1
U. S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-QSB
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED APRIL 4, 1999
OR
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
------- -------
COMMISSION FILE NUMBER 0-23243
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CAFE ODYSSEY, INC.
(Name of Small Business Issuer in Its Charter)
MINNESOTA 31-1487885
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
4801 W. 81ST STREET, SUITE 112, BLOOMINGTON, MN 55437
(Address of Principal Executive Offices)
612-837-9917
(Issuer's Telephone Number, Including Area Code)
HOTEL DISCOVERY, INC.
(Former Name, Former Address and Former Fiscal Year, If Changed Since Last
Report)
Check whether the issuer: (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the preceding 12 months (or for such
shorter period that the issuer was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days. Yes [X] No [ ]
As of May 7, 1999, there were 8,280,102 shares of common stock, $.01 par value,
outstanding.
Transitional Small Business Disclosure Format (check One): Yes [ ] No [X]
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FORWARD-LOOKING STATEMENTS
Certain of the matters discussed in the following pages constitute
"forward-looking statements" within the meaning of the Securities Act of 1933,
as amended and the Securities Exchange Act of 1934, as amended. Forward-looking
statements involve a number of risks and uncertainties, and, in addition to the
factors discussed in this Form 10-QSB, among the other factors that could cause
actual results to differ materially are the following: the Company's ability to
identify and secure suitable locations on acceptable terms; obtain additional
capital necessary for expansion on acceptable terms; open new restaurants in a
timely manner; hire and train additional restaurant personnel and integrate new
restaurants into its operations; the continued implementation of the Company's
strict business discipline over a growing restaurant base; the economic
conditions in the new markets into which the Company expands and possible
uncertainties in the customer base in these areas; changes in customer dining
patterns; competitive pressures from other national and regional restaurant
chains; business conditions, such as inflation or a recession, and growth in the
restaurant industry and the general economy; changes in monetary and fiscal
policies, laws and regulations; and other risks identified from time to time in
the Company's SEC reports, registration statements and public announcements.
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CAFE ODYSSEY, INC.
FORM 10-QSB INDEX
APRIL 4, 1999
Page
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PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Balance Sheets -
As of April 4, 1999 and January 3, 1999 4
Statements of Operations -
For the thirteen weeks ended April 4, 1999 and March 29, 1998 5
Statements of Cash Flows -
For the thirteen weeks ended April 4, 1999 and March 29, 1998 6
Condensed Notes to the Financial Statements 7
ITEM 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 10
PART II OTHER INFORMATION
ITEM 1. Legal Proceedings 17
ITEM 4. Submission of Matters to a Vote of Security Holders 17
ITEM 6. Exhibits and Reports on Form 8-K 17
Signatures 18
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CAFE ODYSSEY, INC.
BALANCE SHEETS
(Unaudited) *
April 4, January 3,
1999 1999
------------ ------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 657,750 $ 106,247
Landlord allowance receivable 962,500 0
Inventories 202,981 161,463
Other current assets 830,901 452,243
------------ ------------
Total current assets 2,654,132 719,953
PROPERTY AND EQUIPMENT, net 15,354,847 11,699,548
OTHER ASSETS 524,050 520,487
------------ ------------
$ 18,533,029 $ 12,939,988
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Short-term notes payable $ 1,324,007 $ 0
Accounts payable 3,916,270 1,452,648
Advances payable to principal shareholder 150,000 100,000
Convertible promissory notes payable 150,000 150,000
Current portion of long-term debt 3,000,000 2,199,007
Accrued expenses 785,507 688,356
------------ ------------
Total current liabilities 9,325,784 4,590,011
DEFERRED RENT 3,786,318 1,755,852
LONG-TERM DEBT, less current portion 729,743 755,878
------------ ------------
Total liabilities 13,841,848 7,101,741
------------ ------------
COMMITMENTS AND CONTINGENCIES (Note 6)
SHAREHOLDERS' EQUITY:
Common stock, $.01 par value, 100,000,000 shares
authorized; 8,280,102 and 8,000,089 shares
issued and outstanding 82,801 80,001
Additional paid-in capital 20,574,890 20,281,140
Less: Common stock subscribed (400,000) (400,000)
Accumulated deficit (15,566,510) (14,122,894)
------------ ------------
Total shareholders' equity 4,691,181 5,838,247
------------ ------------
$ 18,533,029 $ 12,939,988
============ ============
*From Audited Financial Statements
The accompanying condensed notes are an integral part of these financial
statements.
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CAFE ODYSSEY, INC.
STATEMENTS OF OPERATIONS
(UNAUDITED)
Thirteen weeks ended
------------------------------------
April 4, March 29,
1999 1998
----------- -----------
NET SALES $ 2,332,632 $ 804,319
----------- -----------
COSTS AND EXPENSES:
Food, beverage and retail costs 606,587 218,416
Restaurant operating expenses 1,716,303 681,602
Depreciation and amortization 258,168 125,840
Pre-opening expenses 572,932 127,318
General, administrative and development expenses 480,247 742,135
----------- -----------
Total costs and expenses 3,634,237 1,895,311
----------- -----------
LOSS FROM OPERATIONS (1,301,605) (1,090,992)
----------- -----------
INTEREST INCOME (EXPENSE), net (142,011) 90,855
----------- -----------
NET LOSS $(1,443,616) $(1,000,137)
=========== ===========
BASIC AND DILUTED NET LOSS PER SHARE $ (0.18) $ (0.13)
=========== ===========
BASIC AND DILUTED WEIGHTED AVERAGE
OUTSTANDING SHARES 8,055,476 8,000,189
=========== ===========
The accompanying condensed notes are an integral part of these financial
statements.
