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Table of Contents
As filed with the Securities and Exchange Commission on June 3, 2005
Registration No. 333-
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
Kona Grill, Inc.
(Exact Name of Registrant as Specified in Its Charter)
Delaware
5812
20-0216690
(State or Other Jurisdiction of
Incorporation or Organization)
(Primary Standard Industrial
Classification Code Number)
(I.R.S. Employer
Identification Number)
7150 East Camelback Road, Suite 220
Scottsdale, Arizona 85251
(480) 922-8100
(Address, Including Zip Code, and Telephone Number, Including Area Code,
of Registrant’s Principal Executive Offices)
Mark S. Robinow
Chief Financial Officer
Kona Grill, Inc.
7150 East Camelback Road, Suite 220
Scottsdale, Arizona 85251
(480) 922-8100
(Name, Address Including Zip Code, and Telephone Number,
Including Area Code, of Agent for Service)
Copies to:
Quinn P. Williams, Esq.
Brian H. Blaney, Esq.
Scott K. Weiss, Esq.
Greenberg Traurig, LLP
2375 East Camelback Road, Suite 700
Phoenix, Arizona 85016
(602) 445-8000
Gary J. Singer, Esq.
Scott A. Graziano, Esq.
O’Melveny & Myers LLP
610 Newport Center Drive, Suite 1700
Newport Beach, California 92660
(949) 760-9600
Approximate date of commencement of proposed sale to the public: As soon as practicable after the effective date of this registration
statement.
If any of the securities being registered on this form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities
Act of 1933, check the following box. 
If this form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. 
If this form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities
Act registration statement number of the earlier effective registration statement for the same offering. 
If this form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities
Act registration statement number of the earlier effective registration statement for the same offering. 
If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box.

CALCULATION OF REGISTRATION FEE
Title of Each Class of Securities to Be Registered
Common Stock, $.01 par value per share
Proposed Maximum
Aggregate Offering Price(1)
Amount of
Registration Fee
$29,000,000
$3,413.30
(1) Estimated solely for the purpose of calculating the registration fee pursuant to Rule 457(o) under the Securities Act of 1933.
The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the
Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in
accordance with Section 8(a) of the Securities Act of 1933 or until the Registration Statement shall become effective on such date as the
Commission, acting pursuant to Section 8(a), may determine.
Table of Contents
The information in this preliminary prospectus is not complete and may be changed. These securities may not be sold until the
registration statement filed with the Securities and Exchange Commission is effective. This preliminary prospectus is not an offer to
sell nor does it seek an offer to buy these securities in any jurisdiction where the offer or sale is not permitted.
SUBJECT TO COMPLETION, DATED JUNE 3, 2005.
Shares
Common Stock
This is an initial public offering of shares of common stock of Kona Grill, Inc. All of the shares to be sold in the offering are
being sold by Kona Grill, Inc.
Prior to this offering, there has been no public market for our common stock. It is currently estimated that the initial public
offering price per share will be between $
and $
. We intend to apply to have our common stock quoted on the NASDAQ
National Market under the symbol “KONA.”
See “Risk Factors” beginning on page 7 to read about factors you should consider before buying shares of our common
stock.
Neither the Securities and Exchange Commission nor any other regulatory body has approved or disapproved of these
securities or passed upon the accuracy or adequacy of this prospectus. Any representation to the contrary is a criminal
offense.
Per Share
Total
Initial public offering price
Underwriting discounts and commissions
Proceeds, before expenses, to us
$
$
$
We have granted the underwriters a 30-day option to purchase up to an additional
the initial public offering price less the underwriting discount, solely to cover over-allotments.
shares of common stock from us at
The underwriters expect to deliver the shares against payment in New York, New York on
Oppenheimer & Co.
$
$
$
, 2005.
Feltl and Company
Prospectus dated
, 2005.
Table of Contents
[Artwork to be filed by amendment.]
TABLE OF CONTENTS
Page
Prospectus Summary
1
Risk Factors
7
Forward-Looking Statements
16
Market Data and Forecasts
16
Use of Proceeds
17
Dividend Policy
17
Capitalization
18
Dilution
20
Selected Consolidated Financial Data
21
Management’s Discussion and Analysis of Financial Condition and Results of Operations
23
Business
36
Management
48
Certain Relationships and Related Party Transactions
64
Security Ownership of Certain Beneficial Owners and Management
66
Description of Capital Stock
68
Shares Eligible for Future Sale
72
Material U.S. Federal Income Tax Considerations for Non-U.S. Holders of Our Common Stock
74
Underwriting
77
Legal Matters
79
Experts
79
Where You Can Find More Information
80
Index to Consolidated Financial Statements
F-1
EX-10.1.A
EX-10.1.B
EX-10.2
EX-10.3
EX-10.4
EX-10.5
EX-10.6.A
EX-10.6.B
EX-10.7.A
EX-10.7.B
EX-10.8.A
EX-10.8.B
EX-10.8.C
EX-10.9
EX-10.10
EX-23.1
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PROSPECTUS SUMMARY
This summary highlights information contained elsewhere in this prospectus. This summary does not contain all the information
that you should consider before investing in our common stock. You should read this entire prospectus carefully, including “Risk
Factors” and our consolidated financial statements and related notes, before making an investment decision.
All references to “we,” “us,” “our,” or “our company” in this prospectus refer to Kona Grill, Inc. and its consolidated direct
and indirect subsidiaries.
Our Business
Kona Grill restaurants offer innovative freshly prepared food, personalized service, and a contemporary ambiance that create a
satisfying yet affordable dining experience that we believe is superior to many traditional casual dining restaurants. Our high-volume
upscale casual restaurants feature a diverse selection of mainstream American dishes with a flavorful twist as well as a variety of
distinctive appetizers and entrees with an international influence, including an extensive selection of sushi items. Our menu items also
incorporate over 40 unique signature sauces and dressings that we make from scratch, creating broad-based appeal for the lifestyle and
taste trends of a diverse group of guests. Our menu is standardized for all of our restaurants allowing us to deliver consistent
high-quality meals. We believe that our enticing offerings and generous portions, combined with an average check during April 2005
of $14.35 per guest, excluding alcoholic beverages, offer an exceptional value.
Our restaurants accommodate approximately 275 guests and are comprised of multiple dining areas that incorporate modern
eye-catching design elements to create an upscale ambiance that reinforces our high standards of food and service. Our main dining
area, full-service bar, outdoor patio, and sushi bar provide a choice of atmosphere and a variety of environments designed to appeal
and encourage repeat visits with regular guests. We locate our restaurants in high-activity areas such as retail centers, shopping malls,
lifestyle centers, and entertainment centers that are situated near commercial office space and residential housing to attract guests
throughout the day. Our restaurants are designed to satisfy our guests’ dining preferences during lunch, dinner, and non-peak periods
such as late afternoon and late night.
We currently own and operate seven upscale casual dining restaurants located in six states. We opened three restaurants during
2004 and expect to open two restaurants during the second half of 2005 in Sugarland (Houston), Texas and San Antonio, Texas. We
plan to open four or five restaurants during 2006, which will significantly expand our presence in new markets.
During 2004, the average unit volume of our four restaurants open the entire year was $5.5 million, which we believe is among the
highest for publicly traded chain restaurants in the casual dining industry. During 2004, we generated $25.1 million of sales,
representing an increase of $8.5 million, or 50.8%, from $16.6 million of sales generated during 2003. During the quarter ended
March 31, 2005, we generated $8.0 million of sales, an increase of $2.7 million, or 52.0%, from the $5.3 million of sales generated
during the comparable prior year period.
Our Competitive Strengths
We believe that the key strengths of our business include the following:
•
Innovative Menu Selections with Mainstream Appeal. We offer a freshly prepared menu that combines recognizable
American selections with a flavorful twist, a variety of distinctive internationally influenced cuisines, signature
seafood dishes, and award-winning sushi to appeal to a wide range of tastes, preferences, and price points. We
prepare our dishes from original recipes with generous portions and creative and appealing presentations that adhere
to standards that we believe are much closer to fine dining than typical casual dining. Our more than 40 proprietary
sauces and dressings further differentiate our menu items and allow our guests to experience new foods and tastes as
well as share their everyday favorite choices with others.
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•
Distinctive Upscale Casual Dining Experience. Our innovative menu with attractive price points, personalized
service, and contemporary restaurant design with multiple environments blend together to create our upscale casual
dining experience and enables us to attract a broad guest demographic. We design our restaurants with a unique
layout and utilize modern, distinctive design elements, such as our signature 2,000 gallon saltwater aquarium stocked
with bright and colorful exotic fish, plants, and coral. Our multiple dining areas provide our guests with a number of
distinct dining environments and atmospheres to satisfy a range of occasions or dining preferences. Our open
exhibition-style kitchen and sushi bar further emphasize the quality and freshness of our food that are the
cornerstones of our unique upscale casual dining concept.
•
Personalized Guest Service. Our commitment to provide prompt, friendly, and efficient service enhances our
exceptional food, reinforces our upscale ambiance, and helps distinguish us from other traditional casual dining
restaurants. We train our service personnel to provide personalized guest service that is designed to ensure a
pleasurable dining experience and exceed our guests’ expectations. Our kitchen staff completes extensive training to
ensure that our dishes are precisely prepared to provide a consistent quality of taste. We believe our focus on high
service standards underscores our guest-centric philosophy.
•
Multiple Daypart Model. Our appetizers, pizzas, entrees, and sushi offerings provide a flexible selection of items that
can be ordered individually or shared by our guests, allowing them to dine with us during traditional lunch and
dinner meal periods as well as in between customary dining periods such as in the late afternoon and late night. The
lively ambiance of our patio and bar areas provides an energetic social forum for us to attract a younger professional
clientele during these non-peak periods, as well as for all of our guests to enjoy before or after they dine with us. Our
sushi bar provides another dining venue for our guests while offering them a healthier, more adventuresome dining
experience. We believe that our ability to attract and satisfy our guests throughout the day distinguishes us from
many other casual dining chains and helps us maximize sales and leverage our fixed operating costs.
•
Attractive Unit Economics. During 2004, the average unit volume of our four restaurants open the entire year was
$5.5 million, or $777 per square foot. We believe our high average unit volume helps us attract high-quality
employees, leverages our fixed costs, and makes us a desirable tenant for landlords. We expect the average cash
investment for our new restaurants to be approximately $2.3 million, net of landlord tenant improvement allowances
and excluding preopening expense. Our restaurant cash flow provides us the prospect of strong financial returns on
this investment.
•
Strong Management Team with Proven Restaurant Operations Experience. Our senior management has more than
50 years of collective restaurant industry experience. Our seasoned management team has significant experience in
developing and operating multi-unit concepts for companies in a variety of geographic markets throughout the
United States and abroad, including McDonald’s Corporation, Caribou Coffee Company, and Rainforest Cafe, Inc.
Our Growth Strategy
We believe there are significant opportunities to grow our sales, and we believe our concept can support at least
200 company-owned units in the United States. Key elements of our growth strategy include the following:
•
Pursue Disciplined Restaurant Growth. We adhere to a disciplined site selection process and intend to continue
expanding Kona Grill restaurants in both new and existing metropolitan and suburban markets that meet our
demographic, real estate, and investment criteria. During 2004, we opened three new restaurants, all of which were
located in new markets, and we plan to open two restaurants in new markets during the second half of 2005, and four
or five restaurants during 2006. We plan to open the majority of our restaurants in new markets to continue to build
awareness and extend the scope of our concept and brand. Our growth strategy also includes expansion into
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existing markets where we believe we can leverage our infrastructure and gain operating efficiencies associated with
regional supervision, marketing, purchasing, and hiring.
•
Grow Existing Restaurant Sales. We believe that we can improve our unit volumes through ongoing local marketing
efforts designed to generate awareness and trial of our concept and increase the frequency of guest visits. We also
intend to continue evaluating operational initiatives designed to increase unit volumes. For instance, we are currently
reviewing enclosing certain of our existing and future patios in cooler climates and designing certain of our
restaurants with reconfigurable dining areas to accommodate private parties and special events as well as promoting
a formal take-out program for our restaurants.
•
Leverage Depth of Existing Corporate Infrastructure. We have invested and will continue to invest in our corporate
infrastructure by hiring experienced senior management, operating, human resources, and marketing personnel;
implementing operating, management and information systems; and establishing financial controls to minimize risks
associated with our current growth strategy. As we grow, we believe that we will be able to leverage our investments
in our corporate infrastructure and realize the efficiencies that an increasing restaurant base and associated sales
growth can generate.
Our Offices
We maintain our principal executive offices at 7150 East Camelback Road, Suite 220, Scottsdale, Arizona 85251. Our telephone
number is (480) 922-8100. Our website is located at www.konagrill.com. The information contained on our website or that can be
accessed through our website does not constitute part of this prospectus.
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The Offering
Common stock offered
shares
Common stock to be outstanding after this offering
shares
Use of proceeds
We estimate that our net proceeds from this offering will be
approximately $
million, assuming an initial public offering
price of $
per share of common stock, the midpoint of the
range set forth on the cover page of this prospectus, and after
deducting the underwriting discounts and commissions and
estimated offering expenses. We intend to use the proceeds
from this offering for new restaurant development and for
working capital and general corporate purposes. See “Use of
Proceeds.”
Proposed NASDAQ National Market Symbol
KONA
Risk Factors
See “Risk Factors” immediately following this prospectus
summary to read about factors you should consider before
buying shares of our common stock.
of
The number of shares of common stock to be outstanding after this offering is based upon our outstanding shares as
, 2005 and excludes the following:
•
shares of common stock issuable upon the exercise of stock options outstanding with a weighted
average exercise price of $
per share;
•
shares of common stock reserved for issuance under our stock option plans;
•
shares of common stock reserved for issuance upon exercise of outstanding warrants; and
•
shares of common stock reserved for issuance under our employee stock purchase plan.
Except when otherwise indicated, the information in this prospectus
•
assumes the conversion of all of our Series A convertible preferred stock into 4,166,666 shares of our common stock
in connection with the closing of this offering;
•
assumes conversion of our outstanding convertible subordinated promissory note into 2,500,000 shares of our
Series B convertible preferred stock, which will convert into 2,500,000 shares of common stock in connection with
the closing of the offering;
•
assumes no exercise by the underwriters of their option to purchase up to
from us; and
•
does not reflect the anticipated 1-for-5 reverse stock split of our common stock planned by our company prior to the
closing of this offering.
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additional shares of stock
Table of Contents
Summary Consolidated Financial Data
The following table sets forth our summary consolidated financial data. You should read this information in conjunction with our
financial statements, including the related notes, and “Management’s Discussion and Analysis of Financial Condition and Results of
Operations” included elsewhere in this prospectus.
Three Months Ended
March 31,
Year Ended December 31,
2002
2003
2004
2004
2005
(Unaudited)
Consolidated Statement of Operations
Data
(in thousands, except per share data):
Restaurant sales
Costs and expenses:
Restaurant operating costs:
Cost of sales
Labor
Occupancy
Other
Total restaurant operating costs
General and administrative
Preopening expense
Depreciation and amortization
Income (loss) from operations
Nonoperating expenses:
Interest expense, net
Income (loss) from continuing operations
before provision for income taxes
Provision for income taxes
Income (loss) from continuing operations
Income (loss) from discontinued operations
Net income (loss)
$
9,453
$
2,852
3,097
691
1,383
8,023
1,639
438
503
(1,150)
(1,253)
—
(1,253)
$
$
4,952
5,105
1,212
2,304
13,573
2,058
241
823
(87)
103
394(1)
(859)
16,608
$
25,050
$
5,272
$
8,011
7,371
7,502
1,748
3,372
19,993
2,217
880
1,269
691
1,541
1,549
381
706
4,177
366
—
268
461
2,335
2,509
582
975
6,401
1,063
7
511
29
260
360
47
182
(347)
—
(347)
331
55
276
414
—
414
(153)
—
(153)
(319)(1)
(666)
—
276
—
414
—
(153)
$
$
$
Net income (loss) per share — Basic:
Continuing operations
Discontinued operations
Net income (loss)
$
$
(0.18)
0.06
(0.12)
$
(0.18)
0.06
(0.12)
$
$
(0.05)
(0.04)
(0.09)
$
(0.05)
(0.04)
(0.09)
$
$
0.04
—
0.04
$
0.03
—
0.03
$
$
0.06
—
0.06
$
0.04
—
0.04
$
$
(0.02)
—
(0.02)
Net income (loss) per share — Diluted:
Continuing operations
Discontinued operations
Net income (loss)
Weighted average shares used in
computation:
Basic
Diluted
$
$
$
$
$
$
(0.02)
—
(0.02)
6,955
7,184
7,301
7,301
7,316
6,955
7,184
14,027
11,473
7,316
(1) Represents results of operations and gain (loss) on sale of restaurant concepts other than Kona Grill.
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The As Adjusted column of the balance sheet data reflects the sale of
shares of common stock offered by us, after
deducting the underwriting discounts and commissions and estimated offering expenses payable by us (amounts in thousands).
March 31, 2005
Actual
As Adjusted
(Unaudited)
Balance Sheet Data:
Cash and cash equivalents
Working capital (deficit)
Total assets
Long-term debt, including current maturities
Total stockholders’ equity
$
1,966
(67)
20,646
6,663
6,024
Three Months
Ended March 31,
Year Ended December 31,
2002
Other Data (unaudited):
Restaurants open at end of period
Average restaurant sales (in thousands)(1)
Sales per square foot(1)
Same store sales growth(2)
3
$ 4,398
$ 659
(0.3)%
2003
4
$ 4,966
$ 716
7.1%
$
2004
7
$ 5,479
$ 777
7.3%
2004
$
$
4
1,278
184
10.5%
2005
$
$
7
1,358
193
6.9%
(1) Includes only those restaurants open for at least 12 months.
(2) Same store sales growth reflects the periodic change in restaurant sales for the comparable restaurant base. In calculating
same store sales growth, we include a restaurant in the comparable restaurant base after it has been in operation for more
than 18 months.
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RISK FACTORS
You should carefully consider the following risks and all other information set forth in this prospectus before deciding to invest in
shares of our common stock. If any of the events or developments described below actually occurs, our business, financial condition,
and results of operations may suffer. In that case, the trading price of our common stock may decline and you could lose all or part of
your investment.
Risks Related to Our Business
We have a limited operating history and a limited number of restaurants upon which to evaluate our company, and you
should not rely on our history as an indication of our future results.
We currently operate seven restaurants, three of which have operated for less than one year. Consequently, the results we have
achieved to date with a relatively small number of restaurants may not be indicative of those restaurants’ long-term performance or the
potential performance of new restaurants. A number of factors historically have affected and are likely to continue to affect our
average unit volumes and comparable restaurant sales, including the following:
•
our ability to execute effectively our business strategy;
•
our ability to successfully select and secure sites for our Kona Grill concept;
•
the operating performance of new and existing restaurants;
•
competition in our markets;
•
consumer trends; and
•
changes in political or economic conditions.
Our average unit volume and same store sales may not increase at rates achieved over recent periods. Our three newest restaurants
opened with average unit volumes significantly below the average unit volume of our initial four restaurants open 18 full months or
longer. Changes in our average unit volumes and comparable restaurant sales could cause the price of our common stock to fluctuate
substantially.
We have a history of losses and we expect to experience continuing losses for at least the next two years.
We incurred a net loss of $0.2 million during the three-month period ended March 31, 2005, and incurred net losses in each of
2001, 2002, and 2003. We believe that we will continue to incur net losses for at least the next two years, and possibly longer. In
addition, we expect that our expenses for the foreseeable future will increase in order to continue the construction and development of
additional restaurants and to meet the requirements of being a public company. We may find that these efforts are more expensive than
we currently anticipate or that our expansion efforts do not result in proportionate increases in our sales, which would further increase
our losses. We cannot predict whether we will be able to achieve profitability in the future.
Our limited number of restaurants, the significant expense associated with opening new restaurants, and the unit volumes of
our new restaurants makes us susceptible to significant fluctuations in our results of operations.
We currently operate seven restaurants, three of which opened within the last 12 months, and we expect to open two restaurants in
2005 and four or five restaurants in 2006. The capital resources required to develop each new restaurant are significant. We estimate
that the cost of opening a new Kona Grill restaurant currently ranges from $2.5 million to $3.5 million, exclusive of landlord tenant
improvement allowances and preopening expenses and assuming that we do not purchase the underlying real estate. Actual costs may
vary significantly depending upon a variety of factors, including the site and size of the restaurant and conditions in the local real
estate and employment markets. The combination of our
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relatively small number of existing restaurants, the significant investment associated with each new restaurant, and the average unit
volumes of our new restaurants may cause our results of operations to fluctuate significantly, and poor operating results at any one
restaurant or a delay or cancellation in the planned opening of a restaurant could materially affect our company, making the
investment risks related to any one location much larger than those associated with most other restaurants.
Our growth may strain our infrastructure and resources, which could slow our development of new restaurants and adversely
affect our ability to manage our existing restaurants.
We expect to open two restaurants in 2005 and four or five restaurants in 2006. The four or five openings expected in 2006 will be
the most single-year restaurant openings we have had in our history. This expansion and our future growth will increase demands on
our management team, restaurant management systems and resources, financial controls, and information systems. These increased
demands may adversely affect our ability to manage our existing restaurants. If we fail to continue to improve our infrastructure or to
manage other factors necessary for us to meet our expansion objectives, our operating results could be adversely affected.
If we do not successfully expand our restaurant operations, our sales, growth rate, and results of operations could be harmed
significantly.
A critical factor in our future success is our ability to expand successfully our restaurant operations. Our ability to expand
successfully depends upon a number of factors, many of which are beyond our control, including the following:
•
the availability and cost of suitable restaurant locations for development;
•
our ability to compete successfully for suitable restaurant locations;
•
the availability of adequate financing;
•
the timing of delivery of leased premises from our landlords so we can commence our build-out construction activities;
•
construction and development costs;
•
any labor shortages or disputes experienced by our landlords or outside contractors;
•
any unforeseen engineering or environmental problems with the leased premises;
•
our ability to hire, train, and retain additional management and restaurant personnel;
•
our ability to secure governmental approvals and permits, including liquor licenses;
•
our continued development and implementation of management information systems;
•
weather conditions or natural disasters; and
•
general economic conditions.
Each of these factors could delay or prevent us from successfully opening and operating new restaurants, which would adversely
affect our growth and sales and could adversely affect our results of operations.
Our expansion into new markets may present increased risks due to our unfamiliarity with the areas.
As part of our expansion strategy, we will be opening restaurants in markets in which we have no prior operating experience and
in which our brand may not be well known. For example, we expect to open two new restaurants in Texas, a state in which we have no
existing restaurants, during the second half of 2005. These new markets may have different competitive conditions, consumer tastes,
and discretionary spending patterns than restaurants in our existing markets. As a result, we may incur costs related to the opening,
operation, and promotion of these new restaurants that are greater than those incurred in existing markets. Due to these factors, sales at
restaurants opening in new markets may take
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longer to achieve average unit volumes compared with our existing restaurants, if at all, which would adversely affect our results of
operations.
Our expansion in existing markets may cause sales in some of our existing restaurants to decline.
Our growth strategy includes opening new restaurants in our existing markets. We may be unable to attract enough guests to our
new restaurants for them to operate profitably. In addition, guests to our new restaurants may be former guests of one of our existing
restaurants in that market, which may reduce guest visits and sales at those existing restaurants, adversely affecting our results of
operations.
If our distributors or suppliers do not provide food and beverages to us in a timely fashion, we may experience short-term
supply shortages and increased food and beverage costs.
We currently depend on U.S. Foodservice, a national food distribution service company, to provide food and beverage products to
all of our restaurants. We do not have a long-term contractual arrangement with U.S. Foodservice. If U.S. Foodservice or other
distributors or suppliers cease doing business with us, we could experience short-term supply shortages in some or all of our
restaurants and could be required to purchase food and beverage products at higher prices until we are able to secure an alternative
supply source. In addition, any delay in replacing our suppliers or distributors on acceptable terms could, in extreme cases, require us
to remove temporarily items from the menus of one or more of our restaurants.
Failure to protect our trademarks, service marks, or trade secrets could adversely affect our business.
Our business prospects depend in part on our ability to develop favorable consumer recognition of the Kona Grill name. Although
Kona Grill is a federally registered trademark, our trademarks and service marks could be imitated in ways that we cannot prevent.
Alternatively, third parties may attempt to cause us to change our name or not operate in a certain geographic region if our name is
confusingly similar to their name. In addition, we rely on trade secrets, proprietary know-how, concepts, and recipes. Our methods of
protecting this information may not be adequate. Moreover, we may face claims of misappropriation or infringement of third parties’
rights that could interfere with our use of this information. Defending these claims may be costly and, if unsuccessful, may prevent us
from continuing to use this proprietary information in the future, and may result in a judgment or monetary damages. We do not
maintain confidentiality and non-competition agreements with all of our executives, key personnel, or suppliers. If competitors
independently develop or otherwise obtain access to our trade secrets, proprietary know-how, or recipes, the appeal of our restaurants
could be reduced and our business could be harmed.
Litigation could have a material adverse effect on our business.
From time to time, we may be the subject of complaints or litigation from guests alleging food-borne illness, injury, or other food
quality, health, or operational concerns. We may also be subject to complaints or allegations from former, existing, or prospective
employees from time to time. In addition, we are subject to state “dram shop” laws and regulations, which generally provide that a
person injured by an intoxicated person may seek to recover damages from an establishment that wrongfully served alcoholic
beverages to such person. Recent litigation against restaurant chains has resulted in significant judgments, including punitive damages,
under “dram shop” statutes. While we carry liquor liability coverage as part of our existing comprehensive general liability insurance,
we may still be subject to a judgment in excess of our insurance coverage and we may not be able to obtain or continue to maintain
such insurance coverage at reasonable costs, if at all. Regardless of whether any claims against us are valid or whether we are liable,
we may be adversely affected by publicity resulting from such claims, and they may be expensive to defend and may divert time and
money away from our operations and adversely affect our financial condition and results of operations.
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Our ability to raise capital in the future may be limited, which could adversely affect our business.
Changes in our operating plans, acceleration of our expansion plans, lower than anticipated sales, increased expenses, or other
events, including those described in this prospectus, may cause us to seek additional debt or equity financing on an accelerated basis.
Financing may not be available on acceptable terms, or at all, and our failure to raise capital when needed could negatively impact our
growth and other plans as well as our financial condition and results of operations. Additional equity financing, if available, may be
dilutive to the holders of our common stock and may involve significant cash payment obligations, covenants, and financial ratios that
restrict our ability to operate and grow our business.
Our senior management team has a limited history of working together and its failure to integrate into our business or manage
our growing operations could adversely affect our business.
Our success depends, in large part, upon the services of our senior management team. A significant portion of our senior
management team, including our Chief Executive Officer and Chief Financial Officer, has been in place for less than 18 months.
Although experienced in the restaurant industry, these executives do not have previous experience with us and we cannot assure you
that they will fully integrate themselves into our business or that they will manage effectively our growth. Our failure to assimilate
these new executives, the failure of these new executives to perform effectively, or the loss of any of these new executives, could
adversely affect our business, financial condition, and results of operations. We do not carry key person life insurance on any of our
executive officers.
Risks Related to the Restaurant Industry
Negative publicity surrounding our restaurants or the consumption of beef, seafood, poultry, or produce generally, or shifts in
consumer tastes, could impact negatively the popularity of our restaurants, our sales, and our results of operations.
The popularity of our restaurants in general, and our menu offerings in particular, are key factors to the success of our operations.
Negative publicity resulting from poor food quality, illness, injury, or other health concerns, whether related to one of our restaurants
or to the beef, seafood, poultry, or produce industries in general (such as negative publicity concerning the accumulation of
carcinogens in seafood, e-coli, Hepatitis A, and outbreaks of “mad cow” or “foot-and-mouth” disease), or operating problems related
to one or more of our restaurants, could make our brand and menu offerings less appealing to consumers. In addition, other shifts in
consumer preferences away from the kinds of food we offer, whether because of dietary or other health concerns or otherwise, would
make our restaurants less appealing and adversely affect our sales and results of operations.
Increases in the prices of, or reductions in the availability of, seafood, poultry, beef, or produce could reduce our operating
margins and adversely affect our operating results.
Our profitability depends significantly on our ability to anticipate and react to changes in seafood, poultry, beef, or produce costs.
The supply and price of these items is more volatile than other types of food. The type, variety, quality, and price of seafood, poultry,
beef, and produce is subject to factors beyond our control, including weather, transportation costs, governmental regulation,
availability, and seasonality, each of which may affect our food costs or cause a disruption in our supply. We currently do not
purchase seafood, poultry, beef, or produce pursuant to long-term contracts or use financial management strategies to reduce our
exposure to price fluctuations. Changes in the price or availability of certain types of seafood, poultry, beef, or produce could affect
our ability to offer a broad menu and price offering to our guests and could reduce our operating margins and adversely affect our
results of operations.
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A decline in visitors to any of the retail centers, shopping malls, or entertainment centers where our restaurants are located
could negatively affect our restaurant sales.
Our restaurants are primarily located in high-activity areas such as retail centers, shopping malls, lifestyle centers, and
entertainment centers. We depend on high visitor rates at these centers to attract guests to our restaurants. If visitor rates to these
centers decline due to economic or political conditions, anchor tenants closing in retail centers or shopping malls in which we operate,
changes in consumer preferences or shopping patterns, changes in discretionary consumer spending, increasing petroleum prices, or
otherwise, our unit volumes could decline and adversely affect our results of operations.
Regulations affecting the operation of our restaurants could increase our operating costs and restrict our growth.
Each of our restaurants must obtain licenses from regulatory authorities allowing it to sell liquor, beer, and wine, and each
restaurant must obtain a food service license from local health authorities. Each restaurant’s liquor license must be renewed annually
and may be revoked at any time for cause, including violation by us or our employees of any laws and regulations relating to the
minimum drinking age, advertising, wholesale purchasing, and inventory control. In certain states, including states where we have
existing restaurants or where we plan to open restaurants in the near term, the number of liquor licenses available is limited and
licenses are traded at market prices. Liquor, beer, and wine sales comprise a significant portion of our sales, representing
approximately 36% of our sales during 2004 and 34% during the three months ended March 31, 2005. Therefore, if we are unable to
maintain our existing licenses, or if we choose to open a restaurant in those states, the cost of a new license could be significant.
Obtaining and maintaining licenses is an important component of each of our restaurant’s operations, and the failure to obtain or
maintain food and liquor licenses and other required licenses, permits, and approvals would adversely impact our existing restaurants
and our growth strategy.
In addition, the Federal Americans with Disabilities Act prohibits discrimination on the basis of disability in public
accommodations and employment. Although our restaurants are designed to be accessible to the disabled, we could be required to
reconfigure our restaurants to provide service to, or make reasonable accommodations for, disabled persons.
Labor shortages or increases in labor costs could slow our growth or adversely affect our business.
Our success depends in part on our ability to attract, motivate, and retain a sufficient number of qualified employees, including
restaurant general managers and kitchen managers, necessary to continue our operations and keep pace with our growth. If we are
unable to recruit and retain a sufficient number of qualified individuals, our business and our growth could be adversely affected.
Competition for qualified employees could require us to pay higher wages and benefits, which could result in higher labor costs. In
addition, we have a substantial number of hourly employees who are paid the federal or state minimum wage and who rely on tips for
a significant portion of their income. Government-mandated increases in minimum wages, overtime pay, paid leaves of absence, or
health benefits, or increased tax reporting and tax payment requirements for employees who receive gratuities, or a reduction in the
number of states that allow tips to be credited toward minimum wage requirements, could increase our labor costs and reduce our
operating margins.
If general economic and political conditions worsen, consumer spending may decline, which would adversely affect our sales
and results of operations.
The restaurant industry is vulnerable to changes in economic and political conditions. In particular, future terrorist attacks and
military and governmental responses and the prospect of future wars may exacerbate negative changes to economic conditions. When
economic or political conditions worsen, our guests may reduce their level of discretionary spending. We believe that a decrease in
discretionary spending could impact the frequency with which our guests choose to dine out or the amount they spend on meals while
dining out, thereby adversely affecting our sales and results of operations. Additionally, a
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decrease in discretionary spending could adversely affect our ability to price our menu items at favorable levels, adversely affecting
our sales and results of operations.
Our success depends on our ability to compete effectively in the restaurant industry.
The restaurant industry is highly competitive. We compete on the basis of the taste, quality, and price of food offered, guest
service, brand name identification, attractiveness of the facilities, restaurant location, and overall dining experience. Our competitors
include a large and diverse group of restaurant chains and individual restaurants that range from independent local operators that have
opened restaurants in various markets, to well-capitalized national restaurant companies. In addition, we compete with other
restaurants and with retail establishments for real estate. Many of our competitors are well established in the casual dining market
segment and some of our competitors have substantially greater financial, marketing and other resources than we do.
Risks Related to this Offering
The market price for our common stock may be volatile, and you may not be able to sell our stock at a price above the initial
public offering price or at all.
Before this offering, there has been no public market for our common stock. An active and liquid public market for our common
stock may not develop or be sustained after this offering. The price of our common stock in any such market may be higher or lower
than the price you pay. If you purchase shares of common stock in this offering, you will pay a price that was not established in a
competitive market. Rather, you will pay the price that we negotiated with the representatives of the underwriters. Many factors could
cause the market price of our common stock to rise and fall, including the following:
•
variations in our or our competitors’ actual or anticipated operating results;
•
our or our competitors’ growth rates;
•
our or our competitors’ introduction of new locations, menu items, concepts, or pricing policies;
•
recruitment or departure of key personnel;
•
the level and quality of securities analyst coverage for our common stock;
•
changes in the estimates of our operating performance or changes in recommendations by any securities analysts that
follow our stock;
•
changes in the conditions in the restaurant industry, the financial markets, or the economy as a whole;
•
sales of our common stock by our executive officers, directors, and significant stockholders or sales of substantial
amounts of our common stock;
•
announcements of investigations or regulatory scrutiny of our operations or lawsuits filed against us; and
•
changes in accounting principles.
In the past, following periods of volatility in the market price of a company’s securities, securities class action litigation has often been
brought against that company. Due to the potential volatility of our stock price, we may therefore be the target of securities litigation
in the future. Securities litigation could result in substantial costs and divert management’s attention and resources from our business.
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If you purchase shares of our common stock in this offering, you will suffer immediate and substantial dilution in the net
tangible book value of your shares and may be subject to additional future dilution.
Prior investors have paid substantially less per share than the price in this offering. The initial public offering price is substantially
higher than the net tangible book value per share of the outstanding common stock immediately after this offering. Therefore, based
on an assumed offering price of $
per share, the midpoint of the price range set forth on the cover page of this prospectus, if you
purchase our common stock in this offering, you will suffer immediate and substantial dilution of approximately $
per share. If
the underwriters exercise their over-allotment option, or if outstanding options and warrants to purchase our common stock are
exercised, you will experience additional dilution. Any future equity issuances will result in even further dilution to holders of our
common stock.
Our current principal stockholders will continue to own a large percentage of our voting stock after this offering, which will
allow them to control substantially all matters requiring stockholder approval.
Upon the closing of this offering, investors affiliated with our Chairman, Marcus Jundt, will together beneficially own
approximately
% of our outstanding common stock, or
% if the underwriters exercise their over-allotment option in full. In
addition, three of our directors (including Mr. Jundt) following this offering will be affiliated with Mr. Jundt and Jundt Associates. As
a result, Mr. Jundt will have significant influence over our decision to enter into any corporate transaction and may have the ability to
prevent any transaction that requires the approval of stockholders, regardless of whether or not our other stockholders believe that
such transaction is in their own best interests. Such concentration of voting power could have the effect of delaying, deterring, or
preventing a change of control or other business combination, which could in turn have an adverse effect on the market price of our
common stock or prevent our stockholders from realizing a premium over the then-prevailing market price for their shares of common
stock.
The large number of shares eligible for public sale or subject to rights requiring us to register them for public sale could
depress the market price of our common stock.
The market price for our common stock could decline as a result of sales of a large number of shares of our common stock in the
market after this offering, and the perception that these sales could occur may depress the market price. Based on shares outstanding
as of
, 2005, we will have outstanding
shares of common stock after this offering. Of these shares, the
common stock sold in this offering will be freely tradable, except for any shares purchased by our “affiliates” as defined in Rule 144
under the Securities Act of 1933. The holders of substantially all of the remaining
shares of common stock have agreed
with the underwriters, subject to certain exceptions, not to dispose of or hedge any of their common stock or securities convertible into
or exchangeable for shares of common stock during the 180-day period beginning on the date of this prospectus, except with the prior
written consent of the underwriters. After the expiration of the lock-up period, these shares may be sold in the public market, subject
to prior registration or qualification for an exemption from registration, including, in the case of shares held by affiliates, compliance
with the volume restrictions of Rule 144.
Stockholders owning
shares are entitled, under contracts providing for registration rights, to require us to register our
securities owned by them for public sale. In addition, we intend to file registration statements to register the
approximately
million shares reserved for future issuance under our stock option plans and employee stock purchase plan.
Sales of common stock as restrictions end or pursuant to registration rights may make it more difficult for us to sell equity
securities in the future at a time and at a price that we deem appropriate.
We will have broad discretion over the use of proceeds from this offering and may use the proceeds in a manner significantly
different from our current plans.
While we currently expect to use the net proceeds from this offering for new restaurant development, to increase working capital,
and for other general corporate purposes, we will have broad discretion to adjust the application and allocation of the net proceeds. If
our expectations regarding financial
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performance and business needs prove to be inaccurate as a result of changed circumstances or opportunities, we may use the net
proceeds in a manner significantly different from our current plans. The success of our operations that are influenced by capital
expenditures and working capital allocations will substantially depend upon our discretion and judgment with respect to the
application and allocation of the net proceeds from this offering.
We will incur increased costs as a result of being a public company, which may divert management attention from our
business and impair our financial results.
As a public company, we will incur significant legal, accounting, and other expenses that we did not incur as a private company.
In addition, the Sarbanes-Oxley Act of 2002, as well as new rules subsequently implemented by the Securities and Exchange
Commission and NASDAQ, have required changes in corporate governance practices of public companies. We expect these new rules
and regulations to increase our legal and financial compliance costs and to make some activities more time-consuming and costly. In
addition, we will incur additional costs associated with our public company reporting requirements. We also expect these new rules
and regulations to make it more difficult and more expensive for us to obtain directors’ and officers’ liability insurance, and we may
be required to accept reduced policy limits and coverage or incur substantially higher costs to obtain the same or similar coverage. As
a result, it may be more difficult for us to attract and retain qualified persons to serve on our board of directors or as executive officers.
We are currently evaluating and monitoring developments with respect to these rules, and we cannot predict or estimate the amount of
additional costs we may incur or the timing of such costs.
Failure to achieve and maintain effective internal controls in accordance with Section 404 of the Sarbanes-Oxley Act could
have a material adverse effect on our business and stock price.
Pursuant to Section 404 of the Sarbanes-Oxley Act of 2002, within a period of time following the date we become a public
company, we will be required to furnish a report by our management on our internal control over financial reporting. We have not
been subject to these requirements in the past. The internal control report must contain (i) a statement of management’s responsibility
for establishing and maintaining adequate internal control over financial reporting, (ii) a statement identifying the framework used by
management to conduct the required evaluation of the effectiveness of our internal control over financial reporting, (iii) management’s
assessment of the effectiveness of our internal control over financial reporting as of the end of our most recent fiscal year, including a
statement as to whether or not internal control over financial reporting is effective, and (iv) a statement that our independent auditors
have issued an attestation report on management’s assessment of internal control over financial reporting.
To achieve compliance with Section 404 within the prescribed period, we will be engaged in a process to document and evaluate
our internal control over financial reporting, which is both costly and challenging. In this regard, we will need to dedicate internal
resources, engage outside consultants, and adopt a detailed work plan to (i) assess and document the adequacy of internal control over
financial reporting, (ii) take steps to improve control processes where appropriate, (iii) validate through testing that controls are
functioning as documented, and (iv) implement a continuous reporting and improvement process for internal control over financial
reporting. Despite our efforts, we can provide no assurance as to our, or our independent auditors’, conclusions with respect to the
effectiveness of our internal control over financial reporting under Section 404. There is a risk that neither we nor our independent
auditors will be able to conclude within the prescribed timeframe that our internal controls over financial reporting are effective as
required by Section 404. This could result in an adverse reaction in the financial markets due to a loss of confidence in the reliability
of our financial statements.
Provisions in our certificate of incorporation, our bylaws, and Delaware law could make it more difficult for a third party to
acquire us, discourage a takeover, and adversely affect existing stockholders.
Our certificate of incorporation, our bylaws, and the Delaware General Corporation Law contain provisions that may have the
effect of making more difficult, delaying, or deterring attempts by others to
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obtain control of our company, even when these attempts may be in the best interests of stockholders. These include provisions
limiting the stockholders’ powers to remove directors or take action by written consent instead of at a stockholders’ meeting. Our
certificate of incorporation also authorizes our board of directors, without stockholder approval, to issue one or more series of
preferred stock, which could have voting and conversion rights that adversely affect or dilute the voting power of the holders of
common stock. Delaware law also imposes conditions on the voting of “control shares” and on certain business combination
transactions with “interested stockholders.”
These provisions and others that could be adopted in the future could deter unsolicited takeovers or delay or prevent changes in
our control or management, including transactions in which stockholders might otherwise receive a premium for their shares over then
current market prices. These provisions may also limit the ability of stockholders to approve transactions that they may deem to be in
their best interests.
We do not expect to pay any dividends for the foreseeable future.
We do not anticipate that we will pay any dividends to holders of our common stock in the foreseeable future. Accordingly,
investors must rely on sales of their common stock after price appreciation, which may never occur, as the only way to realize any
future gains on their investment. Investors seeking cash dividends should not purchase our common stock.
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FORWARD-LOOKING STATEMENTS
This prospectus contains forward-looking statements. These statements relate to future events or our future financial performance.
We have attempted to identify forward-looking statements by terminology including “anticipates,” “believes,” “can,” “continue,”
“could,” “estimates,” “expects,” “intends,” “may,” “plans,” “potential,” “predicts,” “should,” or “will” or the negative of these terms
or other comparable terminology. These statements are only predictions and involve known and unknown risks, uncertainties, and
other factors, including those discussed under “Risk Factors.” The following factors, among others, could cause our actual results and
performance to differ materially from the results and performance projected in, or implied by, the forward-looking statements:
•
the limited history for evaluating our company;
•
our history of losses and expectation of further losses;
•
the effect of poor operating results on our company;
•
the effect of growth on our infrastructure, resources, and existing sales;
•
our ability to expand our operations in both new and existing markets;
•
the impact of supply shortages and food costs in general;
•
our ability to protect trademarks and other proprietary information;
•
the impact of litigation;
•
our ability to raise capital;
•
our ability to fully utilize and retain new executives;
•
negative publicity surrounding our restaurants or the consumption of our food products in general;
•
a decline in visitors to activity centers surrounding our restaurants;
•
the impact of federal, state, or local government regulations;
•
labor shortages or increases in labor costs;
•
economic and political conditions generally; and
•
the effect of competition in the restaurant industry.
We assume no obligation to publicly update or revise these forward-looking statements for any reason, or to update the reasons
actual results could differ materially from those anticipated in, or implied by, these forward-looking statements, even if new
information becomes available in the future.
MARKET DATA AND FORECASTS
Unless otherwise indicated, information in this prospectus concerning economic conditions and our industry is based on
information from independent industry analysts and publications, including the National Restaurant Association and Technomic, Inc.,
as well as our estimates. Our estimates are derived from publicly available information released by third-party sources, as well as data
from our internal research, and are based on such data and our knowledge of our industry, which we believe to be reasonable. None of
the independent industry publications used in this prospectus were prepared on our or our affiliates’ behalf and none of the sources
cited in this prospectus has consented to the inclusion of any data from its reports, nor have we sought their consent.
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USE OF PROCEEDS
Assuming an initial public offering price of $
per share, which is the midpoint of the range on the cover page of this
prospectus, we estimate that the net proceeds of this offering will be $
million after deducting underwriting discounts and
commissions and estimated offering expenses payable by us. We intend to use the net proceeds from this offering as follows:
•
approximately $
million for new restaurant development; and
•
approximately $
million for working capital and general corporate purposes.
The amounts set forth above are estimates, and we have not yet determined the exact amounts that we will spend for any of these
uses. The amounts and purposes for which we allocate the net proceeds of this offering may vary significantly depending upon a
number of factors, including future sales and the amount of cash generated by our operations. As a result, we will retain broad
discretion in the allocation of the net proceeds from this offering. Pending the uses described above, we will invest the net proceeds in
short-term interest-bearing, investment-grade securities.
DIVIDEND POLICY
We do not anticipate that we will pay any dividends to holders of our common stock in the foreseeable future, but instead we
currently plan to retain any earnings to finance the growth of our business. Payments of any cash dividends in the future, however, is
within the discretion of our Board of Directors and will depend on our financial condition, results of operations, and capital and legal
requirements as well as other factors deemed relevant by our Board of Directors.
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CAPITALIZATION
The following table sets forth our unaudited capitalization as of March 31, 2005
•
on an actual basis, which reflects our actual capitalization as of March 31, 2005 on a historical basis, without any
adjustments to reflect subsequent or anticipated events;
•
on a pro forma basis, which reflects our capitalization as of March 31, 2005 with adjustments to reflect (a) the issuance of
2,500,000 shares of Series B convertible preferred stock upon conversion of all principal amounts outstanding under our
convertible subordinated promissory note; and (b) the issuance of 6,666,666 shares of common stock upon conversion of
our Series A and Series B convertible preferred stock upon the closing of this offering; and
•
on a pro forma as adjusted basis, which reflects our pro forma capitalization as of March 31, 2005 as adjusted to reflect
the sale of the
shares of common stock offered by us in this offering at an assumed public offering price of
$
per share, after deducting estimated underwriting discounts and offering expenses and giving effect to our receipt
of the estimated net proceeds.
March 31, 2005
Actual
Pro Forma
As Adjusted
Pro Forma
(In thousands, except share data)
Cash and cash equivalents
$
1,966
$
1,966
$
Current portion of notes payable
Long-term notes payable, less current portion
Stockholders’ equity(1):
Series A convertible preferred stock, $0.01 par value,
4,166,666 shares authorized, 4,166,666 shares issued and
outstanding, actual; 4,166,666 shares authorized, no shares issued
and outstanding, pro forma; no shares authorized, issued, and
outstanding, pro forma as adjusted
$
663
6,000
$
663
3,309
$
Series B convertible preferred stock, $0.01 par value,
15,000,000 shares authorized, no shares issued and outstanding,
actual and pro forma; no shares authorized, issued, and
outstanding, pro forma as adjusted
Common stock, $0.01 par value, 40,000,000 shares authorized,
7,316,000 shares issued and outstanding, actual;
40,000,000 shares authorized, 13,982,666 shares issued and
outstanding, pro forma;
shares authorized,
shares
issued and outstanding, pro forma as adjusted(2)
Additional paid-in capital
Accumulated deficit
Total stockholders’ equity
Total capitalization
$
42
—
—
—
73
8,892
(2,983)
6,024
12,687
$
140
11,867
(3,292)
8,715
12,687
$
(1) Immediately prior to the closing of this offering, we will modify our capital structure to consist of
million shares of
preferred stock and
million shares of common stock, and all of our currently outstanding shares of common stock will
be converted, on a 1-for-5 basis, into the newly authorized shares of common stock.
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(2) Excludes the following as of
•
of $
•
$
, 2005:
shares issuable upon exercise of stock options outstanding with a weighted average exercise price
per share;
shares issuable upon exercise of outstanding warrants with a weighted average exercise price of
per share;
•
shares reserved for issuance under our stock option plans; and
•
shares reserved for issuance under our employee stock purchase plan.
Please read the capitalization table together with the sections of this prospectus entitled “Selected Consolidated Financial
Information” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our financial
statements and related notes included elsewhere in this prospectus.
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DILUTION
Our pro forma net tangible book value as of March 31, 2005 was $8.7 million, or $0.62 per share of common stock. Pro forma net
tangible book value per share represents the amount of our total tangible assets less total liabilities, divided by the pro forma number
of outstanding shares of common stock.
Dilution in net tangible book value per share represents the difference between the amount per share paid by purchasers of shares
of our common stock in this offering and the pro forma net tangible book value per share of our common stock immediately after
completion of this offering. After giving effect to our sale of
shares at an assumed initial public offering price of
$
per share and after deducting estimated underwriting discounts and commissions and our estimated offering expenses, our
adjusted pro forma net tangible book value at March 31, 2005 would have been $
, or $
per share of common stock.
This represents an immediate increase in net tangible book value of $
per share to existing stockholders and an immediate
dilution in net tangible book value of $
per share to purchasers of shares in this offering. The following table illustrates this per
share dilution:
Assumed initial public offering price per share
$
Pro forma net tangible book value per share as of March 31, 2005
$
Increase per share attributable to new investors
Adjusted pro forma net tangible book value per share after the offering
Dilution per share to new investors
$
The following table summarizes on a pro forma basis as of March 31, 2005, the differences between the number of shares
purchased from us, the total consideration paid to us, and the average price per share paid by existing stockholders (including
consideration received in connection with acquisitions) and by the new investors at an assumed initial public offering price of
$
per share before deducting the estimated underwriting discounts and commissions and estimated expenses of this offering.
Shares Purchased
Number
Total Consideration
Percent
Existing stockholders
New investors
Total
Amount
Average Price
Per Share
Percent
%
$
%
100.0%
$
100.0%
$
The discussion and tables also exclude any shares available for future grant under our stock option plans and employee stock
purchase plan, of which
were subject to options outstanding on
, at a weighted average exercise price of
$
and
shares available for future grant. As of
, there were also
shares of common stock
issuable upon exercise of warrants with weighted average exercise price of $
per share. To the extent the options and warrants
are exercised, there will be further dilution to new investors. The issuance of common stock in connection with the exercise of these
options will result in further dilution to new investors.
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SELECTED CONSOLIDATED FINANCIAL DATA
The selected consolidated financial data presented below has been derived from our consolidated financial statements. The
financial data as of and for the fiscal years ended December 31, 2002, 2003, and 2004 has been derived from our consolidated
financial statements that have been audited by Ernst & Young LLP, independent registered public accounting firm, and included
elsewhere in this prospectus. The financial data as of and for the fiscal years ended December 31, 2000 and 2001 and as of and for the
three months ended March 31, 2004 and 2005 have been derived from our consolidated financial statements that have not been
audited. The financial data for the three months ended March 31, 2004 and 2005 include all adjustments, consisting of normal
recurring adjustments, that we consider necessary for a fair presentation of the information set forth below, and are not necessarily
indicative of the results for the full year. You should read this information in conjunction with our financial statements, including the
related notes, and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included elsewhere in
this prospectus.
Three Months
Ended March 31,
Year Ended December 31,
2000
2001
2002
2003
2004
2004
(Unaudited)
Consolidated Statement of
Operations Data (in
thousands, except per share
data):
Restaurant sales
$
Costs and expenses:
Restaurant operating costs:
Cost of sales
Labor
Occupancy
Other
Total restaurant operating
costs
General and administrative
Preopening expenses
Depreciation and
amortization
Income (loss) from operations
Nonoperating expenses:
Interest expense, net
Income (loss) from continuing
operations before provision for
income taxes
Provision for income taxes
Income (loss) from continuing
operations
Income (loss) from discontinued
operations
Net income (loss)
$
4,534
$
2005
(Unaudited)
5,890
$
9,453
$
16,608
$
25,050
$
5,272
$
8,011
1,402
1,425
349
567
1,819
1,950
455
746
2,852
3,097
691
1,383
4,952
5,105
1,212
2,304
7,371
7,502
1,748
3,372
1,541
1,549
381
706
2,335
2,509
582
975
3,743
4,970
8,023
13,573
19,993
4,177
6,401
637
19
696
172
1,639
438
2,058
241
2,217
880
366
—
1,063
7
288
(153)
324
(272)
503
(1,150)
1,269
691
268
461
511
29
(11)
11
260
360
47
182
(142)
—
(283)
—
(1,253)
—
(347)
—
331
55
414
—
(153)
—
(142)
(283)
(1,253)
(347)
276
414
(153)
225(1)
83
$
7(1)
(276)
823
(87)
103
$
394(1)
(859)
21
$
(319)(1)
(666)
$
—
276
$
—
414
$
—
(153)
Table of Contents
Three Months
Ended March 31,
Year Ended December 31,
2000
2001
2002
2003
2004
2004
(Unaudited)
2005
(Unaudited)
Net income (loss) per share — Basic:
Continuing operations
Discontinued operations
Net income (loss)
$
$
(0.02)
0.03
0.01
$
(0.02)
0.03
0.01
$
$
(0.04)
0.00
(0.04)
$
(0.04)
0.00
(0.04)
$
$
(0.18)
0.06
(0.12)
$
(0.18)
0.06
(0.12)
$
$
(0.05)
(0.04)
(0.09)
$
(0.05)
(0.04)
(0.09)
$
$
0.04
—
0.04
$
0.03
—
0.03
$
$
0.06
—
0.06
$
0.04
—
0.04
$
(0.02)
—
(0.02)
$
Net income (loss) per share — Diluted:
Continuing operations
Discontinued operations
Net income (loss)
$
$
Weighted average shares used in
computation:
Basic
Diluted
$
$
$
$
$
(0.02)
—
(0.02)
$
7,546
7,564
6,955
7,184
7,301
7,301
7,316
7,562
7,564
6,955
7,184
14,027
11,473
7,316
(1) Represents results of operations and gain (loss) on sale of restaurant concepts other than Kona Grill.
December 31,
2000
2001
March 31,
2002
2003
2004
2004
(Unaudited)
Balance Sheet Data
(in thousands):
Cash and cash equivalents
Working capital (deficit)
Total assets
Long-term notes payable,
including current maturities
Total stockholders’ equity
$ 2,281
1,502
4,936
$
(Unaudited)
562
(96)
4,885
$
178
(2,539)
6,816
$
3,107
(218)
12,697
$
3,098
(261)
22,413
1,274
819
2,372
2,652
6,236
2,802
2,226
686
5,425
6,131
$
2002
$
$
3
4,398
659
(0.3)%
2003
$
$
4
4,966
716
7.1%
1,775
153
11,749
$
1,966
(67)
20,646
1,377
6,663
5,838
6,024
Three Months Ended
March 31,
Year Ended December 31,
Other Data (unaudited):
Restaurants open at end of period
Average restaurant sales (in thousands)(1)
Sales per square foot(1)
Same store sales growth(2)
2005
2004
$
$
7
5,479
777
7.3%
2004
$
$
4
1,278
184
10.5%
2005
$
$
7
1,358
193
6.9%
(1) Includes only those restaurants open for at least 12 months.
(2) Same store sales growth reflects the periodic change in restaurant sales for the comparable restaurant base. In calculating same
store sales growth, we include a restaurant in the comparable restaurant base after it has been in operation for more than
18 months.
22
Table of Contents
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
You should read the following discussion and analysis in conjunction with our consolidated financial statements and related notes
contained elsewhere in this prospectus. This discussion contains forward-looking statements that involve risks, uncertainties, and
assumptions. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of a
variety of factors, including those set forth under “Risk Factors” and elsewhere in this prospectus.
Overview
We currently own and operate seven restaurants located in six states. We offer innovative food, personalized service, and a
contemporary ambiance that create a satisfying yet affordable dining experience that we believe is superior to traditional casual dining
restaurants with whom we compete. Our high-volume upscale casual restaurants feature a diverse selection of mainstream American
dishes with a flavorful twist as well as a variety of distinctive appetizers and entrees with an international influence, including an
extensive selection of sushi items. Our menu items are freshly prepared and incorporate over 40 unique signature sauces and dressings
that we make from scratch, creating broad-based appeal for the lifestyle and taste trends of a diverse group of guests. Our menu is
standardized for all of our restaurants allowing us to deliver consistent high-quality meals. We believe that our enticing offerings and
generous portions, combined with an average check during April 2005 of approximately $14.35 per guest, excluding alcoholic
beverages, offer an exceptional value.
We continue to follow a disciplined growth plan focused largely on expanding our presence in new markets. To date, we have
funded our restaurant development, working capital, and general corporate needs with cash flows from operations, loans from
affiliates, the sale of common and preferred stock, receipt of landlord tenant improvement allowances, and borrowings under
equipment term loans. We opened three of our seven restaurants during the second half of 2004 and expect to open two restaurants
during the second half of 2005 in Sugarland (Houston), Texas and San Antonio, Texas. We plan to open four or five restaurants during
2006, which will significantly expand our presence in new markets. Our goal is for our new restaurants to generate average annual
unit volumes of $4.5 million within 12 to 18 months of opening. We believe our typical new restaurants experience gradually
increasing unit volumes as guests begin to discover our concept and we begin to generate market awareness. Our restaurants are also
subject to seasonal fluctuations. Despite our limited operating history, we have identified that sales in most of our restaurants typically
are higher during the spring and summer months and winter holiday season.
We experience various trends in our operating cost structure. Cost of sales, labor, occupancy, and other operating expenses for our
restaurants open at least 12 months generally trend consistent with restaurant sales, and we analyze those costs as a percentage of
restaurant sales. We anticipate that our new restaurants will generally take several months to achieve operating efficiencies and
planned sales levels due to challenges typically associated with new restaurants, including lack of market recognition and the need to
hire and sufficiently train employees, as well as other factors. We expect cost of sales and labor expenses as a percentage of restaurant
sales to be higher when we open a new restaurant, but decrease as a percentage of restaurant sales as the restaurant matures and as the
restaurant management and employees become more efficient operating that unit. The majority of our general and administrative costs
are fixed costs. Following this offering, however, we expect our general and administrative spending to increase as a percentage of
sales as we add executive management, corporate personnel, and infrastructure to support our growth and the requirements associated
with being a public company, including compliance with the Sarbanes-Oxley Act. Thereafter, we expect our general and
administrative costs to decrease as a percentage of restaurant sales as we begin to realize economies of scale.
23
Table of Contents
Key Measures We Use to Evaluate Our Company
Key measures we use to evaluate and assess our business include the following:
Number of Restaurant Openings. Number of restaurant openings reflects the number of restaurants opened during a particular
reporting period.
Same Store Sales Growth. Same store sales growth reflects the periodic change in restaurant sales for the comparable restaurant
base. In calculating same store sales growth, we include a restaurant in the comparable restaurant base after it has been in operation for
more than 18 months. Same store sales growth can be generated by an increase in guest traffic counts or by increases in the per person
average check amount. Menu price changes and the mix of menu items sold can affect the per person average check amount.
Average Unit Volume. Average unit volume represents the average annual restaurant sales for all of our restaurants open for at
least 12 months before the beginning of the period measured.
Key Financial Definitions
Restaurant Sales. Restaurant sales includes gross food and beverage sales, net of promotions and discounts.
Restaurant Cost of Sales. Restaurant cost of sales consists of food and beverage costs.
Restaurant Labor. Restaurant labor includes all direct and indirect labor costs incurred in operations.
Restaurant Occupancy. Restaurant occupancy includes all rent payments associated with the leasing of real estate, including base,
percentage and straight-line rent, property taxes, and common area maintenance expense. We record tenant improvement allowances
as a reduction of occupancy expense over the initial term of the lease.
Other Operating Expenses. Other operating expenses consist of all other restaurant-level operating costs, the major components of
which are utilities, credit card fees, supplies, marketing, repair and maintenance, and other expenses. Other operating expenses contain
both variable and fixed components.
General and Administrative. General and administrative includes all corporate and administrative functions that support
operations and provide infrastructure to facilitate our future growth. Components of this category include management and staff
salaries, bonuses and related employee benefits, travel, information systems, human resources, training, corporate rent, professional
and consulting fees, and corporate insurance costs.
Preopening Expense. Preopening expense consists of costs incurred prior to opening a new restaurant and is comprised principally
of manager salaries and relocation, payroll and related training costs for new employees, including practice and rehearsal of service
activities. We expense restaurant preopening expenses as incurred, and we expect preopening expenses to be similar for each new
restaurant opening, which typically commences 90 days prior to a restaurant opening.
Depreciation and Amortization. Depreciation and amortization expense consists of the depreciation of property and equipment.
We currently have no intangible assets or goodwill recorded on our consolidated balance sheet.
Interest Expense, Net. Interest expense, net includes the cost of our debt obligations and notes payable, including the amortization
of debt discounts, net of interest income.
Sales Per Square Foot. Sales per square foot represents the restaurant sales for our restaurants open for at least 12 months, divided
by the total square feet for such restaurants.
24
Table of Contents
Financial Performance Overview
The following table sets forth certain information regarding our financial performance for 2002, 2003, 2004, and the three months
ended March 31, 2004 and 2005 (unaudited).
Three Months
Ended March 31,
Year Ended December 31,
2002
Restaurant sales growth
Same store sales growth(1)
Average restaurant sales (in thousands)(2)
$
2003
60.5%
(0.3)%
4,398
$
2004
75.7%
7.1%
4,966
$
50.8%
7.3%
5,479
2004
$
46.4%
10.5%
1,278
2005
$
52.0%
6.9%
1,358
(1) Same store sales growth reflects the periodic change in restaurant sales for the comparable restaurant base. In calculating same
store sales growth, we include a restaurant in the comparable restaurant base after it has been in operation for more than
18 months.
(2) Includes only those restaurants open for at least 12 months.
Year Ended December 31,
2002
2003
2004
2005
2006(1)
Store Growth Activity
Beginning Restaurants
Openings
Closings
Total
2
1
—
3
3
1
—
4
4
3
—
7
7
2(2)
—
9
9
4
—
13
(1) Amounts represent estimates. We plan to open four or five restaurants during 2006.
(2) Represents sites currently under construction.
Critical Accounting Policies and Estimates
The preparation of consolidated financial statements in conformity with U.S. generally accepted accounting principles requires us
to make a number of 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. Such estimates and assumptions affect the reported amounts of sales and
expenses during the reporting period. On an ongoing basis, we evaluate estimates and assumptions based upon historical experience
and various other factors and circumstances. We believe our estimates and assumptions are reasonable in the circumstances; however,
actual results may differ from these estimates under different future conditions.
We believe that the estimates and assumptions discussed below are most important to the portrayal of our financial condition and
results of operations, in that they require our most difficult, subjective, or complex judgments, and form the basis for the accounting
policies deemed to be most critical to our operations.
Property and Equipment
We record all property and equipment at cost less accumulated depreciation and we select useful lives that reflect the actual
economic lives of the underlying assets. We calculate depreciation using the straight-line method for financial statement purposes. We
capitalize improvements and expense repairs and maintenance costs as incurred. We are often required to exercise judgment in our
decision whether to capitalize an asset or expense an expenditure that is for maintenance and repairs. Our judgments may produce
materially different amounts of repair and maintenance or depreciation expense if different assumptions were used.
We periodically perform asset impairment analysis of property and equipment related to our restaurant locations. Although we
have not made subjective or complex judgments with respect to these analyses to
25
Table of Contents
date, we expect that the operation of a multi-unit restaurant company will involve such determinations as we grow. Accordingly, we
expect to perform these tests when we experience a “triggering” event, such as a major change in a location’s operating environment,
or other event that might impact our ability to recover our asset investment. Also, we have a policy of reviewing the financial
operations of our restaurant locations on at least a quarterly basis. Locations that do not meet expectations will be identified and
monitored closely throughout the year. Primarily in the fourth quarter, we review actual results and analyze budgets for the ensuing
year. If we deem that a location’s results will continue to be below expectations, we will analyze alternatives for its continued
operation. At that time, we will perform an asset impairment test. If we determine that the asset’s carrying value exceeds the future
undiscounted cash flows, we will record an impairment charge to reduce the asset to its fair value. Calculation of fair value requires
significant estimates and judgements which could vary significantly based on our assumptions. Upon an event such as a formal
decision for abandonment (restaurant closure), we may record additional impairment of assets. Any carryover basis of assets will be
depreciated over the respective remaining useful lives.
Leasing Activities
We lease all of our restaurant properties. At the inception of the lease, we evaluate each property and classify the lease as an
operating or capital lease. We exercise significant judgment in determining the estimated fair value of the restaurant as well as the
discount rate used to discount the minimum future lease payments. The term used for this evaluation includes renewal option periods
only in instances in which the exercise of the renewal option can reasonably be assured and failure to exercise such option would
result in an economic penalty. All of our restaurant leases are classified as operating leases.
Our lease term used for straight-line rent expense is calculated from the date we take possession of the leased premises through the
lease termination date. There is potential for variability in our “rent holiday” period which begins on the possession date and ends on
the store open date. Factors that may affect the length of the rent holiday period generally include construction related delays.
Extension of the rent holiday period due to delays in restaurant opening will result in greater rent capitalized during the rent holiday
period. Contingent rent expense is also recorded over the periods that the liability is incurred.
Income Taxes
We provide for income taxes based on our estimate of federal and state tax liabilities. These estimates include, among other items,
effective rates for state and local income taxes, allowable tax credits for items such as taxes paid on reported tip income, estimates
related to depreciation and amortization expense allowable for tax purposes, and the tax deductibility of certain other items. Our
estimates are based on the information available to us at the time we prepare the income tax provision. We generally file our annual
income tax returns several months after our fiscal year end. Income tax returns are subject to audit by federal, state, and local
governments, generally years after the returns are filed. These returns could be subject to material adjustments or differing
interpretations of the tax laws.
Deferred income tax assets and liabilities are recognized for the expected future income tax consequences of carryforwards and
temporary differences between the book and tax basis of assets and liabilities. Valuation allowances are established for deferred tax
assets that are deemed more likely than not to be realized in the near term. We must assess the likelihood that we will be able to
recover our deferred tax assets. If recovery is not likely, we establish valuation allowances to offset any deferred tax asset recorded.
The valuation allowance is based on our estimates of future taxable income by each jurisdiction in which we operate, tax planning
strategies, and the period over which our deferred tax assets will be recoverable. In the event that actual results differ from these
estimates, we may be unable to implement certain tax planning strategies or adjust these estimates in future periods. As we update our
estimates, we may need to establish an additional valuation allowance which could have a material negative impact on our results of
operations or financial position.
26
Table of Contents
Accounting for Stock Options
We use the method of accounting for employee stock options allowed under Accounting Principles Board (“APB”) Opinion 25
and have adopted the disclosure provisions of SFAS 123, which require pro forma disclosure of the impact of using the fair value at
date of grant method of recording stock-based employee compensation. During December 2004, the Financial Accounting Standards
Board (“FASB”) issued Statement of Financial Accounting Standards 123-revised 2004 (“SFAS 123R”), “Share-Based Payment,”
which replaces Statement of Financial Accounting Standards No. 123 (“SFAS 123”), “Accounting for Stock-Based Compensation,”
and supersedes APB Opinion No. 25 (“APB 25”), “Accounting for Stock Issued to Employees.” SFAS 123R requires the
measurement of all share-based payments to employees, including grants of employee stock options, using a fair-value-based method
and the recording of such expense in our consolidated statements of operations. The accounting provisions of SFAS 123R are effective
for reporting periods beginning after December 15, 2005. The pro forma disclosures previously permitted under SFAS No. 123 no
longer will be an alternative to financial statement recognition. We are evaluating the requirements under SFAS 123R and expect the
adoption will have an impact on our consolidated results of operations and net income (loss) per share; however, it will not have an
effect on our overall cash flow.
We believe estimates and assumptions related to these critical accounting policies are appropriate under the circumstances;
however, should future events or occurrences result in unanticipated consequences, there could be a material impact on our future
financial condition or results of operations.
Results of Operations
The following table sets forth, for the periods indicated, the percentage of restaurant sales of certain items in our financial
statements.
Three Months
Ended March 31,
Year Ended December 31,
2002
2003
2004
2004
2005
(Unaudited)
Restaurant sales
Costs and expenses:
Restaurant operating costs:
Cost of sales
Labor
Occupancy
Other
Total restaurant operating costs
General and administrative
Preopening expense
Depreciation and amortization
Income (loss) from operations
Nonoperating expenses:
Interest expense, net
Income (loss) from continuing operations
before provision for income taxes
Provision for income taxes
Income (loss) from continuing operations
Income (loss) from discontinued operations
Net income (loss)
100.0%
100.0%
100.0%
100.0%
100.0%
30.2
32.8
7.3
14.6
84.9
17.4
4.6
5.3
(12.2)
29.8
30.7
7.3
13.9
81.7
12.4
1.4
5.0
(0.5)
29.4
29.9
7.0
13.5
79.8
8.8
3.5
5.1
2.8
29.2
29.4
7.2
13.4
79.2
7.0
—
5.1
8.7
29.1
31.3
7.3
12.2
79.9
13.2
0.1
6.4
0.4
1.1
1.6
1.5
0.8
2.3
1.3
0.2
1.1
—
1.1%
7.9
—
7.9
—
7.9%
(13.3)
—
(13.3)
4.2
(9.1)%
(2.1)
—
(2.1)
(1.9)
(4.0)%
27
(1.9)
—
(1.9)
—
(1.9)%
Table of Contents
Quarter Ended March 31, 2005 Compared with Quarter Ended March 31, 2004
Restaurant Sales. Restaurant sales increased by $2.7 million, or 52.0%, to $8.0 million during the first quarter of 2005 from
$5.3 million during the first quarter of 2004 primarily as a result of a $2.5 million increase associated with the opening of three new
restaurants during the second half of 2004, a $0.1 million decrease associated with one restaurant that was not included in the same
store sales base, and a $0.3 million related to a 6.9% increase in same store sales.
Cost of Sales. Cost of sales as a percentage of restaurant sales remained relatively consistent, at 29.1% during the first quarter of
2005 and 29.2% during the first quarter of 2004.
Labor. Labor expenses as a percentage of restaurant sales increased to 31.3% during the first quarter of 2005 from 29.4% during
the first quarter of 2004. This increase was primarily due to lower initial sales and high labor costs associated with recently opened
restaurants.
Occupancy. Occupancy expenses as a percentage of restaurant sales increased 0.1% to 7.3% during the first quarter of 2005 from
7.2% during the first quarter of 2004.
Other Operating Expenses. Other operating expenses as a percentage of restaurant sales decreased 1.2% to 12.2% during the first
quarter of 2005 from 13.4% during the first quarter of 2004, primarily as a result of lower expenses associated with the timing of our
advertising and marketing initiatives.
General and Administrative. General and administrative expenses increased by $0.7 million to $1.1 million during the first quarter
of 2005 from $0.4 million during the first quarter of 2004. General and administrative expenses as a percentage of restaurant sales
increased from 7.0% of sales during the first quarter of 2004 to 13.2% of sales during the first quarter of 2005. This increase was
primarily the result of the addition of executive management, corporate personnel, and infrastructure to support our growth strategy
and preparation to meet the reporting and compliance requirements of a public company.
Preopening Expense. As a result of no new restaurant openings during the first quarter of 2004 or 2005, preopening expense was
immaterial.
Depreciation and Amortization. Depreciation and amortization increased $0.2 million to $0.5 million during the first quarter of
2005 from $0.3 million during the first quarter of 2004. The increase was primarily the result of the additional depreciation on three
restaurants opened during the second half of 2004. Depreciation and amortization expenses as a percentage of restaurant sales
increased 1.3% to 6.4% during the first quarter of 2005 from 5.1% during the first quarter of 2004. The change was primarily the
result of higher average capital expenditures and lower restaurant sales in our recently opened restaurants.
Interest Expense, Net. Interest expense, net of interest income, increased to $0.2 million during the first quarter of 2005 from
$47,000 during the first quarter of 2004. The increase was primarily the result of the issuance of our convertible subordinated
promissory note during July 2004 and three new equipment loans. Concurrent with the completion of this offering, we will record a
one-time, non-cash charge to interest expense of $0.3 million upon conversion of our convertible subordinated promissory note.
Provision for Income Taxes. During the first quarter of 2004, we utilized net operating loss carryforwards available to offset our
income tax obligation. During the first quarter of 2005, we did not incur a federal income tax liability.
Year Ended December 31, 2004 Compared with Year Ended December 31, 2003
Restaurant Sales. Restaurant sales increased by $8.5 million, or 50.8%, to $25.1 million during 2004 from $16.6 million during
2003 primarily as a result of a $3.1 million increase associated with the opening of three new restaurants during the second half of
2004, a $4.3 million increase associated with one restaurant opened during 2003 that was not included in our same store sales base, as
well as $1.1 million related to a 7.3% increase in same store sales.
28
Table of Contents
Cost of Sales. Cost of sales as a percentage of restaurant sales decreased slightly to 29.4% during 2004 from 29.8% during 2003.
This reduction in cost of sales as a percentage of restaurant sales was primarily the result of realization of economies of scale in the
purchasing of food and beverage products.
Labor. Labor expenses as a percentage of restaurant sales decreased to 29.9% during 2004 from 30.7% during 2003. This decrease
was primarily the result of increased labor efficiencies driven by more experienced and well-trained restaurant personnel in our
existing units, partially offset by increased labor costs at our recently opened restaurants.
Occupancy. Occupancy expenses as a percentage of restaurant sales decreased 0.3% to 7.0% during 2004 from 7.3% during 2003,
primarily as a result of more favorable lease terms for new restaurants and increased sales in existing restaurants in 2004 that
leveraged the fixed portion of occupancy expenses.
Other Operating Expenses. Other operating expenses as a percentage of restaurant sales decreased 0.4% to 13.5% during 2004
from 13.9% during 2003, primarily as a result of increased sales, which leveraged the fixed portion of other operating expenses in
existing restaurants in 2004.
General and Administrative. General and administrative expenses increased by $0.1 million to $2.2 million during 2004 from
$2.1 million during 2003. General and administrative expenses as a percentage of restaurant sales decreased to 8.8% during 2004 from
12.4% during 2003. This decrease was primarily the result of a one-time compensation charge recorded in 2003 related to a former
senior officer. During 2005, however, we expect our general and administrative spending to increase as a percentage of sales as we
add executive management, corporate personnel, and infrastructure to support our growth strategy and the reporting requirements of a
public company.
Preopening Expense. Preopening expense increased by $0.7 million to $0.9 million during 2004 from $0.2 million during 2003.
The increase was as a result of opening three new restaurants for $0.8 million and a one-time settlement of trademark infringement
claim of $0.1 million during 2004 compared with opening one restaurant during 2003.
Depreciation and Amortization. Depreciation and amortization increased $0.5 million to $1.3 million during 2004 from
$0.8 million during 2003. The increase was primarily the result of the additional depreciation on more restaurants in operation during
2004. Depreciation and amortization expenses as a percentage of restaurant sales increased to 5.1% during 2004 from 5.0% during
2003.
Interest Expense, Net. Interest expense, net of interest income, increased by $0.1 million to $0.4 million during 2004 from
$0.3 million during 2003. The increase was primarily the result of the issuance of equipment financing and a convertible subordinated
promissory note associated with the three new restaurants opened during the second half of 2004.
Provision for Income Taxes. Our effective income tax rate for 2004 was 16.6% related to state income taxes payable. During
2003, we incurred a pre-tax loss. We had no effective tax rate because we did not generate net income, and did not recognize an
income tax benefit, as a valuation allowance was recorded to offset the full benefit. During 2004, our net operating loss carryforwards
offset our income for federal income tax purposes. As of December 31, 2004, we had federal net operating loss carryforwards of
$1.8 million available to offset future taxable income, subject to certain limitations.
Income (Loss) From Discontinued Operations. During 2004, we did not record income (loss) from discontinued operations.
During 2003, we recorded a loss from discontinued operations of $0.3 million primarily associated with a loss on sale of a restaurant
concept that was not related to Kona Grill.
Year Ended December 31, 2003 Compared with Year Ended December 31, 2002
Restaurant Sales. Restaurant sales increased by $7.1 million, or 75.7%, to $16.6 million during 2003 from $9.5 million during
2002 as a result of a $1.7 million increase associated with the opening of one new restaurant during the second half of 2003, a
$4.8 million increase associated with one restaurant opened during 2002 that was not included in our same store sales base, as well as
$0.6 million related to a 7.1% increase in same store sales.
29
Table of Contents
Cost of Sales. Cost of sales as a percentage of restaurant sales decreased to 29.8% during 2003 from 30.2% during 2002. This
reduction in cost of sales was primarily a function of a slight shift in the food and alcohol mix and more efficient purchasing of food
and beverages.
Labor. Labor expenses as a percentage of restaurant sales decreased to 30.7% during 2003 from 32.8% during 2002. This decrease
was the result of increased labor efficiencies driven by more experienced and well-trained restaurant personnel in our existing units as
well as same store sales growth of 7.1%.
Occupancy. Occupancy expenses as a percentage of restaurant sales remained consistent at 7.3% in 2003 and 2002.
Other Operating Expenses. Other operating expenses as a percentage of restaurant sales decreased 0.7% to 13.9% during 2003
from 14.6% during 2002, primarily as a result of increased sales in existing restaurants in 2003 as well as high volume in our
restaurant opened during 2003 and due to decreased expenditures for advertising and marketing.
General and Administrative. General and administrative expenses increased by $0.5 million, or 25.6%, to $2.1 million during
2003 from $1.6 million during 2002. General and administrative expenses as a percentage of restaurant sales decreased to 12.4%
during 2003 from 17.4% during 2002. These decreases were primarily the result of increasing the number of our restaurants without
proportionately increasing general and administrative costs or administrative personnel. This increase was partially offset by a
one-time compensation charge recorded during 2003 relating to a former senior officer.
Preopening Expense. Preopening expense decreased by $0.2 million to $0.2 million during 2003 from $0.4 million during 2002.
The decrease was a result of a more cost effective preopening process associated with the restaurant opened during 2003 compared
with the restaurant opened during 2002.
Depreciation and Amortization. Depreciation and amortization increased $0.3 million to $0.8 million during 2003 from
$0.5 million during 2002. The increase was primarily the result of the additional depreciation on more restaurants in operation during
2003. Depreciation and amortization expenses as a percentage of restaurant sales decreased to 5.0% during 2003 from 5.3% during
2002.
Interest Expense, Net. Interest expense, net of interest income, increased by $0.2 million to $0.3 million during 2003 from
$0.1 million during 2002. The increase was primarily a result of interest associated with our January 2003 bridge loan that was
outstanding for the full year of 2003 compared with approximately seven months during 2002, as well as an increase in our average
outstanding debt from equipment financing to $1.3 million during 2003 compared with $0.7 million during 2002.
Provision for Income Taxes. During 2002, we incurred a pre-tax loss. We did not recognize an income tax benefit, as a valuation
allowance was recorded to offset the full benefit.
Income (Loss) From Discontinued Operations. During 2003, we recorded a loss from discontinued operations of $0.3 million
primarily associated with a loss on sale of a restaurant that was not related to Kona Grill. During 2002, we recorded income from
discontinued operations of $0.4 million, primarily related to a gain on the sale of a restaurant that was not related to Kona Grill.
Potential Fluctuations in Quarterly Results and Seasonality
Our quarterly operating results may fluctuate significantly as a result of a variety of factors, including the following:
•
timing of new restaurant openings and related expenses;
•
restaurant operating costs and preopening costs for our newly-opened restaurants, which are often materially greater
during the first several months of operation than thereafter;
•
labor availability and costs for hourly and management personnel;
•
profitability of our restaurants, especially in new markets;
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•
increases and decreases in comparable restaurant sales;
•
impairment of long-lived assets and any loss on restaurant closures;
•
changes in borrowings and interest rates;
•
general economic conditions;
•
weather conditions or natural disasters;
•
timing of certain holidays;
•
new or revised regulatory requirements and accounting pronouncements;
•
changes in consumer preferences and competitive conditions; and
•
fluctuations in commodity prices.
Our business is also subject to seasonal fluctuations. Historically, sales in most of our restaurants have been higher during the spring
and summer months and winter holiday season. Consequently, our quarterly and annual operating results and comparable restaurant
sales may fluctuate significantly as a result of seasonality and the factors discussed above. Accordingly, results for any one quarter are
not necessarily indicative of results to be expected for any other quarter or for any year and comparable restaurant sales for any
particular future period may decrease. In the future, operating results may fall below the expectations of securities analysts and
investors. In that event, the price of our common stock would likely decrease.
Quarterly Results of Operations
The following table presents unaudited consolidated statements of operations data for each of the nine quarters in the period ended
March 31, 2005. We believe that all necessary adjustments have been included to present fairly the quarterly information when read in
conjunction with our annual financial statements and related notes. The operating results for any quarter are not necessarily indicative
of the results for any subsequent quarter.
Quarter Ended
2003
March 31
Consolidated Statement of
Operations Data (in
thousands):
Restaurant sales
Costs and expenses:
Restaurant operating
costs:
Cost of sales
Labor
Occupancy
Other
$
Total restaurant
operating costs
General and
administrative
Preopening expense
Depreciation and
amortization
3,601
June 30
$
2004
Sept. 30
Dec. 31
3,747 $
3,949
1,096
1,117
259
492
1,109
1,115
277
518
1,176
1,226
300
521
2,964
3,019
475
—
$
March 31
5,311
$
June 30
2005
Sept. 30
Dec. 31
March 31
5,272 $
5,590 $
6,566 $
7,622
$
8,011
1,571
1,647
376
773
1,541
1,549
381
706
1,646
1,636
393
704
1,949
2,009
464
873
2,235
2,308
510
1,089
2,335
2,509
582
975
3,223
4,367
4,177
4,379
5,295
6,142
6,401
442
11
351
230
790
—
366
—
384
127
530
79
937
674
1,063
7
180
180
198
265
268
268
332
401
511
(18)
95
(53)
(111)
461
432
330
(532)
29
56
64
70
70
47
47
119
147
182
(74)
—
31
—
(123)
—
(181)
—
414
—
385
20
211
20
(679)
15
(153)
—
(74)
31
(123)
(181)
414
365
191
(694)
(153)
—
—
(331)
31 $
(454) $
Income (loss) from operations
Nonoperating expenses:
Interest expense, net
Income (loss) from continuing
operations before provision
for income taxes
Provision for income taxes
Income (loss) from continuing
operations
Income (loss) from
discontinued operations
Net income (loss)
$
(74) $
12
(169) $
—
414 $
—
365 $
—
191 $
—
(694) $
—
(153)
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Liquidity and Capital Resources
Our primary liquidity and capital requirements have been for new restaurant development, working capital, and general corporate
needs. Prior to this offering, our main sources of liquidity and capital were cash flows from operations, loans from affiliates, the sale
of common and preferred stock, receipt of landlord tenant improvement allowances, and borrowings under six separate equipment
term loans.
Equipment Loans and Subordinated Notes
As of March 31, 2005, we had six equipment term loans with lenders, each collateralized by restaurant equipment. The
outstanding principal balance under these loans aggregated $4.0 million. The loans bear interest at rates ranging from 7.0% to 8.4%
and require monthly principal and interest payments aggregating $86,000. The loans mature between October 2006 and June 2012.
