<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
AMENDMENT NO. 1
TO
FORM 10-QSB
(MARK ONE)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 27, 1998
OR
[] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
--------- --------
COMMISSION FILE NUMBER 0-23243
- --------------------------------------------------------------------------------
CAFE ODYSSEY, INC.
(Name of Small Business Issuer as Specified in Its Charter)
MINNESOTA 31-1487885
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Indentification No.)
4801 W. 81ST STREET, SUITE 112
BLOOMINGTON, MN 55437
(Address of Principal Executive Offices)
612-837-9917
(Issuer's Telephone Number, Including Area Code)
Check whether the issuer: (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the preceding 12 months (or
for such shorter period that the issuer was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days.
Yes [X] No [ ]
As of November 6, 1998, the number of shares outstanding of the Issuer's
Common Stock, $0.01 par value was 8,000,089.
Transitional Small Business Disclosure Format (check one): Yes [ ] No [X]
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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 1998 and 1999, constitute
"forward-looking statements" within the meaning of the Securities Act of
1933, as amended and the Securities Exchange Act of 1934, as amended.
Forward-looking statements involve a number of risks and uncertainties, and,
in addition to the factors discussed in this Form 10-QSB, among the other
factors that could cause actual results to differ materially are the
following: the Company's ability to identify and secure suitable locations on
acceptable terms, obtain additional capital necessary for expansion on
acceptable terms, open new restaurants in a timely manner, hire and train
additional restaurant personnel and integrate new restaurants into its
operations; the continued implementation of the Company's 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; any impact of the Year 2000 issue,
especially with regard to the Company and vendors; 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
<TABLE>
<CAPTION>
<S> <C> <C>
PAGE
PART I FINANCIAL INFORMATION 4
ITEM 1. Financial Statements
Balance Sheets as of September 27, 1998 and December 28, 1997 4
Statements of Operations for the thirteen weeks ended 5
September 27, 1998 and September 28, 1997 and the thirty-nine weeks
ended September 27, 1998 and September 28, 1997
Statements of Cash Flows for the thirty-nine weeks ended 6
September 27, 1998 and September 28, 1997
Condensed Notes to the Financial Statements 7
ITEM 2. Management's Discussion and Analysis of Financial Condition and 9
Results of Operations
PART II OTHER INFORMATION 13
ITEM 1. Legal Proceedings 13
ITEM 4. Submission of Matters to a Vote of Security Holders 13
ITEM 6. Exhibits and Reports on Form 8-K 13
Signatures 14
</TABLE>
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CAFE ODYSSEY, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
September 27, December 28,
1998 1997
-------------- --------------
ASSETS (Unaudited)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 1,287,027 $ 9,222,174
Inventories 142,898 41,766
Other current assets 622,989 250,043
-------------- --------------
Total current assets 2,052,914 9,513,983
PROPERTY AND EQUIPMENT, net 11,738,959 5,270,160
OTHER ASSETS, net 433,903 55,908
-------------- --------------
$ 14,225,776 $ 14,840,051
============== =============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Short-term notes payable --- 200,000
Accounts payable 1,009,915 669,380
Salaries and wages payable 388,437 366,674
Other accrued expenses 133,262 115,773
Current portion of long-term debt 145,188 69,420
-------------- --------------
Total current liabilities 1,676,802 1,421,247
DEFERRED RENT 1,683,911 ---
LONG-TERM DEBT, less current portion 1,826,021 852,165
CONVERTIBLE PROMISSORY NOTES PAYABLE 150,000 150,000
-------------- --------------
Total liabilities 5,336,734 2,423,412
-------------- --------------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Common stock, $0.01 par value, 100,000,000 shares
authorized; 8,000,089 shares issued and
outstanding 80,001 80,002
Additional paid-in capital 20,152,650 20,152,949
Less: Common stock subscribed (400,000) (400,000)
Accumulated deficit (10,943,609) (7,416,312)
-------------- --------------
Total shareholders' equity 8,889,042 12,416,639
-------------- --------------
$ 14,225,776 $ 14,840,051
============== ==============
</TABLE>
The accompanying condensed notes are an integral part of these balance sheets.
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CAFE ODYSSEY, INC.
STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Thirteen weeks ended Thirty-nine weeks ended
--------------------------- ---------------------------
September September September September
27, 1998 28, 1997 27, 1998 28, 1997
----------- ---------- ----------- -----------
<S> <C> <C> <C> <C>
NET SALES $ 2,522,048 $ 839,171 $ 4,522,043 $ 2,703,735
----------- ---------- ----------- -----------
COSTS AND EXPENSES:
Food, beverage and retail costs 701,781 252,820 1,263,784 864,935
Labor and benefits 883,681 332,173 1,734,625 1,368,475
Restaurant operating expenses 862,182 235,047 1,570,744 837,102
Depreciation and amortization 313,597 164,000 624,736 439,000
Selling, general and administrative 649,073 455,364 2,067,602 1,220,937
expenses
Pre-opening and development costs 60,513 306,755 851,706 496,178
----------- ---------- ----------- -----------
Total costs and expenses 3,470,827 1,746,159 8,113,197 5,226,627
LOSS FROM OPERATIONS (948,779) (906,988) (3,591,154) (2,522,892)
INTEREST INCOME/(EXPENSE), net (37,667) (34,931) 63,857 (100,718)
----------- ---------- ----------- -----------
NET LOSS $ (986,446) $ (941,919) $(3,527,297) $(2,623,610)
=========== ========== =========== ===========
BASIC AND DILUTED NET LOSS PER SHARE $ (0.12) $ (0.18) $ (0.44) $ (0.57)
=========== ========== =========== ===========
BASIC AND DILUTED WEIGHTED AVERAGE 8,000,089 5,278,115 8,000,145 4,624,738
OUTSTANDING SHARES =========== ========== =========== ===========
</TABLE>
The accompanying condensed notes are an integral part of these financial
statements.
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CAFE ODYSSEY, INC.
STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Thirty-nine weeks ended
-----------------------------------
September 27, September 28,
1998 1997
-------------- --------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net loss $ (3,527,297) $ (2,623,610)
Adjustments to reconcile net loss to cash flows from operating activities:
Depreciation and amortization 624,736 439,000
Shares issued for services --- 19,200
Changes in operating assets and liabilities:
Inventories (101,132) 6,393
Other current assets (372,946) (88,011)
Other assets (377,995) (38,154)
Accounts payable 340,535 285,774
Salaries and wages payable 21,763 (106,720)
Other accrued expenses 88,900 (489,003)
-------------- --------------
Net cash used in operating activities (3,303,436) (2,595,131)
-------------- --------------
INVESTING ACTIVITIES:
Purchases of property and equipment (7,093,535) (1,106,958)
-------------- --------------
FINANCING ACTIVITIES:
Net payments on short-term notes payable (200,000) (2,100,000)
Allowance from landlord 1,612,500 ---
Advances from shareholder --- 77,323
Net proceeds from equipment financing 1,002,976
Proceeds from issuance of long-term debt 1,000,000 ---
Principal repayments on long-term debt (953,352) (46,280)
Proceeds from issuance of stock (300) 3,240,503
Collections on stock subscriptions --- 90,000
-------------- --------------
Net cash from financing activities 2,461,824 1,261,546
-------------- --------------
DECREASE IN CASH AND CASH EQUIVALENTS (7,935,147) (2,440,543)
CASH AND CASH EQUIVALENTS, beginning of period 9,222,174 2,707,561
-------------- --------------
CASH AND CASH EQUIVALENTS, end of period $ 1,287,027 $ 267,018
============== ==============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest $ 82,132 $ 50,259
Cash paid for income taxes --- ---
</TABLE>
The accompanying condensed notes are an integral part of these financial
statements.
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CAFE ODYSSEY, INC.
CONDENSED NOTES TO THE FINANCIAL STATEMENTS
SEPTEMBER 27, 1998 AND SEPTEMBER 28, 1997
1. DESCRIPTION OF THE BUSINESS
Cafe Odyssey, Inc. (the Company) owns and operates two 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 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
totalling $1,567,197 to a newly formed corporation in exchange for shares of
such corporation. HMI, with total net assets of $631,966, then merged with and
into the newly formed corporation, the name of which 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 a
unique environment of adventure, imagination, exploration and innovation. In
conjunction with this action, the Company's Board of Directors and shareholders
approved a change in its corporate name from Hotel Discovery, Inc. to Cafe
Odyssey, Inc. The Cafe Odyssey name is being used for the Mall of America
Restaurant and will be used for all subsequent restaurants. At the present time,
the Company intends to retain the name "Hotel Discovery" for the Kenwood
Restaurant because of its already established name.
On May 21, 1998, the Company changed its corporate name from Hotel Discovery,
Inc. to Cafe Odyssey, Inc. to reflect the change in the name of its restaurant
concept to Cafe Odyssey. In conjunction with this change, the Company's symbols
for its Units, Common Stock and Class A Warrants on the Nasdaq SmallCap market
were changed from HOTDU, HOTD and HOTDW to CODYU, CODY and CODYW, respectively,
effective May 24, 1998.
