNC Bank, Ohio, National Association, Stephen D. King
and the Company (incorporated herein by reference to Exhibit
10.3 to the 2Q98 10-QSB)
10.12 Employment Agreement between the Company and Anne D. Huemme
dated December 15, 1997 Company (incorporated herein by
reference to Exhibit 10.10 to the 1997 10-KSB)
10.13 1998 Director Stock Option Plan (incorporated herein by
reference to Exhibit 10.2 to the 2Q98 10-QSB)
10.14 Shopping Center Lease dated May 12, 1998 between Denver
Pavilions, L.P. and the Company (incorporated herein by
reference to Exhibit 10 to the Company's Current Report on
Form 8-K filed on May 27, 1998)
10.15 Open-End Leasehold Mortgage, Security Agreement and Assignment
of Rents, Income and Proceeds made as of September 23, 1998 by
the Company to The Provident Bank ("Provident") (incorporated
herein by reference to Exhibit 10.1 to the Company's Quarterly
Report on Form 10-QSB for the quarter ended September 27, 1998
(the "3Q98 10-QSB")).
10.16 Revolving Promissory Note Mortgage Loan dated September 23,
1998 between the Company and Provident (incorporated herein by
reference to Exhibit 10.2 to the 3Q98 10-QSB)
10.17 Security Agreement dated as of September 23, 1998 between the
Company and Provident (incorporated herein by reference to
Exhibit 10.3 to the 3Q98 10-QSB)
10.18 Agreement Among Guarantors dated November 16, 1998 among
Stephen D. King, Jerry L. Ruyan, Greg C. Mosher and the
Company
10.19 Agreement Among Guarantors dated January 22, 1999 among
Stephen D. King, Jerry L. Ruyan, Andrew Green and the Company
10.20 Warrant No. PL-1 dated November 16, 1998 to purchase 40,000
shares of common stock of the Company issued to Stephen D.
King
10.21 Schedule identifying material details of other warrants issued
by the Company substantially identical to the warrant filed as
Exhibit 10.20
10.22 Indemnification and Contribution Agreement dated March 3, 1999
among Michael A. Bird, John E. Feltl, Stephen D. King, Timothy
I. Maudlin, Wayne W. Mills and the Company
10.23 Promissory Note dated March 10, 1999 of the Company to
BankWindsor
10.24 Warrant No. BWL-1 dated March 3, 1999 to purchase 25,000
shares of common stock of the Company issued to Michael A.
Bird
10.25 Schedule identifying material details of other warrants issued
by the Company substantially identical to the warrant filed as
Exhibit 10.24
24 Powers of Attorney (included on signature page)
27 Financial Data Schedules
(B) REPORTS ON FORM 8-K
On December 8, 1998, the Company filed a report on Form 8-K relating to
its execution on November 23, 1998 of a lease agreement with Irvine
Retail Properties Company to lease approximately 18,000 square feet of
space for a Cafe Odyssey restaurant in the Irvine Spectrum Center, a
dining and entertainment destination in Irvine, California.
<PAGE> 20
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the issuer has duly 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: April 5, 1999
POWER OF ATTORNEY
Each person whose signature below constitutes and appoints Stephen D. King as
such person's true and lawful attorney-in-fact and agent with full power of
substitution and re-substitution for such person and in such person's name,
place and stead, in any and all capacities, to sign any and all amendments to
this Annual Report on Form 10-KSB and to file the same, with all exhibits
thereto, and other documents in connection therewith, with the Securities and
Exchange Commission, granting unto said attorney-in-fact and agent full power
and authority to do and perform each and every act and thing necessary or
desirable to be done in and about the premises, as fully to all intents and
purposes as such person, hereby ratifying and confirming all that said
attorney-in-fact and agent, or her substitute or substitutes, may lawfully do or
cause to do done by virtue hereof.
In accordance with the Exchange Act, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates stated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Stephen D. King Chairman of the Board, Chief April 5, 1999
- -------------------------------- Executive Officer, Chief Financial
Stephen D. King Officer and Director
(Principal Executive Officer and
Financial Officer)
/s/ Ronald K. Fuller President, Chief Operating Officer, April 5, 1999
- -------------------------------- and Director
Ronald K. Fuller
/s/ Michael L. Krienik Director April 5, 1999
- --------------------------------
Michael L. Krienik
/s/ Thomas W. Orr Director April 5, 1999
- --------------------------------
Thomas W. Orr
/s/ Jerry L. Ruyan Director April 5, 1999
- --------------------------------
Jerry L. Ruyan
</TABLE>
20
<PAGE> 21
CAFE ODYSSEY, INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Public Accountants F-2
Balance Sheets as of January 3, 1999 and December 28, 1997 F-3
Statements of Operations for Years Ended January 3, 1999 and December 28, 1997 F-4
Statements of Shareholders' Equity for Years Ended January 3, 1999 and
December 28, 1997 F-5
Statements of Cash Flows for Years Ended January 3, 1999 and December 28, 1997 F-6
Notes to Financial Statements for Years Ended January 3, 1999 and December 28,1997 F-7
</TABLE>
F-1
<PAGE> 22
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Cafe Odyssey, Inc.,
We have audited the accompanying balance sheets of Cafe Odyssey, Inc. as of
January 3, 1999 and December 28, 1997, and the related statements of operations,
shareholders' equity, and cash flows for the years then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Cafe Odyssey, Inc. as of
January 3, 1999 and December 28, 1997, and the results of its operations and its
cash flows for the years then ended in conformity with generally accepted
accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 1 to the
financial statements, the Company has suffered recurring losses from operations
and has a net working capital deficit that raises substantial doubt about its
ability to continue as a going concern. Management's plans in regard to these
matters are also described in Note 1. The financial statements do not include
any adjustments relating to the recoverability and classification of asset
carrying amounts or the amount and classification of liabilities that might
result should the Company be unable to continue as a going concern.
ARTHUR ANDERSEN LLP
Minneapolis, Minnesota,
February 19, 1999
F-2
<PAGE> 23
CAFE ODYSSEY, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
JANUARY 3, DECEMBER 28,
1999 1997
-------------- -------------
ASSETS
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 106,247 $ 9,222,174
Inventories 161,463 41,766
Other current assets 452,243 250,043
------------ ------------
Total current assets 719,953 9,513,983
PROPERTY AND EQUIPMENT, NET 11,699,548 5,270,160
OTHER ASSETS, NET 520,487 55,908
------------ ------------
$ 12,939,988 $ 14,840,051
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Short-term notes payable $ 0 $ 200,000
Accounts Payable 1,452,648 669,380
Advances payable to principal shareholder 100,000 0
Convertible promissory notes payable 150,000 0
Current portion of long-term debt 2,199,007 69,420
Accrued expenses 688,356 482,447
------------ ------------
Total current liabilities 4,590,011 1,421,247
DEFERRED RENT 1,755,852 0
LONG-TERM DEBT, LESS CURRENT PORTION 755,878 852,165
CONVERTIBLE PROMISSORY NOTES PAYABLE 0 150,000
------------ ------------
Total liabilities 7,101,741 2,423,412
------------ ------------
COMMITMENTS AND CONTINGENCIES (NOTES 1 AND 8)
SHAREHOLDERS' EQUITY
Common stock, $.01 par value, 100,000,000 shares authorized;
8,000,089 and 8,000,189 shares issued and outstanding 80,001 80,002
Additional paid-in capital 20,281,140 20,152,949
Less: common stock subscribed (400,000) (400,000)
Accumulated deficit (14,122,894) (7,416,312)
------------ ------------
Total shareholders' equity 5,838,247 12,416,639
------------ ------------
$ 12,939,988 $ 14,840,051
============ ============
</TABLE>
The accompanying notes are an integral part of these balance sheets
F-3
<PAGE> 24
CAFE ODYSSEY, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEARS ENDED
-------------------------------------
JANUARY 3, DECEMBER 28,
1999 1997
----------------- ---------------
<S> <C> <C>
NET SALES $ 6,932,891 $ 3,546,695
COSTS AND EXPENSES:
Food, beverage and retail costs 1,897,492 1,122,313
Restaurant operating expenses 5,038,104 2,835,157
Depreciation and amortization 940,186 614,000
Pre-opening expenses 732,851 792,397
Loss on impairment of restaurant related assets (Note 3) 2,000,000 0
General, administrative and development expenses 3,081,213 2,073,028
------------ ------------
Total costs and expenses 13,689,846 7,436,895
------------ ------------
LOSS FROM OPERATIONS (6,756,956) (3,890,200)
------------ ------------
OTHER INCOME (EXPENSE):
Interest expense (130,625) (173,332)
Interest income 180,999 88,956
------------ ------------
Total other income (expense) 50,374 (84,376)
------------ ------------
NET LOSS $ (6,706,582) $ (3,974,576)
============ ============
BASIC AND DILUTED NET LOSS PER SHARE $ (0.84) $ (0.76)
============ ============
BASIC AND DILUTED WEIGHTED AVERAGE OUTSTANDING SHARES 8,000,131 5,204,835
============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements
F-4
<PAGE> 25
CAFE ODYSSEY, INC.
STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
Common stock Additional Common
------------------------------ paid-in stock Accumulated
Shares Amount capital subscribed deficit Total
------------ ----------- ------------ ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE - DECEMBER 31, 1995 3,000,000 $ 30,000 $ 2,470,000 $ (945,500) $ (1,114,134) $ 440,366
Issuance of shares pursuant to
private placements 945,400 9,454 2,543,126 -- -- 2,552,580
Cash received on stock subscribed -- -- -- 945,500 -- 945,500
Net loss -- -- -- -- (2,327,602) (2,327,602)
------------ ------------ ------------ ------------ ------------ ------------
BALANCE - DECEMBER 29, 1996 3,945,400 39,454 5,013,126 -- (3,441,736) 1,610,844
Initial public offering, net of
offering costs 2,600,000 26,000 11,201,967 -- -- 11,227,967
Sale of common stock pursuant
to private placements 1,447,489 14,475 3,916,029 (690,000) -- 3,240,504
Issuance of shares in lieu of
compensation 7,300 73 21,827 -- -- 21,900
Cash received on stock subscribed -- -- -- 290,000 -- 290,000
Net loss -- -- -- -- (3,974,576) (3,974,576)
------------ ------------ ------------ ------------ ------------ ------------
BALANCE - DECEMBER 28, 1997 8,000,189 80,002 20,152,949 (400,000) (7,416,312) 12,416,639
Issuance of warrants to guarantors -- -- 128,490 -- -- 128,490
Cancellation of share grant (100) (1) (299) -- -- (300)
Net loss -- -- -- -- (6,706,582) (6,706,582)
============ ============ ============ ============ ============ ============
BALANCE - JANUARY 3, 1999 8,000,089 $ 80,001 $ 20,281,140 $ (400,000) $(14,122,894) $ 5,838,247
============ ============ ============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements
F-5
<PAGE> 26
CAFE ODYSSEY, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED
----------------------------------------
JANUARY 3, DECEMBER 28,
1999 1997
------------- -------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net loss $ (6,706,582) $ (3,974,576)
Adjustments to reconcile net loss to
cash flows from operating activities:
Depreciation and amortization 940,186 614,000
Loss on impairment of restaurant related assets 2,000,000 0
Amortization of deferred rent 134,352 0
Amortization of warrant discount 59,302 0
Common stock issued in lieu of compensation 0 21,900
Changes in operating assets and liabilities:
Inventories (119,697) 96,991
Other current assets (202,200) (158,468)
Other assets (336,087) (4,067)
Accounts payable 783,268 (134,505)
Accrued expenses 205,909 (231,072)
------------ ------------
Net cash used in operating activities (3,241,549) (3,769,797)
------------ ------------
INVESTING ACTIVITIES:
Purchases of property and equipment, net (9,369,574) (1,653,644)
------------ ------------
FINANCING ACTIVITIES:
Proceeds from issuance of stock 0 14,468,471
Proceeds from long-term debt 3,002,976 0
Tenant allowance collected 1,621,500 0
Advances/(payments) from/(to) shareholder 100,000 (447,787)
Proceeds from stock subscription 0 290,000
Payments on short-term notes payable (200,000) (2,300,000)
Payments on long-term debt (1,028,980) (72,630)
Payments on cancellation of stock (300) 0
------------ ------------
Net cash provided by financing activities 3,495,196 11,938,054
------------ ------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (9,115,927) 6,514,613
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 9,222,174 2,707,561
------------ ------------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 106,247 $ 9,222,174
============ ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest $ 130,625 $ 173,332
Cash paid for income tax 0 0
</TABLE>
The accompanying notes are an integral part of these financial statements
F-6
<PAGE> 27
CAFE ODYSSEY, INC.