Five of the loans are guaranteed by our parent company and contain prepayment penalties as set forth in each agreement. Two of the
loans are guaranteed by our Chairman, and one of the loans is guaranteed by a former director and officer of our company. The loans
also require us to maintain certain financial covenants calculated at the end of each calendar year, and we were in compliance with all
such financial covenants as of March 31, 2005.
During July 2004, we issued a $3.0 million subordinated promissory note convertible into shares of our Series B preferred stock.
The note is held by an entity controlled by Messrs. Jundt and Hauser, directors of our company. The principal balance of the note
bears interest at an annual rate of 10.0%, payable monthly. The note is subordinate in right of liens and payment in full of up to
$16.0 million of our senior indebtedness, which includes principal and accrued interest payable to banks, insurance companies, or
other secured lenders. Upon 60 days’ prior written notice to the noteholder, we may prepay, without penalty, in whole or in part the
principal and accrued interest payable under the note, at which time the noteholder will have the right to convert the note as described
below. The noteholder also has the right to convert the note at any time prior to payment. The noteholder has agreed to convert the
principal amounts outstanding under the convertible subordinated promissory note into shares of Series B preferred stock and then
immediately convert those shares into our shares of common stock immediately prior to the closing of this offering. Upon such
conversion, we will record a charge to interest expense of $0.3 million.
Cash Flows
The following table summarizes our primary sources of cash during the periods presented (in thousands).
Three Months Ended
March 31,
Year Ended December 31,
2002
Net cash provided by (used in):
Operating activities
Investing activities
Financing activities
Net increase (decrease) in cash and cash equivalents
2003
2004
2004
2005
$
982
(2,919)
1,553
$
545
(2,832)
5,216
$
5,288
(9,254)
3,957
$
1,114
(1,172)
(1,274)
$
(101)
(1,424)
393
$
(384)
$
2,929
$
(9)
$
(1,332)
$
(1,132)
Our operations have not required significant working capital and, like many restaurant companies, we have been able to operate
with negative working capital. Restaurant sales are primarily for cash or by credit card, and restaurant operations do not require
significant inventories or receivables. In addition, we receive trade credit for the purchase of food, beverage, and supplies, thereby
reducing the need for incremental working capital to support growth.
Operating Activities. During the first quarter of 2005, net cash used for operating activities was $0.1 million primarily consisting
of the loss from continuing operations, decrease in accounts payable
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and accrued expenses partially offset by receivable collections and depreciation and amortization. During the first quarter of 2004, net
cash provided by operating activities was $1.1 million consisting primarily of income from operations, depreciation and amortization,
and collections of tenant improvement allowances. Net cash provided by operating activities in 2004 was $5.3 million consisting
primarily of income from continuing operations, depreciation and amortization, increase in accounts payable and accrued expenses,
and collections of $2.1 million tenant improvement allowances from the three restaurants opened during 2004, partially offset by
increases in inventories. Net cash provided by operating activities during 2003 was $0.5 million consisting primarily of our loss from
continuing operations, offset by depreciation and amortization, and increase in accrued expenses, partially offset by decreases in
accounts payable. Net cash provided by operating activities during 2002 was $1.0 million consisting primarily of depreciation and
amortization, increase in accounts payable and accrued expenses, and collection of tenant improvement allowances, partially offset by
cash used to fund our loss from operations.
Investing activities. Net cash used for investing activities was $1.4 million and $1.2 million for the first quarter of 2005 and 2004,
respectively. Investing activities for both periods were primarily related to funding construction in progress, purchase of property and
equipment, and reductions of accounts payable, all related to new restaurant openings. Net cash used for investing activities was
$9.3 million, $2.8 million, and $2.9 million during 2004, 2003, and 2002, respectively. Investing activities during all three periods
consisted primarily of purchases of property and equipment related to new restaurant openings, partially offset by increases in
accounts payable related to such purchases. During 2004 and 2003, net cash used for investing activities also includes expenditures to
acquire liquor licenses. The expenditure during 2003 was offset by proceeds from the sale of a discontinued restaurant concept. We
opened one new restaurant during 2002 and 2003 and opened three new restaurants during 2004.
Financing Activities. Net cash provided by financing activities was $0.4 million during the first quarter of 2005 as a result of
proceeds from equipment loans less related principal payments. Net cash used for financing activities was $1.3 million during the first
quarter of 2004 primarily as a result of payment of a promissory note payable. Net cash provided by financing activities was
$4.0 million during 2004, $5.2 million during 2003, and $1.6 million during 2002. Net financing activities during 2004 consisted
primarily of the issuance of our convertible subordinated promissory note and proceeds from equipment loans, offset by payment of a
promissory note and principal payments on equipment loans. Net financing activities during 2003 resulted from the sale of
$4.0 million of our Series A preferred stock and new borrowings from equipment loans, offset by payments of promissory notes and
principal payments on equipment loans. Net financing activities during 2002 resulted from the issuance of promissory notes.
We believe that the net proceeds of this offering, together with anticipated cash flows from operations and expected landlord
tenant improvement allowances, will be sufficient to satisfy our working capital and capital expenditure requirements, including
restaurant development, preopening expenses, and potential initial operating losses related to new restaurant openings, for at least the
next 12 months. Beyond the next 12 months, additional financing may be needed to fund working capital and restaurant development.
Changes in our operating plans, acceleration of our expansion plans, lower than anticipated sales, increased expenses, or other events,
including those described in “Risk Factors,” may require us to seek additional debt or equity financing on an accelerated basis.
Financing may not be available on acceptable terms, or at all, and our failure to raise capital when needed could impact negatively our
growth plans, financial condition, and results of operations. Additional equity financing may be dilutive to the holders of our common
stock and debt financing, if available, may involve significant cash payment obligations or financial covenants and ratios that restrict
our ability to operate our business.
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Aggregate Contractual Obligations
The following table sets forth our contractual commitments as of December 31, 2004.
Payments Due by Year
Contractual Obligations
2005
2006
2007
2008
2009
Thereafter
Total
(In thousands)
Long-term notes payable, including current
portion
Operating leases
Total
$
595
1,954
$ 2,549
$
605
2,005
$ 2,610
$ 3,137(1)
2,011
$ 5,148(1)
$
517
2,072
$ 2,589
$
557
2,142
$ 2,699
$
$
825
13,316
14,141
$
$
6,236
23,500
29,736
(1) Includes $3.0 million payable upon maturity of the convertible subordinated promissory note that will not be paid in the event
the holder converts the note into shares of our Series B preferred stock and then immediately converts these shares into shares of
our common stock immediately prior to the closing of this offering.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements.
Impact of Inflation
We believe that our results of operations are not materially impacted by moderate changes in the inflation rate. Inflation and
changing prices did not have a material impact on our operations during 2002, 2003, or 2004. Severe increases in inflation, however,
could affect the global and U.S. economies and could have an adverse impact on our business, financial condition, and results of
operations.
Impact of Recently Issued Standards
During December 2004, the Financial Accounting Standards Board (“FASB”) enacted Statement of Financial Accounting
Standards 123-revised 2004 (“SFAS 123R”), “Share-Based Payment,” which replaces Statement of Financial Accounting Standards
(“SFAS”) No. 123 (“SFAS 123”), “Accounting for Stock-Based Compensation,” and supersedes APB Opinion No. 25 (“APB 25”),
“Accounting for Stock Issued to Employees.” SFAS 123R requires the measurement of all share-based payments to employees and
directors, including grants of employee stock options, using a fair-value-based method and the recording of such expense in our
consolidated statements of operations. The accounting provisions of SFAS 123R are effective for reporting periods beginning after
December 15, 2005. We are required to adopt SFAS 123R during the first quarter of fiscal 2006. The pro forma disclosures previously
permitted under SFAS 123 no longer will be an alternative to financial statement recognition. See Note 2 in our Notes to Consolidated
Financial Statements for the pro forma net income and net income per share amounts, for fiscal 2002 through fiscal 2004 and the
three-month periods ended March 31, 2004 and 2005, as if we had used a fair-value-based method similar to the methods required
under SFAS 123R to measure compensation expense for employee stock incentive awards. We are evaluating the requirements under
SFAS 123R and expect the adoption will have an impact on our consolidated results of operations and net income (loss) per share;
however it will not have an effect on our overall cash flow. We have not yet determined the method of adoption or the effect of
adopting SFAS 123R, and we have not determined whether the adoption will result in amounts that are similar to the current pro
forma disclosures under SFAS 123.
During November 2004, the Emerging Issues Task Force (“EITF”) issued EITF No. 04-8, “The Effect of Contingently
Convertible Instruments on Diluted Earnings Per Share,” which states that contingently convertible instruments are subject to the
if-converted method under SFAS No. 128 regardless of the contingent features included in the instrument. EITF No. 04-8 is effective
for periods
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ending after December 15, 2004. The if-converted method was applied to our dilutive earnings per share calculation for the year ended
December 31, 2004.
During November 2004, the FASB issued SFAS No. 151, “Inventory Cost,” an amendment of ARB No. 43, Chapter 4. SFAS
No. 151 will be effective for financial statements for fiscal years beginning after June 15, 2005. This Statement amends the guidance
in ARB No. 43, Chapter 4, “Inventory Pricing” to clarify the accounting for abnormal amounts of idle facility expense, freight,
handling costs, and wasted material (spoilage). We do not expect SFAS No. 151 to have a material impact on our consolidated
financial statements.
Quantitative and Qualitative Disclosures about Market Risk
Derivative Financial Instruments, Other Financial Instruments, and Derivative Commodity Instruments
As of March 31, 2005, we did not participate in any derivative financial instruments, or other financial or commodity instruments
for which fair value disclosure would be required under SFAS No. 107, “Disclosure About Fair Value of Financial Investments.” We
hold no investment securities that would require disclosure of market risk.
Primary Market Risk Exposures
Our primary market risk exposures are in the areas of commodity costs and construction costs. Many of the food products
purchased by us are affected by changes in weather, production, availability, seasonality, and other factors outside our control. In
addition, we believe that almost all of our food and supplies are available from several sources, which helps to control food
commodity risks. We have exposure to rising construction costs, which may impact our actual cost to develop new restaurants.
Although the cost of restaurant construction will not impact significantly the operating results of the restaurant, it would impact the
return on investment for such restaurant.
Inflation
The primary inflationary factors affecting our operations are food, labor, and construction costs. A large number of our restaurant
personnel are paid at rates based on the applicable minimum wage, and increases in the minimum wage directly affect our labor costs.
Many of our leases require us to pay taxes, maintenance, repairs, insurance, and utilities, all of which are generally subject to
inflationary increases. We believe inflation has not had a material impact on our results of operations in recent years.
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BUSINESS
Overview
Kona Grill restaurants offer innovative freshly prepared food, personalized service, and a contemporary ambiance that create a
satisfying and affordable dining experience that we believe is superior to many traditional casual dining restaurants with whom we
compete. Our high-volume upscale casual restaurants feature a diverse selection of mainstream American dishes with a flavorful twist
as well as a variety of distinctive appetizers and entrees with an international influence, including an extensive selection of sushi
items. Our menu items also incorporate over 40 unique signature sauces and dressings that we make from scratch, creating
broad-based appeal for the lifestyle and taste trends of a diverse group of guests, including everyday diners, couples, larger social
groups, families, singles, and empty-nesters as well as special occasion customers. Our menu is standardized for all of our restaurants
allowing us to deliver consistent high-quality meals.
Our restaurants accommodate approximately 275 guests and are comprised of multiple dining areas that incorporate modern
eye-catching design elements to create an upscale ambiance that reinforces our high standards of food and service. Our main dining
area, full-service bar, outdoor patio, and sushi bar provide a choice of atmospheres and a variety of environments designed to appeal
and encourage repeat visits with regular guests. We locate our restaurants in high-activity areas such as retail centers, shopping malls,
lifestyle centers, and entertainment centers that are situated near commercial office space and residential housing to attract guests
throughout the day. Our restaurants are designed to satisfy our guests’ dining preferences during lunch, dinner, and non-peak periods
such as late afternoon and late night.
We currently own and operate seven upscale casual dining restaurants located in six states. We opened three restaurants during
2004 and expect to open two restaurants during the second half of 2005 in Sugarland (Houston), Texas and San Antonio, Texas. We
plan to open four or five restaurants during 2006, which will significantly expand our presence in new markets.
We believe that our enticing offerings and generous portions combined with an average check during April 2005 of $14.35 per
guest, excluding alcoholic beverages, offers our guests exceptional value. This value proposition, coupled with our flexible daypart
model and exceptional service, have created an attractive upscale casual dining experience. Furthermore, our restaurant model
provides us with considerable growth opportunities to develop the Kona Grill concept nationwide.
Our History
McDermott Restaurants, Inc. was incorporated under a prior name by our founder, Michael McDermott, in Arizona during 1996.
We opened our first Kona Grill restaurant in Scottsdale, Arizona during 1998. During 2002, McDermott Restaurants, Inc. completed a
corporate reorganization involving the formation of a Delaware parent holding company, Kona Grill, Inc. Through the reorganization,
McDermott Restaurants, Inc. changed its name to Kona Grill Arizona, Inc. and became a wholly owned subsidiary of Kona Grill, Inc.
All of Kona Grill Arizona’s outstanding common stock was converted, on a share-for-share basis, into common stock of Kona Grill,
Inc.
Recent Developments
During the quarter ended March 31, 2005, we generated $8.0 million of sales, an increase of $2.7 million, or 52.0%, from the
$5.3 million sales generated during the comparable prior year period. Our same store sales growth was 6.9% during the first quarter of
2005 compared with the first quarter of 2004.
Restaurant Industry Overview
The National Restaurant Association estimates that the restaurant industry represents approximately 4.0% of the United States’
gross domestic product. The National Restaurant Association forecasts that restaurant industry sales will continue to experience
growth, reaching $476 billion in 2005, which would
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mark the 14th consecutive year of sales growth for the industry and a 4.9% increase over 2004 sales. The National Restaurant
Association estimates that sales in the full-service segment of the U.S. restaurant industry grew approximately 5.4% per annum
between 2000 and 2004, reaching approximately $158 billion in 2004, and projects that sales at full-service restaurants in the United
States will increase approximately 5.0% to approximately $165 billion in 2005.
Technomic, Inc., a national consulting and research firm, forecasts sales at U.S. full-service restaurants to grow at a compounded
annual rate of 5.7% from 2004 through 2008, compared to forecasted compounded annual growth of 4.8% for the total U.S. restaurant
industry for the same period. According to Technomic, the varied menu category within the full-service restaurant segment of the
U.S. restaurant industry, which we believe Kona Grill participates in, is projected to grow at a 6.0% compounded annual growth rate
from 2004 through 2008.
Within the consumer food industry, studies show that over the past 50 years there has been a steady shift away from the
consumption of “food-at-home” towards the purchase of “food-away-from-home.” According to the National Restaurant Association,
“food-away-from-home” currently represents 47% of all food purchases made by consumers and is projected to represent
approximately 53% by 2010.
We believe that this growth in purchases of “food-away-from-home” in recent times is attributable to, among other things,
demographic, economic, and lifestyle trends, including the following:
•
the rise in the number of women in the workplace;
•
an increase in dual-income families;
•
the aging of the U.S. population; and
•
an increased willingness by consumers to pay for the convenience of meals prepared outside their homes.
Competitive Strengths
We believe that the key strengths of our business include the following:
•
Innovative Menu Selections with Mainstream Appeal. We offer a freshly prepared menu that combines recognizable
American selections with a flavorful twist, a variety of distinctive internationally influenced cuisines, signature seafood
dishes, and award-winning sushi to appeal to a wide range of tastes, preferences, and price points. We prepare our dishes
from original recipes with generous portions and creative and appealing presentations that adhere to standards that we
believe are much closer to fine dining than typical casual dining. Our more than 40 proprietary sauces and dressings
further differentiate our menu items and help create an exceptional meal with harmonized flavors and colors while
allowing our guests to experience new foods and tastes as well as share their everyday favorite choices with others. With
an average check during April 2005 of $14.35 per guest, excluding alcoholic beverages, we believe we provide an
exceptional price/value proposition that helps create a lasting relationship between Kona Grill and our guests.
•
Distinctive Upscale Casual Dining Experience. Our upscale casual dining concept captures some of the best elements of
fine dining including a variety of exceptional food, impeccable service, and an extensive wine and drink list, and
combines them with more casual qualities, like a broad menu with attractive price points and a choice of environments to
fit any dining occasion, enabling us to attract a broad guest demographic. Our innovative menu, personalized service, and
contemporary restaurant design blend together to create our upscale casual dining experience. We design our restaurants
with a unique layout and utilize modern, eye- catching design elements such as our signature 2,000 gallon saltwater
aquarium stocked with bright and colorful exotic fish, plants, and coral. Our multiple dining areas provide our guests with
a number of distinct dining environments and atmospheres to satisfy a range of occasions or dining preferences. Our open
exhibition-style kitchen and sushi bar further emphasize the quality and freshness of our food that are the cornerstones of
our unique upscale casual dining concept.
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•
Personalized Guest Service. Our commitment to provide prompt, friendly, and efficient service enhances our exceptional
food, reinforces our upscale ambiance, and helps distinguish us from other traditional casual dining restaurants. We train
our service personnel to be cordial, friendly, and knowledgeable about all aspects of the restaurant, especially the menu,
which helps us provide personalized guest service that is designed to ensure a pleasurable dining experience and exceed
our guests’ expectations. Our kitchen staff completes extensive training to ensure that our dishes are precisely prepared to
provide a consistent quality of taste. We believe our focus on high service standards underscores our guest-centric
philosophy.
•
Multiple Daypart Model. Our appetizers, pizzas, entrees, and sushi offerings provide a flexible selection of items that can
be ordered individually or shared by our guests, allowing them to dine with us during traditional lunch and dinner meal
periods as well as in between customary dining periods such as in the late afternoon and late night. The lively ambiance
of our patio and bar areas provides an energetic social forum for us to attract a younger professional clientele during these
non-peak periods, as well as for all of our guests to enjoy before or after they dine with us. Our sushi bar provides another
dining venue for our guests to dine with us while offering them a healthier, more adventuresome dining experience. We
believe that our ability to attract and satisfy our guests throughout the day distinguishes us from many other casual dining
chains and helps us maximize sales and leverage our fixed operating costs.
•
Attractive Unit Economics. During 2004, the average unit volume of our four restaurants open the entire year was
$5.5 million, or $777 per square foot. We believe our high average unit volume helps us attract high-quality employees,
leverage our fixed costs, and makes us a desirable tenant for landlords. We expect the average cash investment for our
new restaurants to be approximately $2.3 million, net of landlord tenant improvement allowances and excluding
preopening expense. Our restaurant cash flow provides us the prospect of strong financial returns on this investment.
•
Strong Management Team with Proven Restaurant Operations Experience. Our senior management team led by C.
Donald Dempsey, our Chief Executive Officer and President, Jason J. Merritt, our Executive Vice President and Chief
Operating Officer, and Mark S. Robinow, our Executive Vice President, Chief Financial Officer, and Secretary, have
more than 50 years of collective restaurant industry experience. Our Chief Executive Officer and Chief Financial Officer
were actively involved in the expansion of a number of national and international concepts, including the development of
approximately 400 units for McDonald’s Corporation in Asia, more than 100 units for Caribou Coffee Company, and
40 units for Rainforest Cafe, Inc. Our Chief Operating Officer has been with our company since inception and provides
executive management and operational experience from a number of national multi-unit restaurant chains.
Growth Strategy
We believe that there are significant opportunities to grow our sales, and we believe our concept can support at least 200
restaurants in the United States. The following sets forth the key elements of our growth strategy.
Pursue Disciplined Restaurant Growth
We adhere to a disciplined site selection process and intend to continue expanding Kona Grill restaurants in both new and existing
metropolitan and suburban markets that meet our demographic, real estate, and investment criteria. We plan to open the majority of
our new restaurants in new markets to continue to build awareness of our concept and to establish Kona Grill as a national upscale
casual brand. During 2004, we opened three new restaurants, all of which were located in new markets. Our expansion plans do not
involve any franchised restaurant operations.
We intend to continue expanding Kona Grill restaurants in both metropolitan and suburban markets and will pursue locations that
will enable us to maximize the use of our outdoor patio seating. We maintain a disciplined and controlled site selection process
involving our management team. Our site
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selection criteria for new restaurants includes locating our restaurants near high activity areas such as retail centers, shopping malls,
lifestyle centers, and entertainment centers. In addition, we focus on areas that have above-average income populations, have high
customer traffic from thriving businesses or retail markets, and are convenient for and appealing to business and leisure travelers.
Our growth strategy for developing new restaurants also includes expansion into existing markets. Operating multiple restaurants
in existing markets enables us to leverage our infrastructure and gain operating efficiencies associated with regional supervision,
marketing, purchasing, and hiring. In addition, our ability to hire qualified employees is enhanced in markets where we are well
known and we are able to utilize existing associates in new restaurants.
We plan to open two new restaurant locations during the second half of 2005. Both locations are in Texas; one in Sugarland, a
suburb of Houston, and the second in San Antonio. We do not currently operate any restaurants in Texas. We expect to open four or
five restaurants during 2006, have identified sites, and are negotiating leases for all of these restaurants.
Grow Existing Restaurant Sales
Our goal for existing restaurants is to improve our unit volumes through ongoing local marketing efforts designed to generate
awareness and trial of our concept and increase the frequency of guest visits. During 2004, our comparable restaurants, those open for
more than 18 months, generated same store sales increases of 7.3%. During the first three months of 2005, our comparable restaurants
produced same store sales increases of 6.9% compared with the first quarter of 2004.
We intend to continue to evaluate operational initiatives designed to increase sales at our restaurants. For example, we are
currently evaluating enclosing certain of our existing and future patios in cooler climates to permit the use of our patio year round and
increase restaurant sales. We also plan to design certain of our restaurants with adaptable modules to provide reconfigurable private
dining rooms when needed, which will provide us flexibility to book private parties and special events. We believe by emphasizing
operating in multiple dayparts, we are able to increase sales and leverage both development and fixed operating costs by operating
during a greater number of hours during any given day. In addition, to date we have not promoted our formal take-out program for our
restaurants. Take-out sales represented a minimal amount of our restaurant sales during 2004. According to a study undertaken by
Technomic, during 2004 take-out sales for full-service restaurants averaged 6.0% of sales. We believe that we can increase take-out
sales without a significant capital investment expense per restaurant.
Leverage Depth of Existing Corporate Infrastructure
We believe that successful execution of our growth strategies will enable Kona Grill to be a leading upscale casual dining
restaurant operator in the United States. We have invested and will continue to invest in our corporate infrastructure by hiring
experienced senior management, operating, human resources, and marketing personnel; implementing operating, management, and
information systems; and establishing financial controls to minimize risks associated with our current growth strategy. As we continue
to realize the benefits of our growth, we believe that we will be able to leverage our investments in our corporate infrastructure and
realize benefits from the increasing sales that our company generates.
Unit Economics
During 2004, the average unit volume of our four restaurants open the entire year was $5.5 million, or $777 per square foot. We
believe our high average unit volume helps us attract high-quality employees, leverages our fixed costs, and makes us a desirable
tenant for landlords.
Our prototype restaurant is 6,800 square feet and has seating for approximately 275 guests, including patio seats. We target
prototype average unit volume to be $4.5 million annually, or sales per square foot of $662. The average investment cost for our
restaurants depends upon the type of lease entered into, the amount of tenant improvement allowance we receive from landlords, and
whether we assume responsibility
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for the construction of the building. The average cash investment cost for all of our restaurants opened since the beginning of 2002
was approximately $2.2 million, net of tenant improvement allowances and excluding preopening expense. We expect the cash
investment cost of our prototype restaurant, however, to be approximately $2.3 million, net of landlord tenant improvement
allowances and excluding preopening expense.
We believe that our ability to generate sales throughout the day is a key strength of our concept. The following table depicts the
amount and percentage of contribution to each daypart of overall restaurant sales during the first quarter of 2005.
Sales by Daypart
Three Months Ended
March 31, 2005
Sales
Percent
(In thousands, except
percents)
Lunch
Open to 3:00 p.m.
Dinner
5:00 to 9:00 p.m.
Non-Peak
3:00 p.m. to 5:00 p.m. and
9:00 p.m. to Close
$
Total All Day
$
1,836
23%
4,349
54%
1,826
23%
8,011
100%
Menu
The Kona Grill menu offers guests a diverse selection of recognizable mainstream American dishes each with their own flavorful
twist and a variety of diverse internationally influenced appetizers and entrees including a broad selection of mouthwatering sushi. We
are well-known for our selection of over 40 signature sauces and dressings. Our sauces and dressings distinguish and compliment our
dishes, creating delicious flavor profiles and artistic presentations for our guests. All of our menu items are freshly prepared and
adhere to food standards that we believe are much closer to fine dining than typical casual dining.
Our menu features a selection of appetizers, pizzas, sandwiches, salads, noodle dishes, signature entrees, and desserts. We round
out our menu with over 80 freshly hand-made award-winning sushi choices. Our menu includes socially interactive items that can be
eaten individually or easily shared amongst guests such as our Chicken Satay appetizer served with Hoisin Sauce and our
Garlic Shrimp Pizza with a Roasted Red Pepper Pizza Sauce . Our signature entrees feature our various sauces and offer guests
generous portions that are impressive in presentation and in taste. For example, our popular Macadamia Nut Chicken is served with
our special Shoyu-Cream Sauce accompanied by wok-tossed vegetables and white cheddar mashed potatoes; our Lemon-Grass
Crusted Swordfish includes Coconut Curry Sauce accompanied by sautéed baby bok choy and white cheddar mashed potatoes;
and our Pan-Seared Ahi Tuna is served over steamed white rice with a Sweet-Chili Sauce accompanied by sautéed baby bok
choy.
We are also known for our broad assortment of sushi that includes traditional favorites as well as distinct specialty items such as
our Three-Layered Tuna Tartare made with tuna sashimi, cream cheese, and avocado napoleon with Mandarin Orange
Vinaigrette , or our Jalapeno Yellowtail Sashimi with a slice of jalapeno and cilantro with Ponzu Sauce . We have designed our
sushi menu with a combination of both straight-forward and unintimidating selections such as our California Roll as well as more
sophisticated items such as our Sashimi Platter comprised of cuts of tuna, yellowtail, and salmon. Our menu, coupled with our
sushi selections, offers ample choices for health conscious guests, which the National Restaurant Association expects will continue to
be a point of focus in the future.
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Each of our restaurants has a dedicated kitchen staff member, whom we refer to as our saucier, to oversee the preparation of our
more than 40 unique sauces and dressings that are made fresh from scratch on site using only high-quality ingredients and fresh
produce. Each sauce is designed according to a proprietary recipe for a specific menu item and includes unique flavors and
combinations such as our Honey Cilantro, Pineapple-Chipotle , and Spicy Aioli dipping sauces, and our Peanut Vinaigrette
dressing. We believe that our distinctive sauces and dressings provide a unique flavor profile, which further distinguishes Kona Grill.
Our flavorful sauces and dressings also enhance our guests’ overall dining experience by allowing them to not only experience new
tastes but to also share their favorite sauces with others, helping to create customer loyalty and a socially interactive environment.
The versatility of our menu enables us to provide our guests with dishes that can be enjoyed outside of the traditional lunch and
dinner meal periods as well as to serve our guests for a variety of traditional dining occasions such as everyday dining, professional
lunches, social gatherings and special occasions. Furthermore, each restaurant offers a separate children’s menu.
Menu prices range from $4.50 to $8.50 for appetizers and soups, $5.00 to $9.95 for salads, $7.50 to $12.95 for sandwiches and
lunch entrees, $14.75 to $29.95 for dinner entrees, and $3.50 to $30.00 for our sushi selections ranging from a single sushi item up to
our assorted 18-piece Sashimi Platter . During April 2005, our average guest check was $14.35 excluding alcoholic beverages, and
was $22.40 including alcoholic beverages. Based upon our innovative high-quality recipes, generous portions, and flexible price
points we believe we provide our guests exceptional value that allows us to attract a diverse customer base and increase the frequency
of dining visits to our upscale casual restaurants.
We provide a uniform menu in all of our restaurants and do not feature daily specials, allowing us to deliver consistent,
high-quality food at every location. We review our menu and consider enhancements to existing items or the introduction of new
items based on customer feedback, which helps assure that we are meeting the needs of our guests.
Alcoholic beverage sales represented approximately 36% of our total restaurant sales during 2004 and 34% during the first quarter
of 2005. Our guests enjoy an extensive selection of approximately 20 domestic and imported bottled and draft beers, over 50
selections of wines by the bottle, 40 wines by the glass and a broad selection of liquors and specialty cocktail drinks.
Decor and Atmosphere
We have created a uniform restaurant layout as well as similar interior and exterior design elements in each of our restaurants. The
layout of our restaurants focuses on joined spaces that create multiple distinct dining areas for our guests while also maintaining an
open atmosphere that allows our guests to have a panoramic view of the entire restaurant without negatively impacting the specific
ambiance or dining occasion they desire.
Our main dining room area offers a combination of booth seating and larger central tables. Our full service bar area and covered
outdoor patio offer not only a high-energy, socially interactive area for our guests to enjoy appetizers or sushi while they wait to dine
with us but also serves as a destination for many of our frequent guests who visit us during our late afternoon and late night periods.
Our bar area is strategically placed to ensure that families and other groups that may prefer a quieter, more intimate dining experience
are not disturbed. Our sushi bar provides yet another dining alternative for singles, couples, and our guests with more sophisticated,
health conscious, or adventuresome tastes.
Our restaurant interiors utilize a combination of warm earth tones, rich mahogany wood finishes, and oversized silver gilded
mirrors. We showcase our signature 2,000 gallon saltwater aquarium stocked with bright and colorful exotic fish, plants, and coral in
each of our restaurants and ensure that it can be seen from both our main dining area and our bar area. Our bars are made of granite
and compliment our mahogany finishes to enhance our contemporary design. We use a variety of directional lighting, featuring
shiitake mushroom-shaped ceiling lights, to deliver a warm glow throughout our restaurants and we adjust our dining atmosphere
throughout the day by adjusting the lighting, music, and the choice of television
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programming in our bar area. Our exhibition-style kitchens are brightly lit to display our kitchen staff at work. Our covered outdoor
patio areas seat an average of 58 guests. We utilize state-of-the-art heating technology suspended from our roofs to allow us to
maximize the use of our patios throughout most of the year while avoiding obtrusive heating mechanisms that could detract from our
upscale ambiance.
The exterior of our restaurants typically employ cultured stone and slate to create a highly visible restaurant that features our well
lit, Kona Grill sign. We landscape our restaurants where appropriate and vary the exterior design to coordinate with the surrounding
area. We use accent lighting on trees and directional lighting on our buildings to further increase the visual appeal of our restaurants.
We believe that our existing restaurant asset base is in excellent condition and we maintain each restaurant’s furniture, fixtures,
equipment, and other design elements in accordance with our operating standards.
Food Preparation, Quality Control, and Purchasing
We believe that we have some of the highest food quality standards in the industry. Our systems are designed to protect our food
products throughout the preparation process. We provide detailed specifications to suppliers for our food ingredients, products, and
supplies. We strive to maintain quality and consistency in our restaurants through careful training and supervision of personnel. Our
restaurant general managers receive a minimum of six months of training and kitchen managers receive between three to six months
training, as required, and all receive an operations manual relating to food and beverage preparation and restaurant operations. We also
instruct kitchen managers and staff on safety, sanitation, housekeeping, repair and maintenance, product and service specifications,
ordering and receiving products, and quality assurance. All of our restaurant managers are compliant with Hazard Analysis and
Critical Control Point, or HACCP. We monitor minimum cook temperature requirements and conduct twice-a-day kitchen and food
quality inspections to further assure the safety and quality of all of the items we use in our restaurants.
We are committed to purchasing high-quality ingredients for our restaurants while striving to maintain and improve costs. We use
only the freshest ingredients and, as a result, we maintain only modest inventories. We also have a nonexclusive contract with
U.S. Foodservice, a national food distributor, to be the primary supplier of our food. We have arrangements with local produce
distributors and specialty food suppliers who provide high-quality ingredients and perishable food products. We believe that
competitively priced alternative distribution sources are available should those channels be necessary. We source all of our products
and supplies with reputable and high-quality providers that are capable of distribution on a national level.
Our goal is to maximize our purchasing efficiencies and obtain the lowest possible prices for our ingredients, products, and
supplies, while maintaining the highest quality. Our corporate purchasing manager coordinates our national supply contracts,
negotiates prices for our food supply throughout all of our restaurants, monitors quality control and consistency of the food supplied to
our restaurants, and oversees delivery of food on a nationwide basis. In order to provide the freshest ingredients and products, and to
maximize operating efficiencies between purchase and usage, each restaurant’s kitchen manager determines its daily usage
requirements for food ingredients, products, and supplies. The kitchen manager orders accordingly from our approved suppliers and
all deliveries are inspected to assure that the items received meet our quality specifications and negotiated prices.
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Restaurant Locations
We operate seven restaurants in six states. We lease all of our restaurant sites under lease terms that vary by restaurant; however,
we generally lease space for 10 years and negotiate at least two five-year renewal options. The following table sets forth our restaurant
locations as of March 31, 2005 and anticipated openings for 2005.
State
Year
Opened
City
Arizona
Arizona
Missouri
Nevada
Colorado
Nebraska
Indiana
Texas
Texas
Scottsdale
Chandler
Kansas City
Las Vegas
Denver
Omaha
Carmel
Sugarland (Houston)
San Antonio
1998
2001
2002
2003
2004
2004
2004
2005(2)
2005(2)
Square
Footage
Number of
Seats(1)
5,964
7,389
7,455
7,380
5,920
7,415
7,433
6,914
7,200
249
326
222
275
243
304
295
285
256
(1) Number of seats includes dining room, patio seating, sushi bar, bar, and private dining room (where applicable).
(2) Anticipated opening during the second half of 2005.
Expansion Strategy and Site Selection
We believe the locations of our restaurants are critical to our long-term success and, accordingly, we devote significant time and
resources to analyzing each prospective site. Our restaurant expansion strategy focuses primarily on penetrating new markets in major
metropolitan areas throughout the United States, as well as further penetrating existing markets. In general, we prefer to open our
restaurants in high-profile sites within specific trade areas with the following considerations:
•
suitable demographic characteristics, including residential and commercial population density and above-average
household incomes;
•
visibility;
•
high traffic patterns;
•
general accessibility;
•
availability of suitable parking;
•
proximity of shopping areas and office parks;
•
degree of competition within the trade area; and
•
general availability of restaurant-level employees.
These sites generally include high-volume retail centers, major regional malls, lifestyle centers, and entertainment centers. Our
expansion plans do not include any franchised restaurant operations.
In 2005, we hired an experienced real estate professional as our Director of Real Estate to focus on site selection and future
development. Our Director of Real Estate thoroughly analyzes each prospective site before presenting the site to the management team
for review. Prior to committing to a restaurant site and signing a lease, at least three members of our senior management team review
the prospective site and evaluate the proposed economics of the restaurant based on demographic data and other relevant criteria to
assure that the site will meet our return on investment criteria.
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We believe the high sales volumes of our restaurants make us an attractive tenant and provide us with ample opportunities to
obtain suitable leasing terms from landlords. As a result of the locations we select, which are often in new retail center or shopping
mall developments, our restaurant development timeframes vary according to the landlord’s construction schedule and other factors
that are beyond our control. Once the site has been turned over to us, the typical lead-time from commencement of construction to
opening is approximately five months.
Restaurant Operations
Executive and Restaurant Management
Our executive management team continually monitors restaurant operations, inspects individual restaurants to assure the quality of
products and services and the maintenance of facilities, institutes procedures to enhance efficiency and reduce costs, and provides
centralized support systems. Our Chief Operating Officer has primary responsibility for managing our restaurants and participates in
analyzing restaurant-level performance and strategic planning. We currently employ one district manager who reports directly to our
Chief Operating Officer and oversees our restaurants, supporting the general managers and helping each general manager achieve the
sales and cash flow targets for their restaurant. As we expand our operations, we expect to hire additional district managers who will
each oversee up to 10 restaurants.
Our typical restaurant management team consists of a general manager, an assistant general manager, three front-of-the-house
managers, a kitchen manager, an assistant kitchen manager, and a sushi kitchen manager. Our restaurants each employ approximately
100 non-management employees, many of whom work part-time. The general manager is responsible for the day-to-day operations of
the restaurant, including the hiring, training, development of personnel, and operating results. The kitchen managers are responsible
for overseeing the preparation of our menu and sushi items; maintaining product quality, and closely monitoring food costs and
department labor costs. We also employ a kitchen staff member who is dedicated to the fresh preparation of our sauces and dressings.
Training
We strive to maintain quality and consistency in each of our restaurants through the careful training and supervision of restaurant
personnel and adherence to, high standards related to personnel performance, food and beverage preparation, and maintenance of our
restaurants. All of our restaurant personnel participate in both initial and continuing training programs. Each restaurant general
manager, front-of-the-house manager and kitchen manager completes a formal training program conducted by our company that is
comprised of a mix of classroom and on-the-job instruction. We implement these programs by hiring dedicated corporate personnel as
well as designate well-performing existing restaurant personnel to assist in training. Typical programs for general managers provide at
least six months of training that may include a rotation to different restaurants throughout the country. Typical programs for other
managers provide three to six months of training and may involve work in our other restaurants and cross training of various duties.
The training covers all aspects of management philosophy and overall restaurant operations, including supervisory skills, operating
and performance standards, accounting procedures, and employee selection and training necessary for top-quality restaurant
operations. The training programs also involve intensive understanding and testing of our menu, the ingredients of our various menu
items, and other key service protocols.
Our corporate training personnel are involved in training for both new employees hired in anticipation of our new restaurant
openings as well as for ongoing training in existing restaurants. When we open a new restaurant, we provide training to restaurant
personnel in every position for several weeks prior to opening to assure the smooth and efficient operation of the restaurant from the
first day it opens to the public. Prior to opening a new restaurant, certain of our newly-hired restaurant personnel are staffed in existing
restaurants to learn the operational aspects of a Kona Grill and to obtain on the job instruction.
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We maintain a policy against harassment and discrimination of any type towards both our employees and guests and, to this end,
reinforce this policy through our training of new employees, our policy and training manuals, and periodic reinforcement programs.
Recruitment and Retention
We seek to hire experienced restaurant personnel who are committed to the standards maintained by our company. We also
believe that our unit volume, the image and atmosphere of the Kona Grill concept, and our career advancement and employee benefit
programs enable us to attract high quality management and restaurant personnel. We support our restaurant personnel by offering
competitive wages and benefits, including medical insurance and equity incentives. We motivate and prepare our restaurant personnel
by providing them with opportunities for increased responsibility and advancement. Furthermore, our general managers, assistant
general managers, and kitchen managers share in a bonus tied to the overall profitability of their restaurant. We believe that our
compensation package for our managers and restaurant employees is comparable to those provided by other upscale casual restaurants.
We believe our compensation policies help us attract quality personnel and retain them at turnover rates lower than those generally
experienced by our competitors.
Information Systems
We believe that our management information systems enable us to increase the speed and accuracy of order-taking and pricing,
better assist guest preferences, efficiently schedule labor to better serve guests, monitor labor costs, assist in product purchasing and
menu mix management, promptly access financial and operating data, and improve the accuracy and efficiency of store-level
information and reporting. This information is consolidated at our headquarters in Scottsdale, Arizona.
We utilize an integrated information system as well as manual reporting to manage the flow of information within each of our
restaurants and between our restaurants and the corporate office. This system includes a customized MICROS point-of-sales
(POS) local area network that helps facilitate the operations of the restaurant by recording sales transactions and printing orders in the
appropriate locations within the restaurant. Additionally, we utilize the POS system to authorize, batch, and transmit credit card
transactions, record employee time clock information, schedule labor, and produce a variety of management reports. Our information
system is integrated with our financial reporting system and incorporates a redundancy and back-up emergency operating plan on a
temporary basis if the system experiences downtime.
We transmit electronically to the corporate office on a daily basis select information that we capture from the POS system. Our
corporate information system enables senior management to monitor operating results with daily and weekly sales analysis, monthly
detailed profit statements, and comparisons between actual and budgeted operating results. We intend to utilize further the capacity of
the POS system to support unit management controls and operations in the future. We believe that our current POS system will be an
adequate platform to support our planned expansion. We believe our information systems to be secure and scalable as we build our
organization.
Advertising and Marketing
During 2004, our marketing expenditures were $0.6 million, or 2.5% of our restaurant sales. We expect to continue to invest a
similar percentage of restaurant sales in marketing efforts in the future, primarily in connection with driving comparable restaurant
sales and supporting new restaurant openings.
Our ongoing marketing strategy consists of local advertising on radio and in select print mediums, various public relations
activities, direct mail, and word-of-mouth recommendations. Our marketing strategy is not media driven, but rather our message
focuses on the food, service, and ambiance of the restaurant, to create an environment that fosters repeat patronage and further
encourages word-of-mouth recommendations. We believe that word-of-mouth recommendations are a key component in driving guest
trial and usage.
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We implement a coordinated public relations effort in conjunction with each new restaurant opening. Approximately 60 days
before a scheduled restaurant opening, our local public relations firm collaborates with the local media to publicize our restaurant and
generate awareness of our brand. This effort is usually supplemented by radio, print advertisements, direct mail campaigns, and other
marketing efforts. In addition, we use our website, www.konagrill.com, to help increase our brand awareness as well as gift card sales.
Competition
The restaurant industry is highly competitive. Key competitive factors in the industry include the taste, quality, and price of the
food products offered, quality and speed of guest service, brand name identification, attractiveness of facilities, restaurant location,
and overall dining experience. Although we believe we compete favorably with respect to each of these factors, there are a substantial
number of restaurant operations that compete directly and indirectly with us, many of which have significantly greater financial
resources, higher revenue, and greater economies of scale. The restaurant business is often affected by changes in consumer tastes and
discretionary spending patterns; national and regional economic and public safety conditions; demographic trends; weather conditions;
the cost and availability of raw materials, labor, and energy; purchasing power; governmental regulations; and local competitive
factors. Any change in these or other related factors could adversely affect our restaurant operations. Accordingly, we must constantly
evolve and refine the critical elements of our restaurant concepts over time to protect their longer-term competitiveness. Additionally,
there is competition for highly qualified restaurant management employees and for attractive locations suitable for upscale, high
volume restaurants.
Trademarks
We have registered the service mark “Kona Grill” with the United States Patent and Trademark Office. We believe that our
trademarks and other proprietary rights have significant value and are important to the marketing of our restaurant concept. We have
in the past and expect to continue to protect vigorously our proprietary rights. We cannot predict, however, whether steps taken by us
to protect our proprietary rights will be adequate to prevent misappropriation of these rights or the use by others of restaurant features
based upon, or otherwise similar to, our concept. It may be difficult for us to prevent others from copying elements of our concept and
any litigation to enforce our rights will likely be costly. In addition, other local restaurant companies with names similar to those we
use may try to prevent us from using our marks in those locales.
Government Regulation
Each of our restaurants is subject to licensing and regulation by state and local departments and bureaus of alcohol control, health,
sanitation, zoning, and fire and to periodic review by the state and municipal authorities for areas in which the restaurants are located.
In addition, we are subject to local land use, zoning, building, planning, and traffic ordinances and regulations in the selection and
acquisition of suitable sites for developing new restaurants. Delays in obtaining, or denials of, or revocation or temporary suspension
of, necessary licenses or approvals could have a material adverse impact on our development of restaurants.
We also are subject to regulation under the Fair Labor Standards Act, which governs such matters as working conditions and
minimum wages. An increase in the minimum wage rate or the cost of workers’ compensation insurance, or changes in tip-credit
provisions, employee benefit costs (including costs associated with mandated health insurance coverage), or other costs associated
with employees could adversely affect our company.
In addition, we are subject to the Americans with Disabilities Act of 1990, or ADA. The ADA may require us to make certain
installations in new restaurants or renovations to existing restaurants to meet federally and state mandated requirements. To our
knowledge, we are in compliance in all material respects with all applicable federal, state, and local laws affecting our business.
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Employees
As of March 31, 2005, we employed 817 persons of whom approximately 15 were corporate management and staff personnel, 56
were restaurant managers or trainees, and 746 were employees in non-management restaurant positions. None of our employees are
covered by a collective bargaining agreement with us. We have never experienced a major work stoppage, strike, or labor dispute. We
consider our relations with our employees to be good.
Properties
Each of our restaurants is located in a leased facility. As of March 31, 2005, our restaurant leases had expiration dates ranging
from 2008 to 2019, typically with options to renew for at least a five-year period. Our leases provide for a minimum annual rent and
require additional percentage rent based on unit volume in excess of minimum levels at the particular location. The leases require us to
pay the costs of insurance, taxes, and a portion of the lessor’s operating costs. We do not anticipate any difficulties renewing existing
leases as they expire.
Our executive offices are located in Scottsdale, Arizona.
Litigation
We are involved in various legal proceedings arising out of the ordinary course of our business. We do not believe that any of
those proceedings will have a material adverse effect on our business, financial position, results of operations, or cash flows.
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MANAGEMENT
Directors and Executive Officers
The following table sets forth certain information regarding our directors, executive officers, and key employees:
Name
Marcus E. Jundt
C. Donald Dempsey
Jason J. Merritt
Mark S. Robinow
Frank B. Bennett
Richard J. Hauser
Douglas G. Hipskind
W. Kirk Patterson
Anthony L. Winczewski
Age
39
58
41
48
48
43
37
47
49
Position
Chairman of the Board
President, Chief Executive Officer, and Director
Executive Vice President and Chief Operating Officer
Executive Vice President, Chief Financial Officer, and Secretary
Director
Director
Director
Director
Director
Marcus E. Jundt has served as our Chairman of the Board since March 2004 and has served as a director of our company since
September 2000. Mr. Jundt has served as Vice Chairman and Portfolio Manager of the investment advisory firm of Jundt Associates
since 1992. Mr. Jundt has served as President of Jundt Associates since 1999. From November 1988 to March 1992, Mr. Jundt served
as a research analyst for Victoria Investors covering the technology, health care, financial services, and consumer industries. From
July 1987 until October 1988, Mr. Jundt served in various capacities on the floor of the Chicago Mercantile Exchange with Cargill
Investor Services. Mr. Jundt also serves as a director of Minnetonka Capital Investment, Acuo Corporation, and C-More Medical, all
private companies.
C. Donald Dempsey has served as our President and Chief Executive Officer since May 2004 and as a director since April 2005.
Prior to joining our company, from August 1999 until January 2003, Mr. Dempsey served as the President and Chief Executive
Officer of Caribou Coffee Company. Mr. Dempsey served as the President and Managing Director of McDonald’s Corporation Hong
Kong and Mainland China from January 1996 until July 1999, and as Vice President of International Marketing for McDonald’s from
August 1990 until January 1996. Prior to that time, Mr. Dempsey served as Executive Vice President of Burger King.
Jason J. Merritt has served as our Executive Vice President and Chief Operating Officer since October 2003 and as our Vice
President and Director of Operations since June 1997. Prior to joining our company in 1996, Mr. Merritt had been involved in the
development of and held executive or management positions in various restaurant concepts including Sushi On, Inc., Juice Island, Inc.,
Golden Corral, Inc., and Two Pesos, Inc.
Mark S. Robinow has served as our Executive Vice President, Chief Financial Officer, and Secretary since October 2004. Prior to
joining our company, Mr. Robinow served as the Chief Financial Officer of Integrated Decisions and Systems, Inc. (IDeaS) from July
2000 until October 2004. Mr. Robinow served as the Senior Vice President and Chief Financial Officer of Rainforest Cafe, Inc. from
November 1995 until January 2000. Mr. Robinow served as the Chief Financial Officer of Edina Realty, Inc. from 1993 until 1995,
and as Chief Financial Officer, Secretary, and Treasurer of Ringer Corporation from 1986 until 1993. Mr. Robinow also served as a
senior auditor with Deloitte & Touche from 1980 until 1983.
Frank B. Bennett has served as a director of our company since January 2005. Mr. Bennett has served as President of Artesian
Management, Inc. since April 1994, which manages Artesian Capital, a private equity investment firm based in Minneapolis.
Mr. Bennett served as President of Artesian Capital Management, Inc. from 1989 until April 1994. Prior to founding Artesian Capital,
Mr. Bennett served as a
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Vice President of Corporate Finance of Piper Jaffray & Hopwood and a Vice President of Piper Jaffray Ventures, Inc. Mr. Bennett
currently serves as a director of Northbridge Financial Corporation and as a director and audit committee member of Fairfax Financial
Holdings Limited, Odyssey Re Holdings Corp., Multiband Corporation, and Crum & Forster Holdings Corp.
Richard J. Hauser has served as a director of our company since December 2004. Mr. Hauser serves as the President and owner of
Capital Real Estate, Inc., a commercial real estate development company based in Minneapolis, Minnesota, which he founded in 2001.
In addition, Mr. Hauser is the Manager and owner of Net Lease Development, LLC, which is a controlled operating company under
Capital Real Estate, Inc. Prior to founding Capital Real Estate, Inc. and Net Lease Development, LLC, Mr. Hauser served as a partner
with Reliance Development Company, LLC from 1992 to 2001, where he was responsible for the management, development, and sale
of retail properties.
Douglas G. Hipskind has served as a director of our company since November 2003. Mr. Hipskind has served as a Principal and
Chief Operating Officer of Vail Development, LLC, a hotel development company which is designing and developing the Four
Seasons Resort in Vail, Colorado, since June 2004. Mr. Hipskind also serves as a Managing Director of Jundt Associates, Inc., where
from January 2001 to June 2004, he was responsible for marketing the firm’s public and private investment products. From August
1999 to January 2001 he served as Controller of Jundt Associates, Inc. From December 1993 to August 1999, Mr. Hipskind served in
the Financial Services practice of KPMG LLP, where he was responsible for tax and consulting matters for his mutual fund and
investment partnership clients. Mr. Hipskind is a certified public accountant.
W. Kirk Patterson has served as a director of our company since January 2005. Mr. Patterson has served as Vice President and
Chief Financial Officer of Staktek Holdings, Inc., a provider of high-density memory solutions, since November 2003. From July
2003 to November 2003, Mr. Patterson served as Acting Chief Financial Officer, Vice President of Finance, and Corporate Controller
of Cirrus Logic, Inc., a developer of mixed-signal integrated circuits. From February 2000 to November 2003, he served in a variety of
roles at Cirrus Logic, including Vice President of Finance and Corporate Controller, Treasurer, and Director of Financial Planning and
Analysis. From November 1999 to February 2000, Mr. Patterson served as Regional Manager of Accounting Services of
PricewaterhouseCoopers, a public accounting firm. From June 1980 to November 1999, Mr. Patterson served in several positions with
BP Amoco Corporation, a provider of energy and petrochemicals, most recently as Manager, Planning and Economics, for the Amoco
Energy Group North America.
Anthony L. Winczewski has served as a director of our company since April 2005. Mr. Winczewski has served as President and
Chief Executive Officer of Commercial Partners Title, LLC, a midwestern title insurance agency engaged in providing commercial,
residential, and tax deferred exchange solutions since January 1995. Prior to forming Commercial Partners in 1995, Mr. Winczewski
served as a manager and sales officer for Chicago Title Insurance Company from May 1984 until January 1995. Mr. Winczewski
served as a Vice President and Principal of Winona County Abstract and Title, Inc. from July 1975 until May 1984, and as a paralegal
for Title Insurance Company of Minnesota from June 1974 until July 1975.
There are no family relationships among any of our directors, officers, or key employees. We consider Messrs. Dempsey, Merritt,
and Robinow to be our principal executive officers.
Board Composition and Committees
Our certificate of incorporation provides for a Board of Directors consisting of three classes serving three-year staggered terms.
Class I directors consist of Messrs. Jundt and Hipskind, with the initial term of office of the Class I directors expiring at the annual
meeting of stockholders in 2006. Class II directors consist of Messrs. Hauser, Patterson, and Bennett, with the initial term of office of
Class II directors expiring at the annual meeting of stockholders in 2008. The Class III director consists of M. Winczewski, with the
initial term of office of the Class III director expiring at the annual meeting of stockholders in 2007. Officers serve at the pleasure of
the Board of Directors.
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Our bylaws authorize our Board of Directors to appoint among its members one or more committees, each consisting of one or
more directors. Our Board of Directors has established three standing committees: an audit committee, a compensation committee, and
a nominating/corporate governance committee. The primary purpose of the audit committee is to select the independent registered
public accounting firm to conduct the independent audit of the financial statements of our company; review the annual financial
statements, any significant accounting issues, and the scope of the audit with the independent registered public accounting firm; and
discuss with such firm any other audit-related matters that may arise during the year. The compensation committee reviews and acts
on matters relating to compensation levels and benefit plans for our key executives. The purpose of the nominating/corporate
governance committee is to assist our Board of Directors in fulfilling its responsibility to nominate and approve qualified new
members to our Board of Directors in accordance with our certificate of incorporation and bylaws; to develop and recommend to our
Board of Directors a set of corporate governance principles; and to oversee the selection and compensation of committees of our
Board of Directors.
Prior to the establishment of the audit, compensation, and nominating/corporate governance committees in November 2003, these
functions were performed by our Board of Directors.
Compensation Committee Interlocks and Insider Participation
Our compensation committee currently consists of Messrs. Patterson and Winczewski, non-employee directors (as defined in
Rule 16b-3 under the Securities Exchange Act), who do not have “interlocking” or other relationships with us that would detract from
their independence as committee members. Compensation for Mr. Dempsey for 2004 was established pursuant to the terms of his
employment agreement with us. Compensation decisions regarding our other executive officers were made by our compensation
committee or our board of directors. Mr. Dempsey participated in discussions with the Board of Directors concerning executive officer
compensation.
Director Compensation and Other Information
We grant annually to each non-employee director options to purchase 24,000 shares of our common stock. In addition,
non-employee directors will receive additional options for committee service per year over the standard non-employee director
compensation: options to purchase an additional 24,000 shares of common stock to the Chairman of the Audit Committee, and options
to purchase an additional 8,000 shares of common stock to each member of our Audit Committee (other than the Chairman),
Compensation Committee, and Nominating/Corporate Governance Committee. Non-employee directors also are eligible to receive
grants of stock options or awards pursuant to the discretion of the Compensation Committee or the entire Board of Directors. We will
also reimburse each non-employee director for travel and related expenses incurred in connection with attendance at board and
committee meetings. Employees who also serve as directors will receive no additional compensation for their services as a director.
We also encourage our directors and their spouses, when applicable, to attend at our cost special corporate events with our employees,
suppliers, and others when possible.
During January 2005, in consideration for his service as Chairman of the Board of Directors, we granted to Mr. Jundt options to
purchase 100,000 shares of common stock at an exercise price of $1.20 per share.
Executive Compensation
Compensation Philosophy
We seek to provide a level of compensation that is competitive with companies similar in both size and industry. Our
compensation philosophy is intended to create value for our stockholders through long-term growth in sales and earnings and the
alignment of the interests of management with those of our stockholders. The total compensation package consists of base salary,
executive health benefit and perquisite program, annual incentive bonuses, and stock option grants. This package is intended to tie a
significant portion of the total compensation of our executives to our performance and creation of stockholder value.
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Summary of Cash and Other Compensation
The following table sets forth, for the periods indicated, the total compensation for services in all capacities to us received by our
Chief Executive Officer and our three other executive officers whose aggregate compensation exceeded $100,000 during the fiscal
year ended December 31, 2004.
Summary Compensation Table
Long-Term Compensation
Awards
Annual Compensation(1)
Name and Principal Position
Year
Salary
Bonus
C. Donald Dempsey
President and
Chief
Executive
Officer(2)
2004
$ 175,549
Chandler
2004
2003
$
2004
2003
$ 193,131
$ 101,717
2002
$
81,000
2004
$
43,269
Former
President and
Chief
Executive
Officer(3)
Jason J. Merritt
Executive
Vice President
and Chief
Operating
Officer
Mark S. Robinow
Executive
Vice
President,
Chief
Financial
Officer, and
Secretary(6)
Restricted
Stock
Awards
—(3)
—(3)
$
$
—(3)
—(3)
$ 135,000
—
$
—
89,600
—
—
$
—
48,000(4)
Securities
Underlying
Options
All Other
Compensation
$
—
48,560(3) $
—
—
888,611
—
300,000
$
$
9,033(5)
11,192(5)
—
—
5,000
$
11,844(5)
22,500
—
355,444
$
—
(1) Certain executive officers also received certain perquisites, the value of which did not exceed 10% of the annual salary and
bonus.
(2) Mr. Dempsey became our President and Chief Executive Officer effective May 1, 2004.
(3) Chandler served as our President and Chief Executive Officer through March 2004, for which Chandler received no cash
compensation. In connection with his resignation, we granted to Chandler options to purchase 48,560 shares of our common
stock at an exercise price of $1.20 per share. See “Option Grants.”
(4) As of December 31, 2004, the value of the restricted shares of common stock that were the subject of the award remained at
$48,000.
(5) Represents amounts paid to Mr. Merritt for a car allowance and health club membership.
(6) Mr. Robinow became our Executive Vice President, Chief Financial Officer, and Secretary effective October 18, 2004.
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Option Grants
The following table sets forth certain information with respect to stock options granted to the officers listed during the fiscal year
ended December 31, 2004.
Option Grants in Last Fiscal Year
Potential Realizable
Value at Assumed
Annual Rates
of Stock Price
Appreciation for
Option Term(3)
Individual Grants
Name
C. Donald Dempsey
Chandler
Jason J. Merritt
Mark S. Robinow
Number of
Securities
Underlying
Options
Granted
888,611
48,560(4)
—
355,444
Percent of
Total Options
Granted to
Employees in
Fiscal Year
Exercise
Price per
Share(1)
65.5%
3.6%
—
26.2%
$
$
Expiration
Date(2)
1.00
1.20
—
1.00
$
5%
5/01/14
12/01/07(4)
—
10/18/14
$
$
$
$
10%
$
$
$
$
(1) The exercise prices of all stock options granted were at prices believed by our board of directors to be equal to the fair market
value of our common stock on the date of grant.
(2) Effective March 15, 2005, the Board of Directors accelerated the vesting of all options outstanding under our stock option plans.
(3) Potential gains are net of the exercise price, but before taxes associated with the exercise. Amounts represent hypothetical gains
that could be achieved for the respective options if exercised at the end of the option term. The potential realizable value assumes
that the stock price appreciates from the proposed initial public offering price of $
per share. The assumed 5% and 10%
rates of stock price appreciation are provided in accordance with the rules of the SEC and do not represent our estimate or
projection of the future price of our common stock. Actual gains, if any, on stock option exercises will depend upon the future
market prices of our common stock.
(4) We granted these options to Chandler during December 2004 in connection with his resignation as our President and Chief
Executive Officer. All of the options were vested and exercisable immediately upon grant.
Option Values and Holdings
The following table describes, for each of the listed officers, the exercisable and unexercisable options held by them as of
December 31, 2004. The “Value of Unexercised In-the-Money Options at Fiscal Year-End” shown in the table represents an amount
equal to the difference between the proposed initial public offering price of $
per share and the option exercise price multiplied
by the number of unexercised in-the-money options.
Aggregated Option Exercises in Last Fiscal Year and
Fiscal Year-End Option Values
Value of Unexercised
In-the-Money Options
at Fiscal Year-End
Number of Unexercised
Options at Fiscal Year-End
Name
C. Donald Dempsey
Chandler
Jason J. Merritt
Mark S. Robinow
Exercisable
Unexercisable
—
—
—
—
888,611
48,560
475,000
355,444
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Exercisable
Unexercisable
$
$
$
$
$
$
$
$
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Employment and Separation Agreements
C. Donald Dempsey
Effective May 1, 2004, we entered into an employment agreement with Mr. Dempsey to serve as our President and Chief
Executive Officer. The agreement provides for Mr. Dempsey to receive a base salary of $250,000 per annum, which is to be reviewed
annually by the Board and which shall increase by 20% per annum during the second and third years of employment. During October
2004, the Board increased Mr. Dempsey’s salary to $300,000 per annum. During May 2004, we granted to Mr. Dempsey options to
purchase 888,611 shares of our common stock at an exercise price per share of $1.00. In addition, beginning during fiscal 2005, we
agreed to grant to Mr. Dempsey additional options to purchase 25,000 shares of our common stock at the end of each calendar year if
our average annual sales for new restaurants opened during the year (open at least four months) equals or exceeds $4.5 million on an
annualized basis. If granted, such bonus options will be vested and exercisable immediately upon grant and will have an exercise price
per share equal to the fair market value of our common stock on the date of grant.
The employment agreement provides for Mr. Dempsey to receive his fixed compensation, accrued vacation, and bonus earned but
unpaid through the date of termination of his employment as a result of termination of employment “for cause” as defined in the
agreement. If we terminate Mr. Dempsey’s employment without “cause,” we will pay Mr. Dempsey his fixed compensation, accrued
vacation, pro rata bonus, as well as a severance payment equal to 12 months’ of Mr. Dempsey’s base salary then in effect. In addition,
during the 18-month period following his termination without “cause,” Mr. Dempsey will be entitled to receive all medical, dental, life
insurance, and other benefits otherwise available to him during his employment, and he will be entitled to retain any stock options
vested through the date of termination.
Jason J. Merritt
Effective October 1, 2003, we entered into an employment agreement with Mr. Merritt to serve as our Chief Operating Officer.
The agreement has an initial five-year term that expires October 1, 2008. The agreement provides for Mr. Merritt to receive an annual
base salary of $175,000, which is to be reviewed annually by the Board and which increased to $250,000 effective October 1, 2004.
Thereafter, Mr. Merritt’s base salary will not be reduced. During October 2003, we granted to Mr. Merritt 40,000 shares of our
common stock and options to purchase an additional 300,000 shares of our common stock at an exercise price per share of $1.20.
The employment agreement provides for Mr. Merritt to receive his fixed compensation, accrued vacation, and a pro rata portion of
his bonus earned for the applicable fiscal year through the date of termination of his employment by reason of death or as a result of
termination of employment by us for “cause,” or by Mr. Merritt without “good reason,” each as defined in the agreement. If we
terminate the employment of Mr. Merritt by reason of disability, the agreement provides for the payment of fixed compensation,
accrued vacation, pro rata bonus through the date of termination of employment, as well as a severance payment equal to nine months’
of Mr. Merritt’s base salary then in effect. If we terminate Mr. Merritt’s employment without “cause,” if we do not renew the
agreement at the end of any term, or if he terminates his employment for “good reason,” as defined in the agreement, we will pay
Mr. Merritt his fixed compensation, accrued vacation, pro rata bonus through the date of termination, and we will continue to pay to
Mr. Merritt his base salary for a 12-month period following the date of termination. In addition, during the severance period,
Mr. Merritt will be entitled to receive all medical, dental, life insurance, and other benefits otherwise available to him during his
employment. If we terminate Mr. Merritt’s employment without cause, any stock options held by Mr. Merritt will continue to vest
through the end of the severance period.
In the event of a “change of control” of our company, as defined in the agreement, the successor to our business will be required
to notify us or Mr. Merritt within five days prior to the effective date of the “change of control” whether or not the successor will
assume and agree to perform our obligations under the agreement. In the event that such successor does not so notify us or
Mr. Merritt, the change of control
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will be deemed a termination of Mr. Merritt’s employment under the agreement without “cause,” and the severance provisions
described above will apply. In the event the successor company agrees to assume the employment agreement, then Mr. Merritt may
terminate his employment by providing 30 days’ written notice at any time following the one-year anniversary of the effective date of
the change of control. Upon such termination following the one-year anniversary of the change of control, Mr. Merritt will be entitled
to receive the severance benefits described above as if his employment was terminated by us without “cause.”
Mark S. Robinow
Effective October 15, 2004, we entered into an employment agreement with Mr. Robinow to serve as our Vice President and
Chief Financial Officer. The agreement provides for Mr. Robinow to receive an annual base salary of $225,000. During October 2004,
we granted to Mr. Robinow options to purchase 355,444 shares of our common stock at an exercise price per share of $1.00.
Mr. Robinow is entitled to receive all benefits, including health insurance, as offered to our other senior executive officers.
If we terminate Mr. Robinow’s employment without cause, or if he terminates his employment for good reason, we will pay
Mr. Robinow his fixed compensation and pro rata bonus through the date of termination of his employment, as well as a severance
payment equal to 12 months’ of Mr. Robinow’s base salary then in effect. In addition, the stock options that would have vested during
the year in which such termination without cause occurs will vest and become exercisable. If we terminate Mr. Robinow’s
employment with cause, Mr. Robinow will receive his fixed compensation through the date of termination.
Chandler
Effective December 1, 2004, we entered into a separation agreement with Chandler. In exchange for Chandler’s release of claims
and agreement not to compete with us for a two-year period, we granted to Chandler options to purchase 48,560 shares of our common
stock at an exercise price of $1.20 per share. The options were vested and exercisable upon grant. In addition, Chandler resigned as an
officer and director of our company and agreed to keep confidential certain of our proprietary information.
Management Bonus Program
During January 2005, we approved a management bonus program pursuant to which each of Messrs. Dempsey, Merritt, and
Robinow are eligible to receive 50%, 40%, and 40% of his respective base salary upon successfully achieving certain specified goals.
2002 Stock Plan
During November 2002, our Board of Directors adopted and the stockholders approved the Kona Grill, Inc. 2002 Stock Plan.
During January 2005, our Board of Directors adopted, and our stockholders approved, an amendment to the 2002 Plan. The 2002 Plan
provides for the grant of incentive and nonqualified stock options to acquire our common stock, the direct grant of common stock or
restricted stock units, the grant of stock appreciation rights, or SARs, and the grant of other cash awards to key personnel, directors,
advisors, consultants, and others providing valuable services to our company. The purpose of the 2002 Plan is to promote the interests
of our company and our stockholders by providing such individuals with an opportunity to acquire a proprietary interest in our
company and receive competitive performance-related incentives so as to develop a stronger incentive to put forth maximum effort for
the continued success and growth of our company. We believe that the 2002 Plan represents an important factor in attracting and
retaining qualified personnel. Upon adoption of our 2005 Plan described below, we will discontinue further grants of awards under our
2002 Plan.
The 2002 Plan currently provides that a maximum of 3,250,000 shares of common stock of our company may be issued under the
2002 Plan. Awards or portions of awards that terminate, expire, or are otherwise forfeited will not count toward the maximum number
of shares that may be issued under the 2002 Plan and will again be available for further awards. As of March 31, 2005, options to
purchase
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approximately 2,446,395 shares of common stock were outstanding, and 802,605 shares of common stock remain available for grant.
The power to administer the 2002 Plan rests exclusively with our Board of Directors or a committee consisting of two or more
non-employee directors who are appointed by the Board of Directors. The committee has the power to determine the timing and
recipients of awards, the form and amount of each award, and the terms and conditions for the grant or exercise. The committee may
delegate its authority under the 2002 Plan to one or more officers of our company for purposes of granting and administering awards
to persons other than executive officers. The Board of Directors determines the granting of awards, and the terms, conditions, and
eligibility of such awards with respect to non-employee directors.
The exercise prices of options will be determined by our Board of Directors or the plan administrator, but if an option is intended
to be an incentive stock option, the exercise price may not be less than 100% (110% if the option is granted to a stockholder who at
the time of the grant of the option owns stock possessing more than 10% of the total combined voting power of all of our classes of
stock) of the fair market value of the common stock at the time of the grant. The committee has the power to grant reload options
under the 2002 Plan, which may provide that a participant who exercises an option and pays the option exercise price in whole or in
part with shares of our common stock then owned by the participant for at least six months will be entitled to receive another option
covering the same number of shares tendered with an exercise price of no less than the fair market value of a share of common stock
on the date of grant of such reload option.
In the event of a fundamental change of our company, which means a merger or consolidation of our company with or into any
other corporation, regardless of whether our company is the surviving corporation, a sale of substantially all of the assets of our
company, a statutory share exchange involving our capital stock, or a dissolution or liquidation of our company, the committee may
make appropriate provision for the protection of the outstanding options and SARs by substitution of options, SARs, and appropriate
voting common stock of the corporation surviving any merger or consolidation in lieu of options, SARs, and capital stock of our
company. At least 30 days prior to the occurrence of the fundamental change, our Board of Directors will declare and notify each
holder of an option or SAR whether each option or SAR will be cancelled at the time of or immediately prior to the fundamental
change in exchange for an equivalent cash payment. At such time, each option and SAR will become immediately exercisable in full
and each person holding an option or SAR will have the right to exercise the option or SAR in whole or in part. If declared, each
unexercised option or SAR remaining outstanding prior to the fundamental change will be cancelled.
The 2002 Plan will remain in effect until all shares subject to it are distributed, or until all awards have expired or lapsed, or until
otherwise terminated by our Board of Directors. The plan is not intended to be the exclusive means by which we may issue options or
warrants to acquire our common stock, stock awards, or any other type of award. To the extent permitted by applicable law and
NASDAQ requirements, we may issue any other options, warrants, or awards other than pursuant to the 2002 Plan with or without
stockholder approval.
2005 Stock Award Plan
During
2005, our Board of Directors adopted our 2005 Stock Award Plan, or 2005 Plan, and the 2005 Plan was
approved by our stockholders during
2005.
Background and Purpose
The terms of the plan provide for grants of stock options, stock appreciation rights, restricted stock, deferred stock, bonus stock,
dividend equivalents, other stock related awards and performance awards that may be settled in cash, stock, or other property.
The purpose of the 2005 Plan is to assist us in attracting, motivating, retaining, and rewarding high-quality executives and other
employees, officers, directors, and consultants by enabling such persons to
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acquire or increase a proprietary interest in our company in order to strengthen the mutuality of interests between such persons and our
stockholders, and providing such persons with annual and long-term performance incentives to expend their maximum efforts in the
creation of stockholder value.
General Terms of the 2005 Plan; Shares Available for Issuance
The 2005 Plan provides for the granting of awards in the form of incentive stock options, nonqualified stock options, stock
appreciation rights, shares of restricted common stock, bonus stock in lieu of obligations, or other stock-based awards to employees,
directors, and independent contractors who provide valuable services to our company. The 2005 Plan authorizes the issuance
of
shares of our common stock, all of which shares may be issued pursuant to incentive stock options. The maximum
number of shares of common stock covered by awards granted to any individual in any year may not exceed
. If any
award previously granted under the 2005 Plan is forfeited, terminated, canceled, surrendered, does not vest, or expires without having
been exercised in full, stock not issued under such award will again be available for grant for purposes of the 2005 Plan. If any change
is made in the stock subject to the 2005 Plan, or subject to any award granted under the 2005 Plan (through consolidation, spin-off,
recapitalization, stock dividend, split-up, combination of shares, exchange of shares, or otherwise), the 2005 Plan provides that
appropriate adjustments will be made as to the aggregate number and type of shares available for awards, the maximum number and
type of shares that may be subject to awards to any individual, the number and type of shares covered by each outstanding award, the
exercise price grant price, or purchase price relating to any award, and any other aspect of any award that the Board of Directors or
Compensation Committee determines appropriate.
The 2005 Plan provides that it is not intended to be the exclusive means by which we may issue options to acquire our common
stock or any other type of award. To the extent permitted by applicable law and the rules and regulations of the NASDAQ National
Market, we may issue other options, warrants, or awards other than pursuant to the 2005 Plan without stockholder approval.
Limitations on Awards
The plan imposes individual limitations on certain awards, in part to comply with Section 162(m). Under these limitations, no
more than
shares of stock may be granted to an individual during any fiscal year pursuant to any awards granted under
the plan. The maximum amount that may be earned by any one participant as a performance award or other cash award for a
performance period is $1.0 million. All limitations on the amount of stock to be issued under the plan are subject to adjustment in
certain circumstances.
Eligibility
The persons eligible to receive awards under the plan consist of directors, officers, employees, and independent contractors of our
company and those of our affiliates. However, incentive stock options may be granted under the plan only to our employees, including
officers, and those of our affiliates. An employee on leave of absence may be considered as still in our employ or in the employ of an
affiliate for purposes of eligibility under the plan.
Administration
Our Board of Directors administers the plan. However, the Compensation Committee of our Board of Directors administers the
plan with respect to our senior officers. Together, our Board of Directors and the Compensation Committee are referred to as the plan
administrator. The Compensation Committee members must be “non-employee directors” as defined by Rule 16b-3 of the Securities
Exchange Act, “outside directors” for purposes of Section 162(m), and independent as defined by NASDAQ or any other national
securities exchange on which any of our securities may be listed for trading in the future. Subject to the terms of the plan, the plan
administrator is authorized to select eligible persons to receive awards, determine the type and number of awards to be granted and the
number of shares of our common stock to
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which awards will relate, specify times at which awards will be exercisable or may be settled (including performance conditions that
may be required as a condition thereof), set other terms and conditions of awards, prescribe forms of award agreements, interpret and
specify rules and regulations relating to the plan, and make all other determinations that may be necessary or advisable for the
administration of the plan.
Stock Options and Stock Appreciation Rights
The plan administrator is authorized to grant stock options, including both incentive stock options, which we refer to as ISOs, and
nonqualified stock options. In addition, the plan administrator is authorized to grant stock appreciation rights, which entitle the
participant to receive the appreciation in our common stock between the grant date and the exercise date of a stock appreciation right.
The plan administrator determines the exercise price per share subject to an option and the grant price of a stock appreciation right.
However, the per share exercise price of an ISO and the per share grant price of a stock appreciation right must not be less than the
fair market value of a share of our common stock on the grant date and the per share exercise price of an ISO must not be less than
85% of the fair market value of a share of our common stock on the grant date. The plan administrator generally will fix the maximum
term of each option or stock appreciation right, the times at which each stock option or stock appreciation right will be exercisable,
and provisions requiring forfeiture of unexercised stock options or stock appreciation rights on or following termination of
employment or service, except that no stock option or stock appreciation right may have a term exceeding 10 years. Stock options may
be exercised by payment of the exercise price in cash, shares that have been held for at least six months (or that the plan administrator
otherwise determines will not cause us a financial accounting charge), and outstanding awards or other property having a fair market
value equal to the exercise price, as the plan administrator may determine from time to time. The plan administrator determines
methods of exercise and settlement and other terms of the stock appreciation rights. Stock appreciation rights under the plan may
include “limited stock appreciation rights” exercisable for a stated period of time after we experience a change in control or upon the
occurrence of some other event specified by the plan administrator, as discussed below.
Restricted and Deferred Stock
The plan administrator is authorized to grant restricted stock and deferred stock. Restricted stock is a grant of shares of our
common stock, which may not be sold or disposed of and which may be forfeited in the event of certain terminations of employment
or service, prior to the end of a restricted period specified by the plan administrator. A participant granted restricted stock generally
has all of the rights of one of our stockholders, unless otherwise determined by the plan administrator. An award of deferred stock
confers upon a participant the right to receive shares of our common stock at the end of a specified deferral period, and may be subject
to possible forfeiture of the award in the event of certain terminations of employment prior to the end of a specified restricted period.
Prior to settlement, an award of deferred stock carries no voting or dividend rights or other rights associated with share ownership,
although dividend equivalents may be granted, as discussed below.
Dividend Equivalents
The plan administrator is authorized to grant dividend equivalents conferring on participants the right to receive, currently or on a
deferred basis, cash, shares of our common stock, other awards, or other property equal in value to dividends paid on a specific
number of shares of our common stock or other periodic payments. Dividend equivalents may be granted alone or in connection with
another award, may be paid currently or on a deferred basis and, if deferred, may be deemed to have been reinvested in additional
shares of our common stock, awards, or otherwise as specified by the plan administrator.
Bonus Stock and Awards in Lieu of Cash Obligations
The plan administrator is authorized to grant shares of our common stock as a bonus free of restrictions for services performed for
us or to grant shares of our common stock or other awards in lieu of
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our obligations to pay cash under the plan or other plans or compensatory arrangements, subject to such terms as the plan
administrator may specify.
Other Stock-Based Awards
The plan administrator is authorized to grant awards under the plan that are denominated or payable in, valued by reference to, or
otherwise based on or related to shares of our common stock. Such awards might include convertible or exchangeable debt securities,
other rights convertible or exchangeable into shares of our common stock, purchase rights for shares of our common stock, awards
with value and payment contingent upon our performance or any other factors designated by the plan administrator, and awards valued
by reference to the book value of shares of our common stock or the value of securities of or the performance of specified subsidiaries
or business units. The plan administrator determines the terms and conditions of such awards.
Performance Awards
The right of a participant to exercise or receive a grant or settlement of an award, and the timing thereof, may be subject to such
performance conditions, including subjective individual goals, as may be specified by the plan administrator. In addition, the plan
authorizes specific performance awards, which represent a conditional right to receive cash, shares of our common stock, or other
awards upon achievement of certain pre-established performance goals and subjective individual goals during a specified fiscal year.
Performance awards granted to persons whom the plan administrator expects will, for the year in which a deduction arises, be
“covered employees” (as defined below) will, if and to the extent intended by the plan administrator, be subject to provisions that
should qualify such awards as “performance based” compensation not subject to the limitation on tax deductibility by us under
Section 162(m) of the Internal Revenue Code, or the Code. For purposes of Section 162(m), the term “covered employee” means our
Chief Executive Officer and our four most highly compensated officers as of the end of a taxable year as disclosed in our filings with
the SEC. If and to the extent required under Section 162(m), any power or authority relating to a performance award intended to
qualify under Section 162(m) is to be exercised by the Compensation Committee, it will not be exercised by our Board of Directors.
Subject to the requirements of the plan, the plan administrator will determine performance award terms, including the required
levels of performance with respect to specified business criteria, the corresponding amounts payable upon achievement of such levels
of performance, termination and forfeiture provisions, and the form of settlement. One or more of the following business criteria based
on our consolidated financial statements, or those of our affiliates, or those of our business units or affiliates (except with respect to
the total stockholder return and earnings per share criteria), will be used by the plan administrator in establishing performance goals
for such performance awards (including for awards designed to comply with the performance-based compensation exception to
Section 162(m)): (1) total stockholder return, (2) total stockholder return compared to total return (on a comparable basis) of a
publicly available index; (3) net income; (4) pretax earnings; (5) earnings before interest expense, taxes, depreciation, and
amortization; (6) pretax operating earnings after interest expense but before bonuses and extraordinary or special items; (7) operating
margin; (8) earnings per share; (9) return on equity; (10) return on capital; (11) return on investment; (12) operating earnings;
(13) working capital or inventory; and (14) ratio of debt to stockholders’ equity. In granting performance awards, the plan
administrator may establish unfunded award “pools,” the amounts of which will be based upon the achievement of a performance goal
or goals based on one or more of the business criteria described in the plan. During the first 90 days of a performance period, the plan
administrator will determine who will potentially receive performance awards for that performance period, either out of the pool or
otherwise.
After the end of each performance period, the plan administrator (which will be the Compensation Committee for awards intended
to qualify as performance-based for purposes of Section 162(m)) will determine (a) the amount of any pools and the maximum amount
of potential performance awards payable to each participant in the pools and (b) the amount of any other potential performance awards
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payable to participants in the plan. The plan administrator may, in its discretion, determine that the amount payable as a performance
award will be reduced from the amount of any potential award.
Other Terms of Awards
Awards may be settled in the form of cash, shares of our common stock, other awards, or other property in the discretion of the
plan administrator. Awards under the plan are generally granted without a requirement that the participant pay consideration in the
form of cash or property for the grant (as distinguished from the exercise), except to the extent required by law. The plan administrator
may require or permit participants to defer the settlement of all or part of an award in accordance with such terms and conditions as
the plan administrator may establish, including payment or crediting of interest or dividend equivalents on deferred amounts, and the
crediting of earnings, gains, and losses based on deemed investment of deferred amounts in specified investment vehicles. The plan
administrator is authorized to place cash, shares of our common stock, or other property in trusts or make other arrangements to
provide for payment of our obligations under the plan. The plan administrator may condition any payment relating to an award on the
withholding of taxes and may provide that a portion of any shares of our common stock or other property to be distributed will be
withheld (or previously acquired shares of our common stock or other property be surrendered by the participant) to satisfy
withholding and other tax obligations. Awards granted under the plan generally may not be pledged or otherwise encumbered and are
not transferable except by will or by the laws of descent and distribution, or to a designated beneficiary upon the participant’s death,
except that the plan administrator may, in its discretion, permit transfers of nonqualified stock options for estate planning or other
purposes subject to any applicable restrictions under Rule 16b-3 under the Securities Exchange Act of 1934.
The plan administrator may grant awards in exchange for other awards under the plan or under other of our compensation plans,
or other rights to payment from us, and may grant awards in addition to or in tandem with such other awards or rights. In addition, the
plan administrator may cancel awards granted under the plan in exchange for a payment of cash or other property. The terms of any
exchange of or purchase of an award will be determined by the plan administrator in its sole discretion.
Acceleration of Vesting; Change in Control
The plan administrator may, in its discretion, accelerate the vesting, exercisability, lapsing of restrictions, or expiration of deferral
of any award, including if we undergo a “change in control,” as defined in the plan. In addition, the plan administrator may provide in
an award agreement or employment agreement that the performance goals relating to any performance-based award will be deemed to
have been met upon the occurrence of any “change in control.” The plan administrator may, in its discretion and without the consent
of the participant, either (a) accelerate the vesting of all awards in full or as to some percentage of the award to a date prior to the
effective date of the “change in control;” or (b) provide for a cash payment in exchange for the termination of an award or any portion
of an award where such cash payment is equal to the fair market value of the shares that the participant would receive if the award
were fully vested and exercised as of such date, less any applicable exercise price. The plan administrator will determine whether each
award is assumed, continued, substituted, or terminated. In connection with a “change in control,” we may assign to the acquiring or
successor company any repurchase rights associated with any awards, and the plan administrator may provide that any repurchase
rights held by us associated with such awards will lapse in whole or in part contingent upon the “change in control.”
In the event of a “corporate transaction” (as defined in the plan), the acquiror may assume or substitute for each outstanding stock
award. If the acquiror does not assume or substitute for an outstanding stock option, such stock option will terminate immediately
prior to the close of such corporate transaction to the extent the option is not exercised.