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CAFE ODYSSEY, INC.
STATEMENTS OF CASH FLOWS
(UNAUDITED)
Thirteen weeks ended
----------------------------------
April 4, March 29,
1999 1998
----------- -----------
OPERATING ACTIVITIES:
Net loss $(1,443,616) (1,000,137)
Adjustments to reconcile net loss to cash flows from operating
activities:
Depreciation 258,168 149,641
Amortization of deferred rent 67,966 0
Common stock issued in lieu of compensation 197,708 0
Changes in operating assets and liabilities:
Inventories (41,518) 1,754
Other current assets (378,658) (168,379)
Other assets (3,563) 3,198
Accounts payable 2,463,622 (250,685)
Accrued expenses 97,151 (181,257)
----------- -----------
Net cash provided by (used in) operating activities 1,217,260 (1,445,865)
----------- -----------
INVESTING ACTIVITIES:
Purchases of property and equipment (3,913,467) (2,685,688)
----------- -----------
FINANCING ACTIVITIES:
Proceeds from short-term notes payable 1,125,000 0
Proceeds from long-term debt 1,000,000 0
Tenant allowance collected 1,000,000 0
Advances/(payments) from/(to) shareholder 50,000 0
Amortization of warrant discount 98,842 0
Payments on short-term notes payable 0 (200,000)
Payments on long-term debt (26,132) (17,355)
----------- -----------
Net cash provided by (used in) financing activities 3,247,710 (217,355)
----------- -----------
INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS 551,503 (4,348,908)
CASH AND CASH EQUIVALENTS,
beginning of period 106,247 9,222,174
----------- -----------
CASH AND CASH EQUIVALENTS, end of period $ 657,750 $ 4,873,266
=========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH
FLOW INFORMATION:
Cash paid for interest $ 95,447 $ 44,990
Cash paid for income taxes 0 0
Non-cash item - landlord allowance receivable 962,500 1,600,000
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
APRIL 4, 1999
(UNAUDITED)
1. GENERAL
The Company owns and operates three full service restaurants. One is located in
Cincinnati, Ohio (the "Kenwood Restaurant"), which operates under the trade name
"Hotel Discovery." The other two restaurants operate under the trade name Cafe
Odyssey, as will any future restaurants. One is in the Mall of America, located
in Bloomington, Minnesota, a suburb of Minneapolis (the "Mall of America
Restaurant"), and the other at the Denver Pavilions, located in the downtown
district of Denver, Colorado (the "Denver Pavilions Restaurant"). The Kenwood
Restaurant opened under the name "Hotel Mexico" on December 19, 1996. The Mall
of America Restaurant opened on June 8, 1998. The Denver Pavilions Restaurant
opened March 15, 1999. Prior to the opening of the Kenwood Restaurant, the
Company was in the development stage.
On February 25, 1998, the Company changed the name of its restaurant concept
from Hotel Discovery to Cafe Odyssey. In conjunction with this action, the
Company's Board of Directors and shareholders approved a change in its corporate
name from Hotel Discovery, Inc. to Cafe Odyssey, Inc. This change was approved
by shareholders on May 21, 1998. At the present time, the Company intends to
retain the name "Hotel Discovery" for the Kenwood Restaurant because of its
already established name. See Note 7 for further discussion of the Kenwood
Restaurant.
2. BASIS OF FINANCIAL STATEMENT PRESENTATION
The accompanying unaudited condensed financial statements have been prepared by
the Company pursuant to the rules and regulations of the Securities and Exchange
Commission. Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to such rules and
regulations. Although management believes that the disclosures are adequate to
make the information presented not misleading, it is suggested that these
interim financial statements be read in conjunction with the Company's most
recent 10-KSB dated January 3, 1999. In the opinion of management, all
adjustments (which include only normal recurring adjustments) necessary for a
fair presentation of the financial position, results of operations and cash
flows for the interim periods presented have been made. Operating results for
the thirteen weeks ended April 4, 1999, are not necessarily indicative of the
results that may be expected for the fiscal year ending January 2, 2000.
The Company has adopted a 52/53 week accounting period ending on the Sunday
nearest December 31 of each year. Fiscal year 1999 will be a 52 week year.
3. PROPERTY AND EQUIPMENT
Property and equipment consisted of the following as of:
April 4, January 3,
1999 1999
------------ ------------
Leasehold improvements $ 12,795,485 $ 6,435,925
Equipment and fixtures 4,391,922 4,014,095
Construction in progress 0 2,832,920
------------ ------------
17,187,407 13,273,940
Less: accumulated depreciation and amortization (1,832,560) (1,574,392)
------------ ------------
Total property and equipment, net $ 15,354,847 $ 11,699,548
============ ============
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CAFE ODYSSEY, INC.
CONDENSED NOTES TO THE FINANCIAL STATEMENTS (CONT.)