NOTES TO THE FINANCIAL STATEMENTS JANUARY 3, 1999 AND DECEMBER 28, 1997
1. DESCRIPTION OF THE BUSINESS AND FORMATION OF THE COMPANY
Cafe Odyssey, Inc. (the Company) owns and operates two full service restaurants,
one in Cincinnati, Ohio (the Kenwood Restaurant), which operates under the trade
name "Hotel Discovery", and one in the Mall of America, a suburb of Minneapolis,
Minnesota (the Mall of America Restaurant), which operates under the trade name
"Cafe Odyssey." The Kenwood Restaurant opened under the name "Hotel Mexico" on
December 19, 1996. The Mall of America Restaurant opened on June 8, 1998. Prior
to the opening of the Kenwood Restaurant, the Company was in the development
stage.
The Company's predecessor, Hotel Mexico (HMI), was originally incorporated in
January 1994 as an Ohio corporation. The Kenwood Restaurant Limited Partnership,
an Ohio limited partnership (the Kenwood Partnership), was formed in June 1995
for the purpose of owning and operating the Kenwood Restaurant. HMI's operations
and the net assets of the Kenwood Partnership were combined on November 14,
1996. On that date, the Kenwood Partnership contributed all of its net assets
totaling $1,567,197 to a newly formed corporation in exchange for shares of such
corporation. HMI, with total net assets of $631,966, then merged with and into
the newly formed corporation, the name of which remained Hotel Mexico, Inc.
(hereafter, Hotel Mexico). Upon consummation of the merger, all outstanding
shares of Hotel Mexico were converted into an aggregate of 1,350,000 shares of
Common Stock of the newly formed corporation.
The shares of Hotel Mexico Common Stock received by the Kenwood Partnership in
the reorganization were retained by the Kenwood Partnership until the effective
date of the Company's initial public offering, at which time the shares of
Common Stock and all other partnership assets were distributed to the general
and limited partners in accordance with the partnership agreement and the
Kenwood Partnership was dissolved.
On August 22, 1997, Hotel Mexico merged with and into Hotel Discovery, Inc., a
newly formed Minnesota corporation. The Company has an authorized capital stock
of 100,000,000 undesignated shares, and each share of Common Stock of Hotel
Mexico was converted into one share of the Company's Common Stock.
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 an
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.
Prior to the opening of the Kenwood Restaurant, the Company was in the
development stage, having devoted substantially all of its efforts to the
development of its restaurant concept. Subsequent to the opening of the Kenwood
Restaurant, the Company's efforts have concentrated on raising capital and
constructing additional restaurants. Although the Company has opened two
additional restaurants, including one in 1999 (see Note 10), and no longer
considers itself to be in the development stage, it has not operated profitably
to date and there are no assurances that it will operate profitably in the
future. Furthermore, the Company faces all of the risks, expenses and
difficulties encountered in connection with the expansion and development of a
new and expanding business.
The aforementioned factors raise substantial doubt about the Company's ability
to continue as a going concern. The Company incurred net losses of $6,706,582 in
1998 and $3,974,576 in 1997 and had a working capital deficit of $3,870,058 as
of January 3, 1999. The Company's ability to continue present operations,
successfully implement its expansion plans and operate as a going concern is
contingent upon market acceptance of the Hotel Discovery/Cafe Odyssey concept,
the quality of its restaurant operations and general economic conditions. In
addition, the Company's present source of revenue is limited to its existing
restaurants. There can be no assurances that additional financing to fund
current operations and expansion will be available on terms acceptable or
favorable to the Company. See note 4 for discussion.
F-7
<PAGE> 28
To this end, management intends to improve operations at its existing
restaurants while continuing to seek additional locations to expand the Cafe
Odyssey concept. To the extent the Company's expansion strategy is successful,
management will implement its plan of transitioning to multi-unit operations,
managing higher volume operations, controlling overhead expenses and adding
additional corporate personnel.
The financial statements do not include any adjustments relating to the
recoverability and classification of recorded asset amounts or amounts and
classification of liabilities that might be necessary should the Company be
unable to continue as a going concern.
2. SIGNIFICANT ACCOUNTING POLICIES
FISCAL YEAR
The Company has adopted a 52-53-week year ending on the Sunday nearest December
31 of each year. All references herein to "1998" represent a 53-week fiscal year
ended January 3, 1999 and "1997" represents a 52-week fiscal year ended December
28, 1997.
CASH AND CASH EQUIVALENTS
The Company includes as cash and cash equivalents cash on hand, bank deposits
and all liquid money market investments with original maturities of three months
or less when purchased, which are recorded at the lower of cost or market.
INVENTORIES
Inventories consist primarily of restaurant food and beverages and are stated at
the lower of cost or market as determined by the first-in first-out method.
PRE-OPENING COSTS
The direct and incremental costs associated with opening a new restaurant, which
consist of hiring and training the initial workforce, mock service and other
direct costs are charged to operations when incurred.
PROPERTY AND EQUIPMENT
Property and equipment acquired are recorded at cost. The Company capitalized
interest on funds borrowed to finance construction of $59,302 in 1998 and $0 in
1997. Improvements are capitalized, while repair and maintenance expenses are
charged to operations as incurred. Leasehold improvements are amortized using
the straight-line method over the shorter of the estimated useful life or the
lease term. Furniture and equipment are depreciated on a straight-line method
over their estimated useful lives of 5 to 15 years.
Property and equipment consisted of the following as of:
<TABLE>
<CAPTION>
January 3, December 28,
1999 1997
------------ ------------
<S> <C> <C>
Building and leasehold improvements $ 6,435,925 $ 3,182,160
Equipment and fixtures 4,014,095 2,294,503
Construction in progress 2,832,920 432,497
------------ ------------
13,273,940 5,909,160
Less: accumulated depreciation and
amortization (1,574,392) (639,000)
------------ ------------
Total property and equipment, net $ 11,699,548 $ 5,270,160
============ ============
</TABLE>
F-8
<PAGE> 29
INCOME TAXES
The Company accounts for income taxes using the liability method to recognize
deferred income tax assets and liabilities. Deferred income taxes are provided
for differences between the financial reporting and tax bases of the Company's
assets and liabilities at currently enacted tax rates.
NET LOSS PER COMMON SHARE
Basic and diluted net loss earnings per common share is computed by dividing the
net loss by the weighted average number of common shares outstanding during the
year. The impact of common stock equivalents has been excluded from the
computation of weighted average common shares outstanding, as the net effect
would be antidilutive.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Ultimate results could differ from the estimates.
3. WRITE DOWN OF PROPERTY AND EQUIPMENT
Statement of Financial Accounting Standards (SFAS) No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of"
requires that long-lived assets be reviewed for impairment whenever events or
changes in circumstances indicate that the carrying amount of the assets may not
be recoverable and that impairment losses be recorded on long-lived assets when
indications of impairment are present and the undiscounted cash flows estimated
to be generated by those assets' carrying value. Write-downs of impaired assets
are recorded as adjustments to the cost basis of the respective assets.
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 has recorded a noncash write-down of this
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 SFAS 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.
4. DEBT
The Company borrowed $1,000,000 in August 1996 under a leasehold mortgage term
loan from a bank. The loan bore interest at a variable rate and required monthly
payments of principal and interest of $5,785 through February 1999, at which
time the remaining balance was due. The loan was repaid in full September 1998.
In December 1996, the Company borrowed an additional $2,500,000 under a mortgage
term loan from a bank. The loan bore interest at 5.94% and had payments of
interest only due through January 1998, at which time the entire principal was
due. The loan was repaid in full in January 1997.
In May and June 1997, the Company borrowed an aggregate of $2,800,000 under
bridge loan agreements with banks. The loans
F-9
<PAGE> 30
were both repaid in full in July 1997.
The Company entered into a senior promissory note in June 1998, which had an
outstanding balance of $921,323 at January 3, 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. Current maturities are $165,454 in fiscal year
1999, $193,833 in fiscal year 2000, $227,080 in fiscal year 2001 and $334,965 in
fiscal year 2002.
In September 1998, the Company entered into a $3,000,000 revolving line of
credit facility with a financial institution. This credit facility is secured by
an open-ended leasehold mortgage, security agreement and assignment of rents,
income and proceeds ("Mortgage"), which Mortgage encumbers the leasehold
improvements of the Kenwood Restaurant. In addition, two directors and an
ex-director of the Company entered into a joint and several limited guaranty of
the first $1,000,000 of the Company's borrowings under this credit facility. In
consideration of these guarantees, the Company issued 40,000 five-year warrants
to each of these individuals at an exercise price of $0.75 per share in November
1998. Guarantees for the other $2,000,000 were obtained later in November 1998
from two of the aforementioned directors and an additional third party whereby
two of the directors each severally guaranteed $500,000, and the other third
party guaranteed $1,000,000, of such borrowings. All three guarantors pledged
certain collateral to the financial institution in connection with the latter
guarantees. In exchange for such guarantees and pledges of collateral, the
Company issued 200,000 five-year warrants each to two of the directors in
November 1998, and 400,000 five-year warrants to the other third party in
January 1999, all at an exercise price of $0.75 per share. The Board of
Directors of the Company also authorized the issuance of additional warrants and
the payment of cash penalties to the three guarantors if the borrowings are not
repaid in full by September 30, 1999. This credit facility provides for monthly
payments of interest accrued on the outstanding unpaid principal balance at a
rate equal to the Prime Rate, or 7.75% as of January 3, 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 January 3, 1999, the Company was in compliance with
all such covenants.
Without additional financing, cash generated from the Company's current
operations may not be adequate to repay the mortgage in 1999. There can be no
assurances that additional financing will be available on terms acceptable or
favorable to the Company.
CONVERTIBLE PROMISSORY NOTES PAYABLE
In June and July 1996, the Company executed three convertible promissory notes
totaling $150,000. The notes mature on July 1, 1999, and bear interest at 8.01%.
The notes are convertible into 39,600 shares of the Company's Common Stock at
maturity, at the payee's option.
5. SHAREHOLDERS' EQUITY
CAPITAL STOCK
In June 1997, in connection with the Company's re-incorporation in Minnesota,
the authorized capital of the Company increased to 100,000,000 shares. As
allowed under Minnesota law, the Board of Directors is authorized to designate
and issue shares in such classes or series (including classes or series of
preferred stock) as it deems appropriate and to establish the rights,
preferences, and privileges of such shares.
PRIVATE PLACEMENTS
From November 1996 through July 1997, the Company completed private placement
offerings of an aggregate of $ 2,392,889 shares of Common Stock at $3.00 per
share. The Company received net proceeds of approximately $6.1million after the
payment of approximately $700,000 in related offering costs. The proceeds were
used to pay off certain debt and for additional development costs and working
capital purposes.
INITIAL PUBLIC OFFERING
In November 1997, the Company consummated an initial public offering of
2,600,000 units at an offering price of $5.00 per unit, including 100,000 units
from the exercise of the underwriters' over-allotment option, which occurred in
December 1997. Each
F-10
<PAGE> 31
unit consisted on one share of Common Stock and one Redeemable Class A Warrant.
The Company received net proceeds of approximately $11.2 million after payment
of approximately $1.8 million in related underwriting discount and offering
costs.
WARRANTS
In 1997, the Company granted 214,955 warrants. The warrants are immediately
exercisable at a price of $3.75 per share and expire in five years.
6. STOCK OPTIONS
STOCK OPTION PLAN
The Company's 1997 Stock Option and Incentive Compensation Plan (the "Plan") has
750,000 common shares reserved for issuance. The Plan is administered by a stock
option committee of the Board of Directors which has the discretion to determine
the number of shares granted, the price of the option, the term of the option
and the time period over which the option may be exercised. During 1998, the
Company granted 20,000 options to its outside directors outside of the Plan.
A summary of the status of the Company's Plan as of and for the year ended
January 3, 1999 is presented in the table and narrative below:
<TABLE>
<CAPTION>
Weighted Average
Shares Exercise Price
------ ----------------
<S> <C> <C>
Outstanding, December 29, 1996 0 0
Granted 707,606 $3.11
-------------
Outstanding, December 28, 1997 707,666 $3.11
-------------
Granted/Repriced 846,166 $1.16
Exercised 0
0
Forfeited/Repriced (734,666) $3.10
------------- =====
Outstanding, January 3, 1999 819,166 $1.11
------------- =====
Exercisable, end of Period 295,666
Weighted average FV of options granted $ 0.62
</TABLE>
On December 10, 1998, the board of directors approved a repricing of all
outstanding stock options held by the Company's employees and directors. The new
exercise price of $0.75 was greater than the fair market value ($0.63) of the
Company's stock on that date. A total of 660,666 options price at $3.00 to $4.50
were exchanged for options priced at $0.75. The new options vest in three equal
installments on the first, second and third anniversaries of the new date of
grant.