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Amendment and Termination
Our Board of Directors may amend, alter, suspend, discontinue, or terminate the plan or the plan administrator’s authority to grant
awards without further stockholder approval, except stockholder approval must be obtained for any amendment or alteration if such
approval is required by law or regulation or under the rules of any stock exchange or quotation system on which shares of our
common stock are then listed or quoted. Stockholder approval will not be deemed to be required under laws or regulations, such as
those relating to ISOs, that condition favorable treatment of participants on such approval, although our Board of Directors may, in its
discretion, seek stockholder approval in any circumstance in which it deems such approval advisable. Unless earlier terminated by our
Board of Directors, the plan will terminate on the earlier of (1) 10 years after its adoption by our Board of Directors or (2) such time as
no shares of our common stock remain available for issuance under the plan and we have no further rights or obligations with respect
to outstanding awards under the plan. Amendments to the plan or any award require the consent of the affected participant if the
amendment has a material adverse effect on the participant.
Federal Income Tax Consequences of Awards
The information set forth below is a summary only and does not purport to be complete. In addition, the information is based upon
current federal income tax rules, and therefore is subject to change when those rules change. Moreover, because the tax consequences
to any recipient may depend on his particular situation, each recipient should consult the recipient’s tax adviser regarding the federal,
state, local, and other tax consequences of the grant or exercise of an award or the disposition of stock acquired as a result of an award.
The plan is not qualified under the provisions of Section 401(a) of the Code and is not subject to any of the provisions of the
Employee Retirement Income Security Act of 1974.
Nonqualified Stock Options
Generally, there is no taxation upon the grant of a nonqualified stock option. On exercise, an optionee will recognize ordinary
income equal to the excess, if any, of the fair market value on the date of exercise of the stock over the exercise price. If the optionee
is our employee or an employee of an affiliate, that income will be subject to withholding tax. The optionee’s tax basis in those shares
will be equal to their fair market value on the date of exercise of the option, and the optionee’s capital gain holding period for those
shares will begin on that date.
Subject to the requirement of reasonableness, the provisions of Section 162(m), and the satisfaction of a tax reporting obligation,
we will generally be entitled to a tax deduction equal to the taxable ordinary income realized by the optionee.
Incentive Stock Options
The plan provides for the grant of stock options that qualify as “incentive stock options,” which we refer to as ISOs, as defined in
Section 422 of the Code. Under the Code, an optionee generally is not subject to ordinary income tax upon the grant or exercise of an
ISO. In addition, if the optionee holds a share received on exercise of an ISO for at least two years from the date the option was
granted and at least one year from the date the option was exercised, which we refer to as the Required Holding Period, the difference,
if any, between the amount realized on a sale or other taxable disposition of that share and the holder’s tax basis in that share will be
long-term capital gain or loss.
If, however, an optionee disposes of a share acquired on exercise of an ISO before the end of the Required Holding Period, which
we refer to as a Disqualifying Disposition, the optionee generally will recognize ordinary income in the year of the Disqualifying
Disposition equal to the excess, if any, of the fair market value of the share on the date the ISO was exercised over the exercise price.
However, if the sales proceeds are less than the fair market value of the share on the date of exercise of the option, the amount of
ordinary income recognized by the optionee will not exceed the gain, if any, realized on the sale. If the amount realized on a
Disqualifying Disposition exceeds the fair market value of the share on
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the date of exercise of the option, that excess will be short-term or long-term capital gain, depending on whether the holding period for
the share exceeds one year.
For purposes of the alternative minimum tax, the amount by which the fair market value of a share of stock acquired on exercise
of an ISO exceeds the exercise price of that option generally will be an adjustment included in the optionee’s alternative minimum
taxable income for the year in which the option is exercised. If, however, there is a Disqualifying Disposition of the share in the year
in which the option is exercised, there will be no adjustment for alternative minimum tax purposes with respect to that share. If there is
a Disqualifying Disposition in a later year, no income with respect to the Disqualifying Disposition will be included in the optionee’s
alternative minimum taxable income for that year. In computing alternative minimum taxable income, the tax basis of a share acquired
on exercise of an ISO is increased by the amount of the adjustment taken into account with respect to that share for alternative
minimum tax purposes in the year the option is exercised.
We are not allowed an income tax deduction with respect to the grant or exercise of an ISO or the disposition of a share acquired
on exercise of an ISO after the Required Holding Period. However, if there is a Disqualifying Disposition of a share, we are allowed a
deduction in an amount equal to the ordinary income includible in income by the optionee, provided that amount constitutes an
ordinary and necessary business expense for us and is reasonable in amount, and either the employee includes that amount in income
or we timely satisfy our reporting requirements with respect to that amount.
Stock Awards
Generally, the recipient of a stock award will recognize ordinary compensation income at the time the stock is received equal to
the excess, if any, of the fair market value of the stock received over any amount paid by the recipient in exchange for the stock. If,
however, the stock is not vested when it is received (for example, if the employee is required to work for a period of time in order to
have the right to sell the stock), the recipient generally will not recognize income until the stock becomes vested, at which time the
recipient will recognize ordinary compensation income equal to the excess, if any, of the fair market value of the stock on the date it
becomes vested over any amount paid by the recipient in exchange for the stock. A recipient may, however, file an election with the
Internal Revenue Service, within 30 days of his or her receipt of the stock award, to recognize ordinary compensation income, as of
the date the recipient receives the award, equal to the excess, if any, of the fair market value of the stock on the date the award is
granted over any amount paid by the recipient in exchange for the stock.
The recipient’s basis for the determination of gain or loss upon the subsequent disposition of shares acquired as stock awards will
be the amount paid for such shares plus any ordinary income recognized either when the stock is received or when the stock becomes
vested.
Subject to the requirement of reasonableness, the provisions of Section 162(m), and the satisfaction of a tax reporting obligation,
we will generally be entitled to a tax deduction equal to the taxable ordinary income realized by the recipient of the stock award.
Stock Appreciation Rights
We may grant stock appreciation rights separate from any other award, which we refer to as stand-alone stock appreciation rights,
or in tandem with options, which we refer to as tandem stock appreciation rights, under the plan.
With respect to stand-alone stock appreciation rights, if the recipient receives the appreciation inherent in the stock appreciation
rights in cash, the cash will be taxable as ordinary compensation income to the recipient at the time that the cash is received. If the
recipient receives the appreciation inherent in the stock appreciation rights in shares of stock, the recipient will recognize ordinary
compensation income equal to the excess of the fair market value of the stock on the day it is received over any amounts paid by the
recipient for the stock.
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With respect to tandem stock appreciation rights, if the recipient elects to surrender the underlying option in exchange for cash or
shares of stock equal to the appreciation inherent in the underlying option, the tax consequences to the recipient will be the same as
discussed above relating to the stand-alone stock appreciation rights. If the recipient elects to exercise the underlying option, the
recipient will be taxed at the time of exercise as if he or she had exercised a nonqualified stock option (discussed above).
Subject to the requirement of reasonableness, the provisions of Section 162(m), and the satisfaction of a tax reporting obligation,
we will generally be entitled to a tax deduction equal to the taxable ordinary income realized by the recipient of the stock appreciation
right.
Dividend Equivalents
Generally, the recipient of a dividend equivalent award will recognize ordinary compensation income at the time the dividend
equivalent award is received equal to the fair market value dividend equivalent award received. Subject to the requirement of
reasonableness, the provisions of Section 162(m), and the satisfaction of a tax reporting obligation, we will generally be entitled to a
tax deduction equal to the taxable ordinary income realized by the recipient of the dividend equivalent.
Section 162 Limitations
Section 162(m) denies a deduction to any publicly held corporation for compensation paid to certain “covered employees” in a
taxable year to the extent that compensation to such covered employee exceeds $1 million. It is possible that compensation attributable
to stock awards, when combined with all other types of compensation received by a covered employee from us, may cause this
limitation to be exceeded in any particular year. For purposes of Section 162(m), the term “covered employee” means our Chief
Executive Officer and our four highest compensated officers as of the end of a taxable year as disclosed in our filings with the SEC.
Certain kinds of compensation, including qualified “performance-based” compensation, are disregarded for purposes of the
Section 162(m) deduction limitation. In accordance with Treasury regulations issued under Section 162(m), compensation attributable
to certain stock awards will qualify as performance-based compensation if the award is granted by a committee of the Board of
Directors consisting solely of “outside directors” and the stock award is granted (or exercisable) only upon the achievement (as
certified in writing by the committee) of an objective performance goal established in writing by the committee while the outcome is
substantially uncertain, and the material terms of the plan under which the award is granted is approved by stockholders. A stock
option or stock appreciation right may be considered “performance-based” compensation as described in the previous sentence or by
meeting the following requirements: the incentive compensation plan contains a per-employee limitation on the number of shares for
which stock options and stock appreciation rights may be granted during a specified period, the material terms of the plan are
approved by the stockholders, and the exercise price of the option or right is no less than the fair market value of the stock on the date
of grant.
The regulations under Section 162(m) require that the directors who serve as members of the committee must be “outside
directors.” The plan provides that directors serving on the committee must be “outside directors” within the meaning of
Section 162(m). This limitation would exclude from the committee directors who are (i) our current employees or those of one of our
affiliates, (ii) our former employees or those of one of our affiliates who receive compensation for past services (other than benefits
under a tax-qualified pension plan), (iii) our current and former officers or those of one of our affiliates, (iv) directors currently
receiving direct or indirect remuneration from us or one of our affiliates in any capacity other than as a director, and (v) any other
person who is not otherwise considered an “outside director” for purposes of Section 162(m). The definition of an “outside director”
under Section 162(m) is generally narrower than the definition of a “non-employee director” under Rule 16b-3 of the Exchange Act.
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2005 Employee Stock Purchase Plan
We adopted and our stockholders approved our 2005 Employee Stock Purchase Plan, or purchase plan, during
to become effective upon the closing of this offering.
2005
Share Reserve
The purchase plan authorizes the issuance of
shares of common stock pursuant to purchase rights granted to our
employees or to employees of any of our affiliates, which amount will be increased on the first day of January, from 2006 until 20 ,
by the lesser of
shares or
% of the number of shares of common stock outstanding on that date. However, the
Board of Directors has the authority to designate a smaller number of shares by which the authorized number of shares of common
stock will be increased on that date. The purchase plan is intended to qualify as an employee stock purchase plan within the meaning
of Section 423 of the Code. As of the date hereof, no shares of common stock have been purchased under the purchase plan.
Administration
Our Board of Directors has delegated authority to administer the purchase plan to its compensation committee. The purchase plan
provides a means by which employees may purchase our common stock through payroll deductions. The purchase plan is
implemented by offerings of rights to eligible employees. Under the purchase plan, we may specify offerings with a duration of not
more than
months, and may specify shorter purchase periods within each offering. The first offering will begin on the
effective date of this offering and be approximately
months in duration with purchases occurring every six months. Unless
otherwise determined by the compensation committee, common stock will be purchased for accounts of employees participating in the
purchase plan at a price per share equal to the lower of (1)
% of the fair market value of a share of our common stock on the
date of commencement of participation in the offering, or (2)
% of the fair market value of a share of our common stock on
the date of purchase. Generally, all regular employees, including executive officers, who work more than 20 hours per week and are
customarily employed by us or by any of our affiliates for more than five months per calendar year may participate in the purchase
plan and may authorize payroll deductions of up to
% of their earnings for the purchase of common stock under the purchase
plan.
Limitations
Eligible employees may be granted rights only if the rights, together with any other rights granted under employee stock purchase
plans, do not permit such employee’s rights to purchase our stock to accrue at a rate which exceeds $25,000 of the fair market value of
such stock for each calendar year in which such rights are outstanding. No employee shall be eligible for the grant of any rights under
the purchase plan if immediately after such rights are granted, such employee has voting power over
% or more of our
outstanding capital stock, measured by vote or value.
In the event of certain corporate transactions, any outstanding rights to purchase our stock under the purchase plan will be
assumed, continued or substituted for by the surviving or acquiring entity. If the surviving or acquiring entity elects not to assume,
continue or substitute for such rights, then the participants’ accumulated contributions will be used to purchase shares of our common
stock within ten days prior to such corporate transaction and such purchase rights will terminate immediately thereafter.
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CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
Bridge Financings
May 2002 Bridge — 9% Convertible Notes
During May 2002, we issued to Kona KC Investment LLC, an entity affiliated with Chandler, our former Chief Executive Officer,
9% convertible notes in the aggregate principal amount of $1.0 million together with warrants to purchase an aggregate of
250,000 shares of our common stock at an exercise price of $1.20 per share. The notes were scheduled to mature upon the earlier of
(a) the closing of a financing of our company that generates net proceeds to us of at least $3.0 million; or (b) two years following the
date of issuance of the notes. During August 2003, upon the completion of our Series A preferred financing, all of the notes converted
pursuant to their terms into shares of our Series A preferred stock at a conversion price per share equal to $1.20.
In connection with the May 2002 bridge financing, and subject only to the voting agreement among us and certain of our
stockholders, so long as the bridge loan warrants remain outstanding, Michael McDermott, the founder of our company, agreed to vote
his shares of common stock in favor of one director designated by the investors. Subsequent to the issuance of the notes, we appointed
Chandler as our Chief Executive Officer. The investor appointed Chandler as its director designee, who resigned as an officer and
director of our company during May 2004.
The number of shares issuable upon exercise of the warrants and the exercise price of the warrants are subject to proportionate
adjustment in the event we subdivide our outstanding shares of common stock by recapitalization, reclassification, stock split, reverse
stock split, stock dividend, or other distribution of shares of common stock to our stockholders. In the event of any reorganization of
our company, or in the event we consolidate or merge into another entity or sell all or substantially all of our assets, the holder will be
entitled to receive securities or property that would have been received by the holder had the holder exercised the warrants in full
immediately prior to the closing of such transaction.
October 2002 Bridge — 10% Promissory Note
During October 2002, we issued to Kona KC Investment LLC, an entity affiliated with Chandler, our former Chief Executive
Officer, a promissory note in the aggregate principal amount of $0.5 million. The note bore interest at 10% per annum payable
monthly. The note matured and was repaid in full, together with accrued interest, during January 2003. The note was an unsecured
obligation of our company, however, the obligations under the note were guaranteed by Michael McDermott, our founder.
January 2003 Bridge — 8% Promissory Note
During January 2003, we borrowed $1.2 million from an affiliate of Michael McDermott, our founder and former officer and
director. The loan was in the form of a promissory note that accrued interest at 8% per annum, payable quarterly, and was secured by
certain assets of our company as well as certain shares of our common stock held by Mr. McDermott. In addition, Mr. McDermott
personally guaranteed our obligations under the note. We repaid the note and all accrued interest during January 2004.
Series A Preferred Financing
During August 2003, we issued to seven investors 4,166,666 shares of our Series A preferred stock at a price of $1.20 per share,
which included the sale of 3,333,332 shares for $4.0 million and conversion of $1.0 million principal amount of the notes issued
during May 2002 described above into 833,334 shares. Marcus Jundt, our Chairman of the Board, was the lead investor in this
financing and purchased from us 3,083,332 of such shares for an aggregate investment of $3.7 million. In addition, Kona KC
Investment LLC, an entity affiliated with Chandler, our former Chief Executive Officer, purchased from us 833,334 of such shares for
an aggregate investment of $1.0 million. The holders of Series A preferred stock have agreed to convert their shares into shares of our
common stock immediately prior to the closing of this offering.
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In connection with the Series A preferred financing, we entered into a stockholders agreement with the investors governing certain
restrictions and rights of first on transfer of shares of our capital stock held by the investors. In addition, in all elections of directors,
the investors agreed to vote such shares in favor of seven directors as set forth in the agreement. The holders of Series A preferred
stock have the right to designate two of the seven directors, and have currently designated Messrs. Hipskind and Winczewski. The
parties to the stockholders’ agreement have agreed to terminate the stockholders’ agreement upon the closing of this offering.
Convertible Subordinated Promissory Note Financing
During July 2004, we issued a $3.0 million principal amount subordinated promissory note convertible into shares of our Series B
preferred stock. The note is held by an entity controlled by Marcus Jundt and Richard J. Hauser, directors of our company. The
principal balance of the note bears interest at an annual rate of 10%, payable monthly on the last day of each month. The note is
subordinated in right of liens and payment in full of up to $16.0 million of our senior indebtedness, which includes principal and
accrued interest payable to banks, insurance companies, or other secured lenders. Upon 60 days’ prior written notice to the noteholder,
we may prepay in whole or in part the principal and accrued interest payable under the note, at which time the noteholder shall have
the right to convert the note as described below. The noteholder also has the right to convert the note at any time prior to payment. The
noteholder has agreed to convert the principal amount outstanding under the convertible subordinated promissory note into shares of
Series B preferred stock and then immediately convert those shares into shares of our common stock immediately prior to the closing
of this offering.”
In connection with the issuance of the note, we issued to the noteholder a five-year warrant to purchase up to 1,000,000 shares of
our common stock at an exercise price of $1.00 per share. The warrant is exercisable upon the earlier of July 30, 2009 or the closing of
the sale and issuance of our initial public offering, the gross proceeds of which are at least $25.0 million at a per share price of not less
than $7.00. The warrant contains provisions that provide for the cashless exercise of the warrant. The number of shares issuable upon
exercise of the warrant and the exercise price of the warrant are subject to proportionate adjustment in the event we subdivide our
outstanding shares of common stock by recapitalization, reclassification, stock split, reverse stock split, stock dividend, or other
distribution of shares of common stock to our stockholders. In the event of any reorganization of our company, or in case we
consolidate or merge into another corporation or sell all or substantially all of our assets, the warrantholder will be entitled to receive
securities or property that would have been received by the warrantholder had the holder exercised the warrant in full immediately
prior to the closing of such transaction.
Related Party Options
During January 2005, in consideration for his prior service to our company, including providing capital to our company and his
personal guaranty of company obligations, we granted to Mr. Jundt options to purchase 200,000 shares of our common stock at an
exercise price of $1.20 per share. In addition, in consideration for his service as our Chairman of the Board, during January 2005 we
granted to Mr. Jundt options to purchase 100,000 shares of our common stock at an exercise price of $1.20 per share.
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SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding the beneficial ownership of our common stock on March 31, 2005 by
the following:
•
each of our directors and executive officers;
•
all of our directors and executive officers as a group; and
•
each person known by us to own more than 5% of our common stock.
Name of Beneficial Owner
Directors and Executive Officers:
Marcus E. Jundt
C. Donald Dempsey
Jason J. Merritt
Mark S. Robinow
Chandler
Frank B. Bennett
Richard J. Hauser
Douglas G. Hipskind
W. Kirk Patterson
Anthony L. Winczewski
All directors and executive officers as a group (10 persons)
5% Stockholders:
Kona MN, LLC
Mary Joann Jundt Irrevocable Trust
James R. Jundt
Kona KC Investment LLC
Capital Real Estate, Inc.
Michael J. McDermott
*
Number of
Shares
Beneficially
Owned(1)
Percent Beneficially
Owned(2)
Before
Offering
5,363,006(3)
888,661(4)
518,000(5)
355,444(6)
173,560(7)
48,000(8)
4,357,334(9)
40,000(10)
32,000(11)
—
8,276,005
35.1%
6.0%
3.6%
2.5%
1.2%
*
29.0%
*
*
—
48.1%
3,500,000(12)
1,870,326(13)
1,516,667(14)
1,083,334(15)
833,334(9)
820,280(16)
23.4%
13.4%
10.9%
7.6%
6.0%
5.9%
After
Offering
Less than one percent.
(1) Except as otherwise indicated, each person named in the table has sole voting and investment power with respect to all common
stock beneficially owned, subject to applicable community property law. Except as otherwise indicated, each person may be
reached as follows: c/o Kona Grill, Inc., 7150 East Camelback Road, Suite 220, Scottsdale, Arizona 85251.
(2) The percentages shown are calculated based on 13,982,666 shares of common stock outstanding on March 31, 2005,
and
shares of common stock outstanding as adjusted after the offering. The numbers and percentages shown
include the shares of common stock actually owned as of March 31, 2005 and the shares of common stock that the identified
person or group had the right to acquire within 60 days of such date. In calculating the percentage of ownership, all shares of
common stock that the identified person or group had the right to acquire within 60 days of March 31, 2005 upon the exercise
of options or warrants are deemed to be outstanding for the purpose of computing the percentage of the shares of common stock
owned by that person or group, but are not deemed to be outstanding for the purpose of computing the percentage of the shares
of common stock owned by any other person or group.
(3) Mr. Marcus Jundt is the son of Mr. James R. Jundt, and Mr. Marcus Jundt is a beneficiary of the Mary Joann Jundt Irrevocable
Trust. The number of shares of common stock beneficially owned by
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Mr. Jundt includes (a) 54,000 shares held in trust by his children, of which Mr. Marcus Jundt is not a trustee;
(b) 2,500,000 shares of common stock beneficially owned by Kona MN, LLC, of which Mr. Marcus Jundt is a control person;
(c) 1,000,000 shares of common stock issuable upon exercise of outstanding warrants held by Kona MN, LLC; and
(d) 300,000 shares of common stock issuable upon exercise of vested stock options. The number of shares of common stock
beneficially owned by Mr. Jundt does not include (i) 1,870,326 shares beneficially owned by the Mary Joann Jundt Irrevocable
Trust; or (ii) 1,516,667 shares held by Mr. James R. Jundt. All shares of common stock held by Kona MN, LLC are included in
the beneficial ownership for both Messrs. Jundt and Hauser.
(4) Includes 888,861 shares of common stock issuable upon exercise of vested stock options.
(5) Includes 475,000 shares of common stock issuable upon exercise of vested stock options.
(6) Includes 355,444 shares of common stock issuable upon exercise of vested stock options.
(7) Includes 48,560 shares of common stock issuable upon exercise of vested stock options.
(8) Includes 48,000 shares of common stock issuable upon exercise of vested stock options.
(9) Mr. Hauser is a control person of Capital Real Estate, Inc. and Kona MN, LLC. The number of shares of common stock
beneficially owned by Mr. Hauser includes (a) 833,334 shares of common stock held by Capital Real Estate, Inc.;
(b) 2,500,000 shares of common stock held by Kona MN, LLC; (c) 1,000,000 shares of common stock issuable upon exercise
of outstanding warrants held by Kona MN, LLC; and (d) 24,000 shares of common stock issuable upon exercise of vested stock
options. All shares of common stock held by Kona MN, LLC are included in the beneficial ownership for both Messrs. Jundt
and Hauser.
(10)
Includes 40,000 shares of common stock issuable upon exercise of vested stock options.
(11)
Includes 32,000 shares of common stock issuable upon exercise of vested stock options.
(12)
Includes 2,500,000 shares of common stock and 1,000,000 shares of common stock issuable upon exercise of outstanding
warrants.
(13)
All of such shares are held by the Mary Joann Jundt Irrevocable Trust, of which Mrs. Mary Joann Jundt, the mother of
Mr. Marcus Jundt, is trustee.
(14)
Mr. James Jundt is the father of Mr. Marcus Jundt and has sole voting and dispositive power over all such shares.
(15)
Includes 250,000 shares of common stock issuable upon exercise of outstanding warrants.
(16)
Includes (a) 150,000 shares beneficially owned by The McDermott Family Limited Partnership, LLP, of which Mr. McDermott
is a limited partner; (b) 50,000 shares held by Mr. McDermott’s mother; (c) 20,000 shares held by Mr. McDermott’s father;
(d) 20,000 shares held by Mr. McDermott’s brother; and (e) 24,280 shares of common stock issuable upon exercise of vested
stock options.
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DESCRIPTION OF CAPITAL STOCK
We are authorized to issue
shares of common stock, $.01 par value, and
shares of undesignated
preferred stock, $.01 par value. The following description of our capital stock is intended to be a summary and does not describe all
provisions of our certificate of incorporation or bylaws or Delaware law applicable to us. For a more thorough understanding of the
terms of our capital stock, you should refer to our certificate of incorporation and bylaws, which are included as exhibits to the
registration statement of which this prospectus forms a part.
Common Stock
The holders of common stock are entitled to one vote per share on all matters to be voted upon by stockholders. There is no
cumulative voting. Subject to preferences that may be applicable to any outstanding preferred stock, holders of common stock are
entitled to receive ratably such dividends as may be declared by the board of directors out of funds legally available for that purpose.
In the event of the liquidation, dissolution, or winding up of our company, the holders of common stock are entitled to share ratably in
all assets remaining after payment of liabilities and the liquidation preferences of any outstanding preferred stock. The common stock
has no preemptive or conversion rights, other subscription rights, or redemption or sinking fund provisions.
Preferred Stock
Our certificate of incorporation authorizes our board of directors, without any vote or action by the holders of our common stock,
to issue preferred stock from time to time in one or more series. Our board of directors is authorized to determine the number of shares
and to fix the designations, powers, preferences, and the relative, participating, optional, or other rights of any series of preferred
stock. Issuances of preferred stock would be subject to the applicable rules of the NASDAQ or other organizations on which our
securities are then quoted or listed. Depending upon the terms of preferred stock established by our board of directors, any or all series
of preferred stock could have preference over the common stock with respect to dividends and other distributions and upon our
liquidation. If any shares of preferred stock are issued with voting powers, the voting power of the outstanding common stock would
be diluted. No shares of preferred stock are presently outstanding, and we have no present intention to issue any shares of preferred
stock.
Registration Rights
In connection with our Series A financing during August 2003 and convertible subordinated promissory note financing during
July 2004, we granted certain registration rights to the investors in those offerings. We granted “demand” registration rights to the
investors whereby upon request of the holders of at least 50% of registrable securities, we agreed to register the resale of the shares
held by all of such investors. The demand rights may be exercised by the holders six months following the closing date of a qualified
public offering of our company. A “qualified public offering” means a firm commitment underwritten public offering of our common
stock in which we receive aggregate gross proceeds of at least $25.0 million at a price per share of no less than $7.00. We are not
obligated to effectuate more than one registration before a qualified public offering or one registration following a qualified public
offering. The demand rights are subject to customary underwriter holdbacks in the event the underwriters of such offering determine
that inclusion of such shares would materially adversely affect the marketing of such offering. We also granted certain demand
registration rights whereby the holders of at least 20% of the registrable securities may request that we register for resale their shares
of common stock.
Anti-Takeover Effects
General
Our certificate of incorporation, our bylaws, and the Delaware General Corporation Law contain certain provisions that could
delay or make more difficult an acquisition of control of our company not
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approved by our board of directors, whether by means of a tender offer, open market purchases, a proxy context, or otherwise. These
provisions have been implemented to enable us, particularly but not exclusively in the initial years of our existence as a publicly
owned company, to develop our business in a manner that will foster our long-term growth without disruption caused by the threat of
a takeover not deemed by our board of directors to be in the best interests of our company and our stockholders. These provisions
could have the effect of discouraging third parties from making proposals involving an acquisition or change of control of our
company even if such a proposal, if made, might be considered desirable by a majority of our stockholders. These provisions may also
have the effect of making it more difficult for third parties to cause the replacement of our current management without the
concurrence of our board of directors.
There is set forth below a description of the provisions contained in our certificate of incorporation and bylaws and the Delaware
General Corporation Law that could impede or delay an acquisition of control of our company that our board of directors has not
approved. This description is intended as a summary only and is qualified in its entirety by reference to our certificate of incorporation
and bylaws, which are included as exhibits to the registration statement of which this prospectus forms a part, as well as the Delaware
General Corporation Law.
Authorized but Unissued Preferred Stock
Our certificate of incorporation authorizes our board of directors to issue one or more series of preferred stock and to determine,
with respect to any series of preferred stock, the terms and rights of such series without any further vote or action by our stockholders.
The existence of authorized but unissued shares of preferred stock may enable our board of directors to render more difficult or
discourage an attempt to obtain control of our company by means of a proxy contest, tender offer, or other extraordinary transaction.
Any issuance of preferred stock with voting and conversion rights may adversely affect the voting power of the holders of common
stock, including the loss of voting control to others. The existence of authorized but unissued shares of preferred stock will also enable
our board of directors, without stockholder approval, to adopt a “poison pill” takeover defense mechanism. We have no present plans
to issue any shares of preferred stock.
Number of Directors; Removal; Filling Vacancies
Our certificate of incorporation and bylaws provide that the number of directors shall be fixed only by resolution of our Board of
Directors from time to time or by our stockholders. Our certificate of incorporation provides that directors may be removed by
stockholders by the affirmative vote of at least 75% of the shares entitled to vote. Our certificate of incorporation and bylaws provide
that vacancies on the Board of Directors may be filled only by a majority vote of the remaining directors or by the sole remaining
director.
Classified Board
Our certificate of incorporation provides for our board to be divided into three classes, as nearly equal in number as possible,
serving staggered terms. Approximately one-third of our board will be elected each year. See “Management — Board Composition
and Committees.” The provision for a classified board could prevent a party who acquires control of a majority of our outstanding
common stock from obtaining control of the board until our second annual stockholders meeting following the date the acquirer
obtains the controlling share interest. The classified board provision could have the effect of discouraging a potential acquirer from
making a tender offer or otherwise attempting to obtain control of us and could increase the likelihood that incumbent directors will
retain their positions.
Stockholder Action
Our certificate of incorporation provides that stockholder action may be taken only at an annual or special meeting of
stockholders. This provision prohibits stockholder action by written consent in lieu of a
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meeting. Our certificate of incorporation and bylaws further provide that special meetings of stockholders may be called only by our
Chairman of the Board of Directors, Chief Executive Officer, President, or Secretary, and shall be called by any such officer at the
request in writing of a majority of the Board of Directors. Stockholders are not permitted to call a special meeting or to require our
Board of Directors to call a special meeting of stockholders.
The provisions of our certificate of incorporation and bylaws prohibiting stockholder action by written consent may have the
effect of delaying consideration of a stockholder proposal until the next annual meeting unless a special meeting is called as provided
above. These provisions would also prevent the holders of a majority of the voting power of our stock from unilaterally using the
written consent procedure to take stockholder action. Moreover, a stockholder could not force stockholder consideration of a proposal
over the opposition of the board of directors by calling a special meeting of stockholders prior to the time our chairman or a majority
of the whole board believes such consideration to be appropriate.
Advance Notice for Stockholder Proposals and Director Nominations
Our bylaws establish an advance notice procedure for stockholder proposals to be brought before any annual or special meeting of
stockholders and for nominations by stockholders of candidates for election as directors at an annual meeting or a special meeting at
which directors are to be elected. Subject to any other applicable requirements, including, without limitation, Rule 14a-8 under the
Exchange Act, only such business may be conducted at a meeting of stockholders as has been brought before the meeting by, or at the
direction of, our board of directors, or by a stockholder who has given our Secretary timely written notice, in proper form, of the
stockholder’s intention to bring that business before the meeting. The presiding officer at such meeting has the authority to make such
determinations. Only persons who are nominated by, or at the direction of, our board of directors, or who are nominated by a
stockholder that has given timely written notice, in proper form, to our Secretary prior to a meeting at which directors are to be
elected, will be eligible for election as directors.
Amendments to Bylaws
Our certificate of incorporation provides that only our board of directors or the holders of at least 75% of the shares entitled to
vote at an annual or special meeting of stockholders have the power to amend or repeal our bylaws.
Amendments to Certificate of Incorporation
Any proposal to amend, alter, change, or repeal any provision of our certificate of incorporation requires approval by the
affirmative vote of a majority of the voting power of all of the shares of our capital stock entitled to vote on such matters, with the
exception of certain provisions of our certificate of incorporation that require a vote of at least 66 / 3 % of such voting power. The
requirement of a super-majority vote to approve amendments to the certificate of incorporation or bylaws could enable a minority of
our stockholders to exercise veto power over an amendment.
2
Delaware Statutory Provisions
We are subject to several anti-takeover provisions under the Delaware General Corporation Law, or DGCL, that may deter or
hinder takeovers of Delaware corporations. Delaware’s control share acquisition statute generally provides that shares acquired in a
“control share acquisition” will not possess any voting rights unless either the board of directors approves the acquisition or such
voting rights are approved by a majority of the corporation’s voting shares, excluding interested shares. Interested shares are those
held by our officers and inside directors and by the acquiring party. A “control share acquisition” is an acquisition, directly or
indirectly, by any person of ownership of, or the power to direct the exercise of voting power with respect to, issued and outstanding
“control shares” of a publicly held Delaware corporation. “Control shares” are shares that, except for Delaware’s control share
acquisition statute, would have voting power that, when added to all other shares that can be voted by the acquiring party, would
entitle the acquiring
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party, immediately after the acquisition of such shares, directly or indirectly, to exercise voting power in the election of directors
within any of the following ranges:
•
at least 20% but less than 33 /3% of all voting power;
1
•
at least 33 /3% but less than a majority of all voting power; or
•
a majority or more of all voting power.
1
We also are subject to the “affiliated transactions” statute of the DGCL. The affiliated transactions statute prohibits a publicly held
Delaware corporation from engaging in a broad range of business combinations or other extraordinary corporate transactions with an
“interested stockholder” unless:
•
the transaction is approved by a majority of disinterested directors;
•
the corporation has not had more than 300 stockholders of record at any time during the three years preceding the
announcement of the transaction;
•
the interested stockholder has owned at least 80% of the corporation’s outstanding voting shares for at least five years;
•
the interested stockholder is the beneficial owner of at least 90% of the voting shares (excluding shares acquired directly
from the corporation in a transaction not approved by a majority of the disinterested directors);
•
consideration is paid to the holders of the corporation’s shares equal to the highest amount per share paid by the interested
stockholder for the acquisition of the corporation’s shares in the last two years or the fair market value of the shares, and
other specified conditions are met; or
•
the transaction is approved by the holders of two-thirds of the company’s voting shares other than those owned by the
interested stockholder.
An “interested stockholder” is defined as a person who, together with affiliates and associates, beneficially owns more than 10%
of a company’s outstanding voting shares. The DGCL defines “beneficial ownership” in more detail.
Limitation of Liability and Indemnification of Officers and Directors
Our certificate of incorporation and bylaws limit the liability of directors to the fullest extent permitted by the Delaware General
Corporation Law. In addition, our certificate of incorporation and bylaws provide that we will indemnify our directors and officers to
the fullest extent permitted by law. In connection with this offering, we are entering into indemnification agreements with our current
directors and executive officers and expect to enter into a similar agreement with any new directors or executive officers.
Indemnification for Securities Act Liabilities
Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted for directors, officers, or
controlling persons pursuant to the provisions described in the preceding paragraph, we have been informed that in the opinion of the
Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act and is therefore
unenforceable.
Transfer Agent and Registrar
Upon the closing of this offering, the transfer agent and registrar for our common stock will be
transfer agent’s address is
and its telephone number is
71
. The
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SHARES ELIGIBLE FOR FUTURE SALE
Prior to this offering, there has been no public market for our common stock. We cannot predict the effect, if any, that market
sales of shares, or the availability of shares for sale, will have on the market price of our common stock prevailing from time to time.
Sales of our common stock in the public market after the restrictions described below lapse, or the perception that those sales may
occur, could cause the prevailing market price to decline or to be lower than it might be in the absence of those sales or perceptions.
Sale of Restricted Shares
Upon completion of this offering, we will have
shares of common stock outstanding, based on
shares of
common stock outstanding as of
, 2005. Of these shares, the shares sold in this offering, plus any shares sold upon
exercise of the underwriters’ overallotment option, will be freely tradable without restriction under the Securities Act, except for any
shares purchased by our “affiliates” as that term is defined in Rule 144 under the Securities Act. In general, affiliates include executive
officers, directors, and 10% stockholders. Shares purchased by affiliates will remain subject to the resale limitations of Rule 144.
The remaining shares outstanding prior to this offering are restricted securities within the meaning of Rule 144. Restricted
securities may be sold in the public market only if registered or if they qualify for an exemption from registration under Rules 144,
144(k), or 701 promulgated under the Securities Act, which are summarized below.
Taking into account the lock-up agreements, and assuming Oppenheimer & Co. Inc. does not release shares from these
agreements, the following shares will be eligible for sale in the public market at the following times:
•
beginning on the effective date of the registration statement of which this prospectus forms a part, the shares sold in this
offering will be immediately available for sale in the public market and approximately
shares will be
eligible for sale pursuant to Rule 144(k), none of which are held by affiliates;
•
beginning 90 days after the effective date of the registration statement of which this prospectus forms a part,
approximately
additional shares will be eligible for sale pursuant to Rule 701 that are not subject to lock-up
agreements; and
•
beginning 180 days after the effective date of the registration statement of which this prospectus forms a part (unless the
lock-up period is extended as described below and in “Underwriting”), approximately
additional shares held
by affiliates will be eligible for sale subject to volume, manner of sale, and other limitations under
Rule 144;
additional shares held by nonaffiliates will be eligible for sale pursuant to Rule 701;
and
additional shares will be eligible for sale pursuant to Rule 144(k).
Lock-Up Agreements
Our directors, executive officers, and certain stockholders have entered into lock-up agreements in connection with this offering,
generally providing that they will not offer, sell, contract to sell, or grant any option to purchase or otherwise dispose of our common
stock or any securities exercisable for or convertible into our common stock owned by them for a period of 180 days after the date of
this prospectus without the prior written consent of Oppenheimer & Co. Inc. Despite possible earlier eligibility for sale under the
provisions of Rules 144, 144(k), and 701, shares subject to lock-up agreements will not be salable until these agreements expire or are
waived by Oppenheimer & Co. Inc. These agreements are more fully described in “Underwriting.”
We have been advised by the underwriters that they may at their discretion waive the lock-up agreements; however, they have no
current intention of releasing any shares subject to a lock-up agreement. The release of any lock-up would be considered on a
case-by-case basis. In considering any
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request to release shares covered by a lock-up agreement, the representatives would consider, among other factors, the particular
circumstances surrounding the request, including but not limited to the number of shares requested to be released, market conditions,
the possible impact on the market for our common stock, the trading price of our common stock, historical trading volumes of our
common stock, the reasons for the request and whether the person seeking the release is one of our officers or directors. No agreement
has been made between the underwriters and us or any of our stockholders pursuant to which the representatives will waive the
lock-up restrictions.
Rule 144
In general, under Rule 144 as currently in effect, a person who has beneficially owned restricted securities for at least one year
would be entitled to sell within any three-month period a number of shares that does not exceed the greater of the following:
•
1% of the number of shares of common stock then outstanding; or
•
the average weekly trading volume of the common stock during the four calendar weeks preceding the filing of a notice
on Form 144 with respect to such sale.
Sales under Rule 144 are also subject to requirements with respect to manner of sale, notice, and the availability of current public
information about us.
Rule 144(k)
Under Rule 144(k), a person who is not deemed to have been one of our affiliates at any time during the three months preceding a
sale, and who has beneficially owned the shares proposed to be sold for at least two years, is entitled to sell his or her shares without
complying with the manner of sale, public information, volume limitation, or notice provisions of Rule 144. Therefore, unless
otherwise restricted pursuant to the lock-up agreements or otherwise, those shares may be sold immediately upon the completion of
this offering.
Rule 701
Under Rule 701 as currently in effect, each of our employees, officers, directors, and consultants who purchased shares pursuant
to a written compensatory plan or contract is eligible to resell these shares 90 days after the effective date of this offering in reliance
upon Rule 144, but without compliance with specific restrictions. Rule 701 provides that affiliates may sell their Rule 701 shares
under Rule 144 without complying with the holding period requirement and that non-affiliates may sell their shares in reliance on
Rule 144 without complying with the holding period, public information, volume limitation, or notice provisions of Rule 144.
Form S-8 Registration Statements
We intend to file one or more registration statements on Form S-8 under the Securities Act as soon as practicable after the
completion of this offering for shares issued upon the exercise of options and shares to be issued under our employee benefit plans. As
a result, any options or rights exercised under the 200
incentive compensation plan or any other benefit plan after the
effectiveness of the registration statements will also be freely tradable in the public market. However, such shares held by affiliates
will still be subject to the volume limitation, manner of sale, notice, and public information requirements of Rule 144 unless otherwise
resalable under Rule 701.
Registration Rights
Beginning six months after the completion of this offering, holders of
restricted shares will be entitled to registration
rights on these shares for sale in the public market. See “Description of Capital Stock — Registration Rights.” Registration of these
shares under the Securities Act would result in their becoming freely tradable without restriction under the Securities Act immediately
upon effectiveness of the applicable registration statement.
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MATERIAL U.S. FEDERAL INCOME TAX CONSIDERATIONS FOR
NON-U.S. HOLDERS OF OUR COMMON STOCK
THE DISCUSSION SET FORTH HEREIN IS NOT ADVICE INTENDED TO BE RELIED UPON AND USED, AND
CANNOT BE USED BY ANY TAXPAYER, FOR THE PURPOSE OF AVOIDING ANY PENALTIES IMPOSED ON THE
TAXPAYER. THIS TAX CONSIDERATIONS SECTION WAS WRITTEN TO SUPPORT THE PROMOTION OR
MARKETING OF THE COMMON STOCK DESCRIBED IN THIS PROSPECTUS. EACH PROSPECTIVE INVESTOR
SHOULD SEEK ADVICE BASED ON HIS OR HER PARTICULAR CIRCUMSTANCES FROM AN INDEPENDENT TAX
ADVISOR CONCERNING THE INCOME AND OTHER TAX CONSEQUENCES OF ACQUIRING, OWNING, AND
DISPOSING OF OUR COMMON STOCK.
The following discussion describes the material U.S. federal income tax consequences to non-U.S. holders (as defined below) of
the acquisition, ownership and disposition of our common stock issued pursuant to this offering. This discussion is not a complete
analysis of all the potential U.S. federal income tax consequences relating thereto, nor does it address any tax consequences arising
under any state, local or foreign tax laws or any other U.S. federal tax laws. This discussion is based on the Internal Revenue Code of
1986, as amended (the “Code”), Treasury Regulations promulgated thereunder, judicial decisions, and published rulings and
administrative pronouncements of the Internal Revenue Service (the “IRS”), all as in effect as of the date of this offering. These
authorities may change, possibly retroactively, resulting in U.S. federal income tax consequences different from those discussed
below. No ruling from the IRS has been or will be sought with respect to the matters discussed below, and there can be no assurance
that the IRS will not take a contrary position regarding the tax consequences of the acquisition, ownership or disposition of our
common stock, or that any such contrary position would not be sustained by a court.
This discussion is limited to non-U.S. holders who purchase our common stock issued pursuant to this offering and who hold our
common stock as a capital asset within the meaning of Section 1221 of the Code (generally, property held for investment). This
discussion does not address all U.S. federal income tax considerations that may be relevant to a particular holder in light of that
holder’s particular circumstances. This discussion also does not consider any specific facts or circumstances that may be relevant to
holders subject to special rules under the U.S. federal income tax laws, including, without limitation, U.S. expatriates, partnerships,
“controlled foreign corporations,” “passive foreign investment companies,” corporations that accumulate earnings to avoid
U.S. federal income tax, financial institutions, insurance companies, brokers, dealers or traders in securities, commodities or
currencies, tax-exempt organizations, tax-qualified retirement plans, persons subject to the alternative minimum tax, and persons
holding our common stock as part of a hedge, straddle or other risk reduction strategy or as part of a conversion transaction or other
integrated investment.
For the purposes of this discussion, a non-U.S. holder is any beneficial owner of our common stock that is not a “U.S. person” for
U.S. federal income tax purposes. A U.S. person is any of the following:
•
a citizen or resident of the United States;
•
a corporation or partnership (or other entity treated as a corporation or a partnership for U.S. federal income tax purposes)
created or organized under the laws of the United States, any state thereof or the District of Columbia;
•
an estate the income of which is subject to U.S. federal income tax regardless of its source; or
•
a trust that (1) is subject to the primary supervision of a U.S. court and the control of one or more U.S. persons or (2) has
validly elected to be treated as a U.S. person for U.S. federal income tax purposes.
If a partnership (or other entity taxed as a partnership for U.S. federal income tax purposes) holds our common stock, the tax
treatment of a partner in the partnership generally will depend on the status of the partner and upon the activities of the partnership.
Accordingly, partnerships that hold our common
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stock and partners in such partnerships are urged to consult their tax advisors regarding the specific U.S. federal income tax
consequences to them.
Distributions on our Common Stock
Payments on our common stock will constitute dividends for U.S. federal income tax purposes to the extent paid from our current
or accumulated earnings and profits, as determined under U.S. federal income tax principles. Amounts not treated as dividends for
U.S. federal income tax purposes will constitute a return of capital to the extent of the non-U.S. holder’s adjusted basis, and any
excess will be treated as capital gain.
Dividends paid to a non-U.S. holder of our common stock that are not effectively connected with a U.S. trade or business
conducted by such holder generally will be subject to U.S. federal withholding tax at a rate of 30% of the gross amount of the
dividends, or such lower rate specified by an applicable tax treaty. To receive the benefit of a reduced treaty rate, a non-U.S. holder
must furnish to us or our paying agent a valid IRS Form W-8BEN (or applicable successor form) certifying such holder’s qualification
for the reduced rate. This certification must be provided to us or our paying agent prior to the payment of dividends and must be
updated periodically. Non-U.S. holders that do not timely provide us or our paying agent with the required certification, but which
qualify for a reduced treaty rate, may obtain a refund of any excess amounts withheld by timely filing an appropriate claim for refund
with the IRS.
If a non-U.S. holder holds our common stock in connection with the conduct of a trade or business in the United States, and
dividends paid on the common stock are effectively connected with such holder’s U.S. trade or business, the non-U.S. holder will be
exempt from U.S. federal withholding tax. To claim the exemption, the non-U.S. holder must furnish to us or our paying agent a valid
IRS Form W-8ECI (or applicable successor form).
Any dividends paid on our common stock that are effectively connected with a non-U.S. holder’s U.S. trade or business (or if
required by an applicable tax treaty, attributable to a permanent establishment maintained by the non-U.S. holder in the United States)
generally will be subject to U.S. federal income tax on a net income basis in the same manner as if such holder were a resident of the
United States, unless an applicable tax treaty provides otherwise. A non-U.S. holder that is a foreign corporation also may be subject
to a branch profits tax equal to 30% (or such lower rate specified by an applicable tax treaty) of a portion of its effectively connected
earnings and profits for the taxable year. Non-U.S. holders are urged to consult their own tax advisors regarding the effect of any
applicable tax treaties.
Gain on Disposition of our Common Stock
A non-U.S. holder generally will not be subject to U.S. federal income tax on any gain realized upon the sale or other disposition
of our common stock unless:
•
the gain is effectively connected with the non-U.S. holder’s conduct of a trade or business in the United States, or if
required by an applicable tax treaty, attributable to a permanent establishment maintained by the non-U.S. holder in the
United States;
•
the non-U.S. holder is a nonresident alien individual present in the United States for 183 days or more during the taxable
year of the disposition and certain other requirements are met; or
•
we are or have been a “United States real property holding corporation,” or a USRPHC, for U.S. federal income tax
purposes at any time during the shorter of the five-year period ending on the date of the sale or other disposition and the
period such non-U.S. holder held our common stock (the shorter period referred to as the “lookback period”); provided
that if our common stock is regularly traded on an established securities market, this rule generally will not cause any
gain to be taxable unless the non-U.S. holder owned more than 5% of our common stock at some time during the
lookback period. We do not believe that we are a USRPHC and do not expect to become one in the future. However, we
could become a USRPHC as a result of future changes in assets or operations.
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Unless an applicable tax treaty provides otherwise, gain described in the first or third bullet point above will be subject to
U.S. federal income tax on a net income basis in the same manner as if such holder were a resident of the United States.
Non-U.S. holders that are foreign corporations also may be subject to a branch profits tax equal to 30% (or such lower rate specified
by an applicable tax treaty) of a portion of its effectively connected earnings and profits for the taxable year. Non-U.S. holders are
urged to consult their own tax advisors regarding the effect of any applicable tax treaties.
Gain described in the second bullet point above will be subject to U.S. federal income tax at a flat 30% rate, but may be offset by
U.S. source capital losses.
Information Reporting and Backup Withholding
The amount of dividends on our common stock paid to each non-U.S. holder and the amount of any tax withheld with respect to
those dividends may be required to be reported to the IRS. These information reporting requirements apply even if no withholding was
required because the dividends were effectively connected with the holder’s conduct of a U.S. trade or business, or withholding was
reduced or eliminated by an applicable tax treaty. This information also may be made available under a specific treaty or agreement
with the tax authorities in the country in which the non-U.S. holder resides or is established. Backup withholding, however, generally
will not apply to payments of dividends to a non-U.S. holder of our common stock provided the non-U.S. holder furnishes to us or our
paying agent the required certification as to its non-U.S. status, such as by providing a valid IRS Form W-8BEN or W-8ECI.
Payments of the proceeds from a disposition by a non-U.S. holder of our common stock made by or through a foreign office of a
broker generally will not be subject to information reporting or backup withholding. However, information reporting (but not backup
withholding) will apply to those payments if the broker does not have documentary evidence that the beneficial owner is a
non-U.S. holder, an exemption is not otherwise established, and the broker is:
•
a U.S. person;
•
a controlled foreign corporation for U.S. federal income tax purposes;
•
a foreign person 50% or more of whose gross income is effectively connected with a U.S. trade or business for a specified
three-year period; or
•
a foreign partnership if at any time during its tax year (1) one or more of its partners are U.S. persons who hold in the
aggregate more than 50 percent of the income or capital interest in such partnership or (2) it is engaged in the conduct of
a U.S. trade or business.
Payment of the proceeds from a disposition by a non-U.S. holder of our common stock made by or through the U.S. office of a
broker generally will be subject to information reporting and backup withholding unless the non-U.S. holder certifies as to its
non-U.S. holder status under penalties of perjury, such as by providing a valid IRS Form W-8BEN or W-8ECI, or otherwise
establishes an exemption from information reporting and backup withholding.
Backup withholding is not an additional tax. Any amounts withheld under the backup withholding rules may be allowed as a
refund or a credit against a non-U.S. holder’s U.S. federal income tax liability, provided the required information is timely furnished
to the IRS.
PROSPECTIVE INVESTORS ARE URGED TO CONSULT THEIR TAX ADVISORS REGARDING THE PARTICULAR
U.S. FEDERAL INCOME TAX CONSEQUENCES TO THEM OF ACQUIRING, OWNING AND DISPOSING OF OUR
COMMON STOCK, AS WELL AS ANY TAX CONSEQUENCES ARISING UNDER ANY STATE, LOCAL OR FOREIGN TAX
LAWS AND ANY OTHER U.S. FEDERAL TAX LAWS.
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UNDERWRITING
Our company and the underwriters named below have entered into an underwriting agreement with respect to the shares being
offered. Subject to certain conditions, each underwriter has severally agreed to purchase the number of shares indicated in the
following table. Oppenheimer & Co. Inc. is the representative of the underwriters.
Underwriters
Number of Shares
Oppenheimer & Co. Inc.
Feltl and Company
Total
The underwriters are committed to take and pay for all of the shares being offered, if any are taken, other than the shares covered
by the option described below unless and until this option is exercised.
If the underwriters sell more shares than the total number set forth in the table above, the underwriters have an option to buy up to
an additional
shares from us to cover such sales. They may exercise that option for 30 days. If any shares are purchased
pursuant to this option, the underwriters will severally purchase shares in approximately the same proportion as set forth in the table
above.
The following table shows the per share and total underwriting discounts and commissions to be paid to the underwriters by us.
Such amounts are shown assuming both no exercise and full exercise of the underwriters’ option to purchase
additional
shares from us.
No Exercise
Per Share
Total
$
$
Full Exercise
$
$
Shares sold by the underwriters to the public will initially be offered at the initial public offering price set forth on the cover of
this prospectus. Any shares sold by the underwriters to securities dealers may be sold at a discount of up to $
per share from the
initial public offering price. Any such securities dealers may resell any shares purchased from the underwriters to certain other brokers
or dealers at a discount of up to $
per share from the initial public offering price. If all the shares are not sold at the initial public
offering price, the representative may change the offering price and the other selling terms.
We have agreed that we will not offer, sell, contract to sell, pledge, or otherwise dispose of, directly or indirectly, or file with the
Securities and Exchange Commission a registration statement under the Securities Act relating to, any shares or our common stock or
securities convertible into or exchangeable or exercisable for any shares of our common stock, or publicly disclose the intention to
make any offer, sale, pledge, disposition, or filing, without the prior written consent of the representative for a period of 180 days after
the date of this prospectus. This agreement does not apply to the filing of a registration statement on Form S-8 under the Securities Act
to register securities issuable under our existing employee benefit plans, our issuance of common stock upon exercise of an existing
option, or our granting of awards pursuant to our existing employee benefit plans (subject to the lock-up restrictions described in this
“Underwriting” section).
Our officers, directors, and holders of substantially all of our common stock have agreed that they will not, other than as
contemplated by this prospectus, offer, sell, contract to sell, pledge, or otherwise dispose of, directly or indirectly, any shares of our
common stock or securities convertible into or exchangeable or exercisable for any shares of our common stock, enter into a
transaction that would have the same effect,
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or enter into any swap, hedge, or other arrangement that transfers, in whole or in part, any of the economic consequences of ownership
of our common stock, whether any of these transactions are to be settled by delivery of our common stock or other securities, in cash
or otherwise, or publicly disclose, unless required by law, the intention to make any offer, sale, pledge, or disposition, or to enter into
any transaction, swap, hedge, or other arrangement, without, in each case, the prior written consent of the representative for a period
of 180 days after the date of this prospectus. These agreements are subject to several exceptions.
In the event that either (1) during the last 17 days of the lock-up period, we release earnings results or announce material news or a
material event relating to us, or (2) prior to the expiration of the lock-up period, we announce that we will release earnings results
during the 15-day period beginning on the last day of the initial lock-up period, the expiration of the lock-up period will be extended
until the expiration of the 18-day period beginning on the issuance of the earnings release or the announcement of the material news or
material event.
At our request, the underwriters have reserved for sale at the initial public offering price up to 5% of the shares of the common
stock offered in this offering for sale to our directors, officers, employees, business associates, and related persons who have
expressed an interest in purchasing common stock in the offering. The maximum number of shares that a participant may purchase in
the reserved share program is limited to the participant’s pro rata allocation of the
shares based on the number of shares
for which the participant subscribed. Individuals who purchase these shares will be subject to a 45-day lock-up period. The number of
shares available for sale to the general public in the offering will be reduced to the extent these persons purchase the reserved shares.
Any reserved shares not so purchased will be offered by the underwriters to the general public on the same terms as the other shares.
Prior to the offering, there has been no public market for the shares. The initial public offering price will be negotiated among our
company and the representative. Among the factors to be considered in determining the initial public offering price of the shares, in
addition to prevailing market conditions, will be our historical performance, estimates of our business potential and earnings
prospects, an assessment of our management and the consideration of the above factors in relation to market valuation of companies in
related businesses.
Application will be made to have our common stock quoted on the NASDAQ National Market under the symbol “KONA.”
In connection with the offering, the underwriters may purchase and sell shares of common stock in the open market. These
transactions may include short sales, stabilizing transactions and purchases to cover positions created by short sales. Short sales
involve the sale by the underwriters of a greater number of shares than they are required to purchase in the offering. “Covered” short
sales are sales made in an amount not greater than the underwriters’ option to purchase additional shares from the selling stockholders
in the offering. The underwriters may close out any covered short position by either exercising their option to purchase additional
shares or purchasing shares in the open market. In determining the source of shares to close out the covered short position, the
underwriters will consider, among other things, the price of shares available for purchase in the open market as compared to the price
at which they may purchase additional shares pursuant to the option granted to them. “Naked” short sales are any sales in excess of
such option. The underwriters must close out any naked short position by purchasing shares in the open market. A naked short
position is more likely to be created if the underwriters are concerned that there may be downward pressure on the price of the
common stock in the open market after pricing that could adversely affect investors who purchase in the offering. Stabilizing
transactions consist of various bids for or purchases of common stock made by the underwriters in the open market prior to the
completion of the offering.
The underwriters may also impose a penalty bid. This occurs when a particular underwriter repays to the underwriters a portion of
the underwriting discount received by it because the representative has repurchased shares sold by or for the account of such
underwriter in stabilizing or short covering transactions.
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Purchases to cover a short position and stabilizing transactions may have the effect of preventing or retarding a decline in the
market price of our stock, and together with the imposition of the penalty bid, may stabilize, maintain or otherwise affect the market
price of our common stock. As a result, the price of our common stock may be higher than the price that otherwise might exist in the
open market. If these activities are commenced, they may be discontinued at any time. These transactions may be effected on the
NASDAQ National Market, in the over-the-counter market, or otherwise.
The underwriters do not expect sales to discretionary accounts to exceed five percent of the total number of shares offered.
We estimate that our share of the total expenses of the offering, excluding the underwriting discounts and commissions, will be
approximately $
.
We have agreed to indemnify the several underwriters against certain liabilities, including liabilities under the Securities Act of
1933.
A prospectus in electronic format may be made available on the websites maintained by one or more of the underwriters, or
selling group members, if any, participating in this offering and one or more of the underwriters participating in this offering may
distribute prospectuses electronically. The representative may agree to allocate a number of shares to underwriters and selling group
members for sale to their own online brokerage account holders. Internet distributions will be allocated by the underwriters and selling
group members that will make internet distributions on the same basis as other allocations.
Certain of the underwriters and their respective affiliates have, from time to time, performed, and may in the future perform,
various financial advisory and investment banking services for our company and our affiliates, for which they received or will receive
customary fees and expenses.
LEGAL MATTERS
The validity of the common stock in this offering will be passed upon for us by Greenberg Traurig, LLP, Phoenix, Arizona.
Certain legal matters in connection with this offering will be passed upon for the underwriters by O’Melveny & Myers LLP, Newport
Beach, California.
EXPERTS
The consolidated financial statements of Kona Grill, Inc. at December 31, 2003 and 2004, and for each of the three years in the
period ended December 31, 2004, appearing in this prospectus and registration statement have been audited by Ernst & Young LLP,
independent registered public accounting firm, as set forth in their report thereon appearing elsewhere herein, and are included in
reliance upon such report given on the authority of such firm as experts in accounting and auditing.
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WHERE YOU CAN FIND ADDITIONAL INFORMATION
We have filed a registration statement on Form S-1 with the Securities and Exchange Commission relating to the common stock
offered by this prospectus. This prospectus does not contain all of the information set forth in the registration statement and the
exhibits and schedules to the registration statement. Statements contained in this prospectus as to the contents of any contract or other
document referred to are not necessarily complete and in each instance we refer you to the copy of the contract or other document
filed as an exhibit to the registration statement, each such statement being qualified in all respects by such reference. For further
information with respect to our company and the common stock offered by this prospectus, we refer you to the registration statement,
exhibits, and schedules.
Anyone may inspect a copy of the registration statement without charge at the public reference facility maintained by the SEC in
Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549. Copies of all or any part of the registration statement may be obtained
from that facility upon payment of the prescribed fees. The public may obtain information on the operation of the public reference
room by calling the SEC at 1-800-SEC-0330. The SEC maintains a website at http://www.sec.gov that contains reports, proxy and
information statements, and other information regarding registrants that file electronically with the SEC.
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KONA GRILL, INC.
INDEX TO FINANCIAL STATEMENTS
Page
Report of Independent Registered Public Accounting Firm
F-2
Consolidated Balance Sheets as of December 31, 2003 and 2004 and March 31, 2005 (unaudited)
F-3
Consolidated Statements of Operations for the years ended December 31, 2002, 2003, and 2004 and for the three
months ended March 31, 2004 and 2005 (unaudited)
F-4
Consolidated Statements of Stockholders’ Equity for the years ended December 31, 2002, 2003, and 2004 and for the
three months ended March 31, 2005 (unaudited)
F-5
Consolidated Statements of Cash Flows for the years ended December 31, 2002, 2003, and 2004 and for the three
months ended March 31, 2004 and 2005 (unaudited)
F-6
Notes to Consolidated Financial Statements
F-7
F-1
Table of Contents
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders
Kona Grill, Inc.
We have audited the accompanying consolidated balance sheets of Kona Grill, Inc. as of December 31, 2003 and 2004, and the
related consolidated statements of operations, stockholders’ equity, and cash flows for each of the three years in the period ended
December 31, 2004. These financial statements are the responsibility of the Company’s management. Our responsibility is to express
an opinion on the financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States).
Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. We were not engaged to perform an audit of the Company’s internal control over financial reporting.
Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal
control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates
made by management and 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 consolidated financial position
of Kona Grill, Inc. at December 31, 2003 and 2004, and the consolidated results of its operations and its cash flows for each of the
three years in the period ended December 31, 2004, in conformity with U.S. generally accepted accounting principles.
/s/ Ernst & Young LLP
Phoenix, Arizona
May 20, 2005
F-2
Table of Contents
KONA GRILL, INC.
CONSOLIDATED BALANCE SHEETS
December 31,
2003
March 31,
2005
2004
(Unaudited)
(In thousands)
ASSETS
Current assets:
Cash and cash equivalents
Receivables, primarily due from landlords
Inventories
Prepaids and other
Total current assets
Other assets
Notes receivable
Property and equipment, net
Total assets
$
$
3,107
440
184
36
3,767
106
190
8,634
12,697
$
$
3,098
1,344
336
109
4,887
344
141
17,041
22,413
$
2,786
1,767
$
$
1,966
799
311
76
3,152
351
128
17,015
20,646
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable
Accrued expenses
Current portion of notes payable:
Related party
Other
Total current liabilities
Long-term notes payable:
Related party, net
Other
Deferred rent
Total liabilities
$
Commitments and contingencies (Note 11)
Stockholders’ equity:
Series A convertible preferred stock, $0.01 par value,
4,166,666 shares authorized, issued and outstanding at
December 31, 2003 and 2004, and March 31, 2005
Series B convertible preferred stock, $0.01 par value,
15,000,000 shares authorized, no shares issued or outstanding at
December 31, 2003 and 2004, and March 31, 2005
Common stock, $0.01 par value, 40,000,000 shares authorized,
7,301,000, 7,316,000, and 7,316,000 shares issued and outstanding
at December 31, 2003 and 2004, and March 31, 2005, respectively
Additional paid-in capital
Accumulated deficit
Total stockholders’ equity
Total liabilities and stockholders’ equity
$
1,303
1,193
$
1,200
289
3,985
—
595
5,148
—
663
3,219
—
1,163
2,124
7,272
2,657
2,984
5,493
16,282
2,691
3,309
5,403
14,622
42
42
42
—
—
—
73
8,416
(3,106)
5,425
12,697
$
See accompanying notes to the consolidated financial statements.
F-3
869
1,687
73
8,846
(2,830)
6,131
22,413
$
73
8,892
(2,983)
6,024
20,646
Table of Contents
KONA GRILL, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months Ended
March 31,
Years Ended December 31,
2002
2003
2004
2004
2005
(Unaudited)
(In thousands, except per share data)
Restaurant sales
Costs and expenses:
Restaurant operating costs:
Cost of sales
Labor
Occupancy
Other
Total restaurant operating costs
General and administrative
Preopening expense
Depreciation and amortization
Income (loss) from operations
Nonoperating expenses:
Interest expense, net of interest income of
$24,000, $3,000, and $15,000 in 2002,
2003, and 2004, respectively, and $0
and $2,000 for the three months ended
March 31, 2004 and 2005, respectively
$
9,453
$
2,852
3,097
691
1,383
8,023
1,639
438
503
(1,150)
Income (loss) from discontinued operations
Net income (loss)
Net income (loss) per share — Basic:
Continuing operations
Discontinued operations
Net income (loss)
Net income (loss) per share — Diluted:
Continuing operations
Discontinued operations
Net income (loss)
Weighted average shares used in
computation:
Basic
Diluted
$
$
$
$
25,050
$
5,272
$
8,011
7,371
7,502
1,748
3,372
19,993
2,217
880
1,269
691
1,541
1,549
381
706
4,177
366
—
268
461
2,335
2,509
582
975
6,401
1,063
7
511
29
260
360
47
182
(347)
—
(347)
331
55
276
414
—
414
(153)
—
(153)
27
(57)
—
—
—
367
394
(859)
(262)
(319)
(666)
—
—
276
—
—
414
—
—
(153)
(1,253)
—
(1,253)
$
$
4,952
5,105
1,212
2,304
13,573
2,058
241
823
(87)
103
Income (loss) from continuing operations
before provision for income taxes
Provision for income taxes
Income (loss) from continuing operations
Discontinued operations:
Income (loss) from operations of
discontinued locations
Gain (loss) from sale of restaurant assets
16,608
$
(0.18)
0.06
(0.12)
$
(0.18)
0.06
(0.12)
$
$
$
$
(0.05)
(0.04)
(0.09)
$
(0.05)
(0.04)
(0.09)
$
$
$
$
0.04
—
0.04
$
0.03
—
0.03
$
$
$
$
0.06
—
0.06
$
0.04
—
0.04
$
$
$
(0.02)
—
(0.02)
(0.02)
—
(0.02)
6,955
7,184
7,301
7,301
7,316
6,955
7,184
14,027
11,473
7,316
See accompanying notes to the consolidated financial statements.
F-4
Table of Contents
KONA GRILL, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
Series A
Convertible
Preferred Stock
Shares
Common Stock
Amount
Shares
Additional
Paid-in
Capital
Amount
Accumulated
Deficit
Total
(In thousands)
Balances at December 31,
2001
Common stock
repurchased in
sale of restaurant
assets
Net loss
Balances at December 31,
2002
Common stock
issued in
connection with
purchase of
restaurant assets
Issuance of
common stock
as compensation
Issuance of
Series A
convertible
preferred stock,
net of $63,000 in
issuance costs
Conversion of
convertible
promissory note
to preferred
stock
Net loss
Balances at December 31,
2003
Issuance of
common stock
from exercise of
stock options
and warrants
Beneficial
conversion
feature and
detachable
warrants on
convertible
subordinated
promissory note
Net income
Balances at December 31,
2004
—
$
—
7,365
$
74 $
3,733
$
(1,581) $ 2,226
—
—
—
—
—
—
6,911
69
3,057
—
—
350
3
417
—
420
—
—
40
1
47
—
48
3,334
34
—
—
3,903
—
3,937
833
—
8
—
—
—
—
—
992
—
—
(666)
1,000
(666)
4,167
42
7,301
73
8,416
(3,106)
—
—
15
—
30
—
30
—
—
—
—
—
—
—
—
400
—
—
276
400
276
4,167
42
7,316
73
8,846
(454)
—
(5)
—
(676)
—
—
(859)
(2,440)
(2,830)
(681)
(859)
686
5,425
6,131
Issuance of stock options
as compensation
(unaudited)
Net loss
(unaudited)
Balances at March 31,
2005 (unaudited)
—
—
—
—
46
—
46
—
—
—
—
—
(153)
(153)
42
7,316
4,167
$
$
73 $
8,892
See accompanying notes to the consolidated financial statements.
F-5
$
(2,983) $ 6,024
Table of Contents
KONA GRILL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Three Months Ended
March 31,
Years Ended December 31,
2002
2003
2004
2004
2005
(Unaudited)
(In thousands)
Operating activities
Net (loss) income
Discontinued operations
Income (loss) from continuing operations
Adjustments to reconcile income (loss) from
continuing operations to net cash provided by
operating activities:
Depreciation and amortization
Compensation expense for issuance of common
stock and stock options
Amortization of debt discount
Change in operating assets and liabilities:
Receivables
Inventories
Prepaids and other current assets
Accounts payable
Accrued expenses
Deferred rent
Net cash provided by (used in) continuing operations
$
Net cash provided by discontinued operations
Net cash provided by (used in) operating activities
Investing activities
Purchase of property and equipment
Changes in accounts payable related to property and
equipment additions
Repayment (issuance) of notes receivable
Decrease (increase) in other assets
Proceeds from sale of restaurant
Net cash used in investing activities
Financing activities
Proceeds from issuance of notes payable
Repayments of notes payable
Proceeds from the exercise of stock options and
warrants
Proceeds from issuance of Series A convertible
preferred stock, net of issuance costs
Net cash provided by (used in) financing activities
Net increase (decrease) in cash and cash equivalents
(859)
(394)
(1,253)
$
Cash and cash equivalents at the end of the period
Supplemental disclosures of cash flow
information
Cash paid for interest
Noncash investing and financing activities
Beneficial conversion feature and detachable
warrants on convertible note
Issuance of common stock for purchase of restaurant
assets
Conversion of convertible promissory note to
preferred stock
$
276
—
276
$
414
—
414
$
(153)
—
(153)
503
823
1,269
268
511
—
—
48
—
—
57
—
—
46
34
81
(54)
(37)
830
336
549
(422)
(52)
19
(449)
482
441
(904)
(152)
(73)
872
574
3,369
—
(16)
(5)
11
(9)
451
545
25
33
(972)
(80)
(90)
955
27
982
543
2
545
5,288
—
5,288
1,114
—
1,114
(101)
—
(101)
(3,186)
(3,240)
(9,676)
(690)
(485)
204
12
51
—
(2,919)
388
(2)
(78)
100
(2,832)
611
49
(238)
—
(9,254)
(540)
—
58
—
(1,172)
(945)
13
(7)
—
(1,424)
1,700
(147)
2,194
(915)
5,495
(1,568)
—
(1,274)
525
(132)
—
—
30
—
1,553
3,937
5,216
—
3,957
(384)
Cash and cash equivalents at the beginning of the
period
(666)
319
(347)
2,929
—
—
—
(1,274)
(9)
—
393
(1,332)
(1,132)
$
562
178
$
178
3,107
$
3,107
3,098
$
3,107
1,775
$
3,098
1,966
$
107
$
258
$
343
$
65
$
133
$
—
$
—
$
400
$
—
$
—
$
—
$
420
$
—
$
—
$
—
$
—
$
1,000
$
—
$
—
$
—
Sale of restaurant assets for redemption of common
stock
$
681
$
—
$
—
$
See accompanying notes to the consolidated financial statements.
F-6
—
$
—
Table of Contents
KONA GRILL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2004
Information as of March 31, 2005 and for the Three Months Ended
March 31, 2004 and 2005 is Unaudited.
1.
Organization and Description of Business
Kona Grill, Inc. (the “Company”) owns and operates seven upscale casual dining restaurants in six states under the name “Kona
Grill.”
McDermott Restaurants, Inc. was incorporated under a prior name by our founder, Michael McDermott, in Arizona during 1996.
McDermott Restaurants, Inc. opened its first Kona Grill restaurant in Scottsdale, Arizona during 1998. During 2002, McDermott
Restaurants, Inc. completed a corporate reorganization involving the formation of a Delaware parent holding company, Kona Grill,
Inc. Through the reorganization, McDermott Restaurants, Inc. changed its name to Kona Grill Arizona, Inc. and became a wholly
owned subsidiary of Kona Grill, Inc. All of McDermott Restaurants, Inc.’s outstanding common stock was converted, on a
share-for-share basis, into common stock of Kona Grill, Inc.
2.
Summary of Significant Accounting Policies
Principles of Consolidation
The accompanying consolidated financial statements include the accounts and operations of the Company and its wholly owned
subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation.
Unaudited Interim Information
The consolidated financial statements as of March 31, 2005 and for the three months ended March 31, 2004 and 2005 are
unaudited. The unaudited financial statements have been prepared on the same basis as the audited financial statements and, in the
opinion of management, include all adjustments necessary for fair presentation, consisting of normal recurring adjustments. The
results for the three months ended March 31, 2005, are not necessarily indicative of the results to be expected for the year ending
December 31, 2005, or for any other interim period.
Cash and Cash Equivalents
The Company considers all highly liquid investments with a remaining maturity date of three months or less when purchased to be
cash equivalents. Cash and cash equivalents also include amounts due from credit card processors.
Inventories
Inventories consist of food and beverages and are stated at the lower of cost or market using the first-in, first-out method.
Property and Equipment
Property and equipment are stated at cost less accumulated depreciation. The Company capitalizes all direct costs on the
construction of leasehold improvements. Leasehold improvements are amortized over the shorter of the useful life of the asset or the
related lease term. Repair and maintenance costs are expensed as incurred. Other depreciation periods are as follows: Furniture and
Fixtures, seven years; Computer and electronic equipment, three years. China and smallwares are depreciated over two years up to
50 percent of their original cost, and subsequent additions are expensed as purchased.
F-7
Table of Contents
KONA GRILL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Information as of March 31, 2005 and for the Three Months Ended
March 31, 2004 and 2005 is Unaudited.
The Company evaluates property and equipment for impairment whenever events or changes in circumstances indicate that the
carrying value of those assets may not be recoverable. The Company does not believe there are any indicators of impairment with
respect to its property and equipment.
Deferred Rent
The Company leases its restaurant locations under operating lease agreements with terms of approximately 10 to 15 years. Most of
these agreements require minimum annual rent payments plus contingent rent payments based on a percentage of restaurant sales
which exceed the minimum base rent. Contingent rent payments, to the extent they exceed minimum payments, are accrued over the
periods in which the liability is incurred. The lease agreements typically also require scheduled increases to minimum annual rent
payments. For leases that contain rent escalations, the Company records the total rent payable over the initial lease term (including the
construction period) on a straight-line basis over the life of the initial lease term. Any difference between minimum rent and
straight-line rent is recorded as deferred rent.
Rent expense incurred from the date of possession through the completion of construction is capitalized and included in property
and equipment and amortized over the initial life of the lease. Straight-line rent recorded during the pre-opening period, if material, is
included in pre-opening expense. Deferred rent also includes tenant improvement allowances which are amortized as a reduction of
rent expense on a straight-line basis over the term of the lease.
Revenue Recognition
Revenues from food, beverage, and alcohol sales are recognized when payment is tendered at the point of sale. Revenues from gift
card sales are recognized upon redemption. Prior to redemption, the outstanding balances of all gift cards are included in accrued
expenses in the accompanying consolidated balance sheets.
Pre-opening Expenses
Pre-opening expenses, consisting primarily of manager salaries, advertising, travel, food and beverage, employee payroll and
related training costs incurred prior to the opening of a restaurant, are expensed as incurred.
Advertising Expense
The Company expenses advertising as incurred. Advertising expense for the years ended December 31, 2002, 2003, and 2004 and
for the three months ended March 31, 2004 and 2005, was approximately $290,000, $476,000, $637,000, $140,000, and $97,000,
respectively, and is included in other restaurant operating costs in the accompanying consolidated statements of operations.
Income Taxes
The Company utilizes the liability method of accounting for income taxes. Under the liability method, deferred tax assets and
liabilities are computed at each balance sheet date for temporary differences between the consolidated financial statements and tax
basis of assets and liabilities that will result in taxable or deductible amounts in the future based on tax rates in effect in the years in
which the temporary differences are expected to affect taxable income. Valuation allowances are established when necessary to reduce
deferred tax assets to the amounts that will more likely than not be realized.
F-8
Table of Contents
KONA GRILL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Information as of March 31, 2005 and for the Three Months Ended
March 31, 2004 and 2005 is Unaudited.
Stock Based Compensation
The Company maintains performance incentive plans under which incentive and non-qualified stock options are granted primarily
to employees and non-employee directors. The Company accounts for stock-based compensation in accordance with Accounting
Principles Board Opinion No. 25 (“APB 25”), Accounting for Stock Issued to Employees , and related interpretations. The
Company’s policy is to grant all stock options at the fair market value of the underlying stock at the date of grant. Accordingly, no
compensation expense is recognized for the stock options at the date of grant.
The Company has determined pro forma amounts as if the fair value method required by Statement of Financial Accounting
Standards (“SFAS”) No. 123, Accounting for Stock-Based Compensation , had been applied to its stock-based compensation. The
pro forma effect on net income as if the fair value of stock-based compensation had been recognized as compensation expense on a
straight-line basis over the vesting period of the stock options in each period was as follows (in thousands):
Three Months Ended
March 31,
Year Ended December 31,
2002
2003
2004
2004
2005
(Unaudited)
Net income (loss), as reported
Stock-based compensation expense, net of tax
effect
$
(859)
Pro forma net income (loss)
Net income (loss) per share:
Basic, as reported
$
(666)
$
276
$
414
$
(153)
$
(21)
(880)
$
—
(666)
$
(108)
168
$
(6)
408
$
(337)
(490)
$
(0.12)
$
(0.09)
$
0.04
$
0.06
$
(0.02)
Basic, pro forma
$
(0.12)
$
(0.09)
$
0.02
$
0.06
$
(0.07)
Diluted, as reported
$
(0.12)
$
(0.09)
$
0.03
$
0.04
$
(0.02)
Diluted, pro forma
$
(0.12)
$
(0.09)
$
0.01
$
0.04
$
(0.07)
The per share weighted average fair value for options awarded during the years ended 2002, 2003, and 2004 and the three months
ended March 31, 2005 was $0.30, $0.26, $0.20, and $0.23, respectively. The fair value of options at date of grant was estimated using
the Black-Scholes option-pricing model with the following weighted average assumptions for each respective year: (a) no dividend
yield, (b) 0 percent expected volatility, (c) a risk-free interest rate of 4.5 percent, and (d) expected option life of five years.
Net Income (Loss) Per Share
In accordance with the provisions of SFAS No. 128, Earnings Per Share, basic net income (loss) is computed by dividing net
income (loss) by the weighted average number of common shares outstanding during the period. Diluted net income (loss) per share
includes the dilutive effect of the convertible
F-9
Table of Contents
KONA GRILL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Information as of March 31, 2005 and for the Three Months Ended
March 31, 2004 and 2005 is Unaudited.
subordinated promissory note using the if-converted method, and potential warrant and stock option exercises calculated using the
treasury stock method.
Three Months Ended
March 31,
Year Ended December 31,
2002
2003
2004
2004
2005
(Unaudited)
(In thousands, except per share data)
Numerator:
Net income (loss) available to common
stockholders
Interest and amortization expense related
to convertible subordinated promissory
note, net of tax
$
(859)
$
—
(859)
Denominator:
Weighted average shares — basic
Effect of dilutive securities:
Stock options and warrants
Series A preferred shares
Convertible shares
Net income (loss) per share:
Basic
Diluted
$
(666)
$
—
(666)
$
276
$
189
465
$
414
$
—
414
$
(153)
$
—
(153)
6,955
7,184
7,301
7,301
7,316
—
—
—
6,955
—
—
—
7,184
59
4,167
2,500
14,027
5
4,167
—
11,473
—
—
—
7,316
$
(0.12)
$
(0.09)
$
0.04
$
0.06
$
(0.02)
$
(0.12)
$
(0.09)
$
0.03
$
0.04
$
(0.02)
At December 31, 2002, 2003, and 2004, there were approximately 714,270, 543,500, and 610,340 stock options outstanding and
310,500, 310,500, and 294,500 warrants outstanding, respectively, for which the effect of issuing these options and warrants were
excluded from the calculation of diluted net income (loss) per share because they were anti-dilutive.
Fair Value of Financial Instruments
The carrying amount of receivables, accounts payable, and accrued expenses approximates fair value because of the immediate or
short-term maturity of these financial instruments. The fair value of long-term debt is determined using current applicable rates for
similar instruments and approximates the carrying value of such debt.
Concentration of Credit Risk
The Company is subject to a concentration of credit risk with respect to amounts receivable from landlords for tenant
improvement allowances.
F-10
Table of Contents
KONA GRILL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Information as of March 31, 2005 and for the Three Months Ended
March 31, 2004 and 2005 is Unaudited.
Use of Estimates
The preparation of the financial statements in conformity with U.S. generally accepted accounting principles requires management
to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes.
Actual results could differ from those estimates.
Reclassifications
Certain reclassifications have been made to the 2002 and 2003 financial statements to conform to the 2004 presentation.
Recent Accounting Pronouncements
In December 2004, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 123-revised (“SFAS 123R”),
Share-Based Payment , which replaces SFAS No. 123, and supersedes APB 25, Accounting for Stock Issued to Employees .
SFAS 123R requires the measurement of all share-based payments to employees, including grants of employee stock options, using a
fair-value-based method and the recording of such expense in the consolidated statements of operations. The accounting provisions of
SFAS 123R are effective for reporting periods beginning after December 15, 2005. The pro forma disclosures previously permitted
under SFAS No. 123 no longer will be an alternative to financial statement recognition. The Company is evaluating the requirements
under SFAS 123R and expects the adoption will have an impact on the consolidated results of operations and net income (loss) per
share; however, it will not have an effect on the Company’s overall cash flow. The Company has not yet determined the method of
adoption or the effect of adopting SFAS 123R, and it has not determined whether the adoption will result in amounts that are similar to
the current pro forma disclosures under SFAS No. 123.
In November 2004, the FASB issued SFAS No. 151, Inventory Costs, an amendment of ARB No. 43, Chapter 4. SFAS No. 151 is
effective for fiscal years beginning after June 15, 2005. SFAS No. 151 amends the guidance in ARB No. 43, Chapter 4 to clarify the
accounting for abnormal amounts of idle facility expense, freight, handling costs, and wasted material (spoilage). The Company has
assessed the impact of SFAS No. 151 and does not expect it to have an impact on its financial position, results of operations, or cash
flows.
In November 2004, the Emerging Issues Task Force (“EITF”) issued EITF No. 04-8, The Effect of Contingently Convertible
Instruments on Diluted Earnings Per Share , which states that contingently convertible instruments are subject to the if-converted
method under SFAS No. 128 regardless of the contingent features included in the instrument. EITF No. 04-8 is effective for periods
ending after December 15, 2004. The if-converted method was applied to the Company’s dilutive earnings per share calculation for
the year ended December 31, 2004.
3.
Discontinued Operations — Sale of Restaurant Locations
On December 31, 2001, the Company sold all of the assets relating directly to the ownership and operation of one restaurant
location operating under the name of Saki’s Pacific Rim Cafe located in Tempe, Arizona, to a limited liability company controlled by
a stockholder of the Company and a relative of the then principal stockholder and officer of the Company for $300,000 in the form of
200,000 shares of common stock of the Company held by the purchaser. The purchaser did not assume any of the Company’s
liabilities associated with the restaurant other than the obligation under the operating lease. In
F-11
Table of Contents
KONA GRILL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Information as of March 31, 2005 and for the Three Months Ended
March 31, 2004 and 2005 is Unaudited.
connection with the assignment of the lease, the Company continued to be financially responsible for the lease payments in the event
the new owners defaulted on the lease.
In March 2003, the Company repurchased the assets of Saki’s Pacific Rim Cafe in exchange for 350,000 shares of the Company’s
common stock. At the time of the transaction, the fair value of the Company’s common stock was estimated at $1.20 per share. In
connection with the acquisition, the Company recorded approximately $35,000 in inventory and $385,000 in property and equipment.
In September 2003, the Company sold the assets of Saki’s Pacific Rim Cafe to an entity owned by a stockholder and former
employee of the Company for approximately $100,000. The book value of the assets provided in the sale in excess of the
consideration received resulted in the recognition of a loss on the sale of approximately $262,000. For the year ended December 31,
2003, revenues for the restaurant during the six-month period of operations approximated $766,000, total restaurant operating costs
approximated $780,000, and depreciation and amortization expense approximated $43,000. In accordance with SFAS No. 144,
Accounting for the Impairment or Disposal of Long-Lived Assets , the results of operations of the restaurant is presented as a
component of discontinued operations in the consolidated statements of operations. The Company continues to be financially
responsible for the lease payments in the event the purchaser defaults on the lease. The lessor has obtained certain personal guarantees
of the lease payments from the purchaser’s owners should they fail to perform under the lease. The total remaining lease payments due
under the lease approximated $330,000 at December 31, 2004. The lease expires in January 2007.