APRIL 4, 1999
(UNAUDITED)
4. WRITE-DOWN OF PROPERTY AND EQUIPMENT
The Company's initial restaurant location in Cincinnati, Ohio has not generated
positive operating cash flows to date. This initial format and Hotel Discovery
concept have not served as the prototype for the Company's subsequent
restaurants. Accordingly, the Company recorded a non-cash write-down of the
Kenwood Restaurant of $2,000,000 in 1998. An impairment was determined by the
Company's management based on the operating performance of the restaurant
combined with the difference between the carrying amount of the assets and the
undiscounted cash flows estimated to be generated. The write-down for impairment
of long-lived assets was calculated in accordance with the requirements of
Statement of Financial Accounting Standards No. 121 based primarily on operating
projections, future discounted cash flows and other relevant market factors.
The estimation process involved in determining if assets have been impaired and
in determining fair value is inherently uncertain since it requires estimates of
the current market, as well as future events and conditions. Such future events
and conditions include economic and market conditions, as well as the continued
acceptance of the Hotel Discovery concept. The realization of the estimates
applied to the Company's real estate projects is dependent upon future uncertain
events and conditions, and accordingly, the actual timing and amounts realized
by the Company may differ from the estimated fair values as described herein.
This write-down of the Kenwood Restaurant will allow the Company to divest
itself from this restaurant. The Company has a favorable land lease and as such,
will attempt to market such. Future positive cash flows from a sub-lease could
be generated. There can be no assurances that a sub-lease or sale of the Kenwood
Restaurant will be accomplished during 1999, if at all, which would meet the
requirements of the Company.
5. DEBT
On March 10, 1999, the Company entered into a promissory note for $825,000 with
a financial institution. The note is an unsecured revolving line of credit
facility which requires interest payments only. The interest rate on the note is
equal to the Index Rate (7.75% as of April 15, 1999), with the maximum interest
rate not to exceed 21.75% per annum. The note is due March 10, 2000. The note is
secured by personal guarantees and the Company has issued five-year warrants for
an aggregate of 500,000 shares of common stock at an exercise price of $0.75 per
share to the guarantors in consideration of the guarantees. One guarantor, a
director of the Company, received 87,500 warrants, the remaining 412,500
warrants going to other third party guarantors.
6. COMMITMENTS AND CONTINGENCIES
In conjunction with our expansion activity, the Company enters into fixed price
construction contracts from time to time. At April 4, 1999, there is an
outstanding contract commitment for the construction of the Denver Pavilions
Restaurant. As of April 4, 1999, the balance remaining to be paid under this
contract was approximately $2,300,000.
7. SUBSEQUENT EVENTS
On April 30, 1999, the Company entered into a master equipment lease agreement
("Capital Lease") for $300,000 with a financial institution. The Capital Lease
is secured by substantially all of the furniture, accessories, computer/POS and
kitchen equipment located at the Denver Pavilions Restaurant and required
security deposits of approximately $135,000. Monthly payments of $8,708 are
required through April 2003.
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CAFE ODYSSEY, INC.
CONDENSED NOTES TO THE FINANCIAL STATEMENTS (CONT.)
APRIL 4, 1999
(UNAUDITED)
On May 13, 1999, the Company signed a letter of intent to acquire Popmail.com.
Through partnerships with radio stations nationwide, Popmail.com is a leading
email provider to radio stations. Completion of the transaction is subject to
the approval of the Company's shareholders.
On May 14, 1999, the Company issued 2,000 shares of Series A 8% convertible
preferred stock (the "Preferred Stock") with a stated value of $1,000 per share
in a private placement for total proceeds of $2,000,000 and net proceeds after
expenses of approximately $1,700,000. In addition, the Company issued a warrant
(the "Warrant") to the holder of Preferred Stock to purchase 300,000 shares of
the Company's common stock at $3.00 per share in connection with the offering.
The Warrant is exercisable for five years. In addition to a 10% placement fee
and a 3% unallocable expense allowance, the placement agent received a warrant
to acquire 150,000 shares of Common Stock at $3.00 per share.
The annual dividend of 8% is cumulative and is payable quarterly in arrears
either in cash or in registered shares of the Company's common stock. Each share
of Preferred Stock is convertible into shares of the Company's common stock at a
conversion price equal to 65% of the average closing bid price for the common
stock five days prior to the conversion. The total number of shares of common
stock issuable (i) upon conversion of the Preferred Stock, (ii) as a dividend on
the Preferred Stock and (iii) upon exercise of the Warrant cannot exceed
1,662,687 shares (20% of the number of outstanding shares of common stock on May
14, 1999), unless the Company obtains shareholder approval as required by
Nasdaq. In the event a holder of Preferred Stock is unable to convert shares of
Preferred Stock into common stock because 1,662,687 shares have already been
issued as described in the preceding sentence, the Company must redeem any
unconverted Preferred Stock presented for conversion for cash at a price equal
to 125% of the stated value. The Company has the right to redeem the Preferred
Stock in cash at 135% of stated value plus accrued and unpaid dividends. All
Preferred Stock which is still outstanding on May 14, 2004 is mandatorily
converted at the Conversion Price.
The Company is not required to convert Preferred Stock, whether upon request for
conversion by the holder or upon the May 14, 2004 mandatory conversion date, if
and to the extent that such holder would then own in excess of 5% of the
Company's common stock. If, notwithstanding the foregoing, such holder is deemed
by a court to be the beneficial owner of more than 5% of the Company's common
stock, the Company is required to redeem for cash such number of shares of
Preferred Stock as will reduce such holder's ownership to not more than 5% at a
redemption price equal to the stated value plus accrued and unpaid dividends. In
the case of mandatory conversion, the Company may elect to pay a redemption
price in cash equal to 135% of the stated value plus accrued and unpaid
dividends or may extend the mandatory conversion date for one year.