The Company accounts for these plans under Accounting Principles Board Opinion
No. 25, under which no compensation cost has been recognized. Had compensation
cost for these plans been determined consistent with SFAS No. 123, "Accounting
for Stock-Based Compensation," the Company's net loss and loss per share would
have been increased to the following pro forma amounts for 1998 and 1997:
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
Net Loss As Reported $ (6,706,582) $ (3,974,576)
Pro Forma (6,891,308) (4,093,576)
Basic and Diluted EPS As Reported (0.84) (0.76)
Pro Forma (0.86) (0.79)
</TABLE>
The fair value of each option is estimated on the date of grant using the
Black-Scholes option pricing model with the following weighted average
assumptions used for grants in 1998 and 1997: risk-free interest rate of 6.01%;
no expected dividend yield; expected lives of 7 years; and expected volatility
of 80%.
F-11
<PAGE> 32
7. INCOME TAXES
As of January 3, 1999 and December 28, 1997, the Company's deferred taxes
consisted primarily of net operating loss carryforwards, preopening costs not
currently deductible and accelerated methods of depreciation. The Company has
recorded a full valuation allowance against the net deferred tax asset due to
the uncertainty of realizing the related benefits.
As of January 3, 1999, the Company had net operating loss carryforwards of
approximately $14.0 million, which, if not used, will expire through 2012.
8. COMMITMENTS AND CONTINGENCIES
OPERATING LEASES
The Company has entered into various operating leases for its existing and
future restaurants which have an initial lease term of ten to fifteen years with
an option for renewal. All of these leases contain provisions for contingent
rentals based on a percentage of gross revenues, as defined, and contain
provisions for payments of real estate taxes, insurance and common area costs.
In addition, certain of these leases provide for tenant inducements and rent
abatement. Total rent expense, including common area costs, real estate taxes
and percentage rent, was $604,146 and $236,642, for the years 1998 and 1997,
respectively.
Future minimum rental payments (including the Denver Pavilions restaurant, which
opened March 15, 1999 and excluding percentage rent) are as follows as of
January 3, 1999:
<TABLE>
<S> <C>
1999 $ 947,710
2000 1,197,865
2001 1,065,929
2002 1,053,131
2003 1,027,590
Thereafter 10,308,157
----------------
$ 15,600,382
================
</TABLE>
LITIGATION
The Company is involved in various legal actions rising in the ordinary course
of business. In the opinion of management, the ultimate disposition of these
matters will not have a material adverse effect on the Company's financial
position or the results of its operations.
9. RELATED PARTY TRANSACTIONS
The principal shareholder, director and executive officer provided essentially
all of the Company's working capital in the development stage. At January 3,
1999, the maximum and outstanding amount of indebtedness was $100,000.
During 1998, Krienik Advertising, Inc., an Ohio corporation whose President,
Chief Executive Officer and 100% shareholder is a director of the Company,
provided marketing and advertising services to the Company. Fees paid for these
services, including payments for subcontracted media, printing, production and
research services were $741,077 during 1998.
10. SUBSEQUENT EVENT (UNAUDITED)
On March 15, 1999, the Company opened its third restaurant at the Denver
Pavilions, located in the downtown district of Denver, Colorado. This
restaurant, as with all future restaurants, will operate under the trade name
Cafe Odyssey.
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
principle and interest 90 days from the loan date. The interest rate is 18% per
year, with a 2% loan origination fee. The Company has issued a five year warrant
to purchase 500,000 shares of the Company's common stock at
F-12
<PAGE> 33
an exercise price of $0.50 per share.
On March 10, 1999, the Company entered into a promissory note for $825,000. 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 March 10, 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 will issue warrants to the guarantors in
consideration of the guarantees.
F-13
<PAGE> 1
EXHIBIT 10.18
AGREEMENT AMONG GUARANTORS
This Agreement Among Guarantors (the "Agreement") is made and entered
into as of November 16, 1998, by and among Stephen D. King ("King"), Jerry L.
Ruyan ("Ruyan") Greg C. Mosher ("Mosher") (also each a "Guarantor"), and Cafe
Odyssey, Inc., a Minnesota corporation (the "Company").
INTRODUCTION
A. The Company is a party to a Loan Agreement dated October 9, 1996
with PNC Bank, Ohio, National Association, as amended (the "PNC Loan
Agreement").
B. As of September 23, 1998, the Company entered into a Revolving
Promissory Note (the "Note") with The Provident Bank, an Ohio banking
corporation ("Provident") in order to retire the Company's indebtedness under
the PNC Loan Agreement and obtain additional financing (collectively, the
"Provident Financing"). The Provident Financing consists of a first tranche in
the principal amount of $1,000,000 (the "First Tranche") and a subsequent or
concurrent second tranche in a principal amount of up to $2,000,000 (the "Second
Tranche").
C. In connection with the Company's borrowing under the First Tranche,
Provident required guarantors to execute a $1,000,000 Joint and Several Limited
Unconditional Guaranty (the "First Tranche Guaranty") of the Note. Each of the
Guarantors has executed the First Tranche Guaranty.
D. In connection with the Second Tranche, Provident required guarantors
to execute Several Limited Guarantees (each, a "Second Tranche Guaranty") of the
Note and pledge certain assets to Provident. King and Ruyan have each executed a
$500,000 Second Tranche Guaranty and Mosher has executed a $1,000,000 Second
Tranche Guaranty.
E. In consideration of the Guarantees and the pledge of collateral by
the Guarantors, the Company wishes to issue to each of the Guarantors a warrant
to purchase shares of the Common Stock, $.01 par value (the "Common Stock"), of
the Company (individually a "Warrant" and collectively the "Warrants").
F. The Guarantors and the Company also desire to provide for the
issuance of additional Warrants to the Guarantors if the Company does not repay
the Note on a timely basis.
G. The Guarantors desire to remedy the inequities that may otherwise
result from enforcement of any of the Guarantees through an agreement providing
for appropriate indemnification and contribution rights and obligations among
the Guarantors.
<PAGE> 2
NOW, THEREFORE, in consideration of the foregoing, and for other good
and valuable consideration, the receipt and sufficiency of which is hereby
acknowledged, the Guarantors hereto agree as follows:
1. Guarantees, Collateral and Supplemental Collateral. On or
before the date hereof, each Guarantor has executed the First Tranche Guaranty,
a Second Tranche Guaranty and a Pledge and Security Agreement (a "Pledge") in
connection therewith.
2. Issuance of Warrants upon Execution of Guarantees and Pledges.
(a) In connection with the First Tranche, the Company shall
issue to each Guarantor a Warrant to purchase 40,000 shares of Common Stock in
the form attached as Exhibit A hereto.
(b) In connection with the Second Tranche, the Company shall
issue to each Guarantor a Warrant to purchase 200,000 shares of Common Stock
(except that Mosher shall receive a Warrant to purchase 400,000 shares) in the
form attached as Exhibit A hereto.
3. Issuance of Warrants upon Company's Failure to Timely Repay the Note.
If the Company does not repay the Note in full on or before September 30, 1999
(the "Due Date"):
(a) the Company shall issue to each of King and Ruyan a Warrant
to purchase 30,000 shares of Common Stock in the form attached as Exhibit A
hereto. Thereafter, for so long as any amount due under the Note shall remain
unpaid, on each monthly anniversary of the Due Date, the Company shall issue to
each of King and Ruyan a Warrant to purchase 30,000 shares of Common Stock in
the form attached as Exhibit A hereto;
(b) the Company shall issue to Mosher a Warrant to purchase
50,000 shares of Common Stock in the form attached as Exhibit A hereto.
Thereafter, for so long as any amount due under the Note shall remain unpaid, on
each monthly anniversary of the Due Date, the Company shall issue to Mosher a
Warrant to purchase 50,000 shares of Common Stock in the form attached as
Exhibit A hereto;
(c) the Company shall pay each of King and Ruyan $7,500 on the
Due Date, $15,000 on the first monthly anniversary of the Due Date, $22,500 on
the second monthly anniversary of the Due Date and $30,000 on the third and each
subsequent monthly anniversary of the Due Date until the Note is paid in full;
and
(d) the Company shall pay Mosher $12,500 on the Due Date,
$25,000 on the first monthly anniversary of the Due Date, $37,500 on the second
monthly anniversary of the Due Date and $50,000 on the third and each subsequent
monthly anniversary of the Due Date until the Note is paid in full.
2
<PAGE> 3
4. Company Liability for Payments on Guarantees. Upon a
Guarantor's payment of any loss, claim, damage, expense or liability arising
under the Note (each a "Claim"), the Company shall be obligated to immediately
reimburse such Guarantor for the full amount of such payment. In order to secure
its obligation pursuant to this Section, the Company shall execute a Security
Agreement in the form attached as Exhibit B hereto.
5. Indemnification.
(a) It is the intention of this Agreement that no Guarantor
shall be liable for more than his share of a Claim, as set forth in subsection
(b) of this Section. Accordingly, each Guarantor (in such capacity an
"Indemnifying Guarantor") hereby agrees to indemnify and hold harmless the other
Guarantors (in such capacity an "Indemnified Guarantor") from and against any
Claim which is not reimbursed by the Company pursuant to Section 4 hereof to the
extent, and only to the extent, that such Claim exceeds the Indemnified
Guarantor's share of such Claim. Upon any Guarantor's payment of a Claim, such
Guarantor shall deliver notice thereof (the "Notice of Claim") in reasonable
detail to the Company and to each of the other Guarantors. Within five (5)
business days following receipt of the Notice of Claim, each Guarantor required
to make an indemnification payment pursuant to this Section shall deliver the
same by certified check to the Guarantor who paid such Claim. Each Indemnifying
Guarantor shall also reimburse the Indemnified Guarantor for all costs
(including, without limitation, attorneys' fees) of collecting amounts due the
Indemnified Guarantor pursuant to this Section from such Indemnifying Guarantor.
(b) Each Guarantor's share of a Claim shall be determined as
follows:
(1) If the Claim was made under the First Tranche Guaranty,
King's, Ruyan's and Mosher's shares shall be one-third each.
(2) If the Claim was made under a Second Tranche Guaranty,
King's and Ruyan's shares shall be one-fourth each and Mosher's share shall be
one-half.
6. Contribution.
(a) If and to the extent that the remedies provided in Section
5 hereof to an Indemnified Guarantor are insufficient due to the Insolvency (as
defined in subsection (b) below) of any Indemnifying Guarantor, the Indemnified
Guarantor shall be entitled to a contribution from each solvent Indemnifying
Guarantor such that the aggregate of such contributions totals the excess of the
Indemnified Guarantor's payment of such Claim over such Indemnified Guarantor's
share of such Claim (for this purpose, such share shall be calculated by
allocating the amount of the Claim among the solvent Guarantors based upon the
percentage shares set forth in Section 5(b)). The Indemnified Guarantor shall
deliver a request for contribution (the "Contribution Request") in reasonable
detail to the Company and to each of the solvent Indemnifying Guarantors
regarding his or her right to contribution hereunder. Within five (5) business
days following receipt of the Contribution Request, each solvent Indemnifying
Guarantor required to make a contribution payment pursuant to this Section shall
deliver the same by certified check to such Indemnified Guarantor.
3
<PAGE> 4
(b) An Indemnifying Guarantor shall be deemed "Insolvent" if
such Indemnifying Guarantor (i) applies for or consents to the appointment of a
receiver, trustee, or liquidator, (ii) is unable, or admits in writing his or
her inability to pay debts as they mature, (iii) makes a general assignment for
the benefit of creditors, (iv) is adjudicated bankrupt or insolvent; (v) files a
voluntary petition in bankruptcy or a petition or an answer seeking
reorganization or an arrangement with creditors or to take advantage of any
insolvency law; or (vi) fails to successfully dismiss an involuntary petition
filed against him or her.
7. Draws under Provident Financing. The Chairman of the Board of
the Company, in his or her sole discretion, shall determine the amount and
timing of draws to be made under the Provident Financing, subject to the
aggregate amounts set forth in paragraph B. above.