On February 25, 2002, the Company sold all of the assets relating directly to the ownership and operation of another restaurant
location operating under the name of Sushi On Shea located in Scottsdale, Arizona. The sale of the restaurant was made to a limited
liability company controlled by a stockholder of the Company. The aggregate consideration for the sale of the restaurant assets was
$881,000, consisting of the surrender of 454,000 shares of the Company held by the purchaser and a $200,000 promissory note to the
Company personally guaranteed by the purchaser. The purchaser did not assume any of the Company’s liabilities associated with the
restaurant other than the obligations under the operating lease. The lease expired in October 2003. The terms of the promissory note
are monthly payments of approximately $4,000 including interest at 7.0 percent until March 2007, at which time all remaining
principal and interest is due. As security against any default under the promissory note or lease, the purchaser granted to the Company
a security interest in the restaurant assets sold. On February 25, 2002, the Company loaned to the purchaser approximately $15,000
under the terms of a promissory note bearing interest at 7.0 percent which matured on December 31, 2002.
The fair value of the shares surrendered to the Company at February 25, 2002 was estimated at $681,000, or $1.50 per share. The
consideration received in excess of the book value of the assets (including goodwill) sold, resulted in the recognition of a gain on the
sale of approximately $367,000. In accordance with SFAS No. 144, the results of operations of the restaurant are presented as a
component of discontinued operations in the consolidated statements of operations for the year ended December 31, 2002.
F-12
Table of Contents
KONA GRILL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Information as of March 31, 2005 and for the Three Months Ended
March 31, 2004 and 2005 is Unaudited.
4.
Receivables
Receivables consisted of the following (in thousands):
December 31,
2003
March 31,
2005
2004
(Unaudited)
Landlord tenant improvement allowances
Other
Total
5.
$ 370
70
$ 440
$
1,323
21
1,344
$
$
$
787
12
799
Property and Equipment
Property and equipment consisted of the following (in thousands):
December 31,
2003
March 31,
2005
2004
(Unaudited)
Leasehold improvements
Equipment
Furniture and fixtures
$
Less accumulated depreciation and amortization
Construction in progress
$
6.
7,701
2,393
650
10,744
(2,155)
8,589
45
8,634
$
14,788
4,401
1,087
20,276
(3,424)
16,852
189
17,041
$
$
$
14,844
4,476
1,093
20,413
(3,934)
16,479
536
17,015
Accrued Expenses
Accrued expenses consisted of the following (in thousands):
December 31,
2003
March 31,
2005
2004
(Unaudited)
Accrued payroll
Gift cards
Sales tax
Accrued rent
Other
Total
$
$
F-13
156
150
170
56
661
1,193
$
$
537
304
234
183
509
1,767
$
$
598
239
217
109
524
1,687
Table of Contents
KONA GRILL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Information as of March 31, 2005 and for the Three Months Ended
March 31, 2004 and 2005 is Unaudited.
7.
Notes Payable
Notes payable consisted of the following:
December 31,
2003
March 31,
2005
2004
(Unaudited)
(In thousands)
$3,000,000 convertible subordinated promissory note, net of
unamortized beneficial conversion and warrant discounts of $343,000
and $309,000 at December 31, 2004 and March 31, 2005,
respectively, due to related parties, bearing annual interest at
10 percent payable monthly through July 2007. The convertible
subordinated promissory note is payable in July 2007 unless earlier
converted (Note 8)
$
—
$
2,657
$
2,691
$1,000,000 equipment loan, collateralized by certain restaurant assets of
the Company, payable in monthly installments of $15,521 including
interest at 7.87 percent, until October 2011, at which time all
remaining principal and interest is due and payable. This loan is
guaranteed by the principal stockholder and officer of the Company
—
982
954
$1,000,000 equipment loan, collateralized by certain restaurant assets of
the Company, payable in monthly installments of $15,526 including
interest at 7.88 percent, until May 2011, at which time all remaining
principal and interest is due and payable
—
937
908
$993,544 equipment loan, collateralized by certain restaurant assets of
the Company, payable in monthly installments of $15,015 including
interest at 7.04 percent, until June 2010, at which time all remaining
principal and interest is due and payable. This loan is guaranteed by
the principal stockholder and officer of the Company
938
820
789
$495,000 equipment loan, collateralized by certain restaurant assets of
the Company, payable in monthly installments of $7,703 including
interest at 7.95 percent, until December 2011, at which time all
remaining principal and interest is due and payable (Note 14)
—
495
495
$525,000 equipment loan, collateralized by certain restaurant assets of
the Company, payable in monthly installments of $15,687 including
interest at 8.36 percent, until June 2012, at which time all remaining
principal and interest is due and payable (Note 14)
—
—
525
514
345
301
—
6,236
(595)
5,641
—
6,663
(663)
6,000
$850,000 equipment loan, collateralized by certain assets of the
Company, payable in monthly installments of $16,890 including
interest at 7.4 percent, until October 2006, at which time all remaining
principal and interest is due and payable. This loan is guaranteed by a
former principal stockholder and officer of the Company
$1,200,000 promissory note, due to related party, principal and unpaid
accrued interest at 8.0 percent. The note was repaid in January 2004
Less current portion
$
F-14
1,200
2,652
(1,489)
1,163
$
$
Table of Contents
KONA GRILL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Information as of March 31, 2005 and for the Three Months Ended
March 31, 2004 and 2005 is Unaudited.
Future maturities of notes payable at December 31, 2004 are as follows (in thousands):
2005
2006
2007
2008
2009
Thereafter
$
$
595
605
3,137
517
557
825
6,236
Total interest expense incurred during the years ended December 31, 2002, 2003, and 2004 and the three months ended March 31,
2004 and 2005 was approximately $127,000, $263,000, $375,000, $47,000, and $184,000, respectively. No interest was capitalized
during the three years in the period ended December 31, 2004 or the three months ended March 31, 2005.
8.
Convertible Subordinated Promissory Note
In July 2004, the Company entered into a $3.0 million convertible subordinated promissory note and warrant purchase agreement
with an entity controlled by two directors and principal stockholders of the Company. The note matures on July 25, 2007 and requires
monthly payments of interest only at an annual rate of 10 percent. The principal balance of the note may be prepaid by the Company
any time upon 60 days written notice and is convertible into 2,500,000 shares of the Company’s Series B convertible preferred stock
at the option of the holder prior to payment in full. In addition, the holder received a warrant to purchase 1,000,000 shares of the
Company’s common stock for $1.00 per share. The warrant expires on the earlier of July 30, 2009 or a qualified public offering of the
Company’s common stock as defined by the warrant agreement.
In connection with the issuance of the warrant and beneficial conversion feature, the Company recorded a discount to the
convertible promissory note and a corresponding increase in stockholders’ equity of $400,000. The debt discount is amortized to
interest expense over the life of the note. For the period from July 24, 2004 to December 31, 2004, the Company amortized
approximately $57,000 of the debt discount.
F-15
Table of Contents
KONA GRILL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Information as of March 31, 2005 and for the Three Months Ended
March 31, 2004 and 2005 is Unaudited.
9.
Income Taxes
Income tax expense from continuing operations consisted of the following (in thousands):
Year Ended
December 31,
2002
Three Months
Ended March 31,
2003
2004
2004
2005
(Unaudited)
Current:
Federal
State
—
—
—
$
Deferred:
Federal
State
Total
—
—
—
—
$
$
$
—
—
—
—
55
—
$
—
—
—
—
—
—
—
55
$
—
—
—
$
—
—
—
—
$
—
—
—
$
—
—
—
—
$
Income tax expense (benefit) differed from amounts computed by applying the federal statutory rate to income (loss) from
continuing operations before provision for income taxes as follows (in thousands):
Three Months
Ended March 31,
Year Ended December 31,
2002
2003
2004
2004
2005
(Unaudited)
Income tax expense at federal statutory rate
State income taxes, net of federal benefit
Nondeductible expenses
Business tax credit
Other
Change in valuation reserve
Total
$
$
(426)
—
29
(77)
98
376
—
$
$
F-16
(118)
—
177
(142)
(63)
146
—
$
$
113
36
105
(250)
—
51
55
$
$
141
—
17
(43)
—
(115)
—
$
$
(36)
—
34
(77)
—
79
—
Table of Contents
KONA GRILL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Information as of March 31, 2005 and for the Three Months Ended
March 31, 2004 and 2005 is Unaudited.
The temporary differences that rise to significant portions of deferred tax assets and liabilities were as follows (in thousands):
December 31,
2002
2003
March 31,
2005
2004
(Unaudited)
Deferred tax assets (liabilities):
Net operating loss carryforward
Deferred rent
Business tax credits
Organizational and preopening costs
Accrued expenses
Property and equipment
Accelerated tax depreciation
Other
Net deferred tax assets
Valuation allowance
$
$
719
629
130
176
39
(599)
(75)
(11)
1,008
(1,008)
—
$
$
700
776
272
218
124
(721)
(203)
(12)
1,154
(1,154)
—
$
$
598
2,105
522
484
20
(2,009)
(520)
5
1,205
(1,205)
—
$
$
600
2,105
599
484
20
(2,009)
(520)
5
1,284
(1,284)
—
The valuation allowance increased by approximately $51,000 and $146,000 at December 31, 2004 and December 31, 2003,
respectively. The valuation allowance increased by approximately $79,000 at March 31, 2005. In assessing the realization of deferred
tax assets, the Company considers whether it is more likely than not that some portion or all of the deferred tax assets will not be
realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods
in which those temporary differences become deductible. The Company considers the scheduled reversal of deferred tax liabilities,
projected future taxable income, and tax planning strategies in making this assessment. Based on historical operating losses, the
Company has elected to maintain a full valuation allowance until realization of deferred tax assets is more likely than not.
At December 31, 2004, the Company has approximately $1,752,000 and $611,000 in federal and state net operating loss
carryforwards, respectively, which begin expiring in the year 2012 for federal income tax purposes and 2006 for state income tax
purposes. Utilization of the Company’s net operating loss carryforwards may be subject to substantial annual limitations due to
ownership change rules under the Internal Revenue Code and similar state provisions. Such limitations could result in the expiration of
net operating loss carryforwards before utilization.
The Company also has federal business tax credit carryforwards of approximately $522,000 which begin expiring in 2021. These
credits are also potentially subject to annual limitations due to ownership change rules under the Internal Revenue Code and similar
state provisions.
10.
Stockholders’ Equity
Preferred Stock
The Company is authorized to issue 20,000,000 shares of preferred stock with a par value of $0.01.
In August 2003, the Company recorded the issuance of 4,166,666 shares of Series A convertible preferred stock at $1.20 per
share. The Company raised $4.0 million through the sale of 3,333,332 shares
F-17
Table of Contents
KONA GRILL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Information as of March 31, 2005 and for the Three Months Ended
March 31, 2004 and 2005 is Unaudited.
and issued 833,334 shares upon conversion of a $1.0 million note payable (Note 13). In July 2004, the Company entered into a
$3.0 million convertible subordinated promissory note convertible into 2,500,000 shares of Series B convertible preferred stock at
$1.20 per share.
Holders of Series A and B convertible preferred stock are entitled to receive dividends prior and in preference to any distribution
of dividends to the holders of common stock. Such dividends are not cumulative and no right to such dividends shall accrue to holders
of Series A and B convertible preferred stock unless declared by the Company’s Board of Directors.
The Series A and B convertible preferred stock carries a liquidation value of $2.40 per share. All remaining assets of the Company
would be distributed to the common stockholders. Holders of Series A and B convertible preferred stock have voting rights as if their
preferred shares were converted into common shares.
The holders of the Series A and B convertible preferred stock are entitled at any time to convert their preferred shares into
common shares equal to the aggregate value of their preferred shares divided by the conversion price, as defined, initially set at $1.20.
In the event of a qualified public offering of common shares as defined by the terms of the Series A and B convertible preferred stock,
all preferred shares not earlier converted will be automatically converted into common shares at the then effective conversion price.
Stockholders’ Agreements
The Company is party to agreements which provide certain stockholders a right of first refusal to purchase other stockholders’
interests. Certain other provisions limit the sale or transferability of shares of common stock.
Warrants
The Company issued warrants to purchase 44,500 shares of common stock at an exercise price of $1.10 per share to placement
agents in connection with the Company’s private placement of common stock in 1998. These warrants are exercisable through August
2005. The Company also issued warrants to purchase 16,000 shares of common stock at an exercise price of $1.50 per share to
placement agents in connection with the private placement of common stock in 1999. During 2004, warrants with respect to
14,000 shares were exercised. The remainder of the warrants expired in December 2004.
The Company issued warrants to purchase 250,000 shares of common stock at an exercise price of $1.20 per share in connection
with the issuance of a convertible note in 2002. These warrants are exercisable through May 2009. Since the strike price of the
warrants was in excess of the estimated fair value of the common stock, the value of the warrants was not significant.
In July 2004, the Company issued a warrant to purchase 1,000,000 shares of the Company’s common stock for $1.00 per share in
connection with the execution of a $3.0 million convertible subordinated promissory note agreement. The Company recorded the
value of the warrant at $200,000. In lieu of exercising the warrant for cash, the holder may elect to receive shares equal to the intrinsic
value of the warrant. The warrant expires on the earlier of July 30, 2009 or a qualified public offering of the Company’s common
stock as defined by the warrant agreement (see Note 8).
F-18
Table of Contents
KONA GRILL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Information as of March 31, 2005 and for the Three Months Ended
March 31, 2004 and 2005 is Unaudited.
Stock Options
The Company maintains stock option plans which provide for discretionary grants of incentive stock options and non-qualified
stock options to the Company’s employees, consultants, and non-employee directors. All stock options are granted at or above the fair
market value of the underlying common stock and generally expire 10 years from the date of grant. Employee and consultant stock
options generally vest 25 percent on the date of grant and 25 percent on each annual anniversary date thereafter. Non-employee
director options vest 100 percent on the date of grant.
Activity during 2002, 2003, and 2004 and the three months ended March 31, 2005 under the Company’s stock option plans was as
follows:
Outstanding Options
Shares Available
for Options
Outstanding options at December 31, 2001
Granted
Forfeited
Authorized
Outstanding options at December 31, 2002
Granted
Forfeited
Outstanding options at December 31, 2003
Granted
Forfeited
Exercised
Authorized
Outstanding options at December 31, 2004
Granted (unaudited)
Outstanding options at March 31, 2005
(unaudited)
Weighted Average
Exercise Price
Shares
320,000
(504,270)
70,000
1,150,000
1,035,730
(319,500)
490,270
1,206,500
(1,380,395)
5,500
—
1,500,000
1,331,605
(529,000)
802,605
280,000
504,270
(70,000)
—
714,270
319,500
(490,270)
543,500
1,380,395
(5,500)
(1,000)
—
1,917,395
529,000
$
1.00 - 1.50
1.50
1.00 - 1.50
—
1.00 - 1.50
1.20 - 1.50
1.50
1.00 - 1.50
1.00 - 1.20
1.50
1.50
—
1.00 - 1.50
1.20
2,446,395
$
1.00 - 1.50
Information regarding options outstanding and exercisable at December 31, 2004 is as follows:
Options Outstanding
Range of
Exercise Prices
Number Outstanding
$1.00 - $1.50
11.
1,917,895
Weighted Average Life
8.4 years
Options Exercisable
Weighted
Average Price
$
1.10
Number
658,645
Weighted Average
$
1.18
Commitments and Contingencies
Operating Leases
The Company leases restaurant and office facilities and certain real property under operating leases having terms expiring from
2008 to 2017. The restaurant facility leases primarily have renewal clauses of five years exercisable at the option of the Company and
rent escalation clauses stipulating specific rent increases. The Company records deferred rent to recognize rent evenly over the initial
lease term. Certain of these leases require the payment of contingent rentals based on a percentage of gross revenues, as
F-19
Table of Contents
KONA GRILL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Information as of March 31, 2005 and for the Three Months Ended
March 31, 2004 and 2005 is Unaudited.
defined. Rent expense for the years ended December 31, 2002, 2003, and 2004 and for the three months ended March 31, 2004 and
2005 was approximately $821,000, $1,176,000, $1,748,000, $289,000, and $487,000, respectively. Contingent rent included in rent
expense for the years ended December 31, 2002, 2003, and 2004 and for the three months ended March 31, 2004 and 2005 was
approximately $27,000, $145,000, $190,000, $42,000, and $60,000, respectively.
Future minimum lease payments under operating leases at December 31, 2004, were as follows (in thousands):
2005
$
2006
2007
2008
2009
Thereafter
Total minimum lease payments
$
12.
1,954
2,005
2,011
2,072
2,142
13,316
23,500
Litigation
In November 2004, the Company settled a trademark infringement claim against the Company for $115,000. The claim was made
in March 2004 in connection with the Company’s intent to open a restaurant location in Indiana. The settlement amount is reflected in
the Company’s consolidated statement of operations for the year ended December 31, 2004.
Due to the nature of the restaurant business, the Company is subject to various claims and legal actions during the ordinary course
of business, including such matters as complaints alleging personal injury and employment discrimination. The Company believes that
the outcome of any such pending claims or proceedings, individually or in the aggregate, will not have a material adverse effect on the
Company’s business, financial condition, results of operations, or cash flows.
13.
Related Party Transactions
In October 2002, the Company borrowed $200,000 from a separate partnership entity where the general partner is related to the
former principal stockholder, director, and officer of the Company. The limited partners include stockholders of the Company as well
as a former director and officer of the Company. The promissory note bore interest at the rate of 7.0 percent per annum and was
payable on demand after October 25, 2002. The promissory note was paid in full in January 2003. For the years ended December 31,
2002 and 2003, interest expense recorded on the note was approximately $3,000 and $1,000, respectively.
In May 2002, the Company entered into a $1.0 million convertible note with a limited liability company of which certain of its
members are also stockholders of the Company. For the years ended December 31, 2002, 2003, and 2004, interest expense recorded
on the convertible note was approximately $59,000, $90,000, and $31,000, respectively. The principal balance was converted into
833,334 shares of the Company’s Series A Preferred Stock in August 2003. In October 2002, the Company also borrowed $500,000
from the limited liability company. The promissory note bore interest at the rate of 9.0 percent per annum and matured in January
2003, at which time the note was repaid. For the years ended
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Table of Contents
KONA GRILL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Information as of March 31, 2005 and for the Three Months Ended
March 31, 2004 and 2005 is Unaudited.
December 31, 2002 and 2003, interest expense recorded on the note was approximately $9,000 and $3,000, respectively.
In January 2003, the Company borrowed $1.2 million from an individual who is related to the former principal stockholder,
director, and officer of the Company. This individual is also the controlling member of the limited liability company that purchased
Saki’s Pacific Rim Café in 2001. The promissory note bore an interest at the rate of 8.0 percent per annum and was repaid in January
2004. Interest expense recorded on the note was approximately $90,000 and $4,000 for the years ended December 31, 2003 and 2004,
respectively. The note was secured by certain assets of the Company and was guaranteed by the principal stockholder and officer of
the Company.
In July 2004, the Company entered into the convertible subordinated promissory note and warrant purchase agreement discussed
in Note 8 with an entity controlled by two directors and principal stockholders of the Company. For the year ended December 31,
2004 and for the three months ended March 31, 2005, the Company recorded interest expense of approximately $187,000 and
$109,000, respectively, associated with the note and warrant. The convertible subordinated promissory note is subordinated to existing
and future senior indebtedness.
14.
Subsequent Events
In March 2005, the Company accelerated the vesting of all outstanding unvested employee stock options. As a result, the
Company measured the amount of compensation expense that would be recognized if those employees either terminated employment
or exercised these options on the date of acceleration and determined the maximum compensation expense was approximately
$191,000. Ultimately, compensation expense will be recognized only for those employees who receive a benefit from the acceleration.
In April 2005, the Company entered into a promissory note agreement for a $600,000 equipment loan, collateralized by certain
restaurant assets of the Company, payable in monthly installments of $9,508 including interest at 8.52 percent, until June 2012, at
which time all remaining principal and interest is due and payable. Interim funding of $495,000 of this promissory note was funded in
2004 (see Note 7).
In April 2005, the Company entered into a promissory note agreement for a $995,000 equipment loan, collateralized by certain
restaurant assets of the Company, payable in monthly installments of $15,687 including interest at 8.36 percent, until June 2012, at
which time all remaining principal and interest is due and payable.
F-21
Table of Contents
Shares
Common Stock
PROSPECTUS
Oppenheimer & Co.
Feltl and Company
, 2005
You should rely only on the information contained in this prospectus. No dealer, salesperson or other person is authorized to
give information that is not contained in this prospectus. This prospectus is not an offer to sell nor is it seeking an offer to buy
these securities in any jurisdiction where the offer or sale is not permitted. The information contained in this prospectus is
correct only as of the date of this prospectus, regardless of the time of delivery of this prospectus or any sale of these securities.
Until
, 2005, all dealers that effect transactions in these securities, whether or not participating in this offering,
may be required to deliver a prospectus. This is in addition to the dealers’ obligation to deliver a prospectus when acting as
underwriters and with respect to their unsold allotment or subscriptions.
Table of Contents
PART II
Item 13.
INFORMATION NOT REQUIRED IN PROSPECTUS
Other Expenses of Issuance and Distribution
The following table sets forth the expenses in connection with the offering described in the Registration Statement. All such
expenses are estimates except for the SEC registration fee, the NASD filing fee, and the NASDAQ National Market filing fee. These
expenses will be borne by the Registrant.
SEC registration fee
$
3,413
NASD filing fee
3,400
Blue Sky fees and expenses
*
NASDAQ National Market filing fee
100,000
Transfer agent and registrar fees
*
Accountants’ fees and expenses
*
Legal fees and expenses
*
Printing and engraving expenses
*
Miscellaneous fees
*
Total
$
*
* To be filed by amendment.
Item 14.
Indemnification of Directors and Officers
Section 145 of the Delaware General Corporation Law, or DGCL, permits, in general, a Delaware corporation to indemnify any
person who was or is a party to any proceeding (other than an action by, or in the right of, the corporation) by reason of the fact that he
or she is or was a director or officer of the corporation, or served another entity in any capacity at the request of the corporation,
against liability incurred in connection with such proceeding, including the estimated expenses of litigating the proceeding to
conclusion and the expenses actually and reasonably incurred in connection with the defense or settlement of such proceeding,
including any appeal thereof, if such person acted in good faith and in a manner he or she reasonably believed to be in, or not opposed
to, the best interests of the corporation and, in criminal actions or proceedings, additionally had no reasonable cause to believe that his
or her conduct was unlawful. Section 145(e) of the DGCL permits the corporation to pay such costs or expenses in advance of a final
disposition of such action or proceeding upon receipt of an undertaking by or on behalf of the director or officer to repay such amount
if he or she is ultimately found not to be entitled to indemnification under the DGCL. Section 145(f) of the DGCL provides that the
indemnification and advancement of expense provisions contained in the DGCL shall not be deemed exclusive of any rights to which
a director or officer seeking indemnification or advancement of expenses may be entitled.
Our certificate of incorporation and bylaws provide, in general, that we shall indemnify, to the fullest extent permitted by law, any
and all persons whom we shall have the power to indemnify under those provisions from and against any and all of the expenses,
liabilities, or other matters referred to in or covered by those provisions. Our certificate of incorporation and bylaws also provide that
the indemnification provided for therein shall not be deemed exclusive of any other rights to which those indemnified may be entitled
as a matter of law or which they may be lawfully granted.
In connection with this offering, we are entering into indemnification agreements with each of our current directors and officers to
give these directors and officers additional contractual assurances regarding the scope of the indemnification set forth in our certificate
of incorporation and bylaws and to provide additional procedural protections. We expect to enter into a similar agreement with any
new directors or executive officers.
II-1
Table of Contents
We are in the process of obtaining directors’ and officers’ liability insurance with $
million of coverage.
Pursuant to the Underwriting Agreement to be filed as Exhibit 1 to this registration statement, the underwriters have agreed to
indemnify our directors, officers, and controlling persons against certain civil liabilities that may be incurred in connection with this
offering, including certain liabilities under the Securities Act of 1933, as amended. The underwriters severally and not jointly will
indemnify and hold harmless our company and each of our directors, officers, and controlling persons from and against any liability
caused by any statement or omission in the registration statement, in the prospectus, in any preliminary prospectus, or in any
amendment or supplement thereto, in each case to the extent that the statement or omission was made in reliance upon and in
conformity with written information furnished to us by the underwriters expressly for use therein.
Item 15.
Recent Sales of Unregistered Securities
During the three years preceding the filing of this registration statement, we sold the following securities which were not
registered under the Securities Act of 1933, as amended:
During October 2002, we issued a $500,000 promissory note to an entity affiliated with our former Chief Executive Officer to
provide us with bridge financing. We issued this note in reliance upon Section 4(2) of the Securities Act of 1933 as a transaction by an
issuer not involving a public offering.
During January 23, 2003, we issued a promissory note to in the amount of $1,200,000 to an affiliate of our founder to provide us
with further bridge financing. We issued this note in reliance upon Section 4(2) of the Securities Act of 1933 as a transaction by an
issuer not involving a public offering.
During April 2003, we issued 350,000 shares of our common stock to an investor in connection with an assignment made to the
investor from our founder. We issued these shares in reliance upon Section 4(2) of the Securities Act of 1933 as a transaction by an
issuer not involving a public offering.
During August 2003, we sold 4,166,666 shares of our Series A preferred stock to an aggregate of seven accredited investors, for
an aggregate investment of $5.0 million, which included new cash investment of approximately $4.0 million and conversion of
approximately $1.0 million principal amount of outstanding promissory notes. We issued these shares of Series A preferred stock in
reliance upon Section 4(2) of the Securities Act of 1933 as a transaction by an issuer not involving a public offering.
During December 2003, we issued 40,000 shares of our common stock to an executive officer in consideration for services
rendered to our company. We issued these shares of common stock in reliance upon Section 4(2) of the Securities Act of 1933. The
officer had adequate access to information about our company through the officer’s relationship with our company or through
information provided to the officer.
During July 2004, we issued a $3.0 million aggregate principal amount of convertible subordinated promissory note convertible
into shares of our Series B preferred stock to an entity controlled by two of our directors. The note is convertible into shares of our
Series B preferred stock for each $1.20 in principal and accrued interest. In connection with the issuance of the note, we issued to the
noteholder five-year warrants to purchase up to 1,000,000 shares of our common stock at an exercise price of $1.00 per share. We
issued the note and warrants in reliance upon Section 4(2) of the Securities Act of 1933 as a transaction by an issuer not involving a
public offering.
During December 2004, we sold an aggregate of 1,000 shares of our common stock to one employee pursuant to the exercise of
outstanding options for an aggregate of $1,500 and in consideration of services rendered. The sale and issuance was deemed exempt
from registration under the Securities Act of 1933, as amended, by virtue of Rule 701 thereunder. In accordance with Rule 701, the
shares were issued pursuant to a written compensatory benefit plan and the issuance did not, during any consecutive 12-month period,
exceed 15% of the outstanding shares of our common stock, calculated in accordance with the provisions
II-2
Table of Contents
of Rule 701. These options were the only options exercised by employees, directors, and consultants during the three-year period
preceding the filing of this registration statement.
During December 2004, we issued 14,000 shares of our common stock to an aggregate of five investors upon the exercise of
warrants for a total cash payment of $29,400. We issued these shares of common stock to the investors, in reliance upon Section 4(2)
of the Securities Act of 1933 as a transaction by an issuer not involving a public offering.
During January 2005, we granted options to Mr. Jundt to purchase 200,000 shares of our common stock in consideration for his
prior service to our company and for providing capital to our company. The options are exercisable at $1.20 per share. In addition, in
January 2005, we granted to Mr. Jundt options to purchase 100,000 shares of our common stock at an exercise price of $1.20 per share
in consideration for his service as our Chairman of the Board. We issued these options to Mr. Jundt in reliance upon Section 4(2) of
the Securities Act of 1933 as a transaction by an issuer not involving a public offering.
During
2005, in connection with our initial public offering, we issued 2,500,000 shares of Series B preferred stock
upon the voluntary conversion by the holder of the principal amount outstanding under our convertible subordinated promissory note,
and 2,500,000 shares of common stock upon the voluntary conversion by the holder of the Series B preferred stock. In addition, we
issued 4,166,666 shares of common stock upon the voluntary conversion by the holders of our outstanding shares of Series A
preferred stock. We issued these shares of Series B preferred stock and common stock in reliance upon Section (3)(a)(9) of the
Securities Act as an exchange by the issuer with its existing security holders exclusively where no commission or other remuneration
is paid or given directly or indirectly for soliciting the exchange.
We did not pay or give, directly or indirectly, any commission or other remuneration, including underwriting discounts or
commissions, in connection with any of the issuances of securities listed above. In addition, each of the share certificates issued in the
transactions listed above bears a restrictive legend permitting the transfer thereof only in compliance with applicable securities laws.
Item 16.
(a)
Exhibits and Financial Statement Schedules
Exhibits
Exhibit
Number
Exhibit
*1
*3.1
*3.2
*4.1
*5
10.1(a)
Form of Underwriting Agreement
Certificate of Incorporation of the Registrant
Bylaws of the Registrant
Form of Common Stock Certificate
Opinion of Greenberg Traurig, LLP
Employment Letter Agreement, effective May 1, 2004, between the Company and C. Donald Dempsey
10.1(b)
10.2
Amendment to Employment Letter Agreement, effective May 1, 2004, between the Company and C.
Donald Dempsey
Mutual Waiver and Release of Claims, effective December 1, 2004, between the Company and Chandler
10.3
10.4
Employment Agreement, effective October 1, 2003, between the Company and Jason J. Merritt.
Employment Letter Agreement, effective October 15, 2004, between the Company and Mark S. Robinow
10.5
10.6(a)
Common Stock Purchase Warrant dated July 23, 2004 in favor of Richard J. Hauser
Loan Agreement, dated May 19, 2003, between GE Capital Franchise Finance Corporation and Kona
Grill Kansas City, Inc.
II-3
Table of Contents
Exhibit
Number
10.6(b)
10.7(a)
10.7(b)
10.8(a)
10.8(b)
10.8(c)
10.9
10.10
*10.11
*10.12
*21
23.1
*23.2
24
Exhibit
Promissory Note, dated May 19, 2003, issued by Kona Grill Kansas City, Inc. in favor of GE Capital
Franchise Finance Corporation
Loan Agreement, dated April 30, 2004, between GE Capital Franchise Finance Corporation and Kona
Grill Las Vegas, Inc.
Promissory Note, dated April 30, 2004, issued by Kona Grill Las Vegas, Inc. in favor of GE Capital
Franchise Finance Corporation
Form of Equipment Loan and Security Agreement (i) dated as of September 2, 2004, between Kona Grill
Denver, Inc. and GE Capital Franchise Finance Corporation; (ii) dated as of December 31, 2004,
between Kona Grill Omaha, Inc. and GE Capital Franchise Finance Corporation; and (iii) dated
January 21, 2005 between Kona Grill Indiana, Inc. and GE Capital Franchise Finance Corporation
Form of Equipment Promissory Note, each in favor of GE Capital Franchise Finance Corporation
(i) dated as of April 22, 2005, issued by Kona Grill Omaha, Inc.; and (ii) dated as of May 20, 2005,
issued by Kona Grill Indiana, Inc.
Equipment Promissory Note, dated September 17, 2004, issued by Kona Grill Denver, Inc. in favor of
GE Capital Franchise Finance Corporation
Lease Purchase, dated December 26, 2001, between the Company and Bank of America, N.A.
Kona Grill, Inc. 2002 Stock Plan (as of November 13, 2002)
Kona Grill, Inc. 2005 Stock Award Plan
Kona Grill, Inc. Employee Stock Purchase Plan
List of Subsidiaries
Consent of Ernst & Young LLP, Independent Registered Public Accounting Firm
Consent of Greenberg Traurig, LLP (included in Exhibit 5)
Power of Attorney of Directors and Executive Officers (included on the Signature Page of the
Registration Statement)
* To be filed by amendment.
(b) Financial Statement Schedules
The registrant has not provided any financial statement schedules because the information called for is not required or is shown
either in the financial statements or the notes thereto.
Item 17.
Undertakings
The undersigned registrant hereby undertakes to provide to the underwriter, at the closing specified in the underwriting agreement,
certificates in such denominations and registered in such names as required by the underwriter to permit prompt delivery to each
purchaser.
Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers, and
controlling persons of the registrant pursuant to the foregoing provisions, or otherwise, the registrant has been advised that in the
opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant
of expenses incurred or paid by a director, officer, or controlling person of the registrant in the successful defense of any action, suit,
or proceeding) is asserted by such director, officer, or controlling person in connection with the securities being registered, the
registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by
the final adjudication of such issue.
II-4
Table of Contents
The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act of 1933, the information omitted from the form of
prospectus filed as part of this registration statement in reliance upon Rule 430A and contained in a form of prospectus filed by the
registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be part of this registration
statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities Act of 1933, each post-effective amendment that contains
a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering
of such securities at that time shall be deemed to be the initial bona fide offering thereof.
II-5
Table of Contents
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant has duly caused this registration statement to be signed
on its behalf by the undersigned, thereunto duly authorized, in the city of Scottsdale, state of Arizona, on June 2, 2005.
KONA GRILL, INC.
By: /s/ C. Donald Dempsey
C. Donald Dempsey
President and Chief Executive Officer
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that the persons whose signature appears below constitute and appoint
jointly and severally, C. Donald Dempsey and Mark S. Robinow, and each one of them, as his true and lawful attorneys-in-fact and
agents, with full power of substitution and resubstitution, for him and in his name, place, and stead, in any and all capacities, to sign
any and all amendments (including pre-effective and post-effective amendments) to this registration statement and to sign any
registration statement and amendments thereto for the same offering filed pursuant to Rule 462(b) under the Securities Act of 1933,
and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange
Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and
every act and thing requisite and necessary to be done in connection therewith, as fully to all intents and purposes as he might or could
do in person, hereby ratifying and confirming all which said attorneys-in-fact and agents, or any of them, or their or his substitute or
substitutes, may lawfully do, or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this registration statement has been signed by the following persons in
the capacities and on the dates indicated.
Signature
Title
Date
/s/ Marcus E. Jundt
Chairman of the Board
June 2, 2005
President, Chief Executive Officer, and Director
(Principal Executive Officer)
June 2, 2005
Executive Vice President, Chief Financial
Officer, and Secretary (Principal Accounting
and
Financial Officer)
June 2, 2005
Director
June 2, 2005
Director
June 2, 2005
Marcus E. Jundt
/s/ C. Donald Dempsey
C. Donald Dempsey
/s/ Mark S. Robinow
Mark S. Robinow
/s/ Frank B. Bennett
Frank B. Bennett
/s/ Richard J. Hauser
Richard J. Hauser
II-6
Table of Contents
Signature
Title
Date
/s/ Douglas G. Hipskind
Director
June 2, 2005
Director
June 2, 2005
Director
June 2, 2005
Douglas G. Hipskind
/s/ W. Kirk Patterson
W. Kirk Patterson
/s/ Anthony L. Winczewski
Anthony L. Winczewski
II-7
Table of Contents
INDEX TO EXHIBITS
Exhibit
Number
*1
*3.1
*3.2
*4.1
*5
10.1(a)
10.1(b)
10.2
10.3
10.4
10.5
10.6(a)
10.6(b)
10.7(a)
10.7(b)
10.8(a)
10.8(b)
10.8(c)
10.9
10.10
*10.11
*10.12
*21
23.1
*23.2
24
* To be filed by amendment.
Exhibit
Form of Underwriting Agreement
Certificate of Incorporation of the Registrant
Bylaws of the Registrant
Form of Common Stock Certificate
Opinion of Greenberg Traurig, LLP
Employment Letter Agreement, effective May 1, 2004, between the Company and C. Donald
Dempsey
Amendment to Employment Letter Agreement, effective May 1, 2004, between the Company and
C. Donald Dempsey
Mutual Waiver and Release of Claims, effective December 1, 2004, between the Company and
Chandler
Employment Agreement, effective October 1, 2003, between the Company and Jason J. Merritt.
Employment Letter Agreement, effective October 15, 2004, between the Company and Mark S.
Robinow
Common Stock Purchase Warrant dated July 23, 2004 in favor of Richard J. Hauser
Loan Agreement, dated May 19, 2003, between GE Capital Franchise Finance Corporation and
Kona Grill Kansas City, Inc.
Promissory Note, dated May 19, 2003, issued by Kona Grill Kansas City, Inc. in favor of
GE Capital Franchise Finance Corporation
Loan Agreement, dated April 30, 2004, between GE Capital Franchise Finance Corporation and
Kona Grill Las Vegas, Inc.
Promissory Note, dated April 30, 2004, issued by Kona Grill Las Vegas, Inc. in favor of GE Capital
Franchise Finance Corporation
Form of Equipment Loan and Security Agreement (i) dated as of September 2, 2004, between Kona
Grill Denver, Inc. and GE Capital Franchise Finance Corporation; (ii) dated as of December 31,
2004, between Kona Grill Omaha, Inc. and GE Capital Franchise Finance Corporation; and
(iii) dated January 21, 2005 between Kona Grill Indiana, Inc. and GE Capital Franchise Finance
Corporation
Form of Equipment Promissory Note, each in favor of GE Capital Franchise Finance Corporation
(i) dated as of April 22, 2005, issued by Kona Grill Omaha, Inc.; and (ii) dated as of May 20, 2005,
issued by Kona Grill Indiana, Inc.
Equipment Promissory Note, dated September 17, 2004, issued by Kona Grill Denver, Inc. in favor
of GE Capital Franchise Finance Corporation
Lease Purchase, dated December 26, 2001, between the Company and Bank of America, N.A.
Kona Grill, Inc. 2002 Stock Plan (as of November 13, 2002)
Kona Grill, Inc. 2005 Stock Award Plan
Kona Grill, Inc. Employee Stock Purchase Plan
List of Subsidiaries
Consent of Ernst & Young LLP, Independent Registered Public Accounting Firm
Consent of Greenberg Traurig, LLP (included in Exhibit 5)
Power of Attorney of Directors and Executive Officers (included on the Signature Page of the
Registration Statement)
EXHIBIT 10.1(a)
KONA GRILL LETTERHEAD
Donald Dempsey
13785 Wood Lane
Minnetonka, Minnesota 55305
RE:
EMPLOYMENT TERMS
Dear Don:
The purpose of this letter is to set forth the Employment Terms regarding
your employment by Kona Grill, Inc., a Delaware corporation (the "Company") and
you as the ("Executive").
1.
Duties. Effective May 1, 2004, Executive shall be appointed by the
Board as the President and Chief Executive Officer of the Company.
2.
Term. Executive shall be employed subject to the election of both
parties.
3.
Compensation. Executive's base salary shall be $250,000 per annum.
The Board shall increase Executive's base salary by 20% per year
during the second and third year of employment.
4.
Stock Options. The Company will grant Executive stock options to
purchase 676,408 shares in the common stock at the appraised fair
market value as of May 1, 2004. This number of shares represent 5%
of the total issued and outstanding stock, including stock options
on a fully diluted basis. The stock options will vest as follows:
May 1, 2004, 169,102 shares; May 1, 2005, 169,102 shares; May 1,
2006, 169,102 shares; May 1, 2007, 169,102.
5.
Bonus Options. Beginning May 1, 2005, the Board shall grant
Executive additional options for 25,000 shares at the then fair
value each at the end of each calendar year if the average annual
volume for all new restaurants opened by the Company in that year
equals or exceeds $4,500,000 on an annualized basis. Only
restaurants that have been opened four months or more will qualify,
in the calculation. The bonus options shall be 25,000 shares per
year, unless otherwise agreed upon by the Board.
6.
Benefits. Executive will receive all benefits, including health
insurance, as granted to other senior executives of the Company. The
Company will agree to pay all cost for health insurance for
Executive and Executive's family.
7.
Termination. It is agreed that Executive is employed at will and may
be terminated with or without cause at any time upon ninety (90)
days prior written notice.
8.
Confidentiality and Non-Compete. Executive will sign the attached
Confidentiality and Non-Compete Agreement that all officers and
managers sign that are employees of the Company.
9.
Governing Law. This Agreement shall be governed by the laws of the
State of Arizona.
If you agree with the foregoing, please execute in the space provided
below. We look forward to a long and rewarding relationship.
KONA GRILL, INC.
By: /s/ Marcus Jundt
--------------------------------Marcus Jundt
Chairman
By: /s/ Donald Dempsey
--------------------------------Donald Dempsey
Executive
EXHIBIT 10.1(b)
KONA GRILL LETTERHEAD
Donald Dempsey
13785 Wood Lane
Minnetonka, Minnesota 55305
RE:
AMENDED EMPLOYMENT TERMS
Dear Don:
The purpose of this letter is to amend your employment terms as set forth
in your Employment Letter (the "Employment Letter") between Kona Grill, Inc., a
Delaware corporation (the "Company") and you as the ("Executive"):
Section 7 Termination of the Employment Letter shall be deleted and
replaced in its entirety with the following:
7. Termination. It is agreed that Executive is employed at will and may be
terminated with or without cause at any time upon ninety (90) days prior
written notice. Upon termination (except for Cause as defined below)
Executive shall receive a one-year severance payment equal to 12 months
base salary, a pro rata portion of annual bonus and a pro rata portion of
stock options for the year terminated shall vest upon such termination,
and payment of any COBRA amount due for the provision of any and all
health benefits provided to the Executive and Executive's family
immediately prior to his termination for a period of up to 18 months.
For purposes of this Letter Agreement, the term "Cause" shall mean
(i) an action of the Executive which constitutes a willful and material
breach of, or willful and material failure or refusal (other than by
reason of his disability or incapacity) to perform his duties under this
Agreement that is not cured within forty-five (45) days after receipt by
the Executive of written notice of stone, (ii) fraud, embezzlement or
misappropriation of funds during the Executive's employment with the
Company, or (iii) a conviction of any crime during Executive's employment
with the Company which involves dishonesty or a breach of trust or
involves the Company or its executives. Any termination for Cause shall be
made by written notice to the Executive, which shall set forth in
reasonable detail all acts or omissions upon which the Company is relying
for the termination. The Executive shall have the right to address the
Company's board of directors regarding the acts or omissions set forth in
the notice of termination. Upon any termination pursuant to this Section
7, the Company shall pay to the Executive any due and unpaid compensation
(including any bonus compensation earned but unpaid) and earned but unused
vacation time through the date of termination.
KONA GRILL, INC.
By: /s/ Marcus Jundt
--------------------------------Marcus Jundt
Chairman
By: /s/ Donald Dempsey
--------------------------------Donald Dempsey
Executive
EXHIBIT 10.2
MUTUAL WAIVER AND RELEASE OF CLAIMS
THIS MUTUAL WAIVER AND RELEASE OF CLAIMS AGREEMENT (hereinafter, the
"Agreement"), effective as of December 1, 2004, is entered into in the County of
Maricopa, State of Arizona, by and between Kona Grill, Inc., a Delaware
corporation (the "Company") and Chandler (the "Executive").
RECITALS
1.
Executive has extensive experience in the restaurant business over
the last thirty years, has operated four different concepts in nine states and
three countries, and was employed by Company as an Officer and as a member of
the board of directors of the Company (a "Director").
2.
Company and Executive have entered into a Confidential Agreement
attached hereto at Exhibit A (the "Confidential Agreement").
3.
Executive has resigned as a Director as attached on Exhibit B.
3.
The parties hereto have mutually agreed that it is in their
respective best interests to terminate any and all employment and corporate
relationships between them and bring any and all claims which may arise
therefrom to an amicable resolution.
WHEREFORE, in consideration of the mutual covenants and conditions
contained herein and intending to be legally bound hereby, the parties hereto
agree as follows:
COVENANTS
I.
By execution of this Agreement, Executive hereby acknowledges that he has
resigned from his positions as an employee of Company and as a Director, subject
to the following terms and conditions contained herein:
(a)
In consideration for executing this Agreement, and being bound by
all of its covenants and obligations, Executive shall receive the following
consideration and other good and valuable consideration paid to it by the
Company, the receipt of which is hereby acknowledged: (i) in exchange for
releasing the Company from any and all claims arising out of the Executive's
service as a member of the board of directors, the Company shall release
Executive from any and all claims arising therefrom; and (ii) in exchange for
the non-competition sections of this Agreement and for the other obligations and
releases arising from Executive's service as an officer of the Company, the
Company shall grant Executive an option to purchase 48,560 shares of Common
stock of the Company at $1.20 per share (the "Option"), which Option shall vest
as of the date above, subject to the provisions of this Agreement. Executive
hereby agrees to not to exercise or sell, and the Company agrees to not process
the exercise of any Option or transfer any shares obtained by or through the
Option to any third party for a period of 2 years following the date of this
Agreement;
(b)
Executive shall promptly return all corporate paper and property in
his possession.
(c)
Executive hereby declares that all voting agreements relating to his
stock and/or position as a director or officer of the Company are hereby
terminated. Executive hereby constitutes and appoints the Company and its
successors and assigns as its true and lawful attorneys in fact in connection
with the termination of any and all voting agreements, with full power of
substitution, in the name and stead of the Executive, to terminate and end any
and all voting agreements outstanding.
II.
Both parties agree not to disparage or impugn the business reputation of
the other.
III.
(a)
In consideration of the mutual covenants contained herein,
Executive, for himself and, as applicable, his respective agents, attorneys,
successors, and assigns, hereby fully, forever, irrevocably, and unconditionally
releases the Company, including any parent, subsidiary, related and affiliate
entities, any predecessors, successors, and assigns and the current and past
officers, directors, shareholders, agents, and employees of each and all of the
foregoing from any and all claims, charges, complaints, liabilities, and
obligations of any nature whatsoever, which he may have, whether now known or
unknown, and whether asserted or unasserted, arising from any event or omission
occurring from the beginning of time to the date of execution of this Agreement.
This release includes, without limitations:
(i)
all rights or claims arising out of Executive's
employment with Company and/or the termination of that employment,
including any and all claims arising out of or which could arise out of
the employment relationship between Executive and Company and the
termination of that employment, including but not limited to: (a) any and
all claims under Title VII of the Civil Rights Act of 1964, the Americans
with Disabilities Act, the Age Discrimination in Employment Act, Section
1981 of the Civil Rights Act of 1866, the Employee Retirement Income
Security Act (ERISA), the Equal Pay Act, applicable whistleblower laws,
the Arizona Civil Rights Act, the Arizona Employment Protection Act, and
any other applicable state and local civil rights laws, Arizona wage
payment laws and any and all similar laws in other states; and (b) any
contract, express or implied, tort, statute or any other provision or
theory of law or equity.
(ii) all rights or claims arising out of Executive's service
as a Director and/or the termination of that service;
(iii) all claims arising under any state or federal statute,
or any common law cause of action, including claims for breach of any
express or implied contract, wrongful discharge, tort, civil rights, age
discrimination, personal injury or any claims for attorneys' fees or other
costs, and
(iv) all rights or claims arising out of any existing
agreements between Executive and the Company;
2
(b) Executive represents he has fully disclosed all liabilities and
contracts executed by him on behalf of the Company. Based upon such
representation, Company releases Executive and his heirs, successors or assigns
from all claims of any nature whatsoever whether known or unknown relating to
his employment or service as a Director.
(b) Neither party is releasing the other from any obligation under this
Agreement.
IV.
Executive covenants and agrees to fully indemnify and defend Company and
to hold it harmless of and from any and all claims, demands or causes of action
which may be brought, threatened or pending against it by reason of any actions
of Executive after the date hereof. Company covenants and agrees to fully
indemnify and defend Executive and to hold him harmless of and from any and all
claims, demands or causes of action to the same extent that Company currently
indemnifies its officers and directors, which may be brought, threatened or
pending against it by reason of any actions of Company or any of its officers or
directors occurring up to the date hereof.
V.
Executive covenants and agrees to be fully bound by the following terms
and conditions:
(a) That, while employed by Company, he has had access to trade secrets
and confidential information of Company, including, but not limited to,
introductions to customers, leads to potential customers, opportunities to meet
and develop relationships with customers, knowledge of Company's production
methods and technologies, and knowledge of Company's competitive strategies and
marketing information, including customer lists and pricing information and
strategies. Executive understands and agrees such information is deemed a trade
secret and confidential information. Executive shall not disclose it to any
subsequent Company or third party at any time. In addition, Executive hereby
agrees:
(b) that he shall not disclose or use any confidential information of the
Company;
(c) that he shall not solicit current employees for a period of ninety
(90) days after the date hereof;
(d) that for a period of 2 years following the date of this Agreement, he
shall not own more than 5% or serve as a principal, consultant or employee to
any entity or business which would directly or indirectly engage in any
activities relating to a restaurant business similar in concept to Kona Grill,
including a sushi bar operation, which compete within a radius of 20 miles to
any restaurants owned or operated by the Company or any of its affiliates,
whether such products or services are offered by the Company as of the date
hereof or at any time in the future (provided such products or services were
offered by the Company during the term of Executive's employment), within the
geographic area consisting of the United States of America;
(e) that if he breaches this Paragraph V of the Agreement, Executive
agrees that the any vested Option shall immediately cancel and any shares of the
Company resulting from the
3
Option shall immediately be returned to the Company and the Company shall be
entitled to all remedies available at law or in equity, including injunctive
relief. Executive specifically acknowledges that money damages would be
inadequate where a breach of this Paragraph V is a continuing one and the
applicable restrictive time period described herein is unexpired.
(f) That if any provision of this Paragraph V is, or becomes,
unenforceable, the remaining provisions shall nonetheless remain in full force
and effect, and Executive further agrees that if any provision of this Paragraph
V is found to be over broad or unduly restrictive, the court so finding is
authorized to modify the provision in question to the extent necessary to make
it valid and enforceable.
VI.
It is expressly understood and agreed that the Company, by the
undersigned, has full authority and power to enter into this Agreement, and that
this Agreement shall be deemed drafted equally by all parties hereto and that
the language of all parts of this Agreement shall be construed as a whole,
according to its fair meaning, and any presumption or other principle that the
language herein is to be construed against any party shall not apply.
VII.
Executive, by his execution of this Agreement, avows that the following
statements are true:
(a) That he has been given the opportunity to read this entire Agreement
and has had all questions regarding its meaning and content answered to his
satisfaction.
(b) That he has been advised of his right to seek independent legal advice
and counsel of his own choosing regarding this Agreement.
(c) That he fully understands the content of this Agreement.
(d) That this Agreement is given in return for valuable consideration, as
provided under the terms of this Agreement.
(e) That he enters into this Agreement knowingly and voluntarily in
exchange for the promises made in this Agreement and that no other
representations or promises have been made to him to induce or influence his
execution of this Agreement.
VIII.
This Agreement contains the entire agreement between the parties hereto
and shall be binding upon and inure to the benefit of those parties and the
executors, administrators, personal representatives, estates, heirs, successors
and assigns of each. No provision of this Agreement shall be amended, waived, or
modified except by an instrument in writing signed by the parties hereto.
IX.
4
This Agreement shall be governed in all respects, whether as to validity,
construction, capacity, performance or otherwise by the laws of the State of
Arizona, and no action involving this Agreement may be brought except in the
Superior Court of the State of Arizona or in the United States District Court
for the District of Arizona. The parties hereto further consent to the
jurisdiction of the Superior Court of Arizona with respect to any claim arising
under this Agreement. If any provision of this Agreement is held by a court of
competent jurisdiction to be invalid, void, or unenforceable for any reason
whatsoever, the remaining provisions of the Agreement shall nevertheless
continue in full force and effect without being impaired in any manner
whatsoever.
5
IN WITNESS WHEREOF, Company has caused this Agreement to be executed by
its duly authorized officer, and Executive has hereunto signed this Agreement as
of the day first above written.
Company:
Kona Grill, Inc. a Delaware corporation
/s/ Mark S. Robinow
By: ______________________________________
CFO
Its: ______________________________________
Executive:
/s/ Chandler
________________________
Chandler
6
EXHIBIT 10.3
EMPLOYMENT AGREEMENT
This Employment Agreement ("Agreement") is made and entered into on this
1st day of October, 2003 ("Effective Date") by and between Kona Grill, Inc., a
Delaware corporation (the "Company"), and Jason J. Merritt (hereinafter, the
"Executive").
RECITALS
A.
The Executive is highly knowledgeable regarding the business and
affairs of the Company, its policies, methods and personnel, and is currently
employed as the Vice President of the Company.
B.
The Board of Directors of the Company (the "Board") recognizes that
the Executive has contributed to the growth of the Company, and desires to
assure the Executive of continued employment.
C.
The Executive is willing to make his services available to the
Company and on the terms and conditions hereinafter set forth.
AGREEMENT
NOW, THEREFORE, in consideration of the premises and mutual covenants set
forth herein, the parties agree as follows:
1.
Employment Duties.
1.1
During the Term of Employment under this Agreement ("Term of
Employment"), the Executive shall serve as Chief Operating Officer of the
Company, shall faithfully and diligently perform all services as may be assigned
to him by the Board, and shall exercise such power and authority as may from
time to time be delegated to him by the Board. The Executive shall devote his
full time and attention to the business and affairs of the Company, render such
services to the best of his ability, and promote the interests of the Company.
2.
Term.
2.1
Initial Term. The initial term of this Agreement shall be five
(5) years, commencing on the Effective Date, unless sooner terminated in
accordance with Section 5 hereof ("Initial Term").
2.2
Renewal Terms. At the end of the Initial Term, the Term of
Employment automatically shall renew for successive one (1) year terms ("Renewal
Term"), subject to earlier termination as set forth herein.
3.
Compensation.
3.1
Base Salary. During the Executive's first year of employment
under this Agreement, the Executive shall receive a base salary at the annual
rate of $175,000 (the "Base
Salary") retroactive to October 1, 2003, with such Base Salary payable in
installments consistent with the Company's normal payroll schedule, subject to
applicable withholding and other taxes. Thereafter, the Base Salary shall be
reviewed, at least annually, by the Board for merit increases and shall increase
on October 1, 2004, to $200,000 per annum. At no time after October 1, 2004,
shall Executive's Base Salary fall below $200,000.
3.2
Bonuses
a. During each year of the Term of Employment, the Executive
shall be eligible to receive discretionary bonuses in annual amounts as
determined by the Board in its sole discretion. For the calendar year ending
December 31, 2003, Executive shall receive a bonus payable by April 1, 2004,
which shall consist of (i) a performance bonus to be determined by the Company's
Board in its sole discretion plus (ii) an additional amount ("Stock Grant Tax
Amount") equal to the full amount of federal, state and local income taxes and
any associated interest, penalties and other additions to tax payable by
Executive on account of the stock grant contemplated in Section 4.2(a) of this
Agreement so that after grossing up all payments for the Stock Grant Tax Amount
payable by Executive on account of the receipt of the Stock Grant Tax Amount
under this Section 3.2(a) the Executive will be in the same economic position
that he would have been if the stock grant contemplated in Section 4.2(a) of
this Agreement had not occurred. To the extent any taxing authority later
determines that the Stock Grant Tax Amount is greater than originally reported
by Executive, the Company shall, within ten (10) days after Executive delivers a
written request for reimbursement, pay Executive all such additional amounts
payable by Executive to such taxing authorities on a grossed-up basis as
contemplated by this Section 3.2(a).
b. For the Bonus Period in which the Executive's employment
with the Company terminates for any reason, the Company shall pay the Executive
a pro rata portion (based upon the period ending on the date on which the
Executive's employment with the Company terminates) of the annual bonus
otherwise payable under Section 3.2(a) for the Bonus Period in which such
termination of employment occurs; provided, however, that the Bonus Period for
purposes of this Section 3.2(b) shall be deemed to end on the last day of the
fiscal quarter of the Company in which the Executive's employment so terminates.
c. The Executive shall receive such additional bonuses, if
any, as the Board may in its sole and absolute discretion determine.
d. Any bonuses payable pursuant to this Section 3.2 are
sometimes hereinafter referred to as "Incentive Compensation." Each period for
which Incentive Compensation is payable under the Agreement is sometimes
hereinafter referred to as a Bonus Period. Unless otherwise specified by the
Board or provided under this Agreement, the Bonus Period shall be the fiscal
year of the Company.
4.
Benefits and Expense Reimbursement.
4.1
Compensation/Benefit Programs. During the Term of Employment,
the Executive shall be entitled to participate in all medical, dental, vision,
hospitalization, accidental death and dismemberment, disability, travel and life
insurance plans, and any and all other plans
2
as are presently and hereinafter offered by the Company to its executive
personnel, including pension, profit-sharing and deferred compensation plans,
subject to the general eligibility and participation provisions set forth in
such plans.
4.2
Stock Grant and Stock Options.
a. Stock Grant. Upon the execution of this Agreement by the
parties hereto, the Company shall grant Executive 40,000 shares of Company's
Common Stock. For purposes of this Section 4.2(a), the Company acknowledges and
agrees that the fair market value of the Company's Common Stock on the date of
this Agreement is $1.20 per share. The shares of the Company's Common Stock
granted to Executive under this Section 4.2(a) shall be subject to certain
restrictions as defined from time to time by the Company in its sole discretion.
b. Stock Options. Upon the execution of this Agreement by the
parties hereto, the Company shall grant Executive Three Hundred Thousand
(300,000) stock options (the "Stock Options") to purchase Common Stock of the
Company under (and therefore subject to all terms and conditions of) the
Company's 2002 Stock Plan as attached hereto as Exhibit A (the "Company's Stock
Plan") at an exercise price equal to the current fair market value per share of
the Company's Common Stock which is $1.20 per share. The Stock Options will be
granted as incentive stock options to the extent possible under the Company's
Stock Plan and applicable law. Sixty Thousand (60,000) Stock Options shall vest
upon each anniversary date of this Agreement provided, however, upon the
occurrence of a Change in Control, all unvested Stock Options shall vest
immediately. All or any portion of the vested Stock Options may be exercised at
any one or more times by the Executive during the Term of Employment and for a
period of twelve (12) months following the Term of Employment. The Stock Options
shall be granted pursuant to certain restrictions as defined from time to time
by the Company in its sole discretion.
4.3
Vacation. The Executive shall be entitled to three (3) weeks
of paid vacation each calendar year during the Term of Employment, to be taken
at such times as the Executive and the Company shall mutually determine and
provided that no vacation time shall significantly interfere with the duties
required to be rendered by the Executive hereunder. Any vacation time not taken
by Executive during any calendar year may not be carded forward into any
succeeding calendar year. Any earned but unused vacation time will be paid out
to Executive at the time of his termination.
4.4
Reimbursement of Expenses. Upon the submission of proper
substantiation by the Executive, and subject to the Company's general policies,
the Company shall reimburse the Executive for all reasonable expenses actually
paid or incurred by Executive during the Term of Employment in the course of and
pursuant to the business of the Company.
4.5
Life Insurance. Executive agrees to cooperate with the Company
in obtaining all life insurance as the Board or any lender deems necessary.
4.6
Directors & Officers Insurance. At all times during the Term
of Employment, Executive shall be considered an officer of the Company and shall
be covered by D&O
3
Insurance, or any other similar type of insurance, that provides coverage for
the Executive's acts or omissions undertaken during the course and scope of his
employment.
5.
Termination.
5.1
Termination for Cause. The Company shall at all times have the
right, upon written notice to the Executive, to terminate the Term of Employment
for Cause as defined below. For purposes of this Agreement, the term "Cause"
shall mean (i) an action of the Executive which constitutes a willful and
material breach of, or willful and material failure or refusal (other than by
reason of his disability or incapacity) to perform his duties under, this
Agreement that is not cured within forty-five (45) days after receipt by the
Executive of written notice of same, (ii) fraud, embezzlement or
misappropriation of funds during the Term of Employment, or (iii) a conviction
of any crime during the Term of Employment which involves dishonesty or a breach
of trust or involves the Company or its executives. Any termination for Cause
shall be made by written notice to the Executive, which shall set forth in
reasonable detail all acts or omissions upon which the Company is relying for
the termination. The Executive shall have the right to address the Board
regarding the acts or omissions set forth in the notice of termination. Upon any
termination pursuant to this Section 5.1, the Company shall (i) pay to the
Executive any unpaid Base Salary and earned but unused vacation time through the
date of termination, (ii) pay to the Executive his accrued but unpaid Incentive
Compensation, if any, for any Bonus Period ending on or before the date of the
termination of Executive's employment with the Company in accordance with
Section 3.2(b).
5.2
Disability.
a. In the event the Executive becomes disabled and shall be
unable, or fail, to perform the essential functions of his position with or
without reasonable accommodation, for any period of forty-five (45) days or
more, the Company shall have the option, in accordance with applicable law, to
terminate this Agreement upon written notice to the Executive. Upon termination
pursuant to this Section 5.2, the Company shall (i) pay to the Executive any
unpaid Base Salary and earned but unused vacation time through the effective
date of termination specified in such notice, (ii) pay to the Executive his
accrued but unpaid Incentive Compensation, if any, for any Bonus Period ending
on or before the date of termination of the Executive's employment with the
Company in accordance with Section 3.2(b), and (iii) pay to the Executive a
severance payment equal to nine (9) months of the Executive's Base Salary in
effect at the time of the termination of the Executive's employment with the
Company.
b. For purposes of this Section 5.2, the Executive shall be
considered Disabled or to be suffering from a Disability if the Executive is
unable, after any reasonable accommodations required by the Americans with
Disabilities Act or any applicable state law, to perform the essential functions
of his position because of a physical or mental impairment. In the absence of
agreement between Company and the Executive, whether the Executive is Disabled
or suffering from a Disability (and the date as of which Executive became
Disabled) will be determined by a licensed physician selected by Company. If a
licensed physician selected by the Executive disagrees with the determination of
the physician selected by Company, the two (2) physicians shall select a third
(3rd) physician. The decision of the third (3rd) physician concerning the
Executive's Disability then shall be binding and conclusive on all interested
parties.
4
5.3
Death. Upon the death of the Executive during the Term of
Employment, the Company shall pay to the estate of the deceased Executive (i)
any unpaid Base Salary and earned but unused vacation time through the
Executive's date of death and (ii) any accrued but unpaid Incentive Compensation
for any Bonus Period ending on or before the Executive's date of death in
accordance with Section 3.2(b).
5.4
Termination Without Cause
a. At any time the Company shall have the right to terminate
the Term of Employment without cause by providing written notice not less than
sixty (60) days prior to the termination date, to the Executive. Upon any
termination pursuant to this Section 5.4, or in the event the Company elects not
to renew the Agreement at the end of the Initial or any Renewal Term (except if
the non-renewal is for cause pursuant to Section 5.1), the Company shall (i) pay
to the Executive any unpaid Base Salary and earned but unused vacation time
through the date of termination specified in the notice, (ii) pay to the
Executive the accrued but unpaid Incentive Compensation, if any, for any Bonus
Period ending on or before the date of the termination of the Executive's
employment with the Company in accordance with Section 3.2(b), (iii) continue to
pay the Executive's Base Salary in effect at the time of the termination for a
period (the "Continuation Period") of twelve (12) months following the
termination of the Executive's employment with the Company, in the manner and at
such times as the Base Salary otherwise would have been payable to the
Executive, and (iv) continue to provide the Executive with the benefits he was
receiving under Section 4.1 hereof (the "Benefits") through the end of the
Continuation Period in the manner and at such times as the Benefits otherwise
would have been payable or provided to the Executive. Further, all of
Executive's Stock Options in the Company, including, without limitation, the
Stock Options, shall continue to vest through the end of the Continuation Period
in the same manner and to the same extent as if his employment hereunder
terminated on the last day of the Continuation Period.
b. In the event that the Company is unable to provide the
Executive with any health-related Benefits required hereunder by reason of the
termination of the Executive's employment, coverage shall be continued under
COBRA beginning the first day of the month following the effective termination
date and shall continue for the duration of the Continuation Period and the
Company shall be responsible for paying the full cost of the COBRA premium
directly to the insurance carrier.
5.5
Termination by Executive
a. The Executive shall at all times have the right, by written
notice not less than (30) days prior to the termination date, to terminate the
Term of Employment.
b. Upon termination of the Term of Employment pursuant to this
Section 5.5 by the Executive without Good Reason (as defined below), the Company
shall pay to the Executive any unpaid Base Salary and earned but unused vacation
time through the effective date of termination specified in the notice.
c. Upon termination of the Term of Employment pursuant to this
Section 5.5 by the Executive for Good Reason, the Company shall pay to the
Executive the same
5
amounts, and shall continue to compensate for Benefits in the same amounts, that
would have been payable or provided by the Company to the Executive under
Section 5.4 of this Agreement if the Term of Employment had been terminated by
the Company without Cause.
d. For purposes of this Agreement, "Good Reason" shall mean
(i) the adjustment downward of the Executive's compensation and/or benefits as
provided for by Section 3 of this Agreement; and (ii) any failure by the Company
to comply with any of the provisions of this Agreement, other than an isolated,
insubstantial and inadvertent failure not occurring in bad faith and which is
remedied by the Company promptly after receipt of notice thereof given by the
Executive. "Good Reason" shall not exist as a result of a change in the
Executive's job duties or job title.
5.6
Change in Control of the Company
a. Unless Executive elects to terminate this Agreement
pursuant to subparagraph c below, Executive understands and acknowledges that
the Company may be merged or consolidated with or into another entity and that
such entity shall automatically succeed to the rights and obligations of the
Company hereunder or that the Company may undergo another type of Change in
Control. The Executive hereby acknowledges and agrees that the Executive shall
have no right to terminate this Agreement for a period of one year following the
date of a Change in Control. In the event such a merger or consolidation or
other Change in Control is initiated prior to the end of the Initial or any
Renewal Term, then the provisions of this Section 5.6 shall be applicable.
b. In the event of a pending Change in Control wherein the
Company and/or the Executive has not received written notice at least five (5)
business days prior to the anticipated closing date of the transaction giving
rise to the Change in Control from the successor to all or a substantial portion
of the Company's business and/or assets that such successor is willing as of the
closing to assume and agree to perform the Company's obligations under this
Agreement in the same manner and to the same extent that the Company is hereby
required to perform, then such Change in Control shall be deemed to be a
termination of this Agreement by the Company without Cause during the Term of
Employment and the applicable portions of Section 5.4 hereof will apply.
c. In any Change in Control situation, Executive may, at his
sole discretion, elect to terminate this Agreement at any time on or after the
one-year anniversary of the date of the Change in Control by providing written
notice to the Company and/or a successor to all or a substantial portion of the
Company's business and/or assets at least (30) days prior to the anticipated
termination date. In such case, or in the event that the Company and/or its
successor terminates the Executive after a Change in Control for any reason, the
applicable provisions of Section 5.4 hereof will apply as though the Company had
terminated the Agreement without Cause during the Term of Employment.
d. For purposes of applying this Section 5 under the
circumstances described in (b) above, the effective date of termination will be
the closing date of the transaction giving rise to the Change in Control and all
compensation, reimbursements and lump-sum payments due Executive must be paid in
full by the Company at or prior to such closing.
6
e.
A "Change in Control" shall mean a change in control of
a nature that would be required to be reported in response to Item 6(e) of
Schedule 14A of Regulations 14A promulgated under the Securities Exchange Act of
1934, as amended, as in effect on the date of this Agreement, or if Item 6(e) is
no longer in effect, any regulations issued by the United States Securities and
Exchange Commission pursuant to the Securities Exchange Act of 1934, as amended,
which serve similar purposes; provided further that, without limitation, a
Change in Control shall be deemed to have occurred if and when:
i.
a public offering of the Common Stock of the
Company registered under the Securities Act of 1933, as
amended, and/or any other applicable securities laws, is made,
ii.
the stockholders of the Company shall approve a
merger, consolidation, recapitalization, stock purchase or
reorganization of the Company, a reverse stock split of
outstanding voting securities, or consummation of any such
transactions if stockholder approval is not obtained, other
than any such transaction which would result in at least
seventy-five percent (75%) of the total voting power
represented by the voting securities of the surviving entity
outstanding immediately after such transaction being
beneficially owned by at least seventy-five (75%) of the
holders of outstanding voting securities of the Company
immediately prior to the transaction, with the voting power of
each such continuing holder relative to other such continuing
holders not substantially altered in the transaction, or
iii. the stockholders of the Company shall approve a
plan of complete liquidation of the Company or an agreement
for the sale or disposition by the Company of all or a
substantial portion of the Company's assets to another person
or entity which is not a wholly-owned subsidiary of the
Company (i.e., fifty percent (50%) or more of the total assets
of the Company).
f.
The Executive shall be notified in writing by the
Company at any time that the Company or any member of its Board anticipates that
a Change in Control may take place.
g.
In the event that a Change in Control occurs and any
payments made to the Executive hereunder, or pursuant to any plan, program or
policy of the Company in connection with, on account of, or as a result of, such
Change in Control constitute "excess parachute payments" as defined in Section
280G of the Internal Revenue Code of 1986, as amended (the "Code"), subject to
the excise tax imposed by Section 4999 of the Code, or any successor sections
thereof, the Executive shall receive from the Company or its successor, in
addition to any other amounts payable under this Agreement, a lump-sum payment
equal to the amount of (i) such excise tax, and (ii) the federal and state
income taxes payable by the Executive with respect to any payments made to the
Executive under this subparagraph (g). Such amount will be due and payable by
the Company or its successor within ten (10) days after the Executive deliv7
ers a written request for reimbursement accompanied by a copy of his tax
return(s) showing the excise tax actually incurred by the Executive.
6.
Invention Disclosure and Assignment.
6.1
Disclosure. Executive will, without further consideration,
disclose immediately in writing to Company each and every invention or
improvement, whether or not patentable, copyrightable, or protectable as a trade
secret, that Executive may make or conceive, either solely or jointly with
others, during the Initial Term and the Renewal Terms of this Agreement and
which results from any work for Company, any use of Company's premises or
property, or any use of the Company information or other resources. The
foregoing shall be referred to as a "Company Invention/Improvement," and each
Company Invention/Improvement shall be Company's sole property, free from any
legal or equitable title of Executive, and all necessary documents for
perfecting title of a Company Invention/Improvement shall be executed by
Executive without further consideration and delivered to Company on demand.
Company Invention/Improvement shall include, but not be limited to, all
inventions, improvements, designs, original works of authorship, formulas,
processes, compositions of matter and trade secrets. In addition, Executive
acknowledges and agrees that any copyrightable works prepared by Executive
within the scope of his employment are "works for hire" under the Copyright Act
and that the Company will be considered the author and owner of such
copyrightable works.
6.2
Cooperation. Executive shall promptly review, sign and return
all documents, communicate all pertinent information and do anything else
reasonably requested by Company in order to transfer all rights to any Company
Invention/Improvement to Company or its nominee and to help Company apply for,
obtain, modify, defend, enforce or transfer or otherwise assist Company in the
complete enjoyment of its patent, trade secret, copyright and comparable rights
for such anywhere in the world. Executive will be reimbursed for any reasonable
expenses actually incurred to comply with the foregoing. Executive will not be
entitled to further consideration for services rendered or fights transferred
according to this section, except that if the Executive is no longer providing
services to Company when services according to this section are rendered,
Executive shall be entitled to receive reasonable compensation for the time
reasonably required to render these services.
6.3
Notice. Executive agrees to notify Company in writing before
making any disclosure, or performing or causing to be performed any work for or
on behalf of Company which appears to conflict or threaten to conflict with (a)
rights claimed by such Executive in an Invention or idea conceived by Executive
or others prior to Executive's relationship with Company or otherwise outside
the scope of these terms and conditions, or (b) rights of others arising out of
obligations incurred by Executive prior to Executive's relationship with Company
or in connection with his employment, or otherwise outside the scope of these
terms and conditions. If Executive fails to give notice under the circumstances
specified in the foregoing, Company may assume that no such conflicting
invention or idea exists, and Executive agrees that Executive will make no claim
against Company with respect to the use of any such invention or idea in any
form for any work which Executive performs for or on behalf of Company.
6.4
Confidential Information and Non-Disclosure. All confidential
information which Executive may now possess, may obtain during the Initial Term
or any subsequent
8
Renewal Term, or may create at any time while he is still employed by Company,
relating to the business of the Company, its predecessor and any customer or
supplier of the Company or its predecessor, shall not be published, disclosed or
made accessible by him to any other person, firm or corporation during the
Initial Term or any subsequent Renewal Term or any time thereafter without the
prior written consent of the Company; provided, however, information shall not
be deemed confidential information if such information was generally publicly
available prior to the receipt thereof by Executive or subsequently becomes
generally available through no fault of Executive. Upon request, Executive shall
return all tangible evidence of such confidential information and all other
Company property, including, but not limited to, files (including electronic
files), equipment, computer software, computer hardware, notebooks, reports,
letters, manuals, drawings, blue prints, schematics, keys, pagers, telephones,
credit cards and copies thereof, to the Company prior to or at the termination
of his employment.
7.
Non Competition; Non-Solicitation.
7.1
No Conflict of Interest. During the term of Executive's
employment with Company, Executive must not engage in any work, paid or unpaid,
that creates an actual or potential conflict of interest with Company. Such work
shall include, but is not limited to, directly or indirectly competing with
Company in any way, or acting as an officer, director, Executive, consultant,
stockholder, volunteer, lender, or agent of any business enterprise of the same
nature as, or which is in direct competition with, the business in which Company
is now engaged or in which Company becomes engaged during the term of
Executive's employment with Company, as may be determined by the Company in its
sole discretion. If Company believes such a conflict exists during the term of
this Agreement, Company may ask Executive to choose to discontinue the other
work or resign employment with Company. In addition, Executive agrees not to
refer any client or potential client of Company to competitors of Company,
without obtaining Company's prior written consent, during the term of
Executive's employment.
8.
Post-Termination Non-Competition.
8.1
Consideration For Promise to Refrain From Competing. Executive
agrees that Executive's services are special and unique, that Company's
disclosure of confidential, proprietary information and specialized training and
knowledge to Executive, and that Executive's level of compensation and benefits
and post-termination severance, as applicable, are partly in consideration of
and conditioned upon Executive not competing with Company. Executive
acknowledges that such consideration for Executive's services under this
Agreement is adequate consideration for Executive's promises contained within
this Section 8.
8.2
Promise To Refrain From Competing. Executive understands
Company's need for Executive's promise not to compete with Company is based on
the following: (a) Company has expended, and will continue to expend,
substantial time, money and effort in developing its proprietary information;
(b) Executive will, in the course of Executive's employment, develop, and be
personally entrusted with and exposed to such proprietary information; (c) both
during and after the term of Executive's employment, Company will be engaged in
the highly competitive casual dining industry; (d) Company provides services
nationally and may provide services internationally in the future; and (e)
Company will suffer great loss and irreparable harm if Executive were to enter
into competition with Company. Therefore, in exchange for the con9
sideration described in Sections 3 and 4 above, Executive agrees that for a
period commencing on the Effective Date and ending eighteen (18) months after
termination of Executive's employment with the Company (the "Covenant Period"),
Executive will not either directly or indirectly, whether as a owner, director,
officer, manager, consultant, agent or Executive: (i) work for a competitor,
which is defined to include any company in the business of preparation and
distribution of Contemporary American or Pacific Island restaurant concepts
similar to the Company and featuring a Sushi Bar existing during the Covenant
Period, within a twenty five (25) mile radius of any Kona Grill or any planned
location of such restaurants ("Restricted Business"); or (ii) make or hold any
investment in any Restricted Business in the United States, whether such
investment be by way of loan, purchase of stock or otherwise, provided that
there shall be excluded from the foregoing the ownership of not more than 5% of
the listed or traded stock of any publicly held corporation. For purposes of
this Section 8, the term "Company" shall mean and include Company, any
subsidiary or affiliate of Company, any successor to the business of Company (by
merger, consolidation, sale of assets or stock or otherwise) and any other
corporation or entity of which Executive may serve as a director, officer or
Executive at the request of Company or any successor of Company.
8.3
Reasonableness of Restrictions. Executive represents and
agrees that the restrictions on competition, as to time, geographic area, and
scope of activity, required by this Section 8 are reasonable, do not impose a
greater restraint than is necessary to protect the goodwill and business
interests of Company, and are not unduly burdensome to Executive. Executive
expressly acknowledges that Company competes on a nationwide basis and that the
geographical scope of these limitations is reasonable and necessary for the
protection of Company's trade secrets and other confidential and proprietary
information. Executive further agrees that these restrictions allow Executive an
adequate number and variety of employment alternatives, based on Executive's
varied skills and abilities. Executive represents that Executive is willing and
able to compete in other employment not prohibited by this Agreement.
8.4
Reformation if Necessary. In the event a court of competent
jurisdiction determines that the geographic area, duration, or scope of activity
of any restriction under this Section 8 and its subsections is unenforceable,
the restrictions under this section and its subsections shall not be terminated
but shall be reformed and modified to the extent required to render them valid
and enforceable. Executive further agrees that the court may reform this
Agreement to extend the period of this covenant not to compete by an amount of
time equal to any period in which Executive is in breach of this covenant.
9.
Nonsolicitation.
9.1
Nonsolicitation of Customers or Prospects. Executive
acknowledges that information about Company's customers is confidential and
constitutes trade secrets. Accordingly, Executive agrees that during the
Covenant Period, Executive will not, either directly or indirectly, separately
or in association with others, interfere with, impair, disrupt or damage
Company's relationship with any of its customers or customer prospects by
soliciting or encouraging others to solicit any of them for the purpose of
diverting or taking away business from Company.
10
9.2
Nonsolicitation of Company's Executives. Executive agrees that
during the Covenant Period, Executive will not, either directly or indirectly,
separately or in association with others, interfere with, impair, disrupt or
damage Company's business by soliciting, encouraging or attempting to hire any
of Company's Executives or causing others to solicit or encourage any of
Company's Executives to discontinue their employment with Company.
10.
Injunctive Relief. Executive acknowledges that Executive's breach of
the covenants contained in Sections 6, 7, 8, 9, and 10 (collectively
"Covenants") would cause irreparable injury to Company and agrees that in the
event of any such breach, Company shall be entitled to seek temporary,
preliminary and permanent injunctive relief without the necessity of proving
actual damages or posting any bond or other security.
11.
Agreement to Arbitrate. To the fullest extent permitted by law,
Executive and Company agree to arbitrate any controversy, claim or dispute
between them arising out of or in any way related to this Agreement, the
employment relationship between Company and Executive and any disputes upon
termination of employment, including but not limited to breach of contract,
tort, discrimination, harassment, wrongful termination, demotion, discipline,
failure to accommodate, family and medical leave, compensation or benefits
claims, constitutional claims; and any claims for violation of any local, state
or federal law, statute, regulation or ordinance or common law. Claims for
injunctive relief pursuant to Section 11 above are excluded. For the purpose of
this agreement to arbitrate, references to "Company" include all parent,
subsidiary, or related entities and their Executives, supervisors, officers,
directors, agents, pension or benefit plans, pension or benefit plan sponsors,
fiduciaries, administrators, affiliates and all successors and assigns of any of
them, and this agreement shall apply to them to the extent Executive's claims
arise out of or relate to their actions on behalf of Company.
11.1 Consideration. The mutual promise by Company and Executive to
arbitrate any and all disputes between them (except for those referenced above)
rather than litigate them before the courts or other bodies, provides the
consideration for this agreement to arbitrate.
11.2 Initiation of Arbitration. Either party may exercise the right
to arbitrate by providing the other party with written notice of any and all
claims forming the basis of such right in sufficient detail to inform the other
party of the substance of such claims. In no event shall the request for
arbitration be made after the date when institution of legal or equitable
proceedings based on such claims would be barred by the applicable statute of
limitations.
11.3 Arbitration Procedure. The arbitration will be conducted in
Phoenix, Arizona by a single neutral arbitrator and in accordance with the then
current rules for resolution of employment disputes of the American Arbitration
Association ("AAA"). The parties are entitled to representation by an attorney
or other representative of their choosing. The arbitrator shall have the power
to enter any award that could be entered by a judge of the trial court of the
State of Arizona, and only such power, and shall follow the law. The parties
agree to abide by and perform any award rendered by the arbitrator. The
arbitrator shall issue the award in writing and therein state the essential
findings and conclusions on which the award is based. Judgment on the award may
be entered in any court having jurisdiction thereof.
11
11.4 Costs of Arbitration. Each party shall bear their own costs
for all expenses relating to the arbitration.
12.
General Provisions.
12.1 Successors and Assigns. The rights and obligations of Company
under this Agreement shall inure to the benefit of and shall be binding upon the
successors and assigns of Company. Executive shall not be entitled to assign any
of Executive's rights or obligations under this Agreement.
12.2 Waiver. Either party's failure to enforce any provision of
this Agreement shall not in any way be construed as a waiver of any such
provision, or prevent that party thereafter from enforcing each and every other
provision of this Agreement.
12.3 Attorneys' Fees. Each side will bear its own attorneys' fees
in any dispute unless a statutory section at issue, if any, authorizes the award
of attorneys' fees to the prevailing party.
12.4 Severability. In the event any provision of this Agreement is
found to be unenforceable by an arbitrator or court of competent jurisdiction,
such provision shall be deemed modified to the extent necessary to allow
enforceability of the provision so limited, it being intended that the parties
shall receive the benefit contemplated herein to the fullest extent permitted by
law. If a deemed modification is not satisfactory in the judgment of such
arbitrator or court, the unenforceable provision shall be deemed deleted, and
the validity and enforceability of the remaining provisions shall not be
affected thereby.
12.5 Interpretation; Construction. The headings set forth in this
Agreement are for convenience only and shall not be used in interpreting this
Agreement. Furthermore, Executive acknowledges that Executive has had an
opportunity to draft, review, and revise the Agreement and have it reviewed by
legal counsel, if desired, and, therefore, the normal rule of construction to
the effect that any ambiguities are to be resolved against the drafting party
shall be employed in the interpretation of this Agreement.
12.6 Governing Law. This Agreement will be governed by and
construed in accordance with the laws of the United States and the State of
Arizona. Each party consents to the jurisdiction and venue of the state or
federal courts in Phoenix, Arizona, if applicable, in any action, suit, or
proceeding arising out of or relating to this Agreement.
12.7 Notices. Any notice required or permitted by this Agreement
shall be in writing and shall be delivered as follows with notice deemed given
as indicated: (a) by personal delivery when delivered personally; (b) by
overnight courier upon written verification of receipt; (c) by telecopy or
facsimile transmission upon acknowledgment of receipt of electronic
transmission; or (d) by certified or registered mail, return receipt requested,
upon verification of receipt. Notice shall be sent to the addresses set forth
below, or such other address as either party may specify in writing.