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.
2. BASIS OF FINANCIAL STATEMENT PRESENTATION
The accompanying unaudited condensed financial statements have been prepared by
the Company pursuant to the rules and regulations of the Securities and Exchange
Commission. Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to such rules and
regulations. Although management believes that the
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disclosures are adequate to make the information presented not misleading, it is
suggested that these interim financial statements be read in conjunction with
the Company's most recent 10-KSB dated December 28, 1997. In the opinion of
management, all adjustments (which include only normal recurring adjustments)
necessary for a fair presentation of the financial position, results of
operations and cash flows for the interim periods presented have been made.
Operating results for the thirteen and thirty-nine week periods ended September
27, 1998 are not necessarily indicative of the results that may be expected for
the fiscal year ended January 3, 1999.
The Company has adopted a 52-53-week accounting period ending on the Sunday
nearest December 31 of each year.
3. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
Statement of Financial Accounting Standard (SFAS) No. 130, "Reporting
Comprehensive Income," which was adopted by the Company as of December 29, 1997,
established standards of disclosure and financial statement display for
reporting total comprehensive income and the individual components thereof. The
adoption of SFAS No. 130 did not have a material impact on the Company's
financial position or results of operations as comprehensive income and net
income were the same for all periods presented.
In fiscal 1997, the Company adopted SFAS No. 128, "Earnings per Share," which
requires disclosure of basic earnings per share (EPS) and diluted EPS, which
replace the existing primary EPS and fully diluted EPS, as defined by Accounting
Principles Board (APB) No.15. Basic EPS is computed by dividing net income by
the weighted average number of shares of Common Stock outstanding during the
year. Diluted EPS is computed similarly to primary EPS as previously reported
provided that, when applying the treasury stock method to common equivalent
shares, the Company must use its average share price for the period rather than
the more dilutive greater of the average share price or end-of-period share
price required by APB No.15. The adoption of SFAS No. 128 had no effect on the
Company's September 28, 1997 EPS data.
Statement of Position (SOP) 98-5, "Reporting of the Costs of Start-up
Activities" was adopted by the Company as of December 29, 1997. SOP 98-5
requires companies to expense as incurred all start-up and pre-opening costs
that are not otherwise capitalizable as long-lived assets. The adoption of the
new accounting standard had no effect on the Company, as all pre-opening costs
have been expensed as incurred since inception.
4. DEBT
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, certain directors of the
Company entered into a joint and several limited guaranty of $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. Based on
the guarantees existent as of September 27, 1998, $1,000,000 of the line of
credit was available to the Company. Subsequent to September 27, 1998,
guarantees for the other $2,000,000 were obtained. Two of the directors also
each severally guaranteed another $500,000, and an individual who is not an
officer or director of the Company guaranteed another $1,000,000, of such
borrowings. All three individuals 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 to each of the two directors, and 400,000 five-year warrants to the
other guarantor, 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 two directors and the other guarantor 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 8.25% as of
September 27, 1998. As of September 27, 1998, the Company had borrowings of
$1,000,000 under this credit facility.
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<PAGE> 9
ITEM 2. 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 was formed in January 1994 as an Ohio corporation to develop, own
and operate upscale, casual themed restaurants under the name "Hotel Mexico."
The Company opened its first restaurant in the Kenwood Shopping Center in
Cincinnati, Ohio (the "Kenwood Restaurant") in December 1996 under the trade
name "Hotel Mexico." The Company subsequently renamed its Kenwood Restaurant
"Hotel Discovery," under which name this restaurant continues to operate. Prior
to opening the Kenwood Restaurant, the Company had no revenues and its
activities were devoted solely to development. The Company opened its second
restaurant under the trade name "Cafe Odyssey" in the Mall of America (the "Mall
of America Restaurant") in Bloomington, Minnesota, a suburb of Minneapolis, on
June 8, 1998. During the second quarter of 1998, the Company entered into a
lease agreement for approximately 18,000 square feet of space in the Denver
Pavilions, an urban retail/entertainment complex currently under construction in
downtown Denver, Colorado. The Company expects to open a Cafe Odyssey restaurant
in the Denver Pavilions leased space in the first quarter of 1999.
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 assurance 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 uses a 52- or 53-week fiscal year ending on the Sunday nearest
December 31 of each year.