8. Amendment, Waiver and Third Party Beneficiaries. This Agreement
may not be amended orally, but only by an instrument in writing signed by all of
the Guarantors who are parties hereto. No delay or failure on the part of any
Guarantor to exercise any power or right hereunder shall operate as a waiver
thereof, nor as an acquiescence in any default, nor shall any single or partial
exercise of any power or right preclude any other or further exercise thereof,
or the exercise of any other power or right. The Guarantors acknowledge and
agree that this Agreement is not intended to create any third party beneficiary
rights.
9. Partial Invalidity. If any provision or application of this
Agreement is held unlawful or unenforceable in any respect, such illegality or
unenforceability shall not effect other provisions or applications which can be
given effect, and this Agreement shall be construed as if the lawful and
unenforceable provision or application had never been contained hereby or
prescribed hereby.
10. Governing Law, Submission to Jurisdiction. All questions
concerning the construction, validity and interpretation of this Agreement will
be governed by and construed in accordance with the internal law, and not the
law of conflicts of law, of the State of Minnesota. Each of the parties hereto
consents and agrees to the jurisdiction of any state court sitting in the City
of Minneapolis, State of Minnesota, or any federal court sitting in the city of
Minneapolis, State of Minnesota, and waives any objection based on venue or
forum non conveniens with respect to any action instituted therein.
11. Assignment. This Agreement shall be binding upon the Guarantors
and their successors and assigns and shall inure to the benefit of the
Guarantors and their successors and assigns.
12. Integration. This Agreement contains the full, final and
exclusive statement of the agreement between the Guarantors relating to all
matters set forth herein and supersedes all other oral and written
understandings to the contrary.
13. Counterparts. This Agreement may be executed in separate
counterparts, each of which will be an original and all of which taken together
will constitute one and the same agreement.
4
<PAGE> 5
IN WITNESS WHEREOF, the parties have executed this Agreement effective
as of the date first above written.
CAFE ODYSSEY, INC.
By: /s/ Stephen D. King
---------------------------------
Name: Stephen D. King
---------------------------------
Title: Chief Executive Officer
---------------------------------
/s/ Stephen D. King
---------------------------------------
STEPHEN D. KING
/s/ Jerry L. Ruyan
---------------------------------------
JERRY L. RUYAN
/s/ Greg C. Mosher
---------------------------------------
GREG C. MOSHER
5
<PAGE> 6
EXHIBIT A
[WARRANT]
6
<PAGE> 7
EXHIBIT B
SECURITY AGREEMENT
7
<PAGE> 1
EXHIBIT 10.19
AGREEMENT AMONG GUARANTORS
This Agreement (the "Agreement") is made and entered into as of January
22, 1999, by and among Stephen D. King ("King"), Jerry L. Ruyan ("Ruyan") Andrew
Green ("Green") (each also a "Guarantor"), and Cafe Odyssey, Inc., a Minnesota
corporation (the "Company").
INTRODUCTION
A. The Company is a party to a Loan Agreement dated October 9, 1996
with PNC Bank, Ohio, National Association, as amended (the "PNC Loan
Agreement").
B. As of September 23, 1998, the Company entered into a Revolving
Promissory Note (the "Note") with The Provident Bank, an Ohio banking
corporation ("Provident") in order to retire the Company's indebtedness under
the PNC Loan Agreement and obtain additional financing (collectively, the
"Provident Financing"). The Provident Financing consists of a first tranche in
the principal amount of $1,000,000 (the "First Tranche") and a subsequent or
concurrent second tranche in a principal amount of up to $2,000,000 (the "Second
Tranche").
C. In connection with the Second Tranche, Provident required guarantors
to execute Several Limited Guarantees (each, a "Second Tranche Guaranty") of the
Note and pledge certain assets to Provident. King and Ruyan have each executed a
$500,000 Second Tranche Guaranty, Green is executing a $500,000 Second Tranche
Guaranty concurrently herewith and Green will execute another $500,000 Second
Tranche Guaranty on or before March 10, 1999.
D. In consideration of Green's Guarantees and pledge of collateral, the
Company wishes to issue to Green a warrant to purchase shares of the Common
Stock, $.01 par value (the "Common Stock"), of the Company (individually a
"Warrant" and collectively the "Warrants"). Green and the Company also desire to
provide for the issuance of additional Warrants and payment of cash to Green if
the Company does not repay the Note on a timely basis.
E. The Company has already undertaken to issue warrants and pay cash to
King and Ruyan pursuant to that certain Agreement Among Guarantors dated
November 16, 1998, to which the Company, King and Ruyan are parties.
F. The Guarantors desire to remedy the inequities that may otherwise
result from enforcement of any of the Guarantees through an agreement providing
for appropriate indemnification and contribution rights and obligations among
the Guarantors.
<PAGE> 2
NOW, THEREFORE, in consideration of the foregoing, and for other good
and valuable consideration, the receipt and sufficiency of which is hereby
acknowledged, the Guarantors hereto agree as follows:
1. Guarantees and Collateral. On or before the date hereof, Green
has executed a $500,000 Second Tranche Guaranty and a Pledge and Security
Agreement (a "Pledge") in connection therewith. Green agrees to execute another
$500,000 Second Tranche Guaranty on or before March 10, 1999.
2. Issuance of Warrants upon Execution of Second Tranche
Guarantees and Pledge. In connection with the Second Tranche, the Company shall
issue to Green a Warrant to purchase 200,000 shares of Common Stock in the form
attached as Exhibit A hereto upon his execution of his first $500,000 Second
Tranche Guaranty and a second Warrant to purchase 200,000 shares of Common Stock
upon his execution of his second $500,000 Second Tranche Guaranty.
3. Issuance of Warrants and Payment of Cash upon Company's Failure
to Timely Repay the Note. If the Company does not repay the Second Tranche of
the Note in full on or before September 30, 1999 (the "Due Date"), and assuming
Green has executed two $500,000 Second Tranche Guarantees:
(a) the Company shall issue to Green a Warrant to purchase
40,000 shares of Common Stock in the form attached as Exhibit A hereto.
Thereafter, for so long as any amount due under the Note shall remain unpaid, on
each monthly anniversary of the Due Date, the Company shall issue to Green a
Warrant to purchase 40,000 shares of Common Stock in the form attached as
Exhibit A hereto; and
(b) the Company shall pay Green $10,000 on the Due Date,
$20,000 on the first monthly anniversary of the Due Date, $30,000 on the second
monthly anniversary of the Due Date and $40,000 on the third and each subsequent
monthly anniversary of the Due Date until the Note is paid in full.
4. Company Liability for Payments on Guarantees; Green's Priority.
Upon Green's payment of any loss, claim, damage, expense or liability arising
under the Note (each a "Claim"), the Company shall be obligated to immediately
reimburse Green for the full amount of such payment. In order to secure its
obligation pursuant to this Section, the Company shall execute a Security
Agreement in the form attached as Exhibit B hereto. The parties agree that the
Company's liability to Green under this Section 4 shall have priority over any
obligation of the Company to King or Ruyan under the Agreement Among Guarantors.
5. Draws under Provident Financing. The Chairman of the Board of
the Company, in his or her sole discretion, shall determine the amount and
timing of draws to be made under the Provident Financing, subject to the
aggregate amounts set forth in paragraph B. above.
2
<PAGE> 3
6. Amendment, Waiver and Third Party Beneficiaries. This Agreement
may not be amended orally, but only by an instrument in writing signed by all of
the Guarantors who are parties hereto. No delay or failure on the part of any
Guarantor to exercise any power or right hereunder shall operate as a waiver
thereof, nor as an acquiescence in any default, nor shall any single or partial
exercise of any power or right preclude any other or further exercise thereof,
or the exercise of any other power or right. The Guarantors acknowledge and
agree that this Agreement is not intended to create any third party beneficiary
rights.
7. Partial Invalidity. If any provision or application of this
Agreement is held unlawful or unenforceable in any respect, such illegality or
unenforceability shall not effect other provisions or applications which can be
given effect, and this Agreement shall be construed as if the lawful and
unenforceable provision or application had never been contained hereby or
prescribed hereby.
8. Governing Law, Submission to Jurisdiction. All questions
concerning the construction, validity and interpretation of this Agreement will
be governed by and construed in accordance with the internal law, and not the
law of conflicts of law, of the State of Minnesota. Each of the parties hereto
consents and agrees to the jurisdiction of any state court sitting in the City
of Minneapolis, State of Minnesota, or any federal court sitting in the city of
Minneapolis, State of Minnesota, and waives any objection based on venue or
forum non conveniens with respect to any action instituted therein.
9. Assignment. This Agreement shall be binding upon the Guarantors
and their successors and assigns and shall inure to the benefit of the
Guarantors and their successors and assigns.
10. Integration. This Agreement contains the full, final and
exclusive statement of the agreement between the Guarantors relating to all
matters set forth herein and supersedes all other oral and written
understandings to the contrary.
11. Counterparts. This Agreement may be executed in separate
counterparts, each of which will be an original and all of which taken together
will constitute one and the same agreement.
3
<PAGE> 4
IN WITNESS WHEREOF, the parties have executed this Agreement effective
as of the date first above written.
CAFE ODYSSEY, INC.
By: /s/ Stephen D. King
--------------------------------
Name: Stephen D. King
--------------------------------
Title: Chief Executive Officer
--------------------------------
/s/ Stephen D. King
---------------------------------------
STEPHEN D. KING
/s/ Jerry L. Ruyan
---------------------------------------
JERRY L. RUYAN
/s/ Andrew Green
---------------------------------------
ANDREW GREEN
4
<PAGE> 5
EXHIBIT A
[WARRANT]
5
<PAGE> 6
EXHIBIT B
SECURITY AGREEMENT
6
<PAGE> 7
The Warrant and the securities issuable upon exercise of this Warrant (the
"Securities") have not been registered under the Securities Act of 1933 (the
"Securities Act") or under any state securities or Blue Sky laws ("Blue Sky
Laws"). No transfer, sale, assignment, pledge, hypothecation or other
disposition of this Warrant or the Securities or any interest therein may be
made except (a) pursuant to an effective registration statement under the
Securities Act and any applicable Blue Sky Laws or (b) if the Company has been
furnished with both an opinion of counsel for the holder, which opinion and
counsel shall be reasonably satisfactory to the Company, to the effect that no
registration is required because of the availability of an exemption from
registration under the Securities Act and applicable Blue Sky Laws, and
assurances that the transfer, sale, assignment, pledge, hypothecation or other
disposition will be made only in compliance with the conditions of any such
registration or exemption.
WARRANT TO PURCHASE SHARES OF COMMON STOCK
OF CAFE ODYSSEY, INC.
WARRANT NO. PL-1 Bloomington, Minnesota
November 16, 1998
This certifies that, for value received, STEPHEN D. KING, or his
successors or assigns ("Holder") is entitled to purchase from Cafe Odyssey, Inc.
(the "Company") Forty Thousand (40,000) fully paid and nonassessable shares (the
"Shares") of the Company's Common Stock, $.01 par value (the "Common Stock"), at
any time and from time to time from the date hereof until November 16, 2003, at
an exercise price equal to the lower of (i) $0.75 or (ii) the price per share at
which the Company sells Common Stock or issues warrants or options in any public
or private transaction which is consummated between the date of this Warrant and
the earlier of (a) the date of exercise of this Warrant and (b) the date on
which no Guarantees by the original Holder of indebtedness of the Company to
Provident Bank, an Ohio banking corporation, are still outstanding (the
"Exercise Price"), subject to adjustment as herein provided.