12
12.8 Counterparts. This Agreement may be executed in one or more
counterparts, each of which shall be deemed to be an original but all of which
together shall constitute one and the same instrument and agreement.
13.
Survival. Sections 8 ("Post-Termination Non-Competition"), 9
("Nonsolicitation"), 10 ("Injunctive Relief"), 11 ("Agreement to
Arbitrate"), 12 ("General Provisions") and 14 ("Entire Agreement")
of this Agreement shall survive Executive's employment by Company.
14.
Entire Agreement. This Agreement, the attached exhibits, and any
documents related to Executive's stock options, constitutes the
entire agreement between the parties relating to this subject matter
and supersedes all prior or simultaneous representations,
discussions, negotiations, and agreements, whether written or oral.
This Agreement may be amended or modified only with the written
consent of Executive and the President of Company. To the extent
that the terms of this Employment Agreement conflicts with the
Restricted Stock Grant Agreement, the terms of this Agreement shall
control. No oral waiver, amendment or modification will be effective
under any circumstances whatsoever.
IN WITNESS WHEREOF, the undersigned have executed this Agreement as of the
date first above written.
KONA GRILL, INC.
By: /s/ Chandler
------------------------------Name: Chandler
Title: President
EXECUTIVE:
/s/ Jason Merritt
----------------------------------Jason Merritt
13
EXHIBIT 10.4
KONA GRILL LETTERHEAD
Mark Robinow
5916 Lee Valley Road
Edina, MN 55439
RE: EMPLOYMENT TERMS
Dear Mark:
The purpose of this letter is to set forth the Employment Terms regarding
your employment by Kona Grill, Inc., a Delaware corporation (the "Company") and
you as the ("Executive").
1.
Duties. Effective October 15, 2004, Executive shall be appointed by
the Board as the Vice President and Chief Financial Officer of the
Company.
2.
Term. Executive shall be employed subject to the election of both
parties.
3.
Compensation. Executive's base salary shall be $225,000 per annum.
The Executive shall be eligible for an annual bonus of up to 40% of
his base salary based upon successfully achieving certain goals as
specified by Company management. Following the first quarter of
employment, Executive is eligible for a prorated portion of his
bonus (10% of his full-year base salary based upon one quarter of a
year of employment) to be paid during the first calendar quarter of
2005.
4.
Stock Options. The Company will grant Executive stock options to
purchase 270,560 shares in the common stock at an exercise price of
$1.00 per share. This number of shares represents 2% of the total
issued and outstanding stock, including stock options on a fully
diluted basis. The stock options will vest as follows: September 30,
2004, 67,640 shares; September 30, 2005, 67,640 shares; September
30, 2006, 67,640 shares; September 30, 2007, 67,640.
5.
Benefits. Executive shall be entitled to receive all benefits,
including health insurance, as offered to other senior executives of
the Company.
6.
Termination. It is agreed that Executive is employed at will and may
be terminated with or without cause at any time upon ninety (90)
days prior written notice. Upon termination (except for cause)
Executive shall receive a one-year severance payment equal to 12
months base salary, a pro rata portion of annual bonus and a pro
rata portion of stock options for the year terminated shall vest
upon such termination (except for cause). In the event Executive is
required to relocate, resulting in termination of employment, such
termination shall be considered without cause and severance
provisions of this paragraph will apply.
7.
Confidentiality and Non-Compete. Executive will sign the attached
Confidentiality and Non-Compete Agreement that all officers and
managers sign that are employees of the Company.
8.
Governing Law. This Agreement shall be governed by the laws of the
State of Arizona.
If you agree with the foregoing, please execute in the space provided
below. We look forward to a long and rewarding relationship.
KONA GRILL, INC.
By: /s/ Donald Dempsey
--------------------------------Donald Dempsey
Chief Executive Officer
By: /s/ Mark Robinow
-------------------------------Mark Robinow
Executive
EXHIBIT 10.5
THIS WARRANT AND THE SECURITIES ISSUABLE UPON EXERCISE OF THIS WARRANT HAVE NOT
BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES
ACT"), AND MAY NOT BE SOLD, OFFERED FOR SALE, ASSIGNED, TRANSFERRED OR OTHERWISE
DISPOSED OF, UNLESS REGISTERED PURSUANT TO THE PROVISIONS OF THE SECURITIES ACT
OR AN OPINION OF COUNSEL IS OBTAINED STATING THAT SUCH DISPOSITION IS IN
COMPLIANCE WITH AN AVAILABLE EXEMPTION FROM SUCH REGISTRATION.
JULY 23, 2004
KONA GRILL, INC.
Warrant for the Purchase of Shares of Common Stock
For value received, Kona MN, a Delaware limited liability company, its
successors or assigns ("Holder"), is entitled to purchase from Kona Grill, Inc.,
a Delaware corporation (the "Company"), up to 1,000,000 fully paid and
nonassessable shares of the Company's Common Stock, $.01 par value per share
(the "Common Stock") at the price of $1.00 per share, subject to adjustments as
noted below (the "Exercise Price"). This Warrant amends and restates that
certain Warrant issued by the Company on July 23, 2004.
The Holder agrees with the Company that this Warrant is issued, and all
the rights hereunder shall be held, subject to all of the conditions,
limitations and provisions set forth herein.
1. Exercise of Warrant. Subject to the terms and conditions set forth
herein, this Warrant may be exercised in whole or in part, pursuant to the
procedures provided below, at any time on or before 7:00 p.m., Eastern time, on
July 30, 2009 (the "Expiration Date") or, if such day is a day on which banking
institutions in New York are authorized by law to close, then on the next
succeeding day that shall not be such a day. To exercise this Warrant the Holder
shall present and surrender this Warrant to the Company at its principal office,
with the Warrant Exercise Form attached hereto duly executed by the Holder and
accompanied by payment (either (a) in cash or by check, payable to the order of
the Company, (b) by cancellation by the Holder of indebtedness or other
obligations of the Company to the Holder, or (c) by a combination of (a) or
(b)), of the aggregate Exercise Price for the total aggregate number of shares
for which this Warrant is exercised. Upon receipt by the Company of this
Warrant, together with the executed Warrant Exercise Form and payment of the
Exercise Price for the shares to be acquired, in proper form for exercise, and
subject to the Holder's compliance with all requirements of this Warrant for the
exercise hereof, the Holder shall be deemed to be the holder of record of the
shares of Common Stock (or Other Securities) issuable upon such exercise,
notwithstanding that the stock transfer books of the Company shall then be
closed or that certificates representing such shares of Common Stock shall not
then be actually delivered to the Holder.
2. Net Issue Exercise. Notwithstanding any provisions herein to the
contrary, if the fair market value of one share of Common Stock is greater than
the Exercise Price (at the date of calculation as set forth below), in lieu of
exercising this Warrant for cash, the Holder may elect to receive shares equal
to the value (as determined below) of this Warrant (or the portion thereof being
canceled) by surrender of this Warrant at the principal office of the Company
together with the properly endorsed Notice of Exercise and notice of such
election in which event the Company shall issue to the Holder a number of shares
of Common Stock computed using the following formula:
X = Y (A-B)
------A
Where
Holder
X = the number of shares of Common Stock to be issued to the
Y = the number of shares of Common Stock purchasable under the
Warrant or, if only a portion of the Warrant is being
exercised, the portion of the Warrant being canceled (at the
date of such calculation)
A = the fair market value of one share of the Company's Common
Stock (at the date of such calculation)
B = Exercise Price (as adjusted to the date of such
calculation)
3. Reservation of Shares. The Company will at all times reserve for
issuance and delivery upon exercise of this Warrant all shares of Common Stock
or other shares of capital stock of the Company (and Other Securities) from time
to time receivable upon exercise of this Warrant. All such shares (and Other
Securities) shall be duly authorized and, when issued upon such exercise, shall
be validly issued, fully paid, and non-assessable and free of all preemptive
rights.
4. Fractional Shares. No fractional shares or scrip representing
fractional shares shall be issued upon the exercise of this Warrant, but the
Company shall pay the Holder an amount equal to the Fair Market Value (as
defined below) of such fractional share of Common Stock in lieu of each fraction
of a share otherwise called for upon any exercise of this Warrant.
5. Fair Market Value. For purposes of this Warrant, the Fair Market Value
of one share of Common Stock (or Other Security) shall be determined as of any
date (the "Value Date") by the Company's Board of Directors in good faith;
provided, however, that where there exists a public market for the Company's
Common Stock on the Value Date, the fair market value per share shall be either:
(a) If the Common Stock is listed on a national securities exchange or
admitted to unlisted trading privileges on such exchange or listed for trading
on the NASDAQ system, the Fair Market Value shall be the last reported sale
price of the security on such exchange or system on the last business day prior
to the Value Date or if no such sale is made on such day, the average of the
closing bid and asked prices for such day on such exchange or system; or
(b) If the Common Stock is not so listed or so admitted to unlisted
trading privileges, the Fair Market Value shall be the mean of the last reported
bid and asked prices reported by the National Quotation Bureau, Inc. on the last
business day prior to the Value Date.
6. Assignment or Loss of Warrant. Subject to the transfer restrictions
herein (including Section 9), upon surrender of this Warrant to the Company or
at the office of its stock transfer agent, if any, with the Assignment Form
annexed hereto duly executed and funds sufficient to pay any transfer tax, the
Company shall, without charge, execute and deliver a new Warrant in the name of
the assignee named in such instrument of assignment and this Warrant shall
promptly be canceled. Upon receipt by the Company of evidence reasonably
satisfactory to it of the loss, theft, destruction or mutilation of this
Warrant, and of reasonably satisfactory indemnification by the Holder, and upon
surrender and cancellation of this Warrant, if mutilated, the Company shall
execute and deliver a replacement Warrant of like tenor and date.
7. Rights of the Holder. The Holder shall not, by virtue hereof, be
entitled to any rights of a stockholder in the Company, either at law or in
equity, and the rights of the Holder are limited to those expressed in this
Warrant.
8.
Adjustments.
8.1 Adjustment for Recapitalization. If the Company shall at any
time after the date of this Warrant subdivide its outstanding shares of Common
Stock (or Other Securities at the time receivable upon the exercise of the
Warrant) by recapitalization, reclassification or split-up thereof, or if the
Company shall declare a stock dividend or distribute shares of Common Stock to
its shareholders, the
2
number of shares of Common Stock (or Other Securities) subject to this Warrant
immediately prior to such subdivision shall be proportionately increased, and if
the Company shall at any time after the date of this Warrant combine the
outstanding shares of Common Stock by recapitalization, reclassification or
combination thereof, the number of shares of Common Stock subject to this
Warrant immediately prior to such combination shall be proportionately
decreased. Any such adjustment and adjustment to the Exercise Price pursuant to
this Section 8.1 shall be effective at the close of business on the effective
date of such subdivision or combination or if any adjustment is the result of a
stock dividend or distribution then the effective date for such adjustment based
thereon shall be the record date therefor.
8.2
[Intentionally Omitted]
8.3 Adjustment in number of shares of Common Stock. Upon each
adjustment of the Exercise Price pursuant to Section 8.1, the Holder shall
thereafter be entitled to purchase, at the Exercise Price resulting from such
adjustment, the number of shares obtained by multiplying the Exercise Price in
effect immediately prior to such adjustment by the number of shares purchasable
pursuant hereto immediately prior to such adjustment and dividing the product
thereof by the Exercise Price resulting from such adjustment.
8.4 Adjustment for Reorganization, Consolidation, Merger, Etc. In
case of any reorganization of the Company (or any other corporation, the
securities of which are at the time receivable on the exercise of this Warrant)
after the date of this Warrant or in case after such date the Company (or any
such other corporation) shall consolidate with or merge into another corporation
or convey all or substantially all of its assets to another corporation, then,
and in each such case, the Holder of this Warrant upon the exercise thereof as
provided in Section 1 at any time after the consummation of such reorganization,
consolidation, merger or conveyance, shall be entitled to receive, in lieu of
the securities and property receivable upon the exercise of this Warrant prior
to such consummation, the securities or property to which such Holder would have
been entitled upon such consummation if such Holder had exercised this Warrant
immediately prior thereto; in each such case, the terms of this Warrant shall be
applicable to the securities or property receivable upon the exercise of this
Warrant after such consummation.
8.5 Certificate as to Adjustments. The adjustments provided in this
Section 8 shall be interpreted and applied by the Company in such a fashion so
as to reasonably preserve the applicability and benefits of this Warrant (but
not to increase or diminish the benefits hereunder). In each case of an
adjustment in the number of shares of Common Stock receivable on the exercise of
the Warrant, the Company at its expense will promptly compute such adjustment in
accordance with the terms of the Warrant and prepare a certificate executed by
two executive officers of the Company setting forth such adjustment and showing
in detail the facts upon which such adjustment is based. The Company will
forthwith mail a copy of each such certificate to each Holder.
8.6
Notices of Record Date, Etc.
In the event that:
(a) the Company shall declare any dividend or other
distribution to the holders of Common Stock, or authorizes the granting to
Common Stock holders of any right to subscribe for, purchase or otherwise
acquire any shares of stock of any class or any other securities; or
(b) the Company authorizes any capital reorganization of the
Company, any reclassification of the capital stock of the Company, any
consolidation or merger of the Company with or into another corporation, or any
conveyance of all or substantially all of the assets of the Company to another
corporation or entity; or
(c) the Company authorizes any voluntary or involuntary
dissolution, liquidation or winding up of the Company; or
3
(d) the Company shall have filed, or shall have entered into
an understanding with an underwriter to prepare, a registration statement that
would, once declared effective, cause termination of this Warrant in accordance
with clause (ii) of Section 1,
then, and in each such case, the Company shall mail or cause to be mailed to the
holder of this Warrant at the time outstanding a notice specifying, as the case
may be, (i) the date on which a record is to be taken for the purpose of such
dividend, distribution or right, and stating the amount and character of such
dividend, distribution or right, or (ii) the date on which such reorganization,
reclassification, consolidation, merger, conveyance, dissolution, liquidation or
winding up is to take place, and the time, if any is to be fixed, as to which
the holders of record of Common Stock (or such other securities at the time
receivable upon the exercise of the Warrant) shall be entitled to exchange their
shares of Common Stock (or such Other Securities) for securities or other
property deliverable upon such reorganization, reclassification, consolidation,
merger, conveyance, dissolution, liquidation or winding up. Such notice shall be
mailed at least 20 days prior to the date therein specified.
8.7 No Impairment. The Company will not, by any voluntary action,
avoid or seek to avoid the observance or performance of any of the terms to be
observed or performed hereunder by the Company, but will at all times in good
faith assist in the carrying out of all the provisions of this Section 8 and in
the taking of all such action as may be necessary or appropriate in order to
protect the rights of the Holder of this Warrant against impairment.
9. Transfer to Comply with the Securities Act. This Warrant and any Common
Stock acquired upon exercise (the "Warrant Stock") may not be sold, transferred,
pledged, hypothecated, or otherwise disposed of except as follows: (a) to a
person who, in the opinion of counsel to the Company, is a person to whom this
Warrant or the Warrant Stock may legally be transferred without registration and
without the delivery of a current prospectus under the Securities Act of 1933,
as amended (the "Securities Act") with respect thereto; or (b) to any person
upon delivery of a prospectus then meeting the requirements of the Securities
Act relating to such securities and the offering thereof for such sale or
disposition, and thereafter to all successive assignees.
10. Legend. Unless the issuance of the shares of Warrant Stock has been
registered under the Securities Act, or, in the case of a cashless exercise in
accordance with Section 2, two years have elapsed since the purchase of this
Warrant by the Holder, upon exercise of any of the Warrants and the issuance of
any of the shares of Warrant Stock, all certificates representing shares shall
bear on the face thereof substantially the following legend:
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND MAY NOT
BE SOLD, OFFERED FOR SALE, ASSIGNED, TRANSFERRED, OR OTHERWISE
DISPOSED OF, UNLESS REGISTERED PURSUANT TO THE PROVISIONS OF THAT
ACT OR UNLESS AN OPINION OF COUNSEL TO THE CORPORATION IS OBTAINED
STATING THAT SUCH DISPOSITION IS IN COMPLIANCE WITH AN AVAILABLE
EXEMPTION FROM SUCH REGISTRATION.
11. Notices. All notices required hereunder shall be in writing and shall
be deemed given when telegraphed, delivered personally or within two days after
mailing when mailed by certified or registered mail, return receipt requested,
to the Company or the Holder, as the case may be, for whom such notice is
intended, if to the Holder, at the address of such party shown on the books of
the Company, or if to the Company, to the president thereof, at the address set
forth on the signature page hereof, or at such other address of which the
Company or the Holder has been advised by notice hereunder.
4
12. Applicable Law. The Warrant is issued under and shall for all purposes
be governed by and construed in accordance with the laws of the state of
Arizona, without regard to the conflict of laws provisions of such State.
IN WITNESS WHEREOF, the Company has caused this Warrant to be signed on
its behalf, in its corporate name, by its duly authorized officer, all as of the
day and year first above written.
KONA GRILL, INC.
By: /s/ Mark S. Robinow
-------------------------------------Mark S. Robinow, Chief Financial Officer
Address: Kona Grill, Inc.
7373 E. Doubletree Ranch Road,
Suite 210
Scottsdale, Arizona 85258
5
WARRANT EXERCISE FORM
The undersigned hereby irrevocably elects to (i) exercise the within
Warrant to purchase __________ shares of the Common Stock of Kona Grill, Inc.,
Delaware corporation, pursuant to the provisions of Section 1 of the attached
Warrant, and hereby makes payment of $__________ in payment therefor, or (ii)
exercise this Warrant for the purchase of _______ shares of ____________ Stock,
pursuant to the provisions of Section 2 of the attached Warrant. The
undersigned's execution of this form constitutes the undersigned's agreement to
all the terms of the Warrant and to comply therewith.
____________________________________________
Signature
Print Name: ________________________
____________________________________________
Signature, if jointly held
Print Name:
____________________________________________
Date
6
ASSIGNMENT FORM
FOR VALUE RECEIVED_____________________________ ("Assignor") hereby sells,
assigns and transfers unto _______________________________ ("Assignee") all of
Assignor's right, title and interest in, to and under Warrant No. W-____ issued
by ____________________________, dated ______________.
DATED: _________________
ASSIGNOR:
____________________________________________
Signature
Print Name:
____________________________________________
Signature, if jointly held
Print Name:
ASSIGNEE:
The undersigned agrees to all of the terms of the Warrant and to comply
therewith.
____________________________________________
Signature
Print Name:
____________________________________________
Signature, if jointly held
Print Name:
7
EXHIBIT 10.6(a)
LOAN AGREEMENT
THIS LOAN AGREEMENT (this "Agreement") is made as of May 19, 2003 (the
"Closing Date"), by and between GE CAPITAL FRANCHISE FINANCE CORPORATION, a
Delaware corporation ("Lender"), and KONA GRILL KANSAS CITY, INC., a Delaware
corporation ("Borrower").
AGREEMENT:
In consideration of the mutual covenants and provisions of this Agreement,
the parties agree as follows:
1. DEFINITIONS. The following terms shall have the following meanings for
all purposes of this Agreement:
"ADA" means the Americans with Disabilities Act of 1990, as such act may
be amended from time to time.
"Affiliate" means any Person which directly or indirectly controls, is
under common control with, or is controlled by any other Person. For purposes of
this definition, "controls", "under common control with" and "controlled by"
means the possession, directly or indirectly, of the power to direct or cause
the direction of the management and policies of such Person, whether through
ownership of voting securities or otherwise.
"Anti-Money Laundering Laws" means all applicable laws, regulations and
government guidance on the prevention and detection of money laundering,
including 18 U.S.C. Sections 1956 and 1957, and the BSA.
"Applicable Regulations" means all applicable statutes, regulations,
rules, ordinances, codes, licenses, permits, orders and approvals of each
Governmental Authority having jurisdiction over the Premises, including, without
limitation, all health, building, fire, safety and other codes, ordinances and
requirements, all applicable standards of the National Board of Fire
Underwriters and the ADA and all policies or rules of common law, in each case,
as amended, and any judicial or administrative interpretation thereof, including
any judicial order, consent, decree or judgment applicable to any of the
Borrower Parties.
"Borrower Parties" means, collectively, Borrower and any guarantors of the
Loan (including, in each case, any predecessors-in-interest).
"BSA" means the Bank Secrecy Act (31 U.S.C. Sections 5311 et. seq.), and
its implementing regulations, Title 31 Part 103 of the U.S. Code of Federal
Regulations.
"Business Day" means any day on which Lender is open for business other
than a Saturday, Sunday or a legal holiday, ending at 5:00 P.M. Phoenix, Arizona
time.
"Change of Control" means a change in control of any of the Borrower
Parties, including, without limitation, a change in control resulting from
direct or indirect transfers of voting stock or partnership, membership or other
ownership interests, whether in one or a series of transactions. For purposes of
this definition, "control" means the possession, directly or indirectly, of the
power to direct or cause the direction of the management and policies of any of
the Borrower Parties, as applicable, and a Change of Control will occur if any
of the following occur: (i) any merger or consolidation by any of the Borrower
Parties, as applicable, with or into any other entity; or (ii) if any "Person"
as defined in Section 3(a)(9) of the Securities and Exchange Act of 1934, as
amended (the "Exchange Act"), and as used in Section 13(d) and 14(d) thereof,
including a "group" as defined in Section 13(d) of the Exchange Act, who,
subsequent to the Closing, becomes the "beneficial owner" (as defined in Rule
13d-3 under the Exchange Act), of securities of any of the Borrower Parties, as
applicable, representing 50% or more of the combined voting power of Borrower's
then outstanding securities (other than indirectly as a result of the redemption
by any of the Borrower Parties, as applicable, of its securities).
"Closing" means the disbursement of the Loan Amount by Title Company as
contemplated by this Agreement.
"Code" means Title 11 of the United States Code, 11 U.S.C. Sec. 101 et
seq., as amended.
"Default Rate" has the meaning set forth in the Note.
"Entity" means any entity that is not a natural person.
"Environmental Condition" means any condition with respect to soil,
surface waters, groundwaters, land, stream sediments, surface or subsurface
strata, ambient air and any environmental medium comprising or surrounding the
Premises, whether or not yet discovered, which would reasonably be expected to
or does result in any damage, loss, cost, expense, claim, demand, order or
liability to or against any of the Borrower Parties or Lender by any third party
(including, without limitation, any Governmental Authority), including, without
limitation, any condition resulting from the operation of business at the
Premises and/or the operation of the business of any other property owner or
operator in the vicinity of the Premises and/or any activity or operation
formerly conducted by any person or entity on or off the Premises.
"Environmental Indemnity Agreement" means the environmental indemnity
agreement dated as of the date of this Agreement executed by Borrower for the
benefit of the Indemnified Parties and such other parties as are identified in
such agreement with respect to the Premises, as the same may be amended from
time to time.
"Environmental Insurer" means American International Specialty Lines
Insurance Company, or such other environmental insurance company as Lender may
select, and its successors and assigns.
"Environmental Laws" means any present and future federal, state and local
laws, statutes, ordinances, rules, regulations, orders, injunctions and decrees
of Governmental Authorities and common law, relating to Hazardous Materials
and/or the protection of human health or the environment by reason of a Release
or a Threatened Release of Hazardous Materials or relating to liability for or
costs of Remediation or prevention of Releases. "Environmental Laws" includes,
but is not limited to, the following statutes, as amended, any successor
thereto, and any regulations, rulings, orders or decrees promulgated pursuant
thereto, and any state or local statutes, ordinances, rules, regulations,
orders, injunctions and decrees of Governmental Authorities: the Comprehensive
Environmental Response, Compensation and Liability Act, 42 U.S.C. Sections 9601
et seq.; the Emergency Planning and Community Right-to-Know Act, 42 U.S.C.
Sections 11001 et seq.; the Hazardous Materials Transportation Act, 49 U.S.C.
Sections 5101 et seq.; the Resource Conservation and Recovery Act (including but
not limited to Subtitle I relating to underground storage tank systems), 42
U.S.C. Sections 6901 et seq.; the Clean Water Act, 33 U.S.C. Sections 1251 et
seq.; the Clean Air Act, 42 U.S.C. Sections 7401 et seq.; the Toxic Substances
Control Act, 15 U.S.C. Sections 2601 et seq.; the Safe Drinking Water Act, 42
U.S.C. Sections 7401 et seq.; the Occupational Safety and Health Act, 29 U.S.C.
Section 651 et seq.; the Federal Insecticide, Fungicide and Rodenticide Act, 7
U.S.C. Sections 136 et seq.; the Endangered Species Act, 16 U.S.C. Sections 1531
et seq. and the National Environmental Policy Act, 42 U.S.C. Sections 4321 et
seq. "Environmental Laws" also includes, but is not limited to, any present and
future federal, state and local laws, statutes, ordinances, rules, regulations,
orders, injunctions and decrees of Governmental Authorities and common law:
conditioning transfer of property upon a negative declaration or other approval
of a Governmental Authority of the environmental condition of the property;
requiring notification or disclosure of Releases or other environmental
condition of the Premises to any Governmental Authority or other person or
entity, whether or not in connection with transfer of title to or interest in
property; imposing conditions or requirements relating to Hazardous Materials in
connection with permits or other authorizations required by Governmental
Authorities; relating to the handling and disposal of Hazardous Materials;
relating to nuisance, trespass or other causes of action related to Hazardous
Materials; and relating to wrongful death, personal injury, or property or other
damage in connection with the physical condition or use of the Premises by
reason of the presence of Hazardous Materials in, on, under or above the
Premises.
"Environmental Liens" has the meaning set forth in Section 5.K(9).
"Environmental Policy" means the environmental insurance policy issued by
Environmental Insurer to Lender with respect to the Premises, which
Environmental Policy shall be in form and substance satisfactory to Lender in
its sole discretion.
"Event of Default" has the meaning set forth in Section 9.
2
"FCCR Amount" has the meaning set forth in Section 9.A(7).
"Fee" means an underwriting, site assessment, valuation, processing and
commitment fee equal to 1% of the Loan Amount.
"Fixed Charge Coverage Ratio" has the meaning set forth in Section 6.J.
"GAAP" means generally accepted accounting principles consistently
applied.
"Governmental Authority" means any governmental authority, agency,
department, commission, bureau, board, instrumentality, court or
quasi-governmental authority having jurisdiction or supervisory or regulatory
authority over the Premises or any of the Borrower Parties.
"Guaranty" means the unconditional guaranty of payment and performance
dated as of the date of this Agreement executed by Michael McDermott for the
benefit of Lender with respect to the Loan.
"Hazardous Materials" means (a) any toxic substance or hazardous waste,
substance, solid waste or related material, or any pollutant or contaminant; (b)
radon gas, asbestos in any form which is or could become friable, urea
formaldehyde foam insulation, transformers or other equipment containing
dielectric fluid having levels of polychlorinated biphenyls in excess of
applicable standards established by any Governmental Authority, any petroleum
product or additive, any petroleum-based substances or any similar terms
described or defined in any Environmental Laws applicable to or regulating below
or above ground tanks and associated piping systems used in connection with the
storage, dispensing and general use of petroleum and petroleum-based substances,
or any Toxic Mold; (c) any substance, gas, material or chemical which is now or
hereafter defined as or included in the definition of "hazardous substances,"
"toxic substances," "hazardous materials," "hazardous wastes," "regulated
substances" or words of similar import under any Environmental Laws; and (d) any
other chemical, material, gas or substance the exposure to or release of which
is prohibited, limited or regulated by any Governmental Authority that asserts
or may assert jurisdiction over the Premises or the operations or activity at
the Premises, or any chemical, material, gas or substance that does or is
reasonably likely to pose a hazard to the health and/or safety of the occupants
of the Premises or the owners and/or occupants of property adjacent to or
surrounding the Premises.
"Indemnified Parties" means Lender, Environmental Insurer, the trustees
under the Mortgage, if applicable, and any person or entity who is or will have
been involved in the origination of the Loan, any person or entity who is or
will have been involved in the servicing of the Loan, any person or entity in
whose name the encumbrance created by the Mortgage is or will have been
recorded, persons and entities who may hold or acquire or will have held a full
or partial interest in the Loan (including, but not limited to, investors or
prospective investors in any Securitization, Participation or Transfer, as well
as custodians, trustees and other fiduciaries who hold or have held a full or
partial interest in the Loan for the benefits of third parties), as well as the
respective directors, officers, shareholders, partners, members, employees,
lenders, agents, servants, representatives, contractors, subcontractors,
affiliates, subsidiaries, participants, successors and assigns of any and all of
the foregoing (including, but not limited to, any other person or entity who
holds or acquires or will have held a participation or other full or partial
interest in the Loan or the Premises, whether during the term of the Loan or as
a part of or following a foreclosure of the Loan and including, but not limited
to, any successors by merger, consolidation or acquisition of all or a
substantial portion of Lender's assets and business).
"Indemnity Agreements" means all indemnity agreements executed for the
benefit of any of the Borrower Parties, any current lessee or occupant or any
prior owner, lessee or occupant of the Premises in connection with Hazardous
Materials, including, without limitation, the right to receive payments under
such indemnity agreements.
"Lease Estoppel Certificate and Consent" has the meaning set forth in
Section 4.H.
"Lender Entities" means, collectively, Lender (including any
predecessor-in-interest to Lender) and any Affiliate of Lender (including any
Affiliate of any predecessor-in-interest to Lender).
"Loan" means the loan for the Premises, described in Section 2.
3
"Loan Amount" means $993,544.00 or 50% of acceptable documented costs,
whichever is less.
"Loan Documents" means, collectively, this Agreement, the Note, the
Mortgage, the Environmental Indemnity Agreement, the Subordination Agreement,
the UCC-1 Financing Statements, the Guaranty and all other documents,
instruments and agreements executed in connection therewith or contemplated
thereby, as the same may be amended from time to time.
"Loan Pool" means:
(i) in the context of a Securitization, any pool or group of loans
that are a part of such Securitization;
(ii) in the context of a Transfer, all loans which are sold,
transferred or assigned to the same transferee; and
(iii) in the context of a Participation, all loans as to which
participating interests are granted to the same participant.
"Material Adverse Effect" means a material adverse effect on (i) the
Premises, including, without limitation, the operation of the Premises as a
Permitted Concept, or (ii) Borrower's ability to perform its obligations under
the Loan Documents.
"Mortgage" means the deed of trust or mortgage dated as of the date of
this Agreement executed by Borrower for the benefit of Lender with respect to
the Premises.
"Note" means the promissory note dated as of the date of this Agreement in
the Loan Amount evidencing the Loan, as the same may be amended, restated and/or
substituted from time to time, including, without limitation, as a result of the
payment of the FCCR Amount pursuant to Section 9.
"Obligations" has the meaning set forth in the Mortgage.
"OFAC Laws and Regulations" means Executive Order 13224 issued by the
President of the United States of America, the Terrorism Sanctions Regulations
(Title 31 Part 595 of the U.S. Code of Federal Regulations), the Terrorism List
Governments Sanctions Regulations (Title 31 Part 596 of the U.S. Code of Federal
Regulations), the Foreign Terrorist Organizations Sanctions Regulations (Title
31 Part 597 of the U.S. Code of Federal Regulations), and the Cuban Assets
Control Regulations (Title 31 Part 515 of the U.S. Code of Federal Regulations),
and all other present and future federal, state and local laws, ordinances,
regulations, policies, lists (including, without limitation, the Specially
Designated Nationals and Blocked Persons List) and any other requirements of any
Governmental Authority (including, without limitation, the United States
Department of the Treasury Office of Foreign Assets Control) addressing,
relating to, or attempting to eliminate, terrorist acts and acts of war, each as
hereafter supplemented, amended or modified from time to time, and the present
and future rules, regulations and guidance documents promulgated under any of
the foregoing, or under similar laws, ordinances, regulations, policies or
requirements of other states or localities.
"Other Agreements" means, collectively, all agreements and instruments
between, among or by (1) any of the Borrower Parties and/or any Affiliate of any
of the Borrower Parties (including any Affiliate of any predecessor-in-interest
to any of the Borrower Parties), and, or for the benefit of, (2) any of the
Lender Entities, including, without limitation, promissory notes and guaranties;
provided, however, the term "Other Agreements" shall not include the agreements
and instruments defined as the Loan Documents.
"Participation" means one or more grants by Lender or any of the other
Lender Entities to a third party of a participating interest in notes evidencing
obligations to repay secured or unsecured loans owned by Lender or any of the
other Lender Entities or any or all servicing rights with respect thereto.
4
"Permitted Amounts" means, with respect to any given level of Hazardous
Materials, that level or quantity of Hazardous Materials in any form or
combination of forms the presence, use, storage, release or handling of which
does not constitute a violation of any Environmental Laws and is customarily
employed in the ordinary course of, or associated with, similar businesses
located in the state in which the Premises is located.
"Permitted Concept" means a Kona Grill restaurant or such other nationally
or regionally recognized restaurant concept as Lender may approve, which
approval shall not be unreasonably withheld.
"Permitted Exceptions" means those recorded easements, restrictions, liens
and encumbrances set forth as exceptions in the title insurance policy issued by
Title Company to Lender and approved by Lender in its sole discretion in
connection with the closing of the Loan.
"Permitted Lease" means, the lease relating to the Premises and all
modifications, amendments and supplements thereto disclosed in the Lease
Estoppel Certificate and Consent delivered with respect thereto, and all
modifications, amendments and supplements consented to by Lender pursuant to the
terms of the Mortgage.
"Person" means any individual, corporation, partnership, limited liability
company, trust, unincorporated organization, Governmental Authority or any other
form of entity.
"Personal Property" has the meaning set forth in the Mortgage.
"Premises" means the parcel or parcels of real estate described on Exhibit
A attached hereto, together with all rights, privileges and appurtenances
associated therewith and all buildings, fixtures and other improvements now or
hereafter located thereon (whether or not affixed to such real estate) and the
Personal Property.
"Questionnaire" means the environmental questionnaire completed on behalf
of the Borrower Parties with respect to the Premises and submitted to
Environmental Insurer in connection with the issuance of the Environmental
Policy.
"Related Premises" means those properties (other than the Premises) which
are the subject of mortgage loans from any of the Lender Entities to any of the
Borrower Parties.
"Release" means any presence, release, deposit, discharge, emission,
leaking, spilling, seeping, migrating, injecting, pumping, pouring, emptying,
escaping, dumping, disposing or other movement of Hazardous Materials.
"Remediation" means any response, remedial, removal, or corrective action,
any activity to clean up, detoxify, decontaminate, contain or otherwise
remediate any Hazardous Materials required by any Environmental Law or any
Governmental Authority, any actions to prevent, cure or mitigate any Release,
any action to comply with any Environmental Laws or with any permits issued
pursuant thereto, any inspection, investigation, study, monitoring, assessment,
audit, sampling and testing, laboratory or other analysis, or any evaluation
relating to any Hazardous Materials, including, without limitation, all acts
necessary to clean and disinfect any portions of the Premises affected by Toxic
Mold and to eliminate the sources of Toxic Mold in or on the Premises,
including, without limitation, providing any necessary moisture and control
systems at the Premises.
"Restoration" has the meaning set forth in the Mortgage.
"Securitization" means one or more sales, dispositions, transfers or
assignments by Lender or any of the other Lender Entities to a special purpose
corporation, trust or other entity identified by Lender or any of the other
Lender Entities of notes evidencing obligations to repay secured or unsecured
loans owned by Lender or any of the other Lender Entities (and, to the extent
applicable, the subsequent sale, transfer or assignment of such notes to another
special purpose corporation, trust or other entity identified by Lender or any
of the other Lender Entities), and the issuance of bonds, certificates, notes or
other instruments evidencing interests in pools of such loans, whether in
connection with a permanent asset securitization or a sale of loans in
anticipation of a permanent asset securitization. Each Securitization shall be
undertaken in accordance with all requirements which may be imposed
5
by the investors or the rating agencies involved in each such sale, disposition,
transfer or assignment or which may be imposed by applicable securities, tax or
other laws or regulations.
"Subordination Agreements" means the subordination agreements dated as of
the date of this Agreement executed by Borrower and certain shareholders of
Borrower with respect to the Subordinate Debt.
"Subordinate Debt" means the debt of Borrower to certain shareholders of
Borrower described in the Subordination Agreements.
"Threatened Release" means a substantial likelihood of a Release which
requires action to prevent or mitigate damage to the soil, surface waters,
groundwaters, land, stream sediments, surface or subsurface strata, ambient air
or any other environmental medium comprising or surrounding the Premises which
may result from such Release.
"Title Company" means Lawyers Title Insurance Corporation.
"Toxic Mold" means any toxic mold or fungus of a type which would pose a
risk to human health or the environment or would negatively impact the value of
the Premises.
"Transfer" means one or more sales, transfers or assignments by Lender or
any of the other Lender Entities to a third party of notes evidencing
obligations to repay secured or unsecured loans owned by Lender or any of the
other Lender Entities or any or all servicing rights with respect thereto.
"UCC-1 Financing Statements" means such UCC-1 Financing Statements as
Lender shall file with respect to the transactions contemplated by this
Agreement.
"U.S. Publicly-Traded Entity" is an Entity whose securities are listed on
a national securities exchange or quoted on an automated quotation system in the
U.S. or a wholly-owned subsidiary of such an Entity.
2. TRANSACTION. On the terms and subject to the conditions set forth in
the Loan Documents, Lender shall make the Loan. The Loan will be evidenced by
the Note and secured by the Mortgage. Borrower shall repay the outstanding
principal amount of the Loan together with interest thereon in the manner and in
accordance with the terms and conditions of the Note and the other Loan
Documents. The Loan shall be advanced at the Closing in cash or otherwise
immediately available funds subject to any prorations and adjustments required
by this Agreement.
3. ESCROW AGENT. Borrower and Lender hereby employ Title Company to act as
escrow agent in connection with the transaction described in this Agreement.
Borrower and Lender will deliver to Title Company all documents, pay to Title
Company all sums and do or cause to be done all other things necessary or
required by this Agreement, in the reasonable judgment of Title Company, to
enable Title Company to comply herewith and to enable any title insurance policy
provided for herein to be issued. Title Company shall not cause the transaction
to close unless and until it has received written instructions from Lender and
Borrower to do so. Title Company is authorized to pay, from any funds held by it
for Lender's or Borrower's respective credit all amounts necessary to procure
the delivery of such documents and to pay, on behalf of Lender and Borrower, all
charges and obligations payable by them, respectively. Borrower will pay all
charges payable by it to Title Company. Title Company is authorized, in the
event any conflicting demand is made upon it concerning these instructions or
the escrow, at its election, to hold any documents and/or funds deposited
hereunder until an action shall be brought in a court of competent jurisdiction
to determine the rights of Borrower and Lender or to interplead such documents
and/or funds in an action brought in any such court. Deposit by Title Company of
such documents and funds, after deducting therefrom its charges and its expenses
and attorneys' fees incurred in connection with any such court action, shall
relieve Title Company of all further liability and responsibility for such
documents and funds. Title Company's receipt of this Agreement and opening of an
escrow pursuant to this Agreement shall be deemed to constitute conclusive
evidence of Title Company's agreement to be bound by the terms and conditions of
this Agreement pertaining to Title Company. Disbursement of any funds shall be
made by check, certified check or wire transfer, as directed by Borrower and
Lender. Title Company shall be under no obligation to disburse any funds
represented by check or draft, and no check or draft shall be payment to Title
Company in compliance with any of the requirements
6
hereof, until it is advised by the bank in which such check or draft is
deposited that such check or draft has been honored. Title Company is authorized
to act upon any statement furnished by the holder or payee, or a collection
agent for the holder or payee, of any lien on or charge or assessment in
connection with the Premises, concerning the amount of such charge or assessment
or the amount secured by such lien, without liability or responsibility for the
accuracy of such statement. The employment of Title Company as escrow agent
shall not affect any rights of subrogation under the terms of any title
insurance policy issued pursuant to the provisions thereof.
4. CLOSING CONDITIONS. The obligation of Lender to consummate the
transaction contemplated by this Agreement is subject to the fulfillment or
waiver of each of the following conditions:
A. Title Insurance Commitments. Lender shall have received for the
Premises a preliminary title report and irrevocable commitment to insure title
in the amount of the Loan, by means of a mortgagee's ALTA extended coverage
policy of title insurance (or its equivalent, in the event such form is not
issued in the jurisdiction where the Premises is located) issued by Title
Company showing Borrower vested with good and marketable fee or leasehold title,
as the case may be, in the real property comprising the Premises, committing to
insure Lender's first priority lien upon and security interest in such real
property subject only to Permitted Exceptions, and containing such endorsements
as Lender may require.
B. Survey. Lender shall have received a current ALTA survey of the
Premises or its equivalent, the form and substance of which shall be
satisfactory to Lender in its reasonable discretion. Lender shall have obtained
a flood certificate indicating that the location of the Premises is not within
the 100-year flood plain or identified as a special flood hazard area as defined
by the Federal Emergency Management Agency, or if the Premises is in such a
flood plain or special flood hazard area, Borrower shall have provided Lender
with evidence of flood insurance maintained on the Premises in an amount and on
terms and conditions reasonably satisfactory to Lender.
C. Environmental. Lender shall have completed such environmental due
diligence of the Premises as it deems necessary or advisable in its sole
discretion, including, without limitation, receiving an Environmental Policy
with respect to the Premises, and Lender shall have approved the environmental
condition of the Premises in its sole discretion.
D. Compliance With Representations, Warranties and Covenants. All of the
representations and warranties set forth in Section 5 shall be true, correct and
complete as of the Closing Date, and Borrower shall be in compliance with each
of the covenants set forth in Section 6 as of the Closing Date. No event shall
have occurred or condition shall exist or information shall have been disclosed
by Borrower or discovered by Lender which has had or would be reasonably likely
to have a material adverse effect on the Premises, any of the Borrower Parties
or Lender's willingness to consummate the transaction contemplated by this
Agreement, as determined by Lender in its sole and absolute discretion.
E. Proof of Insurance. Borrower shall have delivered to Lender
certificates of insurance and copies of insurance policies showing that all
insurance required by the Loan Documents and providing coverage and limits
satisfactory to Lender are in full force and effect.
F. Legal Opinions. Borrower shall have delivered to Lender such legal
opinions as Lender may reasonably require all in form and substance reasonably
satisfactory to Lender and its counsel.
G. Fee and Closing Costs. Borrower shall have paid the Fee to Lender and
shall have paid all costs of the transactions described in this Agreement,
including, without limitation, the cost of title insurance premiums and all
endorsements required by Lender, survey charges, UCC and litigation search
charges, the attorneys' fees of Borrower, reasonable attorneys' fees and
expenses of Lender, the cost of the environmental due diligence undertaken
pursuant to Section 4.C, including, without limitation, the cost of the
Environmental Policy, Lender's site inspection costs and fees, stamp taxes,
mortgage taxes, transfer fees, escrow, filing and recording fees and UCC filing
and recording fees (including preparation, filing and recording fees for UCC
continuation statements). Borrower shall have also paid all real and personal
property and other applicable taxes and assessments and other charges relating
to the Premises which are due and payable on or prior to the Closing Date as
well as taxes and
7
assessments due and payable subsequent to the Closing Date but which Title
Company requires to be paid at Closing as a condition to the issuance of the
title insurance policy described in Section 4.A.
H. Permitted Lease. The Permitted Lease shall be in full force and effect
and Borrower shall be entitled to occupy the Premises. Lender shall have
approved the Permitted Lease in its sole discretion and Borrower shall have
delivered to Lender an estoppel certificate and consent from the Permitted
Lessor, the form and substance of which shall be satisfactory to Lender in its
sole discretion (the "Permitted Lease Estoppel Certificate and Consent").
Borrower shall have provided Lender with a recorded copy (or executed original
in recordable form) of a memorandum of lease for the Premises. If any mortgages
or deeds of trust (or other similar security agreements) encumber fee simple
title to the Premises, the holders of such instruments shall have delivered
nondisturbance agreements to Borrower and Lender with respect to the Permitted
Lease in form and substance acceptable to Lender in its reasonable discretion.
I. Closing Documents. At or prior to the Closing Date, Lender and/or the
Borrower Parties, as may be appropriate, shall have executed and delivered or
shall have caused to be executed and delivered to Lender, or as Lender may
otherwise direct, the Loan Documents and such other documents, payments,
instruments and certificates, as Lender may require in form acceptable to
Lender.
J. Subordination Agreements. Borrower shall have delivered to Lender the
Subordination Agreements which shall be in form and substance acceptable to
lender and which shall subordinate the Subordinate Debt to the Loan.
Upon fulfillment or waiver of all of the above conditions, Lender shall
deposit funds necessary to close this transaction with the Title Company and
this transaction shall close in accordance with the terms and conditions of this
Agreement.
5. REPRESENTATIONS AND WARRANTIES OF BORROWER. The representations and
warranties of Borrower contained in this Section are being made by Borrower as
of the Closing Date to induce Lender to enter into this Agreement and consummate
the transactions contemplated herein and shall survive the Closing. Borrower
represents and warrants to Lender (and Environmental Insurer solely with respect
to Section 5.K) as follows:
A. Financial Information. Borrower has delivered to Lender certain
financial statements and other information concerning the Borrower Parties in
connection with the transaction described in this Agreement (collectively, the
"Financial Information"). The Financial Information is true, correct and
complete in all material respects; there have been no amendments to the
Financial Information since the date such Financial Information was prepared or
delivered to Lender. Borrower understands that Lender is relying upon the
Financial Information and Borrower represents that such reliance is reasonable.
All financial statements included in the Financial Information were prepared in
accordance with GAAP and fairly present as of the date of such financial
statements the financial condition of each individual or entity to which they
pertain. No change has occurred with respect to the financial condition of any
of the Borrower Parties and/or the Premises as reflected in the Financial
Information which has not been disclosed in writing to Lender or has had, or
could reasonably be expected to result in, a Material Adverse Effect.
B. Organization and Authority. Each of the Borrower Parties (other than
individuals), as applicable, is duly organized or formed, validly existing and
in good standing under the laws of its state of incorporation or formation.
Borrower is qualified as a foreign corporation, partnership or limited liability
company, as applicable, to do business in the state where the Premises is
located and each of the Borrower Parties is qualified as a foreign corporation,
partnership or limited liability company, as applicable, to do business in any
other jurisdiction where the failure to be qualified would reasonably be
expected to result in a Material Adverse Effect. All necessary action has been
taken to authorize the execution, delivery and performance by the Borrower
Parties of this Agreement and the other Loan Documents. The person(s) who have
executed this Agreement on behalf of Borrower are duly authorized so to do.
Borrower is not a "foreign corporation", "foreign partnership", "foreign trust",
"foreign estate" or "foreign person" (as those terms are defined by the Internal
Revenue Code of 1986, as amended). Borrower's U.S. Federal Tax Identification
number, Organization Identification number and principal place of business are
correctly set forth on the signature page of this Agreement. None of the
Borrower Parties, and no individual or
8
entity owning directly or indirectly any interest in any of the Borrower
Parties, is an individual or entity whose property or interests are subject to
being blocked under any of the OFAC Laws and Regulations or is otherwise in
violation of any of the OFAC Laws and Regulations; provided, however, the
representation contained in this sentence shall not apply to any Person to the
extent such Person's interest is in or through a U.S. Publicly-Traded Entity.
C. Enforceability of Documents. Upon execution by the Borrower Parties,
this Agreement and the other Loan Documents shall constitute the legal, valid
and binding obligations of the Borrower Parties, enforceable against the
Borrower Parties in accordance with their respective terms, except as such
enforceability may be limited by applicable bankruptcy, insolvency, liquidation,
reorganization and other laws affecting the rights of creditors generally and
general principles of equity.
D. Litigation. There are no suits, actions, proceedings or investigations
pending, or to the best of its knowledge, threatened against or involving the
Borrower Parties or the Premises before any arbitrator or Governmental
Authority, except for such suits, actions, proceedings or investigations which,
individually or in the aggregate, have not had, and would not reasonably be
expected to result in, a Material Adverse Effect.
E. Absence of Breaches or Defaults. The Borrower Parties are not, and the
authorization, execution, delivery and performance of this Agreement and the
other Loan Documents will not result, in any breach or default under any other
document, instrument or agreement to which any of the Borrower Parties is a
party or by which any of the Borrower Parties, the Premises or any of the
property of any of the Borrower Parties is subject or bound, except for such
breaches or defaults which, individually or in the aggregate, have not had, and
would not reasonably be expected to result in, a Material Adverse Effect. The
authorization, execution, delivery and performance of this Agreement and the
other Loan Documents will not violate any applicable law, statute, regulation,
rule, ordinance, code, rule or order. The Premises is not subject to any right
of first refusal, right of first offer or option to purchase or lease granted to
a third party.
F. Utilities. Adequate public utilities are available at the Premises to
permit utilization of the Premises as a Permitted Concept and all utility
connection fees and use charges will have been paid in full prior to
delinquency.
G. Zoning; Compliance With Laws. The Premises is in compliance with all
applicable zoning requirements, and the use of the Premises as a Permitted
Concept does not constitute a nonconforming use under applicable zoning
requirements. The Borrower Parties and the Premises are in compliance with all
Applicable Regulations except for such noncompliance, which has not had, and
would not reasonably be expected to result in, a Material Adverse Effect.
H. Area Development; Wetlands. No condemnation or eminent domain
proceedings affecting the Premises have been commenced or, to the best of
Borrower's knowledge, are contemplated. Neither the Premises nor, to the best of
Borrower's knowledge, the real property bordering the Premises are designated by
any Governmental Authority as a wetlands.
I. Licenses and Permits; Access. All required licenses and permits, both
governmental and private, to use and operate the Premises as a Permitted Concept
are in full force and effect, except for such licenses and permits the failure
of which to obtain has not had, and would not reasonably be expected to result
in, a Material Adverse Effect. Adequate rights of access to public roads and
ways are available to the Premises for unrestricted ingress and egress and
otherwise to permit utilization of the Premises for their intended purposes, and
all such public roads and ways have been completed and dedicated to public use.
J. Condition of Premises. The Premises, including the Personal Property,
is in good condition and repair and well-maintained, ordinary wear and tear
excepted, fully equipped and operational, free from structural defects, safe and
properly lighted.
K. Environmental. Except as disclosed in the Questionnaire:
9
(1) Neither the Premises nor any of the Borrower Parties are in
violation of, or subject to, any pending or, to Borrower's actual
knowledge, threatened investigation or inquiry by any Governmental
Authority or to any remedial obligations under any Environmental Laws, and
this representation and warranty would continue to be true and correct
following disclosure to the applicable Governmental Authorities of all
relevant facts, conditions and circumstances, if any, pertaining to the
Premises;
(2) All permits, licenses or similar authorizations required to
construct, occupy, operate or use any buildings, improvements, fixtures
and equipment forming a part of the Premises by reason of any
Environmental Laws have been obtained;
(3) No Hazardous Materials have been used, handled, manufactured,
generated, produced, stored, treated, processed, transferred, disposed of
or otherwise Released in, on, under, from or about the Premises, except in
Permitted Amounts;
(4) The Premises does not contain Hazardous Materials, except in
Permitted Amounts;
(5) There is no threat of any Release migrating to the Premises in
excess of Permitted Amounts;
(6) There is no past or present non-compliance with Environmental
Laws, or with permits issued pursuant thereto, in connection with the
Premises;
(7) None of the Borrower Parties has received any written or oral
notice or other communication from any person or entity (including but not
limited to a Governmental Authority) relating to Hazardous Materials or
Remediation thereof in excess of Permitted Amounts, of possible liability
of any person or entity pursuant to any Environmental Law, other
environmental conditions in connection with the Premises, or any actual or
potential administrative or judicial proceedings in connection with any of
the foregoing;
(8) All information known to any of the Borrower Parties or
contained in the files of any of the Borrower Parties relating to any
Environmental Condition or Releases of Hazardous Materials in, on, under
or from the Premises, other than in Permitted Amounts, has been provided
to Lender, including, without limitation, information relating to all
prior Remediation;
(9) The Premises has been kept free and clear of all liens and other
encumbrances imposed pursuant to any Environmental Law (the "Environmental
Liens"); and none of the Borrower Parties has allowed any tenant or other
user of the Premises to do any act that materially increased the dangers
to human health or the environment, posed an unreasonable risk of harm to
any person or entity (whether on or off the Premises), impaired the value
of the Premises in any material respect, is contrary to any requirement of
any insurer, constituted a public or private nuisance, constituted waste,
or violated any covenant, condition, agreement or easement applicable to
the Premises; and
(10) The information and disclosures in the Questionnaire are true,
correct and complete in all material respects, and the person or persons
executing the Questionnaire were duly authorized to do so.
Lender has charged Borrower a fee for the Environmental Policy. Borrower
acknowledges that the Environmental Policy is for the sole protection of Lender
and will not protect Borrower or provide Borrower with any coverage thereunder.
Borrower acknowledges and agrees that Environmental Insurer may rely on the
environmental representations and warranties set forth in this subsection K,
that Environmental Insurer is an intended third-party beneficiary of such
representations and warranties and that Environmental Insurer shall have all
rights and remedies available at law or in equity as a result of a breach of
such representations and warranties, including, to the extent applicable, the
right of subrogation.
L. Title to Premises; First Priority Lien. Borrower is the holder of a
leasehold interest in the Premises. Borrower is the owner of all Personal
Property, free and clear of all liens, encumbrances, charges and
10
security interests of any nature whatsoever, and no Affiliate of Borrower owns
any of the Personal Property. Upon Closing, Lender shall have a first priority
lien upon and security interest in Borrower's right, title and interest in and
to the Premises pursuant to the Mortgage and the UCC-1 Financing Statements.
M. No Mechanics' Liens. There are no delinquent accounts payable or
mechanics' liens in favor of any materialman, laborer, or any other person or
entity in connection with labor or materials furnished to or performed on any
portion of the Premises; and no work has been performed or is in progress nor
have materials been supplied to the Premises or agreements entered into for work
to be performed or materials to be supplied to the Premises prior to the date
hereof, which will be delinquent on or before the Closing Date.
N. Permitted Lease. Borrower has delivered to Lender a true, correct and
complete copy of the Permitted Lease. The Permitted Lease is the only lease or
agreement between the Permitted Lessor and Borrower with respect to the
Premises. The Permitted Lease is in full force and effect and constitutes the
legal, valid and binding obligations of Borrower and the Permitted Lessor,
enforceable against Borrower and the Permitted Lessor in accordance with its
terms, except as such enforceability may be limited by applicable bankruptcy,
insolvency, liquidation, reorganization and other laws affecting the rights of
creditors generally and general principles of equity. None of the Borrower
Parties has assigned, transferred, mortgaged, hypothecated or otherwise
encumbered the Permitted Lease or any rights thereunder or any interest therein,
and none of the Borrower Parties has received any notice that the Permitted
Lessor has made any assignment, pledge or hypothecation of all or any part of
its rights or interest in the Permitted Lease. No notice of default from the
Permitted Lessor has been received under the Permitted Lease which has not been
cured and no notice of default to the Permitted Lessor has been given under the
Permitted Lease which has not been cured. No event has occurred and no condition
exists which, with the giving of notice or the lapse of time or both, would
constitute a default under the Permitted Lease. The Permitted Lease has a term
(including renewal options) which will expire after the fifth anniversary of the
scheduled maturity date of the Note.
O. Money Laundering. (1) Borrower has taken all reasonable measures, in
accordance with all applicable Anti-Money Laundering Laws, with respect to each
holder of a direct or indirect interest in the Borrower Parties, to assure that
funds invested by such holders in the Borrower Parties are derived from legal
sources; provided, however, none of the foregoing shall apply to any Person to
the extent that such Person's interest is in or through a U.S. Publicly-Traded
Entity.
(2) To Borrower's knowledge after making due inquiry, neither any of the
Borrower Parties nor any holder of a direct or indirect interest in the Borrower
Parties (a) is under investigation by any Governmental Authority for, or has
been charged with, or convicted of, any violation of any Anti-Money Laundering
Laws, or drug trafficking, terrorist-related activities or other money
laundering predicated crimes or a violation of the BSA, (b) has been assessed
civil penalties under these or related laws, or (c) has had any of its funds
seized or forfeited in an action under these or related laws; provided, however,
none of the foregoing shall apply to any Person to the extent that such Person's
interest is in or through a U.S. Publicly-Traded Entity.
(3) Borrower has taken reasonable steps, consistent with industry practice
for comparable organizations and in any event as required by law, to ensure that
the Borrower Parties are and shall be in compliance with all (i) Anti-Money
Laundering Laws and (ii) OFAC Laws and Regulations.
6. COVENANTS. Borrower covenants to Lender (and Environmental Insurer
solely with respect to Section 6.F) from and after the Closing Date and until
all of the Obligations are satisfied in full, as follows:
A. Payment of the Note. Borrower shall punctually pay, or cause to be
paid, the principal, interest and all other sums to become due in respect of the
Note and the other Loan Documents in accordance with the Note and the other Loan
Documents. Borrower shall authorize Lender to establish arrangements whereby all
scheduled payments made in respect of the Obligations are transferred by
Automated Clearing House Debit initiated by Lender directly from an account at a
U.S. bank in the name of Borrower to such account as Lender may designate or as
Lender may otherwise designate.
11
B. Title. Borrower shall maintain a valid leasehold interest in the
Premises, and title to the Personal Property and the remainder of the Premises,
free and clear of all liens, encumbrances, charges and other exceptions to
title, except the Permitted Exceptions. Lender shall have a valid first lien
upon and security interest in the Premises, including the Personal Property,
pursuant to the Mortgage and the UCC-1 Financing Statements.
C. Organization and Status of Borrower; Preservation of Existence. Each of
the Borrower Parties (other than individuals), as applicable, shall be validly
existing and in good standing under the laws of its state of incorporation or
formation. Borrower shall be qualified as a foreign corporation, partnership or
limited liability company to do business in the state where the Premises is
located, and each of the Borrower Parties shall be qualified as a foreign
corporation, partnership or limited liability company in any other jurisdiction
where the failure to be qualified would reasonably be expected to result in a
Material Adverse Effect. Borrower shall preserve its current form of
organization and shall not change its legal name, its state of formation, nor,
in one transaction or a series of related transactions, merge with or into, or
consolidate with, any other entity without providing, in each case, Lender with
30 days' prior written notice and obtaining Lender's prior written consent (to
the extent such consent is required under Section 7 of this Agreement). In
addition, Borrower shall require, and shall take reasonable measures to comply
with the requirement, that no individual or entity owning directly or indirectly
any interest in any of the Borrower Parties is an individual or entity whose
property or interests are subject to being blocked under any of the OFAC Laws
and Regulations or is otherwise in violation of any of the OFAC Laws and
Regulations; provided, however, the covenant contained in this sentence shall
not apply to any Person to the extent that such Person's interest is in or
through a U.S. Publicly-Traded Entity.
D. Licenses and Permits. All required licenses and permits, both
governmental and private, to use and operate the Premises as a Permitted Concept
shall be maintained in full force and effect.
E. Compliance With Laws Generally. The use and occupation of the Premises,
and the condition thereof, including, without limitation, any Restoration, shall
comply with all Applicable Regulations now or hereafter in effect. In addition,
the Borrower Parties shall comply with all Applicable Regulations now or
hereafter in effect, including, without limitation, the OFAC Laws and
Regulations and Anti-Money Laundering Laws. Without limiting the generality of
the other provisions of this Section, Borrower shall comply with the ADA, and
all regulations promulgated thereunder, as it affects the Premises.
F. Compliance With Environmental Laws. (1) The Premises, the Borrower
Parties and any other operator or user of the Premises shall not be in violation
of or subject to any investigation or inquiry by any Governmental Authority or
subject to any Remediation obligations under any Environmental Laws.
(2) All uses and operations on or of the Premises, whether by Borrower or
any other person or entity, shall be in compliance with all Environmental Laws
and permits issued pursuant thereto.
(3) There shall be no Releases or Hazardous Materials in, on, under or
from the Premises, except in Permitted Amounts.
(4) Borrower shall keep the Premises, or cause the Premises to be kept,
free and clear of all Environmental Liens.
(5) Borrower shall not do or allow any tenant or other user of the
Premises to do any act that (a) materially increases the dangers to human health
or the environment, (b) poses an unreasonable risk of harm to any person or
entity (whether on or off the Premises), (c) impairs or is reasonably likely to
impair the value of the Premises, (d) is contrary to any requirement of any
insurer, (e) constitutes a public or private nuisance or constitutes waste, or
(f) violates any covenant, condition, agreement or easement applicable to the
Premises.
(6) Borrower shall immediately notify Lender in writing upon Borrower
obtaining actual knowledge of:
(a) any presence of Releases or Threatened Releases in, on, under,
from or migrating towards the Premises, in excess of Permitted Amounts,
including, without limitation, the presence on or under the
12
Premises, or the escape, seepage, leakage, spillage, discharge, emission
or release of any Hazardous Materials, apparent or real, in excess of
Permitted Amounts;
(b) any non-compliance with any Environmental Laws related in any
way to the Premises;
(c) any Environmental Lien or any act or omission which could
reasonably be expected to result in the imposition of an Environmental
Lien;
(d) any required or proposed Remediation of environmental conditions
relating to the Premises, including, without limitation, any and all
enforcement, clean-up, remedial, removal or other governmental or
regulatory actions threatened, instituted or completed pursuant to any of
the Environmental Laws affecting the Premises;
(e) any written or oral notice or other communication of which any
of the Borrower Parties becomes aware from any source whatsoever
(including but not limited to a Governmental Authority) relating in any
way to Hazardous Materials or Remediation thereof, possible liability of
any person or entity pursuant to any Environmental Law, other
environmental conditions in connection with the Premises, or any actual or
potential administrative or judicial proceedings in connection with
anything referred to in this Agreement; or
(f) any investigation or inquiry initiated by any Governmental
Authority relating to the Environmental Condition of the Premises.
(7) Borrower shall, at its sole cost and expense:
(a) perform any environmental site assessment or other investigation
of environmental conditions in connection with the Premises as may be
reasonably requested by Lender (including but not limited to sampling,
testing and analysis of soil, water, air, building materials and other
materials and substances whether solid, liquid or gas), and share with
Lender and Environmental Insurer the reports and other results thereof,
and Lender, Environmental Insurer and other Indemnified Parties shall be
entitled to rely on such reports and other results thereof; and
(b) have the Premises inspected as may be required by any
Environmental Laws for seepage, spillage and other environmental concerns.
Borrower shall provide Lender with written certified results of all
inspections performed on the Premises. All costs and expenses associated
with the inspection, preparation and certification of results, as well as
those associated with any corrective action, shall be paid by Borrower.
All inspections and tests performed on the Premises shall be conducted in
compliance with all Environmental Laws.
(8) Borrower shall, at its sole cost and expense, and without limiting the
rights of Lender under any other provision of this Agreement, including, without
limitation, subsection (10), comply with all reasonable written requests of
Lender to:
(a) reasonably effectuate Remediation of any condition (including
but not limited to a Release) in, on, under or from the Premises;
(b) comply with any Environmental Law;
(c) comply with any directive from any Governmental Authority; and
(d) take any other reasonable action necessary or appropriate for
protection of human health or the environment.
(9) Lender, Environmental Insurer and any other person or entity
designated by Lender, including but not limited to any receiver, any
representative of a Governmental Authority, and any environmental consultant,
shall
13
have the right, but not the obligation, to enter upon the Premises during normal
business hours or at any time in the event of an emergency (including without
limitation in connection with any Securitization, Participation or Transfer
contemplated by this Agreement or in connection with the exercise of any
remedies set forth in the Mortgage or the other Loan Documents) to assess any
and all aspects of the environmental condition of the Premises and its use,
including but not limited to conducting any environmental assessment or audit
(the scope of which shall be determined in Lender's sole and absolute
discretion) and taking samples of soil, groundwater or other water, air, or
building materials, and conducting other invasive testing. Borrower shall
cooperate with and provide access to Lender, Environmental Insurer and any such
person or entity designated by Lender. Any such assessment and investigation
shall be at Borrower's sole cost and expense if, at the time Lender undertakes
such assessment or investigation, Lender has a reasonable basis for believing
that a Release has occurred at the Premises in excess of Permitted Amounts or if
an Event of Default has occurred and is continuing. Otherwise, any such
assessment and investigation shall be at Lender's sole cost and expense.
(10) Upon any Release, on, above or under the Premises, Borrower shall
immediately remedy such situation in accordance with all Environmental Laws and
any request of Lender. Should Borrower fail to remedy or cause the remedy of
such situation in accordance with all Environmental Laws, Lender shall be
permitted to take such actions in its sole discretion to remedy such situation
and any costs and expenses incurred in connection therewith will be paid by
Borrower.
G. Financial Statements. Within 45 days after the end of each fiscal
quarter and within 120 days after the end of each fiscal year of Borrower,
Borrower shall deliver to Lender (a) complete financial statements of the
Borrower Parties including a balance sheet, profit and loss statement, statement
of cash flows and all other related schedules for the fiscal period then ended;
(b) income statements for the business at the Premises; and (c) such other
financial information as Lender may reasonably request in order to establish
compliance with the financial covenants in the Loan Documents, including,
without limitation, Section 6.J of this Agreement. All such financial statements
shall be prepared in accordance with GAAP from period to period, and shall be
certified to be accurate and complete by Borrower (or the Treasurer or other
appropriate officer of Borrower). In the event the property and business at the
Premises is ordinarily consolidated with other business for financial statement
purposes, such financial statements shall be prepared on a consolidated basis
showing separately the sales, profits and losses, assets and liabilities
pertaining to the Premises with the basis for allocation of overhead of other
charges being clearly set forth. The financial statements delivered to Lender
need not be audited, but Borrower shall deliver to Lender copies of any audited
financial statements of Borrower which may be prepared, as soon as they are
available. Borrower shall also cause to be delivered to Lender copies of any
financial statements required to be delivered to Borrower by any tenants of the
Premises.
H. Lost Note. Borrower shall, if the Note is mutilated, destroyed, lost or
stolen (a "Lost Note"), promptly deliver to Lender, upon receipt from Lender of
an affidavit and indemnity in a form reasonably acceptable to Lender and
Borrower stipulating that the Note has been mutilated, destroyed, lost or
stolen, in substitution therefor, a new promissory note containing the same
terms and conditions as such Lost Note with a notation thereon of the unpaid
principal and accrued and unpaid interest. Borrower shall provide fifteen (15)
days' prior notice to Lender before making any payments to third parties in
connection with a Lost Note.
I. Inspections. Borrower shall, during normal business hours (or at any
time in the event of an emergency), (1) provide Lender and Lender's officers,
employees, agents, advisors, attorneys, accountants, architects, and engineers
with access to the Premises, all drawings, plans, and specifications for the
Premises in possession of the Borrower Parties, all engineering reports relating
to the Premises in the possession of the Borrower Parties, the files,
correspondence and documents relating to the Premises, and the financial books
and records, including lists of delinquencies, relating to the ownership,
operation, and maintenance of the Premises (including, without limitation, any
of the foregoing information stored in any computer files), (2) allow such
persons to make such inspections, tests, copies, and verifications as Lender
considers necessary, and (3) if Borrower is in breach of the Fixed Charge
Coverage Ratio requirement set forth in the following subsection J, pay expenses
reasonably incurred by Lender from time to time in conducting such inspections,
tests, copies and verifications upon demand (such amounts to bear interest at
the Default Rate if not paid upon demand until paid).
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J. Corporate Fixed Charge Coverage Ratio. Borrower shall maintain a
Corporate Fixed Charge Coverage Ratio of at least 1.25:1, determined as of the
last day of each fiscal year of Borrower. For purposes of this Section, the term
"Corporate Fixed Charge Coverage Ratio" shall mean with respect to the twelve
month period of time immediately preceding the date of determination (the first
such period being the first full fiscal year of Borrower after the date hereof),
the ratio calculated for such period of time, each as determined in accordance
with GAAP, of (a) the sum of Net Income, Depreciation and Amortization, Interest
Expense and Operating Lease Expense, minus income taxes or charges equivalent to
income taxes allocable to the period of determination, to (b) the sum of
Operating Lease Expense, scheduled principal payments of long term Debt,
scheduled maturities of all Capital Leases and Interest Expense (excluding
non-cash interest expense and amortization of non-cash financing expenses).
For purposes of this Section, the following terms shall be defined as set
forth below:
"Capital Lease" shall mean all leases of any property, whether real,
personal or mixed, by Borrower or any of the other Borrower Parties, as
applicable, which lease would, in conformity with GAAP, be required to be
accounted for as a capital lease on the balance sheet of Borrower. The
term "Capital Lease" shall not include any operating lease.
"Debt" shall mean with respect to Borrower and the other Borrower
Parties, collectively, and for the period of determination (i)
indebtedness for borrowed money, (ii) obligations evidenced by bonds,
indentures, notes or similar instruments, (iii) obligations to pay the
deferred purchase price of property or services, (iv) obligations under
leases which should be, in accordance with GAAP, recorded as Capital
Leases, and (v) obligations under direct or indirect guarantees in respect
of, and obligations (contingent or otherwise) to purchase or otherwise
acquire, or otherwise to assure a creditor against loss in respect of,
indebtedness or obligations of others of the kinds referred to in clauses
(i) through (iv) above.
"Depreciation and Amortization" shall mean the depreciation and
amortization accruing during any period of determination with respect to
Borrower and the other Borrower Parties, collectively, as determined in
accordance with GAAP.
"Interest Expense" shall mean for any period of determination, the
sum of all interest accrued or which should be accrued in respect of all
Debt of Borrower and the other Borrower Parties, collectively, as
determined in accordance with GAAP.
"Net Income" shall mean with respect to the period of determination,
the net income or net loss of Borrower and the other Borrower Parties,
collectively. In determining the amount of Net Income, (i) adjustments
shall be made for nonrecurring gains and losses or non-cash items
allocable to the period of determination, (ii) deductions shall be made
for, among other things, Depreciation and Amortization, Interest Expense,
Operating Lease Expense and actual corporate overhead expense allocable to
the period of determination, and (iii) no deductions shall be made for
income taxes or charges equivalent to income taxes allocable to the period
of determination, as determined in accordance with GAAP.
"Operating Lease Expense" shall mean the sum of all payments and
expenses incurred by Borrower and the other Borrower Parties,
collectively, under any operating leases during the period of
determination including, without limitation, the Permitted Lease, as
determined in accordance with GAAP.
Lender shall have the right to elect at any time to convert the Fixed
Charge Coverage Ratio requirement from a requirement which is applicable to the
Premises individually to an aggregate Fixed Charge Coverage Ratio requirement
which is applicable to the Premises and such of the Related Premises as may be
selected by Lender (collectively, the "FCCR Premises"). To the extent that an
aggregate Fixed Charge Coverage Ratio requirement is imposed by Lender, the
definitions relating to the Fixed Charge Coverage Ratio shall be deemed to be
modified as applicable to provide for the calculation of the aggregate Fixed
Charge Coverage Ratio.
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K. Affiliate Transactions. Unless otherwise approved by Lender, all
transactions between Borrower and any of its Affiliates shall be on terms
substantially as advantageous to Borrower as those which could be obtained by
Borrower in a comparable arm's length transaction with a non-Affiliate of
Borrower.
L. Compliance Certificates. Within 60 days after the end of each fiscal
year of Borrower, Borrower shall deliver a compliance certificate to Lender in a
form to be provided by Lender in order to establish that Borrower is in
compliance in all material respects with all of its obligations, duties and
covenants under the Loan Documents.
M. OFAC Laws and Regulations. Borrower shall immediately notify Lender in
writing if any individual or entity owning directly or indirectly any interest
in any of the Borrower Parties or any director, officer, member, manager or
partner of any of such holders is an individual or entity whose property or
interests are subject to being blocked under any of the OFAC Laws and
Regulations or is otherwise in violation of any of the OFAC Laws and
Regulations, or is under investigation by any governmental entity for, or has
been charged with, or convicted of, drug trafficking, terrorist-related
activities or any violation of Anti-Money Laundering Laws, has been assessed
civil penalties under these or related laws, or has had funds seized or
forfeited in an action under these or related laws; provided, however, the
covenant contained in this sentence shall not apply to any Person to the extent
that such Person's interest is in or through a U.S. Publicly-Traded Entity.
7. PROHIBITION ON CHANGE OF CONTROL AND PLEDGE. Without limiting the terms
and conditions of Section 3.09 of the Mortgage, Borrower agrees that, from and
after the Closing Date and until all of the Obligations are satisfied in full,
without the prior written consent of Lender: (1) no Change of Control shall
occur; and (2) no interest in any of the Borrower Parties shall be pledged,
encumbered, hypothecated or assigned as collateral for any obligation of any of
the Borrower Parties (each, a "Pledge"). In addition, no interest in any of the
Borrower Parties, or in any individual or person owning directly or indirectly
any interest in any of the Borrower Parties, shall be transferred, assigned or
conveyed to any individual or person whose property or interests are subject to
being blocked under any of the OFAC Laws and Regulations and/or who is in
violation of any of the OFAC Laws and Regulations, and any such transfer,
assignment or conveyance shall not be effective until the transferee has
provided written certification to Borrower and Lender that (A) the transferee or
any person who owns directly or indirectly any interest in transferee, is not an
individual or entity whose property or interests are subject to being blocked
under any of the OFAC Laws and Regulations or is otherwise in violation of the
OFAC Laws and Regulations, and (B) the transferee has taken reasonable measures
to assure than any individual or entity who owns directly or indirectly any
interest in transferee, is not an individual or entity whose property or
interests are subject to being blocked under any of the OFAC Laws and
Regulations or is otherwise in violation of the OFAC Laws and Regulations;
provided, however, the covenant contained in this sentence shall not apply to
any Person to the extent that such Person's interest is in or through a U.S.
Publicly-Traded Entity. Lender's consent to a Change of Control and/or Pledge
shall be subject to the satisfaction of such conditions as Lender shall
determine in its sole discretion, including, without limitation, (i) the
execution and delivery of such modifications to the terms of the Loan Documents
as Lender shall request, (ii) the proposed Change of Control and/or Pledge
having been approved by each of the rating agencies which have issued ratings in
connection with any Securitization of the Loan as well as any other rating
agency selected by Lender, and (iii) the proposed transferee having agreed to
comply with all of the terms and conditions of the Loan Documents (including any
modifications requested by Lender pursuant to clause (i) above). In addition,
any such consent shall be conditioned upon payment by Borrower to Lender of (x)
a fee equal to one percent (1%) of the then outstanding principal balance of the
Note and (y) all out-of-pocket costs and expenses incurred by Lender in
connection with such consent, including, without limitation, reasonable
attorneys' fees. Lender shall not be required to demonstrate any actual
impairment of its security or any increased risk of default hereunder in order
to declare the Obligations immediately due and payable upon a Change of Control
or Pledge in violation of this Section. The provisions of this Section shall
apply to every Change of Control or Pledge regardless of whether voluntary or
not, or whether or not Lender has consented to any previous Change of Control or
Pledge.
8. TRANSACTION CHARACTERIZATION. A. It is the intent of the parties hereto
that this Agreement and the other Loan Documents are a contract to extend a
financial accommodation (as such term is used in the Code) for the benefit of
Borrower.
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B. It is the intent of the parties hereto that the business relationship
created by the Loan Documents is solely that of creditor and debtor and has been
entered into by both parties in reliance upon the economic and legal bargains
contained in the Loan Documents. None of the agreements contained in the Loan
Documents is intended, nor shall the same be deemed or construed, to create a
partnership (either de jure or de facto) between Borrower and Lender, to make
them joint venturers, to make Borrower an agent, legal representative, partner,
subsidiary or employee of Lender, nor to make Lender in any way responsible for
the debts, obligations or losses of Borrower.
9. DEFAULT AND REMEDIES. A. Each of the following shall be deemed an event
of default by Borrower (each, an "Event of Default"):
(1) If any representation or warranty of any of the Borrower Parties set
forth in any of the Loan Documents is false in any material respect, or if any
of the Borrower Parties renders any statement or account which is false in any
material respect.
(2) If any principal, interest or other monetary sum due under the Note,
the Mortgage or any other Loan Document is not paid within five days after the
date when due; provided, however, notwithstanding the occurrence of such an
Event of Default, Lender shall not be entitled to exercise its rights and
remedies set forth below unless and until Lender shall have given Borrower
notice thereof and a period of five days from the delivery of such notice shall
have elapsed without such Event of Default being cured.
(3) If Borrower fails to observe or perform any of the other covenants
(except with respect to a breach of the Fixed Charge Coverage Ratio, which
breach is addressed in subitem (7) below), conditions, or obligations of this
Agreement; provided, however, if any such failure does not involve the payment
of any monetary sum, is not willful or intentional, does not place any rights or
interest in collateral of Lender in immediate jeopardy, and is within the
reasonable power of Borrower to promptly cure after receipt of notice thereof,
all as determined by Lender in its reasonable discretion, then such failure
shall not constitute an Event of Default hereunder, unless otherwise expressly
provided herein, unless and until Lender shall have given Borrower notice
thereof and a period of 30 days shall have elapsed, during which period Borrower
may correct or cure such failure, upon failure of which an Event of Default
shall be deemed to have occurred hereunder without further notice or demand of
any kind being required. If such failure cannot reasonably be cured within such
30-day period, as determined by Lender in its reasonable discretion, and
Borrower is diligently pursuing a cure of such failure, then Borrower shall have
a reasonable period to cure such failure beyond such 30-day period, which shall
not exceed 90 days after receiving notice of the failure from Lender. If
Borrower shall fail to correct or cure such failure within such 90-day period,
an Event of Default shall be deemed to have occurred hereunder without further
notice or demand of any kind being required.
(4) If any of the Borrower Parties becomes insolvent within the meaning of
the Code, files or notifies Lender that it intends to file a petition under the
Code, initiates a proceeding under any similar law or statute relating to
bankruptcy, insolvency, reorganization, winding up or adjustment of debts
(collectively, an "Action"), becomes the subject of either a petition under the
Code or an Action, or is not generally paying its debts as the same become due.
(5) If there is an "Event of Default" or a breach or default, after the
passage of all applicable notice and cure or grace periods, under any other Loan
Document or any of the Other Agreements.
(6) If a final, nonappealable judgment is rendered by a court against any
of the Borrower Parties which (i) has a material adverse effect on the operation
of the Premises as a Permitted Concept, or (ii) is in an amount greater than
$100,000.00 and not covered by insurance, and, in either case, is not discharged
or provision made for such discharge within 60 days from the date of entry of
such judgment.
(7) If there is a breach of the Fixed Charge Coverage Ratio requirement
and Lender shall have given Borrower notice thereof and Borrower shall have
failed within a period of 30 days from the delivery of such notice to (i) pay to
Lender the FCCR Amount (without premium or penalty), (ii) prepay the Note in
whole but not in part (without premium or penalty) or (iii) notify Lender of
Borrower's election to substitute a Substitute Premises for the Premises in
accordance with the terms of Section 11 (the failure of Borrower to complete
such substitution within 60
17
days after Lender shall have given the notice discussed above shall be deemed to
be an Event of Default without further notice or demand of any kind being
required). For purposes of the preceding sentence, "FCCR Amount" means that sum
of money which, when subtracted from the outstanding principal amount of the
Note, and assuming the resulting principal balance is reamortized in equal
monthly payments over the remaining term of the Note at the rate of interest set
forth therein, will result in an adjusted Fixed Charge Coverage Ratio for the
Premises of at least 1.25:1 based on the prior year's operations. Promptly after
Borrower's payment of the FCCR Amount, Borrower and Lender shall execute an
amendment to the Note in form and substance reasonably acceptable to Lender
reducing the principal amount payable to Lender under the Note and reamortizing
the principal amount of the Note in equal monthly payments over the then
remaining term of the Note at the rate of interest set forth therein.
(8) If there is a breach or default, after the passage of any applicable
notice and grace period, under the Permitted Lease, or if the Permitted Lease
terminates or expires prior to the scheduled maturity date of the Note.
B. Upon the occurrence and during the continuance of an Event of Default,
subject to the limitations set forth in subsection A, Lender may declare all or
any part of the obligations of Borrower under the Note, this Agreement and any
other Loan Document to be due and payable, and the same shall thereupon become
due and payable without any presentment, demand, protest or notice of any kind
except as otherwise expressly provided herein, and Borrower hereby waives notice
of intent to accelerate the obligations secured by the Mortgage and notice of
acceleration. Thereafter, Lender may exercise, at its option, concurrently,
successively or in any combination, all remedies available at law or in equity,
including without limitation any one or more of the remedies available under the
Note, the Mortgage or any other Loan Document. Neither the acceptance of this
Agreement nor its enforcement shall prejudice or in any manner affect Lender's
right to realize upon or enforce any other security now or hereafter held by
Lender, it being agreed that Lender shall be entitled to enforce this Agreement
and any other security now or hereafter held by Lender in such order and manner
as it may in its absolute discretion determine. No remedy herein conferred upon
or reserved to Lender is intended to be exclusive of any other remedy given
hereunder or now or hereafter existing at law or in equity or by statute. Every
power or remedy given by any of the Loan Documents to Lender, or to which Lender
may be otherwise entitled, may be exercised, concurrently or independently, from
time to time and as often as may be deemed expedient by Lender.