RESULTS OF OPERATIONS FOR THE THIRTEEN WEEKS ENDED SEPTEMBER 27, 1998 AND
SEPTEMBER 28, 1997
For the thirteen weeks ended September 27, 1998 (hereinafter, "third quarter of
1998"), the Company had net sales of $2,522,048 compared to $839,171 for the
thirteen weeks ended September 28, 1997 (hereinafter, "third quarter of 1997").
The increase in sales is attributable to the opening of the Mall of America
Restaurant in the second quarter of 1998, offset by a decline in sales at the
Kenwood Restaurant for the third quarter of 1998 as compared to the third
quarter of 1997 during which the Kenwood Restaurant was "re-opened" as "Hotel
Discovery."
For the third quarter of 1998, food, beverage and retail costs were $701,781 or
27.8% of sales compared to $252,820 or 30.1% of sales for the third quarter of
1997. The improvement in food, beverage and retail costs as a percentage of
sales is due primarily to improved food and beverage controls and menu
management in both the Mall of America Restaurant and the Kenwood Restaurant.
For the third quarter of 1998, labor, benefits and other direct restaurant
operating expenses were $1,745,863 or 69.2% of sales compared to $567,220 or
67.6% of sales for the third quarter of 1997. This increase in labor, benefits
and other direct restaurant operating expenses as a percentage of sales is due
primarily as a result of operating inefficiencies at the Kenwood Restaurant,
caused by the inability to leverage some relatively fixed operating costs
against the lower sales levels experienced at the Kenwood Restaurant. This
effect was partially offset by better efficiencies at the Mall of America
Restaurant, which allowed better leverage of operating costs against the higher
sales levels experienced at the Mall of America Restaurant.
For the third quarter of 1998, the Company had a net loss of $986,446 compared
to a net loss of $941,919 for the
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third quarter of 1997. The net loss for the third quarter of 1998 is primarily
attributable to operating losses at the Kenwood Restaurant, general and
administrative expenses associated with building the senior management team to
execute the Company's growth plans and the initial pre-opening costs for the
Company's third restaurant in Denver. The net loss for the third quarter of 1997
was largely attributable to expenses incurred in repositioning the Company's
trade name from Hotel Mexico to Hotel Discovery, general and administrative
expenses associated with building a senior management team to execute the
Company's growth plans and the initial pre-opening costs for the Company's Mall
of America restaurant. Continued development of the Company's concept and
execution of the Company's growth strategy will impact pre-opening and general
and administrative expenses on an ongoing basis.
RESULTS OF OPERATIONS FOR THE THIRTY-NINE WEEKS ENDED SEPTEMBER 27, 1998 AND
SEPTEMBER 28, 1997
For the thirty-nine weeks ended September 27, 1998 (hereinafter, "first three
quarters of 1998"), the Company had net sales of $4,522,043 compared to
$2,703,735 for the thirty-nine weeks ended September 28, 1997 (hereinafter,
"first three quarters of 1997"). The increase in sales is attributable to the
opening of the Mall of America Restaurant in the second quarter of 1998, offset
by a decline in sales at the Kenwood Restaurant for the first three quarters of
1998 as compared to its post-grand opening in the first quarter of 1997 and its
re-opening as "Hotel Discovery" in the third quarter of 1997.
For the first three quarters of 1998, food, beverage and retail costs were
$1,263,784 or 27.9% of sales compared to $864,935 or 32.0% of sales for the
first three quarters of 1997. The improvement in food, beverage and retail costs
as a percentage of sales is due primarily to better efficiencies from food and
beverage controls and waste management at the higher volume Mall of America
Restaurant and improved food and beverage controls and menu management at the
Kenwood Restaurant.
For the first three quarters of 1998, labor, benefits and other direct
restaurant operating expenses were $3,305,369 or 73.1% of sales compared to
$2,205,577 or 81.6% of sales for the first three quarters of 1997. This
improvement in labor, benefits and other direct restaurant operating expenses as
a percentage of sales is due primarily as a result of improved operating
efficiencies at the Kenwood Restaurant in the first half of 1998 as compared to
its start-up operations in the first half of 1997, as well as the better
efficiencies in leveraging operating costs against the higher sales levels
experienced at the Mall of America Restaurant.