This Warrant is subject to the following provisions, terms and
conditions:
1. Exercise of Warrant.
a. Exercise for Cash. The rights represented by this Warrant may
be exercised by the Holder, in whole or in part (but not as to a
fractional share of Common Stock), by the surrender of this Warrant
(properly endorsed, if required, at the Company's principal office in
Bloomington, Minnesota, or such other office or agency of the Company
as the Company may designate by notice in writing to the Holder at the
address of such Holder appearing on the books of the Company at any
time within the period above named), and upon payment to it by
certified check, bank draft or cash of the purchase price for such
Shares. The Company agrees that the Shares so purchased shall have and
are deemed to be issued to the Holder as the record owner of such
Shares as of the close of business on the date on which this Warrant
shall have been surrendered and payment made for such Shares as
aforesaid. Certificates for the Shares of Common Stock so purchased
shall be delivered to the Holder within a reasonable time, not
exceeding ten (10) days, after the rights represented by this Warrant
shall have been so exercised, and, unless this Warrant has expired, a
new Warrant representing the number of Shares, if any, with respect to
which this Warrant shall not then have been exercised shall also be
delivered to the Holder within such time. The Company may require that
any such new
<PAGE> 8
Warrant or any certificate for Shares purchased upon the exercise
hereof bear a legend substantially similar to that which is contained
on the face of this Warrant.
b. Cashless Exercise. Upon receipt of a notice of cashless
exercise, the Company shall deliver to the Holder (without payment by
the Holder of any exercise price) that number of Shares that is equal
to the quotient obtained by dividing (x) the value of the Warrant on
the date that the Warrant shall have been surrendered (determined by
subtracting the aggregate exercise price for the Shares in effect on
the Exercise Date from the aggregate Fair Market Value (hereinafter
defined) for the Shares by (y) the Fair Market Value of one share of
Common Stock. A notice of "cashless exercise" shall state the number of
Shares as to which the Warrant is being exercised. "Fair Market Value"
for purposes of this Section (b) shall mean the average of the Common
Stock closing prices reported by the principal exchange on which the
Common Stock is traded, or the last sale prices as reported by the
National Association of Securities Dealers, Inc. Automated Quotation
System ("Nasdaq") National Market or SmallCap Market, as the case may
be, for the ten (10) business days immediately preceding the Exercise
Date or, in the event no public market shall exist for the Common Stock
at the time of such cashless exercise, Fair Market Value shall mean the
fair market value of the Common Stock as the same shall be determined
in the good faith discretion of the Board of Directors, after full
consideration of all factors then deemed relevant by such Board in
establishing such value, including by way of illustration and not
limitation, the per share purchase price of Common Stock or per
security convertible into one share of Common Stock of the most recent
sale of shares of Common Stock or securities convertible into Common
Stock by the Company after the date hereof all as evidenced by the vote
of a majority of the directors then in office.
2. Transferability of This Warrant. This Warrant is issued upon the
following terms, to which each Holder consents and agrees:
a. Until this Warrant is transferred on the books of the Company,
the Company will treat the Holder of this Warrant registered as such on
the books of the Company as the absolute owner hereof for all purposes
without being affected by any notice to the contrary.
b. This Warrant may not be exercised, and this Warrant and the
Shares underlying this Warrant shall not be transferable, except in
compliance with all applicable state and federal securities laws,
regulations and orders, and with all other applicable laws, regulations
and orders.
c. The Warrant may not be transferred, and the Shares underlying
this Warrant may not be transferred, without the Holder obtaining an
opinion of counsel satisfactory in form and substance to the Company's
counsel stating that the proposed transaction will not result in a
prohibited transaction under the Securities Act of 1933, as amended
("Securities Act"), and applicable Blue Sky laws. By accepting this
Warrant, the Holder agrees to act in accordance with any conditions
reasonably imposed on such transfer by such opinion of counsel.
d. Neither this issuance of this Warrant nor the issuance of the
Shares underlying this Warrant have been registered under the
Securities Act.
3. Certain Covenants of the Company. The Company covenants and agrees
that all Shares which may be issued upon the exercise of the rights represented
by this Warrant, upon issuance and full payment for the Shares so purchased,
will be duly authorized and issued, fully paid and nonassessable and free from
all taxes, liens and charges with respect to the issue hereof, except those that
may be
2
<PAGE> 9
created by or imposed upon the Holder or its property, and without limiting the
generality of the foregoing, the Company covenants and agrees that it will from
time to time take all such actions as may be requisite to assure that the par
value per share of the Common Stock is at all times equal to or less than the
effective purchase price per share of the Common Stock issuable pursuant to this
Warrant. The Company further covenants and agrees that during the period within
which the rights represented by this Warrant may be exercised, the Company will
at all times have authorized and reserved free of preemptive or other rights for
the exclusive purpose of issue upon exercise of the purchase rights evidenced by
this Warrant, a sufficient number of shares of its Common Stock to provide for
the exercise of the rights represented by this Warrant.
4. Adjustment of Exercise Price and Number of Shares. The Exercise
Price and number of Shares are subject to the following adjustments:
a. Adjustment of Exercise Price for Stock Dividend, Stock Split or
Stock Combination. In the event that (i) any dividends on any class of
stock of the Company payable in Common Stock or securities convertible
into or exercisable for Common Stock ("Common Stock Equivalents") shall
be paid by the Company, (ii) the Company shall subdivide its then
outstanding shares of Common Stock into a greater number of shares, or
(iii) the Company shall combine its outstanding shares of Common Stock,
by reclassification or otherwise, then, in any such event, the Exercise
Price in effect immediately prior to such event shall (until adjusted
again pursuant hereto) be adjusted immediately after such event to a
price (calculated to the nearest full cent) determined by dividing (a)
the number of shares of Common Stock outstanding immediately prior to
such event, multiplied by the then existing Exercise Price, by (b) the
total number of shares of Common Stock outstanding immediately after
such event, and the resulting quotient shall be the adjusted Exercise
Price per share. No adjustment of the Exercise Price shall be made if
the amount of such adjustment shall be less than $.05 per share, but in
such case any adjustment that would otherwise be required then to be
made shall be carried forward and shall be made at the time and
together with the next subsequent adjustment which, together with any
adjustment or adjustments so carried forward, shall amount to not less
than $.05 per share.
b. Adjustment of Exercise Price for Dilutive Common Stock Issuances. If
at any time prior to the exercise of this Warrant in full but following
the date on which no Guarantees by the original Holder of indebtedness
of the Company to Provident Bank are still outstanding, the Company
shall (i) issue or sell any Common Stock Equivalents without
consideration or for consideration per share (in cash, property or
other assets) less than the Exercise Price per share on the date of
such issuance or sale or (ii) fix a record date for the issuance of
subscription rights, options or warrants to all holders of Common Stock
entitling them to subscribe for or purchase Common Stock (or Common
Stock Equivalents) at a price (or having an exercise or conversion
price per share) less than the Exercise Price on the record date
described below, the Exercise Price shall be adjusted so that the
Exercise Price shall equal the price determined by multiplying the
Exercise Price in effect immediately prior to the date of such sale or
issuance (which date in the event of distribution to shareholders shall
be deemed to be the record date set by the Company to determine
shareholders entitled to participate in such distribution) by a
fraction, the numerator of which shall be (i) the number of shares of
Common Stock outstanding on the date of such sale or issuance, plus
(ii) the number of additional shares of Common Stock which the
aggregate consideration received by the Company upon such issuance or
sale (plus the aggregate of any additional amount to be received by the
Company upon the exercise of such subscription rights, options or
warrants) would purchase at such current market price per share of the
Common Stock; and the denominator of which
3
<PAGE> 10
shall be (i) the number of shares of Common Stock outstanding on the
date of such issuance or sale, plus (ii) the number of additional
shares of Common Stock offered for subscription or purchase (or into
which the Common Stock Equivalents so offered are exercisable or
convertible). Any adjustments required by this paragraph shall be made
immediately after such issuance or sale or record date, as the case may
be. Such adjustments shall be made successively whenever such event
shall occur.
c. Adjustment of Number of Shares Purchasable on Exercise of
Warrants. Upon each adjustment of the Exercise Price pursuant to this
Section, the Holder shall thereafter (until another such adjustment) be
entitled to purchase at the adjusted Exercise Price the number of
shares, calculated to the nearest full share, obtained by multiplying
the number of shares specified in such Warrant (as adjusted as a result
of all adjustments in the Exercise Price in effect prior to such
adjustment) by the Exercise Price in effect prior to such adjustment
and dividing the product so obtained by the adjusted Exercise Price.
d. Notice as to Adjustment. Upon any adjustment of the Exercise
Price and any increase or decrease in the number of shares of Common
Stock purchasable upon the exercise of the Warrant, then, and in each
such case, the Company within thirty (30) days thereafter shall give
written notice thereof, by first class mail, postage prepaid, addressed
to each Holder as shown on the books of the Company, which notice shall
state the adjusted Exercise Price and the increased or decreased number
of shares purchasable upon the exercise of the Warrants, and shall set
forth in reasonable detail the method of calculation and the facts upon
which such calculation is based.
e. Effect of Reorganization, Reclassification, Merger, etc. If at
any time while any Warrant is outstanding there should be any capital
reorganization of the capital stock of the Company (other than the
issuance of any shares of Common Stock in subdivision of outstanding
shares of Common Stock by reclassification or otherwise and other than
a combination of shares provided for in Section 4(a) hereof), or any
consolidation or merger of the Company with another corporation, or any
sale, conveyance, lease or other transfer by the Company of all or
substantially all of its property to any other corporation, which is
effected in such a manner that the holders of Common Stock shall be
entitled to receive cash, stock, securities, or assets with respect to
or in exchange for Common Stock, then, as a part of such transaction,
lawful provision shall be made so that each Holder shall have the right
thereafter to receive, upon the exercise hereof, the number of shares
of stock or other securities or property of the Company, or of the
successor corporation resulting from such consolidation or merger, or
of the corporation to which the property of the Company has been sold,
conveyed, leased or otherwise transferred, as the case may be, which
the Holder would have been entitled to receive upon such capital
reorganization, reclassification of capital stock, consolidation,
merger, sale, conveyance, lease or other transfer, if such Warrant had
been exercised immediately prior to such capital reorganization,
reclassification of capital stock, consolidation, merger, sale,
conveyance, lease or other transfer. In any such case, appropriate
adjustments (as determined by the Board of Directors of the Company)
shall be made in the application of the provisions set forth in this
Warrant (including the adjustment of the Exercise Price and the number
of Shares issuable upon the exercise of the Warrants) to the end that
the provisions set forth herein shall thereafter be applicable, as near
as reasonably may be, in relation to any shares or other property
thereafter deliverable upon the exercise of the Warrants as if the
Warrants had been exercised immediately
4
<PAGE> 11
prior to such capital reorganization, reclassification of capital
stock, such consolidation, merger, sale, conveyance, lease or other
transfer and the Warrant Holders had carried out the terms of the
exchange as provided for by such capital reorganization, consolidation
or merger. The Company shall not effect any such capital
reorganization, consolidation, merger or transfer unless, upon or prior
to the consummation thereof, the successor corporation or the
corporation to which the property of the Company has been sold,
conveyed, leased or otherwise transferred shall assume by written
instrument the obligation to deliver to each Holder such shares of
stock, securities, cash or property as in accordance with the foregoing
provisions such Holder shall be entitled to purchase.
5. No Rights as Stockholders. This Warrant shall not entitle the
Holder as such to any voting rights or other rights as a stockholder of the
Company.
6. Registration Rights. At any time after the Company is eligible to
file a registration statement on Form S-3, but in any event no later than
January 1, 1999, the Company shall register the Shares under a registration
statement (the "Registration Statement") under the Securities Act and such Blue
Sky Laws of those states as are reasonably selected by the Holder. The Company
shall use its best efforts to have the Registration Statement declared effective
by the Securities and Exchange Commission (the "Commission") as soon as
practicable. The Company shall keep the Registration Statement effective and
current until the earlier to occur of (i) the date all the Shares are sold, (ii)
the date all of the Shares may be sold under Rule 144(k) under the Securities
Act or (iii) the expiration date of this Warrant. Except as set forth in the
following sentence, the Company shall bear all expenses and fees incurred in
connection with the preparation, filing, and amendment of the Registration
Statement with the Commission. The Holder shall pay (i) all fees, disbursements
and expenses of any counsel or expert retained by the Holder and (ii) all
underwriting discounts and commissions, filing fees and any transfer or other
taxes relating to the Shares included in the Registration Statement.
7. Governing Law. This Warrant shall be governed by and construed in
accordance with the laws of the State of Minnesota.
8. Amendments and Waivers. The provisions of this Warrant may not be
amended, modified or supplemented, and waiver or consents to departures from the
provisions hereof may not be given, unless the Company agrees in writing and has
obtained the written consent of the Holders.
9. Notices. All notices or communications hereunder, except as herein
otherwise specifically provided, shall be in writing and if sent to the Holder
shall be mailed, delivered, or telefaxed and confirmed to the Holder at his or
her address set forth on the records of the Company; or if sent to the Company
shall be mailed, delivered, or telefaxed and confirmed to Cafe Odyssey, Inc.,
4801 West 81st Street, Suite 112, Bloomington, MN 55437 or to such other address
as the Company or the Holder shall notify the other as provided in this Section.
5
<PAGE> 12
IN WITNESS WHEREOF, Cafe Odyssey, Inc. has caused this Warrant to be
signed by its duly authorized officer in the date set forth above.
CAFE ODYSSEY, INC.