10. INDEMNITY; RELEASE. A. Borrower shall, at its sole cost and expense,
protect, defend, indemnify, release and hold harmless each of the Indemnified
Parties for, from and against any and all claims, suits, liabilities (including,
without limitation, strict liabilities), actions, proceedings, obligations,
debts, damages, losses, costs, expenses, diminutions in value, fines, penalties,
charges, fees, expenses, judgments, awards, amounts paid in settlement and
damages of whatever kind or nature (including, without limitation, attorneys'
fees, court costs and other costs of defense) (collectively, "Losses) (excluding
Losses suffered by an Indemnified Party directly arising out of such Indemnified
Party's gross negligence or willful misconduct; provided, however, that the term
"gross negligence" shall not include gross negligence imputed as a matter of law
to any of the Indemnified Parties solely by reason of Borrower's interest in the
Premises or Borrower's failure to act in respect of matters which are or were
the obligation of Borrower under the Loan Documents), and costs of Remediation
(whether or not performed voluntarily), engineers' fees, environmental
consultants' fees, and costs of investigation (including but not limited to
sampling, testing, and analysis of soil, water, air, building materials and
other materials and substances whether solid, liquid or gas) imposed upon or
incurred by or asserted against any Indemnified Parties, and directly or
indirectly arising out of or in any way relating to any one or more of the
following:
(1) any presence of any Hazardous Materials in, on, above, or under the
Premises;
(2) any past, present or Threatened Release in, on, above, under or from
the Premises;
(3) any activity by Borrower, any person or entity affiliated with
Borrower or any tenant or other user of the Premises in connection with any
actual, proposed or threatened use, treatment, storage, holding, existence,
disposition or other Release, generation, production, manufacturing, processing,
refining, control, management, abatement, removal, handling, transfer or
transportation to or from the Premises of any Hazardous Materials at any time
located in, under, on or above the Premises;
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(4) any activity by Borrower, any person or entity affiliated with
Borrower or any tenant or other user of the Premises in connection with any
actual or proposed Remediation of any Hazardous Materials at any time located
in, under, on or above the Premises, whether or not such Remediation is
voluntary or pursuant to court or administrative order, including but not
limited to any removal, remedial or corrective action;
(5) any past, present or threatened non-compliance or violations of any
Environmental Laws (or permits issued pursuant to any Environmental Law) in
connection with the Premises or operations thereon, including but not limited to
any failure by Borrower, any person or entity affiliated with Borrower or any
tenant or other user of the Premises to comply with any order of any
Governmental Authority in connection with any Environmental Laws;
(6) the imposition, recording or filing or the threatened imposition,
recording or filing of any Environmental Lien encumbering the Premises;
(7) any administrative processes or proceedings or judicial proceedings in
any way connected with any matter addressed in this Agreement;
(8) any past, present or threatened injury to, destruction of or loss of
natural resources in any way connected with the Premises, including but not
limited to costs to investigate and assess such injury, destruction or loss;
(9) any acts of Borrower, any person or entity affiliated with Borrower or
any tenant or other user of the Premises in arranging for disposal or treatment,
or arranging with a transporter for transport for disposal or treatment, of
Hazardous Materials owned or possessed by Borrower, any person or entity
affiliated with Borrower or any tenant or other user, at any facility or
incineration vessel owned or operated by another person or entity and containing
such or similar Hazardous Materials;
(10) any acts of Borrower, any person or entity affiliated with Borrower
or any tenant or other user of the Premises, in accepting any Hazardous
Materials for transport to disposal or treatment facilities, incineration
vessels or sites selected by Borrower, any person or entity affiliated with
Borrower or any tenant or other user of the Premises, from which there is a
Release, or a Threatened Release of any Hazardous Materials which causes the
incurrence of costs for Remediation;
(11) any personal injury, wrongful death, or property damage arising under
any statutory or common law or tort law theory, including but not limited to
damages assessed for the maintenance of a private or public nuisance or for the
conducting of an abnormally dangerous activity on or near the Premises;
(12) any misrepresentation or inaccuracy in any representation or warranty
or material breach or failure to perform any covenants or other obligations
pursuant to this Agreement; or
(13) any failure by Borrower to comply with any of the terms and
conditions of the Permitted Lease, including, without limitation, any costs and
expenses incurred by any of the Indemnified Parties to cure any such failure.
B. Borrower fully and completely releases, waives and covenants not to
assert any claims, liabilities, actions, defenses, challenges, contests or other
opposition against Lender and Environmental Insurer, however characterized,
known or unknown, foreseen or unforeseen, now existing or arising in the future,
relating to this Agreement and any Hazardous Materials, Releases and/or
Remediation on, at or affecting the Premises.
11. MISCELLANEOUS PROVISIONS.
A. Notices. All notices, consents, approvals or other instruments required
or permitted to be given by either party pursuant to this Agreement or any of
the other Loan Documents shall be in writing and given by (i) hand delivery,
(ii) facsimile, (iii) express overnight delivery service or (iv) certified or
registered mail, return receipt requested, and shall be deemed to have been
delivered upon (a) receipt, if hand delivered, (b) transmission, if
19
delivered by facsimile, (c) the next Business Day, if delivered by express
overnight delivery service, or (d) the third Business Day following the day of
deposit of such notice with the United States Postal Service, if sent by
certified or registered mail, return receipt requested. Notices shall be
provided to the parties and addresses (or facsimile numbers, as applicable)
specified below:
If to Borrower:
Kona Grill Kansas City, Inc.
7373 E. Doubletree Ranch Road
Suite 210
Scottsdale, AZ 85258
Attention: Larry Folk
Telephone: (480) 922-8100
Telecopy:
(480) 991-6811
If to Lender:
GE Capital Franchise Finance Corporation
17207 North Perimeter Drive
Scottsdale, AZ 85255
Attention: General Counsel
Telephone:
(480) 585-4500
Telecopy:
(480) 585-2226
B. Real Estate Commission. Lender and Borrower represent and warrant to
each other that they have dealt with no real estate or mortgage broker, agent,
finder or other intermediary in connection with the transactions contemplated by
this Agreement or the other Loan Documents. Lender and Borrower shall indemnify
and hold each other harmless from and against any costs, claims or expenses,
including attorneys' fees, arising out of the breach of their respective
representations and warranties contained within this Section.
C. Waiver and Amendment; Document Review. (1) No provisions of this
Agreement or the other Loan Documents shall be deemed waived or amended except
by a written instrument unambiguously setting forth the matter waived or amended
and signed by the party against which enforcement of such waiver or amendment is
sought. Waiver of any matter shall not be deemed a waiver of the same or any
other matter on any future occasion.
(2) In the event Borrower makes any request upon Lender requiring Lender
or Lender's attorneys to review and/or prepare (or cause to be reviewed and/or
prepared) any documents, plans, specifications or other submissions in
connection with or arising out of this Agreement or any of the other Loan
Documents, then Borrower shall (x) reimburse Lender promptly upon Lender's
demand for all out-of-pocket costs and expenses incurred by Lender in connection
with such review and/or preparation, including, without limitation, reasonable
attorneys' fees, and (y) pay Lender a reasonable processing and review fee.
D. Captions. Captions are used throughout this Agreement and the other
Loan Documents for convenience of reference only and shall not be considered in
any manner in the construction or interpretation hereof.
E. Lender's Liability. Notwithstanding anything to the contrary provided
in this Agreement or the other Loan Documents, it is specifically understood and
agreed, such agreement being a primary consideration for the execution of this
Agreement and the other Loan Documents by Lender, that (1) there shall be
absolutely no personal liability on the part of any shareholder, director,
officer or employee of Lender, with respect to any of the terms, covenants and
conditions of this Agreement or the other Loan Documents, (2) Borrower waives
all claims, demands and causes of action against Lender's officers, directors,
employees and agents in the event of any breach by Lender of any of the terms,
covenants and conditions of this Agreement or the other Loan Documents to be
performed by Lender and (3) Borrower shall look solely to the assets of Lender
for the satisfaction of each and every remedy of Borrower in the event of any
breach by Lender of any of the terms, covenants and conditions of this Agreement
or the other Loan Documents to be performed by Lender, such exculpation of
liability to be absolute and without any exception whatsoever.
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F. Severability. The provisions of this Agreement and the other Loan
Documents shall be deemed severable. If any part of this Agreement or the other
Loan Documents shall be held invalid, illegal or unenforceable, the remainder
shall remain in full force and effect, and such invalid, illegal or
unenforceable provision shall be reformed by such court so as to give maximum
legal effect to the intention of the parties as expressed therein.
G. Construction Generally. This Agreement and the other Loan Documents
have been entered into by parties who are experienced in sophisticated and
complex matters similar to the transaction contemplated by this Agreement and
the other Loan Documents and are entered into by both parties in reliance upon
the economic and legal bargains contained therein and shall be interpreted and
construed in a fair and impartial manner without regard to such factors as the
party which prepared the instrument, the relative bargaining powers of the
parties or the domicile of any party. Borrower and Lender were each represented
by legal counsel competent in advising them of their obligations and liabilities
hereunder.
H. Further Assurances. Borrower will, at its sole cost and expense, do,
execute, acknowledge and deliver or cause to be done, executed, acknowledged and
delivered all such further acts, documents, conveyances, notes, mortgages, deeds
of trust, assignments, security agreements, financing statements and assurances
as Lender shall from time to time reasonably require or deem advisable to carry
into effect the purposes of this Agreement and the other Loan Documents, to
perfect any lien or security interest granted in any of the Loan Documents and
for the better assuring and confirming of all of Lender's rights, powers and
remedies under the Loan Documents.
I. Attorneys' Fees. In the event of any judicial or other adversarial
proceeding between the parties concerning this Agreement or the other Loan
Documents, the prevailing party shall be entitled to recover its attorneys' fees
and other costs in addition to any other relief to which it may be entitled.
J. Entire Agreement. This Agreement and the other Loan Documents, together
with any other certificates, instruments or agreements to be delivered in
connection therewith, constitute the entire agreement between the parties with
respect to the subject matter hereof, and there are no other representations,
warranties or agreements, written or oral, between Borrower and Lender with
respect to the subject matter of this Agreement and the other Loan Documents.
Notwithstanding anything in this Agreement and the other Loan Documents to the
contrary, with respect to the Premises, upon the execution and delivery of this
Agreement by Borrower and Lender, any bid proposals or loan commitments with
respect to the transactions contemplated by this Agreement shall be deemed null
and void and of no further force and effect and the terms and conditions of this
Agreement shall control notwithstanding that such terms and conditions may be
inconsistent with or vary from those set forth in such bid proposals or loan
commitments.
K. Forum Selection; Jurisdiction; Venue; Choice of Law. Borrower
acknowledges that this Agreement and the other Loan Documents were substantially
negotiated in the State of Arizona, this Agreement and the other Loan Documents
were executed by Lender in the State of Arizona and executed and delivered by
Borrower in the State of Arizona, all payments under the Note will be delivered
in the State of Arizona and there are substantial contacts between the parties
and the transactions contemplated herein and the State of Arizona. For purposes
of any action or proceeding arising out of this Agreement or any of the other
Loan Documents, the parties hereto hereby expressly submit to the jurisdiction
of all federal and state courts located in the State of Arizona and Borrower
consents that it may be served with any process or paper by registered mail or
by personal service within or without the State of Arizona in accordance with
applicable law. Furthermore, Borrower waives and agrees not to assert in any
such action, suit or proceeding that it is not personally subject to the
jurisdiction of such courts, that the action, suit or proceeding is brought in
an inconvenient forum or that venue of the action, suit or proceeding is
improper. It is the intent of the parties hereto that all provisions of this
Agreement and the Note shall be governed by and construed under the laws of the
State of Arizona, without giving effect to its principles of conflicts of law.
To the extent that a court of competent jurisdiction finds Arizona law
inapplicable with respect to any provisions of this Agreement or the Note, then,
as to those provisions only, the laws of the state where the Premises is located
shall be deemed to apply. Nothing in this Section shall limit or restrict the
right of Lender to commence any proceeding in the federal or state courts
located in the state in which the Premises is located to the extent Lender deems
such proceeding necessary or advisable to exercise remedies available under this
Agreement or the other Loan Documents.
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L. Counterparts. This Agreement and the other Loan Documents may be
executed in one or more counterparts, each of which shall be deemed an original.
M. Assignments by Lender; Binding Effect. Lender may assign in whole or in
part its rights under this Agreement, including, without limitation, in
connection with any Transfer, Participation and/or Securitization. Upon any
unconditional assignment of Lender's entire right and interest hereunder, Lender
shall automatically be relieved, from and after the date of such assignment, of
liability for the performance of any obligation of Lender contained herein. This
Agreement and the other Loan Documents shall be binding upon and inure to the
benefit of Borrower and Lender and their respective successors and permitted
assigns, including, without limitation, any United States trustee, any debtor in
possession or any trustee appointed from a private panel.
N. Survival. Except for the conditions of Closing set forth in Section 4,
which shall be satisfied or waived as of the Closing Date, all representations,
warranties, agreements, obligations and indemnities of Borrower and Lender set
forth in this Agreement and the other Loan Documents shall survive the Closing.
O. Waiver of Jury Trial and Punitive, Consequential, Special and Indirect
Damages. BORROWER AND LENDER HEREBY KNOWINGLY, VOLUNTARILY AND INTENTIONALLY
WAIVE THE RIGHT EITHER MAY HAVE TO A TRIAL BY JURY WITH RESPECT TO ANY AND ALL
ISSUES PRESENTED IN ANY ACTION, PROCEEDING, CLAIM OR COUNTERCLAIM BROUGHT BY
EITHER OF THE PARTIES HERETO AGAINST THE OTHER OR ITS SUCCESSORS WITH RESPECT TO
ANY MATTER ARISING OUT OF OR IN CONNECTION WITH THIS AGREEMENT, ANY OF THE OTHER
LOAN DOCUMENTS OR ANY DOCUMENT CONTEMPLATED HEREIN OR RELATED HERETO. THIS
WAIVER BY THE PARTIES HERETO OF ANY RIGHT EITHER MAY HAVE TO A TRIAL BY JURY HAS
BEEN NEGOTIATED AND IS AN ESSENTIAL ASPECT OF THEIR BARGAIN. FURTHERMORE,
BORROWER AND LENDER HEREBY KNOWINGLY, VOLUNTARILY AND INTENTIONALLY WAIVE THE
RIGHT EITHER MAY HAVE TO SEEK PUNITIVE, CONSEQUENTIAL, SPECIAL AND INDIRECT
DAMAGES FROM THE OTHER AND ANY OF THE OTHER'S AFFILIATES, OFFICERS, DIRECTORS OR
EMPLOYEES OR ANY OF THEIR SUCCESSORS WITH RESPECT TO ANY AND ALL ISSUES
PRESENTED IN ANY ACTION, PROCEEDING, CLAIM OR COUNTERCLAIM BROUGHT BY EITHER
PARTY AGAINST THE OTHER OR ANY OF THE OTHER'S AFFILIATES, OFFICERS, DIRECTORS OR
EMPLOYEES OR ANY OF THEIR SUCCESSORS WITH RESPECT TO ANY MATTER ARISING OUT OF
OR IN CONNECTION WITH THIS AGREEMENT, ANY OF THE OTHER LOAN DOCUMENTS OR ANY
DOCUMENT CONTEMPLATED HEREIN OR RELATED HERETO. THE WAIVER BY BORROWER AND
LENDER OF ANY RIGHT THEY MAY HAVE TO SEEK PUNITIVE, CONSEQUENTIAL, SPECIAL AND
INDIRECT DAMAGES HAS BEEN NEGOTIATED BY THE PARTIES HERETO AND IS AN ESSENTIAL
ASPECT OF THEIR BARGAIN.
P. Transfers, Participations and Securitizations. (1) A material
inducement to Lender's willingness to complete the transactions contemplated by
the Loan Documents is Borrower's agreement that Lender may, at any time,
complete a Transfer, Participation or Securitization with respect to the Note,
Mortgage and/or any of the other Loan Documents or any or all servicing rights
with respect thereto.
(2) Borrower agrees to cooperate in good faith with Lender in connection
with any such Transfer, Participation and/or Securitization of the Note,
Mortgage and/or any of the other Loan Documents, or any or all servicing rights
with respect thereto, including, without limitation (i) providing such
documents, financial and other data, and other information and materials (the
"Disclosures") which would typically be required with respect to the Borrower
Parties by a purchaser, transferee, assignee, servicer, participant, investor or
rating agency involved with respect to such Transfer, Participation and/or
Securitization, as applicable; provided, however, the Borrower Parties shall not
be required to make Disclosures of any confidential information or any
information which has not previously been made public unless required by
applicable federal or state securities laws; and (ii) amending the terms of the
transactions evidenced by the Loan Documents to the extent necessary so as to
satisfy the requirements of purchasers, transferees, assignees, servicers,
participants, investors or selected rating agencies involved in any such
Transfer, Participation or Securitization, so long as such amendments would not
have a material adverse effect upon the Borrower Parties or the transactions
contemplated hereunder. Lender shall be responsible for preparing at its expense
any documents evidencing the amendments referred to in the preceding subitem
(ii).
22
(3) Borrower consents to Lender providing the Disclosures, as well as any
other information which Lender may now have or hereafter acquire with respect to
the Premises or the financial condition of the Borrower Parties to each
purchaser, transferee, assignee, servicer, participant, investor or rating
agency involved with respect to each Transfer, Participation and/or
Securitization, as applicable. Lender and Borrower (and their respective
Affiliates) shall each pay their own attorneys' fees and other out-of-pocket
expenses incurred in connection with the performance of their respective
obligations under this Section.
(4) Notwithstanding anything to the contrary contained in this Agreement
or the other Loan Documents: (a) an Event of Default or a breach or default,
after the passage of all applicable notice and cure or grace periods, under any
Loan Document or Other Agreement which relates to a loan or sale/leaseback
transaction which has not been the subject of a Securitization, Participation or
Transfer shall not constitute an Event of Default or a breach or default, as
applicable, under any Loan Document or Other Agreement which relates to a loan
which has been the subject of a Securitization, Participation or Transfer; (b)
an Event of Default or a breach or default, after the passage of all applicable
notice and cure or grace periods, under any Loan Document or Other Agreement
which relates to a loan which is included in any Loan Pool shall not constitute
an Event of Default or a breach or default, as applicable, under any Loan
Document or Other Agreement which relates to a loan which is included in any
other Loan Pool; (c) the Loan Documents and Other Agreements corresponding to
the loans in any Loan Pool shall not secure the obligations of any of the
Borrower Parties contained in any Loan Document or Other Agreement which does
not correspond to a loan in such Loan Pool; and (d) the Loan Documents and Other
Agreements which do not correspond to a loan in any Loan Pool shall not secure
the obligations of any of the Borrower Parties contained in any Loan Document or
Other Agreement which does correspond to a loan in such Loan Pool.
Q. Estoppel Certificate. At any time, and from time to time, each party
agrees, promptly and in no event later than fifteen (15) days after a request
from the other party, to execute, acknowledge and deliver to the other party a
certificate in the form supplied by the other party, certifying: (a) to its
knowledge, whether there are then any existing defaults by it or the other party
in the performance of their respective obligations under this Agreement or any
of the other Loan Documents, and, if there are any such defaults, specifying the
nature and extent thereof; (b) that no notice of default has been given or
received by it under this Agreement or any of the other Loan Documents which has
not been cured, except as to defaults specified in the certificate; (c) the
capacity of the person executing such certificate, and that such person is duly
authorized to execute the same on behalf of it; and (d) any other information
reasonably requested by the other party in connection with this Agreement and
the other Loan Documents.
R. Substitute Guarantor. Borrower shall have the one-time right to
substitute an approved, replacement guarantor (the "Replacement Guarantor") for
Michael McDermott as a guarantor of the Loan pursuant to the Guaranty, provided
that the Replacement Guarantor shall (i) have a net worth at least equal to the
net worth of Michael McDermott at the time the Loan was approved by Lender, (ii)
have provided such documentation
23
IN WITNESS WHEREOF, Borrower and Lender have entered into this Agreement
as of the date first above written.
LENDER:
GE CAPITAL FRANCHISE FINANCE CORPORATION,
a Delaware corporation
By /s/ Kelly A. Hallford
--------------------------------------Printed Name Kelly A. Hallford
----------------------------Its Vice President
-------------------------------------BORROWER:
KONA GRILL KANSAS CITY, INC.,
a Delaware corporation
By /s/ Jason Merritt
--------------------------------------Printed Name Jason Merritt
----------------------------Its Vice President
-------------------------------------U.S. Federal Tax Identification Number:
--------------------------------------Organization Identification Number:
--------------------------------------Principal Place of Business:
----------------------, ----------------
STATE OF ARIZONA
) SS.
COUNTY OF MARICOPA
)
)
The foregoing instrument was acknowledged before me on May 19, 2003 by
Kelly A. Hallford, Vice President of GE Capital Franchise Finance Corporation, a
Delaware corporation, on behalf of the corporation.
/s/ Ann Halpern
Notary Public
My Commission Expires:
August 2, 2005
STATE OF ARIZONA
) SS.
COUNTY OF MARICOPA
)
)
The foregoing instrument was acknowledged before me on May 15, 2003 by
Jason Merritt, Vice President of Kona Grill Kansas City, Inc., an Delaware
corporation, on behalf of the corporation.
/s/ Joy Cravens, /s/ Joy Capella
Notary Public
My Commission Expires:
February 5, 2005
EXHIBIT 10.6(b)
PROMISSORY NOTE
Dated as of May 19, 2003
$993,544.00
Scottsdale, Arizona
KONA GRILL KANSAS CITY, INC., a Delaware corporation ("Borrower"), for
value received, hereby promises to pay to GE CAPITAL FRANCHISE FINANCE
CORPORATION, a Delaware corporation ("Lender"), whose address is 17207 North
Perimeter Drive, Scottsdale, Arizona 85255, or order, on or before June 1, 2010
(the "Maturity Date"), as herein provided, the principal sum of $993,544.00, and
to pay interest on the unpaid principal amount of this Note from the date hereof
to the Maturity Date at the fixed rate of 7.04 % per annum on the basis of a
360-day year of twelve 30-day months (the "Rate"), such principal and interest
to be paid in immediately available funds and in lawful money of the United
States. Initially capitalized terms which are not otherwise defined in this Note
shall have the meanings set forth in that certain Loan Agreement dated as of the
date of this Note between Borrower and Lender, as such agreement may be amended,
restated and/or supplemented from time to time (the "Loan Agreement").
Interest on the principal amount of this Note for the period commencing
with the date such principal amount is advanced by Lender through the last day
in the month in which this Note is dated shall be due and payable upon delivery
of this Note. Thereafter, principal and interest shall be payable in consecutive
monthly installments of $15,014.68 commencing on July 1, 2003, and continuing on
the first day of each month thereafter until the Maturity Date, at which time
the outstanding principal and unpaid accrued interest shall be due and payable.
Borrower may prepay this Note in full, but not in part (except as
otherwise set forth below), including all accrued but unpaid interest
hereunder and all sums advanced by Lender pursuant to the Loan Documents
and any Other Agreements, provided that (i) no Event of Default has
occurred under any of the Loan Documents or any Other Agreements, (ii) any
such prepayment shall only be made on a regularly scheduled payment date
upon not less than 30 days prior written notice from Borrower to Lender,
and (iii) except as otherwise set forth below, any such prepayment shall
be made together with payment of a prepayment premium equal to:
(i) 4% of the amount prepaid if the prepayment is made on or
following the date of this Note but prior to the first anniversary
of the date of this Note;
(ii) 3% of the amount prepaid if the prepayment is made on or
following the first anniversary of the date of this Note but prior
to the second anniversary of the date of this Note;
(iii) 2% of the amount prepaid if the prepayment is made on or
following the second anniversary of the date of this Note but prior
to the third anniversary of the date of this Note; and
(iv) 1% of the amount prepaid if the prepayment is made on or
following the third anniversary of the date of this Note but prior
to the fourth anniversary of the date of this Note.
If this Note is prepaid on or following the fourth anniversary of the date
of this Note, Borrower shall not be required to pay a prepayment premium. The
foregoing prepayment premium shall be due and payable if this Note is prepaid
prior to the fourth anniversary of this Note regardless of whether such
prepayment is the result of a voluntary prepayment by Borrower or as a result of
Lender declaring the unpaid principal balance of this Note, accrued interest and
all other sums due under this Note, the Mortgage, the other Loan Documents and
any Other Agreements, due and payable as contemplated below; provided, however,
the prohibition on a partial prepayment and the prepayment premium shall not be
applicable with respect to a prepayment of this Note in connection with an
application of condemnation proceeds as contemplated by the Mortgage or as
contemplated by the Loan Agreement as a result of a breach and subsequent cure
by Borrower of the Fixed Charge Coverage Ratio required by the Loan Agreement.
In addition to prepayment premium set forth above, Borrower may be subject
to the payment of a prepayment fee (the "Prepayment Fee") equal to the amount of
any, required to offset the adverse impact to Lender of any decline in interest
rates. The Prepayment Fee is determined by (i) calculating the decrease
(expressed in basis points) in the current weekly average yield of four (4) year
U.S. Dollar Interest Rate Swaps (as published in Federal Reserve Statistical
Release H.15[519]) from the date on which the Rate is set until the Friday
immediately preceding the week in which the prepayment is made, (ii) dividing
the decrease calculated in (i) by 100; (iii) multiplying the result calculated
in (ii) by the applicable prepayment factor shown below; and (iv) multiplying
the product calculated in (iii) by the principal balance to be repaid.
Number of Months
Remaining
84-73
72-61
60-49
48-37
36-25
24-13
12 or less
Prepayment Factor
.033
.029
.024
.019
.014
.010
.005
If the Index is unchanged or has increased during such period, no
Prepayment Fee shall be due.
The foregoing prepayment fee and/or prepayment premium, as applicable,
shall be due and payable if this Note is prepaid regardless of whether such
prepayment is the result of a voluntary prepayment by Borrower or as a result of
Lender declaring the unpaid principal balance of this Note, accrued interest and
all other sums due under this Note, the Mortgage encumbering the Premises
corresponding to this Note, the other Loan Documents and any Other Agreements,
due and payable as contemplated below; provided, however, the prohibition on a
partial prepayment and the prepayment fee and/or prepayment premium, as
applicable, shall not be applicable with respect to a prepayment of this Note in
connection with an application of condemnation proceeds as contemplated by the
Mortgage encumbering the Premises corresponding to this Note.
Upon execution of this Note, Borrower shall authorize Lender to establish
arrangements whereby all payments of principal and interest hereunder are
transferred by Automated Clearing House Debit initiated by Lender directly from
an account at a U.S. bank in the name of Borrower to such account as Lender may
designate or as Lender may otherwise designate. Each payment of principal and
interest hereunder shall be applied first toward any past due payments under
this Note (including payment of all Costs (as herein defined)), then to accrued
interest, and the balance, after the payment of such accrued interest, if any,
shall be applied to the unpaid principal balance of this Note; provided,
however, each payment hereunder after an Event of Default has occurred shall be
applied as Lender in its sole discretion may determine.
This Note is secured by the Mortgage and the other Loan Documents. Upon
the occurrence of an Event of Default, Lender may declare the entire unpaid
principal balance of this Note, accrued interest, if any, and all other sums due
under this Note and any Loan Documents or Other Agreements due and payable at
once without notice to Borrower. All past-due principal and/or interest shall
bear interest from the due date to the date of actual payment at the lesser of
the highest rate for which the undersigned may legally contract or the rate of
14% per annum (the "Default Rate"), and such Default Rate shall continue to
apply following a judgment in favor of Lender under this Note. If Borrower fails
to make any payment or installment due under this Note within five days of its
due date, Borrower shall pay to Lender, in addition to any other sum due Lender
under this Note or any other Loan Document, a late charge equal to 5% of such
past-due payment or installment (the "Late Charge"), which Late Charge is a
reasonable estimate of the loss that may be sustained by Lender due to the
failure of Borrower to make timely payments. All payments of principal and
interest due hereunder shall be made (i) without deduction of any present and
future taxes, levies, imposts, deductions, charges or withholdings, which
amounts shall be paid by Borrower, and (ii) without any other right of
abatement, reduction, setoff, defense, counterclaim, interruption, deferment or
recoupment for any reason whatsoever. Borrower will pay the amounts necessary
such that the gross amount of the principal and interest received by Lender is
not less than that required by this Note.
2
No delay or omission on the part of Lender in exercising any remedy, right
or option under this Note shall operate as a waiver of such remedy, right or
option. In any event, a waiver on any one occasion shall not be construed as a
waiver or bar to any such remedy, right or option on a future occasion. Borrower
hereby waives presentment, demand for payment, notice of dishonor, notice of
protest, and protest, notice of intent to accelerate, notice of acceleration and
all other notices or demands in connection with delivery, acceptance,
performance, default or endorsement of this Note. All notices, consents,
approvals or other instruments required or permitted to be given by either party
pursuant to this Note shall be given in accordance with the notice provisions in
the Loan Agreement. Should any indebtedness represented by this Note be
collected at law or in equity, or in bankruptcy or other proceedings, or should
this Note be placed in the hands of attorneys for collection after default,
Borrower shall pay, in addition to the principal and interest due and payable
hereon, all costs of collecting or attempting to collect this Note (the
"Costs"), including reasonable attorneys' fees and expenses of Lender (including
those fees and expenses incurred in connection with any appeal) and court costs
whether or not a judicial action is commenced by Lender. This Note may not be
amended or modified except by a written agreement duly executed by the party
against whom enforcement of this Note is sought. In the event that any one or
more of the provisions contained in this Note shall be held to be invalid,
illegal or unenforceable in any respect, such invalidity, illegality or
unenforceability shall not affect any other provision of this Note, and this
Note shall be construed as if such provision had never been contained herein or
therein. Time is of the essence in the performance of each and every obligation
under this Note.
Notwithstanding anything to the contrary contained in any of the Loan
Documents, the obligations of Borrower to Lender under this Note and any other
Loan Documents are subject to the limitation that payments of interest and late
charges to Lender shall not be required to the extent that receipt of any such
payment by Lender would be contrary to provisions of applicable law limiting the
maximum rate of interest that may be charged or collected by Lender. The portion
of any such payment received by Lender that is in excess of the maximum interest
permitted by such provisions of law shall be credited to the principal balance
of this Note or if such excess portion exceeds the outstanding principal balance
of this Note, then such excess portion shall be refunded to Borrower. All
interest paid or agreed to be paid to Lender shall, to the extent permitted by
applicable law, be amortized, prorated, allocated and/or spread throughout the
full term of this Note (including, without limitation, the period of any renewal
or extension thereof) so that interest for such full term shall not exceed the
maximum amount permitted by applicable law.
This obligation shall bind Borrower and its successors and assigns, and
the benefits hereof shall inure to Lender and its successors and assigns.
3
IN WITNESS WHEREOF, Borrower has executed and delivered this Note
effective as of the date first set forth above.
BORROWER:
KONA GRILL KANSAS CITY, INC.,
a Delaware corporation
By /s/ Jason Merritt
--------------------------------------Printed Name Jason Merritt
----------------------------Its Vice President
--------------------------------------
EXHIBIT 10.7(a)
LOAN AGREEMENT
THIS LOAN AGREEMENT (this "Agreement") is made as of April 30, 2004 (the
"Closing Date"), by and between GE CAPITAL Franchise Finance Corporation, a
Delaware corporation ("Lender"), and KONA GRILL LAS VEGAS, INC., a Delaware
corporation ("Borrower").
AGREEMENT:
In consideration of the mutual covenants and provisions of this Agreement,
the parties agree as follows:
1. DEFINITIONS. The following terms shall have the following meanings for
all purposes of this Agreement:
"ADA" means the Americans with Disabilities Act of 1990, as such act may
be amended from time to time.
"Affiliate" means any Person that directly or indirectly controls, is
under common control with, or is controlled by any other Person. For purposes of
this definition, "controls", "under common control with" and "controlled by"
mean the possession, directly or indirectly, of the power to direct or cause the
direction of the management and policies of such Person, whether through
ownership of voting securities or otherwise.
"Anti-Money Laundering Laws" means all applicable laws, regulations and
government guidance on the prevention and detection of money laundering,
including 18 U.S.C. Section Section 1956 and 1957, and the BSA.
"Applicable Regulations" means all applicable statutes, regulations,
rules, ordinances, codes, licenses, permits, orders and approvals of each
Governmental Authority having jurisdiction over the Premises, including, without
limitation, all health, building, fire, safety and other codes, ordinances and
requirements, all applicable standards of the National Board of Fire
Underwriters and the ADA and all policies or rules of common law, in each case,
as amended, and any judicial or administrative interpretation thereof, including
any judicial order, consent, decree or judgment applicable to any of the
Borrower Parties.
"Borrower Parties" means, collectively, Borrower and any guarantors of the
Loan (including, in each case, any predecessors-in-interest).
"BSA" means the Bank Secrecy Act (31 U.S.C. Section Section 5311 et.
seq.), and its implementing regulations, Title 31 Part 103 of the U.S. Code of
Federal Regulations.
"Business Day" means any day on which Lender is open for business other
than a Saturday, Sunday or a legal holiday, ending at 5:00 P.M. Phoenix, Arizona
time.
"Closing" means the disbursement of the Loan Amount by Title Company as
contemplated by this Agreement.
"Code" means Title 11 of the United States Code, 11 U.S.C. Sec. 101 et
seq., as amended.
"Corporate Fixed Charge Coverage Ratio" has the meaning set forth in
Section 6.J.
"Default Rate" has the meaning set forth in the Note.
"Entity" means any entity that is not a natural person.
"Environmental Indemnity Agreement" means the environmental indemnity
agreement dated as of the date of this Agreement executed by Borrower for the
benefit of the Indemnified Parties and such other parties as are identified in
such agreement with respect to the Premises, as the same may be amended from
time to time.
"Environmental Insurer" means American International Specialty Lines
Insurance Company, or such other environmental insurance company as Lender may
select, and its successors and assigns.
"Environmental Policy" means the environmental insurance policy issued by
Environmental Insurer to Lender with respect to the Premises, which
Environmental Policy shall be in form and substance satisfactory to Lender in
its sole discretion.
"Event of Default" has the meaning set forth in Section 7.
"Fee" means an underwriting, site assessment, valuation, processing and
commitment fee equal to 1% of the sum of the Loan Amount for all of the
Premises.
"GAAP" means generally accepted accounting principles consistently
applied.
"Governmental Authority" means any governmental authority, agency,
department, commission, bureau, board, instrumentality, court or
quasi-governmental authority having jurisdiction or supervisory or regulatory
authority over the Premises or any of the Borrower Parties.
"Guarantors" means Kona Grill, Inc. and Michael McDermott
"Guaranty" means the unconditional guaranty of payment and performance
dated as of the date of this Agreement executed by Guarantors for the benefit of
Lender with respect to the Loan, as the same may be amended from time to time.
"Hazardous Materials" means (a) any toxic substance or hazardous waste,
substance, solid waste or related material, or any pollutant or contaminant; (b)
radon gas, asbestos in any form which is or could become friable, urea
formaldehyde foam insulation, transformers or other equipment containing
dielectric fluid having levels of polychlorinated biphenyls in excess of
applicable standards established by any Governmental Authority, or any petroleum
product or additive; (c) any substance, gas, material or chemical which is now
or hereafter defined as or included in the definition of "hazardous substances,"
"toxic substances," "hazardous materials," "hazardous wastes," "regulated
substances" or words of similar import under any Environmental Laws; and (d) any
other chemical, material, gas or substance the exposure to or release of which
is prohibited, limited or regulated by any Governmental Authority that asserts
or may assert jurisdiction over the Premises or the operations or activity at
the Premises, or any chemical, material, gas or substance that does or is
reasonably likely to pose a hazard to the health and/or safety of the occupants
of the Premises or the owners and/or occupants of property adjacent to or
surrounding the Premises.
"Indemnified Parties" means Lender, Environmental Insurer, the trustee
under the Mortgage, if applicable, and any person or entity who is or will have
been involved in the origination of the Loan, any person or entity who is or
will have been involved in the servicing of the Loan, any person or entity in
whose name the encumbrance created by the Mortgage is or will have been
recorded, persons and entities who may hold or acquire or will have held a full
or partial interest in the Loan (including, but not limited to, investors or
prospective investors in any Securitization, Participation or Transfer, as well
as custodians, trustees and other fiduciaries who hold or have held a full or
partial interest in the Loan for the benefits of third parties), as well as the
respective directors, officers, shareholders, partners, members, employees,
lenders, agents, servants, representatives, contractors, subcontractors,
affiliates, subsidiaries, participants, successors and assigns of any and all of
the foregoing (including, but not limited to, any other person or entity who
holds or acquires or will have held a participation or other full or partial
interest in the Loan or the Premises, whether during the term of the Loan or as
a part of or
2
following a foreclosure of the Loan and including, but not limited to, any
successors by merger, consolidation or acquisition of all or a substantial
portion of Lender's assets and business).
"Indemnity Agreements" means all indemnity agreements executed for the
benefit of any of the Borrower Parties or any prior owner, lessee or occupant of
the Premises in connection with Hazardous Materials, including, without
limitation, the right to receive payments under such indemnity agreements.
"Lender Entities" means, collectively, Lender (including any
predecessor-in-interest to Lender) and any Affiliate of Lender (including any
Affiliate of any predecessor-in-interest to Lender).
"Loan" means the loan for the Premises described in Section 2.
"Loan Amount" means $1,000,000.00.
"Loan Documents" means, collectively, this Agreement, the Note, the
Mortgage, the Environmental Indemnity Agreement, the UCC-1 Financing Statements,
all guaranties of the Loan, if any, and all other documents, instruments and
agreements executed in connection therewith or contemplated thereby, as the same
may be amended from time to time.
"Loan Pool" means: (i) in the context of a Securitization, any pool or
group of loans that are a part of such Securitization; (ii) in the context of a
Transfer, all loans which are sold, transferred or assigned to the same
transferee; and (iii) in the context of a Participation, all loans as to which
participating interests are granted to the same participant.
"Material Adverse Effect" means a material adverse effect on (i) the
Premises, including, without limitation, the operation of the Premises as a
Permitted Concept, or (ii) Borrower's ability to perform its obligations under
the Loan Documents.
"Mortgage" means the deed of trust, deed to secure debt or mortgage dated
as of the date of this Agreement executed by Borrower for the benefit of Lender
with respect to the Premises, as the same may be amended from time to time.
"Note" means the promissory note dated as of the date of this Agreement
executed by Borrower in favor of Lender evidencing the Loan with respect to the
Premises, as the same may be amended, restated and/or substituted from time to
time
"Obligations" has the meaning set forth in the Mortgage.
"OFAC Laws and Regulations" means Executive Order 13224 issued by the
President of the United States of America, the Terrorism Sanctions Regulations
(Title 31 Part 595 of the U.S. Code of Federal Regulations), the Terrorism List
Governments Sanctions Regulations (Title 31 Part 596 of the U.S. Code of Federal
Regulations), the Foreign Terrorist Organizations Sanctions Regulations (Title
31 Part 597 of the U.S. Code of Federal Regulations), and the Cuban Assets
Control Regulations (Title 31 Part 515 of the U.S. Code of Federal Regulations),
and all other present and future federal, state and local laws, ordinances,
regulations, policies, lists (including, without limitation, the Specially
Designated Nationals and Blocked Persons List) and any other requirements of any
Governmental Authority (including, without limitation, the United States
Department of the Treasury Office of Foreign Assets Control) addressing,
relating to, or attempting to eliminate, terrorist acts and acts of war, each as
hereafter supplemented, amended or modified from time to time, and the present
and future rules, regulations and guidance documents promulgated under any of
the foregoing, or under similar laws, ordinances, regulations, policies or
requirements of other states or localities.
"Other Agreements" means, collectively, all agreements and instruments
between, among or by (1) any of the Borrower Parties and/or any Affiliate of any
of the Borrower Parties (including any Affiliate of any predecessor-in-interest
to any of the Borrower Parties), and, or for the benefit of, (2) any of the
3
Lender Entities, including, without limitation, promissory notes and guaranties;
provided, however, the term "Other Agreements" shall not include the agreements
and instruments defined as the Loan Documents.
"Parent Company" means Kona Grill, Inc., a Delaware corporation.
"Participation" means one or more grants by Lender or any of the other
Lender Entities to a third party of a participating interest in notes evidencing
obligations to repay secured or unsecured loans owned by Lender or any of the
other Lender Entities or any or all servicing rights with respect thereto.
"Permitted Concept" means a Kona Grill restaurant.
"Permitted Exceptions" means those recorded easements, restrictions, liens
and encumbrances set forth as exceptions in the title insurance policies issued
by Title Company to Lender and approved by Lender in its sole discretion in
connection with the closing of the Loan.
"Person" means any individual, corporation, partnership, limited liability
company, trust, unincorporated organization, Governmental Authority or any other
form of entity.
"Personal Property" has the meaning set forth in the Mortgage.
"Premises" means the parcel or parcels of real estate legally described on
Exhibit A attached hereto, together with all rights, privileges and
appurtenances associated therewith and all buildings, fixtures and other
improvements now or hereafter located thereon (whether or not affixed to such
real estate) and the Personal Property."Questionnaire" means the environmental
questionnaire completed on behalf of the Borrower Parties with respect to the
Premises and submitted to Environmental Insurer in connection with the issuance
of the Environmental Policy.
"Release" means any presence, release, deposit, discharge, emission,
leaking, spilling, seeping, migrating, injecting, pumping, pouring, emptying,
escaping, dumping, disposing or other movement of Hazardous Materials or USTs.
"Remediation" means any response, remedial, removal, or corrective action,
any activity to clean up, detoxify, decontaminate, contain or otherwise
remediate any Hazardous Materials or USTs required by any Environmental Law or
any Governmental Authority, any actions to prevent, cure or mitigate any
Release, any action to comply with any Environmental Laws or with any permits
issued pursuant thereto, any inspection, investigation, study, monitoring,
assessment, audit, sampling and testing, laboratory or other analysis, or any
evaluation relating to any Hazardous Materials or USTs.
"Restoration" has the meaning set forth in the Mortgage.
"Securitization" means one or more sales, dispositions, transfers or
assignments by Lender or any of the other Lender Entities to a special purpose
corporation, trust or other entity identified by Lender or any of the other
Lender Entities of notes evidencing obligations to repay secured or unsecured
loans owned by Lender or any of the other Lender Entities (and, to the extent
applicable, the subsequent sale, transfer or assignment of such notes to another
special purpose corporation, trust or other entity identified by Lender or any
of the other Lender Entities), and the issuance of bonds, certificates, notes or
other instruments evidencing interests in pools of such loans, whether in
connection with a permanent asset securitization or a sale of loans in
anticipation of a permanent asset securitization. Each Securitization shall be
undertaken in accordance with all requirements which may be imposed by the
investors or the rating agencies involved in each such sale, disposition,
transfer or assignment or which may be imposed by applicable securities, tax or
other laws or regulations.
4
"Subordination Agreements" means the Subordination Agreements executed by
certain shareholders and Affiliates of Borrower for the benefit of Lender,
subordinating the Subordinate Debt to the Loan.
"Subordinate Debt" means the debt of Borrower to certain shareholders and
Affiliates of Borrower described in the Subordination Agreements.
"Title Company" means Lawyers Title Insurance Corporation.
"Transfer" means one or more sales, transfers or assignments by Lender or
any of the other Lender Entities to a third party of notes evidencing
obligations to repay secured or unsecured loans owned by Lender or any of the
other Lender Entities or any or all servicing rights with respect thereto.
"UCC-1 Financing Statements" means such UCC-1 Financing Statements as
Lender shall file with respect to the transactions contemplated by this
Agreement.
"U.S. Publicly-Traded Entity" is an Entity whose securities are listed on
a national securities exchange or quoted on an automated quotation system in the
U.S. or a wholly-owned subsidiary of such an Entity.
"USTs" means any one or combination of below or above ground tanks and
associated piping systems used in connection with the storage, dispensing and
general use of petroleum and petroleum-based substances.
2.
TRANSACTION. On the terms and subject to the conditions set forth in
the Loan Documents, Lender shall make the Loan. The Loans will be evidenced by
the Note and secured by the Mortgage. Borrower shall repay the outstanding
principal amount of the Loan together with interest thereon in the manner and in
accordance with the terms and conditions of the Note and the other Loan
Documents. The Loan shall be advanced at the Closing in cash or otherwise
immediately available funds subject to any prorations and adjustments required
by this Agreement. The obligation of Lender to consummate the transaction
contemplated by this Agreement is subject to the fulfillment or waiver of each
of the conditions contained in the loan commitment issued by Lender to Borrower
with respect to the Loan and the "Loan Closing Checklist" prepared by Lender
with respect to the Loan.
3.
ESCROW AGENT; CLOSING COSTS. Borrower and Lender hereby employ Title
Company to act as escrow agent in connection with the transactions described in
this Agreement. Borrower and Lender will deliver to Title Company all documents,
pay to Title Company all sums and do or cause to be done all other things
necessary or required by this Agreement, in the reasonable judgment of Title
Company, to enable Title Company to comply herewith and to enable any title
insurance policy provided for herein to be issued. Title Company shall not cause
the transaction to close unless and until it has received written instructions
from Lender and Borrower to do so. Title Company is authorized to pay, from any
funds held by it for Lender's or Borrower's respective credit all amounts
necessary to procure the delivery of such documents and to pay, on behalf of
Lender and Borrower, all charges and obligations payable by them, respectively.
Borrower will pay all charges payable by it to Title Company. Title Company is
authorized, in the event any conflicting demand is made upon it concerning these
instructions or the escrow, at its election, to hold any documents and/or funds
deposited hereunder until an action shall be brought in a court of competent
jurisdiction to determine the rights of Borrower and Lender or to interplead
such documents and/or funds in an action brought in any such court. Deposit by
Title Company of such documents and funds, after deducting therefrom its charges
and its expenses and attorneys' fees incurred in connection with any such court
action, shall relieve Title Company of all further liability and responsibility
for such documents and funds. Title Company's receipt of this Agreement and
opening of an escrow pursuant to this Agreement shall be deemed to constitute
conclusive evidence of Title Company's agreement to be bound by the terms and
conditions of this Agreement pertaining to Title Company. Disbursement of any
funds shall be made by check, certified check or wire transfer, as directed by
Borrower and Lender. Title Company shall be under no obligation to disburse any
funds
5
represented by check or draft, and no check or draft shall be payment to Title
Company in compliance with any of the requirements hereof, until it is advised
by the bank in which such check or draft is deposited that such check or draft
has been honored. Title Company is authorized to act upon any statement
furnished by the holder or payee, or a collection agent for the holder or payee,
of any lien on or charge or assessment in connection with the Premises,
concerning the amount of such charge or assessment or the amount secured by such
lien, without liability or responsibility for the accuracy of such statement.
The employment of Title Company as escrow agent shall not affect any rights of
subrogation under the terms of any title insurance policy issued pursuant to the
provisions thereof.
4. CLOSING CONDITIONS. The obligation of Lender to consummate the
transaction contemplated by this Agreement is subject to the fulfillment or
waiver of each of the following conditions:
A. Title Insurance Commitments. Lender shall have received for the
Premises a preliminary title report and irrevocable commitment to insure title
in the amount of the Loan, by means of a mortgagee's, ALTA extended coverage
policy of title insurance (or its equivalent, in the event such form is not
issued in the jurisdiction where the Premises is located) issued by Title
Company showing Borrower vested with good and marketable fee title in the real
property comprising such Premises, committing to insure Lender's first priority
lien upon and security interest in such real property subject only to Permitted
Exceptions, and containing such endorsements as Lender may require.
B. Survey. Lender shall have received (i) a current ALTA survey of the
Premises or its equivalent, the form and substance of which shall be
satisfactory to Lender in its reasonable discretion and (ii) the Site and
Utility Plans. Lender shall have obtained a flood certificate indicating that
the location of the Premises is not within the 100-year flood plain or
identified as a special flood hazard area as defined by the Federal Emergency
Management Agency, or if the Premises is in such a flood plain or special flood
hazard area, Borrower shall have provided Lender with evidence of flood
insurance maintained on the Premises in an amount and on terms and conditions
reasonably satisfactory to Lender.
C. Environmental. Lender shall have completed such environmental due
diligence of the Premises as it deems necessary or advisable in its sole
discretion, including, without limitation, receiving an Environmental Policy
with respect to the Premises, and Lender shall have approved the environmental
condition of the Premises in its sole discretion.
D. Compliance With Representations, Warranties and Covenants. All of the
representations and warranties set forth in Section 5 shall be true, correct and
complete as of the Closing Date, and Borrower shall be in compliance with each
of the covenants set forth in Section 6 as of the Closing Date. No event shall
have occurred or condition shall exist or information shall have been disclosed
by Borrower or discovered by Lender which has had or would be reasonably likely
to have a material adverse effect on the Premises, any of the Borrower Parties
or Lender's willingness to consummate the transaction contemplated by this
Agreement, as determined by Lender in its sole and absolute discretion.
E. Proof of Insurance. Borrower shall have delivered to Lender
certificates of insurance and copies of insurance policies showing that all
insurance required by the Loan Documents and providing coverage and limits
satisfactory to Lender are in full force and effect.
F. Legal Opinions. Borrower shall have delivered to Lender such legal
opinions as Lender may reasonably require all in form and substance reasonably
satisfactory to Lender and its counsel.
G. Fee and Closing Costs. Borrower shall have paid the Fee to Lender and
shall have paid all costs of the transactions described in this Agreement,
including, without limitation, the cost of title insurance premiums and all
endorsements required by Lender, survey charges, UCC and litigation search
charges, the attorneys' fees of Borrower, reasonable attorneys' fees and
expenses of Lender, the cost of the environmental due diligence undertaken
pursuant to Section 4.C, including, without limitation, the cost of the
Environmental Policy, Lender's site inspection costs and fees, stamp taxes,
mortgage taxes, transfer fees, escrow, filing and recording fees and UCC filing
and recording fees (including preparation,
6
filing and recording fees for UCC continuation statements). Borrower shall have
also paid all real and personal property and other applicable taxes and
assessments and other charges relating to the Premises which are due and payable
on or prior to the Closing Date as well as taxes and assessments due and payable
subsequent to the Closing Date but which Title Company requires to be paid at
Closing as a condition to the issuance of the title insurance policy described
in Section 4.A.
H
Closing Documents. At or prior to the Closing Date, Lender and/or
the Borrower Parties, as may be appropriate, shall have executed and delivered
or shall have caused to be executed and delivered to Lender, or as Lender may
otherwise direct, the Loan Documents and such other documents, payments,
instruments and certificates, as Lender may require in form acceptable to
Lender.
I.
Subordination Agreements. Borrower shall have caused the
Subordination Agreements to be delivered to Lender, all in form and substance
acceptable to Lender in its sole discretion.
Upon fulfillment or waiver of all of the above conditions, Lender shall
deposit funds necessary to close this transaction with the Title Company and
this transaction shall close in accordance with the terms and conditions of this
Agreement.
5.
REPRESENTATIONS AND WARRANTIES OF BORROWER. The representations and
warranties of Borrower contained in this Section are being made by Borrower as
of the Closing Date to induce Lender to enter into this Agreement and consummate
the transactions contemplated herein and shall survive the Closing. Borrower
represents and warrants to Lender (and Environmental Insurer solely with respect
to Section 3.K) as follows:
A.
Financial Information. Borrower has delivered to Lender certain
financial statements and other information concerning the Borrower Parties in
connection with the transaction described in this Agreement (collectively, the
"Financial Information"). The Financial Information is true, correct and
complete in all material respects; there have been no amendments to the
Financial Information since the date such Financial Information was prepared or
delivered to Lender. Borrower understands that Lender is relying upon the
Financial Information and Borrower represents that such reliance is reasonable.
All financial statements included in the Financial Information were prepared in
accordance with GAAP and fairly present as of the date of such financial
statements the financial condition of each individual or entity to which they
pertain. No change has occurred with respect to the financial condition of any
of the Borrower Parties and/or the Premises as reflected in the Financial
Information, which has not been disclosed in writing to Lender or has had, or
could reasonably be expected to result in, a Material Adverse Effect.
B.
Organization and Authority. Each of the Borrower Parties (other than
individuals), as applicable, is duly organized or formed, validly existing and
in good standing under the laws of its state of incorporation or formation.
Borrower is qualified as a foreign corporation, partnership or limited liability
company, as applicable, to do business in each state where the Premises are
located, and each of the Borrower Parties is qualified as a foreign corporation,
partnership or limited liability company, as applicable, to do business in any
other jurisdiction where the failure to be qualified would reasonably be
expected to result in a Material Adverse Effect. All necessary action has been
taken to authorize the execution, delivery and performance by the Borrower
Parties of this Agreement and the other Loan Documents. The person(s) who have
executed this Agreement on behalf of Borrower are duly authorized so to do.
Borrower is not a "foreign corporation", "foreign partnership", "foreign trust",
"foreign estate" or "foreign person" (as those terms are defined by the Internal
Revenue Code of 1986, as amended). Borrower's U.S. Federal Tax Identification
number, Organization Identification number and principal place of business are
correctly set forth on the signature page of this Agreement. None of the
Borrower Parties, and no individual or entity owning directly or indirectly any
interest in any of the Borrower Parties, is an individual or entity whose
property or interests are subject to being blocked under any of the OFAC Laws
and Regulations or is otherwise in violation of any of the OFAC Laws and
Regulations; provided,
7
however, the representation contained in this sentence shall not apply to any
Person to the extent such Person's interest is in or through a U.S.
Publicly-Traded Entity.
C. Enforceability of Documents. Upon execution by the Borrower Parties,
this Agreement and the other Loan Documents shall constitute the legal, valid
and binding obligations of the Borrower Parties, respectively, enforceable
against the Borrower Parties in accordance with their respective terms, except
as such enforceability may be limited by applicable bankruptcy, insolvency,
liquidation, reorganization and other laws affecting the rights of creditors
generally and general principles of equity.
D. Litigation. There are no suits, actions, proceedings or investigations
pending, or to the best of its knowledge, threatened against or involving the
Borrower Parties or the Premises before any arbitrator or Governmental
Authority, except for such suits, actions, proceedings or investigations which,
individually or in the aggregate, have not had, and would not reasonably be
expected to result in, a Material Adverse Effect.
E. Absence of Breaches or Defaults. The Borrower Parties are not, and the
authorization, execution, delivery and performance of this Agreement and the
other Loan Documents will not result, in any breach or default under any other
document, instrument or agreement to which any of the Borrower Parties is a
party or by which any of the Borrower Parties, the Premises or any of the
property of any of the Borrower Parties is subject or bound, except for such
breaches or defaults which, individually or in the aggregate, have not had, and
would not reasonably be expected to result in, a Material Adverse Effect. The
authorization, execution, delivery and performance of this Agreement and the
other Loan Documents will not violate any applicable law, statute, regulation,
rule, ordinance, code, rule or order. The Premises is not subject to any right
of first refusal, right of first offer or option to purchase or lease granted to
a third party.
F. Utilities. Adequate public utilities are available at the Premises to
permit utilization of the Premises as a Permitted Concept and all utility
connection fees and use charges will have been paid in full prior to
delinquency.
G. Zoning; Compliance With Laws. The Premises is in compliance with all
applicable zoning requirements, and the use of the Premises as a Permitted
Concept does not constitute a nonconforming use under applicable zoning
requirements. The Borrower Parties and the Premises are in compliance with all
Applicable Regulations except for such noncompliance which has not had, and
would not reasonably be expected to result in, a Material Adverse Effect.
H. Area Development; Wetlands. No condemnation or eminent domain
proceedings affecting the Premises have been commenced or, to the best of
Borrower's knowledge, are contemplated. Neither the Premises, nor to the best of
Borrower's knowledge, the real property bordering the Premises, are designated
by any Governmental Authority as a wetlands.
I. Licenses and Permits; Access. All required licenses and permits, both
governmental and private, to use and operate the Premises as a Permitted Concept
are in full force and effect, except for such licenses and permits the failure
of which to obtain has not had, and would not reasonably be expected to result
in, a Material Adverse Effect. Adequate rights of access to public roads and
ways are available to the Premises for unrestricted ingress and egress and
otherwise to permit utilization of the Premises for their intended purposes, and
all such public roads and ways have been completed and dedicated to public use.
J. Condition of Premises. The Premises, including the Personal Property,
is in good condition and repair and well maintained, ordinary wear and tear
excepted, fully equipped and operational, free from structural defects, safe and
properly lighted.
K. Environmental. The representations and warranties of Borrower set forth
in Section 2 of the Environmental Indemnity Agreement, together with the
corresponding definitions, are incorporated by
8
reference into this Agreement as if stated in full in this Agreement. Lender has
charged Borrower a fee for the Environmental Policy. Borrower acknowledges that
the Environmental Policy is for the sole protection of Lender and will not
protect Borrower or provide Borrower with any coverage thereunder. Borrower
acknowledges and agrees that Environmental Insurer may rely on the environmental
representations and warranties incorporated by reference into this subsection K,
that Environmental Insurer is an intended third-party beneficiary of such
representations and warranties and that Environmental Insurer shall have all
rights and remedies available at law or in equity as a result of a breach of
such representations and warranties, including, to the extent applicable, the
right of subrogation.
L.
Title to Premises; First Priority Lien. Fee title to the real
property comprising the Premises is vested in Borrower, free and clear of all
liens, encumbrances, charges and security interests of any nature whatsoever,
except the Permitted Exceptions. Borrower is owner of all Personal Property,
free and clear of all liens, encumbrances, charges and security interests of any
nature whatsoever, and no Affiliate of Borrower owns any of the Personal
Property. Upon Closing, Lender shall have a first priority lien upon and
security interest in the Premises pursuant to the Mortgage and the UCC-1
Financing Statements.
M.
No Mechanics' Liens. There are no delinquent accounts payable or
mechanics' liens in favor of any materialman, laborer, or any other person or
entity in connection with labor or materials furnished to or performed on any
portion of the Premises; and no work has been performed or is in progress nor
have materials been supplied to the Premises or agreements entered into for work
to be performed or materials to be supplied to the Premises prior to the date
hereof, which will be delinquent on or before the Closing Date.
N.
Money Laundering. (1) Borrower has taken all reasonable measures, in
accordance with all applicable Anti-Money Laundering Laws, with respect to each
holder of a direct or indirect interest in the Borrower Parties, to assure that
funds invested by such holders in the Borrower Parties are derived from legal
sources; provided, however, none of the foregoing shall apply to any Person to
the extent that such Person's interest is in or through a U.S. Publicly-Traded
Entity.
(2) To Borrower's knowledge after making due inquiry, neither any of the
Borrower Parties nor any holder of a direct or indirect interest in the Borrower
Parties (a) is under investigation by any Governmental Authority for, or has
been charged with, or convicted of, any violation of any Anti-Money Laundering
Laws, or drug trafficking, terrorist-related activities or other money
laundering predicated crimes or a violation of the BSA, (b) has been assessed
civil penalties under these or related laws, or (c) has had any of its funds
seized or forfeited in an action under these or related laws; provided, however,
none of the foregoing shall apply to any Person to the extent that such Person's
interest is in or through a U.S. Publicly-Traded Entity.
(3) Borrower has taken reasonable steps, consistent with industry practice
for comparable organizations and in any event as required by law, to ensure that
the Borrower Parties are and shall be in compliance with all (i) Anti-Money
Laundering Laws and (ii) OFAC Laws and Regulations.
6.
COVENANTS. Borrower covenants to Lender (and Environmental Insurer
solely with respect to Section 4.F) from and after the Closing Date and until
all of the Obligations are satisfied in full, as follows:
A.
Payment of the Note. Borrower shall punctually pay, or cause to be
paid, the principal, interest and all other sums to become due in respect of the
Note and the other Loan Documents in accordance with the Note and the other Loan
Documents. Borrower shall authorize Lender to establish arrangements whereby all
scheduled payments made in respect of the Obligations are transferred by
Automated Clearing House Debit initiated by Lender directly from an account at a
U.S. bank in the name of Borrower to such account as Lender may designate or as
Lender may otherwise designate.
9
B. Title. Borrower shall maintain good and marketable fee simple title to
the real property comprising the Premises and title to the Personal Property,
free and clear of all liens, encumbrances, charges and other exceptions to
title, except the Permitted Exceptions. Lender shall have valid first liens upon
and security interests in the Premises, including the Personal Property,
pursuant to the Mortgage and the UCC-1 Financing Statements.
C. Organization and Status of Borrower; Preservation of Existence. Each of
the Borrower Parties (other than individuals), as applicable, shall be validly
existing and in good standing under the laws of its state of incorporation or
formation. Borrower shall be qualified as a foreign corporation, partnership or
limited liability company to do business in each state where the Premises are
located, and each of the Borrower Parties shall be qualified as a foreign
corporation, partnership or limited liability company in any other jurisdiction
where the failure to be qualified would reasonably be expected to result in a
Material Adverse Effect. Borrower shall preserve its current form of
organization and shall not change its legal name, its state of formation, nor,
in one transaction or a series of related transactions, merge with or into, or
consolidate with, any other entity without providing, in each case, Lender with
30 days' prior written notice and obtaining Lender's prior written consent (to
the extent such consent is required under Section 5 of this Agreement). In
addition, Borrower shall require, and shall take reasonable measures to comply
with the requirement, that no individual or entity owning directly or indirectly
any interest in any of the Borrower Parties is an individual or entity whose
property or interests are subject to being blocked under any of the OFAC Laws
and Regulations or is otherwise in violation of any of the OFAC Laws and
Regulations; provided, however, the covenant contained in this sentence shall
not apply to any Person to the extent that such Person's interest is in or
through a U.S. Publicly-Traded Entity.
D. Licenses and Permits. All required licenses and permits, both
governmental and private, to use and operate the Premises as a Permitted Concept
shall be maintained in full force and effect.
E. Compliance With Laws Generally. The use and occupation of the Premises,
and the condition thereof, including, without limitation, any Restoration, shall
comply with all Applicable Regulations now or hereafter in effect, including,
without limitation, the OFAC Laws and Regulations and Anti-Money Laundering
Laws. In addition, the Borrower Parties shall comply with all Applicable
Regulations now or hereafter in effect. Without limiting the generality of the
other provisions of this Section, Borrower shall comply with the ADA, and all
regulations promulgated thereunder, as it affects the Premises.
F. Compliance With Environmental Provisions. The covenants, obligations
and agreements of Borrower set forth in Sections 3 through 7 of the
Environmental Indemnity Agreement, together with the corresponding definitions,
are incorporated by reference into this Agreement as if stated in full in this
Agreement.
G. Financial Statements. Within 45 days after the end of each fiscal
quarter and within 120 days after the end of each fiscal year of Borrower,
Borrower shall deliver to Lender (a) complete financial statements of the
Borrower Parties including a balance sheet, profit and loss statement, statement
of cash flows and all other related schedules for the fiscal period then ended;
(b) income statements for the business at the Premises; and (c) such other
financial information as Lender may reasonably request in order to establish
compliance with the financial covenants in the Loan Documents, including,
without limitation, Section 4.J of this Agreement. All such financial statements
shall be prepared in accordance with GAAP from period to period, and shall be
certified to be accurate and complete by Borrower (or the Treasurer or other
appropriate officer of Borrower). In the event the property and business at the
Premises is ordinarily consolidated with other business for financial statement
purposes, such financial statements shall be prepared on a consolidated basis
showing separately the sales, profits and losses, assets and liabilities
pertaining to the Premises with the basis for allocation of overhead of other
charges being clearly set forth. The financial statements delivered to Lender
need not be audited, but Borrower shall deliver to Lender copies of any audited
financial statements of Borrower which may be prepared, as soon as they are
available. Borrower shall also
10
cause to be delivered to Lender copies of any financial statements required to
be delivered to Borrower by any tenants of the Premises.
H.
Lost Note. Borrower shall, if the Note is mutilated, destroyed, lost
or stolen (a "Lost Note"), promptly deliver to Lender, upon receipt from Lender
of an affidavit and indemnity in a form reasonably acceptable to Lender and
Borrower stipulating that the Note has been mutilated, destroyed, lost or
stolen, in substitution therefor, a new promissory note containing the same
terms and conditions as the Lost Note with a notation thereon of the unpaid
principal and accrued and unpaid interest. Borrower shall provide fifteen (15)
days' prior notice to Lender before making any payments to third parties in
connection with the Lost Note.
I.
Inspections. Borrower shall, during normal business hours (or at any
time in the event of an emergency), (1) provide Lender and Lender's officers,
employees, agents, advisors, attorneys, accountants, architects, and engineers
with access to the Premises, all drawings, plans, and specifications for the
Premises in possession of any of the Borrower Parties, all engineering reports
relating to the Premises in the possession of any of the Borrower Parties, the
files, correspondence and documents relating to the Premises, and the financial
books and records, including lists of delinquencies, relating to the ownership,
operation, and maintenance of the Premises (including, without limitation, any
of the foregoing information stored in any computer files), (2) allow such
persons to make such inspections, tests, copies, and verifications as Lender
considers necessary, and (3) if Borrower is in breach of the Corporate Fixed
Charge Coverage Ratio requirement set forth in the following subsection J, pay
expenses reasonably incurred by Lender from time to time in conducting such
inspections, tests, copies and verifications upon demand (such amounts to bear
interest at the Default Rate if not paid upon demand until paid).
J.
Corporate Fixed Charge Coverage Ratio. It shall be an Event of
Default hereunder if Parent Company shall fail to maintain a Corporate Fixed
Charge Coverage Ratio of at least 1.25:1, determined as of the last day of each
fiscal year of Borrower. For purposes of this Section, the term "Corporate Fixed
Charge Coverage Ratio" shall mean with respect to the twelve month period of
time immediately preceding the date of determination, the ratio calculated for
such period of time, each as determined in accordance with GAAP, of (a) the sum
of Parent Company's Net Income, plus Interest Expense, plus Depreciation and
Amortization expense, plus Operating Lease Expense, plus or minus other non-cash
adjustments to Net Income (if any), less increases in officer or shareholder
loans receivable, less dividends or distributions not otherwise expensed on the
Borrower's income statement divided by the sum of Parent Company's aggregate
Debt service (i.e. principal and interest) plus Capital Lease payments, plus
Operating Lease expense paid in the applicable fiscal year.
For purposes of this Section, the following terms shall be defined as set
forth below:
"Capital Lease" shall mean all leases of any property, whether real,
personal or mixed, by Parent Company or any Affiliate of Parent Company,
as applicable, which lease would, in conformity with GAAP, be required to
be accounted for as a capital lease on the balance sheet of Parent Company
or any Affiliate of Parent Company. The term "Capital Lease" shall not
include any operating lease.
"Debt" shall mean with respect to Parent Company and any Affiliate
of Parent Company, collectively, and for the period of determination (i)
indebtedness for borrowed money, (ii) obligations evidenced by bonds,
indentures, notes or similar instruments, (iii) obligations to pay the
deferred purchase price of property or services, (iv) obligations under
leases which should be, in accordance with GAAP, recorded as Capital
Leases, and (v) obligations under direct or indirect guarantees in respect
of, and obligations (contingent or otherwise) to purchase or otherwise
acquire, or otherwise to assure a creditor against loss in respect of,
indebtedness or obligations of others of the kinds referred to in clauses
(i) through (iv) above.
11
"Depreciation and Amortization" shall mean the depreciation and
amortization accruing during any period of determination with respect to
Parent Company and any Affiliate of Parent Company, collectively, as
determined in accordance with GAAP.
"Interest Expense" shall mean for any period of determination, the
sum of all interest accrued or which should be accrued in respect of all
Debt of Parent Company and any Affiliate of Parent Company, collectively,
as determined in accordance with GAAP.
"Net Income" shall mean with respect to the period of determination,
the net income or net loss of Parent Company and the Affiliates of Parent
Company, collectively. In determining the amount of Net Income, (i)
adjustments shall be made for nonrecurring gains and losses or non-cash
items allocable to the period of determination, (ii) deductions shall be
made for, among other things, Depreciation and Amortization, Interest
Expense, Operating Lease Expense and actual corporate overhead expense
allocable to the period of determination, and (iii) no deductions shall be
made for income taxes or charges equivalent to income taxes allocable to
the period of determination, as determined in accordance with GAAP.
"Operating Lease Expense" shall mean the sum of all payments and
expenses incurred by Parent Company and any Affiliates of Parent Company,
collectively, under any operating leases during the period of
determination, as determined in accordance with GAAP.
B.
Affiliate Transactions. Unless otherwise approved by Lender, all
transactions between Borrower and any of its Affiliates shall be on terms
substantially as advantageous to Borrower as those which could be obtained by
Borrower in a comparable arm's length transaction with a non-Affiliate of
Borrower.
C.
Compliance Certificates. Within 60 days after the end of each fiscal
year of Borrower, Borrower shall deliver a compliance certificate to Lender in a
form to be provided by Lender in order to establish that Borrower is in
compliance in all material respects with all of its obligations, duties and
covenants under the Loan Documents.
D.
OFAC Laws and Regulations. Borrower shall immediately notify Lender
in writing if any individual or entity owning directly or indirectly any
interest in any of the Borrower Parties or any director, officer, member,
manager or partner of any of such holders is an individual or entity whose
property or interests are subject to being blocked under any of the OFAC Laws
and Regulations or is otherwise in violation of any of the OFAC Laws and
Regulations, or is under investigation by any governmental entity for, or has
been charged with, or convicted of, drug trafficking, terrorist-related
activities or any violation of Anti-Money Laundering Laws, has been assessed
civil penalties under these or related laws, or has had funds seized or
forfeited in an action under these or related laws; provided, however, the
covenant contained in this sentence shall not apply to any Person to the extent
that such Person's interest is in or through a U.S. Publicly-Traded Entity.
7.
SALES, TRANSFERS, ASSIGNMENTS AND PLEDGES. Without limiting the
terms and conditions of Section 3.09 of the Mortgage, Borrower agrees that
Borrower shall not, without the prior written consent of Lender, sell, convey,
mortgage, grant, bargain, encumber, pledge, assign, or otherwise transfer the
Premises or any part thereof or permit the Premises or any part thereof to be
sold, conveyed, mortgaged, granted, bargained, encumbered, pledged, assigned, or
otherwise transferred, other than sales from inventory in the ordinary course of
business and the replacement of obsolete Personal Property. A sale, conveyance,
mortgage, grant, bargain, encumbrance, pledge, assignment, or transfer within
the meaning of this Section shall be deemed to include, but not limited to, (a)
an installment sales agreement wherein Borrower agrees to sell the Premises or
any part thereof for a price to be paid in installments; (b) an agreement by
Borrower leasing all or any part of the Premises or a sale, assignment or other
transfer of, or the grant of a security interest in, Borrower's right, title and
interest in and to any Lease or any Rents (as defined in the Mortgage); (c) any
merger by or with any of the Borrower Parties or any equity owner of any of the
Borrower Parties or any entity directly or indirectly controlling in any
12
manner such equity owner or any of the Borrower Parties (collectively, "Borrower
Equity Owners") or any pledge, encumbrance, hypothecation or collateral
assignment of the equity ownership of any of the Borrower Parties or any of the
Borrower Equity Owners; (d) if any of the Borrower Parties or the Borrower
Equity Owners is not a natural person, the voluntary or involuntary sale,
conveyance or transfer of such entity's equity interests, or the creation or
issuance of new equity interests which in one or a series of transactions
results in more than 49% of the equity interests of such entity being held by
any party or parties who are not, as of the date of this Agreement, equity
owners of any of the Borrower Parties or the Borrower Equity Owners; (e) if any
of the Borrower Parties or the Borrower Equity Owners is a limited or general
partnership or limited liability company, the change, removal or resignation of
any general partner or managing member, as applicable; and (f) if any of the
Borrower Entities or any Borrower Equity Owners is a corporation, limited
liability company governed by a board of managers or trust, the change, removal
or resignation, other than by death or incapacity, in one or a series of
transactions of a majority of the board of directors, board of managers or
trustees, as applicable. In addition, no interest in any of the Borrower
Parties, or in any individual or person owning directly or indirectly any
interest in any of the Borrower Parties, shall be transferred, assigned or
conveyed to any individual or person whose property or interests are subject to
being blocked under any of the OFAC Laws and Regulations and/or who is in
violation of any of the OFAC Laws and Regulations, and any such transfer,
assignment or conveyance shall not be effective until the transferee has
provided written certification to Borrower and Lender that (A) the transferee or
any person who owns directly or indirectly any interest in transferee, is not an
individual or entity whose property or interests are subject to being blocked
under any of the OFAC Laws and Regulations or is otherwise in violation of the
OFAC Laws and Regulations, and (B) the transferee has taken reasonable measures
to assure than any individual or entity who owns directly or indirectly any
interest in transferee, is not an individual or entity whose property or
interests are subject to being blocked under any of the OFAC Laws and
Regulations or is otherwise in violation of the OFAC Laws and Regulations;
provided, however, the covenant contained in this sentence shall not apply to
any Person to the extent that such Person's interest is in or through a U.S.
Publicly-Traded Entity.
Notwithstanding the foregoing, a transfer by devise or descent or by
operation of law upon the death of a member, partner or stockholder of any of
the Borrower Parties or any general or limited partner or member thereof shall
not be deemed to be a sale, conveyance, mortgage, grant, bargain, encumbrance,
pledge, assignment, or transfer within the meaning of this Section.
Lender's consent to any matter contemplated by this Section shall be
subject to the satisfaction of such conditions as Lender shall determine in its
sole discretion, including, without limitation, (i) the execution and delivery
of such modifications to the terms of the Loan Documents as Lender shall
request, and (ii) the proposed transferee having agreed to comply with all of
the terms and conditions of the Loan Documents (including any modifications
requested by Lender pursuant to clause (i) above). In addition, any such consent
shall be conditioned upon payment by Borrower to Lender of (x) a fee equal to
one percent (1%) of the then outstanding principal balance of the Note and (y)
all out-of-pocket costs and expenses incurred by Lender in connection with such
consent, including, without limitation, reasonable attorneys' fees. Lender shall
not be required to demonstrate any actual impairment of its security or any
increased risk of default hereunder in order to declare the Obligations
immediately due and payable upon Borrower's sale, conveyance, mortgage, grant,
bargain, encumbrance, pledge, assignment, or transfer as contemplated by this
Section. The provisions of this Section shall apply to every such sale,
conveyance, mortgage, grant, bargain, encumbrance, pledge, assignment, or
transfer regardless of whether voluntary or not, or whether or not Lender has
consented to any previous sale, conveyance, mortgage, grant, bargain,
encumbrance, pledge, assignment, or transfer pursuant to this Section.
8. TRANSACTION CHARACTERIZATION. It is the intent of the parties hereto
that the business relationship created by the Loan Documents is solely that of
creditor and debtor and has been entered into by both parties in reliance upon
the economic and legal bargains contained in the Loan Documents. None of the
agreements contained in the Loan Documents is intended, nor shall the same be
deemed or construed, to create a partnership (either de jure or de facto)
between Borrower and Lender, to make them joint venturers, to make Borrower an
agent, legal representative, partner, subsidiary or employee of Lender, nor to
make Lender in any way responsible for the debts, obligations or losses of
Borrower.
13
9.
DEFAULT AND REMEDIES. A. Each of the following shall be deemed an
event of default by Borrower (each, an "Event of Default"):
(1)
forth
or if
false
If any
in any
any of
in any
representation or warranty of any of the Borrower Parties set
of the Loan Documents is false in any material respect when made,
the Borrower Parties renders any statement or account which is
material respect.
(2)
If any principal, interest or other monetary sum due under the Note,
the Mortgage or any other Loan Document is not paid within five days after the
date when due; provided, however, notwithstanding the occurrence of such an
Event of Default, Lender shall not be entitled to exercise its rights and
remedies set forth below unless and until Lender shall have given Borrower
notice thereof and a period of five days from the delivery of such notice shall
have elapsed without such Event of Default being cured.
(3)
If Borrower fails to observe or perform any of the other covenants,
conditions, or obligations of this Agreement; provided, however, if any such
failure does not involve the payment of any monetary sum, is not willful or
intentional, does not place any rights or interest in collateral of Lender in
immediate jeopardy, and is within the reasonable power of Borrower to promptly
cure after receipt of notice thereof, all as determined by Lender in its
reasonable discretion, then such failure shall not constitute an Event of
Default hereunder, unless otherwise expressly provided herein, unless and until
Lender shall have given Borrower notice thereof and a period of 30 days shall
have elapsed, during which period Borrower may correct or cure such failure,
upon failure of which an Event of Default shall be deemed to have occurred
hereunder without further notice or demand of any kind being required. If such
failure cannot reasonably be cured within such 30-day period, as determined by
Lender in its reasonable discretion, and Borrower is diligently pursuing a cure
of such failure, then Borrower shall have a reasonable period to cure such
failure beyond such 30-day period, which shall not exceed 90 days after
receiving notice of the failure from Lender. If Borrower shall fail to correct
or cure such failure within such 90-day period, an Event of Default shall be
deemed to have occurred hereunder without further notice or demand of any kind
being required.
(4)
If any of the Borrower Parties becomes insolvent within the meaning
of the Code, files or notifies Lender that it intends to file a petition under
the Code, initiates a proceeding under any similar law or statute relating to
bankruptcy, insolvency, reorganization, winding up or adjustment of debts
(collectively, an "Action"), becomes the subject of either a petition under the
Code or an Action, or is not generally paying its debts as the same become due.
(5)
If there is an "Event of Default" or a breach or default, after the
passage of all applicable notice and cure or grace periods, under any other Loan
Document, or any of the Other Agreements.
(6)
If a final, nonappealable judgment is rendered by a court against
any of the Borrower Parties which (i) has a material adverse effect on the
operation of the Premises as a Permitted Concept, or (ii) is in an amount
greater than $100,000.00 and not covered by insurance, and, in either case, is
not discharged or provision made for such discharge within 60 days from the date
of entry of such judgment.
(7)
If Parent Company shall fail to maintain the Corporation Fixed
Charge Coverage ratio covenant set forth in Section 6.J.
10.
MISCELLANEOUS PROVISIONS.
A.
Notices. All notices, consents, approvals or other instruments
required or permitted to be given by either party pursuant to this Agreement or
any of the other Loan Documents shall be in writing and given by (i) hand
delivery, (ii) facsimile, (iii) express overnight delivery service or (iv)
certified or registered mail, return receipt requested, and shall be deemed to
have been delivered upon (a) receipt, if hand delivered, (b) transmission, if
delivered by facsimile, (c) the next Business Day, if delivered by express
overnight delivery service, or (d) the third Business Day following the day of
deposit of such
14
notice with the United States Postal Service, if sent by certified or registered
mail, return receipt requested. Notices shall be provided to the parties and
addresses (or facsimile numbers, as applicable) specified below. If to Borrower:
Kona Grill Las Vegas, Inc., 7373 East Doubletree Ranch Rd., Ste 210, Scottsdale,
AZ 85258, Attention: James Spiel, Controller, Telephone: (480) 922-8100,
Telecopy: (480) 991-6811; and if to Lender: GE Capital Franchise Finance
Corporation, 17207 North Perimeter Drive, Scottsdale, AZ 85255, Attention:
General Counsel, Telephone: 480-585-4500, Telecopy: 480-585-2225.
B.
Real Estate Commission. Lender and Borrower represent and warrant to
each other that they have dealt with no real estate or mortgage broker, agent,
finder or other intermediary in connection with the transactions contemplated by
this Agreement or the other Loan Documents. Lender and Borrower shall indemnify
and hold each other harmless from and against any costs, claims or expenses,
including attorneys' fees, arising out of the breach of their respective
representations and warranties contained within this Section.
C.
Waiver and Amendment; Document Review. (1) No provisions of this
Agreement or the other Loan Documents shall be deemed waived or amended except
by a written instrument unambiguously setting forth the matter waived or amended
and signed by the party against which enforcement of such waiver or amendment is
sought. Waiver of any matter shall not be deemed a waiver of the same or any
other matter on any future occasion.
(2)
In the event Borrower makes any request upon Lender requiring Lender
or Lender's attorneys to review and/or prepare (or cause to be reviewed and/or
prepared) any documents, plans, specifications or other submissions in
connection with or arising out of this Agreement or any of the other Loan
Documents, then Borrower shall (x) reimburse Lender promptly upon Lender's
demand for all out-of-pocket costs and expenses incurred by Lender in connection
with such review and/or preparation, including, without limitation, reasonable
attorneys' fees, and (y) pay Lender a reasonable processing and review fee.
D.
Captions. Captions are used throughout this Agreement and the other
Loan Documents for convenience of reference only and shall not be considered in
any manner in the construction or interpretation hereof.
E.
Lender's Liability. Notwithstanding anything to the contrary
provided in this Agreement or the other Loan Documents, it is specifically
understood and agreed, such agreement being a primary consideration for the
execution of this Agreement and the other Loan Documents by Lender, that (1)
there shall be absolutely no personal liability on the part of any shareholder,
director, officer or employee of Lender, with respect to any of the terms,
covenants and conditions of this Agreement or the other Loan Documents, (2)
Borrower waives all claims, demands and causes of action against Lender's
officers, directors, employees and agents in the event of any breach by Lender
of any of the terms, covenants and conditions of this Agreement or the other
Loan Documents to be performed by Lender and (3) Borrower shall look solely to
the assets of Lender for the satisfaction of each and every remedy of Borrower
in the event of any breach by Lender of any of the terms, covenants and
conditions of this Agreement or the other Loan Documents to be performed by
Lender, such exculpation of liability to be absolute and without any exception
whatsoever.
F.
Severability. The provisions of this Agreement and the other Loan
Documents shall be deemed severable. If any part of this Agreement or the other
Loan Documents shall be held invalid, illegal or unenforceable, the remainder
shall remain in full force and effect, and such invalid, illegal or
unenforceable provision shall be reformed by such court so as to give maximum
legal effect to the intention of the parties as expressed therein.
G.
Construction Generally. This Agreement and the other Loan Documents
have been entered into by parties who are experienced in sophisticated and
complex matters similar to the transaction contemplated by this Agreement and
the other Loan Documents and are entered into by both parties in reliance upon
the economic and legal bargains contained therein and shall be interpreted and
15
construed in a fair and impartial manner without regard to such factors as the
party which prepared the instrument, the relative bargaining powers of the
parties or the domicile of any party. Borrower and Lender were each represented
by legal counsel competent in advising them of their obligations and liabilities
hereunder.
H. Further Assurances. Borrower will, at its sole cost and expense, do,
execute, acknowledge and deliver or cause to be done, executed, acknowledged and
delivered all such further acts, documents, conveyances, notes, mortgages, deeds
of trust, assignments, security agreements, financing statements and assurances
as Lender shall from time to time reasonably require or deem advisable to carry
into effect the purposes of this Agreement and the other Loan Documents, to
perfect any lien or security interest granted in any of the Loan Documents and
for the better assuring and confirming of all of Lender's rights, powers and
remedies under the Loan Documents.
I. Attorneys' Fees. In the event of any judicial or other adversarial
proceeding between the parties concerning this Agreement or the other Loan
Documents, the prevailing party shall be entitled to recover its attorneys' fees
and other costs in addition to any other relief to which it may be entitled.
J. Entire Agreement. This Agreement and the other Loan Documents, together
with any other certificates, instruments or agreements to be delivered in
connection therewith, constitute the entire agreement between the parties with
respect to the subject matter hereof, and there are no other representations,
warranties or agreements, written or oral, between Borrower and Lender with
respect to the subject matter of this Agreement and the other Loan Documents.
Notwithstanding anything in this Agreement and the other Loan Documents to the
contrary, with respect to the Premises, upon the execution and delivery of this
Agreement by Borrower and Lender, any bid proposals or loan commitments with
respect to the transactions contemplated by this Agreement shall be deemed null
and void and of no further force and effect and the terms and conditions of this
Agreement shall control notwithstanding that such terms and conditions may be
inconsistent with or vary from those set forth in such bid proposals or loan
commitments.