For the first three quarters of 1998, the Company had a net loss of $3,527,297
compared to a net loss of $2,623,610 for the first three quarters of 1997. The
net loss for the first three quarters of 1998 is primarily attributable to
operating losses at the Kenwood Restaurant, start-up operations at the Mall of
America Restaurant, general and administrative expenses associated with building
a senior management team to execute the Company's growth plans, costs associated
with repositioning the Company's trade name to Cafe Odyssey from Hotel Discovery
and pre-opening costs for the Mall of America and Denver restaurants. The net
loss for the first three quarters of 1997 was largely attributable to the
start-up operations at the Kenwood Restaurant, costs associated with
repositioning the trade name to Hotel Discovery from Hotel Mexico and initial
pre-opening costs for the Mall of America restaurant. Continued development of
the Company's concept and execution of the Company's growth strategy will impact
pre-opening and general and administrative expenses on an ongoing basis.
LIQUIDITY AND CAPITAL RESOURCES
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 therein (iii) the development and construction of the
Mall of America Restaurant and the Denver Restaurant and (iv) the funding of
operating cash flow deficits. Total capital expenditures for the Kenwood
Restaurant were approximately $5.1 million, net of landlord contributions. Total
capital expenditures for the Mall of America Restaurant were approximately $5.0
million, net of landlord contributions of approximately $1.6 million, minimum
rent abatement of approximately $405,000 and approximately $308,000 in one-time
production and mold costs that will be allocated to the Company's next two
restaurants.
The Company's primary sources of working capital have been proceeds from the
sale of Common Stock to and
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borrowings from its principal shareholder, chairman and founder, Stephen D.
King, the private placement of Common Stock and debt, equipment lease financing,
as well as the proceeds from the Company's initial public offering of Units in
November 1997. For the first three quarters of 1998 and 1997, the Company used
$3,303,436 and $2,595,131, respectively, in cash flow for operating activities.
As of September 27, 1998, the Company had working capital of $376,112.
In November 1997, the Company completed an initial public offering of 2,500,000
Units, each Unit consisting of one share of Common Stock and one redeemable
Class A Warrant at an initial public offering price of $5.00 per Unit. In
December 1997, the Company issued an additional 100,000 Units to its principal
underwriter, R.J. Steichen & Company, pursuant to the underwriter's decision to
exercise a portion of its over-allotment option. The Company received net
proceeds of approximately $11.2 million in conjunction with the initial public
offering and the partial exercise of the underwriter's over-allotment.
The 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.
In September 1998, the Company entered into a $3,000,000 revolving line of
credit facility with The Provident Bank. 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, Stephen D. King, the
Chairman of the Company, and Jerry L. Ruyan and Greg C. Mosher, directors of the
Company (Mr. Mosher has since resigned as a director), entered into a joint and
several guaranty of $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. Messrs. King and Ruyan also each severally
guaranteed another $500,000, and in January 1999 an individual who is not an
officer or director of the Company severally guaranteed another $1,000,000, of
such borrowings. All three individuals pledged certain collateral to The
Provident Bank in connection with the latter guarantees. In exchange for such
guarantees and pledges of collateral, the Company issued 200,000 five-year
warrants to each of Messrs. King and Ruyan, and 400,000 five-year warrants to
the other guarantor, 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 Messrs. King and Ruyan and the other guarantor
if the borrowings from The Provident Bank 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 8.25% as of September 27, 1998. As of September 27, 1998, the Company had
borrowings of $1,000,000 under this credit facility.
The Company intends to open up to two restaurants in 1999. The Company estimates
that its capital expenditures (excluding any landlord contributions) will be
approximately $9 to $12 million in fiscal 1998 and $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 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.
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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 June 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 April 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 April 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 April 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.
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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is involved in routine legal actions in the ordinary course of its
business. Although outcomes of any such legal actions cannot be predicted, in
the opinion of management there is no legal proceeding pending against or
involving the Company for which the outcome is likely to have a material adverse
effect upon the financial position or results of operations of the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
10.1 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")
10.2 Revolving Promissory Note Mortgage Loan dated September 23, 1998
between the Company and Provident
10.3 Security Agreement dated as of September 23, 1998 between the
Company and Provident
27 Financial Data Schedule
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SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
CAFE ODYSSEY, INC.
By: /s/ Stephen D. King
---------------------
Stephen D. King
Chairman of the Board and Chief
Financial Officer
Date: February 5, 1999 (Principal Financial and Accounting Officer)
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EXHIBIT INDEX
Exhibit Number Description
- -------------- -----------
10.1 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") *
10.2 Revolving Promissory Note Mortgage Loan
dated September 23, 1998 between the Company
and Provident *
10.3 Security Agreement dated as of September 23,
1998 between the Company and Provident *
27 Financial Data Schedule *
* Previously filed
15