By /s/ Stephen D. King
-----------------------------------
Its Chief Executive Officer
-----------------------------------
6
<PAGE> 13
SUBSCRIPTION FORM
To be signed only upon exercise of Warrant.
The undersigned, the holder of the within Warrant, hereby irrevocably
elects to exercise the purchase right represented by such Warrant for, and to
purchase thereunder, ____________________ of the shares of Common Stock of Cafe
Odyssey, Inc. (the "Shares") to which such Warrant relates and herewith makes
payment of $_____________ therefor in cash, certified check or bank draft and
requests that a certificate evidencing the Shares be delivered to,
_______________________________, the address for whom is set forth below the
signature of the undersigned:
Dated:
--------------------
----------------------------------------------
(Signature)
----------------------------------------------
----------------------------------------------
(Address)
* * *
ASSIGNMENT FORM
To be signed only upon authorized transfer of Warrant.
FOR VALUE RECEIVED, the undersigned hereby sells, assigns, and
transfers unto_____________________________________ the right to purchase
shares of Common Stock of Cafe Odyssey, Inc. to which the within Warrant
relates and appoints____________________ attorney, to transfer said right on
the books of_________________ with full power of substitution in the premises.
Dated:
--------------------
----------------------------------------------
(Signature)
----------------------------------------------
----------------------------------------------
(Address)
7
<PAGE> 1
EXHIBIT 10.21
<TABLE>
<CAPTION>
Date of Name of Warrant Number of Shares Expiration
Issuance Warrant Recipient No. of Common Stock Date
<S> <C> <C> <C> <C>
11/16/98 Jerry L. Ruyan PL-2 40,000 11/16/2003
11/05/98 Greg C. Mosher PL-3 40,000 11/05/2003
11/16/98 Stephen D. King PL-4 200,000 11/16/2003
11/16/98 Jerry L. Ruyan PL-5 200,000 11/16/2003
1/22/99 Andrew Green PL-6 200,000 1/22/2004
1/22/99 Andrew Green PL-7 200,000 1/22/2004
</TABLE>
<PAGE> 1
EXHIBIT 10.22
INDEMNIFICATION AND CONTRIBUTION AGREEMENT
This Agreement (the "Agreement") is made and entered into as of March
3, 1999, by and among Michael A. Bird ("Bird"), John E. Feltl ("Feltl"), Stephen
D. King ("King"), Timothy I. Maudlin ("Maudlin"), and Wayne W. Mills ("Mills")
(each also a "Guarantor"), and Cafe Odyssey, Inc., a Minnesota corporation (the
"Company").
INTRODUCTION
A. The Company is a party to a Revolving Credit Agreement dated
____________, 1999 with BankWindsor (the "BankWindsor Agreement") providing for
the borrowing by the Company of up to $1,000,000 on a revolving basis (the
"BankWindsor Financing");
B. As a condition to the borrowing, BankWindsor required one or more
guarantors to execute Several Guarantees (each, a "Guaranty") of the BankWindsor
Financing. The Guarantors have executed Guarantees in the following amounts:
Bird, $50,000; Feltl, $175,000; King, $175,000; Maudlin, $100,000; and Mills,
$500,000.
C. In consideration of the Guarantees, the Company wishes to issue to
the Guarantors five-year warrants to purchase an aggregate of 500,000 shares of
the Common Stock, $.01 par value (the "Common Stock"), of the Company
(individually a "Warrant" and collectively the "Warrants").
D. The Guarantors desire to remedy the inequities that may otherwise
result from other than pro rata payments on the Guarantees by providing for
appropriate indemnification and contribution rights and obligations among the
Guarantors.
NOW, THEREFORE, in consideration of the foregoing, and for other good
and valuable consideration, the receipt and sufficiency of which is hereby
acknowledged, the Guarantors hereto agree as follows:
1. Issuance of Warrants. On the date hereof, the Company shall issue
Warrants to each of the Guarantors, in the form attached as EXHIBIT A hereto, in
the following denominations: Bird, 25,000 shares; Feltl, 87,500 shares; King,
87,500 shares; Maudlin, 50,000 shares; and Mills, 250,000 shares.
2. Company Liability to Guarantors for Payments on Guarantees. Upon
any Guarantor's payment to BankWindsor under his Guaranty (a "Claim"),
<PAGE> 2
(a) the Company shall be obligated to immediately reimburse such
Guarantor for the full amount of such Claim, together with
18% annual interest accrued thereon from the date the Claim
was paid; or
(b) in lieu of such reimbursement, such Guarantor may elect to
convert the amount of the Claim (together with accrued
interest) into Common Stock at a conversion price equal to
50% of the average last sale price of the Common Stock for
the 30 consecutive trading days immediately preceding such
conversion. If any Guarantor makes such an election, the
Company shall file, as soon as practicable, a registration
statement on Form S-3 (the "Registration Statement") to
register the Common Stock under the Securities Act and such
Blue Sky Laws of those states as are reasonably selected by
the Guarantor. The Company shall use its best efforts to have
the Registration Statement declared effective by the
Securities and Exchange Commission (the "Commission") as soon
as practicable. The Company shall keep the Registration
Statement effective and current until all the Common Stock is
sold or the Common Stock may be sold under Rule 144(k) under
the Securities Act, whichever is earlier. The Company shall
bear all expenses and fees incurred in connection with the
preparation, filing, and amendment of the Registration
Statement, except that the Guarantor shall pay all fees,
disbursements and expenses of any counsel or expert retained
by the Guarantor and all underwriting discounts and
commissions, filing fees and any transfer or other taxes
relating to the Common Stock included in the Registration
Statement.
3. Indemnification.
(a) It is the intention of this Agreement that no Guarantor shall
be liable for more than his share of a Claim, as set forth in subsection (b) of
this Section. Accordingly, each Guarantor (in such capacity an "Indemnifying
Guarantor") hereby agrees to indemnify and hold harmless the other Guarantors
(in such capacity an "Indemnified Guarantor") from and against any Claim which
is not reimbursed by the Company pursuant to Section 2(a) hereof to the extent,
and only to the extent, that such Claim exceeds the Indemnified Guarantor's
share of such Claim. Upon any Guarantor's payment of a Claim, such Guarantor
shall deliver notice thereof (the "Notice of Claim") in reasonable detail to the
Company and the other Guarantors. Within five (5) business days following
receipt of the Notice of Claim, each Guarantor required to make an
indemnification payment pursuant to this Section shall deliver the same by
certified check to the Guarantor who paid such Claim. Each Indemnifying
Guarantor shall also reimburse the Indemnified Guarantor for all costs
(including, without limitation, attorneys' fees) of collecting amounts due the
Indemnified Guarantor pursuant to this Section from such Indemnifying Guarantor.
(b) Each Guarantor's share of a Claim shall be as follows: Bird,
5%; Feltl, 17.5%; King, 17.5%; Maudlin, 10%; and Mills, 50%.
2
<PAGE> 3
4. Contribution.
(a) If and to the extent that the remedies provided in Section 3
to an Indemnified Guarantor are insufficient due to the Insolvency (as defined
in subsection (b) below) of any Indemnifying Guarantor, the Indemnified
Guarantor shall be entitled to a contribution from each solvent Indemnifying
Guarantor such that the aggregate of such contributions totals the excess of the
Indemnified Guarantor's payment of such Claim over such Indemnified Guarantor's
share of such Claim (for this purpose, such share shall be calculated by
allocating the amount of the Claim among the solvent Guarantors based upon the
percentage shares set forth in Section 3(b)). The Indemnified Guarantor shall
deliver a request for contribution (the "Contribution Request") in reasonable
detail to the Company and to the solvent Indemnifying Guarantors regarding his
or her right to contribution hereunder. Within five (5) business days following
receipt of the Contribution Request, each solvent Indemnifying Guarantor
required to make a contribution payment pursuant to this Section shall deliver
the same by certified check to such Indemnified Guarantor.
(b) An Indemnifying Guarantor shall be deemed "Insolvent" if such
Indemnifying Guarantor (i) applies for or consents to the appointment of a
receiver, trustee, or liquidator, (ii) is unable, or admits in writing his or
her inability to pay debts as they mature, (iii) makes a general assignment for
the benefit of creditors, (iv) is adjudicated bankrupt or insolvent; (v) files a
voluntary petition in bankruptcy or a petition or an answer seeking
reorganization or an arrangement with creditors or to take advantage of any
insolvency law; or (vi) fails to successfully dismiss an involuntary petition
filed against him or her.
5. Draws under BankWindsor Financing. The Chairman of the Board of
the Company, in his or her sole discretion, shall determine the amount and
timing of draws to be made under the BankWindsor Financing, subject to the
maximum amount set forth in paragraph A. above.
6. Amendment, Waiver and Third Party Beneficiaries. This Agreement
may not be amended orally, but only by an instrument in writing signed by all of
the parties hereto. No delay or failure on the part of any Guarantor to exercise
any power or right hereunder shall operate as a waiver thereof, nor as an
acquiescence in any default, nor shall any single or partial exercise of any
power or right preclude any other or further exercise thereof, or the exercise
of any other power or right. The Guarantors acknowledge and agree that this
Agreement is not intended to create any third party beneficiary rights.
7. Partial Invalidity. If any provision or application of this
Agreement is held unlawful or unenforceable in any respect, such illegality or
unenforceability shall not effect other provisions or applications which can be
given effect, and this Agreement shall be construed as if the lawful and
unenforceable provision or application had never been contained hereby or
prescribed hereby.
8. Governing Law, Submission to Jurisdiction. All question
concerning the construction, validity and interpretation of this Agreement will
be governed by and construed in accordance with the internal law, and not the
law of conflicts of law, of the State of Minnesota. Each
3
<PAGE> 4
of the parties hereto consents and agrees to the jurisdiction of any state court
sitting in the City of Minneapolis, State of Minnesota, or any federal court
sitting in the city of Minneapolis, State of Minnesota, and waives any objection
based on venue or forum non conveniens with respect to any action instituted
therein.
9. Counterparts. This Agreement may be executed in separate
counterparts, each of which will be an original and all of which taken together
will constitute one and the same agreement.
IN WITNESS WHEREOF, the parties have executed this Agreement effective
as of the date first above written.
CAFE ODYSSEY, INC.
By /s/ Stephen D. King
Name: Stephen D. King
Title: Chief Executive Officer
/s/ Timothy I. Maudlin
- ------------------------------------- TIMOTHY I. MAUDLIN
MICHAEL A. BIRD
/s/ Wayne W. Mills
- ------------------------------------- WAYNE W. MILLS
JOHN E. FELTL
/s/ Stephen D. King
STEPHEN D. KING
4
<PAGE> 1
EXHIBIT 10.23
BORROWER
BANKWINDSOR CAFE ODYSSEY, INC.
IDS Center
740 Marquette Avenue COMMERCIAL/
Minneapolis, MN 55402 AGRICULTURAL
(612) 338-2150 REVOLVING OR DRAW
"LENDER" ADDRESS NOTE-VARIABLE RATE
4801 W 81st St SUITE 112
BLOOMINGTON, MN 55437
TELEPHONE NO. IDENTIFICATION NO.
<TABLE>
<CAPTION>
OFFICER INTEREST PRINCIPAL AMOUNT/ FUNDING/ MATURITY CUSTOMER NUMBER LOAN NUMBER
INITIALS RATE CREDIT LIMIT AGREEMENT DATE DATE
<S> <C> <C> <C> <C> <C>
KRH VARIABLE $825,000,00 03/10/99 03/10/00 97498502
</TABLE>
PROMISE TO PAY
For value received, Borrower promises to pay to the order of Lender indicated
above the principal amount of EIGHT HUNDRED TWENTY-FIVE THOUSAND AND NO/100
Dollars ($825,000.00) or, if less, the aggregate unpaid principal amount of all
loans or advances made by the Lender to the Borrower, plus interest on the
unpaid principal balance at the rate and in the manner described below. All
amounts received by Lender shall be applied first to late payment charges and
expenses, then to accrued interest, and then to principal or in any other order
as determined by Lender, in Lender's sole discretion, as permitted by law.
INTEREST RATE: This Note has a variable rate feature. Interest on the Note may
change from time to time if the Index Rate identified below changes. Interest
shall be computed on the basis of 360 days and the actual number of days per
year. Interest on this Note shall be calculated at a variable rate equal to
No/1000 percent (0.00%) per annum over the Index Rate. The initial Index Rate is
currently SEVEN AND 750/1000 percent (7.750%) per annum. The initial interest
rate on this Note shall be SEVEN AND 750/1000 percent (7.750%) per annum. Any
change In the interest rate resulting from a change in the Index Rate will be
effective on: THE DATE THE INDEX RATE CHANGES.