K. Forum Selection; Jurisdiction; Venue; Choice of Law. Borrower
acknowledges that this Agreement and the other Loan Documents were substantially
negotiated in the State of Arizona, this Agreement and the other Loan Documents
were executed by Lender in the State of Arizona and delivered by Borrower in the
State of Arizona, all payments under the Note will be delivered in the State of
Arizona and there are substantial contacts between the parties and the
transactions contemplated herein and the State of Arizona. For purposes of any
action or proceeding arising out of this Agreement or any of the other Loan
Documents, the parties hereto hereby expressly submit to the jurisdiction of all
federal and state courts located in the State of Arizona and Borrower consents
that it may be served with any process or paper by registered mail or by
personal service within or without the State of Arizona in accordance with
applicable law. Furthermore, Borrower waives and agrees not to assert in any
such action, suit or proceeding that it is not personally subject to the
jurisdiction of such courts, that the action, suit or proceeding is brought in
an inconvenient forum or that venue of the action, suit or proceeding is
improper. It is the intent of the parties hereto that all provisions of this
Agreement and the Note shall be governed by and construed under the laws of the
State of Arizona, without giving effect to its principles of conflicts of law.
To the extent that a court of competent jurisdiction finds Arizona law
inapplicable with respect to any provisions of this Agreement or the Note, then,
as to those provisions only, the laws of the state where the Premises is located
shall be deemed to apply. Nothing in this Section shall limit or restrict the
right of Lender to commence any proceeding in the federal or state courts
located in the state in which the Premises is located to the extent Lender deems
such proceeding necessary or advisable to exercise remedies available under this
Agreement or the other Loan Documents.
L. Counterparts. This Agreement and the other Loan Documents may be
executed in one or more counterparts, each of which shall be deemed an original.
M. Assignments by Lender; Binding Effect. Lender may assign in whole or in
part its rights under this Agreement, including, without limitation, in
connection with any Transfer, Participation and/or
16
Securitization. Upon any unconditional assignment of Lender's entire right and
interest hereunder, Lender shall automatically be relieved, from and after the
date of such assignment, of liability for the performance of any obligation of
Lender contained herein. This Agreement and the other Loan Documents shall be
binding upon and inure to the benefit of Borrower and Lender and their
respective successors and permitted assigns, including, without limitation, any
United States trustee, any debtor in possession or any trustee appointed from a
private panel.
N.
Survival. Except for the conditions of Closing described in Section
2, which shall be satisfied or waived as of the Closing Date, all
representations, warranties, agreements, obligations and indemnities of Borrower
and Lender set forth in this Agreement and the other Loan Documents shall
survive the Closing.
O.
WAIVER OF JURY TRIAL AND PUNITIVE, CONSEQUENTIAL, SPECIAL AND
INDIRECT DAMAGES. BORROWER AND LENDER HEREBY KNOWINGLY, VOLUNTARILY AND
INTENTIONALLY WAIVE THE RIGHT EITHER MAY HAVE TO A TRIAL BY JURY WITH RESPECT TO
ANY AND ALL ISSUES PRESENTED IN ANY ACTION, PROCEEDING, CLAIM OR COUNTERCLAIM
BROUGHT BY EITHER OF THE PARTIES HERETO AGAINST THE OTHER OR ITS SUCCESSORS WITH
RESPECT TO ANY MATTER ARISING OUT OF OR IN CONNECTION WITH THIS AGREEMENT, ANY
OF THE OTHER LOAN DOCUMENTS OR ANY DOCUMENT CONTEMPLATED HEREIN OR RELATED
HERETO. THIS WAIVER BY THE PARTIES HERETO OF ANY RIGHT EITHER MAY HAVE TO A
TRIAL BY JURY HAS BEEN NEGOTIATED AND IS AN ESSENTIAL ASPECT OF THEIR BARGAIN.
FURTHERMORE, BORROWER AND LENDER HEREBY KNOWINGLY, VOLUNTARILY AND INTENTIONALLY
WAIVE THE RIGHT EITHER MAY HAVE TO SEEK PUNITIVE, CONSEQUENTIAL, SPECIAL AND
INDIRECT DAMAGES FROM THE OTHER AND ANY OF THE OTHER'S AFFILIATES, OFFICERS,
DIRECTORS OR EMPLOYEES OR ANY OF THEIR SUCCESSORS WITH RESPECT TO ANY AND ALL
ISSUES PRESENTED IN ANY ACTION, PROCEEDING, CLAIM OR COUNTERCLAIM BROUGHT BY
EITHER PARTY AGAINST THE OTHER OR ANY OF THE OTHER'S AFFILIATES, OFFICERS,
DIRECTORS OR EMPLOYEES OR ANY OF THEIR SUCCESSORS WITH RESPECT TO ANY MATTER
ARISING OUT OF OR IN CONNECTION WITH THIS AGREEMENT, ANY OF THE OTHER LOAN
DOCUMENTS OR ANY DOCUMENT CONTEMPLATED HEREIN OR RELATED HERETO. THE WAIVER BY
BORROWER AND LENDER OF ANY RIGHT THEY MAY HAVE TO SEEK PUNITIVE, CONSEQUENTIAL,
SPECIAL AND INDIRECT DAMAGES HAS BEEN NEGOTIATED BY THE PARTIES HERETO AND IS AN
ESSENTIAL ASPECT OF THEIR BARGAIN.
P.
Transfers, Participations and Securitizations. (1) A material
inducement to Lender's willingness to complete the transactions contemplated by
the Loan Documents is Borrower's agreement that Lender may, at any time,
complete a Transfer, Participation or Securitization with respect to the Note,
Mortgage and/or any of the other Loan Documents or any or all servicing rights
with respect thereto.
(2)
Borrower agrees to cooperate in good faith with Lender in connection
with any such Transfer, Participation and/or Securitization of the Note,
Mortgage and/or any of the other Loan Documents, or any or all servicing rights
with respect thereto, including, without limitation (i) providing such
documents, financial and other data, and other information and materials (the
"Disclosures") which would typically be required with respect to the Borrower
Parties by a purchaser, transferee, assignee, servicer, participant, investor or
rating agency involved with respect to such Transfer, Participation and/or
Securitization, as applicable; provided, however, the Borrower Parties shall not
be required to make Disclosures of any confidential information or any
information which has not previously been made public unless required by
applicable federal or state securities laws; and (ii) amending the terms of the
transactions evidenced by the Loan Documents to the extent necessary so as to
satisfy the requirements of purchasers, transferees, assignees, servicers,
participants, investors or selected rating agencies involved in any such
Transfer, Participation or Securitization, so long as such amendments would not
have a material adverse effect upon the Borrower Parties or the transactions
contemplated hereunder. Lender shall be responsible for preparing at its expense
any documents evidencing the amendments referred to in the preceding subitem
(ii).
17
(3)
Borrower consents to Lender providing the Disclosures, as well as
any other information which Lender may now have or hereafter acquire with
respect to the Premises or the financial condition of the Borrower Parties to
each purchaser, transferee, assignee, servicer, participant, investor or rating
agency involved with respect to each Transfer, Participation and/or
Securitization, as applicable. Lender and Borrower (and their respective
Affiliates) shall each pay their own attorneys fees and other out-of-pocket
expenses incurred in connection with the performance of their respective
obligations under this Section.
(4)
Notwithstanding anything to the contrary contained in this Agreement
or the other Loan Documents: (a) an Event of Default or a breach or default,
after the passage of all applicable notice and cure or grace periods, under any
Loan Document or Other Agreement which relates to a loan or sale/leaseback
transaction which has not been the subject of a Securitization, Participation or
Transfer shall not constitute an Event of Default or a breach or default, as
applicable, under any Loan Document or Other Agreement which relates to a loan
which has been the subject of a Securitization, Participation or Transfer; (b)
an Event of Default or a breach or default, after the passage of all applicable
notice and cure or grace periods, under any Loan Document or Other Agreement
which relates to a loan which is included in any Loan Pool shall not constitute
an Event of Default or a breach or default, as applicable, under any Loan
Document or Other Agreement which relates to a loan which is included in any
other Loan Pool; (c) the Loan Documents and Other Agreements corresponding to
the loans in any Loan Pool shall not secure the obligations of any of the
Borrower Parties contained in any Loan Document or Other Agreement which does
not correspond to a loan in such Loan Pool; and (d) the Loan Documents and Other
Agreements which do not correspond to a loan in any Loan Pool shall not secure
the obligations of any of the Borrower Parties contained in any Loan Document or
Other Agreement which does correspond to a loan in such Loan Pool.
Q.
Estoppel Certificate. At any time, and from time to time, each party
agrees, promptly and in no event later than fifteen (15) days after a request
from the other party, to execute, acknowledge and deliver to the other party a
certificate in the form supplied by the other party, certifying: (a) to its
knowledge, whether there are then any existing defaults by it or the other party
in the performance of their respective obligations under this Agreement or any
of the other Loan Documents, and, if there are any such defaults, specifying the
nature and extent thereof; (b) that no notice of default has been given or
received by it under this Agreement or any of the other Loan Documents which has
not been cured, except as to defaults specified in the certificate; (c) the
capacity of the person executing such certificate, and that such person is duly
authorized to execute the same on behalf of it; and (d) any other information
reasonably requested by the other party in connection with this Agreement and
the other Loan Documents.
18
IN WITNESS WHEREOF, Borrower and Lender have entered into this Agreement
as of the date first above written.
LENDER:
GE CAPITAL FRANCHISE FINANCE
CORPORATION, a Delaware
corporation
By /s/ Kelly A. Hallford
-----------------------------------Printed Name Kelly A. Hallford
Its Vice President
BORROWER:
KONA GRILL LAS VEGAS, INC.,
a Delaware corporation
By /s/ James Spiel
-----------------------------------Printed Name James Spiel
Its Vice President
U.S. Federal Tax Identification Number:
20-0032438
Organization Identification Number:
3581671
STATE OF ARIZONA
) SS.
COUNTY OF MARICOPA
)
)
The foregoing instrument was acknowledged before me on May 6, 2004 by
Kelly A. Hallford, VP of GE Capital Franchise Finance Corporation, a Delaware
corporation, on behalf of the corporation.
/s/ Ann Halpern
-------------------------------Notary Public
My Commission Expires:
August 2, 2005
STATE OF ARIZONA
) SS.
COUNTY OF MARICOPA
)
)
The foregoing instrument was acknowledged before me on April 29, 2004 by
James Spiel, VP of Kona Grill Las Vegas, Inc., a Delaware corporation, on behalf
of the corporation.
/s/ Kristen Weber
-------------------------------Notary Public
My Commission Expires:
March 8, 2008
EXHIBIT 10.7(b)
PROMISSORY NOTE
Dated as of April 30, 2004
$1,000,000.00
Scottsdale, Arizona
KONA GRILL LAS VEGAS, INC., a Delaware corporation ("Borrower"), for
value received, hereby promises to pay to GE CAPITAL FRANCHISE FINANCE
CORPORATION, a Delaware corporation ("Lender"), whose address is 17207 North
Perimeter Drive, Scottsdale, Arizona 85255, or order, on or before May 1, 2011
(the "Maturity Date"), as herein provided, the principal sum of $1,000,000.00,
and to pay interest on the unpaid principal amount of this Note from the date
hereof to the Maturity Date at the rate of 7.88% per annum on the basis of a
360-day year of twelve consecutive 30-day months, such principal and interest to
be paid in immediately available funds and in lawful money of the United States.
Initially capitalized terms which are not otherwise defined in this Note shall
have the meanings set forth in that certain Loan Agreement dated as of the date
of this Note between Borrower and Lender, as such agreement may be amended,
restated and/or supplemented from time to time (the "Loan Agreement").
Interest on the principal amount of this Note for the period commencing
with the date such principal amount is advanced by Lender through the last day
in the month in which this Note is dated shall be due and payable upon delivery
of this Note. Thereafter, principal and interest shall be payable in consecutive
monthly installments of $15,526.50 commencing on June 1, 2004, and continuing on
the first day of each month thereafter until the Maturity Date, at which time
the outstanding principal and unpaid accrued interest shall be due and payable.
Borrower may prepay this Note in full, but not in part (except as
otherwise set forth below), including all accrued but unpaid interest hereunder
and all sums advanced by Lender pursuant to the Loan Documents and any Other
Agreements, provided that (i) no Event of Default has occurred under any of the
Loan Documents or any Other Agreements, (ii) any such prepayment shall only be
made on a regularly scheduled payment date upon not less than 30 days prior
written notice from Borrower to Lender, and (iii) except as otherwise set forth
below, any such prepayment shall be made together with payment of an amount
equal to the sum of:
(a) a prepayment fee determined by: (i) calculating the
decrease (expressed in basis points) in the weekly average yield of
four-year U.S. Dollar Swaps (as published in Federal Reserve
Statistical Release H.15[519]) (the "Index") on the Friday immediately
preceding the week in which the prepayment is made from the date
hereof, and dividing such decrease by 100; (ii) multiplying the result
determined in (i) by the prepayment factor shown below corresponding to
the applicable period of time during which such prepayment is made, and
(iii) multiplying such product by the principal balance to be prepaid.
If the Index is unchanged or has increased since the date hereof, no
prepayment fee shall be due.
Loan Year
--------1
2
3
4
5
6
7
Variable Rate Factor
-------------------0.033
0.029
0.024
0.019
0.014
0.010
0.005
The first Loan Year shall mean the period of time commencing on the
date of this Note and ending on the last day of the twelfth consecutive month
commencing with the month after the month in which this Note is dated, unless
this Note is dated the first day of a month, in which case the first Loan Year
shall mean the twelve consecutive calendar months commencing with the date of
this Note. Each subsequent Loan Year shall mean the
successive twelve consecutive month period following the preceding Loan Year. If
the Index is unchanged or has increased since the date of this Note, no
prepayment fee shall be due.
Plus:
(b) a prepayment premium equal to:
(i) 4% of the amount prepaid if the prepayment is
made on or following the date of this Note but prior to the
first anniversary of the date of this Note;
(ii) 3% of the amount prepaid if the prepayment is
made on or following the first anniversary of the date of this
Note but prior to the second anniversary of the date of this
Note;
(iii) 2% of the amount prepaid if the prepayment is
made on or following the second anniversary of the date of
this Note but prior to the third anniversary of the date of
this Note; and
(iv) 1% of the amount prepaid if the prepayment is
made on or following the third anniversary of the date of this
Note but prior to the fourth anniversary of the date of this
Note.
The foregoing prepayment fee and prepayment premium, as applicable,
shall be due and payable regardless of whether such prepayment is the result of
a voluntary prepayment by Borrower or as a result of Lender declaring the unpaid
principal balance of this Note, accrued interest and all other sums due under
this Note, the Mortgage, the other Loan Documents and any Other Agreements, due
and payable as contemplated below; provided, however, the prohibition on a
partial prepayment and the prepayment fee and prepayment premium, as applicable,
shall not be applicable with respect to a prepayment of this Note in connection
with an application of condemnation proceeds as contemplated by the Mortgage or
as contemplated by the Loan Agreement as a result of a breach and subsequent
cure by Borrower of the Fixed Charge Coverage Ratio required by the Loan
Agreement.
This Note is secured by the Mortgage and the other Loan Documents. Upon
the occurrence of an Event of Default, Lender may declare the entire unpaid
principal balance of this Note, accrued interest, if any, and all other sums due
under this Note and any Loan Documents or Other Agreements due and payable at
once without notice to Borrower. All past-due principal and/or interest shall
bear interest from the due date to the date of actual payment at the lesser of
the highest rate for which the undersigned may legally contract or the rate of
14% per annum (the "Default Rate"), and such Default Rate shall continue to
apply following a judgment in favor of Lender under this Note. If Borrower fails
to make any payment or installment due under this Note within five days of its
due date, Borrower shall pay to Lender, in addition to any other sum due Lender
under this Note or any other Loan Document, a late charge equal to 5% of such
past-due payment or installment (the "Late Charge"), which Late Charge is a
reasonable estimate of the loss that may be sustained by Lender due to the
failure of Borrower to make timely payments. All payments of principal and
interest due hereunder shall be made (i) without deduction of any present and
future taxes, levies, imposts, deductions, charges or withholdings, which
amounts shall be paid by Borrower, and (ii) without any other right of
abatement, reduction, setoff, defense, counterclaim, interruption, deferment or
recoupment for any reason whatsoever. Borrower will pay the amounts necessary
such that the gross amount of the principal and interest received by Lender is
not less than that required by this Note.
No delay or omission on the part of Lender in exercising any remedy,
right or option under this Note shall operate as a waiver of such remedy, right
or option. In any event, a waiver on any one occasion shall not be construed as
a waiver or bar to any such remedy, right or option on a future occasion.
Borrower hereby waives presentment, demand for payment, notice of dishonor,
notice of protest, and protest, notice of intent to accelerate, notice of
acceleration and all other notices or demands in connection with delivery,
acceptance, performance, default or endorsement of this Note. All notices,
consents, approvals or other instruments required or permitted to be given by
either party pursuant to this Note shall be given in accordance with the notice
provisions in the Loan Agreement. Should any indebtedness represented by this
Note be collected at law or in equity, or in bankruptcy or other proceedings, or
should this Note be placed in the hands of attorneys for collection after
default, Borrower shall pay, in addition to the principal and interest due and
payable hereon, all costs of collecting or attempting to collect this Note (the
"Costs"), including reasonable attorneys' fees and expenses of Lender (including
those fees and expenses
2
incurred in connection with any appeal) and court costs whether or not a
judicial action is commenced by Lender. This Note may not be amended or modified
except by a written agreement duly executed by the party against whom
enforcement of this Note is sought. In the event that any one or more of the
provisions contained in this Note shall be held to be invalid, illegal or
unenforceable in any respect, such invalidity, illegality or unenforceability
shall not affect any other provision of this Note, and this Note shall be
construed as if such provision had never been contained herein or therein. Time
is of the essence in the performance of each and every obligation under this
Note.
Notwithstanding anything to the contrary contained in any of the Loan
Documents, the obligations of Borrower to Lender under this Note and any other
Loan Documents are subject to the limitation that payments of interest and late
charges to Lender shall not be required to the extent that receipt of any such
payment by Lender would be contrary to provisions of applicable law limiting the
maximum rate of interest that may be charged or collected by Lender. The portion
of any such payment received by Lender that is in excess of the maximum interest
permitted by such provisions of law shall be credited to the principal balance
of this Note or if such excess portion exceeds the outstanding principal balance
of this Note, then such excess portion shall be refunded to Borrower. All
interest paid or agreed to be paid to Lender shall, to the extent permitted by
applicable law, be amortized, prorated, allocated and/or spread throughout the
full term of this Note (including, without limitation, the period of any renewal
or extension thereof) so that interest for such full term shall not exceed the
maximum amount permitted by applicable law.
This obligation shall bind Borrower and its successors and assigns, and
the benefits hereof shall inure to Lender and its successors and assigns.
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IN WITNESS WHEREOF, Borrower has executed and delivered this Note
effective as of the date first set forth above.
BORROWER:
KONA GRILL LAS VEGAS, INC.,
a Delaware corporation
By /s/ James Spiel
----------------------------------Printed Name James Spiel
------------------------Its
Secretary
----------------------------------
EXHIBIT 10.8(a)
EQUIPMENT LOAN AND SECURITY AGREEMENT
This LOAN AND SECURITY AGREEMENT (this "Agreement"), dated as of
______________ (the "Closing Date") is made by and between KONA GRILL _____,
INC., a Delaware corporation ("Borrower"), and GE CAPITAL FRANCHISE FINANCE
CORPORATION, a Delaware corporation ("GE").
NOW, THEREFORE, in consideration of the premises and the covenants set
forth herein, the receipt and sufficiency of which are hereby acknowledged,
Borrower and GE hereby agree as follows:
1. Transaction; Closing Conditions; Interim and Term Loans. A. On the terms and
subject to the conditions set forth in the Loan Documents (as defined below), GE
shall make an equipment loan to Borrower with respect to the Collateral (as
defined below) in the amount of ___________ (the "Loan Amount"). Such equipment
loan shall be made in the form of an interim equipment loan (the "Interim Loan")
evidenced and disbursed in accordance with subsection C below, and a term
equipment loan evidenced and disbursed in accordance with subsection D below
(the "Term Loan")(the Interim Loan and the Term Loan are defined collectively as
the "Equipment Loan"). The Equipment Loan will be evidenced by the Interim Note
and the Term Note (as defined in subsections C and D below) (the Interim Note
and the Term Note are herein sometimes each called an "Equipment Note" and
collectively the "Equipment Notes"),this Agreement, such UCC-1 Financing
Statements as GE shall require and the guaranty or guaranties required by the
documents described in the following subsection B, as applicable (such
documents, together with all other documents, instruments and agreements
executed in connection with, or contemplated by such documents, including the
Authorization Regarding Information form previously delivered on behalf of the
Borrower to GE, and any amendments to any thereof collectively, the "Loan
Documents"). Borrower shall repay the outstanding principal amount of the
Equipment Loan with interest thereon in the manner and in accordance with the
terms and conditions of the Equipment Notes and the other Loan Documents. The
Equipment Loan shall be advanced in cash or otherwise immediately available
funds subject to any prorations and adjustments required by this Agreement. For
purposes of this Agreement, "Collateral" means all equipment, machinery,
furniture, appliances, trade fixtures, goods, replacements, substitutions,
additions, parts and accessories now owned or hereafter acquired by Borrower and
located at the parcel or parcels of real estate described in Exhibit A attached
hereto (the "Premises"), including, without limitation, fryers, grills, ovens,
warmers, refrigerators, freezers, waste disposal units, dishwashers, beverage
dispensers, ice cream makers, racks, display cases, light fixtures, decor,
counters, cash registers, salad equipment, tables, seating, signs and similar
property of Borrower, together with the proceeds thereof and income therefrom.
B. The obligation of GE to consummate the transaction contemplated by this
Agreement is subject to the fulfillment or waiver of each of the conditions
contained in the loan commitment issued by GE to Borrower with respect to the
Equipment Loan and the "Loan Closing Checklist" prepared by GE with respect to
the Equipment Loan.
C. The Interim Loan in an amount up to the Loan Amount shall be disbursed
by GE to Borrower or at Borrower's direction in up to six (6) partial advances
made at the request of Borrower, subject to the satisfaction of the applicable
conditions contemplated by the preceding subsection B and this subsection C. The
Interim Loan shall be evidenced by and repayable with interest in accordance
with an interim equipment promissory note dated as of the date of this Agreement
executed by Borrower and payable to the order of GE in the Loan Amount (the
"Interim Note"). Borrower shall give GE at least ten (10) days' notice, in the
form of a request for the advance of loan proceeds (the "Request"), specifying
the date on which any portion of the Interim Loan is to be borrowed. Each
Request shall be accompanied by an original copy of the invoice or invoices for
the Collateral to be acquired with such proceeds. Such notice shall constitute a
representation and warranty by Borrower that as of the date of the notice, no
Event of Default (as defined in Section 12) or event that, with the lapse of
time or the giving of notice or both, would constitute an Event of Default, has
occurred and is continuing. GE shall have no obligation to advance any portion
of the Interim Loan if an Event of Default shall have occurred and be
continuing. No Request shall be delivered to GE after the fifth day preceding
the Outside Funding Date (as defined below) and GE shall have no obligation to
disburse any portion of the Interim Loan after the Outside
1
Funding Date. GE will disburse the Interim Loan proceeds to the invoicing
parties, or if Borrower shall have paid the amount of any such invoice, GE shall
reimburse Borrower for such portion of the Loan Amount upon receipt from
Borrower of proof of payment satisfactory to GE. The outstanding amount of the
Interim Loan set forth in GE's records (which may include computer records)
shall be prima facie evidence of the principal amount due and owing to GE under
the Interim Note. The Interim Loan shall be due and payable on the earlier of
January 31, 2005 (the "Outside Funding Date") and the Final Funding Date (as
defined in the following subsection D), provided, that, if all of the conditions
to GE making the Term Loan are satisfied on or before such due date, Borrower
may, in lieu of paying GE the outstanding principal amount of the Interim Note
and all accrued but unpaid interest thereunder (the "Outstanding Interim Loan
Amount") in immediately available funds, repay such amounts by crediting the
Outstanding Interim Loan Amount against the amount of the Term Loan.
D. The Term Loan in the Loan Amount shall be made by GE to Borrower,
subject to the satisfaction of the applicable conditions contemplated by the
preceding subsection B and this subsection D, but in no event later than the
Outside Funding Date. GE shall have no obligation to advance the Term Loan if an
Event of Default shall have occurred and be continuing. The Term Loan shall be
evidenced by and repayable with interest in accordance with the terms of an
equipment promissory note (the "Term Note"), dated as of the date on which the
remaining undisbursed portion of the Term Loan is disbursed by GE to Borrower
(the "Final Funding Date"). The Term Note shall be executed by Borrower and
payable to the order of GE. If Borrower elects to credit the Outstanding Interim
Loan Amount against the amount of the Term Loan, the amount of the Term Loan
advanced to Borrower in cash on the Final Funding Date shall be reduced by the
Outstanding Interim Loan Amount.
2. Security Interest Created; Obligations Secured. A. Borrower hereby grants to
GE a security interest in the Collateral to secure the payment of the following
indebtedness and obligations (the "Obligations"): (i) payment of indebtedness
evidenced by the Equipment Notes, together with all extensions, renewals,
amendments and modifications thereof; and (ii) payment of all other indebtedness
and other sums, including interest at the applicable rate, which may be owed
under, and performance of all other obligations and covenants contained in, any
other Loan Document or any Other Agreement (as defined below), together with any
other instrument given to evidence or further secure the payment and performance
of any obligation secured hereby or thereby. For purposes of this Agreement, the
term:
"Affiliate" means any individual, corporation, partnership, limited liability
company, trust, unincorporated organization, Governmental Authority (as defined
in Section 3 (iii) below) or any other form of entity ("Person") which directly
or indirectly controls, is under common control with, or is controlled by any
other Person. For purposes of this definition, "controls", "under common control
with" and "controlled by" means the possession, directly or indirectly, of the
power to direct or cause the direction of the management and policies of such
Person, whether through ownership of voting securities or otherwise; and "Other
Agreements" means, collectively, all agreements and instruments between, among
or by (1) any of Borrower and any guarantor of the Obligations (collectively,
the "Borrower Parties") or any Affiliate of any of the Borrower Parties
(including any Affiliate of any predecessor-in-interest to any of the Borrower
Parties), and, or for the benefit of, (2) any of GE (including any
predecessor-in-interest to GE) and any Affiliate of GE (including any Affiliate
of any predecessor-in-interest to GE), including, without limitation, promissory
notes and guaranties; provided, however, the term "Other Agreements" shall not
include the agreements and instruments defined as the Loan Documents.
B. Borrower authorizes GE to file financing statements with respect to the
security interest of GE, continuation statements with respect thereto, and any
amendments to such financing statements that may be necessitated by reason of
any of the changes described in Section 13. Borrower agrees that,
notwithstanding any provision in the Uniform Commercial Code as adopted in the
State of Arizona (the "UCC") to the contrary, Borrower shall not file a
termination statement of any financing statement filed by GE in connection with
any security interest granted under this Agreement if GE reasonably objects to
the filing of such termination statement.
C. GE shall at all times have a perfected security interest in the
Collateral that shall be prior to any other interests therein. Borrower shall do
all acts and things, shall execute and file all instruments
2
(including security agreements, UCC financing statements, continuation
statements, etc.) requested by GE to establish, maintain and continue the
perfected security interest of GE in the Collateral, and shall promptly on
demand pay all costs and expenses of (i) filing and recording, including the
costs of any searches deemed necessary by GE from time to time to establish and
determine the validity and the continuing priority of the security interest of
GE, and (ii) all other claims and charges that in the reasonable opinion of GE
might prejudice, imperil or otherwise affect the Collateral or security interest
therein of GE. Borrower agrees that a carbon, photographic or other reproduction
of a security agreement or financing statement shall be sufficient as a
financing statement. GE is hereby irrevocably appointed Borrower's
attorney-in-fact to take any of the foregoing actions requested of Borrower by
GE if Borrower should fail to take such actions, which appointment shall be
deemed coupled with an interest.
3. Borrower's Representations and Warranties. Borrower represents and warrants
to GE as of the date of this Agreement and the Final Funding Date as follows:
(i) All financial statements and other information concerning the Borrower
Parties delivered to GE by Borrower in connection with the transaction described
in this Agreement (collectively, the "Financial Information") are true, correct
and complete in all material respects; there have been no amendments to the
Financial Information since the date such Financial Information was prepared or
delivered to GE; and Borrower understands that GE is relying upon the Financial
Information and Borrower represents that such reliance is reasonable. All
financial statements included in the Financial Information were prepared in
accordance with generally accepted accounting principles consistently applied
("GAAP") and fairly present as of the date of such financial statements the
financial condition of each individual or entity to which they pertain. No
change has occurred with respect to the financial condition of any of the
Borrower Parties or the Collateral as reflected in the Financial Information
which has not been disclosed in writing to GE or has had, or could reasonably be
expected to result in, a material adverse effect on (i) the Collateral,
including without limitation, the use of the Collateral in the operation of a
Kona Grill (the "Permitted Concept"), or (ii) Borrower's ability to perform its
obligations under the Loan Documents ("Material Adverse Effect").
(ii) Each of the Borrower Parties (other than individuals), as applicable,
is duly organized or formed, validly existing and in good standing under the
laws of its state of incorporation or formation, Borrower is qualified as a
foreign corporation, partnership or limited liability company, as applicable, to
do business in the state(s) where the Collateral is located, and each of the
Borrower Parties is qualified as a foreign corporation, partnership or limited
liability company, as applicable, to do business in any other jurisdiction where
the failure to be qualified would reasonably be expected to result in a Material
Adverse Effect. All necessary action has been taken to authorize the execution,
delivery and performance by the Borrower Parties of this Agreement and the other
Loan Documents. The person(s) who have executed this Agreement on behalf of
Borrower are duly authorized so to do. Borrower is not a "foreign corporation",
"foreign partnership", "foreign trust", "foreign estate" or "foreign person" (as
those terms are defined by the Internal Revenue Code of 1986, as amended).
(iii) Upon execution by the Borrower Parties, this Agreement and the other
Loan Documents shall constitute the legal, valid and binding obligations of the
Borrower Parties, respectively, enforceable against the Borrower Parties in
accordance with their respective terms. There are no suits, actions, proceedings
or investigations pending, or to the best of its knowledge, threatened against
or involving the Borrower Parties, the Collateral or the Premises before any
arbitrator or any governmental authority, agency, department, commission,
bureau, board, instrumentality, court or quasi-governmental authority having
jurisdiction or supervisory or regulatory authority over the Collateral or any
of the Borrower Parties ("Governmental Authority"), except for such suits,
actions, proceedings or investigations which, individually or in the aggregate,
have not had, and could not reasonably be expected to result in, a Material
Adverse Effect. The Borrower Parties are not, and the authorization, execution,
delivery and performance of this Agreement and the other Loan Documents will not
result, in any breach or default under any other document, instrument or
agreement to which any of the Borrower Parties is a party or by which any of the
Borrower Parties, the Premises, the Collateral or any of the property of any of
the Borrower Parties is subject or bound, except for such breaches or defaults
which, individually or in the aggregate, have not had, and could not reasonably
be expected to result in, a Material Adverse Effect.
3
The authorization, execution, delivery and performance of this Agreement and the
other Loan Documents will not violate any applicable law, statute, regulation,
rule, ordinance, code, rule or order. The Collateral is not subject to any right
of first refusal, right of first offer or option to purchase or lease granted to
a third party.
4. Use. Borrower agrees that the Collateral will be used at the Premises solely
in the conduct of Borrower's business as a Permitted Concept and will at all
times remain in the possession and control of Borrower at the Premises and will
not be removed without GE's prior written consent. Borrower promises that the
Collateral at all times will be used and operated under and in compliance with
all applicable statutes, regulations, rules, ordinances, codes, licenses,
permits, orders and approvals of each Governmental Authority having jurisdiction
over the Collateral, and all policies or rules of common law, in each case, as
amended, and any judicial or administrative interpretation thereof, including
any judicial order, consent, decree or judgment applicable to any of the
Borrower Parties, except for such noncompliance which will not have, and will
not reasonably be expected to have, a Material Adverse Effect. Borrower will not
permit any Collateral to be subject to any lien, charge or encumbrance except
that of GE and will keep the Collateral free and clear of any and all liens,
charges, encumbrances, and adverse claims. Borrower will not sell, lease, rent,
or otherwise dispose of any item of Collateral without the prior written consent
of GE.
5. Maintenance and Improvement. Borrower shall at all times, at its own expense,
keep the Collateral in good and efficient working order, condition and repair
and well maintained, ordinary wear and tear excepted, and shall make all
inspections and repairs required by law, regulation or insurance policy.
Borrower shall also make any alterations, improvements or additions to the
Collateral that are required by law or regulation. Any alterations,
improvements, or additions to the Collateral shall be made at the expense of
Borrower, shall constitute accessions to the Collateral and shall be subject to
GE's security interest.
6. Loss and Damage. Borrower shall bear the risk of damage, loss, theft, or
destruction, partial or complete, of the Collateral from whatsoever source
arising, whether or not such loss or damage is covered by insurance. Borrower
shall promptly notify GE in writing in the event of any damage, loss, theft, or
destruction, partial or complete, of any item of Collateral. While no Event of
Default shall have occurred and be continuing, GE agrees to apply insurance
proceeds payable to GE by reason of any such damage, loss, theft, or
destruction, at the option of GE, to (a) repair or restore the Collateral to
good condition and working order, (b) replace the Collateral with similar
equipment in good repair, condition and working order, or (c) pay GE, in cash,
an amount equal to the unamortized cost for that item and all other amounts then
due and owing under this Agreement, and upon payment of that amount, this
Agreement shall terminate with respect to that item only, and GE will release
its interest in that item.; provided, however, such release shall not limit or
effect in any manner the amounts otherwise payable by Borrower to GE under the
Loan Documents. Upon the occurrence and during the continuance of an Event of
Default, GE shall have the right to apply the insurance proceeds from any
damage, loss, theft or destruction to any item of Collateral toward the
Obligations in such order, priority and proportions as GE shall determine or pay
such proceeds in whole or in part to Borrower to be applied toward repair,
restoration or replacement of the Collateral as contemplated by the preceding
subitems (a) and (b) of this Section 6.
7. Insurance. Borrower shall procure and continuously maintain and pay for (a)
all risk physical damage insurance covering loss or damage to the Collateral for
not less than the full replacement value thereof naming GE as additional insured
and loss payee, (b) bodily injury and property damage combined single limit
liability insurance in an amount not less than Two Million Dollars ($2,000,000)
for each location at which any of the Collateral is located, and (c) such other
insurance as may from time to time be reasonably required by GE in order to
protect its interests with respect to the Collateral, with such insurance
companies and pursuant to such contracts or policies and with such deductibles
as are satisfactory to GE. All contracts and policies shall include provisions
for the protection of GE notwithstanding any act or neglect of or breach or
default by Borrower, shall provide for payment of insurance proceeds to GE,
shall provide that they may not be modified, terminated or canceled unless GE
4
is given at least thirty (30) days' advance written notice thereof, and shall
provide that the coverage is "primary coverage" for the protection of Borrower
or GE notwithstanding any other coverage carried by GE or Borrower protecting
against similar risks. Borrower shall promptly notify any appropriate insurer
and GE of each and every occurrence that may become the basis of a claim or
cause of action against the insured and provide GE with all data pertinent to
such occurrence. Borrower shall furnish GE with certificates of such insurance
or copies of policies upon request and shall furnish GE with renewal
certificates not less than thirty (30) days prior to the renewal date. Proceeds
of all insurance are payable first to GE to the extent of its interest.
Insurance must be issued by insurance companies licensed to do business in the
state in which the Premises is located and which are rated A:VIII or better by
Best's Key Rating Guide or otherwise approved by GE. All policies shall be
written as primary policies, with deductibles not to exceed $10,000.
8. Taxes. Borrower agrees to pay all taxes, assessments and other governmental
charges of whatsoever kind and character by whom payable on or relating to any
item of Collateral or the sale, ownership, use, shipment, transportation,
delivery or operation thereof or payable in respect to any obligation of
Borrower. Upon receipt of a request therefor from GE, Borrower will submit
written evidence of payment of the obligations described in this section.
9. Financial Data. Within 45 days after the end of each fiscal quarter and
within 120 days after the end of each fiscal year of Borrower, Borrower shall
deliver to GE (a) complete financial statements of the Borrower Parties
including a balance sheet, profit and loss statement, statement of cash flows
and all other related schedules for the fiscal period then ended; (b) income
statements for the business at the Premises; and (c) such other financial
information as GE may reasonably request in order to establish compliance with
the financial covenants in the Loan Documents, as applicable. All such financial
statements and information shall be prepared in accordance with GAAP from period
to period, and shall be certified to be accurate and complete by Borrower (or
the Treasurer or other appropriate officer of Borrower). Borrower understands
that GE is relying upon such financial statements and Borrower represents that
such reliance is reasonable. The financial statements delivered to GE need not
be audited, but Borrower shall deliver to GE copies of any audited financial
statements of Borrower that may be prepared, as soon as they are available.
Borrower shall also provide GE with personal financial statements and tax
returns of any guarantor on an annual basis within ninety (90) days after the
close of each calendar year, and such information concerning its business as GE
may reasonably request.
10. General Indemnity. Borrower shall, at its sole cost and expense, protect,
defend, indemnify, release and hold harmless each of the Indemnified Parties (as
defined below) for, from and against any and all claims, suits, liabilities
(including, without limitation, strict liabilities), actions, proceedings,
obligations, debts, damages, losses, costs, expenses, diminutions in value,
fines, penalties, charges, fees, expenses, judgments, awards, amounts paid in
settlement and damages of whatever kind or nature (including, without
limitation, attorneys' fees, court costs and other costs of defense)
(collectively, "Losses") (excluding Losses suffered by an Indemnified Party
directly arising out of such Indemnified Party's gross negligence or willful
misconduct; provided, however, that the term "gross negligence" shall not
include gross negligence imputed as a matter of law to any of the Indemnified
Parties solely by reason of Borrower's interest in the Collateral or Borrower's
failure to act in respect of matters which are or were the obligation of
Borrower under the Loan Documents) caused by, incurred or resulting from
Borrower's operations of or relating in any manner to the Collateral or the
Premises, whether relating to their original design or construction, latent
defects, alteration, maintenance, use by Borrower or any person thereon,
supervision or otherwise, or from any breach of, default under, or failure to
perform, any term or provision of this Agreement by Borrower, its officers,
employees, agents or other persons, including, without limitation, Losses
arising from (1) any accident, injury to or death of any person or loss of or
damage to property occurring in connection with the Collateral or the Premises
or any portion thereof, (2) any use, non-use or condition in, on or about, or
possession, alteration, repair, operation, maintenance or management of, the
Collateral or the Premises or any portion thereof or the sidewalks, curbs,
parking areas, streets or ways adjoining the Premises, (3) any representation or
warranty made herein by Borrower, in any certificate delivered in connection
herewith or in any other agreement to which Borrower is a party or pursuant
thereto being false or misleading in any material respect as of the date such
representation or warranty was made, (4) performance of any labor or services or
the furnishing of
5
any materials or other property in respect to the Collateral or the Premises or
any portion thereof, (5) any taxes, assessments or other charges which Borrower
is required to pay under Section 8, (6) any lien, encumbrance or claim arising
on or against the Collateral or the Premises or any portion thereof under any
applicable regulation or otherwise which Borrower is obligated hereunder to
remove and discharge, or the failure to comply with any applicable regulation,
(7) the claims of any licensees, tenants or other occupants of all or any
portion of the Collateral or the Premises or any Person acting through or under
Borrower or otherwise acting under or as a consequence of this Agreement or any
sublease, (8) any act or omission of Borrower or its agents, contractors,
licensees, subtenants or invitees [NOT CONTAINED IN KONA GRILL DENVER AGREEMENT
and (9) any disclosures of information, financial or otherwise, (x) made by GE
or GE's employees, officers, agents and designees to any third party as
contemplated by Section 26 of this Agreement or (y) obtained from any credit
reporting agency with respect to Borrower, any guarantor of the Equipment Loan,
any Affiliate of Borrower, any of the other Borrower Parties or any operator or
lessee of the Premises.] It is expressly understood and agreed that Borrower's
obligations under this Section shall survive the expiration or earlier
termination of this Agreement for any reason. The term "Indemnified Parties"
means GE and its directors, officers, shareholders, trustees, beneficial owners,
partners and members, any directors, officers, shareholders, trustees,
beneficial owners, partners, members of any shareholders, beneficial owners,
partners or members of GE, and all employees, agents, servants, representatives,
contractors, subcontractors, affiliates, subsidiaries, participants, successors
and assigns of any of the foregoing, including, but not limited to, any
successors by merger, consolidation or acquisition of all or a substantial
portion of the assets and business of GE.
11. Actions by GE; Lost Note. A. Borrower agrees that GE may, at its option, and
without any obligation to do so, pay, perform, and discharge any and all
amounts, costs, expenses and liabilities that are the responsibility of Borrower
under the Loan Documents if Borrower fails to timely pay, perform or discharge
the same, and all amounts expended by GE in so doing or in respect of or in
connection with the Collateral shall become part of the obligations secured by
the Loan Documents and shall be immediately due and payable by Borrower to GE
upon demand therefor and shall bear interest at the Default Rate (as defined in
the Equipment Note).
B. Borrower agrees that the Loan Documents shall remain in full effect,
without waiver or surrender of any of GE's rights there under, notwithstanding
the occurrence of any one or more of the following: (i) extension of the time of
payment of the whole or any part of the Equipment Note; (ii) any change in the
terms and conditions of the Equipment Note; (iii) substitution of any other
evidence of indebtedness for the Equipment Note; (iv) acceptance by GE of any
collateral or security of any kind for the payment of the Equipment Note; (v)
surrender, release, exchange or alteration of any Collateral, collateral or
other security, either in whole or in part; or (vi) release, settlement,
discharge, compromise, change or amendment, in whole or in part, of any claim of
GE against Borrower or of any claim against any guarantor or other party
secondarily or additionally liable for the payment of the Equipment Note.
C. Borrower shall, if the Equipment Note is mutilated, destroyed, lost or
stolen (a "Lost Note"), promptly deliver to GE, upon receipt from GE of an
affidavit and indemnity in a form reasonably acceptable to GE and Borrower
stipulating that the Equipment Note has been mutilated, destroyed, lost or
stolen, in substitution therefor, a new promissory note containing the same
terms and conditions as the Lost Note with a notation thereon of the unpaid
principal and accrued and unpaid interest. Borrower shall provide 15 days' prior
notice to GE before making any payments to third parties in connection with a
Lost Note.
12. Events of Default and Remedies. A. Each of the following shall be deemed an
event of default by Borrower (each, an "Event of Default"):
(1) If any representation or warranty of any of the Borrower Parties set
forth in any of the Loan Documents is false in any material respect or if any of
the Borrower Parties renders any statement or account that is false in any
material respect.
6
(2) If any principal, interest or other monetary sum due under the
Equipment Note or any other Loan Document is not paid within five days after the
date when due; provided, however, notwithstanding the occurrence of such an
Event of Default, GE shall not be entitled to exercise its rights and remedies
set forth below unless and until GE shall have given Borrower notice thereof and
a period of five days from the delivery of such notice shall have elapsed
without such Event of Default being cured.
(3) If Borrower fails to observe or perform any of the other covenants,
conditions, or obligations of this Agreement; provided, however, if any such
failure does not involve the payment of any monetary sum, is not willful or
intentional, does not place any rights or interest in collateral of GE in
immediate jeopardy, and is within the reasonable power of Borrower to promptly
cure after receipt of notice thereof, all as determined by GE in its reasonable
discretion, then such failure shall not constitute an Event of Default
hereunder, unless otherwise expressly provided herein, unless and until GE shall
have given Borrower notice thereof and a period of 30 days shall have elapsed,
during which period Borrower may correct or cure such failure, upon failure of
which an Event of Default shall be deemed to have occurred hereunder without
further notice or demand of any kind being required. If such failure cannot
reasonably be cured within such 30-day period, as determined by GE in its
reasonable discretion, and Borrower is diligently pursuing a cure of such
failure, then Borrower shall have a reasonable period to cure such failure
beyond such 30-day period, which shall not exceed 90 days after receiving notice
of the failure from GE. If Borrower shall fail to correct or cure such failure
within such 90-day period, an Event of Default shall be deemed to have occurred
hereunder without further notice or demand of any kind being required.
(4) If any of the Borrower Parties becomes insolvent within the meaning of
Title 11 of the United States Code, 11 U.S.C. Sec. 101 et seq., as amended (the
"Code"), files or notifies GE that it intends to file a petition under the Code,
initiates a proceeding under any similar law or statute relating to bankruptcy,
insolvency, reorganization, winding up or adjustment of debts (collectively, an
"Action"), becomes the subject of either a petition under the Code or an Action,
or is not generally paying its debts as the same become due.
(5) If there is an "Event of Default" or a breach or default, after the
passage of all applicable notice and cure or grace periods, under any other Loan
Document or any of the Other Agreements.
(6) If there is a default or event of default under any lease agreement
with respect to the Premises to which Borrower is a party, or if Borrower
receives a notice of default with respect to any such lease and fails to provide
a contemporaneous copy thereof to GE.
(7) If a final, nonappealable judgment is rendered by a court against any
of the Borrower Parties which (i) has a material adverse effect on the operation
of the Premises as a Permitted Concept, or (ii) is in an amount greater than
$100,000.00 and not covered by insurance, and, in either case, is not discharged
or provision made for such discharge within 60 days from the date of entry of
such judgment.
B. Upon the occurrence and during the continuance of an Event of Default,
subject to the limitations set forth in subsection A, GE shall have all rights
and remedies of a secured party in, to and against the Collateral granted by the
UCC and otherwise available at law or in equity, including, without limitation:
(1) the right to declare any or all payments due under the Equipment Notes, the
other Loan Documents, the Other Agreements and all other documents evidencing
the Obligations immediately due and payable without any presentment, demand,
protest or notice of any kind, except as otherwise expressly provided herein,
and Borrower hereby waives notice of intent to accelerate the Obligations and
notice of acceleration; (2) the right to recover all fees and expenses
(including reasonable attorney fees) in connection with the collection or
enforcement of the Obligations, which fees and expenses shall constitute
additional Obligations of Borrower hereunder; (3) the right to act as, and
Borrower hereby constitutes and appoints GE, Borrower's true, lawful and
irrevocable attorney-in-fact (which appointment shall be deemed coupled with an
interest) to demand, receive and enforce payments and to give receipts,
releases, satisfaction for and to sue for moneys payable to Borrower under or
with respect to any of the Collateral, and actions taken pursuant to this
appointment may be taken either in the name of Borrower or in the name of GE
with the same force and effect as if this appointment had not been made; (4) the
right to take immediate and exclusive possession of the Collateral, or any part
thereof, and for that purpose,
7
with or without judicial process and notice to the Borrower, enter (if this can
be done without breach of the peace) upon any premises on which the Collateral
or any part thereof may be situated and remove the same there from (provided
that if the Collateral is affixed to real estate, such removal shall be subject
to the conditions stated in the UCC); (5) the right to hold, maintain, preserve
and prepare the Collateral for sale, until disposed of; (6) the right to render
the Collateral unusable and dispose of the Collateral; (7) the right to require
Borrower to assemble and package the Collateral and make it available to GE for
its possession at a place to be designated by GE which is reasonably convenient
to GE; (8) the right to sell, lease, hold or otherwise dispose of all or any
part of the Collateral; and (9) the right to sue for specific performance of any
Obligations or to recover damages for breach thereof.
GE shall be entitled to receive on demand, as additional Obligations
hereunder, interest accruing at the Default Rate on all amounts not paid when
due under the Equipment Notes or this Agreement until the date of actual
payment. GE shall have no duty to mitigate any loss to Borrower occasioned by
enforcement of any remedy hereunder and shall have no duty of any kind to any
subordinated creditor of Borrower. Neither the acceptance of this Agreement nor
its enforcement shall prejudice or in any manner affect GE's right to realize
upon or enforce any other security now or hereafter held by GE, it being agreed
that GE shall be entitled to enforce this Agreement and any other security now
or hereafter held by GE in such order and manner as it may in its absolute
discretion determine. No remedy herein conferred upon or reserved to GE is
intended to be exclusive of any other remedy given hereunder or now or hereafter
existing at law or in equity or by statute. Every power or remedy given by any
of the Loan Documents to GE, or to which GE may be otherwise entitled, may be
exercised, concurrently or independently, from time to time and as often as may
be deemed expedient by GE.
C. Should GE exercise the rights and remedies specified in the preceding
subsection B, any proceeds received thereby shall be first applied to pay the
costs and expenses, including reasonable attorneys' fees, incurred by GE as a
result of the Event of Default. The remainder of any proceeds, after payment of
GE's costs and expenses, shall be applied to the satisfaction of the Obligations
and any excess paid over to Borrower.
D. Until an Event of Default shall occur, Borrower may retain possession of
the Collateral and may use it in any lawful manner not inconsistent with this
Agreement, with the provisions of any policies of insurance thereon or the other
Loan Documents.
13. Sales, Transfers, Assignments and Pledges. Borrower agrees that
Borrower shall not, without the prior written consent of GE, sell, convey,
mortgage, grant, bargain, encumber, pledge, assign, or otherwise transfer the
Collateral or any part thereof or permit the Collateral or any part thereof to
be sold, conveyed, mortgaged, granted, bargained, encumbered, pledged, assigned,
or otherwise transferred, other than replacements consented to by GE. A sale,
conveyance, mortgage, grant, bargain, encumbrance, pledge, assignment, or
transfer within the meaning of this Section shall be deemed to include, but not
limited to, (a) an installment sales agreement wherein Borrower agrees to sell
the Collateral or any part thereof for a price to be paid in installments; (b)
an agreement by Borrower leasing all or any part of the Collateral; (c) if any
of the Borrower Parties or any general or limited partner or member of any of
the Borrower Parties is a corporation, any merger by or with such corporation,
or the voluntary or involuntary sale, conveyance, transfer or pledge of such
corporation's stock (or the stock of any corporation directly or indirectly
controlling such corporation by operation of law or otherwise), or the creation
or issuance of new stock, by which an aggregate of more than forty nine percent
(49%) of such corporation's stock shall be vested in a party or parties who are
not now stockholders; (d) if any of the Borrower Parties or any general or
limited partner or any member of any of the Borrower Parties is a limited or
general partnership or joint venture, the change, removal or resignation of a
general partner, limited partner or managing partner or the transfer or pledge
of the partnership interest of any general partner, limited partner or managing
partner or any profits or proceeds relating to such partnership interest; and
(e) if any of the Borrower Parties or any general or limited partner or member
of any of the Borrower Parties is a limited liability company, the change,
removal or resignation of a managing member or the transfer or pledge of the
membership interest of any member or any profits or proceeds relating to such
membership interest. Notwithstanding the foregoing, a transfer by devise or
descent or by operation
8
of law upon the death of a member, partner or stockholder of any of the Borrower
Parties or any general or limited partner or member thereof shall not be deemed
to be a sale, conveyance, mortgage, grant, bargain, encumbrance, pledge,
assignment, or transfer within the meaning of this Section.
GE's consent to any matter contemplated by this Section shall be subject to
the satisfaction of such conditions as GE shall determine in its sole
discretion, including, without limitation, (i) the execution and delivery of
such modifications to the terms of the Loan Documents as GE shall request, and
(ii) the proposed transferee having agreed to comply with all of the terms and
conditions of the Loan Documents (including any modifications requested by GE
pursuant to clause (i) above). In addition, any such consent shall be
conditioned upon payment by Borrower to GE of (x) a fee equal to one percent
(1%) of the then outstanding principal balance of the Equipment Note and (y) all
out-of-pocket costs and expenses incurred by GE in connection with such consent,
including, without limitation, reasonable attorneys' fees. GE shall not be
required to demonstrate any actual impairment of its security or any increased
risk of default hereunder in order to declare the Obligations immediately due
and payable upon Borrower's sale, conveyance, mortgage, grant, bargain,
encumbrance, pledge, assignment, or transfer as contemplated by this Section.
The provisions of this Section shall apply to every such sale, conveyance,
mortgage, grant, bargain, encumbrance, pledge, assignment, or transfer
regardless of whether voluntary or not, or whether or not GE has consented to
any previous sale, conveyance, mortgage, grant, bargain, encumbrance, pledge,
assignment, or transfer pursuant to this Section.
14. Inspection. Borrower shall, during normal business hours (or at any time in
the event of an emergency), (1) provide GE and GE's officers, employees, agents
and advisors with access to the Collateral and all files, correspondence and
documents relating to the Collateral (including, without limitation, any of the
foregoing information stored in any computer files), and (2) allow such persons
to make such inspections, tests, copies, and verifications as GE considers
necessary. Inspections conducted by GE shall be for its own benefit and shall
not be relied on by Borrower or any third parties.
15. Personal Property. No item of Collateral will be attached or affixed to
realty or any building without GE's prior knowledge and the written consent and
waiver, in form and substance acceptable to GE, of the landlord and the
mortgagee, if any, of the real property to which the Collateral is proposed to
be attached or affixed.
16. Notices. Except for any notice required under applicable law to be given in
another manner, any notices required under this Agreement or any of the other
Loan Documents shall be in writing and shall be given by mailing such notice by
certified mail or by sending such notice by Federal Express or other nationally
recognized courier, addressed to GE at: 17207 North Perimeter Drive, Scottsdale,
Arizona 85255, Attn: Collateral Management and to Borrower at: Kona Grill _____,
______________________________________________________________________________,
or to such other address as either party may from time to time specify in
writing to the other. Notices so mailed or sent shall be deemed given on the
date shown on the return receipt or courier's records as the date of delivery or
first attempted delivery.
17. Further Instruments; Document Review. From time to time, Borrower will
execute such further instruments as GE may reasonably require in order to
protect, preserve and maintain rights and remedies set forth in this Agreement
and the other Loan Documents, including, without limitation, the security
interest granted in connection herewith. In the event Borrower makes any request
upon GE requiring GE or GE's attorneys to review or prepare (or cause to be
reviewed or prepared) any documents or other submissions in connection with or
arising out of this Agreement or any of the other Loan Documents, then Borrower
shall (x) reimburse GE promptly upon GE's demand for all out-of-pocket costs and
expenses incurred by GE in connection with such review or preparation,
including, without limitation, reasonable attorneys' fees, and (y) pay GE a
reasonable processing and review fee.
18. Authorization to Insert; Estoppel Certificates. Borrower authorizes GE to
insert in the spaces provided in the Loan Documents, as applicable, dates,
models, serial numbers, loan numbers and other pertinent data relative to the
proper identification of Borrower, the Collateral or this Equipment Loan. At any
time, and from time to time, each party agrees, promptly and in no event later
than 15 days after a written request from the other party, to execute,
acknowledge and deliver to the other party a certificate in
9
the form supplied by the other party, certifying as to such information
reasonably requested by the other party in connection with this Agreement and
the other Loan Documents.
19. Survival. All representations, warranties, covenants, and agreements of
Borrower shall survive the execution and delivery of this Agreement or any other
agreements or documents executed in connection herewith, and the performance of
this Agreement.
20. Assignment By GE; Binding Effect. GE may assign in whole or in part its
rights under this Agreement. Upon any unconditional assignment of GE's entire
right and interest hereunder, GE shall automatically be relieved, from and after
the date of such assignment, of liability for the performance of any obligation
of GE contained herein. This Agreement and the other Loan Documents shall be
binding upon and inure to the benefit of Borrower and GE and their respective
successors and permitted assigns, including, without limitation, any United
States trustee, any debtor in possession or any trustee appointed from a private
panel. Notwithstanding anything to the contrary provided in this Agreement or
the other Loan Documents, it is specifically understood and agreed, such
agreement being a primary consideration for the execution of this Agreement and
the other Loan Documents by GE, that (1) there shall be absolutely no personal
liability on the part of any shareholder, director, officer or employee of GE,
with respect to any of the terms, covenants and conditions of this Agreement or
the other Loan Documents, (2) Borrower waives all claims, demands and causes of
action against GE's officers, directors, employees and agents in the event of
any breach by GE of any of the terms, covenants and conditions of this Agreement
or the other Loan Documents to be performed by GE and (3) Borrower shall look
solely to the assets of GE for the satisfaction of each and every remedy of
Borrower in the event of any breach by GE of any of the terms, covenants and
conditions of this Agreement or the other Loan Documents to be performed by GE,
such exculpation of liability to be absolute and without any exception
whatsoever.
21. Joint and Several; Severability. The obligations of all Borrowers hereunder
shall be both joint and several. The provisions of this Agreement and the other
Loan Documents shall be deemed severable. If any part of this Agreement or the
other Loan Documents shall be held invalid, illegal or unenforceable, the
remainder shall remain in full force and effect, and such invalid, illegal or
unenforceable provision shall be reformed by such court so as to give maximum
legal effect to the intention of the parties as expressed therein. This
Agreement and the other Loan Documents may be executed in one or more
counterparts, each of which shall be deemed an original.
22. Non-Waiver; Attorney's Fees. This Agreement, the Equipment Notes and the
other Loan Documents comprise the entire agreement between GE and Borrower with
respect to the Collateral, and any amendments thereto shall only be in a writing
executed by both parties. No delay or failure by GE shall constitute a waiver or
otherwise affect or impair any right, power or remedy available to GE nor shall
any waiver or indulgence by GE or any partial or single exercise of any right,
power or remedy preclude any other or further exercise thereof. The exercise of
any right, power or remedy shall in no event constitute a waiver or cure of any
default under this Agreement or prejudice GE in the exercise of any right
hereunder unless in the exercise of such right all obligations of Borrower under
this Agreement are fully performed. In the event of any judicial or other
adversarial proceeding between the parties concerning this Agreement or the
other Loan Documents, the prevailing party shall be entitled to recover its
attorneys' fees and other costs in addition to any other relief to which it may
be entitled.
23. Governing Law; Time of the Essence. Borrower acknowledges that this
Agreement and the other Loan Documents were substantially negotiated in the
State of Arizona, this Agreement and the other Loan Documents were executed by
GE in the State of Arizona and delivered by Borrower in the State of Arizona,
all payments under the Equipment Notes will be delivered in the State of Arizona
and there are substantial contacts between the parties and the transactions
contemplated herein and the State of Arizona. For purposes of any action or
proceeding arising out of this Agreement or any of the other Loan Documents, the
parties hereto hereby expressly submit to the jurisdiction of all federal and
state courts located in the State of Arizona and Borrower consents that it may
be served with any process or paper by registered mail or by personal service
within or without the State of Arizona in accordance with applicable law.
Furthermore, Borrower waives and agrees not to assert in any such action, suit
or proceeding that it
10
is not personally subject to the jurisdiction of such courts, that the action,
suit or proceeding is brought in an inconvenient forum or that venue of the
action, suit or proceeding is improper. It is the intent of the parties hereto
that all provisions of this Agreement and the Equipment Notes shall be governed
by and construed under the laws of the State of Arizona, without giving effect
to its principles of conflicts of law. To the extent that a court of competent
jurisdiction finds Arizona law inapplicable with respect to any provisions of
this Agreement or the Equipment Notes, then, as to those provisions only, the
laws of the state(s) where the Collateral is located shall be deemed to apply.
Nothing in this Section shall limit or restrict the right of GE to commence any
proceeding in the federal or state courts located in the state(s) in which the
Collateral is located to the extent GE deems such proceeding necessary or
advisable to exercise remedies available under this Agreement or the other Loan
Documents. Time is of the essence in the payment and performance by Borrower of
all of its obligations under this Agreement and the other Loan Documents.
24. Cross-Default and Cross-Collateralization. Notwithstanding anything to the
contrary contained in this Agreement or the other Loan Documents: (a) an Event
of Default or a breach or default, after the passage of all applicable notice
and cure or grace periods, under any Loan Document or Other Agreement which
relates to a loan or sale/leaseback transaction which has not been the subject
of a securitization, participation or transfer shall not constitute an Event of
Default or a breach or default, as applicable, under any Loan Document or Other
Agreement which relates to a loan which has been the subject of a
securitization, participation or transfer; (b) an Event of Default or a breach
or default, after the passage of all applicable notice and cure or grace
periods, under any Loan Document or Other Agreement which relates to a loan
which is included in any Loan Pool shall not constitute an Event of Default or a
breach or default, as applicable, under any Loan Document or Other Agreement
which relates to a loan which is included in any other Loan Pool; (c) the Loan
Documents and Other Agreements corresponding to the loans in any Loan Pool shall
not secure the obligations of any of the Borrower Parties or any Affiliate of
any of the Borrower Parties contained in any Loan Document or Other Agreement
which does not correspond to a loan in such Loan Pool; and (d) the Loan
Documents and Other Agreements which do not correspond to a loan in any Loan
Pool shall not secure the obligations of any of the Borrower Parties or any
Affiliate of any of the Borrower Parties contained in any Loan Document or Other
Agreement which does correspond to a loan in such Loan Pool. For purposes of
this Section, the term "Loan Pool" means: (i) in the context of a
securitization, any pool or group of loans that are a part of such
securitization; (ii) in the context of a transfer, all loans which are sold,
transferred or assigned to the same transferee; and (iii) in the context of a
participation, all loans as to which participating interests are granted to the
same participant.
25. WAIVER OF JURY TRIAL AND PUNITIVE, CONSEQUENTIAL, SPECIAL AND INDIRECT
DAMAGES. BORROWER AND GE HEREBY KNOWINGLY, VOLUNTARILY AND INTENTIONALLY WAIVE
THE RIGHT EITHER MAY HAVE TO A TRIAL BY JURY WITH RESPECT TO ANY AND ALL ISSUES
PRESENTED IN ANY ACTION, PROCEEDING, CLAIM OR COUNTERCLAIM BROUGHT BY EITHER OF
THE PARTIES HERETO AGAINST THE OTHER OR ITS SUCCESSORS WITH RESPECT TO ANY
MATTER ARISING OUT OF OR IN CONNECTION WITH THIS AGREEMENT, ANY OF THE OTHER
LOAN DOCUMENTS OR ANY DOCUMENT CONTEMPLATED HEREIN OR RELATED HERETO. THIS
WAIVER BY THE PARTIES HERETO OF ANY RIGHT EITHER MAY HAVE TO A TRIAL BY JURY HAS
BEEN NEGOTIATED AND IS AN ESSENTIAL ASPECT OF THEIR BARGAIN. FURTHERMORE,
BORROWER AND GE HEREBY KNOWINGLY, VOLUNTARILY AND INTENTIONALLY WAIVE THE RIGHT
EITHER MAY HAVE TO SEEK PUNITIVE, CONSEQUENTIAL, SPECIAL AND INDIRECT DAMAGES
FROM THE OTHER AND ANY OF THE OTHER'S AFFILIATES, OFFICERS, DIRECTORS OR
EMPLOYEES OR ANY OF THEIR SUCCESSORS WITH RESPECT TO ANY AND ALL ISSUES
PRESENTED IN ANY ACTION, PROCEEDING, CLAIM OR COUNTERCLAIM BROUGHT BY EITHER
PARTY AGAINST THE OTHER OR ANY OF THE OTHER'S AFFILIATES, OFFICERS, DIRECTORS OR
EMPLOYEES OR ANY OF THEIR SUCCESSORS WITH RESPECT TO ANY MATTER ARISING OUT OF
OR IN CONNECTION WITH THIS AGREEMENT, ANY OF THE OTHER LOAN DOCUMENTS OR ANY
DOCUMENT CONTEMPLATED HEREIN OR RELATED HERETO. THE WAIVER BY BORROWER AND GE OF
ANY RIGHT THEY MAY HAVE TO SEEK PUNITIVE, CONSEQUENTIAL, SPECIAL AND
11
INDIRECT DAMAGES HAS BEEN NEGOTIATED BY THE PARTIES HERETO AND IS AN ESSENTIAL
ASPECT OF THEIR BARGAIN.
[NOT CONTAINED IN KONA GRILL DENVER 26. Disclosure Authorization. Borrower
authorizes GE and its employees, officers, agents, representatives and designees
to:
(i) distribute to, or publish for the use by, any third-parties for
statistical analysis purposes the unit-level or corporate level operating
results for the Premises, Borrower, any guarantor of the Equipment Loan, any
Affiliate of Borrower, any of the other Borrower Parties or any operator or
lessee of the Premises prepared by GE from financial statements obtained from
Borrower; and
(ii) obtain personal credit reports, business credit reports or asset
reports, as applicable, with respect to Borrower, any guarantor of the Equipment
Loan, any Affiliate of Borrower, any of the other Borrower Parties or any
operator or lessee of the Premises.]
27. Corporate Fixed Charge Coverage Covenant. Until such time as all of
Borrower's obligations under the Equipment Note and the other Loan Documents are
paid, satisfied and discharged in full, Borrower shall maintain a Corporate
Fixed Charge Coverage Ratio of at least ______, as determined as of Borrower's
fiscal year end. For purposes of this Section, the term "Corporate Fixed Charge
Coverage Ratio" shall mean with respect to the twelve month period of time
immediately preceding the date of determination, the ratio calculated for such
period of time, each as determined in accordance with GAAP, of (a) the sum of
net income, depreciation and amortization, interest expense, income taxes, and
operating lease expense, plus or minus other non-cash adjustments or
non-recurring items (as allowed by GEFF), plus or minus changes in officer or
shareholders loans and dividends or distributions not otherwise expensed on the
Borrower's income statement to (b) the sum of operating lease expense, principal
payments of long term debt, maturities of all capital leases and interest
expense (excluding non-cash interest expense and amortization of non-cash
financing expenses).
28. Patriot Act Provisions. A. The following terms shall have the meanings
specified for this Section: "Anti-Money Laundering Laws" means all applicable
laws, regulations and government guidance on the prevention and detection of
money laundering, including, without limitation, 18 U.S.C. Section Section 1956
and 1957, and the BSA; "BSA" means the Bank Secrecy Act (31 U.S.C. Section
Section 5311 et. seq.), and its implementing regulations, Title 31 Part 103 of
the U.S. Code of Federal Regulations; "Entity" means any entity that is not a
natural person; and "OFAC Laws and Regulations" means Executive Order 13224
issued by the President of the United States of America, the Terrorism Sanctions
Regulations (Title 31 Part 595 of the U.S. Code of Federal Regulations), the
Terrorism List Governments Sanctions Regulations (Title 31 Part 596 of the U.S.
Code of Federal Regulations), the Foreign Terrorist Organizations Sanctions
Regulations (Title 31 Part 597 of the U.S. Code of Federal Regulations), and the
Cuban Assets Control Regulations (Title 31 Part 515 of the U.S. Code of Federal
Regulations), and all other present and future federal, state and local laws,
ordinances, regulations, policies, lists (including, without limitation, the
Specially Designated Nationals and Blocked Persons List) and any other
requirements of any Governmental Authority (including, without limitation, the
United States Department of the Treasury Office of Foreign Assets Control)
addressing, relating to, or attempting to eliminate, terrorist acts and acts of
war, each as hereafter supplemented, amended or modified from time to time, and
the present and future rules, regulations and guidance documents promulgated
under any of the foregoing, or under similar laws, ordinances, regulations,
policies or requirements of other states or localities.
B. Borrower represents and warrants to GE as of the date of this Agreement
and the Closing Date as follows: (i) none of the Borrower Parties, and no
individual or entity owning directly or indirectly any interest in any of the
Borrower Parties, is an individual or entity whose property or interests are
subject to being blocked under any of the OFAC Laws and Regulations or is
otherwise in violation of any of the OFAC Laws and Regulations; (ii) Borrower
has taken all reasonable measures, in accordance with all applicable Anti-Money
Laundering Laws, with respect to each holder of a direct or indirect interest in
the Borrower Parties, to assure that funds invested by such holders in the
Borrower Parties are derived
12
from legal sources; (iii) to Borrower's knowledge after making due inquiry,
neither any of the Borrower Parties nor any holder of a direct or indirect
interest in the Borrower Parties (a) is under investigation by any Governmental
Authority for, or has been charged with, or convicted of, any violation of any
Anti-Money Laundering Laws, or drug trafficking, terrorist-related activities or
other money laundering predicated crimes or a violation of the BSA, (b) has been
assessed civil penalties under these or related laws, or (c) has had any of its
funds seized or forfeited in an action under these or related laws; and (iv)
Borrower has taken reasonable steps, consistent with industry practice for
comparable organizations and in any event as required by law, to ensure that the
Borrower Parties are and shall be in compliance with all (a) Anti-Money
Laundering Laws and (b) OFAC Laws and Regulations.
C. Borrower covenants to GE from and after the date of this Agreement and
until all of the Obligations are satisfied in full, as follows: (i) Borrower
shall require, and shall take reasonable measures to comply with the
requirement, that no individual or entity owning directly or indirectly any
interest in any of the Borrower Parties is an individual or entity whose
property or interests are subject to being blocked under any of the OFAC Laws
and Regulations or is otherwise in violation of any of the OFAC Laws and
Regulations; (ii) the Borrower Parties shall at all times comply with the OFAC
Laws and Regulations and Anti-Money Laundering Laws; (iii) Borrower shall
immediately notify GE in writing if any individual or entity owning directly or
indirectly any interest in any of the Borrower Parties or any director, officer,
member, manager or partner of any of such holders is an individual or entity
whose property or interests are subject to being blocked under any of the OFAC
Laws and Regulations or is otherwise in violation of any of the OFAC Laws and
Regulations, or is under investigation by any governmental entity for, or has
been charged with, or convicted of, drug trafficking, terrorist-related
activities or any violation of Anti-Money Laundering Laws, has been assessed
civil penalties under these or related laws, or has had funds seized or
forfeited in an action under these or related laws; (iv) without limiting the
terms and conditions of Section 13 of this Agreement, Borrower agrees that, from
and after the date of this Agreement and until all of the Obligations are
satisfied in full, no interest in any of the Borrower Parties, or in any
individual or person owning directly or indirectly any interest in any of the
Borrower Parties, shall be transferred, assigned or conveyed to any individual
or person whose property or interests are subject to being blocked under any of
the OFAC Laws and Regulations or who is in violation of any of the OFAC Laws and
Regulations, and any such transfer, assignment or conveyance shall not be
effective until the transferee has provided written certification to Borrower
and GE that (A) the transferee or any person who owns directly or indirectly any
interest in transferee, is not an individual or entity whose property or
interests are subject to being blocked under any of the OFAC Laws and
Regulations or is otherwise in violation of the OFAC Laws and Regulations, and
(B) the transferee has taken reasonable measures to assure that any individual
or entity who owns directly or indirectly any interest in transferee, is not an
individual or entity whose property or interests are subject to being blocked
under any of the OFAC Laws and Regulations or is otherwise in violation of the
OFAC Laws and Regulations.
[BALANCE OF THIS PAGE INTENTIONALLY LEFT BLANK]
13
GE:
GE CAPITAL FRANCHISE FINANCE CORPORATION,
a Delaware corporation
By /s/ Kelly A. Hallford
-------------------------------------Printed Name: Kelly A. Hallford
--------------------------Its: Vice President
------------------------------------
BORROWER:
KONA GRILL _____, INC.,
a Delaware corporation
By /s/ James Spiel
-------------------------------------Printed Name: James Spiel
Its: Secretary
14
EXHIBIT 10.8(b)
EQUIPMENT PROMISSORY NOTE
$_______________
Scottsdale Arizona
Dated as of ______, 2005
KONA GRILL
, INC., a Delaware corporation ("Borrower"), for value
received, hereby promises to pay to GE CAPITAL FRANCHISE FINANCE CORPORATION, a
Delaware corporation ("GE"), whose address is 17207 North Perimeter Drive,
Scottsdale, Arizona 85255, or order, on or before _______________, 2012 (the
"Maturity Date"), as herein provided, the principal sum of $_______________, and
to pay interest on the unpaid principal amount of this Note from the date hereof
to the Maturity Date at the _____ rate of _________% per annum on the basis of a
360-day year consisting of twelve consecutive 30-day months, such principal and
interest to be paid in immediately available funds and in lawful money of the
United States. Initially capitalized terms which are not otherwise defined in
this Note shall have the meanings set forth in that certain Loan and Security
Agreement dated as of _________________ between Borrower and GE, as such
agreement may be amended, restated and/or supplemented from time to time (the
"Loan Agreement").
Interest on the principal amount of this Note for the period commencing
with the date such principal amount is advanced by GE through the last day in
the month in which this Note is dated shall be due and payable upon delivery of
this Note. Thereafter, principal and interest shall be payable in consecutive
monthly installments of $____________ commencing on ______________ 1, 2005, and
continuing on the first day of each month thereafter until the Maturity Date, at
which time the outstanding principal and unpaid accrued interest shall be due
and payable.
Borrower may prepay this Note in full, but not in part (except as
otherwise set forth below), including all accrued but unpaid interest hereunder
and all sums advanced by GE pursuant to the Loan Documents and any Other
Agreements, provided that (i) no Event of Default has occurred under any of the
Loan Documents or any Other Agreements, (ii) any such prepayment shall only be
made on a regularly scheduled payment date upon not less than 30 days prior
written notice from Borrower to GE, and (iii) except as otherwise set forth
herein, any such prepayment shall be made together with payment of an amount
equal to the sum of:
(a) a prepayment fee equal to 1% of the amount prepaid; and
(b) a prepayment premium equal to the positive difference (if any)
between (i) the present value of the stream of monthly principal and
interest payments due under the Note from the date of such prepayment
through the scheduled Maturity Date (the "Remaining Scheduled Term"),
calculated using the interpolated yield, at the time of such prepayment,
of the two U.S. Dollar Interest Rate Swaps (as published in Federal
Reserve Statistical Release H.15[519]
http://www.federalreserve.gov/releases/H15/) whose terms most closely
match the Remaining Scheduled Term, and (ii) the present value of the
stream of monthly principal and interest payments due under this Note from
the date of such prepayment through the scheduled Maturity Date,
calculated using the interpolated yield, as of the Closing Date, of the
two U.S. Dollar Interest Rate Swaps whose terms most closely match the
originally scheduled term of this Note.
The foregoing prepayment fee and prepayment premium, as applicable, shall
be due and payable regardless of whether such prepayment is the result of a
voluntary prepayment by Borrower or as a result of GE declaring the unpaid
principal balance of this Note, accrued interest and all other sums due under
this Note, the other Loan Documents and any Other Agreements, due and payable as
contemplated below.
1
Upon execution of this Note, Borrower shall authorize GE to establish
arrangements whereby all payments of principal and interest hereunder are
transferred by Automated Clearing House Debit initiated by GE directly from an
account at a U.S. bank in the name of Borrower to such account as GE may
designate or as GE may otherwise designate. Each payment of principal and
interest hereunder shall be applied first toward any past due payments under
this Note (including payment of all Costs (as herein defined)), then to accrued
interest, and the balance, after the payment of such accrued interest, if any,
shall be applied to the unpaid principal balance of this Note; provided,
however, each payment hereunder after an Event of Default has occurred shall be
applied as GE in its sole discretion may determine.
This Note is secured by the Loan Agreement and the other Loan Documents.
Upon the occurrence of an Event of Default, GE may declare the entire unpaid
principal balance of this Note, accrued interest, if any, and all other sums due
under this Note and any Loan Documents or Other Agreements due and payable at
once without notice to Borrower. All past-due principal and/or interest shall
bear interest from the due date to the date of actual payment at a rate (the
"Default Rate") equal to at the lesser of (i) the highest rate for which the
undersigned may legally contract or (ii) the rate of 14% per annum, and such
Default Rate shall continue to apply following a judgment in favor of GE under
this Note. If Borrower fails to make any payment or installment due under this
Note within five days of its due date, Borrower shall pay to GE, in addition to
any other sum due GE under this Note or any other Loan Document, a late charge
equal to 5% of such past-due payment or installment (the "Late Charge"), which
Late Charge is a reasonable estimate of the loss that may be sustained by GE due
to the failure of Borrower to make timely payments. All payments of principal
and interest due hereunder shall be made (i) without deduction of any present
and future taxes, levies, imposts, deductions, charges or withholdings, which
amounts shall be paid by Borrower, and (ii) without any other right of
abatement, reduction, setoff, defense, counterclaim, interruption, deferment or
recoupment for any reason whatsoever. Borrower will pay the amounts necessary
such that the gross amount of the principal and interest received by GE is not
less than that required by this Note.
No delay or omission on the part of GE in exercising any remedy, right or
option under this Note shall operate as a waiver of such remedy, right or
option. In any event, a waiver on any one occasion shall not be construed as a
waiver or bar to any such remedy, right or option on a future occasion. Borrower
hereby waives presentment, demand for payment, notice of dishonor, notice of
protest, and protest, notice of intent to accelerate, notice of acceleration and
all other notices or demands in connection with delivery, acceptance,
performance, default or endorsement of this Note. All notices, consents,
approvals or other instruments required or permitted to be given by either party
pursuant to this Note shall be given in accordance with the notice provisions in
the Loan Agreement. Should any indebtedness represented by this Note be
collected at law or in equity, or in bankruptcy or other proceedings, or should
this Note be placed in the hands of attorneys for collection after default,
Borrower shall pay, in addition to the principal and interest due and payable
hereon, all costs of collecting or attempting to collect this Note (the
"Costs"), including reasonable attorneys' fees and expenses of GE (including
those fees and expenses incurred in connection with any appeal) and court costs
whether or not a judicial action is commenced by GE. This Note may not be
amended or modified except by a written agreement duly executed by the party
against whom enforcement of this Note is sought. In the event that any one or
more of the provisions contained in this Note shall be held to be invalid,
illegal or unenforceable in any respect, such invalidity, illegality or
unenforceability shall not affect any other provision of this Note, and this
Note shall be construed as if such provision had never been contained herein or
therein. Time is of the essence in the performance of each and every obligation
under this Note.
Notwithstanding anything to the contrary contained in any of the Loan
Documents, the obligations of Borrower to GE under this Note and any other Loan
Documents are subject to the limitation that payments of interest and late
charges to GE shall not be required to the extent that receipt of any such
payment by GE would be contrary to provisions of applicable law limiting the
maximum rate of interest that may be charged or collected by GE. The portion of
any such payment received by GE that is in excess of the maximum interest
permitted by such provisions of law shall be credited to the principal balance
of this Note or if such excess portion exceeds the outstanding principal balance
of this Note, then
2
such excess portion shall be refunded to Borrower. All interest paid or agreed
to be paid to GE shall, to the extent permitted by applicable law, be amortized,
prorated, allocated and/or spread throughout the full term of this Note
(including, without limitation, the period of any renewal or extension thereof)
so that interest for such full term shall not exceed the maximum amount
permitted by applicable law.
This obligation shall bind Borrower and its successors and assigns, and
the benefits hereof shall inure to GE and its successors and assigns.
3
IN WITNESS WHEREOF, Borrower has executed and delivered this Note
effective as of the date first set forth above.
BORROWER:
KONA GRILL _______, INC.,
a Delaware corporation
By
/s/ James Spiel
--------------------------------------Printed Name: James Spiel
Its: Secretary
4
EXHIBIT 10.8(c)
EQUIPMENT PROMISSORY NOTE
$1,000,000.00
Scottsdale Arizona
Dated as of September 17, 2004
KONA GRILL DENVER, INC., a Delaware corporation ("Borrower"), for value
received, hereby promises to pay to GE CAPITAL FRANCHISE FINANCE Corporation, a
Delaware corporation ("GE"), whose address is 17207 North Perimeter Drive,
Scottsdale, Arizona 85255, or order, on or before October 1, 2011 (the "Maturity
Date"), as herein provided, the principal sum of $1,000,000.00, and to pay
interest on the unpaid principal amount of this Note from the date hereof to the
Maturity Date at the rate of 7.87% per annum on the basis of a 360-day year
consisting of twelve consecutive 30-day months, such principal and interest to
be paid in immediately available funds and in lawful money of the United States.
Initially capitalized terms which are not otherwise defined in this Note shall
have the meanings set forth in that certain Loan and Security Agreement dated as
of September 17, 2004, between Borrower and GE, as such agreement may be
amended, restated and/or supplemented from time to time (the "Loan Agreement").
Interest on the principal amount of this Note for the period commencing with the
date such principal amount is advanced by GE through the last day in the month
in which this Note is dated shall be due and payable upon delivery of this Note.
Thereafter, principal and interest shall be payable in consecutive monthly
installments of $15,521.53 commencing on November 1, 2004, and continuing on the
first day of each month thereafter until the Maturity Date, at which time the
outstanding principal and unpaid accrued interest shall be due and payable.
Borrower may prepay this Note in full, but not in part (except as
otherwise set forth below), including all accrued but unpaid interest hereunder
and all sums advanced by GE pursuant to the Loan Documents and any Other
Agreements, provided that (i) no Event of Default has occurred under any of the
Loan Documents or any Other Agreements, (ii) except as otherwise set forth
herein, any such prepayment shall only be made on a regularly scheduled payment
date upon not less than 30 days prior written notice from Borrower to GE, and
(iii) any such prepayment shall be made together with payment of an amount equal
to the sum of:
(a) a prepayment fee determined by: (i) calculating the decrease
(expressed in basis points) in the then-current weekly average yield of
five-year U.S. Dollar Swaps (as published in Federal Reserve Statistical
Release H.15[519]) (the "Index") on the Friday immediately preceding the
week in which the prepayment is made from the date hereof, and dividing
such decrease by 100; (ii) multiplying the result determined in (i) by the
prepayment factor shown below corresponding to the applicable Loan Year as
indicated below during which such prepayment is made, and (iii)
multiplying such product by the principal balance to be prepaid. If the
Index is unchanged or has increased since the date hereof, no prepayment
fee shall be due.
Loan Year
---------
Prepayment Factor
-----------------
1
.033
2
.029
3
.024
4
.019
5
.014
1
6
.010
7
.005
The first Loan Year shall mean the period of time commencing on the date
of this Note and ending on the last day of the twelfth consecutive month
commencing with the month after the month in which this Note is dated, unless
this Note is dated the first day of a month, in which case the first Loan Year
shall mean the twelve consecutive calendar months commencing with the date of
this Note. Each subsequent Loan Year shall mean the successive twelve
consecutive month period following the preceding Loan Year. If the Index is
unchanged or has increased since the date of this Note, no prepayment fee shall
be due.
Plus:
(b) a prepayment premium equal to:
(i) 4% of the amount prepaid if the prepayment is made on or
following the date of this Note but prior to the first anniversary
of the date of this Note;
(ii) 3% of the amount prepaid if the prepayment is made on or
following the first anniversary of the date of this Note but prior
to the second anniversary of the date of this Note;
(iii) 2% of the amount prepaid if the prepayment is made on or
following the second anniversary of the date of this Note but prior
to the third anniversary of the date of this Note; and
(iv) 1% of the amount prepaid if the prepayment is made on or
following the third anniversary of the date of this Note but prior
to the fourth anniversary of the date of this Note.
The foregoing prepayment fee and prepayment premium, as applicable, shall
be due and payable regardless of whether such prepayment is the result of a
voluntary prepayment by Borrower or as a result of GE declaring the unpaid
principal balance of this Note, accrued interest and all other sums due under
this Note, the other Loan Documents and any Other Agreements, due and payable as
contemplated below.