The Company is required to file by June 13, 1999 a Registration Statement
relating to the resale of common stock issuable (i) upon conversion of the
Preferred Stock, (ii) in lieu of cash dividends on the Preferred Stock and (iii)
upon exercise of the Warrant. If the Registration Statement is not filed by such
date, or has not been declared effective by the SEC by October 11, 1999, the
Company must pay liquidated damages thereafter until such conditions are
satisfied.
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ITEM 2.
CAFE ODYSSEY, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following management's discussion and analysis of financial condition and
results of operations should be read in connection with the accompanying
unaudited condensed financial statements and related notes thereto included
elsewhere in this report, and the audited financial statements and notes thereto
included in the Company's Form 10-KSB for the fiscal year ended January 3, 1999.
OVERVIEW
Cafe Odyssey, Inc. (the "Company") develops, owns and operates restaurants with
multiple themed dining rooms designed to appeal to the upscale casual dining
market. The Company owns and operates three full service restaurants. One is
located in Cincinnati, Ohio (the "Kenwood Restaurant"), which operates under the
trade name "Hotel Discovery." The other two restaurants operate under the trade
name Cafe Odyssey, as will any future restaurants. One is in the Mall of
America, located in Bloomington, Minnesota, a suburb of Minneapolis (the "Mall
of America Restaurant"), and the other at the Denver Pavilions, located in the
downtown district of Denver, Colorado (the "Denver Pavilions Restaurant")
(together the "Restaurants"). The Kenwood Restaurant opened under the name
"Hotel Mexico" on December 19, 1996. The Mall of America Restaurant opened on
June 8, 1998. The Denver Pavilions Restaurant opened March 15, 1999. Prior to
the opening of the Kenwood Restaurant, the Company was in the development stage.
The Company began operations as Hotel Mexico, Inc. ("HMI"), which was
incorporated in Ohio in January 1994. The Kenwood Restaurant Limited
Partnership, an Ohio limited partnership (the "Kenwood Partnership") was formed
in June 1995 to own and operate the Kenwood Restaurant. HMI's operations and the
net assets of the Kenwood Partnership were combined in November 1996 and in
August 1997. HMI was reorganized as Hotel Discovery, Inc., a Minnesota
corporation.
On February 25, 1998, the Company changed the name of its restaurant concept
from Hotel Discovery to Cafe Odyssey. The Company believes that the new name
better reflects the concept's primary focus on award-winning food, served in a
unique environment of adventure, imagination, exploration and innovation. In
conjunction with this action, the Company's Board of Directors and shareholders
approved a change in its corporate name from Hotel Discovery, Inc. to Cafe
Odyssey, Inc. This change was approved by shareholders on May 21, 1998. At the
present time, the Company intends to retain the name "Hotel Discovery" for the
Kenwood Restaurant because of its already established name.
On May 13, 1999, the Company signed a letter of intent to acquire Popmail.com.
Through partnerships with radio stations nationwide, Popmail.com is a leading
email provider to radio stations. Completion of the transaction is subject to
the approval of the Company's shareholders.
Future revenue and profits, if any, will depend upon various factors, including
market acceptance of the Cafe Odyssey concept, the quality of restaurant
operations, the ability to expand to multi-unit locations and general economic
conditions. The Company's present source of revenue is limited to its existing
restaurants. There can be no assurances the Company will successfully implement
its expansion plans, in which case it will continue to be dependent on the
revenues from the existing restaurants. The Company also faces all of the risks,
expenses and difficulties frequently encountered in connection with the
expansion and development of a new and expanding business. Furthermore, to the
extent the Company's expansion strategy is successful, it must manage the
transition to multiple-site operations, higher volume operations, the control of
overhead expenses and the addition of necessary personnel.
The Company has adopted a 52/53 week accounting period ending on the Sunday
nearest December 31 of each year.
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CAFE ODYSSEY, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONT.)
RESULTS OF OPERATIONS FOR THE THIRTEEN WEEKS ENDED APRIL 4, 1999 AND MARCH 29,
1998
NET SALES
The Company's only revenue source for the period ended March 29, 1998, was the
Kenwood Restaurant. Accordingly, comparisons for this thirteen week period may
not be meaningful.
The net sales for the thirteen weeks ended April 4, 1999, was $2,332,632
compared to net sales of $804,319 for the thirteen weeks ended March 29, 1998,
an increase of $1,528,313 or 190.0%. The increase in sales is attributable to
the Mall of America Restaurant and the opening of the Denver Pavilions
Restaurant on March 15, 1999.
The Kenwood Restaurant had net sales for the thirteen weeks ended April 4, 1999,
of $501,132 compared to net sales of $804,319 for the thirteen weeks ended March
29, 1998, a decrease of $303,187 or 37.7%. This beta site has not generated
positive operating cash flows to date. This initial format and Hotel Discovery
concept have not served as the prototype for the Company's subsequent
restaurants. Accordingly, the Company recorded a non-cash write-down of the
Kenwood Restaurant of $2,000,000 in 1998. This write-down of the Kenwood
Restaurant will allow the Company to divest itself from this restaurant. The
Company has a favorable land lease and intends to market the property for either
a sub-lease or outright sale. Future positive cash flows from a sub-lease could
be generated. There can be no assurances that a sub-lease or sale of the Kenwood
Restaurant will be accomplished during 1999, if at all, which would meet the
requirements of the Company.