INDEX RATE: The Index Rate for this Note shall be: U.S. BANK REFERENCE RATE
MINIMUM RATE/MAXIMUM RATE: The minimum interest rate on this Note shall be SEVEN
AND 750/1000 percent (7.750) per annum. The maximum interest rate on this Note
shall not exceed TWENTY-ONE AND 750/1000 percent (21.750%) per annum or the
maximum interest rate Lender is permitted to charge by law, whichever is less.
POST-MATURITY RATE: After maturity, whether due to scheduled maturity or
acceleration, Lender may increase the interest rate on this Note to: __________,
or the maximum interest rate Lender is permitted to charge by law, from the date
of maturity until paid.
PAYMENT SCHEDULE: Borrower shall pay the principal and interest according to the
following schedule: ON DEMAND, IF NO DEMAND IS MADE, THEN INTEREST ONLY PAYMENTS
BEGINNING APRIL 10, 1999 AND CONTINUING AT MONTHLY TIME INTERVALS THEREAFTER. A
FINAL PAYMENT OF THE UNPAID PRINCIPAL BALANCE PLUS ACCRUED INTEREST IS DUE AND
PAYABLE ON MARCH 10, 2000.
All payments will be made to Lender at its address described above and in lawful
currency of the United States of America.
RENEWAL: If checked, [ ] this Note is a renewal of loan number ______________,
and is not in payment of that Note.
SECURITY: To secure the payment and performance of obligations incurred under
this Note, Borrower grants Lender a security interest in, and pledges and
assigns to Lender all of Borrower's rights, title, and interest, in all monies,
instruments, savings, checking and other deposit accounts of Borrower's,
(excluding IRA, Keogh and trust accounts and deposits subject to tax penalties
if so assigned) that are now or in the future in Lender's custody or control.
Upon default, and to the extent permitted by applicable law, Lender may exercise
any (or all of Its rights or remedies as a secured party with respect to such
property which rights and remedies shall be in addition to all other rights and
remedies granted to Lender including, without limitation, Lender's common law
right of setoff. [ ] If checked, the obligations under this Note are also
secured by a lien and/or security interest in the property described in the
documents executed in connection with this Note as well as any other property
designated as security now or in the future.
PREPAYMENT: This Note may be prepaid in part or in full on or before its
maturity date. If this Note contains more than one installment, all prepayments
will be credited as determined by Lender and as permitted by law. If this Note
is prepaid in full, there will be: [X] no prepayment penalty. [ ] A prepayment
penalty of _________ % of the principal prepaid.
LATE CHARGE: If a payment is received more than [N/A] days late, Borrower will
be charged a late charge of: [ ] _______ % of the late payment; [ ]
$____________ or __________ % of the late payment, whichever is [ ] greater [ ]
less.
REVOLVING OR DRAW FEATURE: [X] This Note possesses a revolving feature. Upon
satisfaction of the conditions set forth in this Note, Borrower shall be
entitled to borrow up to the full principal amount of the Note and to repay and
reborrow from time to time during the term of this Note. [ ] This Note possesses
a draw feature. Upon satisfaction of the conditions set forth in this Note,
Borrower shall be entitled to make one or more draws under this Note. The
aggregate amount of such draws shall not exceed the full principal amount of
this Note. Lender shall maintain a record of the amounts loaned to and repaid
by Borrower under this Note. The aggregate unpaid principal
<PAGE> 2
amount shown on such record shall be rebuttable presumptive evidence of the
principal amount owing and unpaid on this Note. The Lender's failure to record
the date and amount of any loan or advance shall not limit or otherwise affect
the obligations of the Borrower under this Note to repay the principal amount of
the loans or advances together with all interest accruing thereon. Lender shall
not be obligated to provide Borrower with a copy of the record on a periodic
basis. Borrower shall be entitled to inspect or obtain a copy of the record
during Lender's business hours.
CONDITIONS FOR ADVANCES: If there is no default under this Note, Borrower shall
be entitled to borrow monies or make draws under this Note (subject to the
limitations described above) under the following conditions: THIS NOTE EVIDENCES
A DISCRETIONARY LINE OF CREDIT; IT SHALL NOT MEAN THAT THE BANK IS OBLIGATED TO
MAKE ANY ADVANCES. EACH ADVANCE ON THIS NOTE SHALL BE IN THE SOLE DISCRETION OF
THE BANK'S OFFICERS.
BORROWER ACKNOWLEDGES THAT BORROWER HAS READ, UNDERSTANDS, AND AGREES TO THE
TERMS AND CONDITIONS OF THIS NOTE INCLUDING THE PROVISIONS ON THE REVERSE SIDE.
BORROWER ACKNOWLEDGES RECEIPT OF AN EXACT COPY OF THIS NOTE.
NOTE DATE: March 10, 1999
BORROWER: CAFE ODYSSEY, INC. BORROWER: CAFE ODYSSEY, INC.
/s/ Stephen King /s/ Ronald Fuller
STEPHEN KING RONALD FULLER
CEO PRESIDENT
BORROWER: BORROWER:
- ----------------------------------- -----------------------------------
BORROWER: BORROWER:
- ----------------------------------- -----------------------------------
TERMS AND CONDITIONS
1. DEFAULT: Borrower will be in default under this Note in the event that
Borrower or any guarantor or any other third party: (a) fails to make any
payment on this Note or any other indebtedness to Lender when due; (b) fails to
perform any obligation or breaches any warranty or covenant to Lender Contained
in this Note or any other present or future written agreement regarding this or
any indebtedness of Borrower to Lender; (c) provides or causes any false or
misleading signature or representation to be provided to Lender; (d) allows the
collateral securing this Note (if any) to be lost, stolen, destroyed, damaged in
any material respect, or subjected to seizure or confiscation; (e) permits the
entry or service of any garnishment, judgment, tax levy, attachment or lion
against Borrower, any guarantor, or any of their property or the Collateral; (f)
dies, becomes legally incompetent, is dissolved or terminated, ceases to operate
its business, becomes insolvent, makes an assignment for the benefit of
creditors, fails to pay debts as they become due, or becomes the subject of any
bankruptcy, insolvency or debtor rehabilitation proceeding; or (g) causes Lender
to deem itself insecure for any reason, or Lender, for any reason, in good faith
deems itself insecure.
2. RIGHTS OF LENDER ON DEFAULT: If there is a default under this Note, Lender
will be entitled to exercise one or more of the following remedies without
notice or demand (except as required by law): (a) to cease making additional
advances under this Note; (b) to declare the principal amount plus accrued
interest under this Note and all other present and future obligations of
Borrower immediately due and payable in full; (c) to collect the outstanding
obligations of Borrower with or without resorting to judicial process; (d) to
take possession of any collateral in any manner permitted by law; (e) to require
Borrower to deliver and make available to Lender any collateral at a place
reasonably convenient to Borrower and Lender; (f) to sell, lease or otherwise
dispose of any collateral and collect any deficiency balance with or without
resorting to legal process; (g) to set-off Borrower's obligations against any
amounts due to Borrower including, but not limited to monies, instruments, and
deposit accounts maintained with Lender; and (h) to exercise all other rights
available to Lender under any other written agreement or applicable law.
Lender's rights are cumulative and may be exercised together, separately, and in
any order. Lender's remedies under this paragraph are in addition to those
available at common law, including, but not limited to, the right of set-off.
3. DEMAND FEATURE: If this Note contains a demand feature, Lender's right to
demand payment, at any time, and from time to time, shall be in Lender's sole
and absolute discretion, whether or not any default has occurred.
4. FINANCIAL INFORMATION: Borrower will provide Lender with current financial
statements and other financial information (including, but not limited to),
balance sheets and profit and loss statements) upon request.
5. MODIFICATION AND WAIVER: The modification or waiver of any of Borrower's
obligations or Lender's rights under this Note must be contained in a writing
signed by Lender. Lender may perform any of Borrower's obligations or delay or
fail to exercise any of its rights without causing a waiver of those obligations
or rights. A waiver on one occasion will not constitute a waiver on any other
occasion. Borrower's obligations under this Note shall not be affected if Lender
amends, compromises, exchanges, fails to exercise, impairs or releases any of
the obligations belonging to any co-borrower or guarantor or any of its rights
against
<PAGE> 3
any co-borrower, guarantor or collateral.
6. SEVERABILITY AND INTEREST LIMITATION: If any provision of this Note is
invalid, illegal or unenforceable, the validity, legality, and enforceability of
the remaining provisions shall not in any way be affected or impaired thereby.
Notwithstanding anything contained in this Note to the contrary, in no event
shall interest accrue under this Note, before or after maturity, at a rate in
excess of the highest rate permitted by applicable law, and if interest
(including any charge or fee held to be interest by a court of competent
jurisdiction) in excess thereof be paid, any excess shall constitute a payment
of, and be applied to, the principal balance hereof, and if the principal
balance has been fully paid, then such interest shall be repaid to the Borrower.
7. ASSIGNMENT: Borrower will not be entitled to assign any of its rights,
remedies or obligations described in this Note without the prior written consent
of Lender which may be withheld by Lender in its sole discretion. Lender will be
entitled to assign some or all of its rights and remedies described in this Note
without notice to or the prior consent of Borrower in any manner.
8. NOTICE: Any notice or other communication to be provided to Borrower or
Lender under this Note shall be in writing and sent to the parties at the
addresses as described in this Note or such other address as the parties may
designate in writing from time to time.
9. APPLICABLE LAW: This Note shall be governed by the laws of the state
indicated in Lender's address. Borrower consents to the jurisdiction and venue
of any court located in the state indicated in Lender's address in the event of
any legal proceeding pertaining to the negotiation, execution, performance or
enforcement of any term or condition contained in this Note or any related loan
document and agrees not to commence or seek to remove such legal proceeding in
or to a different court.
10. COLLECTION COSTS: If Lender hires an attorney to assist in collecting any
amount due or enforcing any right or remedy under this Note, Borrower agrees to
pay Lender's attorney's fees, to the extent permitted by applicable law, and
collection costs.
11. RETURNED CHECK: If a check for payment is returned to Lender for any reason,
Lender will charge an additional fee of $20.00.
12. MISCELLANEOUS: This Note is being executed for commercial/agricultural
purposes. Borrower and Lender agree that time is of the essence. Borrower waives
presentment, demand for payment, notice of dishonor and protest. If Lender
obtains a judgment for any amount due under this Note, interest will accrue on
the judgment at the judgment rate of interest permitted by law. All references
to Borrower in this Note shall include all of the parties signing this Note. If
there is more than one Borrower, their obligations will be joint and several.
This Note and any related documents represent the complete and integrated
understanding between Borrower and Lender pertaining to the terms and conditions
of those documents.
13. JURY TRIAL WAIVER: BORROWER HEREBY WAIVES ANY RIGHT TO TRIAL BY JURY IN ANY
CIVIL ACTION ARISING OUT OF, OR BASED UPON, THIS NOTE OR THE COLLATERAL SECURING
THIS NOTE.
14. ADDITIONAL TERMS:
Purpose: Working capital
<PAGE> 1
EXHIBIT 10.24
The Warrant and the securities issuable upon exercise of this Warrant (the
"Securities") have not been registered under the Securities Act of 1933 (the
"Securities Act") or under any state securities or Blue Sky laws ("Blue Sky
Laws"). No transfer, sale, assignment, pledge, hypothecation or other
disposition of this Warrant or the Securities or any interest therein may be
made except (a) pursuant to an effective registration statement under the
Securities Act and any applicable Blue Sky Laws or (b) if the Company has been
furnished with both an opinion of counsel for the holder, which opinion and
counsel shall be reasonably satisfactory to the Company, to the effect that no
registration is required because of the availability of an exemption from
registration under the Securities Act and applicable Blue Sky Laws, and
assurances that the transfer, sale, assignment, pledge, hypothecation or other
disposition will be made only in compliance with the conditions of any such
registration or exemption.
WARRANT TO PURCHASE SHARES OF COMMON STOCK
OF CAFE ODYSSEY, INC.
WARRANT NO. BWL-1 Bloomington, Minnesota
March 3, 1999
This certifies that, for value received, MICHAEL A. BIRD, or his
successors or assigns ("Holder") is entitled to purchase from Cafe Odyssey, Inc.