Upon execution of this Note, Borrower shall authorize GE to establish
arrangements whereby all payments of principal and interest hereunder are
transferred by Automated Clearing House Debit initiated by GE directly from an
account at a U.S. bank in the name of Borrower to such account as GE may
designate or as GE may otherwise designate. Each payment of principal and
interest hereunder shall be applied first toward any past due payments under
this Note (including payment of all Costs (as herein defined)), then to accrued
interest, and the balance, after the payment of such accrued interest, if any,
shall be applied to the unpaid principal balance of this Note; provided,
however, each payment hereunder after an Event of Default has occurred shall be
applied as GE in its sole discretion may determine.
This Note is secured by the Loan Agreement and the other Loan Documents.
Upon the occurrence of an Event of Default, GE may declare the entire unpaid
principal balance of this Note, accrued interest, if any, and all other sums due
under this Note and any Loan Documents or Other Agreements due and payable at
once without notice to Borrower. All past-due principal and/or interest shall
bear interest from the due date to the date of actual payment at a rate (the
"Default Rate") equal to at the lesser of (i) the highest rate for which the
undersigned may legally contract or (ii) the rate of 14% per annum, and such
Default Rate shall continue to apply following a judgment in favor of GE under
this
2
Note. If Borrower fails to make any payment or installment due under this Note
within five days of its due date, Borrower shall pay to GE, in addition to any
other sum due GE under this Note or any other Loan Document, a late charge equal
to 5% of such past-due payment or installment (the "Late Charge"), which Late
Charge is a reasonable estimate of the loss that may be sustained by GE due to
the failure of Borrower to make timely payments. All payments of principal and
interest due hereunder shall be made (i) without deduction of any present and
future taxes, levies, imposts, deductions, charges or withholdings, which
amounts shall be paid by Borrower, and (ii) without any other right of
abatement, reduction, setoff, defense, counterclaim, interruption, deferment or
recoupment for any reason whatsoever. Borrower will pay the amounts necessary
such that the gross amount of the principal and interest received by GE is not
less than that required by this Note.
No delay or omission on the part of GE in exercising any remedy, right or
option under this Note shall operate as a waiver of such remedy, right or
option. In any event, a waiver on any one occasion shall not be construed as a
waiver or bar to any such remedy, right or option on a future occasion. Borrower
hereby waives presentment, demand for payment, notice of dishonor, notice of
protest, and protest, notice of intent to accelerate, notice of acceleration and
all other notices or demands in connection with delivery, acceptance,
performance, default or endorsement of this Note. All notices, consents,
approvals or other instruments required or permitted to be given by either party
pursuant to this Note shall be given in accordance with the notice provisions in
the Loan Agreement. Should any indebtedness represented by this Note be
collected at law or in equity, or in bankruptcy or other proceedings, or should
this Note be placed in the hands of attorneys for collection after default,
Borrower shall pay, in addition to the principal and interest due and payable
hereon, all costs of collecting or attempting to collect this Note (the
"Costs"), including reasonable attorneys' fees and expenses of GE (including
those fees and expenses incurred in connection with any appeal) and court costs
whether or not a judicial action is commenced by GE. This Note may not be
amended or modified except by a written agreement duly executed by the party
against whom enforcement of this Note is sought. In the event that any one or
more of the provisions contained in this Note shall be held to be invalid,
illegal or unenforceable in any respect, such invalidity, illegality or
unenforceability shall not affect any other provision of this Note, and this
Note shall be construed as if such provision had never been contained herein or
therein. Time is of the essence in the performance of each and every obligation
under this Note.
Notwithstanding anything to the contrary contained in any of the Loan
Documents, the obligations of Borrower to GE under this Note and any other Loan
Documents are subject to the limitation that payments of interest and late
charges to GE shall not be required to the extent that receipt of any such
payment by GE would be contrary to provisions of applicable law limiting the
maximum rate of interest that may be charged or collected by GE. The portion of
any such payment received by GE that is in excess of the maximum interest
permitted by such provisions of law shall be credited to the principal balance
of this Note or if such excess portion exceeds the outstanding principal balance
of this Note, then such excess portion shall be refunded to Borrower. All
interest paid or agreed to be paid to GE shall, to the extent permitted by
applicable law, be amortized, prorated, allocated and/or spread throughout the
full term of this Note (including, without limitation, the period of any renewal
or extension thereof) so that interest for such full term shall not exceed the
maximum amount permitted by applicable law.
This obligation shall bind Borrower and its successors and assigns, and
the benefits hereof shall inure to GE and its successors and assigns.
3
IN WITNESS WHEREOF, Borrower has executed and delivered this Note
effective as of the date first set forth above.
BORROWER:
KONA GRILL DENVER, INC.,
a Delaware corporation
By /s/ James Spiel
-----------------------------Printed Name: James Spiel
Its: Secretary
EXHIBIT 10.9
LEASE PURCHASE
-------------------------------------------------------------------------------LESSEE: MCDERMOTT RESTAURANTS, INC.
LESSOR: BANK OF AMERICA, N.A.
7373 E. DOUBLETREE RANCH RD.
C/O AZ BUSINESS LOAN PROCESSING
SUITE 130
201 EAST WASHINGTON STREET
SCOTTSDALE, AZ 85058-2141
PHOENIX, AZ 85004
-------------------------------------------------------------------------------DESCRIPTION OF COLLATERAL: PURCHASE MONEY SECURITY INTEREST IN ALL
INVENTORY, CHATTEL PAPER, ACCOUNTS, EQUIPMENT AND GENERAL INTANGIBLES; WHETHER
ANY OF THE FOREGOING IS OWNED NOW OR ACQUIRED LATER; ALL ACCESSIONS, ADDITIONS,
REPLACEMENTS, AND SUBSTITUTIONS RELATING TO ANY OF THE FOREGOING; ALL RECORDS OF
ANY KIND RELATING TO ANY OF THE FOREGOING; ALL PROCEEDS RELATING TO ANY OF THE
FOREGOING (INCLUDING INSURANCE, GENERAL INTANGIBLES AND OTHER ACCOUNTS PROCEEDS)
TOTAL AMOUNT FINANCED:
$850,000.00
TERMS OF RENTAL PAYMENTS:
MONTHLY PAYMENT: $16,890,54
NUMBER OF PAYMENTS:
60
FIRST MONTHLY PAYMENT IS PAYABLE ON NOVEMBER 27, 2001 AND THEREAFTER ON
THE SAME DAY OF EACH CONSECUTIVE MONTH.
THIS LEASE PURCHASE (the "Lease") is entered into between MCDERMOTT RESTAURANTS,
INC., (the "Lessee") and Bank of America, N.A. (the "Lessor") dated as of the
date set forth below.
Lessee wishes to purchase certain equipment and has requested that Lessor
provide the financing for such equipment pursuant to the terms of this Lease. In
consideration of the foregoing and other valuable consideration, Lessor and
Lessee agree as follows:
LEASE. Lessor and Lessee agree that Lessor will finance pursuant to the
provisions of this Lease the equipment described herein (the items of equipment
subject hereto, together with all attachments, accessions, accessories, parts,
and additions to and all replacements of and substitutions for such equipment,
whether now owned or hereafter acquired, whether now existing or hereafter
arising, individually and collectively called the "Equipment").
TERM. Subject to the conditions stated herein, the term of this Lease (the
"Term") for the Equipment financed pursuant to this Lease shall commence on the
later of (a) the date of this Lease, or (b) the date of delivery of the
Equipment, but in no event later than the date set forth above for first monthly
payment.
PAYMENTS. Lessee agrees to pay the total amount of payments (the "Payments") for
the financing of the Equipment in the amounts and at the times which are
indicated herein, plus such additional amounts as may be provided herein.
Payments shall be made as indicated herein, at the address of Lessor stated
above or as otherwise provided to Lessee in writing. Lessee agrees
that Lessor shall have the right to satisfy any Payments due under this Lease by
directly charging any account of Lessee with Lessor or with any affiliate bank
of Lessor.
NO ABATEMENT OF PAYMENTS. There will be no abatement or reduction of Payments by
Lessee for any reason, including but not limited to, any defense, recoupment,
setoff, counterclaim, or any claim arising out of or related to any defects,
damages, malfunctions, breakdowns, infirmities, losses or thefts of the
Equipment. Lessee assumes and shall bear the entire risk of loss and damage to
the Equipment from any cause whatsoever, it being the intention of the parties
that the Payments and any other sums required to be paid to Lessor hereunder
shall be paid ,in all events unless the obligation of Lessee to make Payments is
terminated as otherwise provided herein.
PREPAYMENT. Lessee may pay without penalty all or a portion of the amount owed
earlier than it is due. Early Payments will not, unless agreed to by Lessor in
writing, relieve Lessee of Lessee's obligation to continue to make Payments
under the payment schedule. Rather, they will reduce the principal balance due
and may result in Lessee making fewer Payments.
EARLY TERMINATION. Lessor reserves the right, if requested by Lessee to remove
an item of Equipment from this Lease, to require that all Payments due under the
Lease be paid in full (less such amount as is attributable to the unearned
interest component of such Payments based upon a simple interest accrual method,
and the rate implicit in the Payments, as determined by Lessor in its
discretion) whereupon the Lessor will release its interest in all of the
Equipment subject to this Lease. Should Lessor consent to Lessee's request to
remove an item of Equipment from this Lease and not require payment in full, and
provided that no Event of Default has occurred, Lessee may do so upon payment of
the remaining Payments for such item of Equipment less such amount as is
attributable to the unearned interest component of such Payments based upon a
simple interest accrual method, and the rate implicit in the Payments, as
determined by Lessor in its discretion. Upon such payment, Lessor will release
its interest in the respective item of Equipment and the item of Equipment shall
no longer be subject to this Lease.
LATE CHARGES. Should Lessee fail to pay any part of the Payments or any other
sum required to be paid to Lessor hereunder, within 15 DAYS AFTER THE DUE DATE
THEREOF, LESSEE SHALL PAY A LATE PAYMENT CHARGE EQUAL TO 4.00% OF THE DELINQUENT
PAYMENT.
SECURITY INTEREST. Notwithstanding that this instrument is referred to as a
"Lease", Lessee will at all times hold title to the Equipment during the Term.
Lessor and Lessee acknowledge this instrument is a lease intended as security
and is not intended to constitute a lease for tax or accounting purposes. Use
of the term "Lease" in the title of this instrument is solely for the
convenience of the parties hereto. Lessee hereby grants to Lessor a security
interest in the Equipment, whether now or hereafter covered by this Lease,
together with all of the following, whether now owned or hereafter acquired,
whether now existing or hereafter arising, and wherever located:
(a)
The Equipment.
(b) All documents covering the Equipment and all accounts, contract
rights, general intangibles, instruments, rents, monies, payments, and all
other rights, arising out of a sale, lease, or other disposition of the
Equipment.
(c) All proceeds (including insurance proceeds) from the sale,
destruction, loss, or other disposition of the Equipment.
(d) All records and data relating to the Equipment, whether in the
form of a writing, photograph, microfilm, microfiche, or electronic media,
together with all of Lessee's right, title, and interest in and to all computer
software required to utilize, create, maintain, and process any such records or
data on electronic media.
The security interest granted herein shall secure all indebtedness and
obligations of Lessee to Lessor under this Lease, whether for Payments in
respect of the same Equipment, Payments in respect of other Equipment, costs or
expenses, or otherwise.
OBLIGATIONS OF LESSEE.
Lessee warrants and covenants to Lessor as follows:
ORGANIZATION. Lessee is a corporation which is duly organized,
validly existing, and in good standing under the laws of the state of
Lessee's organization. Lessee has its chief executive office at the
address specified at the beginning of this Lease. Lessee will notify
Lessor of any change in the location of Lessee's chief executive
office.
PERFECTION OF SECURITY INTEREST.
Lessee agrees to execute such
financing statements, notices of lien, and powers of attorney, and to
take whatever other actions are requested by Lessor to perfect and
continue Lessor's security interest in the Equipment, including the
delivery to Lessor of all certificates of title (showing Lessor as
legal owner or lienholder if required by law to perfect Lessor's
security interest in the item of Equipment) or manufacturer's
certificates of origin. Lessee hereby irrevocably appoints Lessor as
its attorney-in-fact for the purpose of executing any documents
necessary to perfect or to continue the security interest granted in
this Lease or pursuant hereto, or to more specifically identify the
Equipment so as to ensure the validity and perfection of such
security interest. Lessor may at any time, and without further
authorization from Lessee, file a carbon, photographic or other
reproduction of any financing statement or of this Lease for use as a
financing statement.
Lessee will reimburse Lessor for all expenses for the perfection and
the continuation of the perfection of Lessor's security interest in
the Equipment. Lessee promptly will notify Lessor of any change in
Lessee's name including any change to the assumed or fictitious
business names of Lessee.
REMOVAL OF EQUIPMENT. Lessee shall keep the Equipment at Lessee's
address shown above, or at such other locations as are acceptable to
Lessor. Lessee shall not remove the Equipment from its existing
locations without the prior written consent of Lessor. To the extent
that the Equipment consists of vehicles, or other titled property,
Lessee shall not take or permit any action which would require
application for certificates of title for any vehicle outside the
State of Nevada, without the prior written consent of Lessor.
TRANSACTIONS INVOLVING EQUIPMENT. Lessee shall not sell, lease, or
otherwise transfer or dispose of the Equipment. Lessee shall not
pledge, assign, sublease, mortgage, encumber or otherwise permit the
Equipment to be subject to any lien, security interest, encumbrance,
or charge, other than the security interest provided for in this
Lease, without the prior written consent of Lessor. This includes
security interests even if junior in right to the security interests
granted under this Lease. Unless waived by Lessor, all proceeds from
any disposition of the Equipment (for whatever reason) shall be held
in trust for Lessor and shall not be commingled with any other funds;
provided however, this requirement shall not constitute consent by
Lessor to any sale or other disposition. Upon receipt, Lessee shall
immediately deliver any such proceeds to Lessor.
TITLE. Lessee represents and warrants to Lessor that it holds good
and marketable title to the Equipment, free and clear of all liens
and encumbrances except for the lien of this Lease. No financing
statement covering any of the Equipment is on file in any public
office other than those which reflect the security interest created
by this Lease. Lessee agrees to protect and defend Lessor's rights in
the Equipment against the claims and demands of all other persons.
MAINTENANCE AND INSPECTION OF EQUIPMENT. Lessee shall maintain all
Equipment in good condition and repair. Lessee will not commit or
permit damage to or destruction of the Equipment or any part of the
Equipment. Lessor and its designated representatives and agents shall
have the right at all times to examine, inspect, and audit the
Equipment wherever located. Lessee shall immediately notify Lessor of
all cases involving the repossession, loss or damage of or to any
Equipment; of any dispute arising with respect to the Equipment; and
generally of all events affecting the Equipment or the value thereof.
PERSONAL PROPERTY. The Equipment is, and shall at all times be and
remain, personal property notwithstanding that the Equipment or any
part thereof may now be, or hereafter become, in any manner affixed or
attached to real property or any building thereon. Upon request of
Lessor, Lessee shall obtain, as to any place where the Equipment is
located, a waiver from the landlord and mortgagee thereof with respect
to any rights they may have in and to the Equipment or the rights of
levy or seizure thereon.
2
TAXES, ASSESSMENTS AND LIENS. Lessee will pay when due all taxes,
assessments and liens upon the Equipment, its use or operation, or upon
this Lease. Lessee may withhold any such payment or may elect to
contest any lien if Lessee is in good faith conducting an appropriate
proceeding to contest the obligation to pay and so long as Lessor's
interest in the Equipment is not, in Lessor's sole opinion, thereby
jeopardized. If the Equipment is subjected to a lien which is not
discharged within fifteen (15) days, Lessee shall deposit with Lessor
cash, a sufficient corporate surety bond or other security satisfactory
to Lessor in an amount adequate to provide for the discharge of the
lien plus any interest, costs or other charges that could accrue as a
result of foreclosure or sale of the Equipment. In any contest Lessee
shall defend itself and Lessor and shall satisfy any final adverse
judgment before enforcement against the Equipment. Lessee shall name
Lessor as an additional obligee under any surety bond furnished in the
contest proceedings.
COMPLIANCE WITH GOVERNMENTAL REQUIREMENTS. Lessee shall comply promptly
with all laws, ordinances and regulations of all governmental
authorities applicable to the Equipment. Lessee may contest in good
faith any such law, ordinance or regulation and withhold compliance
during any proceeding, including appropriate appeals, so long as
Lessor's interest in the Equipment, in Lessor's opinion, is not
jeopardized.
MAINTENANCE OF CASUALTY INSURANCE. Lessee shall procure and maintain
all risks insurance, including without limitation fire, theft and
liability coverage together with such other insurance as Lessor may
require with respect to the Equipment, in form, amounts, coverages and
basis reasonably acceptable to Lessor and issued by a company or
companies reasonably acceptable to Lessor. Lessee, upon request of
Lessor, will deliver to Lessor from time to time the policies or
certificates of insurance in form satisfactory to Lessor, including
stipulations that coverages will not be cancelled or diminished without
at least thirty (30) days prior written notice to Lessor and not
including any disclaimer of the insurer's liability for failure to give
such a notice. In connection with all policies covering Equipment
Lessee will provide Lessor with such loss payable or other endorsements
as Lessor may require. If Lessee at any time fails to obtain or
maintain any insurance as required under this Lease, Lessor may (but
shall not be obligated to) obtain such insurance as Lessor deems
appropriate, including if it so chooses "single interest insurance,"
which will cover only Lessor's interest in the Equipment.
APPLICATION OF INSURANCE PROCEEDS. Lessee shall promptly notify Lessor
of any loss or damage to the Equipment. Lessor may present proof of
loss to Lessee's insurer if Lessee fails to do so within fifteen (15)
days of the casualty. All proceeds of any insurance on the Equipment,
including accrued interest thereon, shall be held by Lessor as part of
the security for the indebtedness. If Lessor consents to repair or
replacement of the damaged or destroyed Equipment, Lessor shall, upon
satisfactory proof of expenditure, pay or reimburse Lessee from the
proceeds for the reasonable cost of repair or restoration. If Lessor
does not consent to repair or replacement of the Equipment, Lessor
shall retain a sufficient amount of the proceeds to pay the remaining
Payments due under this Lease less such amount as is attributable to
the unearned interest component of such Payments based upon a simple
interest accrual method, and the rate implicit in the Payments, as
determined by Lessor in its discretion, and shall pay the balance, if
any, to Lessee. Any
3
proceeds which have been disbursed within six (6) months after their
receipt and which Lessee has not committed to the repair or restoration
of the Equipment shall be used to pay the indebtedness.
INSURANCE REPORTS. Lessee, upon request of Lessor, shall furnish to
Lessor reports on each existing policy of insurance showing such
information as Lessor may reasonably request including the following:
(a) the name of the insurer; (b) the risks insured; (c) the amount of
the policy; (d) the property insured; (e) the then current value on the
basis of which insurance has been obtained and the manner of
determining that value; and (f) the expiration date of the policy. In
addition, Lessee shall at Lessee's cost and upon request by Lessor
(however not more often than annually) have an independent appraiser
satisfactory to Lessor determine, as applicable, the cash value or
replacement cost of the Equipment.
BUSINESS PURPOSES. The Equipment will be used solely for business or
commercial purposes.
SALE OF ASSETS. Lessee shall not convey, lease, sell, transfer or
assign all or substantially all of its assets, and shall not liquidate
or discontinue its normal operations with intent to liquidate, without
the prior written consent of Lessor.
LESSEE'S RIGHT TO POSSESSION. Until an Event of Default, Lessee may have
possession and beneficial use of all the Equipment and may use it in any lawful
manner not inconsistent with this Lease. If Lessor at any time has possession of
any Equipment, whether before or after an Event of Default, Lessor shall be
deemed to have exercised reasonable care in the custody and preservation of the
Equipment if Lessor takes such action for that purpose as Lessee shall request
or as Lessor, in Lessor's sole discretion, shall deem appropriate under the
circumstances, but failure to honor any request by Lessee shall not of itself be
deemed to be a failure to exercise reasonable care. Lessor shall not be required
to take any steps necessary to preserve any rights in the Equipment against
prior parties, nor to protect, preserve or maintain any security interest given
to secure the Equipment.
EXPENDITURES BY LESSOR. If not discharged or paid when due, Lessor may (but
shall not be obligated to) discharge or pay any amounts required to be
discharged or paid by Lessee under this Lease, including without limitation all
taxes, liens, security interests, encumbrances, and other claims, at any time
levied or placed on the Equipment. Lessor also may (but shall not be obligated
to) pay all costs for insuring, maintaining and preserving the Equipment. All
such expenditures incurred or paid by Lessor for such purposes will then bear
interest from the date incurred or paid by Lessor to the date of repayment by
Lessee at a rate equal to 1.5% per month, or the highest rate permitted by
applicable law, if less.
All such expenses shall become a part of the indebtedness hereunder and, at
Lessor's option, will (a) be payable on demand, (b) be apportioned among and be
payable with any Payments to become due during either (i) the term of any
applicable insurance policy or (ii) the remaining Term of the Payments or (c) be
treated as a balloon payment which will be due and payable with the respective
final Payments. The security interests granted pursuant to this Lease also will
4
secure payment of these amounts. Such right shall be in addition to all other
rights and remedies to which Lessor may be entitled upon the occurrence of an
Event of Default.
RIGHT OF SETOFF. Lessee grants to Lessor a contractual possessory security
interest in, and hereby assigns, conveys; delivers, pledges, and transfers to
Lessor all Lessee's right, title and interest in and to, Lessee's accounts with
Lessor (whether checking, savings, or some other account), including without
limitation all accounts held jointly with someone else and all accounts Lessee
may open in the future, excluding however all IRA, Keogh, and trust accounts.
Lessee authorizes Lessor, to the extent permitted by applicable law, to charge
or setoff all sums owing on the indebtedness against any and all such accounts.
EVENTS OF DEFAULT. Each of the following shall constitute an event of default
(an "Event of Default") under this Lease:
DEFAULT ON INDEBTEDNESS. Failure of Lessee to make any Payment when
due.
OTHER INDEBTEDNESS. Failure of Lessee to make any payment when due of
any other indebtedness of Lessee to Lessor or to any affiliate of
Lessor.
OTHER DEFAULTS. Failure of Lessee to comply with or to perform any
other term, obligation, covenant or condition contained in this Lease
or in any other agreement between Lessor, or any affiliate of Lessor,
and Lessee, or Lessee dies or becomes incompetent.
FALSE STATEMENTS. Any warranty, representation, statement or report
made or furnished to Lessor by or on behalf of Lessee under this Lease
is false or misleading in any material respect, either now or at the
time made or furnished.
DEFECTIVE LEASE. This Lease ceases to be in full force and effect
(including failure to create a valid, first perfected security interest
or lien) at any time and for any reason.
INSOLVENCY. The dissolution or termination of Lessee's existence as a
going business, the insolvency of Lessee, the appointment of a receiver
for any part of Lessee's property, any assignment for the benefit of
creditors, or the commencement of any proceeding under any bankruptcy
or insolvency laws by or against Lessee.
CREDITOR PROCEEDINGS. Commencement of foreclosure proceedings, whether
by judicial proceeding, self-help, repossession or any other method, by
any creditor of Lessee or by any governmental agency against the
Equipment or any other collateral securing the indebtedness. This
includes a garnishment of any of Lessee's deposit accounts with Lessor.
EVENTS AFFECTING GUARANTOR. Any of the preceding events occurs with
respect to any guarantor of any of the Payments or other indebtedness
hereunder or such guarantor dies or becomes incompetent.
RIGHTS AND REMEDIES ON DEFAULT. If an Event of Default occurs under this Lease,
to the extent permitted by law, interest shall accrue on amounts owed hereunder
at such interest
5
rate as Lessor shall determine in its sole discretion, up to the maximum
interest rate allowed by law, or if none, 18% per annum. Also, if an Event of
Default occurs, at any time thereafter, Lessor shall have all the rights of a
secured party under the State of Uniform Commercial Code. In addition and
without limitation, Lessor may exercise any one or more of the following rights
and remedies:
ACCELERATE INDEBTEDNESS. Lessor may declare all Payments (less such
amount as is attributable to the unearned interest component of such
Payments based upon a simple interest accrual method, and the rate
implicit in the Payments, as determined by Lessor in its discretion),
and other indebtedness hereunder immediately due and payable, without
notice.
ASSEMBLE EQUIPMENT. Lessor may require Lessee to deliver to Lessor all
or any portion of the Equipment and any and all certificates of title
and other documents relating to the Equipment. Lessor may require
Lessee to assemble the Equipment and make it available to Lessor at a
place to be designated by Lessor. Lessor also shall have full power to
enter upon the property of Lessee to take possession of and remove the
Equipment. If the Equipment contains other goods not covered by this
Lease at the time of repossession, Lessee agrees Lessor may take such
other goods, provided that Lessor makes reasonable efforts to return
them to Lessee after repossession.
SELL THE EQUIPMENT. Lessor shall have the full power to sell, lease,
transfer, or otherwise deal with the Equipment or proceeds thereof in
its own name or that of Lessee. Lessor may sell the Equipment at public
auction or private sale. Unless the Equipment threatens to decline
speedily in value or is of a type customarily sold on a recognized
market, Lessor will give Lessee reasonable notice of the time after
which any private sale or any other intended disposition of the
Equipment is to be made. The requirements of reasonable notice shall be
met if such notice is given at least ten (10) days before the time of
the sale or disposition. All expenses relating to the disposition of
the Equipment, including without limitation the expenses of retaking,
holding, insuring, preparing for sale and selling the Equipment, shall
become a part of the indebtedness secured by this security interest
granted pursuant to this Lease and shall be payable on demand, with
such interest rate as Lessor shall determine in its sole discretion, up
to the maximum amount allowed by law, or if none, 18% per annum.
APPOINT RECEIVER. To the extent permitted by applicable law, Lessor
shall have the following rights and remedies regarding the appointment
of a receiver: (a) Lessor may have a receiver appointed as a matter of
right, (b) the receiver may be an employee of Lessor and may serve
without bond, and (c) all fees of the receiver shall become part of the
indebtedness secured by the security interest granted pursuant to the
Lease and shall be payable on demand, with such interest rate as Lessor
shall determine in its sole discretion, up to the maximum amount
allowed by law, or if none, 18% per annum.
OBTAIN DEFICIENCY. If Lessor chooses to sell any or all of the
Equipment, Lessor may obtain a judgment against Lessee and/or any
guarantor for any deficiency remaining on the indebtedness due to
Lessor after application of all amounts received from the exercise of
the rights provided in this Lease.
6
OTHER RIGHTS AND REMEDIES. Lessor shall have all the rights and
remedies of a secured creditor under the provisions of the Uniform
Commercial Code, as amended from time to time. In addition, Lessor
shall have and may exercise any or all other rights and remedies it may
have available at law, in equity, or otherwise.
CUMULATIVE REMEDIES. All of Lessor's rights and remedies, whether
evidenced by this Lease or by any other writing, shall be cumulative
and may be exercised singularly or concurrently. Election by Lessor to
pursue any remedy shall not exclude pursuit of any other remedy, and an
election to make expenditures or to take action to perform an
obligation of Lessee, after Lessee's failure to perform, shall not
affect Lessor's right to declare an Event of Default and to exercise
its remedies.
INDEMNIFICATION. Lessee hereby agrees to indemnify, protect and save Lessor or
its assigns harmless from any and all liabilities, liens, obligations, losses,
claims, damages, actions, suits, proceedings, costs and expenses, including
attorneys' fees, imposed or incurred by or asserted against Lessor or its
assigns, arising out of, connected with, or resulting directly or indirectly
from the Equipment, including without limitation, the manufacture, purchase,
lease, possession, Operation, condition (including all defects whether or not
discoverable by either party hereto), delivery, selection, use, or return of the
Equipment, including but not limited to any of the foregoing giving rise to or
causing personal injury, environmental liability, property damage, or death, or
by operation of law. Lessee shall give Lessor or its assigns prompt written
notice of any matter hereby indemnified against and agrees that upon notice by
Lessor or its assigns of the assertion of such a claim, action, damage,
obligation, liability or lien, Lessee shall assume full responsibility for the
defense thereof. All of Lessor's rights and privileges arising from the
indemnities contained in this Lease shall survive the expiration or earlier
termination of this Lease, and such indemnities are expressly made for the
benefit of, and shall be enforceable by Lessor, its successors and assigns.
MISCELLANEOUS PROVISIONS. The following miscellaneous provisions are a part of
this Lease.
AMENDMENTS. This Lease, together with any related documents,
constitutes the entire understanding and agreement of the parties as to
the matters set forth in this Lease. No alteration of or amendment to
this Lease shall be effective unless given in writing and signed by the
party or parties sought to be charged or bound by the alteration or
amendment.
APPLICABLE LAW. This Lease has been delivered to Lessor and accepted by
Lessor in the State of Nevada. This Lease shall be governed by and
construed in accordance with the laws of the State of Nevada.
CAPTION HEADINGS. Caption headings in this Lease are for convenience
purposes only and are not to be used to interpret or define the
provisions of this Lease.
COSTS AND EXPENSES. Lessee agrees to pay upon demand all of Lessor's
out-of-pocket expenses, including reasonable attorneys' fees, incurred
in connection with the preparation, execution, enforcement and
collection of this Lease or in connection with the
7
financing pursuant to this Lease. Lessor may pay someone else to help
collect the indebtedness and to enforce this Lease, and Lessee will pay
that amount. This includes, subject to any limits under applicable law,
Lessor's reasonable attorneys' fees and Lessor's legal expenses,
whether or not there is a lawsuit or an arbitration proceeding,
including reasonable attorneys' fees for bankruptcy proceedings
(including efforts to modify or vacate any automatic stay or
injunction), appeals, and any anticipated post-judgment collection
services. Lessee also will pay any court costs, in addition to all
other sums provided by law.
NOTICES. All notices required to be given under this Lease shall be
given in writing, may be sent by telefacsimile (unless otherwise
required by law) and shall be effective when actually delivered or when
deposited with a nationally recognized overnight courier or deposited
in the United States mail, first class, postage prepaid, addressed to
the party to whom the notice is to be given at the address shown above.
Any party may change its address for notices under this Lease by giving
formal written notice to the other parties, specifying that the purpose
of the notice is to change the party's address. To the extent permitted
by applicable law, if there is more than one Lessee, notice to any
Lessee will constitute notice to all Lessees. For notice purposes,
Lessee agrees to keep Lessor informed at all times of Lessee's current
address(es).
POWER OF ATTORNEY. Lessee hereby appoints Lessor as its true and lawful
attorney-in-fact, irrevocably, with full power of substitution to do
the following: (a) to demand, collect, receive, receipt for, sue and
recover all sums of money or other property which may now or hereafter
become due, owing or payable from the Equipment or its proceeds; (b) to
execute, sign and endorse any and all claims, instruments, receipts,
checks, drafts or warrants issued in respect of the Equipment or its
proceeds; (c) to settle or compromise any and all claims arising under
the Equipment, and, in the place and stead of Lessee, to execute and
deliver its release and settlement for the claim; and (d) to file any
claim or claims or to take any action or institute or take part in any
proceedings, either in its own name or in the name of Lessee, or
otherwise, which in the discretion of Lessor may seem to be necessary
or advisable. This power is given as security for the indebtedness, and
the authority hereby conferred is and shall be irrevocable and shall
remain in full force and effect until renounced by Lessor.
NO USURY. Notwithstanding anything to the contrary contained herein, in
no event shall Lessee be required to pay an amount that violates any
applicable usury or other law, and if any such limit is exceeded the
amount due shall be reduced to the maximum amount permitted by law.
SEVERABILITY. If a court of competent jurisdiction finds any provision
of this Lease to be invalid or unenforceable as to any person or
circumstance, such finding shall not render that provision invalid or
unenforceable as to any other persons or circumstances. If feasible,
any such offending provision shall be deemed to be modified, or it
shall be stricken and all other provisions of this Lease in all other
respects shall remain valid and enforceable.
8
SUCCESSOR INTERESTS. Subject to the limitations set forth above On
transfer of the Equipment, this Lease shall be binding upon and inure
to the benefit of the parties, their successors and assigns. Lessee
shall not, however, have the right to assign its rights or duties under
this Lease, or any other interest herein, without the prior written
consent of Lessor. Lessor may assign its rights under this Lease
without notice to or consent by Lessee.
TIME IS OF THE ESSENCE. Time is of the essence in the performance of
this Lease.
WAIVER. Lessor shall not be deemed to have waived any rights under this
Lease unless such waiver is given in writing and signed by Lessor. No
delay or omission on the part of Lessor in exercising any right shall
operate as a waiver of such right or any other right. A waiver by
Lessor of a provision of this Lease shall not prejudice or constitute a
waiver of Lessor's right otherwise to demand strict compliance with
that provision or any other provision of this Lease. No prior waiver by
Lessor, nor any course of dealing between Lessor and Lessee, shall
constitute a waiver of any of Lessor's rights or of any of Lessee's
obligations as to any future transactions.
DISCLAIMER OF WARRANTIES. Lessee acknowledges and agrees that it has
selected each item, type, quality, quantity and supplier of the
Equipment based upon its own judgment and disclaims any reliance upon
any statements or representations made by Lessor, and agrees that the
Equipment is of a design, size, quality, and capacity required by
Lessee and is suitable for its purpose. Lessee acknowledges that Lessor
is neither the manufacturer, distributor, seller, or owner of the
Equipment, and that Lessor has no knowledge or familiarity with it.
Lessee agrees to settle all claims, defenses, setoffs, and
counterclaims it may have with any manufacturer, distributor, seller,
or owner of the Equipment, and will not assert any thereof against
Lessor. LESSOR MAKES NO WARRANTIES OR REPRESENTATIONS, EXPRESS OR
IMPLIED, AS TO THE VALUE, DESIGN, CONDITION, MERCHANTABILITY OR FITNESS
FOR A PARTICULAR PURPOSE OF THE EQUIPMENT OR ANY OTHER REPRESENTATION
OR WARRANTY WITH RESPECT TO THE EQUIPMENT, AND, AS TO LESSOR, LESSEE
LEASES THE EQUIPMENT AS IS.
NO FINANCE LEASE. Lessor and Lessee agree that this Lease is not a
"finance lease" under the Article of the Uniform Commercial Code that
governs personal property leases. Lessee waives any right (a) to cancel
or repudiate this Lease, (b) to reject or revoke acceptance of any item
of Equipment, and (c) to recover from Lessor any general or
consequential damages, for any reason whatsoever.
DISCLAIMER OF TAX TREATMENT. LESSEE ACKNOWLEDGES AND AGREES THAT THE
SOLE RESPONSIBILITY FOR DETERMINING THE PROPER TREATMENT OF THIS LEASE
FOR FEDERAL, STATE AND LOCAL INCOME TAX PURPOSES RESTS WITH THE LESSEE.
LESSOR MAKES NO REPRESENTATION AS TO THE PROPER TREATMENT OF THIS LEASE
FOR SUCH PURPOSES. LESSEE IS ADVISED TO CONSULT WITH ITS TAX ADVISOR
REGARDING SUCH TREATMENT.
9
JURISDICTION. Lessee and Lessor consent to jurisdiction and venue in
the state or federal courts in any county where Lessor maintains an
office.
ADDITIONAL PROVISION:
PRESENTATION OF ANNUAL TAX RETURNS OF BORROWER WITHIN 120 DAYS OF YEAR END.
ARBITRATION AND WAIVER OF JURY TRIAL. ANY CLAIM OR CONTROVERSY
("CLAIM") BETWEEN THE PARTIES, WHETHER ARISING IN CONTRACT OR TORT OR
BY STATUTE INCLUDING, BUT NOT LIMITED TO, CLAIMS RESULTING FROM OR
RELATING TO THIS LEASE SHALL, UPON THE REQUEST OF EITHER PARTY, BE
RESOLVED BY ARBITRATION IN ACCORDANCE WITH THE FEDERAL ARBITRATION ACT
(TITLE 9, US CODE). ARBITRATION PROCEEDINGS WILL BE CONDUCTED IN
ACCORDANCE WITH THE RULES FOR ARBITRATION OF FINANCIAL SERVICES
DISPUTES OF J.A.M.S./ENDISPUTE. THE ARBITRATION SHALL BE CONDUCTED IN
ANY STATE WHERE REAL PROPERTY COLLATERAL FOR THIS LEASE OR THE BANK
OFFICE ORIGINATING THE CREDIT IS LOCATED. THE ARBITRATION HEARING SHALL
COMMENCE WITHIN 90 DAYS OF THE DEMAND FOR ARBITRATION AND CLOSE WITHIN
90 DAYS OF COMMENCEMENT, AND ANY AWARD WHICH MAY INCLUDE LEGAL FEES
SHALL BE ISSUED (WITH A BRIEF WRITTEN STATEMENT OF THE REASONS
THEREFOR) WITHIN 30 DAYS OF THE CLOSE OF HEARING. ANY DISPUTE
CONCERNING WHETHER A CLAIM IS ARBITRABLE OR BARRED BY THE STATUTE OF
LIMITATIONS SHALL BE DETERMINED BY THE ARBITRATOR. THIS ARBITRATION
PROVISION IS NOT INTENDED TO LIMIT THE RIGHT OF ANY PARTY TO EXERCISE
SELF-HELP REMEDIES, TO SEEK AND OBTAIN INTERIM OR PROVISIONAL RELIEF OF
ANY KIND OR TO INITIATE JUDICIAL OR NON-JUDICIAL FORECLOSURE AGAINST
ANY REAL OR PERSONAL PROPERTY COLLATERAL. IF FOR ANY REASON A CLAIM IS
NOT ARBITRATED, THE PARTIES IRREVOCABLY AND VOLUNTARILY AGREE TO WAIVE
ANY RIGHT TO A TRIAL BY JURY IN RESPECT OF SUCH CLAIM.
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LESSEE ACKNOWLEDGES HAVING READ ALL THE PROVISIONS OF THIS LEASE, AND LESSEE
AGREES TO ITS TERMS. THIS LEASE IS DATED DECEMBER 26, 2001.
LESSEE:
MCDERMOTT RESTAURANTS, INC.
BY: /S/ MICHAEL J. MCDERMOTT
---------------------------------NAME: MICHAEL J. MCDERMOTT
TITLE: PRESIDENT/CEO
LESSOR:
BANK OF AMERICA, N.A.
BY: /S/ JAN HAVILL
---------------------------------JAN HAVILL
GUARANTY
GUARANTY. Each of the undersigned individuals (each, a "Guarantor"),
for good and valuable consideration, jointly and severally and unconditionally
and irrevocably guarantees to the above Lessor, and its successors and assigns,
the payment and performance, when due, of all of the above Lessee's obligations
(collectively, the "Obligations") under the above Lease. Each Guarantor further
agrees to pay, jointly and severally, all fees and costs (including, without
limitation, attorneys' fees) that Lessor, or its assigns, may incur in
collecting the amounts due. Each Guarantor agrees that from time to time Lessor
may, without notice to Guarantors and without affecting their liability: (i)
release any person liable for the Obligations; (ii) extend, renew, or modify the
terms of or accelerate the Obligations, in whole or in part; (iii) modify the
Lease; or (iv) waive or fail to enforce any of its rights under the Lease.
GENERAL WAIVERS. Except as prohibited by applicable law, each Guarantor
waives any right to require Lessor: (i) to continue providing services to
Lessee; (ii) to make any presentment, protest, demand or notice of any kind;
(iii) to proceed directly against any person, including Lessee, or any other
Guarantor; (iv) to proceed directly against or exhaust any collateral held by
Lessor from Lessee, any Guarantor or any other person; or (v) to pursue any
other remedy within Lessor's power. Each Guarantor also waives any and all
rights, claims and defenses arising by reason of: (i) any law which may prevent
Lessor from bringing any action, including a claim for
11
deficiency, against any Guarantor, before or after Lessor's commencement or
completion of any foreclosure action; (ii) any election of remedies by Lessor
that may adversely affect any Guarantor's subrogation or reimbursement rights;
(iii) any other defense of Lessee, any Guarantor or any other person; (iv) any
right to claim discharge of the Obligations on the basis of unjustified
impairment of any collateral for the Obligations; (v) any statute of
limitations; or (vi) any defenses given to Guarantors at law or in equity other
than actual payment and performance of the Obligations. Each Guarantor further
waives any deductions to the amount guaranteed by virtue of any right of setoff,
counterclaim, subrogation, counter demand, recoupment or similar right, whether
asserted by Lessee or any Guarantor, until final payment of all the Obligations.
WAIVERS OF SUBROGATION AND OTHER RIGHTS AND DEFENSES. Until final
payment of all the Obligations, each Guarantor waives (i) any right of
subrogation, reimbursement, indemnification, and contribution (contractual,
statutory, or otherwise) arising from the existence or performance of this
Guaranty, (ii) any right to enforce any remedy which Lessor now or may hereafter
have against Lessee, and (iii) any benefit of, and any right to participate in,
any of Lessor's collateral for the Obligations.
INFORMATION REGARDING LESSEE. Each Guarantor acknowledges and agrees
that it has the sole responsibility for, and has adequate means of, obtaining
from Lessee such information concerning Lessee's financial condition and
business operations as such Guarantor requires. Each Guarantor further
acknowledges and agrees that Lessor has no duty, and such Guarantor is not
relying on Lessor, at any time to disclose to such Guarantor any information
relating to Lessee's financial condition and business operations.
SETOFF. Each Guarantor grants to Lessor a security interest in all
deposits and other accounts now or hereafter maintained by such Guarantor with
Lessor (or any direct or indirect parent; subsidiary or affiliate of Lessor)
including, without limitation, all accounts held jointly with another person or
entity (except accounts in which a security interest is prohibited by law). Each
Guarantor authorizes Lessor (and each such parent, subsidiary and affiliate) to:
(i) charge or setoff any Obligations against deposits and accounts; and (ii)
administratively freeze all deposits and accounts.
MISCELLANEOUS. If any of the Obligations are paid at any time and
Lessor is required to remit such payment to Lessee's trustee in bankruptcy (or
similar person) under any federal or state bankruptcy or insolvency law, the
Obligations shall be considered unpaid for the purpose of enforcement of this
Guaranty. No formal acceptance of this Guaranty is necessary to make it
effective. This Guaranty shall be continuing. The failure of any Guarantor to
sign this Guaranty shall not discharge or impair the liability of any Guarantor
who signs this Guaranty. This Guaranty shall be governed by, and interpreted in
accordance with, the laws of the State of Nevada.
JURISDICTION. The parties consent to jurisdiction and venue in the
state or federal courts in any county where Lessor maintains an office.
12
ADDITIONAL PROVISIONS:
PRESENTATION OF ANNUAL TAX RETURNS OF GUARANTOR WITHIN 120 DAYS OF YEAR END.
ARBITRATION AND WAIVER OF JURY TRIAL. ANY CLAIM OR CONTROVERSY
("CLAIM") BETWEEN THE PARTIES, WHETHER ARISING IN CONTRACT OR TORT OR
BY STATUTE INCLUDING, BUT NOT LIMITED TO, CLAIMS RESULTING FROM OR
RELATING TO THIS GUARANTY SHALL, UPON THE REQUEST OF EITHER PARTY, BE
RESOLVED BY ARBITRATION IN ACCORDANCE WITH THE FEDERAL ARBITRATION ACT
(TITLE 9, US CODE). ARBITRATION PROCEEDINGS WILL BE CONDUCTED IN
ACCORDANCE WITH THE RULES FOR ARBITRATION OF FINANCIAL SERVICES
DISPUTES OF J.A.M.S./ENDISPUTE. THE ARBITRATION SHALL BE CONDUCTED IN
ANY STATE WHERE REAL PROPERTY COLLATERAL FOR THIS GUARANTY OR THE BANK
OFFICE ORIGINATING THE CREDIT IS LOCATED. THE ARBITRATION HEARING SHALL
COMMENCE WITHIN 90 DAYS OF THE DEMAND FOR ARBITRATION AND CLOSE WITHIN
90 DAYS OF COMMENCEMENT, AND ANY AWARD WHICH MAY INCLUDE LEGAL FEES
SHALL BE ISSUED (WITH A BRIEF WRITTEN STATEMENT OF THE REASONS
THEREFORE) WITHIN 30 DAYS OF THE CLOSE OF HEARING. ANY DISPUTE
CONCERNING WHETHER A CLAIM IS ARBITRABLE OR BARRED BY THE STATUTE OF
LIMITATIONS SHALL BE DETERMINED BY THE ARBITRATOR. THIS ARBITRATION
PROVISION IS NOT INTENDED TO LIMIT THE RIGHT OF ANY PARTY TO EXERCISE
SELF-HELP REMEDIES, TO SEEK AND OBTAIN INTERIM OR PROVISIONAL RELIEF OF
ANY KIND OR TO INITIATE JUDICIAL OR NON-JUDICIAL FORECLOSURE AGAINST
ANY REAL OR PERSONAL PROPERTY COLLATERAL. IF FOR ANY REASON A CLAIM IS
NOT ARBITRATED, THE PARTIES IRREVOCABLY AND VOLUNTARILY AGREE TO WAIVE
ANY RIGHT TO A TRIAL BY JURY IN RESPECT OF SUCH CLAIM.
GUARANTOR:
NAME: /S/ MICHAEL J. MCDERMOTT
-----------------------MICHAEL J. MCDERMOTT
13
EXHIBIT 10.10
KONA GRILL, INC.
2002 STOCK PLAN
(AS OF NOVEMBER 13, 2002)
1. Purpose. The purpose of the Kona Grill, Inc. 2002 Stock Plan (the "Plan") is
to promote the interests of Kona Grill, Inc. (the "Company") and its
shareholders by providing employees of the Company and any parent or
subsidiaries thereof, and any other individuals who provide services to the
Company or any parent or subsidiaries as non-employee directors, consultants or
advisors, with an opportunity to acquire a proprietary interest in the Company
and receive competitive performance-related incentives so as to develop a
stronger incentive to put forth maximum effort for the continued success and
growth of the Company. In addition, the opportunity to acquire a proprietary
interest in the Company and receive competitive performance-related incentives
will aid in attracting and retaining personnel of outstanding ability.
2. Definitions. The capitalized terms used in this Plan and not defined
elsewhere have the meanings set forth below.
(a) "Affiliate" means any corporation that is a "parent corporation" or
"subsidiary corporation" of the Company, as those terms are defined in Code
Section 424(e) and (f), or any successor provisions.
(b) "Agreement" means a written contract consistent with the terms of this
Plan entered into between the Company or an Affiliate and a Participant,
containing the terms and conditions of an Award in such form and not
inconsistent with this Plan as the Committee shall approve from time to time,
together with all amendments thereto.
(c) "Award" means an award granted under this Plan in the form of Options,
SARs, or other Stock Awards.
(d) "Board" means the Board of Directors of the Company.
(e) "Cause" means (i) dishonesty, fraud or misrepresentation; (ii)
engaging in conduct that is injurious to the Company or any Affiliate in any
significant way, including by way of damage to its reputation or standing in the
industry; (iii) conviction of, or entering a plea of nolo contendre to, a crime
that constitutes a felony; (iv) breach of any employment agreement or other
agreement with, or duty owed to, the Company or any Affiliate, including any
agreement or duty not to make unauthorized disclosure of confidential or
proprietary information about the Company or any Affiliate, or not to compete
with the Company or any Affiliate; or (v) violation of any policy of the Company
or any Affiliate.
(f) "Code" means the Internal Revenue Code of 1986, as amended and in
effect from time to time or any successor statute.
(g) "Committee" means the two or more Non-Employee Directors designated by
the Board to administer this Plan under Section 3.1.
(h) "Company" means Kona Grill, Inc., a Delaware corporation, or the
successor to all or substantially all of its businesses by merger,
consolidation, purchase of assets or otherwise.
(i) "Disability" means, for purposes of exercising an Incentive Option, a
disability within the meaning of Code Section 22(e)(3), and for all other
purposes, any illness or other physical or mental condition of a Participant
that renders the Participant incapable of performing his or her customary and
usual duties for the Company or any Affiliate, or any medically determinable
illness or other physical or mental condition resulting from a bodily injury,
disease or mental disorder which, in the judgment of the Committee, is permanent
and continuous in nature. The Committee may require such medical or other
evidence as it deems necessary to judge the nature and permanency of the
Participant's condition.
(j) "Employee" means an employee, officer or director of the Company or an
Affiliate, except that for purposes of Incentive Stock Option Awards under the
Plan, the term "Employee" shall not include a Non-Employee Director.
(k) "Exchange Act" means the Securities Exchange Act of 1934, as amended.
(l) "Fair Market Value" as of any date means the value of a share of the
Company's common stock determined as follows:
(1) If the Company's common stock is listed or admitted to trading
on any established stock exchange or a national market system, including
the Nasdaq National Market System or The Nasdaq SmallCap Market, its Fair
Market Value shall be the closing per share sales price for such stock as
quoted on such exchange or system for the last market trading day prior to
the date of determination on which a sale of the Company's common stock
occurred, as reported in The Wall Street Journal or such other source as
the Committee deems reliable.
(2) If clause (1) is inapplicable, the Fair Market Value shall be
what the Committee determines in good faith to be 100% of the fair market
value of a share of the Company's common stock on that date, using such
criteria as it shall determine, in its sole discretion, to be appropriate
for valuation.
(m) "Fundamental Change" shall mean a dissolution or liquidation of the
Company, a sale of substantially all of the assets of the Company, a merger or
consolidation of the Company with or into any other corporation, regardless of
whether the Company is the surviving corporation, or a statutory share exchange
involving capital stock of the Company.
(n) "Incentive Option" means any Option designated as such and granted in
accordance with the requirements of Code Section 422 or any successor provision.
(o) "Non-Employee Director" means a member of the Board who is not an
employee of the Company or any Affiliate.
(p) "Non-Statutory Option" means an Option other than an Incentive Option.
(q) "Option" means a right to purchase Shares, including both
Non-Statutory Options and Incentive Options.
(r) "Participant" means a person to whom an Award is or has been made in
accordance with this Plan.
(s) "Plan" means this Kona Grill, Inc. 2002 Stock Plan, as may be amended
and in effect from time to time.
(t) "SAR" means an Award or stock appreciation rights, the value of which
is determined in relation to the appreciation in value of Shares, made pursuant
to Section 8 of this Plan.
2
(u) "Securities Act" means the Securities Act of 1933, as amended.
(v) "Shares" means shares of the Company's common stock.
(w) "Stock Award" means any one of the types of Awards that may be granted
by the Committee pursuant to Section 9.
(x) "Transferee" means any member of the Participant's immediate family
(i.e., his or her children, step-children, grandchildren and spouse) or any
trust for the benefit of such family members or any partnership in which such
family members are the only partners.
3. Administration.
(a) General. This Plan shall be administered by a committee of two or more
Non-Employee Directors (the "Committee"), appointed by the Company's Board of
Directors (the "Board"). If the Board has not appointed such a committee to
administer this Plan, then the Board shall constitute the Committee. The
Committee shall have the power, subject to the limitations contained in this
Plan, to determine when and to whom Awards will be granted, to specify the form
and amount of each Award and the terms and conditions for the grant or exercise
of any Award, to amend the terms and conditions (other than price) of any
outstanding Award, and to determine whether, to what extent and under what
circumstances Awards may be settled, paid or exercised in cash, Shares, other
Awards or other property or canceled, forfeited or suspended. Subject to the
provisions of this Plan, the Committee may from time to time adopt such rules
for the administration of this Plan as it deems appropriate. The decision or
interpretation of the Committee on any matter affecting this Plan or any
Agreement made under this Plan, or the rights and obligations arising under this
Plan or any Award granted hereunder, shall be final, conclusive and binding upon
all persons, including the Company and Participants.
(b) Action by the Committee. A majority of the members of the Committee
shall constitute a quorum for any meeting of the Committee, and the act of a
majority of the members present at any meeting at which a quorum is present or
the act approved in writing by a majority of all the members of the Committee
shall be the act of the Committee. In the performance of their duties under this
Plan, the Committee members shall be entitled to rely upon information and
advice furnished by the Company's officers, employees, accountants or counsel,
or any executive compensation consultant or other professional retained by the
Company or the Committee to assist in the administration of this Plan, and no
member of the Committee shall be liable for any action taken or not taken in
good faith reliance upon any such information or advice.
(c) Delegation of Authority. The Committee may delegate all or any part of
its authority under this Plan to one or more officers of the Company for
purposes of granting and administering Awards to persons other than persons who
are then subject to the reporting requirements of Section 16 of the Exchange
Act.
(d) Awards to Non-Employee Directors. Notwithstanding any other provision
of this Plan, the granting, terms, and conditions of Awards granted to
Non-Employee Directors shall be determined by the Board, and the Board rather
than the Committee shall have discretion as to the granting of such Awards or as
to altering or amending any terms, conditions or eligibility requirements of
such Awards.
(e) Rule 16b-3. It is the intent that this Plan and all Awards granted
pursuant to it shall be administered by the Committee so as to permit this Plan
and Awards to comply with Rule 16b-3 under the Exchange Act at any time that any
class of equity securities of the Company is registered pursuant to Section 12
of the Exchange Act. If any provision of this Plan or of any Agreement would
otherwise
3
frustrate or conflict with the intent expressed in this paragraph 3(e), that
provision to the extent possible shall be interpreted and deemed amended in the
manner determined by the Committee so as to avoid the conflict. To the extent of
any remaining irreconcilable conflict with this intent, the provision shall be
deemed void as applicable to Participants who are then subject to the reporting
requirements of Section 16 of the Exchange Act.
(f) Indemnification. To the full extent permitted by law, (i) no member of
the Committee or any person to whom authority under this Plan is delegated shall
be liable for any action or determination taken or made in good faith with
respect to this Plan or any Award granted hereunder, and (ii) the members of the
Committee and each person to whom authority under this Plan is delegated shall
be entitled to indemnification by the Company against and from any loss or
liability (including reasonable expenses) incurred by such member or person by
reason of any such actions and determinations.
4. Shares Available Under this Plan.
(a) Number of Shares. Subject to the following paragraphs of this Section
4, the number of Shares available for issuance pursuant to Awards under this
Plan shall not exceed 1,750,000. Shares issued pursuant to Awards may be shares
which have been authorized but unissued, or have previously been issued and
reacquired by the Company, or both.
(b) Shares Again Available. Except as provided in the last sentence of
this paragraph 4(b), Awards or portions of Awards that are terminated, expired,
exchanged, forfeited or settled without the distribution of Shares, including
Shares that are not used because the terms and conditions of the applicable
Award are not met, shall not count toward the maximum number of Shares that may
be issued under this Plan as provided in Section 4(a), and the Shares that were
subject to such Awards or portions of Awards shall again be available for
further Awards. However, Shares with respect to which an SAR has been exercised,
whether paid in cash and/or in Shares, and shares of Restricted Stock which have
been granted with dividend or voting rights during the Term of the Restricted
Stock will count toward the maximum number of shares specified in Section 4(a)
and may not again be awarded under this Plan.
(c) Shares Used to Pay Exercise Price. If the exercise price of any Option
is paid by surrendering previously owned Shares to the Company (either by actual
delivery or by attestation), only the number of Shares issued net of the Shares
surrendered shall be deemed issued for purposes of the determining maximum
number of Shares available for issuance under paragraph 4(a).
(d) Fractional Shares. No fractional shares may be issued under this Plan.
Fractional shares will be rounded to the nearest whole share.
(e) Adjustments for Changes in Capitalization. In the event of any stock
dividend, stock split, combination of shares, reorganization, merger,
consolidation, recapitalization, liquidation, reclassification, rights offering,
or extraordinary dividend or distribution (including a spin-off), or any other
change in the corporate structure or Shares, the Committee (or if the Company
does not survive any such transaction, the board of directors of the surviving
corporation) may, in order to prevent dilution or enlargement of rights of
Participants and without the consent of any Participant, make such adjustments
as it determines in its discretion to be appropriate as to (i) the number and
kind of securities subject to and available for Awards under this Plan, (ii) the
number and type of securities and amount of cash subject to Awards then
outstanding, and (iii) the exercise price applicable to any outstanding Award.
5. Eligibility. Awards of any kind may granted under this Plan to any Employee
at the discretion of the Committee. Non-Statutory Options also may be granted to
(i) other individuals who are not Employees or Non-Employee Directors but who
provide services to the Company or an Affiliate in the
4
capacity of an advisor or consultant, and (ii) any individual that the Company
desires to induce to become an Employee, advisor or consultant, but any such
grant shall be contingent upon such individual or entity becoming employed or
retained by the Company or an Affiliate. References in the remainder of this
Plan to "employment" and similar terms (other than "Employee") shall include the
providing of services in the capacity of an advisor or consultant.
6. General Terms of Awards.
(a) Agreements. Each Award will be evidenced by an Agreement setting forth
the terms, conditions and restrictions, as determined by the Committee, which
will apply to such Award, in addition to the terms and conditions specified in
this Plan. The Committee need not require the signing of an Agreement by a
Participant, in which case acceptance of the Award by the Participant will
constitute agreement by the Participant to the terms, conditions and
restrictions of the Award as set forth in the Agreement and this Plan.
(b) Term. Each Agreement shall set forth the scheduled term of the Award,
the applicable exercisability or vesting schedule, and any applicable
performance period, as the case may be. The scheduled term of an Incentive
Option shall not exceed ten years from the date of its grant. Acceleration of
the vesting or exercisability schedule of an Award and of the expiration of the
applicable term is permitted upon such terms and conditions as shall be set
forth in the Agreement.
(c) Transferability. Except as provided in this paragraph, during the
lifetime of a Participant to whom an Award is granted, only that Participant (or
that Participant's legal representative) may exercise an Option or SAR, or
receive payment with respect to any other Stock Award. Except as otherwise
provided in the applicable Agreement, no Award may be assigned, transferred, or
encumbered by a Participant other than by will or the laws of descent and
distribution, or, with regard to Awards other than Incentive Options, pursuant
to a qualified domestic relations order as defined in the Code or Title 1 of the
Employee Retirement Income Security Act or the rules thereunder. The Committee,
in its discretion, may provide in an Agreement that (i) the Award subject to the
Agreement may be transferable to a beneficiary designated on a form provided for
such purpose and filed by the Participant with the Company in the event of a
Participant's death, or (ii) the Award (other than an Incentive Option) may be
transferred to a Transferee so long as the Participant receives no consideration
for the transfer. Any Award held by a Transferee or beneficiary shall continue
to be subject to the same terms and conditions that were applicable to that
Award immediately prior to its transfer. An Award may be exercised by, or paid
to, a Transferee, beneficiary or other successor of a Participant following the
death of the Participant to the extent, and during the period of time, if any,
provided in the applicable Agreement.
(d) Termination of Employment. Except as otherwise provided by the
Committee in an applicable Agreement, the following provisions shall apply in
case of a termination of employment:
(1) Options and SARs.
(A) Death or Disability. If a Participant's employment
terminates because of Disability or death, any outstanding Option or
SAR granted to such Participant shall become exercisable in full and
may be exercised by the Participant or his or her successor at any
time until the earlier of (i) one year after the date of such
termination, or (ii) the expiration of the scheduled term of such
Award.
(B) Cause or Resignation. If a Participant's employment is
terminated by the Company or any Affiliate for Cause, or by the
Participant other than due to reasons
5
specified in subparagraph (1)(A) above, any outstanding Option or
SAR granted to such Participant will terminate immediately.
(C) Other Reasons. If a Participant's employment terminates
for any reason other than those specified in subparagraphs (1)(A)
and (B) above, the portion of any Option or SAR that was unvested
and unexercisable immediately prior to the termination of employment
will terminate immediately, but the portion of the Option or SAR
that was exercisable immediately prior to the termination of
employment will continue to be exercisable until the earlier of (i)
three months after the termination of employment, or (ii)) the
expiration of the scheduled term of such Award.
(2) Restricted Stock and Stock Units.
(A) Death or Disability. If a Participant's employment
terminates because of death or Disability, a pro rata portion of
Shares of Restricted Stock (as described in paragraph 10(c)) or of
Stock Units (as described in paragraph 10(d)) held by such
Participant will become vested as of the termination of employment,
based upon that portion of the scheduled term of the Award that had
expired prior to the termination of employment and, where vesting of
the Award was also contingent upon the achievement of performance
objectives, the extent to which such performance objectives were
achieved.
(B) Other Reasons. If a Participant's employment terminates
for any reason other than those specified in subparagraph (2)(A)
above, any Shares of Restricted Stock or Stock Units that have not
yet vested will immediately be forfeited.
For purposes of this paragraph 6(d), a Participant's employment shall be
considered terminated if (i) the Company subsidiary, division or business unit
to which the Participant is assigned or provides services is divested by the
Company and is thereafter no longer an Affiliate or part of the Company or an
Affiliate, and (ii) in connection therewith the Participant is not reassigned to
the Company or any of its continuing Affiliates.
(e) Tax Withholding. Delivery of Shares pursuant to a Stock Award or upon
exercise of any Non-Statutory option, and payment of any cash in settlement of
any Award, shall be subject to any required withholding taxes. A person
receiving Shares under a Stock Award or exercising a Non-Statutory option may,
as a condition precedent to receiving the Shares, be required to pay the Company
a cash amount equal to the amount of any required withholdings. In lieu of all
or any part of such a cash payment, the Committee may provide in any Agreement
(or provide by Committee action with respect to any Award already outstanding)
that a person exercising an Option or receiving Shares pursuant to a Stock Award
may cover all or any part of the required withholdings, and any additional
withholdings up to the amount needed to cover the individual's full FICA and
federal, state and local income tax liability with respect to income arising
from the exercise of the option or receipt of the Shares, through the delivery
to the Company of unencumbered Shares, through a reduction in the number of such
Shares to be delivered to the person, or through a subsequent return to the
Company of Shares delivered to the person (in each case, such Shares having an
aggregate Fair Market Value on the date of exercise or receipt of the Shares
equal to the amount of the withholding taxes being paid through such delivery,
reduction or subsequent return of Shares).
(f) Rights as Shareholder. A Participant shall have no rights as a
shareholder with respect to any securities covered by an Award until the date
the Participant becomes the holder of record of the Shares, if any, to which the
Award relates.
6
7. Options.
(a) Terms Applicable to All Options.
(1) Grant of Options. Subject to the terms and conditions of this
Plan, the Committee may, from time to time during the term of this Plan,
grant to eligible Employees, consultants and advisors of the Company and
its Affiliates Options on such terms and conditions as the Committee
determines. Options granted under this Plan may be either Incentive
Options or Non-Statutory Options. Only Non-Statutory Options may be
granted to Participants who are not Employees or who are Non-Employee
Directors. The date of approval by the Committee of the granting of an
Option shall be considered the grant date of such Option.
(2) Exercise Price. The exercise price per share for each Option
shall be determined by the Committee and set forth in the applicable
Agreement, but for Incentive Options shall not be less than 100% of the
Fair Market Value of a Share as of the date the Incentive Option is
granted (except as provided in Section 15 of this Plan).
(3) Exercisability. Each option will be exercisable in whole or in
part on the terms provided in the Agreement. No option will be exercisable
at any time after the expiration of its scheduled term. When an option is
no longer exercisable, it shall be deemed to have lapsed or terminated.
(4) Method of Exercise. Upon satisfaction of the applicable
conditions relating to exercisability, a person entitled to exercise an
Option may exercise it during its scheduled term in whole or in part from
time to time, by providing the Company with a notice of exercise in the
form and manner that the Committee may prescribe. The exercise price of
Shares with respect to which an Option is being exercised is payable in
full at the time of exercise, except that if the exercise arrangement
described in clause (iv) below is utilized, payment of the exercise price
may be made as soon as practicable after exercise. The exercise price of
an Option may be paid by methods permitted by the Committee from time to
time, including any one or more of the following: (i) cash, (ii)
tendering, either by actual delivery of shares or by attestation, to the
Company Shares already owned by the Participant for a period of six months
and having a Fair Market Value on the date of exercise equal to the
aggregate exercise price for the Shares as to which the Option is being
exercised, (iii) authorizing the Company to withhold from the total number
of Shares as to which the Option is being exercised the number of Shares
having a Fair Market Value on the date of exercise equal to the aggregate
exercise price for the total number of Shares as to which the Option is
being exercised, and (iv) irrevocably authorizing a third party with which
the Participant has a brokerage or similar relationship to sell the Shares
(or a sufficient portion of such Shares) acquired upon the exercise of the
Option and remit to the Company a portion of the sale proceeds sufficient
to pay the entire exercise price to the Company.
(5) Termination. Except as otherwise provided in an applicable
Agreement, each Option shall expire, and all rights to purchase Shares
thereunder will terminate, on the earliest of:
(A) ten years after the date such Option is granted;
(B) the expiration of any period after the termination of the
Participant's employment within which the option is exercisable as
specified in subparagraph 6(d)(1) or the applicable Agreement; or
7
(C) the date, if any, fixed for cancellation pursuant to
paragraph 11(b).
(6) Reload Options. The Committee may provide in an Agreement that a
Participant who exercises an Option and pays the Option price in whole or
in part with Shares then owned by the Participant will be entitled to
receive another Option covering the same number of Shares tendered and
with an exercise price of no less than the Fair Market Value of a Share on
the date of grant of such additional Option ("Reload Option"). Unless
otherwise provided in the Agreement, a Participant, in order to be
entitled to a Reload Option, must pay with Shares that he or she has owned
for at least the preceding six months.
(b) Terms Applicable to Incentive Options. In addition to the terms and
conditions applicable to all Options, the following additional terms and
conditions apply to Incentive Options:
(1) To the extent that the aggregate Fair Market Value (determined
as of the date the Option is granted) of Shares with respect to which
Incentive Options are exercisable for the first time by any Participant
during any calendar year (under all incentive stock option plans of the
Company and any parent or subsidiary) exceeds $100,000, such Options shall
be treated as Non-Statutory Options.
(2) An Incentive Option shall not be exercisable more than 10 years
after the date of grant (or such other limit as may be required by the
Code) if this limitation is necessary to qualify the option as an
Incentive option.
(3) No Award of an Incentive Stock Option shall be made more than 10
years after the effective date of this Plan (or such other limit as may be
required by the Code) if this limitation is necessary to qualify the
Option as an Incentive Stock Option.
(4) The Agreement covering an Incentive Option shall contain such
other terms and provisions that the Committee determines necessary to
qualify this Option as an Incentive Option.
(5) Notwithstanding any other provision of this Plan to the
contrary, no Participant may receive an Incentive Option under this Plan
if, at the time the Award is granted, the Participant owns (after
application of the rules contained in Code Section 424(d), or its
successor provision), Shares possessing more than ten percent of the total
combined voting power of all classes of stock of the Company or its
subsidiaries, unless (i) the exercise price for that Incentive Option is
at least 110 percent of the Fair Market Value of the Shares subject to
that Incentive Option on the date of grant and (ii) that Incentive Option
is not exercisable more than five years after the date that it is granted.
8. Stock Appreciation Rights. An Award of an SAR shall entitle the Participant,
subject to terms and conditions determined by the Committee, to receive upon
exercise of the SAR all or a portion of the excess of (i) the Fair Market Value
of a specified number of Shares as of the date of exercise of the SAR over (ii)
a specified price that shall not be less than the Fair Market Value of the same
number of Shares as of the date of grant of the SAR. An SAR may be granted in
connection with, or completely independent of, an Option or any other Award
under this Plan. If issued in connection with a previously or contemporaneously
granted Option, the Committee may impose a condition that exercise of an SAR
cancels a pro rata portion of the Option with which it is connected and vice
versa. Each SAR may be exercisable in whole or in part on the terms provided in
the applicable Agreement, but no SAR shall be exercisable at any time after the
expiration of its scheduled term. Upon exercise of an SAR, payment shall be made
at such time or times as shall be provided in the Agreement in the form of cash,
Shares or a combination of cash and Shares as provided in the Agreement. The
Agreement may provide for a
8
limitation upon the amount or percentage of the total appreciation on which
payment (whether in cash or Shares) may be made in the event of the exercise of
an SAR.
9. Stock Awards.
(a) Form of Awards. The Committee may grant Stock Awards that are payable
in Shares or denominated in units equivalent in value to Shares or are otherwise
based on or related to Shares, including Awards of Restricted Stock, Stock Units
and Performance Units, subject to such terms, conditions and restrictions as the
Committee may determine to be applicable to such Awards in its discretion.
(b) Stock Payment. Shares may be used as payment for compensation that
otherwise would have been delivered in cash (including compensation that is
intended to qualify as performance-based compensation for purposes of Section
162(m) of the Code), and no minimum vesting period will apply to such shares
unless otherwise determined by the Committee. Any Shares used for such payment
will be valued at their Fair Market Value at the time of such payment, and will
be subject to such terms and conditions as determined by the Committee.
(c) Restricted Stock. An Award of Restricted Stock shall consist of Shares
subject to restrictions on transfer and conditions of forfeiture. The terms and
conditions of any Restricted Stock Award, including restrictions on transfer,
forfeiture conditions, performance conditions, circumstances under which the
transfer restrictions and forfeiture conditions will lapse and the Restricted
Stock vest, and scheduled term of the Award, will be established by the
Committee and included in the applicable Agreement. The Committee may provide
for the lapse or waiver of any restriction or condition based on such factors or
criteria as the Committee may determine. Until shares subject to a Restricted
Stock Award vest, they shall be evidenced by a certificate deposited with the
Company or its designee, or by a book-entry notation on the records of the
Company's transfer agent. Upon the vesting of such Shares, certificate(s) shall
be issued to the Participant. No Award of Restricted Stock may vest earlier than
one year from the date of grant, unless otherwise provided in the applicable
Agreement. Unless otherwise provided in the applicable Agreement, a Participant
with a Restricted Stock Award shall have all the other rights of a shareholder
of the Company, including the right to receive dividends and the right to vote
the Shares of Restricted Stock.
(d) Stock Units. An Award of Stock Units shall be denominated in Shares
and shall provide a Participant with the right to receive Shares (or, to the
extent specified by the Committee in the applicable Agreement, the cash value of
such shares) in the future, after the satisfaction of specified vesting
conditions. The terms and conditions of any Stock Unit Award will be established
by the Committee and included in the applicable Agreement, and such terms may
include the payment by the Company of dividend equivalents on such Stock Units
equal to the dividends that would have been payable on the corresponding number
of Shares.
(e) Performance Units. An Award of Performance Units shall entitle the
Participant to future payments of cash, Shares or a combination of cash and such
shares, as provided in the Agreement, based upon the achievement of
pre-established performance targets. These performance targets may include
targets selected by the Committee and consisting of one or any combination of
earnings or earnings per share before income tax (profit before taxes); earnings
before interest, taxes, depreciation and amortization; net earnings or net
earnings per share (profit after taxes); inventory, total or net operating asset
turnover; accounts receivable (measured in terms of days sales outstanding);
operating expenses, operating profit; total shareholder return; return on
equity; pre-tax and pre-interest expense return on average invested capital,
which may be expressed on a current value basis; profit before taxes or profit
after taxes less the Company's cost of capital; or sales growth. Any such
targets may relate to one or any
9
combination of two or more of the Company's or a group's, unit's, division's,
Affiliate's or an individual's performance. The Agreement may establish that a
portion of the total potential of a Participant's Award will be paid for
performance that exceeds the minimum target but falls below the maximum target
applicable to the Award. Following the conclusion of each performance period,
the Committee shall determine the extent to which (i) performance targets have
been attained, (ii) any other terms and conditions with respect to an Award
relating to the performance period have been satisfied and (iii) payment is due
with respect to an Award of Performance Units. The Agreement may permit an
acceleration of the performance period and an adjustment of performance targets
and payments with respect to some or ail of the Performance Units awarded to a
Participant, upon such terms and conditions as shall be set forth in the
Agreement, upon the occurrence of events such as those discussed in paragraph
4(e).
10. Limitations on Transfer of Shares. The Committee may provide in any
Agreement that, during any time prior to the consummation of an underwritten
public offering and sale by the Company of Shares to the public pursuant to an
effective registration statement under the Securities Act (other than an
offering made in connection with a business acquisition or combination pursuant
to a registration statement on Form S-4 or any similar form, or an employee
benefit plan pursuant to a registration statement on Form S-8 or any similar
form):
(a) Termination Repurchase Right. If a Participant ceases to be employed
by the Company and its Affiliates for any reason, then such Participant's Shares
issued pursuant to Awards, whether issued prior to or following termination of
employment ("Award Shares"), will be subject to repurchase by the Company, in
the Company's sole discretion, pursuant to the terms and conditions set forth in
this Plan and the applicable Agreement. The purchase price will be equal to the
Fair Market Value of such Award Shares as of the date that the Company delivers
a repurchase notice to a Participant.
(b) Right of First Refusal. If a Participant receives a bona fide offer to
purchase any Award Shares, and the Participant wishes to accept such offer, then
the Participant must first offer such Award Shares for sale to the Company at
the same price and upon the same terms (or terms as similar as reasonably
possible) as those offered to the Participant, and pursuant to the procedures
and terms set forth in the applicable Agreement. If the Company elects not to
exercise its right of first refusal, any transferee must agree in writing to
also be subject to the Company's right of first refusal as set forth in the
applicable Agreement.
(c) Restrictions on Transfer. No Participant may sell, pledge, transfer or
otherwise dispose of any interest in any Award Shares except, subject to any
additional limitations contained in the Company's Articles of Incorporation or
Bylaws, (i) to the Company, (ii) in a public offering registered under the
Securities Act, (iii) pursuant to Participant's will or beneficiary designation
or applicable laws of descent and distribution, (iv) to a Transferee, or (v) in
a transaction that is exempt from registration under the Securities Act and any
applicable state securities laws. The restrictions contained in this paragraph
10(c) will continue to be applicable to Award Shares after any transfer of the
type referred to in clauses (iii), (iv) or (v) above and, as a condition to any
such transfer, each transferee of such Award Shares must agree in writing to be
bound by such restrictions. A transfer will be permitted pursuant to clause (v)
above only if the transferor of the Award Shares has first complied with
paragraphs 10(a) and (b), as applicable, and delivers to the Company an opinion
of counsel reasonably acceptable in form and substance to the Company that
registration under the Securities Act is not required in connection with such
transfer.
11. Fundamental Change. In the event of a proposed Fundamental Change, the
Committee may, but shall not be obligated to do any of the following.
10
(a) Replacement of Options or SARs. If the Fundamental Change is a merger
or consolidation or statutory share exchange, the Committee may make appropriate
provision for the protection of the outstanding Options and SARs by the
substitution of options, stock appreciation rights and appropriate voting common
stock of the corporation surviving any merger or consolidation or, if
appropriate, the parent corporation of the Company or such surviving
corporation, in lieu of Options, SARs and capital stock of the Company.
(b) Cancellation of Options or SARs. At least 30 days prior to the
occurrence of the Fundamental Change, declare, and provide written notice to
each holder of an Option or SAR of the declaration, that each outstanding option
and SAR, whether or not then exercisable, shall be canceled at the time of, or
immediately prior to the occurrence of the Fundamental Change in exchange for
payment to each holder of an option or SAR, within ten days after the
Fundamental Change, of cash equal to the product of (i) the amount, if any, by
which the Event Proceeds per Share (as defined below) exceeds, in the case of an
option, the exercise price per share of such Option or, in the case of an SAR,
the specified price per share as of the date of grant, and (ii) the number of
Shares subject to such Option or SAR. At the time of such a declaration, each
SAR and each Option shall immediately become exercisable in full and each person
holding an Option or a SAR shall have the right, during the period preceding the
time of cancellation of the Option or SAR, to exercise the Option as to all or
any part of the Shares covered thereby or the SAR in whole or in part, as the
case may be. If such a declaration occurs, each outstanding Option and SAR that
has not been exercised prior to the Fundamental Change shall be canceled at the
time of, or immediately prior to, the Fundamental Change. No person holding an
Option or a SAR shall be entitled to any payment under this Section 11(b) if the
scheduled term of such Option or SAR expires before the Fundamental Change. For
purposes of this paragraph 11(b), "Event Proceeds per Share" shall mean the cash
plus the fair market value, as determined in good faith by the Committee, of the
non-cash consideration to be received for each Share by the shareholders of the
Company upon the occurrence of the Fundamental Change.
12. Forfeitures. The Committee may provide in any Agreement that:
(a) Termination. If a Participant has received cash, Shares, or a
combination thereof pursuant to an Award within six months prior to the
termination of Participant's employment by the Company or any Affiliate for
Cause, or by the Participant for any reason other than death or Disability, the
Committee may require the Participant to return to the Company the cash and
Shares received, or in lieu of such Shares, the economic value thereof. If the
Shares were received upon the exercise of an Option, upon the return of the
Shares the Company will pay the Participant an amount per Share equal to the
exercise price paid by the Participant to acquire such Shares. For purposes of
this paragraph, the "economic value thereof" means the number of Shares received
multiplied by the difference between (i) the Fair Market Value of a Share on the
date received by the Participant and (ii) the exercise price per Share, if any,
paid by the Participant to acquire the Shares.
(b) Proscribed Conduct. If a Participant engages in certain proscribed
conduct during the term of any Award or within one year after the Participant's
termination of employment, whichever is later, the Award will immediately
terminate on the date the Participant enters into such conduct, and the Company
will have the same rights to the return of cash and Shares (or the economic
value thereof) as are specified in paragraph 12(a) with respect to cash and/or
Shares that are or were received by the Participant pursuant to an Award after
the date one year prior to the date the Participant first engaged in such
conduct. The proscribed conduct may include competition with the Company or any
Affiliate, unauthorized disclosure of material proprietary information of the
Company or any Affiliate, a violation of applicable business ethics policies of
the Company or any Affiliate or any other conduct specified in the Agreement.
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(c) Setoff. The Company may deduct from any amounts the Company may owe a
Participant from time to time (including amounts owed as wages or other
compensation, fringe benefits, or vacation pay) any amounts the Participant may
owe the Company under paragraphs 12(a) and (b).
13. Effective Date and Duration of this Plan. This Plan shall be effective as of
November 13, 2002. This Plan will remain in effect until all Shares subject to
it are distributed, or until all Awards have expired or lapsed, or until this
Plan is terminated pursuant to Section 14. Awards made prior to the termination
of this Plan may be exercised, vested or otherwise effectuated beyond such
termination unless limited in an Agreement or otherwise.
14. Amendment, Modification and Termination of this Plan. The Board may at any
time terminate, suspend or amend this Plan. The Committee may at any time amend
any or all Agreements under this Plan to the extent permitted by law. No
termination, suspension, or amendment of this Plan or amendment of any Agreement
may materially and adversely affect any right acquired by any Participant under
an Award granted before the date of such termination, suspension, or amendment,
unless consented to by the Participant or required as a matter of law. No
amendment to this Plan shall require shareholder approval unless such approval
is required under applicable law.
15. Substitute Awards. The Committee may also grant Options, SARs, or other
Stock Awards under this Plan having terms, conditions and provisions that vary
from those specified in this Plan if any such Awards are granted in substitution
for, or in connection with the assumption of, existing options, stock
appreciation rights, or other awards granted, awarded or issued by another
corporation and assumed or otherwise agreed to be provided for by the Company
pursuant to or by reason of a transaction involving a corporate merger,
consolidation, acquisition of property or stock, separation, reorganization or
liquidation to which the Company or a Subsidiary is a party.
16. General Provisions.
(a) Plan Does Not Affect Employment Status. No person shall have any claim
or right to be granted an Award, and neither the grant of an Award nor anything
contained in this Plan or an Agreement shall confer upon any Participant any
right to continue in the employment of the Company or any Affiliate, or to
participate in any other compensation or benefit plan or program, or limit in
any way the right of the Company or any Affiliate to terminate such
Participant's employment at any time.
(b) Unfunded Plan. This Plan will be unfunded and the Company will not be
required to segregate any assets that may at any time be represented by Awards
under this Plan. Neither the Company, its Affiliates, the Committee, nor the
Board shall be deemed to be a trustee of any amounts to be paid under this Plan
nor shall anything contained in this Plan or any action taken pursuant to its
provisions create or be construed to create a fiduciary relationship between the
Company or its Affiliates, and a Participant or his or her successor or
Transferee.
(c) Limits of Liability. Any liability of the Company to any Participant
with respect to an Award shall be based solely upon contractual obligations
created by this Plan and the Agreement.
(d) Compliance with Applicable Legal Requirements. No Shares distributable
pursuant to this Plan shall be issued unless the issuance complies with all
applicable legal requirements including, without limitation, compliance with the
provisions of applicable state securities laws, the Securities Act, the Exchange
Act and the requirements of the exchanges on which the Company's Shares may, at
the time, be listed. This Plan is a compensatory benefit plan within the meaning
of Rule 701 under the Securities Act and, unless and until Shares are publicly
traded, the issuance of Shares pursuant to this Plan is intended to qualify for
the exemption from registration under the Securities Act provided by Rule 701,
except to the
12
extent that the Company relies upon Regulation D under the Securities Act for
sales to "accredited investors" (as defined in Rule 501(a) of Regulation D).
(e) Deferrals and Settlements. The Committee may require or permit
Participants to elect to defer the issuance of Shares or the settlement of
Awards in cash under such rules and procedures as it may establish under this
Plan. it may also provide that deferred settlements include the payment or
crediting of interest on the deferral amounts.
(f) Other Benefit and Compensation Programs. Payments and other benefits
received by a Participant under an Award made pursuant to this Plan shall not be
deemed a part of a Participant's regular, recurring compensation for purposes of
any termination, indemnity or severance pay laws and shall not be included in,
nor have any effect on, the determination of benefits under any other employee
benefit plan, contract or similar arrangement provided by the Company or an
Affiliate unless expressly so provided by such other plan, contract or
arrangement, or unless the Committee determines that an Award or portion of an
Award should be included to accurately reflect competitive compensation
practices or to recognize that an Award has been made in lieu of a portion of
competitive cash compensation.
(g) Requirements of Law.
(1) To the extent that federal laws do not otherwise control, this
Plan and all determinations made and actions taken pursuant to this Plan
shall be governed by the laws of Delaware without regard to its conflicts
of law principles and construed accordingly.
(2) In the event any provision of this Plan shall be held illegal or
invalid for any reason, the illegality or invalidity shall not effect the
remaining parts of this Plan, and this Plan shall be construed and
enforced as if the illegal or invalid provision had not been included.
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EXHIBIT 23.1
Consent of Independent Registered Public Accounting Firm
We consent to the reference to our firm under the caption "Experts" and to the
use of our reports dated May 20, 2005, in the Registration Statement (Form S-1
No. 333-_____) and related Prospectus of Kona Grill, Inc. for the registration
of _________ shares of its common stock.
/s/ Ernst & Young LLP
Phoenix, Arizona
June 2, 2005