The Mall of America Restaurant, which opened June 8, 1998, had net sales for the
thirteen weeks ended April 4, 1999, of $1,443,709.
The Denver Pavilions Restaurant, which opened March 15, 1999, had net sales for
the three weeks ended April 4, 1999, of $387,791.
COSTS AND EXPENSES
The food, beverage and retail costs for the thirteen weeks ended April 4, 1999,
were $606,587 compared to $218,416 for the thirteen weeks ended March 29, 1998,
an increase of $388,171 or 177.7%. The percentage increase in food, beverage and
retail costs as compared to the percentage increase of sales reflects the
economies of scale of the larger revenue restaurants.
The Kenwood Restaurant had food, beverage and retail costs for the thirteen
weeks ended April 4, 1999, of $133,308 compared to $218,416 for the thirteen
weeks ended March 29, 1998, a decrease of $85,108 or 39.0%. The correlation that
exists between the decrease in costs and expenses is in line with the decrease
in revenues.
The Mall of America Restaurant, which opened June 8, 1998, had food, beverage
and retail costs for the thirteen weeks ended April 4, 1999, of $368,057.
The Denver Pavilions Restaurant, which opened March 15, 1999, had food, beverage
and retail costs for the three weeks ended April 4, 1999, of $105,222.
Restaurant operating expenses, which include labor, direct and indirect
expenses, and occupancy expenses for the thirteen weeks ended April 4, 1999,
were $1,716,303 compared to $681,602 for the thirteen weeks ended March 29,
1998, an increase of $1,034,701 or 151.8%. The percentage increase in restaurant
operating expenses as compared to the percentage increase of sales reflects the
economies of scale of the larger revenue restaurants.
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CAFE ODYSSEY, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONT.)
Depreciation and amortization expenses for the thirteen weeks ended April 4,
1999, were $258,168 compared to $125,840 for the thirteen weeks ended March 29,
1998, an increase of $132,328 or 105.2%. This increase is due primarily to the
addition of the Mall of America Restaurant.
Pre-opening and start-up expenses were $572,932 for thirteen weeks ended April
4, 1999, as compared to $127,318 for the thirteen weeks ended March 29, 1998, an
increase of $445,614 or 350.0%. This increase includes pre-opening expenses of
$504,973 for the Denver Pavilions Restaurant and $67,959 related to the Irvine,
California site. The Company has decided not to open a restaurant at this
specific site.
The Company's executive and administrative office located in Bloomington,
Minnesota, had general, administrative and development expenses for the thirteen
weeks ended April 4, 1999, of $480,247 compared to $742,135 for the thirteen
weeks ended March 29, 1998, a decrease of $261,888 or 35.3%. This decrease
reflects the results of the Company's efforts to reduce its general,
administrative and development expense line items for the 1999 fiscal year.
Interest expense was $142,049 for thirteen weeks ended April 4, 1999, as
compared to interest income of $118,690. The Company has to address the numerous
executive and administrative staffing requirements, the requirements needed to
manage remote sites, shareowner relationships, etc. and development costs
associated with site location. The Company will be seeking additional senior
management personnel as well as support staff, which will also have an
associated impact on future earnings. The Company expects to continue to incur
operating losses during 1999.
LIQUIDITY AND CAPITAL RESOURCES
The Company had a working capital deficit of $6,671,652 at April 4, 1999,
compared to working capital deficit of $3,870,058 on January 3, 1999. Cash and
cash equivalents were $657,750 at April 4, 1999, representing an increase of
$551,503 from the cash and cash equivalents of $106,247 at January 3, 1999.
Since inception, the Company's principal capital requirements have been (i) the
development of the Company and the Hotel Discovery/Cafe Odyssey concept, (ii)
the construction of the Kenwood Restaurant and the acquisition of furniture,
fixtures and equipment of approximately $5.1 million, net of landlord
contributions, (iii) the construction of the Mall of America Restaurant and the
acquisition of furniture, fixtures and equipment of approximately $4.8 million,
net of landlord contributions, and (iv) the development of the Denver Pavilions
Restaurant.
The Company's primary sources of working capital have been proceeds from the
sale of common stock to and borrowings from its principal shareholder, Stephen
D. King, the private placement of common stock and debt, as well as the proceeds
from the Company's initial public offering of Units in November 1997. During
1998 and 1997, the maximum amount of borrowings from Mr. King outstanding at any
one time was $100,000 and $1,148,430, respectively. The amount of outstanding
indebtedness as of April 4, 1999 was $150,000.
In October 1995, Kenwood Restaurant Limited Partnership, an Ohio limited
partnership formed in June 1995 (the "Kenwood Partnership"), raised $2.5 million
in a private placement of 250 shares of common stock of the Company's
predecessor (which shares were split 825-to-1 in November 1996, and now
represent 206,250 shares of the Company) and limited partnership interests in
the Kenwood Partnership. In a reorganization of the Company which occurred in
November 1996, the Kenwood Partnership contributed all of its net assets to the
Company's predecessor, including the Kenwood Restaurant, in exchange for
1,350,000 shares of common stock of the Company. The general partner of the
Kenwood Partnership was Kenwood Restaurant, Inc., an Ohio corporation that was
controlled by Stephen D. King until his resignation as an officer and director
in September 1997. The Kenwood Partnership was dissolved in October 1997.