(the "Company") Twenty Five Thousand (25,000) fully paid and nonassessable
shares (the "Shares") of the Company's Common Stock, $.01 par value (the "Common
Stock"), at any time and from time to time from the date hereof until March 3,
2004, at an exercise price of $0.75 per share (the "Exercise Price"), subject to
adjustment as herein provided. This Warrant, together with certain other common
stock purchase warrants (collectively the "Warrants") to purchase an aggregate
of 500,000 shares of Common Stock, were issued by the Company pursuant to the
terms of that certain Indemnification and Contribution Agreement dated March 3,
1999 by and among the Company, Holder and certain other persons (collectively
the "Guarantors"), which Guarantors have each executed a several Guaranty of a
portion of the Company's revolving indebtedness to BankWindsor (the "BankWindsor
Indebtedness").
This Warrant is subject to the following provisions, terms and
conditions:
1. Exercise of Warrant.
a. Exercise for Cash. The rights represented by this Warrant may
be exercised by the Holder, in whole or in part (but not as to a fractional
share of Common Stock), by the surrender of this Warrant (properly endorsed, if
required, at the Company's principal office in Bloomington, Minnesota, or such
other office or agency of the Company as the Company may designate by notice in
writing to the Holder at the address of such Holder appearing on the books of
the Company at any time within the period above named), and upon payment to it
by certified check, bank draft or cash of the purchase price for such Shares.
The Company agrees that the Shares so purchased shall have and are deemed to be
issued to the Holder as the record owner of such Shares as of the close of
business on the date on which this Warrant shall have been surrendered and
payment made for such Shares as aforesaid. Certificates for the Shares of Common
Stock so purchased shall be delivered to the Holder within a reasonable time,
not exceeding ten (10) days, after the rights represented by this Warrant shall
have been so exercised, and, unless this Warrant has expired, a new Warrant
representing the number of Shares, if any, with respect to which this Warrant
shall not then have been exercised shall also be delivered to the Holder within
such time. The Company may require that any such new Warrant or any certificate
<PAGE> 2
for Shares purchased upon the exercise hereof bear a legend substantially
similar to that which is contained on the face of this Warrant.
b. Cashless Exercise. Upon receipt of a notice of cashless
exercise, the Company shall deliver to the Holder (without payment by the Holder
of any exercise price) that number of Shares that is equal to the quotient
obtained by dividing (x) the value of the Warrant on the date that the Warrant
shall have been surrendered (determined by subtracting the aggregate exercise
price for the Shares in effect on the Exercise Date from the aggregate Fair
Market Value (hereinafter defined) for the Shares by (y) the Fair Market Value
of one share of Common Stock. A notice of "cashless exercise" shall state the
number of Shares as to which the Warrant is being exercised. "Fair Market Value"
for purposes of this Section (b) shall mean the average of the Common Stock
closing prices reported by the principal exchange on which the Common Stock is
traded, or the last sale prices as reported by the National Association of
Securities Dealers, Inc. Automated Quotation System ("Nasdaq") National Market
or SmallCap Market, as the case may be, for the ten (10) business days
immediately preceding the Exercise Date or, in the event no public market shall
exist for the Common Stock at the time of such cashless exercise, Fair Market
Value shall mean the fair market value of the Common Stock as the same shall be
determined in the good faith discretion of the Board of Directors, after full
consideration of all factors then deemed relevant by such Board in establishing
such value, including by way of illustration and not limitation, the per share
purchase price of Common Stock or per security convertible into one share of
Common Stock of the most recent sale of shares of Common Stock or securities
convertible into Common Stock by the Company after the date hereof all as
evidenced by the vote of a majority of the directors then in office.
2. Transferability of this Warrant. This Warrant is issued upon the
following terms, to which each Holder consents and agrees:
a. Until this Warrant is transferred on the books of the
Company, the Company will treat the Holder of this Warrant registered
as such on the books of the Company as the absolute owner hereof for
all purposes without being affected by any notice to the contrary.
b. This Warrant may not be exercised, and this Warrant and the
Shares underlying this Warrant shall not be transferable, except in
compliance with all applicable state and federal securities laws,
regulations and orders, and with all other applicable laws, regulations
and orders.
c. The Warrant may not be transferred, and the Shares underlying
this Warrant may not be transferred, without the Holder obtaining an
opinion of counsel satisfactory in form and substance to the Company's
counsel stating that the proposed transaction will not result in a
prohibited transaction under the Securities Act of 1933, as amended
("Securities Act"), and applicable Blue Sky laws. By accepting this
Warrant, the Holder agrees to act in accordance with any conditions
reasonably imposed on such transfer by such opinion of counsel.
d. Neither this issuance of this Warrant nor the issuance of the
Shares underlying this Warrant have been registered under the
Securities Act.
3. Certain Covenants of the Company. The Company covenants and agrees
that all Shares which may be issued upon the exercise of the rights represented
by this Warrant, upon issuance and full payment for the Shares so purchased,
will be duly authorized and issued, fully paid and nonassessable
2
<PAGE> 3
and free from all taxes, liens and charges with respect to the issue hereof,
except those that may be created by or imposed upon the Holder or its property,
and without limiting the generality of the foregoing, the Company covenants and
agrees that it will from time to time take all such actions as may be requisite
to assure that the par value per share of the Common Stock is at all times equal
to or less than the effective purchase price per share of the Common Stock
issuable pursuant to this Warrant. The Company further covenants and agrees that
during the period within which the rights represented by this Warrant may be
exercised, the Company will at all times have authorized and reserved free of
preemptive or other rights for the exclusive purpose of issue upon exercise of
the purchase rights evidenced by this Warrant, a sufficient number of shares of
its Common Stock to provide for the exercise of the rights represented by this
Warrant.
4. Adjustment of Exercise Price and Number of Shares. The Exercise
Price and number of Shares are subject to the following adjustments:
a. Adjustment of Exercise Price for Stock Dividend, Stock Split
or Stock Combination. In the event that (i) any dividends on any class
of stock of the Company payable in Common Stock or securities
convertible into or exercisable for Common Stock ("Common Stock
Equivalents") shall be paid by the Company, (ii) the Company shall
subdivide its then outstanding shares of Common Stock into a greater
number of shares, or (iii) the Company shall combine its outstanding
shares of Common Stock, by reclassification or otherwise, then, in any
such event, the Exercise Price in effect immediately prior to such
event shall (until adjusted again pursuant hereto) be adjusted
immediately after such event to a price (calculated to the nearest full
cent) determined by dividing (a) the number of shares of Common Stock
outstanding immediately prior to such event, multiplied by the then
existing Exercise Price, by (b) the total number of shares of Common
Stock outstanding immediately after such event, and the resulting
quotient shall be the adjusted Exercise Price per share. No adjustment
of the Exercise Price shall be made if the amount of such adjustment
shall be less than $.05 per share, but in such case any adjustment that
would otherwise be required then to be made shall be carried forward
and shall be made at the time and together with the next subsequent
adjustment which, together with any adjustment or adjustments so
carried forward, shall amount to not less than $.05 per share.
b. Adjustment of Exercise Price for Dilutive Common Stock
Issuances. If at any time prior to the exercise of this Warrant in full
but following the date on which no Guarantees by the original Holder of
indebtedness of the Company to BankWindsor are still outstanding, the
Company shall (i) issue or sell any Common Stock Equivalents without
consideration or for consideration per share (in cash, property or
other assets) less than the Exercise Price per share on the date of
such issuance or sale or (ii) fix a record date for the issuance of
subscription rights, options or warrants to all holders of Common Stock
entitling them to subscribe for or purchase Common Stock (or Common
Stock Equivalents) at a price (or having an exercise or conversion
price per share) less than the Exercise Price on the record date
described below, the Exercise Price shall be adjusted so that the
Exercise Price shall equal the price determined by multiplying the
Exercise Price in effect immediately prior to the date of such sale or
issuance (which date in the event of distribution to shareholders shall
be deemed to be the record date set by the Company to determine
shareholders entitled to participate in such distribution) by a
fraction, the numerator of which shall be (i) the number of shares of
Common Stock outstanding on the date of such sale or issuance, plus
(ii) the number of additional shares of Common Stock which the
aggregate consideration received by the Company upon such issuance or
sale (plus
3
<PAGE> 4
the aggregate of any additional amount to be received by the Company
upon the exercise of such subscription rights, options or warrants)
would purchase at such current market price per share of the Common
Stock; and the denominator of which shall be (i) the number of shares
of Common Stock outstanding on the date of such issuance or sale, plus
(ii) the number of additional shares of Common Stock offered for
subscription or purchase (or into which the Common Stock Equivalents so
offered are exercisable or convertible). Any adjustments required by
this paragraph shall be made immediately after such issuance or sale or
record date, as the case may be. Such adjustments shall be made
successively whenever such event shall occur.
c. Adjustment of Number of Shares Purchasable on Exercise of
Warrants. Upon each adjustment of the Exercise Price pursuant to this
Section, the Holder shall thereafter (until another such adjustment) be
entitled to purchase at the adjusted Exercise Price the number of
shares, calculated to the nearest full share, obtained by multiplying
the number of shares specified in such Warrant (as adjusted as a result
of all adjustments in the Exercise Price in effect prior to such
adjustment) by the Exercise Price in effect prior to such adjustment
and dividing the product so obtained by the adjusted Exercise Price.
d. Notice as to Adjustment. Upon any adjustment of the Exercise
Price and any increase or decrease in the number of shares of Common
Stock purchasable upon the exercise of the Warrant, then, and in each
such case, the Company within thirty (30) days thereafter shall give
written notice thereof, by first class mail, postage prepaid, addressed
to each Holder as shown on the books of the Company, which notice shall
state the adjusted Exercise Price and the increased or decreased number
of shares purchasable upon the exercise of the Warrants, and shall set
forth in reasonable detail the method of calculation and the facts upon
which such calculation is based.
e. Effect of Reorganization, Reclassification, Merger, etc. If
at any time while any Warrant is outstanding there should be any
capital reorganization of the capital stock of the Company (other than
the issuance of any shares of Common Stock in subdivision of
outstanding shares of Common Stock by reclassification or otherwise and
other than a combination of shares provided for in Section 4(a)
hereof), or any consolidation or merger of the Company with another
corporation, or any sale, conveyance, lease or other transfer by the
Company of all or substantially all of its property to any other
corporation, which is effected in such a manner that the holders of
Common Stock shall be entitled to receive cash, stock, securities, or
assets with respect to or in exchange for Common Stock, then, as a part
of such transaction, lawful provision shall be made so that each Holder
shall have the right thereafter to receive, upon the exercise hereof,
the number of shares of stock or other securities or property of the
Company, or of the successor corporation resulting from such
consolidation or merger, or of the corporation to which the property of
the Company has been sold, conveyed, leased or otherwise transferred,
as the case may be, which the Holder would have been entitled to
receive upon such capital reorganization, reclassification of capital
stock, consolidation, merger, sale, conveyance, lease or other
transfer, if such Warrant had been exercised immediately prior to such
capital reorganization, reclassification of capital stock,
consolidation, merger, sale, conveyance, lease or other transfer. In
any such case, appropriate adjustments (as determined by the Board of
Directors of the Company) shall be made in the application of the
provisions set forth in this Warrant (including the adjustment of the
Exercise Price and the number of Shares issuable upon
4
<PAGE> 1
EXHIBIT 10.25
<TABLE>
<CAPTION>
Date of Name of Warrant Number of Shares Expiration
Issuance Warrant Recipient No. of Common Stock Date
<S> <C> <C> <C> <C>
3/03/99 John E. Feltl BWL-2 82,500 3/03/2004
3/03/99 Stephen D. King BWL-3 82,500 3/03/2004
3/03/99 Timothy I. Maudlin BWL-4 50,000 3/03/2004
3/03/99 Wayne W. Mills BWL-5 250,000 3/03/2004
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JAN-3-1999
<PERIOD-START> DEC-29-1997
<PERIOD-END> JAN-3-1999
<CASH> 106,247
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 161,463
<CURRENT-ASSETS> 452,243
<PP&E> 13,273,940
<DEPRECIATION> 1,574,392
<TOTAL-ASSETS> 12,939,988
<CURRENT-LIABILITIES> 4,590,011
<BONDS> 755,878
0
0
<COMMON> 80,001
<OTHER-SE> 5,758,246
<TOTAL-LIABILITY-AND-EQUITY> 12,939,988
<SALES> 6,932,891
<TOTAL-REVENUES> 6,932,891
<CGS> 1,897,492
<TOTAL-COSTS> 13,689,846
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 130,625
<INCOME-PRETAX> (6,706,582)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (6,706,582)
<EPS-PRIMARY> (.84)
<EPS-DILUTED> (.84)
</TABLE>