The Company borrowed $1.0 million under a leasehold mortgage term loan from a
bank, which was personally guaranteed by Mr. King. This financing was used for
the Kenwood Restaurant. Principal and interest were due
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CAFE ODYSSEY, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONT.)
monthly through February 1999. This loan was repaid in September 1998. In
December 1996 the Company borrowed an additional $2.5 million under a mortgage
term loan from a bank. Payments of interest only were due through January 1998
at which time the entire principal balance was due. This loan was paid in full
on January 31, 1997. In May 1997 the Company borrowed $2.0 million on a 13-month
term note, with interest only payable monthly at the rate of 7.15%. This note
was guaranteed by Mr. King and was collateralized by substantially all of the
Company's assets. This note was repaid in July 1997. On June 23, 1997, the
Company borrowed $800,000, also collateralized by substantially all of the
Company's assets. The loan was personally guaranteed by Mr. King and was repaid
in full in July 1997.
From November 1996 through July 1997 the Company's predecessor completed private
placements of an aggregate of 2,392,889 shares of Common stock at $3.00 per
share. The net proceeds were approximately $6.1 million. Such proceeds were
fully utilized for the Kenwood Restaurant, repayment of indebtedness, working
capital and construction of the Mall of America Restaurant and the Denver
Pavilions Restaurant.
On August 12, 1997, the Company borrowed $200,000 from Provident Bank at an
annual rate of interest of 2% over Provident's reference rate. The loan was
personally guaranteed by Mr. King and was repaid in full in November 1997. On
September 8, 1997, the Company borrowed $200,000 from Bank Windsor at an annual
rate of 1.125% over Bank Windsor's reference rate. The loan was payable on
demand and had an outstanding principal balance of $200,000 on December 28,
1997. This loan was repaid in full in January 1998. On October 3, 1997, the
Company borrowed $200,000 from Trakehner Holdings, Inc., which bore interest at
8.75% and was due on demand or no later than the effective date of the Company's
initial public offering. This loan was repaid in full in November 1997.
In November 1997 the Company completed an initial public offering of 2,500,000
Units, each Unit consisting of one share of Common Stock and one redeemable
Class A Warrant at an initial public offering price of $5.00 per Unit. In
December 1997 the Company issued an additional 100,000 Units to its principal
underwriter, R.J. Steichen & Company, pursuant to the underwriter's decision to
exercise a portion of its over-allotment option. The Company received net
proceeds of approximately $11.2 million in conjunction with the initial public
offering and the partial exercise of the underwriter's over-allotment.
The Company entered into a senior promissory note in June 1998, which had an
outstanding balance of $882,390 at April 4, 1999. The note requires monthly
installments of $25,044 including interest of 15.94%. The note is secured by
equipment and is due July 2002.
In September 1998 the Company entered into a $3,000,000 revolving line of credit
facility with a financial institution. This credit facility is secured by an
open-ended leasehold mortgage, security agreement and assignment of rents,
income and proceeds ("Mortgage"), which Mortgage encumbers the leasehold
improvements of the Kenwood Restaurant. In addition, two directors and an
ex-director of the Company entered into a joint and several limited guaranty of
the first $1,000,000 of the Company's borrowings under this credit facility. In
consideration of these guarantees, the Company issued 40,000 five-year warrants
to each of these individuals at an exercise price of $0.75 per share in November
1998. Guarantees for the other $2,000,000 were obtained later in November 1998
from two of the aforementioned directors and an additional third party whereby
two of the directors each severally guaranteed $500,000, and the other third
party guaranteed $1,000,000, of such borrowings. All three guarantors pledged
certain collateral to the financial institution in connection with the latter
guarantees. In exchange for such guarantees and pledges of collateral, the
Company issued 200,000 five-year warrants each to two of the directors in
November 1998, and 400,000 five-year warrants to the other third party in
January 1999 all at an exercise price of $0.75 per share. The Board of Directors
of the Company also authorized the issuance of additional warrants and the
payment of cash penalties to the three guarantors if the borrowings are not
repaid in full by September 30, 1999. This credit facility provides for monthly
payments of interest accrued on the outstanding unpaid principal balance at
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CAFE ODYSSEY, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONT.)
a rate equal to the Prime Rate, or 7.75% as of April 4, 1999. As of April 2,
1999, the Company has borrowed $3,000,000 under this credit facility. The line
of credit facility and senior promissory note contain certain restrictive
covenants, as defined. As of April 4, 1999, the Company was in compliance with
all such covenants.
On February 23, 1999, the Company entered into a promissory note for $300,000
with a private investor. The note is unsecured and requires a balloon payment of
principal and interest 90 days from the loan date. The interest rate is 18% per
year, with a 2% loan origination fee. The Company issued a five year warrant to
such investor to purchase 50,000 shares of the Company's common stock at an
exercise price of $0.50 per share.
On March 10, 1999, the Company entered into a promissory note for $825,000 with
a financial institution. The note is an unsecured revolving line of credit
facility which requires interest payments only. The interest rate on the note is
equal to the Index Rate (7.75% as of April 15, 1999), with the maximum interest
rate not to exceed 21.75% per annum. The note is due March 10, 2000. The note is
secured by personal guarantees and the Company has issued five-year warrants for
an aggregate of 500,000 shares of common stock at an exercise price of $0.75 per
share to the guarantors in consideration of the guarantees. One guarantor, a
director of the Company, received 87,500 warrants, the remaining 412,500
warrants going to other third party guarantors.
On April 30, 1999, the Company entered into a master equipment lease agreement
("Capital Lease") for $300,000 with a financial institution. The Capital Lease
is secured by substantially all of the furniture, accessories, computer/POS and
kitchen equipment located at the Denver Pavilions Restaurant and required
security deposits of approximately $135,000. The note bears interest at 17.3%
and monthly payments of $8,708 are required for 4 years.
On May 13, 1999, the Company signed a letter of intent to acquire Popmail.com.
Through partnerships with radio stations nationwide, Popmail.com is a leading
email provider to radio stations. Completion of the transaction is subject to
the approval of the Company's shareholders.
On May 14, 1999, the Company issued 2,000 shares of Series A 8% convertible
preferred stock (the "Preferred Stock") with a stated value of $1,000 per share
in a private placement for total proceeds of $2,000,000 and net proceeds after
expenses of approximately $1,700,000. In addition, the Company issued a warrant
(the "Warrant") to the holder of Preferred Stock to purchase 300,000 shares of
the Company's common stock at $3.00 per share in connection with the offering.
The Warrant is exercisable for five years. In addition to a 10% placement fee
and a 3% unallocable expense allowance, the placement agent received a warrent
to acquire 150,000 shares of Common Stock at $3.00 per share.
The annual dividend of 8% is cumulative and is payable quarterly in arrears
either in cash or in registered shares of the Company's common stock. Each share
of Preferred Stock is convertible into shares of the Company's common stock at a
conversion price equal to 65% of the average closing bid price for the common
stock five days prior to the conversion. The total number of shares of common
stock issuable (i) upon conversion of the Preferred Stock, (ii) as a dividend on
the Preferred Stock and (iii) upon exercise of the Warrant cannot exceed
1,662,687 shares (20% of the number of outstanding shares of common stock on May
14, 1999), unless the Company obtains shareholder approval as required by
Nasdaq. In the event a holder of Preferred Stock is unable to convert shares of
Preferred Stock into common stock because 1,662,687 shares have already been
issued as described in the preceding sentence, the Company must redeem any
unconverted Preferred Stock presented for conversion for cash at a price equal
to 125% of the stated value. The Company has the right to redeem the Preferred
Stock in cash at 135% of stated value plus accrued and unpaid dividends. All
Preferred Stock which is still outstanding on May 14, 2004 is mandatorily
converted at the Conversion Price.
The Company is not required to convert Preferred Stock, whether upon request for
conversion by the holder or upon the May 14, 2004 mandatory conversion date, if
and to the extent that such holder would then own in excess of 5% of the
Company's common stock. If, notwithstanding the foregoing, such holder is deemed
by a court to be the beneficial owner of more than 5% of the Company's common
stock, the Company is required to redeem for cash
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CAFE ODYSSEY, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONT.)
such number of shares of Preferred Stock as will reduce such holder's ownership
to not more than 5% at a redemption price equal to the stated value plus accrued
and unpaid dividends. In the case of mandatory conversion, the Company may elect
to pay a redemption price in cash equal to 135% of the stated value plus accrued
and unpaid dividends or may extend the mandatory conversion date for one year.
The Company is required to file by June 13, 1999 a Registration Statement
relating to the resale of common stock issuable (i) upon conversion of the
Preferred Stock, (ii) in lieu of cash dividends on the Preferred Stock and (iii)
upon exercise of the Warrant. If the Registration Statement is not filed by such
date, or has not been declared effective by the SEC by October 11, 1999, the
Company must pay liquidated damages thereafter until such conditions are
satisfied.
The Class A Warrants are subject to redemption by the Company at any time, on
not less than 30 days' written notice, at a price of $0.01 per Warrant at any
time following a period of 14 consecutive trading days where the per share
average closing bid price of the Company's common stock exceeds $7.00 (subject
to adjustment), provided that a current prospectus covering the shares issuable
upon the exercise of the Class A Warrants is then effective under federal
securities laws. For these purposes, the closing bid price of the common stock
shall be determined by the last reported sale price on the primary exchange on
which the common stock is traded.
The Company will not open any new restaurants in fiscal year 1999 unless
sufficient capital is raised. Management is committed to its original,
fundamental strategy of slow, controlled growth. This approach to expansion
although conservative, will strengthen the concept and avoid the pitfalls of
some of the competition by insuring that the management team is not outdistanced
and can execute the Company standards. It also insures that the real estate
strategy is not compromised due to forced timing of restaurant openings. With
the successful execution of the Denver Pavilions Restaurant, being opened on
time and on budget, the Company has terminated the lease agreement with the
Irvine, California developer primarily due to the physical placement that the
restaurant would occupy within the Irvine complex. The Company is investigating
other real estate site locations.
The Company estimates that its capital expenditures required for its next
restaurant (excluding any landlord contributions) will be approximately $3 to
$10 million. The Company expects to finance its concept development and
expansion through cash flow from operations, the exercise of its Class A
Warrants and other forms of financing such as the sale of additional equity and
debt securities, capital leases and other credit facilities. There are no
assurances that such financing will be available on terms acceptable or
favorable to the Company.
IMPACT OF THE YEAR 2000 ISSUE
INTRODUCTION. The term "Year 2000" is used to describe general problems that may
result from improper processing of dates and date-sensitive calculations by
computers or other machinery as the year 2000 is approached and reached. This
problem stems from the fact that many of the world's computer hardware and
software applications have historically used only the last two digits to refer
to a year. As a result, many of these computer programs do not or will not
properly recognize a year that begins with "20" instead of the familiar "19." If
not corrected, many computer applications could fail or create erroneous
results. The following information was prepared to comply with the guidelines
for Year 2000 disclosure that the Securities and Exchange Commission issued in
an Interpretative Release, effective August 4, 1998. These guidelines require
significantly more detailed information than was previously required by the
Commission.
THE COMPANY'S STATE OF READINESS. To operate its business, the Company relies on
many third party information technology systems ("IT"), including its point of
sale, table seating and reservation management, inventory management, credit
card processing, payroll, accounts payable, fixed assets, banking and general
ledger systems. The Company does not maintain any proprietary IT systems and has
not made any modifications to any of the IT systems provided to it by its IT
vendors. The Company has requested that each of the vendors providing
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CAFE ODYSSEY, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONT.)
hardware and software to run these systems ("IT vendors") complete a Year 2000
compliance questionnaire. The Company has not yet received completed
questionnaires from all of its IT vendors. Of those questionnaires that have
been completed, the Company has been provided software upgrades and enhancements
that, when installed, will ensure that the information technology systems
associated with that particular vendor will be Year 2000 compliant. The Company
expects that all assurances and/or IT upgrades and enhancements from its IT
vendors will be completed and installed by September 1, 1999.
The Company also relies upon government agencies, utility companies, providers
of telecommunications services, food, beverage and retail product suppliers and
other third party product and service providers ("Material Relationships"), over
which it can assert little control. The Company's ability to conduct its core
business is dependent upon the ability of these Material Relationships to ensure
Year 2000 compliance, to the extent they affect the Company. If the
telecommunications carriers, public utilities, key food, beverage and retail
product suppliers and other Material Relationships do not appropriately rectify
their Year 2000 issues, the Company's ability to conduct its core business may
be materially impacted, which could result in a material adverse effect on the
Company's financial condition.
The Company has begun an assessment of all Material Relationships to determine
risk and assist in the development of contingency plans. This effort is expected
to be completed by September 1, 1999.
COSTS TO ADDRESS THE COMPANY'S YEAR 2000 ISSUES. The Company expenses costs
associated with its Year 2000 compliance efforts as the costs are incurred. The
Company has not yet incurred any expenses in connection with its Year 2000
compliance efforts to date, and estimates it will spend no more than $5,000 to
complete its Year 2000 compliance efforts. The Company estimates that the only
costs that it will incur in connection with its Year 2000 compliance efforts
will be in the testing phase, which will not occur until it has received
assurances from each of its IT vendors that their IT systems upon which the
Company relies are Year 2000 compliant. All costs associated with bringing these
IT systems into Year 2000 compliance are expected to be borne by the Company's
IT vendors. It is expected that the Company will have received these assurances
and will begin its testing phase by September 1, 1999. It should be noted,
however, that the Company is unable to estimate the costs that it may incur as a
result of Year 2000 problems suffered by its IT vendors and Material
Relationships, and that there can be no assurance that the Company will
successfully identify and rectify all its Year 2000 problems.
RISKS PRESENTED BY YEAR 2000 PROBLEMS. The Company has not yet begun the testing
phase of its Year 2000 compliance efforts. As a result, the Company cannot fully
assess the risks from any potential Year 2000 issues. Once the testing phase is
underway, which is expected to occur no later than September 1, 1999, the
Company may identify areas of its core business that are at risk of Year 2000
disruption. In addition, many of the Company's critical Material Relationships
may not appropriately address their Year 2000 issues, the result of which could
have a material adverse effect on the Company's financial condition and results
of operations.
THE COMPANY'S CONTINGENCY PLANS. Because the Company has not yet begun the
testing phase of its Year 2000 compliance efforts, and accordingly has not yet
fully assessed its risks from any potential Year 2000 issues, the Company has
not yet developed detailed contingency plans specific to Year 2000 issues for
any specific areas of business. The Company expects, however, to develop
detailed contingency plans specific to Year 2000 issues once the testing phase
of its Year 2000 compliance efforts is complete and its key risks have been
assessed.
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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
3.1 Articles of Incorporation, as amended
10.1 Common Stock Purchase Warrant to purchase 300,000
shares of Cafe Odyssey, Inc. dated as of May 14,
1999, issued to The Shaar Fund Ltd.
10.2 Securities Purchase Agreement, dated as of
May 14, 1999, between Cafe Odyssey, Inc.,
and The Shaar Fund Ltd.
10.3 Registration Rights Agreement, dated May 14, 1999,
between Cafe Odyssey, Inc., and The Shaar Fund Ltd.
27 Financial Data Schedule
(b) REPORTS ON FORM 8-K
None
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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
Chief Executive Officer and
Chief Financial Officer
Date: May 18, 1999
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